Globalisation and trade restrictions

Globalisation

Globalisation - the increasing integration and interdependence of economies around the world.

Multinational company (MNC) - a firm that owns or controls production or other business operations in more than one country.

Host country - a country in which an MNC operates outside the country where it is based.

Home country - the country in which an MNC is based.

Globalisation links countries through trade, investment, production, information and migration. A product may be designed in one country, use components from several others and be assembled and sold internationally.

Causes of changes in globalisation

Named cause	How it changes globalisation
Trade restrictions	Lower restrictions make importing and exporting easier, increasing international trade; higher restrictions can slow it.
Transport costs	Cheaper, faster and more reliable shipping makes distant production and trade profitable; higher transport costs weaken these links.
Communication costs	Cheap digital communication lets firms coordinate workers, suppliers and customers across countries; disruption or higher cost has the opposite effect.
Movement of MNCs	An MNC entering more countries spreads capital, technology and production networks; withdrawal reduces international integration.

Analysis chain: Cause changes -> cross-border trade or investment becomes easier/harder -> firms reorganise production and sales -> economies become more/less connected.

Consequences of changes in globalisation

Area	Possible effects of greater globalisation	Why the final effect varies
International trade	Exports and imports usually rise as markets and supply chains connect.	Trade restrictions, transport costs and competitiveness still matter.
Competition	Consumers may gain lower prices, choice and quality; inefficient firms may lose sales.	Domestic firms may adapt, merge, specialise or close.
Environment	Technology can spread, but production, transport and resource extraction may raise pollution.	Regulation, energy sources and environmental standards determine the damage.
Migration	Workers may move towards higher wages and job opportunities.	Immigration rules, skills, family ties and costs restrict movement.
Income distribution	Skilled workers, owners and competitive exporters may gain; displaced workers may lose.	Education, mobility, tax and benefit policy affect how gains are shared.
Economic development	Trade, jobs, investment and technology can raise productivity and incomes.	Weak institutions, profit outflows or dependence on low-value production can limit gains.

The role of multinational companies

MNCs may move abroad to access customers, raw materials, skilled or lower-cost labour, transport links, tax advantages or stable business conditions. Their effects should be considered separately for host and home countries.

Country	Possible advantages	Possible disadvantages
Host	Jobs and wages; investment and tax revenue; exports; training, management skills and technology; stronger competition and supplier opportunities.	Profits may leave the country; domestic firms may be displaced; tax concessions reduce revenue; weak regulation may allow low wages or environmental damage; dependence on MNC decisions.
Home	Profits from overseas; access to markets and resources; growth of headquarters, research and high-skilled services; greater global influence.	Some production and jobs may move abroad; tax may be shifted overseas; the country may lose productive capacity in certain industries.

Evaluation: The effect of an MNC depends on the number and quality of jobs, tax actually paid, links with local suppliers, technology transfer, environmental rules and whether profits are reinvested locally.

Trade restrictions: the four methods

Protection - government action that restricts imports or supports domestic producers against foreign competition.

Tariff - a tax placed on imports, raising their domestic price.

Import quota - a legal limit on the quantity of a product that may be imported over a period.

Subsidy - a payment or financial support that lowers domestic producers' costs.

Embargo - a complete ban on importing or exporting a product, or on trade with a particular country.

Method	Immediate mechanism	Likely market effect
Tariff	Imported products become more expensive.	Import demand may fall; domestic firms may gain sales; the government earns tax revenue.
Import quota	Import quantity is directly restricted.	Domestic supply is protected, but shortages or higher prices may occur.
Subsidy	Domestic production costs fall.	Domestic firms can lower prices or expand output, but the government has an opportunity cost.
Embargo	The prohibited trade stops legally.	Domestic buyers must find substitutes; prices may rise sharply if alternatives are limited.

Reasons for trade restrictions

Infant (sunrise) industry - a new industry that may need temporary protection while it develops skills, scale and efficiency.

Declining (sunset) industry - an established industry experiencing falling output, demand or employment.

Strategic industry - an industry considered essential to national security or the basic functioning of the economy.

Dumping - selling a product in another country at an unusually low price, possibly below the cost of production; often to gain international market share.

Reason	Government's argument	Evaluation issue
Protect infant industries	Reducing foreign competition may let new firms gain experience and lower costs.	Protection may become permanent even if the industry never becomes competitive.
Protect declining industries	Slows job losses and gives workers and regions time to adjust.	Resources remain in an inefficient industry and consumers pay more.
Protect strategic industries	Reduces dependence on foreign suppliers of essentials.	Domestic production may be costly and the definition of strategic can be abused.
Avoid dumping	Prevents foreign firms from destroying domestic competition through unsustainably low prices.	A genuinely efficient foreign producer may be mistaken for a dumper.
Reduce a current-account deficit	Lower imports reduce payments leaving the current account.	Retaliation may reduce exports; weak domestic competitiveness remains unresolved.
Raise tax revenue	Tariffs provide government revenue.	Revenue falls if imports collapse and consumers bear higher prices.
Restrict demerit goods	Limits imports whose consumption causes harm.	Domestic production or illegal trade may replace imports.
Promote sustainability	Discourages goods with high transport emissions or weak environmental standards.	It may be disguised protection and can provoke retaliation.

Consequences of trade restrictions

Home country: possible gains	Home country: possible costs	Trading partners
Protected output, jobs and strategic capacity may rise.	Consumers face higher prices and less choice.	Export sales, output and employment may fall.
Tariffs raise revenue and imports may fall.	Competition weakens, so efficiency and innovation may fall.	Governments may retaliate with restrictions on the home country's exports.
Infant industries may gain time to become competitive.	Subsidies cost taxpayers; quotas and embargoes can create shortages or illegal markets.	World trade and the gains from specialisation may shrink.