<6.2 GLOBALISATION, FREE TRADE & PROTECTIONISM> 

• REDUCED TRANSPORTATION COSTS: 'CONTAINERISATION' and larger and more efficient ships, airplanes, and trains have lowered the cost of moving goods.

• ADVANCES IN COMMUNICATION: Consumers can now purchase products online from anywhere in the world and are more in touch with trends in other countries. Executives of multinational companies (MNCs) can also keep in close contact with managers of foreign branches. 

• REMOVAL OF SOME TRADE RESTRICTIONS: The general trend has been for tariffs and quotas to be reduced. (Membership of the WTO requires removal of trade barriers)

• Using the BELOW-mentioned 'causes of globalisation' explain why a consumer in the UK is more than likely to buy a mobile phone cover 'Made in China', rather than 'Made in the UK'. (6 marks)

  • • "A consumer in the UK is most likely to buy a phone case that was made in China rather than in the UK, firstly because the actual cost is in fact lower than that of a phone case made in the UK, primarily because the cost of shipping it from China to the UK is now so small that it barely adds to the cost of the product, this is due to containerization, which refers to....

    • Secondly...

    • Thirdly..."

• • • Producing in countries where their products are sold rather than exporting to those countries will REDUCE THE MNCs’ TRANSPORTATION COSTS.

• Being close to their customer base will enable them to keep in RESPOND QUICKLY TO ANY CHANGES IN TASTES & PREFERENCES.

• • • Producing in countries where their products are sold will enable them to AVOID RESTRICTIONS ON IMPORTS, such as TARIFFS and QUOTAS.

• • • Producing in countries where LABOUR and RAW MATERIALS are CHEAPER will allow them to HAVE LOWER COSTS.

• They may also RECEIVE GRANTS from the governments of the countries in which they set up as they are in high demand.

• Using the above example, write a letter from Elon Musk to his TESLA shareholders, outlining the benefits that they will reap from setting up production facilities in India in the near future. 

• In your answer please mention all 5 benefits listed above in context.

• READ the following parliamentary speech by Prime minister Modi exclaiming the merits to India of the proposed building of a TESLA production plant. COPY & PASTE it into your google doc and HIGHLIGHT/UNDERLINE all the BENEFITS that you can find and EXTRACT them into a LIST: 

  • • "The potential establishment of a Tesla production facility in India presents a transformative opportunity for our nation's economy. One of the most immediate benefits would be the significant increase in employment opportunities. This endeavor would create a multitude of jobs across various skill levels, ranging from assembly line workers to engineers, thereby reducing unemployment and enhancing the livelihoods of our citizens. Furthermore, the operation of a Tesla facility would substantially boost industrial output, contributing to the growth of our gross domestic product (GDP). This increased economic activity would not only elevate India's standing on the global stage but also foster inclusive growth by creating a ripple effect of economic prosperity. Moreover, the tax revenue generated from Tesla's operations would serve as a vital source of funding for improving the provision of merit goods such as education and healthcare. These funds can be channeled towards enhancing access to quality education and healthcare services for all our citizens, thereby promoting human capital development and ensuring a healthier, more educated workforce. The introduction of Tesla's cutting-edge technologies and innovative management ideas would catalyze a wave of technological advancement across various industries in India. Domestic firms would have the opportunity to learn from Tesla's expertise and incorporate these advancements into their own operations, thereby strengthening our industrial base and diversifying into new sunrise industries. Finally, as a condition of investment, Tesla would be required to develop and build new infrastructure that benefits not only their operations but also the broader domestic industries. This could include the construction of new airports, road and rail networks, as well as schools and hospitals. By investing in such critical infrastructure, Tesla would contribute to the overall development of our nation, facilitating smoother transportation and providing essential social services to our citizens"

• 
  

• Now imagine that you are opposing the investment by TESLA, and you need to find some counterarguments for the points highlighted by PM Modi in task 1. as well as Make a any others you can think about drawing on the 'NEGATIVE' dropdown above.

• FREE TRADE occurs when there are NO RESTRICTIONS on the products bought by firms and consumers from abroad or products sold by firms to other countries and no imposition of special taxes called 'TARIFFS'.

• When countries trade with each other, they import products from the other countries so that domestic firms become exposed to MORE COMPETITON IN THEIR DOMESTIC MARKETS. At the same time, they export products to other countries so their own products also face MORE COMPETITON IN THE OVERSEAS MARKET. This can be beneficial as it will FORCE INEFFICIENT FIRMS TO EXIT THE MARKET and should result in a BETTER ALLOCATION OF BOTH DOMESTIC AND GLOBAL RESOURCES.

• INCREASED COMPETITON from FOREIGN IMPORTED GOODS lead to GREATER PRICE COMPETITON and PRICE WARS, resulting in LOWER PRICES FOR CONSUMERS. 

• IMPORTED INTERMEDIATE GOODS that are produced more efficiently ain other countries, lead to LOWER COSTS OF PRODUCTION for domestic producers which they pass on to the consumer in the form of LOWER PRICES.

