Hello, Future Economists! Welcome to International Trade!
This chapter, Globalisation, Free Trade, and Protection, is crucial because it explains how countries interact economically. Understanding these ideas helps you make sense of why a shirt made in Vietnam is sold in London, or why governments sometimes try to block certain imports.
Don't worry if this seems like a lot of global movement; we will break it down piece by piece!
1. Globalisation and Multinational Companies (MNCs)
1.1 Defining Globalisation (6.2.1)
Globalisation is the process by which the world's economies become increasingly integrated (linked together) through the movement of goods, services, capital (money), and labour (workers).
Think of it this way: Globalisation means the world market is acting less like a collection of separate countries and more like one massive, interconnected village.
1.2 The Role of Multinational Companies (MNCs) (6.2.2)
The main driver of globalisation is the Multinational Company (MNC).
Definition: An MNC is a large firm that produces or sells goods and services in more than one country. They have a "home" country where their headquarters are, and "host" countries where they operate branches or factories.
Example: Coca-Cola (HQ in the USA) operates bottling plants and sells products in nearly every country in the world.
Costs and Benefits of MNCs to Host Countries
A host country is where the MNC sets up its factory or office (e.g., a factory owned by a US company built in Mexico).
Benefits for the Host Country:
- Job Creation: MNCs build new factories, directly employing local people and providing income.
- Improved Skills/Technology: Workers receive training, and the host country gains access to modern production methods and technology.
- Increased GDP: The production boosts the country's output and economic growth.
- Increased Competition: Local firms are forced to become more efficient to compete with the large MNC.
Costs for the Host Country:
- Competition Kills Local Firms: Small domestic businesses may be unable to compete and are forced to shut down, leading to job losses in the local sector.
- Repatriation of Profits: MNCs often send profits earned in the host country back to their headquarters (the home country). This money leaves the host economy.
- Resource Exploitation: MNCs may use up local resources (like water or minerals) or cause pollution, damaging the environment.
- Political Influence: Due to their size, MNCs can pressure the government to offer tax breaks or specific policies that favour the company over the local population.
Costs and Benefits of MNCs to Home Countries
A home country is where the MNC's headquarters are located (e.g., the USA for Coca-Cola).
Benefits for the Home Country:
- Income/Profit: The home country receives income from the profits repatriated (sent back) by the MNCs operating abroad.
- Economies of Scale: A larger global market allows the MNC to produce on a much larger scale, reducing costs.
Costs for the Home Country:
- Job Losses: If the MNC shifts production abroad (outsourcing) to countries with cheaper labour, jobs are lost in the home country.
- Less Investment: Funds are invested overseas rather than in the home country.
Quick Key Takeaway: Globalisation is the world connecting. MNCs drive this connection, bringing both wealth and risks (like competition and profit repatriation) to the countries they operate in.
2. Free Trade (6.2.3)
2.1 Defining Free Trade
Free Trade occurs when goods and services can be traded between countries without any artificial barriers, such as taxes or limits on quantity.
It is the opposite of protectionism (which we will cover next!). Free trade allows countries to fully benefit from the principle of specialisation (where countries focus on producing what they are best and most efficient at).
2.2 Benefits of Free Trade
Free trade is generally favoured by economists because it increases economic welfare across the world. The benefits are felt by everyone in the economy:
Benefits for Consumers:
- Lower Prices: Goods are produced in the country that can make them most cheaply, and competition drives prices down.
- More Choice: Consumers have access to a wider variety of goods from around the world (e.g., Japanese cars, French wines, Peruvian coffee).
- Higher Quality: Firms must constantly innovate and improve quality to compete internationally.
Benefits for Producers (Firms):
- Larger Markets: Firms can sell their goods to millions of customers globally, not just domestically.
- Greater Economies of Scale: Selling to larger markets means output increases, which helps firms achieve lower average costs.
- Cheaper/Better Inputs: Firms can import raw materials and capital equipment from whichever country offers the best price or quality.
Benefits for the Economy:
- Efficient Resource Allocation: Resources (land, labour, capital) move towards the industries where the country has a comparative advantage (where it is relatively most efficient).
- Higher Standard of Living: Lower prices and higher incomes (due to efficiency) lead to greater purchasing power.
