Pack 7 Part 1: International Economics Flashcards
What are the characteristics of globalisation?
a) an increase in international trade and interdependence:
- businesses/countries increasingly specialise where they have an advantage and engage in international trade, increasing interdependence
b) Increased foreign direct investment and movement of capital:
- development of globally banking system and increase in financial capital moving across the world
- increase in foreign direct investment, meaning purchase of foreign company or setting up a company abroad
c) increased importance of global companies:
- characterised by more TNCs because global companies can:
- take advantage of growing global demand
- lower costs through the offshoring production
- can lower tax bills through tax avoidance
What is globalisation?
the increasing internationalisation of trade and ever-increasing integration of the world’s economies into a single interdependent global market
What is transfer pricing?
- if corporation tax is higher in Country where a business operates than Country B where the business also operates
- the business will want to make more profits in Country B to minimise the tax paid
- therefore, they will charge a high transfer price for the raw materials to achieve this
What factors contribute to globalisation?
a) improvements in transport:
- significant falls in the cost of transport, due to increasing speed of air/sea travel
- so goods can be imported/exported more cheaply, allows firms to set-up all around the world, such as to take advantage of cheap labour
HOWEVER: cost of transport very dependent on oil prices, which have dramatically risen at times and is heavily taxed for environmental reasons, might become more expensive in future as push for non-renewable energy resources
b) improvement in communication:
- significant falls in cost of communication, such as cost/availability of the Internet
- growth of e-commerce has allowed cheap access to global markets
- improvements in ICT allow firms to operate more efficiently on a global scale, allowing global companies to operate cost-efficient and reduce possible diseconomies of scale
HOWEVER: relies on improvements in transport and even if improved may still be difficult to manage TNCs and technology can have technical problems
What are the characteristics of globalisation?
- an increase in international trade and interdependence
- increased foreign direct investment and movement of capital
- increased importance of global companies - TNCs
Explain tax avoidance referring to global companies
Transfer pricing:
- if a global company mines raw materials in Country A and transports them to Country B to manufacture, pay tax in each country on the profits produced there
- if low corporation tax in country A (mine raw materials) and high corporation tax in country B (manufacturing)
- company will charge a high transfer price (price for raw materials) to increase profits in Country A and reduce tax paid
Example 2:
- Country C: low tax country where the global company has its headquarters
- Country D: high tax country where the global company has located production
- HQ charges the subsidiary (for use of their patents and brands) to increase profits in country C and so reduce tax paid
Factors contributing to globalisation
-
Improvements in transport:
- exports cheaper,
- firms relocate so take advantage of cheap labour
HOWEVER: cost dependent on oil prices - rise dramatically/heavily taxed, non-renewable sources scarcer -
Improvement in Communication:
- fall in cost/growth of e-commerce allow firms to operate efficiently on global scale
- However: growth of e-commerce relies on improvements in transport -
Lowering of trade barriers:
- cheaper to export
- can be physically more trade
However: countries may be less reluctant to reduce trade barriers in times of economic hardship : protectionism -
Growth of trading blocs:
- e.g EU and USMCA
However: may reduce trade between member and non-member countries (protectionist measures) -
capital mobility and the opening up of markets:
- capital mobility = reduce restrictions on capital movements
- collapse of communism/opening up of China = higher FDI opportunities -
Increased development of economies and rising real incomes:
- increased consumption = higher imports
- as countries develop, can export more via industrialisation
However: depend on marginal propensity to import, as some may choose to save rather than spend -
Increased importance of Transnational companies:
- mean more firms operating in range of different countries should = more exporting of final products to a wide range of different countries
- also importing raw materials to minimise costs of production = higher interdependence between countries
HOWEVER: backlash against TNCs if continue to avoid paying tax/causing environmental damage
Impacts of globalisation on individual countries
- increased world output, growth and employment, as specialise internationally where they have an advantage
- reduction in absolute poverty: greater world growth should be more jobs
- lower inflation rate: global companies locating in low-cost countries, see costs of production fall and reduction in price of goods
HOWEVER:
- increased inequality, as main beneficiaries are business owners
- job losses and the loss of industries as countries relocate leading to de-industrialisation = job losses
- greater risk: more specialised
Impact of globalisation on governments
- greater economic prosperity and political benefits: global companies provide employment opportunities
- improved budget balance: increase in growth = greater tax revenue/ less spending on benefits
However:
- tax avoidance
- potential political costs: global companies may drive down wages, provide poor working conditions and damage environment
Impact of globalisation on workers
- global companies may provide employment: find employment in different countries
- higher wages and living standards (as global demand increases with economic growth/trade)
However:
- potential job losses: if companies relocate
- downward pressure on wages: workers now competing in global workforce pressure to keep wages low as companies can relocate to areas with cheaper labour
Impact of globalisation of producers
- gaining larger market
- lower production costs: economies of scale, offshoring by relocating production to lower cost countries
- tax avoidance and transfer pricing
HOWEVER:
- increased risk and interdependence
- diseconomies of scale (communication, bureaucracy etc)
- greater competition
- anti-globalisation backlash (exploitation of workers, tax avoidance)
Impact of globalisation on consumers
- increased consumer choice
- lower prices (companies can reduce production costs/ increased competition)
However:
- issue of homogenisation: companies may put local producers out of business and so reduce options available for consumers
- higher prices set by global companies: lower costs of production may not be passed onto consumers - monopoly power
Impact of globalisation on the environment
- transportation of goods: air/noise pollution
- production of goods and services - pollution
- stain on environment and scarce resources
However:
- development of renewable energy
What is regulation of transfer pricing?
- used to tackle issue of tax avoidance
- Arm’s length principle: price agreed in a transaction between two related parties must be the same as the price agreed in a comparable transfer between two unrelated parties
- when unrelated companies carry out transactions with each other, market forces determine price of goods etc
- however, transactions between related companies, external forces may not directly affect prices because of corporate synergies, tax planning etc
HOWEVER:
- too much room for interpretation
- inability to control other forms of tax avoidance
Global tax reforms
- move by G7 to implement minimum rate of corporation tax to prevent companies reducing corporation tax rates to attract global companies and ensure a fair amount of tax is paid by these companies no matter the country
Limits to controlling global companies
- issues for developing countries: if global companies have strong influence (large output compared to economy), countries may find it hard to control, especially if companies have better lawyers etc
- balance between attracting and controlling global companies:
- many countries rely on FDI so may be an incentive to under-regulate to attract them, especially as global companies can relocate elsewhere
- global nature of companies: response to issues need to be global to be successful - difficult
Assumptions of international trade models
- only two countries
- no transport costs
- no economies of scle
- homogeneous goods (identical)
- factors of production are perfectly mobile (can be switched between industries instantly without cost)
- perfect knowledge
- no tariffs or quotas
absolute advantage
ability of a country to produce a greater qty of a good or service with the same qty of inputs per unit of time
trade only beneficial if OPPORTUNITY COST RATIOS differ between countries
comparative advantage
an economy’s ability to produce a particular good/service at a lower opportunity cost than its trading partner
