International Trade _ Globalisation

Why trade at all? Because countries differ in what they can produce efficiently.

Comparative advantage. A country has a comparative advantage in a good if it can produce that good at LOWER OPPORTUNITY COST than another country.

Worked logic. Imagine Country A can produce wine and cloth. Country B can produce both too. Even if A is BETTER at both, A still gains from specialising in whichever has LOWER OPPORTUNITY COST in A and trading with B.

David Ricardo's classic example (early 1800s): England and Portugal trading wine and cloth, even though Portugal is more efficient in both. Portugal has comparative advantage in wine; England has comparative advantage in cloth. Trade benefits both.

Why do real economies trade? Beyond comparative advantage:

• Different natural resources.
• Different climates.
• Different skill bases.
• Different technology.
• Economies of scale (large markets allow more efficient production).

Cambridge tip. Mark schemes for "benefits of trade" expect 4 distinct benefits. Memorise: comparative advantage, lower prices, scale, innovation transfer.

Protectionism = government policies that restrict trade. Several tools:

1. Tariffs. Tax on imports. Raises the price of imported goods, making domestic alternatives more competitive. Government earns revenue.

Effect: consumers pay more; domestic firms gain market share; foreign firms sell less.

2. Quotas. Limit on the QUANTITY of imports. Caps the volume that can enter.

Effect: consumers pay more (less supply, higher equilibrium price); domestic firms gain protection. Government does NOT earn revenue (unlike tariffs).

3. Subsidies (to domestic producers). Government payments to domestic firms that lower their costs.

Effect: domestic firms can compete against imports without raising consumer prices (initially). But subsidies cost government money.

4. Regulations and standards. Health, safety, environmental rules can be designed to favour domestic producers.

5. Exchange rate manipulation. Some countries deliberately keep their currency weak to make exports competitive.

Cambridge tip. Top-band answers can name and explain THREE tools, with effects on (a) domestic firms, (b) foreign firms, (c) consumers, (d) government.

Arguments FOR protectionism:

1. Infant industry argument. A new industry needs protection while it grows. Without protection, foreign competitors with established economies of scale would crush it.

Logic. Once the industry matures, protection is removed. Many newly-industrialising countries used this approach (South Korea, Japan, China at various points).

Limit. Hard to know when an industry has 'matured' — protection often becomes permanent.

2. Protect employment. Tariffs and quotas protect domestic jobs threatened by cheaper foreign competition.

Limit. Often protects jobs in declining industries while raising costs across the economy.

3. Anti-dumping. When foreign firms sell BELOW cost (perhaps subsidised by their government), domestic firms struggle. Tariffs are sometimes justified to counter this.

4. National security. Some industries (defence, food, energy) are deemed too important to depend on foreign suppliers.

5. Retaliation. Counter-tariffs to punish countries that started a trade war.

Arguments AGAINST protectionism:

1. Higher consumer prices. Protection raises prices. Consumers — especially low-income — bear the cost.

2. Reduced choice.

3. Reduced efficiency. Protected firms have less incentive to be efficient. Productivity falls.

4. Retaliation. Other countries respond with their own tariffs → trade war → ALL worse off. Example: 1930s Smoot-Hawley tariffs deepened the Great Depression.

5. Reduced economic growth. Less trade = less specialisation = lower world output.

6. Distorts comparative advantage. Protected firms may not be the most efficient.

Most economists support free trade with safeguards. Free trade for most goods, plus targeted support for genuinely strategic industries and for displaced workers (retraining, transition support).

Cambridge tip. Mark schemes for evaluation questions expect BOTH sides. The infant-industry argument is the most-credited 'for' argument.

Globalisation is the process of increasing economic integration between countries. It includes:

• More international trade.
• More foreign direct investment.
• More migration.
• Faster spread of technology and ideas.
• Multinational corporations operating worldwide.

Benefits:

• Lower prices for consumers worldwide as production moves to lowest-cost locations.
• Higher growth in developing countries through trade, FDI, and technology transfer.
• Specialisation gains.
• Cultural exchange and shared knowledge.
• Lower poverty. China and India lifting hundreds of millions out of poverty largely through globalisation.

Costs:

• Disruption to domestic industries. Workers in declining sectors lose jobs as production moves abroad.
• Inequality. Globalisation has created big winners (skilled workers, capital owners, growing economies) and losers (less-skilled workers in advanced economies). Within-country inequality has often risen.
• Climate change. Long supply chains and increased shipping raise carbon emissions.
• Cultural homogenisation. Local cultures may erode as global brands dominate.
• Vulnerability. Long supply chains are fragile (COVID exposed this).

Globalisation today. Since the 2010s, globalisation has slowed:

• Trade tensions (US-China).
• Reshoring and nearshoring (firms moving production closer).
• COVID-driven supply chain rethinking.
• Geopolitical tensions.

Cambridge tip. Top-band answers acknowledge BOTH benefits AND costs. The 2008 crisis and COVID have made the costs more salient; older textbooks emphasised benefits more.