6.2. Globalisation and trade restrictions
- Syllabus
- 0455–2027–2028
- Topic
- 6.2
- Level
- —
Learning objectives
6.2.1Definition of globalisation• Definition of globalisation6.2.2Causes and consequences of changes in globalisation• causes of changes in globalisation:• changes in trade restrictions• changes in transport costs• changes in communication costs• movement of multinational companies (MNCs)• effects of changes in globalisation on:• international trade• competition• the environment• migration• income distribution• economic development6.2.3Role of multinational companies (MNCs)• MNCs and their advantages and disadvantages to host countries and home countries6.2.4Types of trade restrictions / methods of protection• tariffs• import quotas• subsidies• embargoes6.2.5Reasons for trade restrictions• protect infant (sunrise) industries• protect declining (sunset) industries• protect strategic industries• avoid dumping• reduce a deficit on the current account of the balance of payments• raise tax revenue• restrict the import of demerit goods• promote environmental sustainability6.2.6Consequences of trade restrictions• impact of trade restrictions on the home country and its trading partners• advantages and disadvantages of restricting free trade
Define globalisation
Globalisation is the increasing integration and interdependence of national economies. It occurs as goods, services, capital, people, technology and information move more easily across borders, linking production and markets in different countries.
A product may be designed in one country, financed in another, assembled from inputs made in several others and sold worldwide. Decisions or shocks in one economy can therefore affect firms, workers and consumers elsewhere.
Globalisation is broader than international trade. Trade is one cross-border flow; globalisation also includes investment, MNC production networks, migration, communication and the spread of knowledge.
Trace causes and effects of changing globalisation
| Change | Route to more globalisation |
|---|---|
| lower trade restrictions | imports and exports face fewer barriers |
| lower transport costs | distant goods become cheaper to move |
| lower communication costs | firms coordinate, sell and transfer knowledge internationally |
| MNC expansion | production, investment and employment link more countries |
| Area | Possible gains | Possible costs or uneven effects |
|---|---|---|
| trade and competition | more markets, choice and pressure to improve | domestic firms may lose sales or exit |
| environment | cleaner technology can spread | extra transport and production may create pollution |
| migration | workers fill shortages and send remittances | skills may leave origin countries; services may face pressure |
| income distribution | new jobs, exports and lower prices can raise incomes | gains may favour skilled workers, owners, regions or MNCs more than others |
| development | investment, tax revenue, skills and technology | dependence, profit outflows or weak labour/environmental standards |
Globalisation does not automatically increase or reduce competition or inequality. The result depends on market entry, firm power, worker skills, ownership, taxation, regulation and how gains are shared.
Evaluate multinational companies
A multinational company (MNC) owns or controls production in more than one country. The host country receives the foreign operation; the home country is where the MNC is based.
| Country | Possible advantages | Possible disadvantages |
|---|---|---|
| host | jobs, investment, exports, tax revenue, skills and technology | profit outflows, pressure on local firms, environmental damage, low pay or tax avoidance |
| home | profits, overseas markets, cheaper inputs and stronger global scale | jobs or investment may move abroad; tax base may fall |
The balance depends on the type and quality of jobs, local sourcing, tax rules, regulation, profit reinvestment, technology transfer and whether the MNC gains excessive market power.
Do not count every foreign seller as an MNC: the firm must operate or control production across countries, not merely export.
Distinguish four trade restrictions
| Method | How it restricts trade | Immediate effect |
|---|---|---|
| tariff | tax on imports | raises their domestic price and government revenue |
| import quota | maximum quantity or value allowed | directly limits import supply |
| subsidy | payment or support to domestic producers | lowers their costs relative to imports |
| embargo | complete ban on trade with a country or in a product | stops the prohibited trade |
Each method protects domestic producers by making imports dearer, scarcer or unavailable, or by making home production cheaper. The exact effect on price, quantity and revenue differs by method.
A quota is not a tax and does not automatically create government revenue. A subsidy supports domestic supply rather than directly taxing or limiting imports.
Explain why governments restrict trade
| Aim | Reason for protection |
|---|---|
| infant industry | give a new industry time to lower costs and become competitive |
| declining industry | slow job losses and structural change |
| strategic industry | preserve essential domestic capacity or security |
| anti-dumping | respond to imports sold below cost or unfairly low prices |
| current-account deficit | reduce import spending |
| tax revenue | collect tariff income |
| demerit goods | reduce harmful imports |
| environmental sustainability | discourage high-pollution goods or production |
The reason must match the instrument and time horizon. Temporary infant-industry protection may allow learning and scale, while permanent protection can remove pressure to become efficient.
A stated aim is not proof the policy will achieve it. Import demand, retaliation, domestic capacity and enforcement determine the outcome.
Evaluate the consequences of trade restrictions
| Home-country group | Possible gain | Possible loss |
|---|---|---|
| protected producers and workers | higher sales, output and employment | weaker competitive pressure may reduce efficiency |
| consumers and import-using firms | domestic supply may survive | higher prices, less choice and higher input costs |
| government | tariff revenue and strategic control | subsidy cost and enforcement cost |
Trading partners lose export demand, output and employment. They may retaliate with their own restrictions, shrinking trade further. A tariff can also divert demand toward less efficient domestic production.
Short-run protection may preserve an infant, declining or strategic industry, reduce selected harmful imports or improve the current account. Long-run costs can include higher prices, inefficient firms, slower innovation, retaliation and reduced specialisation.
Do not assess only domestic producers. A complete judgment includes consumers, firms using imported inputs, government, trading partners and the time period.