Did you know? Many international organisations, such as the World Trade Organisation (WTO), exist specifically to promote and enforce free trade rules globally.
Quick Key Takeaway: Free trade means no barriers. This leads to lower costs, greater choice for consumers, and increased efficiency globally due to specialisation.
3. Protectionism: Barriers to Trade
3.1 Defining Protectionism
Protectionism is the use of barriers to restrict international trade. Governments implement these policies to protect domestic industries from foreign competition.
3.2 Methods of Protection (6.2.4)
These are the tools a government uses to restrict imports:
- Tariffs (Customs Duties):
Definition: A tariff is a tax placed on imported goods.
Effect: The tax increases the price of the imported good, making the domestically produced alternative relatively cheaper and more attractive.
- Import Quotas:
Definition: A quota is a physical limit on the volume or quantity of a particular good that can be imported over a specific period.
Effect: By limiting supply, quotas drive up the price of the imported good and guarantee a certain market share for domestic producers.
- Subsidies:
Definition: A subsidy is a payment or financial aid given by the government to domestic producers.
Effect: This lowers the domestic producer's costs, allowing them to sell their goods at a lower price than imports, making them more competitive.
- Embargoes:
Definition: An embargo is a complete ban on the import or export of a specific product or trade with a specific country, usually for political reasons.
Effect: Totally prevents competition, but often isolates the home country politically or economically.
Quick Review of Protection Methods (TQSE)
- Tariffs = Tax on imports.
- Quotas = Quantity limit.
- Subsidies = Support payments to local firms.
- Embargoes = Entire ban on imports.
3.3 Reasons for Protection (Why Governments Intervene) (6.2.5)
Governments typically justify protectionist measures using four main arguments:
- To Protect Infant Industries:
A new (infant) industry is one that has just started and cannot yet compete with large, established foreign rivals because it hasn't achieved economies of scale. Protection gives it time to grow, become efficient, and eventually compete internationally.
- To Protect Declining Industries:
When an industry is losing its competitive advantage (e.g., old manufacturing plants), protection gives the government time to manage the decline slowly. This prevents sudden mass unemployment and allows workers time to retrain for new jobs.
- To Protect Strategic Industries:
These are industries considered vital for national security or essential public services (e.g., defense, key food production, energy supply). A country may protect these sectors to ensure it is not dependent on foreign supply, especially during political conflict.
- To Avoid Dumping:
Dumping occurs when a foreign firm sells goods in another country at a price below their cost of production. The goal is usually to eliminate domestic competitors, allowing the foreign firm to establish a monopoly later. Protection measures (like high tariffs) can prevent this unfair practice.
3.4 Consequences and Effectiveness of Protection (6.2.6)
Protectionism creates winners and losers, both domestically and internationally.
A. Impact on the Home Country (the one imposing the barrier)
Benefits (Pros of Protection):
- Protects Domestic Employment: Local firms remain open, saving jobs.
- Government Revenue (Tariffs): The tax collected on imports increases government income.
- Better Balance of Payments: Restricting imports improves the current account position (less money leaving the country to pay for foreign goods).
Costs (Cons of Protection):
- Higher Prices and Less Choice for Consumers: Since foreign competition is limited, domestic firms can charge higher prices, and consumers have fewer goods to select from.
- Reduced Efficiency: Domestic firms, protected from competition, have less incentive to innovate or cut costs. They remain inefficient.
B. Impact on Trading Partners (the countries being restricted)
Costs for Trading Partners:
- Reduced Exports: The partner country loses sales and income because its goods cannot enter the protected market easily.
- Retaliation Risk: The trading partner is likely to introduce its own protectionist measures against the home country's exports, leading to a trade war. This restricts world trade overall.
Effectiveness of Protection:
Protection measures are often effective in the short run (e.g., saving a declining industry for a few years). However, they tend to be ineffective or damaging in the long run because they remove the incentive for local firms to become competitive and efficient, ultimately leading to higher costs for consumers and a less flexible economy.
Final Key Takeaway: Protectionism uses barriers (TQSE) for reasons like protecting new or strategic industries. While it saves some local jobs, its main long-term cost is inefficiency, higher prices, and the risk of international trade wars.