What is globalisation?
Globalisation describes the increasing integration of economies around the world. An International Monetary Fund (IMF) article defines economic globalisation as the expanding interdependence of world economies through the growing scale of cross‑border trade of commodities and services, the flow of international capital, and the wide and rapid spread of technology and information【30240301132181†L90-L97】.
Benefits and costs of globalisation
- Greater variety of goods and services at lower prices due to international competition and economies of scale.
- Access to larger markets enables firms to grow and increase efficiency.
- Technology and knowledge transfer helps developing countries to industrialise.
- However, globalisation may lead to job losses in declining industries, widen income inequalities, and harm the environment if production shifts to countries with lax regulations.
Free trade and its advantages
Free trade is the absence of barriers such as tariffs, quotas and subsidies that distort international exchanges. Free trade allows countries to specialise according to comparative advantage and increases consumer choice. It also fosters competition, innovation and lower prices.
Protectionism
Protectionism involves government actions to restrict imports or promote domestic production. Governments may adopt protectionist measures to protect infant industries, safeguard strategic sectors, prevent dumping (selling below cost), preserve jobs, improve the balance of payments or raise revenue.
| Policy tool | Description | Effects |
|---|---|---|
| Tariffs | Taxes on imported goods, raising their price. | Protects domestic producers but raises prices for consumers; can provoke retaliation. |
| Quotas | Limits on the quantity of imports allowed. | Guarantees market share for domestic producers; restricts consumer choice. |
| Subsidies | Financial support to domestic firms to lower their costs and make them more competitive. | May improve export performance but strains government budgets and may distort competition. |
| Administrative barriers | Strict product standards or customs procedures that make it difficult for foreign goods to enter. | Protect domestic industries but may be challenged as unfair trade practices. |
| Exchange controls | Limiting the amount of foreign currency available for imports. | Helps conserve foreign reserves but can lead to shortages and black markets. |
Evaluating trade policies
Free trade promotes efficiency and consumer welfare but may harm vulnerable industries and workers. Protectionism can safeguard jobs and nurture emerging industries but risks higher prices, inefficiency and trade disputes. Policymakers need to strike a balance, gradually exposing domestic firms to competition while providing support for adjustment.
Examples and applications
The benefits of free trade can be seen in the formation of the European Union (EU). By eliminating tariffs and harmonising standards, member countries have created a single market where goods, services, people and capital move freely. Consumers enjoy greater choice and lower prices, and firms can specialise and achieve economies of scale.
Protectionism is evident in the US–China trade dispute. Starting in 2018, the United States imposed tariffs on Chinese imports to address concerns over intellectual property rights and trade imbalances. China responded with its own tariffs. The resulting uncertainty disrupted supply chains and raised costs for businesses and consumers in both countries.
Many developing countries use tariffs to protect infant industries until they become competitive. For example, South Korea and Japan supported their car industries with protectionist measures in the past, gradually reducing barriers as the firms gained strength. The challenge is to ensure that protection does not become permanent and stifle innovation.
