Globalisation Flashcards
What are the main characteristics of globalisation?
- increase in trade as proportion of world GDP
- increased movements of financial capital between countries
- increased international specialisation and division of labour (parts made in different countries)
- growing importance of transnational companies (TNCs) and foreign direct investment
What are the main factors contributing to globalisation?
- fall in transport costs (enable goods to be imported/ exported cheaper
- fall in communication costs e.g. cost of use of internet fallen significantly over last 20 years
- lowering of trade barriers since WW2 has been major factor in growth of world trade (WTO has been responsible for negotiating reductions in tariffs)
- collapse of communism/ opening up of China contributed to globalisation
What is the WTO?
World Trade Organization
What are the main benefits of globalisation?
- enables application of law of comparative advantage
- wider choice of goods at lower price for consumers
- lower CoP as a result of offshoring and EoS for producers
What are the main problems with globalisation?
- promoted exploitation of workers, children, farmers & environment, and use of countries which have weaker health and safety laws
- external costs associated with trade e.g. food miles & global warming
- increased inequality e.g. rich countries have much greater access to internet than poor countries, putting poor countries at a bigger disadvantage as wealth creation is dependent on the ready availability of information
- liberalisation of financial markets has been associated with increased global instability e.g. 1990s Asian financial crises, global credit crunch
- argued that global imbalances are unsustainable e.g. US current account deficit
- 2008 crisis arguably led to deglobalisation
What is deglobalisation?
- countries adopt protectionist policies in an attempt to protect domestic employment
- e.g. USA gave subsidies to car industry in 2009
- EU raised duties on imported Vietnamese shoes in 2009
Explain the law of comparative advantage
- even if one country has an absolute advantage in the production of all goods, it can still benefit from specialisation and trade if it specialises in the production of goods in which it has a comparative advantage
- there must be difference in opportunity cost of producing the products
What is the formula for terms of trade?
(index of export prices)/(index of import prices)x100
What are the main criticisms of the law of comparative advantage?
- free trade is not necessarily fair trade e.g. rich countries might exert their monopsony power to force producers in developing countries to accept low prices
- based on unrealistic assumptions e.g. constant CoP, zero transport costs and no barriers to trade
What are the main benefits of protectionist policies?
- protect infant industries: without protection infant industries unable to compete due to lack of EoS
- protect geriatric industries
- ensure employment protection
- protect dumping
- correct a BoP deficit on current account: restrictions on imports may help reduce imbalance between value of imports and value of exports (however under floating exchange rate system this correction may happen automatically)
- restrict imports from countries who health and safety and environmental regulations are less stringent: arguably developing countries have unfair comparative advantage as production not subject to same laws
- strategic reasons i.e. not dependent on certain imports (food, defence equipment, energy) in event of war
- raise tax revenues (especially for developing countries)
- in retaliation e.g. trade restrictions against Iran, Russia
What are geriatric industries
industries that might demand protection so that they have time to restructure and rationalise production to become competitive again. These typically occur in developed economics losing their comparative advantage
What is dumping?
goods exported to another country at below average CoP - form of predatory pricing illegal under WTO rules
What are the main types of protection/ import barriers?
- tariffs: taxes on imported goods
- quotas: physical restriction on amount of goods that can be imported
- subsidies to domestic producers: grants given to domestic producers lower CoP, making goods more competitive ∴ act as barrier to trade
- administrative regulations e.g. strict labelling, h&s and environmental regulations inc. CoP for foreign firms
- if country does not have freely floating exchange rate, then authorities may hold down value of currency artificially to give goods a competitive advantage e.g. China
What determines the impact of a tariff on imports?
- size of tariff
- PED and domestic PES: if demand and supply both price elastic then tariff will be more effective in reducing imports
What are the main criticisms of protectionist policies?
- inefficient resource allocation
- higher prices and less choice for consumers
- less incentive for domestic producers to become more efficient
- difficulty of moving trade barriers - adverse affect on domestic producers
