🌍 Globalisation: Breaking Down Economic Borders (9708 A Level Economics)
Welcome to one of the most exciting and relevant topics in Economics: Globalisation! This chapter explains how the world economy has become deeply interconnected, turning individual national economies into a vast global marketplace.
Why is this important? Everything you wear, eat, or use is likely a product of globalisation. Understanding this topic helps you analyze huge real-world issues, from trade wars and poverty reduction to climate change and technological shifts. Let’s dive in!
1. Defining Globalisation (11.6.1)
At its heart, globalisation is about increasing integration. Think of the world economy as a giant puzzle, and globalisation is the process of sticking all the pieces together.
What is Globalisation?
Globalisation is the process by which the world's economies, cultures, and populations are becoming increasingly interconnected, primarily through cross-border trade in goods and services, flows of money (capital), and movement of people (labour) and information.
It means that economic decisions made in one country (say, a trade policy change in the US) can rapidly affect consumers and producers thousands of miles away (say, farmers in Vietnam).
Quick Review: The key flows of Globalisation
- Goods & Services: Free trade is rising.
- Capital: Money moves easily (e.g., Foreign Direct Investment).
- Labour: People migrate for work (though often less free than capital).
- Information/Technology: Knowledge and data flow instantly.
Causes of Globalisation (Why is it speeding up?)
The acceleration of globalisation is driven by several powerful forces:
(i) Technological Advances
- Transport: Containerisation and cheaper shipping (e.g., large super-tankers) make transporting goods across oceans incredibly cheap and efficient.
- Communication/Internet: Instant communication (email, video calls) allows multinational companies (MNCs) to manage factories and staff all over the world easily.
(ii) Liberalisation of Trade and Investment
- Reduced Protectionism: Organisations like the World Trade Organisation (WTO) encourage countries to reduce tariffs (taxes on imports) and quotas.
- Trade Agreements: Countries signing agreements to reduce barriers (e.g., Free Trade Agreements).
- Deregulation: Many governments have removed rules that restricted foreign ownership or capital flows, making international investment easier.
(iii) Growth of Multinational Companies (MNCs)
MNCs (like Apple, Toyota, or Coca-Cola) operate in multiple countries. They drive globalisation by:
- Seeking out the cheapest production locations globally.
- Spreading technology and management techniques internationally.
Did you know? The cost of shipping a standard container across the Atlantic Ocean has fallen dramatically since the 1950s, making it cheaper to ship goods than to manufacture them locally in many cases.
2. Consequences of Globalisation (11.6.1)
Globalisation is a double-edged sword, bringing massive benefits to some while creating serious challenges for others. When answering exam questions, you must provide a balanced argument covering both sides.
Positive Consequences (Advantages)
- Increased Economic Growth: Globalisation allows countries to specialise according to their comparative advantage, boosting efficiency and overall world output (GDP).
- Lower Consumer Prices: Firms move production to low-wage countries, reducing costs. This cost saving is often passed on to consumers in the form of lower prices (e.g., cheaper electronics or clothing).
- Greater Variety and Choice: Consumers gain access to a wider range of imported goods and services.
- Improved Efficiency: Increased international competition forces domestic firms to become more efficient, innovate, or risk going out of business.
- Transfer of Technology and Skills: MNCs bring advanced technology, training, and management skills to developing host countries, boosting their human capital and potential growth.
Negative Consequences (Disadvantages)
- Increased Inequality (Within countries): High-skilled labour in developed countries might benefit hugely from global markets, while low-skilled manufacturing workers face job losses due to outsourcing to cheaper economies.
- Job Insecurity and Structural Unemployment: As industries move abroad, workers are left unemployed (structural unemployment). Example: Textile factory closures in developed nations.
- Environmental Costs: Increased production and transportation (shipping, air travel) lead to higher consumption of fossil fuels and greater pollution. Enforcement of environmental standards can be difficult globally.
- Loss of National Sovereignty: When governments sign international trade treaties or accept conditions from organisations like the IMF or WTO, they may lose the ability to set their own domestic policies (e.g., they cannot easily use protectionism to save a struggling industry).
