11.6 Globalisation
- Syllabus
- 9708–2026–2027
- Topic
- 11.6
- Level
- A2
Learning objectives
Globalisation links economies through trade, finance, technology, migration and information
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.
Economic integration deepens as members share more market rules and autonomy
| Form | Internal barriers | External policy | Additional integration |
|---|---|---|---|
| Preferential trade area | Some member barriers reduced | Independent | Limited preferences |
| Free trade area (FTA) | Tariffs/quotas substantially removed among members | Each member keeps own tariffs; rules of origin prevent trans-shipment | Goods/services market access |
| Customs union | Internal free trade | Common external tariff (CET) | Members cannot independently set non-member tariffs |
| Common market | Customs union | Common external trade policy | Freer movement of labour and capital |
| Economic union | Common market | Shared external framework | Wider coordination/harmonisation of economic policies |
| Monetary union | May accompany deep integration | Joint monetary framework | Common currency or irrevocably fixed rates and common monetary policy |
The decisive FTA-customs-union difference is the common external tariff. Both remove internal tariffs; only the customs union requires members to apply the same tariff to non-members. A shared currency is a monetary-union feature, not a necessary customs-union feature.
| Potential gain | Potential cost/condition |
|---|---|
| Specialisation, scale, competition, lower prices, quality/choice and productivity | Structural unemployment and unequal regional/sectoral adjustment |
| Larger market attracts FDI and strengthens bargaining/political links | Rules/non-tariff barriers may still restrict trade |
| Trade creation and stronger within-bloc supply chains | Trade diversion from efficient outsiders |
| Factor mobility can fill skill/capital gaps | Migration tensions/brain drain and congestion |
| Common policy/currency can reduce transaction and exchange uncertainty | Loss of tariff, monetary or wider policy sovereignty; one policy may not fit all |
Deeper integration is not automatically better: compare market size/complementarity, creation versus diversion, mobility and adjustment support, common-policy fit, non-tariff rules and the value placed on national policy autonomy.
A member signing its own non-member tariff deal weakens a customs union's CET. Wage differences or currency changes alone do not dissolve the customs-union rule.
Identify creation or diversion by comparing the old and new real-cost supplier
| Outcome after integration | Supplier switch | Core welfare tendency |
|---|---|---|
| Trade creation | Higher-cost domestic production is replaced by lower-real-cost member imports | Resources reallocated toward efficiency; lower price raises consumption and reduces costly domestic output |
| Trade diversion | Lower-real-cost non-member imports are replaced by higher-real-cost member imports because the CET changes tariff-inclusive prices | World production cost rises; member trade expands but efficiency may fall |
Use three steps: (1) add the old/new ad valorem or specific tariff to each foreign price; (2) choose the cheapest available supplier before and after integration; (3) compare suppliers' pre-tariff resource costs. Domestic-to-cheaper-member is creation; cheaper-outsider-to-costlier-member is diversion. Both can occur across different products.
In the standard small-country tariff-removal diagram, the domestic price falls from tariff-inclusive import price to the lower partner price. Quantity demanded rises, domestic supply falls and imports expand. Consumer surplus rises; domestic producer surplus and government tariff revenue fall. The two net welfare-gain triangles are the production-efficiency gain plus consumption-efficiency gain.
| Larger likely creation/welfare gain | Smaller likely gain |
|---|---|
| Larger tariff removal/price fall | Small price difference |
| More elastic domestic demand and supply | Inelastic demand/supply or strong home preference |
| High-cost domestic output initially | Little domestic displacement/consumption response |
| Large member scale/competition and dynamic investment effects | High adjustment costs, unemployment or external costs |
Membership does not guarantee net benefit. Add creation/diversion, tariff-revenue and producer/consumer redistribution, structural unemployment, scale/competition, FDI, current-account/multiplier and environmental effects. A tariff-revenue transfer is not by itself a national resource loss; net welfare depends on real efficiency changes and external effects.