Globalization, Free Trade and Protection | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)
6.2.1 Definition of Globalisation
- Globalisation is the increasing integration and interdependence of economies across the world through:
- Trade
- Investment
- Technology
- Movement of people and capital
- It involves the expansion of international markets and the global spread of:
- Products
- Services
- Labour
- Culture and knowledge
6.2.2 Role of Multinational Companies (MNCs)
Definition:
- MNCs are firms that operate in more than one country, often with headquarters in one nation and production or branches elsewhere.
Benefits to Host Countries:
| Benefit | Explanation |
|---|---|
| Employment opportunities | Jobs created for local workers |
| Technology transfer | Advanced equipment and techniques introduced |
| Infrastructure development | Roads, ports, power systems may improve |
| Foreign direct investment (FDI) | Boosts capital inflow and tax revenue |
| Training and skills | Workers gain new experience and education |
Costs to Host Countries:
| Cost | Explanation |
|---|---|
| Exploitation of labour | Low wages, poor conditions, limited rights |
| Profit repatriation | Profits sent back to home country instead of being reinvested locally |
| Environmental damage | Pollution, deforestation without proper regulation |
| Dependency | Over-reliance on one MNC or sector |
| Cultural erosion | Loss of local identity due to foreign corporate influence |
Effects on Home Countries:
| Positive | Negative |
|---|---|
| Higher global profits | Loss of jobs due to outsourcing |
| Access to cheap resources | Decline in domestic industries |
| Global brand presence | Political backlash from job losses |
6.2.3 Benefits of Free Trade
Definition:
- Free trade refers to international trade without barriers, such as tariffs, quotas, or subsidies.
Benefits for Consumers:
- Greater variety of goods and services.
- Lower prices due to global competition.
- Higher quality due to efficiency and innovation.
Benefits for Producers:
- Access to larger markets for exports.
- Cheaper inputs and raw materials.
- Economies of scale from mass production.
Benefits for Economies:
- Increased efficiency from specialization (comparative advantage).
- Faster economic growth via trade expansion.
- Technology transfer and global investment opportunities.
6.2.4 Methods of Protection
Protectionism:
- Use of barriers to restrict imports and shield domestic industries.
Methods:
| Method | Description |
|---|---|
| Tariffs | Taxes on imported goods → raises prices to protect domestic firms |
| Import Quotas | Limits quantity of imports → controls supply |
| Subsidies | Government payments to domestic producers → lowers costs and improves competitiveness |
| Embargoes | Complete bans on trade with certain countries or products |
6.2.5 Reasons for Protection
| Reason | Explanation |
|---|---|
| Infant Industry Argument | New industries need time to develop and become competitive |
| Declining Industry Protection | Prevents large job losses in sunset industries |
| Strategic Industries | Defense, food, and health sectors need safeguarding |
| Prevent Dumping | Foreign firms selling at unfairly low prices to eliminate competition |
| Correct Trade Imbalances | Reduce current account deficit by limiting imports |
| Protect Jobs | Especially during economic downturns or shocks |
| Maintain Cultural Identity | Shield domestic creative industries (films, books, media) |
6.2.6 Consequences of Protection
Positive Effects:
| Home Country | Trading Partners |
|---|---|
| Saves domestic jobs | May force others to diversify |
| Protects vital industries | Temporary gain from new markets |
| Maintains economic stability | Encourages self-sufficiency |
Negative Effects:
| Home Country | Trading Partners |
|---|---|
| Higher prices for consumers | Retaliation (trade wars) |
| Less efficiency due to lack of competition | Loss of export markets |
| Misallocation of resources | Global trade slowdown |
| Slower innovation | Damage to diplomatic relations |
Effectiveness Considerations:
- Short-term protection may help struggling sectors.
- Long-term protection often leads to inefficiency and global retaliation.
- WTO discourages prolonged or unjustified protectionism.
Exam Tip
- Always define key terms clearly (e.g., tariffs, MNCs, free trade).
- Use real-world examples like:
- US tariffs on China (2018)
- Apple as an MNC in multiple countries
- Bangladesh textile export growth
- Evaluate both benefits and drawbacks of MNCs and protectionism.
- Understand that globalisation is not universally beneficial — depends on country context.