- Vulnerability to External Shocks: Since countries are highly interconnected, an economic crisis in one major region (like the 2008 Financial Crisis) can quickly spread worldwide.
3. Economic Integration (11.6.2)
Globalisation doesn't happen magically; it is often formalised through agreements where countries agree to link their economies more closely. This is called Economic Integration.
Think of integration as a ladder, where each rung involves deeper commitment and closer cooperation. You need to know the distinction between the four main types:
(i) Free Trade Area (FTA)
This is the first step up the ladder.
- Definition: Member countries eliminate all tariffs and quotas on trade among themselves.
- External Policy: Each member is free to set its own tariffs and trade restrictions against non-member countries.
- Example: NAFTA (now USMCA).
(ii) Customs Union (CU)
A Customs Union is a Free Trade Area with one additional rule.
- Definition: An FTA plus a Common External Tariff (CET) imposed on all goods imported from outside the union.
- Why is CET important? It prevents external countries from importing cheaply into the country with the lowest individual tariff and then shipping goods duty-free to high-tariff partner countries.
- Example: MERCOSUR in South America.
(iii) Monetary Union (MU)
This is a big step, requiring a major loss of national control.
- Definition: A Customs Union plus a common currency and a single central monetary authority (Central Bank).
- Consequences: Members lose the ability to set their own interest rates or use their exchange rate to adjust to economic shocks.
- Example: The Eurozone (countries using the Euro).
(iv) Full Economic Union
The highest level of integration, requiring nearly total alignment.
- Definition: A Monetary Union plus the harmonisation (making policies the same) of national economic policies, including fiscal (taxation and government spending) and regulatory policies.
- Consequences: Complete free movement of goods, services, capital, and labour, combined with unified macro policy.
- Note: The European Union is often cited as aiming for this, but it is not fully achieved, as tax policies often remain under national control.
Memory Aid for Integration: CET F.A.M.E (Common External Tariff, Free movement of factors, Alignment of Macroeconomic policy, Exchange rate/currency fixed/common)
4. Trade Creation and Trade Diversion (11.6.3)
When countries form a trading bloc (like an FTA or CU), the welfare impact (whether the world is better off) is determined by two contrasting effects: Trade Creation and Trade Diversion.
Don't worry if this seems tricky at first—it’s simply about comparing costs!
(i) Trade Creation
Trade creation happens when a country shifts consumption/production from a higher-cost domestic producer to a lower-cost producer within the trading bloc.
- Process: Before the bloc, Country A bought high-cost goods from its own inefficient producers because of tariffs on imports. After the bloc is formed, Country A can import the same good duty-free from its new partner Country B, which is a lower-cost producer.
- Welfare Effect: Positive. Resources are now allocated more efficiently according to comparative advantage, resulting in lower prices and greater consumer surplus. This is a net gain for the world economy.
Analogy: You used to buy expensive, low-quality coffee from a local shop because imported coffee had a heavy tax. Now, thanks to the FTA, you can buy cheaper, better coffee from your partner country. You are better off.
(ii) Trade Diversion
Trade diversion happens when a country shifts consumption/production from a lower-cost non-member producer to a higher-cost producer within the trading bloc.
- Process (Crucial Point): Country A imports from non-member Country C because Country C is the cheapest producer globally. However, when Country A joins a Customs Union, it must apply the Common External Tariff (CET) to Country C’s goods. This tariff makes Country C's goods artificially more expensive than the duty-free goods imported from the (naturally higher-cost) partner Country B.
- Welfare Effect: Negative. Trade diversion pushes production away from the globally most efficient producer (Country C) to a less efficient partner producer (Country B). This results in a loss of global economic welfare.
Analogy: Country A used to buy the world's cheapest bananas from Country C (non-member). Now, due to the CET, Country A must impose a large tariff on Country C’s bananas, making them more expensive than the slightly higher-cost, tariff-free bananas from partner Country B. Country A is forced to buy from a less efficient source.
Overall Evaluation
When assessing a new trading bloc, economists must determine:
If Trade Creation > Trade Diversion, the overall effect on the country/bloc is positive.
If Trade Diversion > Trade Creation, the overall effect on the country/bloc is negative.