Globalisation & Trade Restrictions

3. Consequences of changes in globalisation

A rise in globalisation has wide effects, and most of them cut both ways.

• International trade. Trade grows as barriers fall and supply chains spread across borders, raising output and incomes.
• Competition. Domestic firms face more foreign competition, which can lower prices and raise quality, but can also drive less efficient domestic firms out of business.
• The environment. More production and longer transport chains can raise pollution and emissions, though the spread of cleaner technology can work the other way.
• Migration. Easier movement of people lets workers go where jobs and wages are higher, helping fill labour shortages but also straining housing and services in receiving countries.
• Income distribution. Globalisation has lifted hundreds of millions out of absolute poverty, but within countries it can widen the gap between skilled workers and capital owners, who gain, and low-skilled workers in import-competing industries, who may lose out.
• Economic development. Access to world markets, foreign investment and technology can speed up development in poorer countries, although those that stay dependent on a narrow range of primary exports benefit less.

4. The role of multinational companies (MNCs)

A multinational company (MNC) is a firm that owns or controls production in more than one country, for example a carmaker with factories in several nations.

MNCs are a major force in globalisation, and they affect both the host country (where they invest) and their home country (where they are based).

Advantages to the host country

• Employment. MNCs create jobs directly and through their local supply chains, raising incomes.
• Technology and skills. They bring advanced production methods and training, raising the productivity of local workers.
• Investment and output. They add capital the country could not raise itself, increasing output and economic growth.
• Tax revenue and exports. Their profits and sales can raise government tax revenue and boost the country's exports, helping the current account.

Disadvantages to the host country

• Profit repatriation. MNCs may send much of their profit back to their home country rather than reinvesting it locally.
• Competition for domestic firms. Local firms may be unable to compete and close down, and a dominant MNC may later raise prices.
• Use of weak regulation. MNCs may exploit lower wages or weaker environmental rules in the host country.

Effects on the home country

The home country gains the repatriated profits and may keep high-skilled head-office and design jobs, but it can lose lower-skilled jobs as production moves abroad.

5. Methods of protection (types of trade restriction)

Despite the gains from free trade, governments often restrict imports to shelter domestic industries. The main tools are:

• Tariff (import duty). A tax added to the price of imported goods. It makes imports dearer, so consumers switch to domestic substitutes, and it raises revenue for the government.
• Import quota. A physical limit on the quantity of a good that may be imported in a period. It caps imports directly and gives domestic producers a larger share of the market, but it raises no revenue for the government.
• Subsidy to domestic producers. A government payment that lowers domestic firms' costs, letting them undercut imports. Domestic output rises, but the subsidy is a cost to the government.
• Embargo. A complete ban on imports of a good, or on trade with a particular country, usually for political or health reasons.

A subsidy to domestic producers shifts supply to the right, from S to S + subsidy, lowering the market price from P1 to P2 and raising quantity from Q1 to Q2. This lets domestic firms undercut imports, but the area A + B (the fall in price to consumers plus the higher price received by producers) is the cost of the subsidy to the government.

6. Reasons for trade restrictions

Governments give several reasons for restricting imports.

• Protect infant (sunrise) industries. New industries may be too small to compete with established foreign rivals; temporary protection lets them grow.
• Protect declining (sunset) industries. Slowing the decline of an old industry gives workers and the area time to adjust and avoids a sudden rise in unemployment.
• Protect strategic industries. A country may want to keep the ability to produce essentials such as food, energy or defence equipment in case trade is cut off.
• Avoid dumping. If foreign firms sell below cost to drive out domestic competitors, a tariff can restore fair competition.
• Reduce a current-account deficit. Cutting imports narrows a trade deficit, at least until trading partners retaliate.
• Raise tax revenue. Tariffs generate revenue, which matters most for governments with limited other ways to collect tax.
• Restrict the import of demerit goods. Barriers can reduce imports of goods that are over-consumed because consumers underestimate the harm they cause, such as narcotics, tobacco or alcohol. An embargo bans them outright, while a high tariff simply makes them dearer.
• Promote environmental sustainability. Restrictions can discourage imports produced in damaging ways or with high transport emissions.

7. Consequences of trade restrictions

Trade restrictions help some groups and harm others, in both the home country and its trading partners.

Effects on the home country

• Domestic producers in the protected industry gain market share, output and jobs.
• Consumers face higher prices and less choice, which hits low-income households hardest.
• The government may gain revenue (from tariffs) but bears costs (from subsidies).
• Domestic firms may become less efficient over time, because protection reduces the pressure of competition.
• Firms that use imported inputs face higher costs, which can raise their prices and reduce their output and employment.

Effects on trading partners

Trading partners lose export sales to the protecting country, which can reduce their output and employment. They often retaliate with restrictions of their own, so the protecting country's exports fall too. Escalating retaliation can lead to a trade war that leaves all sides worse off.

The overall verdict is that protection can bring short-term gains to a specific industry but tends to impose wider long-term costs through higher prices, lost efficiency and retaliation.