International Trade & Globalisation

International Trade & Globalisation

International trade is the exchange of goods and services across national borders. Globalisation is the increasing integration of the world's economies through trade, capital flows, migration, and technology.

Why Countries Trade: Comparative Advantage

Absolute Advantage (Adam Smith)

A country has an absolute advantage if it can produce a good using fewer resources than another country. Smith argued countries should specialise in goods where they have an absolute advantage and trade for the rest.

Comparative Advantage (David Ricardo)

A country has a comparative advantage in a good if it can produce it at a lower opportunity cost than another country. Ricardo demonstrated that even if one country is more efficient at producing everything, both countries benefit from specialising and trading.

Example:

Country	Cloth (hours/unit)	Wine (hours/unit)
England	100	120
Portugal	90	80

Portugal has an absolute advantage in both goods. But:

• Portugal's opportunity cost of wine = 80/90 = 0.89 cloth
• England's opportunity cost of wine = 120/100 = 1.2 cloth
• Portugal has a comparative advantage in wine (lower opportunity cost)
• England has a comparative advantage in cloth

Both countries gain if Portugal specialises in wine and England in cloth.

Assumptions and Limitations

• Constant returns to scale (unrealistic)
• No transport costs (significant in practice)
• Perfect factor mobility within countries, immobility between (partially true)
• No barriers to trade
• Only two countries, two goods (real world is far more complex)
• Developing countries may be locked into primary product dependency (terms of trade may deteriorate — Prebisch-Singer hypothesis)
• Does not account for dynamic comparative advantage (countries can develop new advantages through investment and policy)

Benefits of Free Trade

• Consumer benefits: lower prices, greater variety, higher quality
• Efficiency: resources allocated to their most productive use globally
• Economies of scale: access to larger markets allows firms to reduce average costs
• Competition: foreign competition forces domestic firms to innovate and improve efficiency
• Technology transfer: trade facilitates the spread of knowledge and technology
• Economic growth: empirical evidence shows open economies tend to grow faster (East Asian tigers: South Korea, Taiwan, Singapore)
• Political cooperation: trade creates interdependence, reducing conflict risk

Arguments for Protectionism

Despite the case for free trade, governments may restrict trade using tariffs, quotas, subsidies, embargoes, or regulations (non-tariff barriers).

Justifications

Argument	Explanation	Evaluation
Infant industry	New industries need protection from established foreign competitors until they achieve economies of scale	Difficult to identify genuine infant industries; protection may become permanent; rent-seeking
National security	Strategic industries (defence, energy, food) should be domestically controlled	Valid for genuinely strategic goods; but often used as a pretext
Anti-dumping	Foreign firms sell below cost to destroy domestic competition, then raise prices	WTO allows anti-dumping duties; but difficult to prove intent; may harm consumers
Protecting employment	Prevent job losses from import competition	Short-term fix; long-term inefficiency; retaliation may cost more jobs
Correcting BoP deficit	Reduce imports to improve the current account	May invite retaliation; WTO rules restrict this; addresses symptom not cause
Environmental/labour standards	Prevent "race to the bottom" from countries with low standards	Legitimate concern; but may be disguised protectionism
Revenue	Tariffs raise government revenue (important for developing countries with limited tax bases)	Distorts trade; regressive (raises prices for consumers)

Costs of Protectionism

• Higher prices for consumers (deadweight welfare loss)
• Reduced competition → less innovation, X-inefficiency
• Retaliation → trade wars (US-China tariffs from 2018; Smoot-Hawley Tariff Act 1930 deepened the Great Depression)
• Misallocation of resources → protects inefficient domestic producers
• Harms developing countries that rely on access to rich-country markets

Globalisation

Causes of Globalisation

• Technological progress: internet, containerisation, air freight → lower transport and communication costs
• Trade liberalisation: WTO (GATT rounds), regional trade agreements (EU single market, USMCA)
• Financial liberalisation: deregulation of capital markets → free flow of investment
• TNCs (Transnational Corporations): organise production globally, exploiting cost differences
• Political change: fall of communism, China's opening (1978), India's liberalisation (1991)

Impact of Globalisation

Benefits:

• Economic growth: integration into global markets has lifted hundreds of millions out of poverty (China, India)
• Consumer benefits: cheaper goods, more variety
• FDI: brings capital, technology, skills, and management expertise to developing countries
• Specialisation: countries focus on comparative advantage
• Cultural exchange: spread of ideas, education, and innovation

Costs:

• Inequality: within countries (skilled vs unskilled workers); between countries (some left behind — sub-Saharan Africa)
• Deindustrialisation: manufacturing jobs move to low-cost countries (UK lost 3 million manufacturing jobs 1980-2010)
• Environmental damage: increased production and transport → higher emissions; "pollution havens" in countries with weak regulation
• Cultural homogenisation: dominance of Western brands and culture
• Financial contagion: interconnected financial markets mean crises spread rapidly (2008 Global Financial Crisis, Asian Crisis 1997)
• Tax competition: TNCs exploit differences in tax regimes (profit shifting, transfer pricing) → tax base erosion
• Loss of sovereignty: WTO rules, trade agreements, and TNC power may limit governments' ability to set independent policy

Role of the WTO (World Trade Organisation)

• Successor to GATT (1995)
• Promotes free trade through negotiation rounds (Doha Round — stalled)
• Provides a dispute resolution mechanism
• Enforces rules-based trading (Most Favoured Nation principle, national treatment)
• Evaluation: progress on tariff reduction; but Doha Round failure shows difficulty of multilateral agreement; accused of favouring rich countries; increasingly bypassed by bilateral/regional agreements

Evaluation: Is Globalisation a Force for Good?

Optimistic view (neoliberal):

• Free trade and open markets maximise global welfare
• Rising tide lifts all boats
• Technology and trade are irresistible forces — policy should facilitate adjustment, not resist

Critical view (structuralist/heterodox):

• Benefits are unevenly distributed — within and between countries
• Market power of TNCs exploits developing countries
• Environmental costs are unsustainable
• Need for managed globalisation: trade combined with strong domestic institutions, social safety nets, environmental regulation, and progressive taxation

Recent trends:

• Slowbalisation: since 2008, trade growth has slowed relative to GDP growth
• Reshoring: some firms bringing production closer to home (supply chain resilience post-COVID)
• US-China decoupling: geopolitical tensions leading to trade restrictions, sanctions, and technology bans
• Brexit: UK's departure from the EU single market — a significant deglobalisation event

Exam Technique

• Always explain comparative advantage with a worked example showing opportunity costs
• Use tariff diagrams (with domestic supply, world supply, and tariff-inclusive supply) to show deadweight loss
• Evaluate protectionism argument by argument — avoid blanket statements
• Discuss globalisation with balance — benefits AND costs, winners AND losers
• Reference real-world examples: WTO disputes, US-China tariffs, EU single market, COVID supply chains, Brexit
• In 25-mark essays, conclude whether globalisation is net positive with a justified argument