11.6 Globalisation

Globalisation is the increasing integration and interdependence of economies and societies through cross-border flows of goods, services, capital, people, technology and ideas.

It can expand markets, specialisation, competition and knowledge transfer, but can also transmit shocks, intensify inequality, weaken bargaining power or increase environmental pressure. Effects differ by sector, country and group.

A global supply chain can lower consumer prices and spread production know-how, yet a port closure or financial shock can disrupt several countries at once.

Globalisation is not a single policy or an automatic benefit; distinguish openness from the distribution and resilience of its effects.

A preferential trade area lowers some barriers; a free-trade area removes internal tariffs while members keep separate external policies; a customs union adds a common external tariff; a common market adds freer factor movement; an economic and monetary union coordinates wider policies and may share a currency.

Each deeper stage increases integration but reduces some national policy autonomy. The real effect depends on member economies, rules of origin, trade creation, diversion and adjustment costs.

A customs union lets members trade without internal tariffs but prevents each member from setting an independent tariff on a non-member. A common market additionally allows labour and capital to move more freely.

A free-trade area is not a customs union, and sharing a currency is not required for every form of economic integration.

Trade creation occurs when integration lets members import from a lower-cost partner instead of producing domestically. Trade diversion occurs when a member switches from a more efficient non-member to a less efficient member because the common external tariff changes relative prices.

Creation tends to improve efficiency and consumer welfare; diversion can reduce it, although dynamic investment, bargaining and wider integration benefits may alter the overall judgement.

If domestic cost is 12, member cost is 8 and non-member cost is 6, a customs union may create trade if the member replaces domestic output, but divert trade from the non-member if the tariff makes the member supplier cheaper at the border.

Membership does not guarantee net welfare gains: compare the old supplier, the new supplier, tariff revenue and consumer/producer effects.