Globalization, Free Trade and Protection (Copy)

6.2.1 Definition of Globalisation

• Globalisation = process by which economies, cultures, and societies become increasingly interconnected through:
  • Trade in goods and services (e.g., China exports manufactured goods worldwide).
  • Movement of capital and labour (e.g., foreign investment and migration).
  • Spread of technology and ideas (e.g., smartphones, internet platforms).
  • Multinational companies (MNCs) expanding production across borders.

Diagram: Features of Globalisation

Trade ↔ Investment ↔ Technology ↔ Labour Mobility
         ↓                   ↑
      Global Interconnectedness

6.2.2 Role of Multinational Companies (MNCs)

• Definition: Firms operating in more than one country, with headquarters in one (home country) and branches in others (host countries).

Benefits to Host Countries:

• Job creation.
• Transfer of skills, technology, and expertise.
• Increased exports and foreign exchange earnings.
• Infrastructure improvements (e.g., transport, energy).

Costs to Host Countries:

• Repatriation of profits to home country (less reinvestment locally).
• Market dominance → local firms may be forced out.
• Exploitation of cheap labour and weak regulations.
• Environmental concerns.

Benefits to Home Countries:

• Higher profits and dividends for shareholders.
• Access to raw materials from host countries.
• Market expansion → boosts economic growth.

Costs to Home Countries:

• Loss of jobs as production is relocated abroad.
• Overdependence on global operations.

Diagram: MNC Flow

Home Country → Capital & Technology → Host Country
Host Country → Cheap Labour & Resources → Home Country

6.2.3 Benefits of Free Trade

• Definition: Trade without barriers (no tariffs, quotas, or restrictions).

For Consumers:

• Lower prices (imports from cheapest producers).
• Wider variety of goods and services.
• Better quality through competition.

For Producers/Firms:

• Access to larger global markets.
• Economies of scale from higher output.
• Increased competitiveness.

For Economies:

• Efficient allocation of resources (comparative advantage).
• Faster economic growth.
• Higher employment in export industries.

Diagram: Gains from Free Trade

Country A specialises in Oil, Country B in Textiles.
Trade → Both consume more of both goods than without trade.

6.2.4 Methods of Protection

• Definition: Barriers imposed by governments to restrict imports and protect domestic industries.

Main Methods:

1. Tariffs (import taxes):
   • Raise price of imports → domestic goods more competitive.

   Diagram:

   Price ↑ → Import demand ↓
   

2. Import quotas:
   • Limit quantity of imports allowed.
   • Protects local industries by restricting supply.
3. Subsidies:
   • Government financial support to domestic firms to lower costs.
   • Makes exports more competitive.
4. Embargoes:
   • Complete ban on trade with specific countries (often political).

6.2.5 Reasons for Protection

1. Infant industry argument:
   • New industries need protection until they become competitive.
2. Declining industries:
   • To protect jobs in industries facing long-term decline.
3. Strategic industries:
   • Defence, energy, or agriculture considered vital for national security.
4. Prevention of dumping:
   • Stopping foreign firms selling below cost to destroy local firms.
5. Balance of payments protection:
   • Reducing imports to limit trade deficits.
6. Political reasons:
   • Embargoes to punish or isolate countries.

Diagram: Protection Justification

Protection → Short-term industry support
         ↓
Risk: Higher consumer prices, retaliation

6.2.6 Consequences of Protection

On the Home Country:

• Positive:
  • Saves domestic jobs in protected industries.
  • Encourages local production.
  • Prevents over-dependence on imports.
• Negative:
  • Consumers face higher prices and less choice.
  • Inefficiency → domestic firms may lack innovation.
  • Retaliation from trading partners (trade wars).

On Trading Partners:

• Reduced export revenues.
• Worsening of diplomatic/economic relations.
• May retaliate with their own tariffs.

On the Global Economy:

• Reduction in global trade volumes.
• Slower economic growth worldwide.

Diagram: Consequences of Protection

Short-term: Domestic jobs saved
Long-term: Higher prices, inefficiency, retaliation