• Through trade, countries can IMPORT A LARGER VARIETY of goods and services, possibly of HGHER QUALITY, INCREASING CHOICES FOR CONSUMERS. 

• Countries may NEED A NUMBER OF NATURAL RESOURCES OR CAPITAL GOODS that are NOT AVAILABLE DOMESTICALLY. Trade allows countries to import inputs they need for domestic production.

• Whenever countries sell goods and services to other countries, they ACQUIRE FOREIGN EXCHANGE (FOREX), which allows them to make payments to other countries for the goods and services they import, or make other payments abroad.

• With trade, firms now have ACCESS TO A MUCH LARGER CUSTOMER BASE, which means they can POTENTIALLY MAE MUCH LARGER SALES AND PROFITS, especially if their domestic market is small or already saturated.

• The possibility of trade and exports to other countries involves an EXPANSION N THE SIZE OF THE MARKET, allowing firms to produce more output, ACHIEVE ECONOMIES OF SCALE and enjoy the benefits of LOWER AVERAGE COSTS, which include LOWER PRICES and therefore GREATER EXPORT COMPETITIVENESS, or the ability to compete better in foreign markets.

• When countries trade with each other, DOMESTIC FIRMS BECOME EXPOSED TO COMPETITON from products produced by firms in other countries. They are therefore FORCED TO BECOME MORE EFFICIENT; in other words, they must try to PRODUCE AT THE LOWEST POSSIBLE COST. 

• If they do not become more efficient, they will have to sell their output at higher prices to cover their higher costs; consumers will prefer the lower-priced imported products, and HIGHER-COST FIRMS MAY GO OUT OF BUSINESS. Therefore, increased competition leads to greater efficiency.

• With reference to THREE OF THE BENEFITS OF FREE TRADE listed above as well as your understanding of 'International specialisation', explain why free trade benefits Singapore.

• PROTECTIONISM is the shielding of the country’s industries from the competition posed by other countries’ industries and hence involves restriction of free trade. 

• TARIFFS, also known as customs duties, our taxes on imported goods, and the most common form of trade protection. Tariffs have two purposes. The first is to protect a domestic industry from foreign competition and is called a PROTECTIVE TARIFF and the other is to raise revenue for the government and this is called a REVENUE TARIFF. Whatever the. Purpose. The effects on the economy are the same. 

• EXPLAIN HOW THE REMOVAL OF A TARIFF WILL IMPACT THE FOLLOWING STAKEHOLDERS:

• • • • • • DOMESTIC CONSUMERS

          • DOMESTIC PRODUCERS

          • DOMESTIC WORKERS

          • DOMESTIC GOVERNMENT

          • FOREIGN IMPORTERS

          • FOREIGN WORKERS

• TARIFFS, also known as customs duties, our taxes on imported goods, and the most common form of trade protection. Tariffs have two purposes. The first is to protect a domestic industry from foreign competition and is called a PROTECTIVE TARIFF and the other is to raise revenue for the government and this is called a REVENUE TARIFF. Whatever the. Purpose. The effects on the economy are the same. 

• PRODUCTION SUBSIDIES are PAYMENTS GRANTED BY THE GOVERNMENT PER UNIT OF OUTPUT SOLD DOMESTICALLY which allows them TO LOWER THEIR UNIT COST so they are MORE COMPETITIVE when COMPETING with IMPORTS within the DOMESTIC MARKET. 

• An INFANT INDUSTRY is a NEW DOMESTIC INDUSTRY that has not had time to establish itself and achieve efficiencies in production, and therefore CAN'T COMPETE WITH THE ALREADY WELL-ESTABLISHED COMPETITORS FROM ABROAD WHICH HAVE MUCH LOWER COSTS due to ECONOMIES OF SCALE. 

• Therefore, for the infant industry to stand a chance it must also achieve economies of scale and so in the mean time NEEDS PROTECTION FROM IMPORTS until it grows to a size where protection is no longer needed.

• Certain industries are essential for NATIONAL SECURITY such as AIRCRAFT, WEAPONS, CHEMICALS, and of course the RAW MATERIALS to build them, and more recently issues regarding FOOD SECURITY have raised concerns about self-sustainability in times of global shocks such as COVID and the UKRAINE-RUSSIA CONFLICT, hence protectionism is needed so that a country can produce these necessities itself. 

• In times of war or a national emergency, a country should not have to depend on imports for its defence. Moreover, there may be dangers in having ‘unfriendly’ nations specialise in weapons production.

• DUMPING refers to the practice of SELLING A GOOD IN INTERNATIONAL MARKETS AT  AN ARTIFICIALLY LOW PRICE, due to HELP FROM GOVERNMNET EXPORT SUBSIDIES. 

• Dumping is considered to be an UNFAIR TRADE PRACTICE, and is ILLEGAL according to the WTO, therefor, if a country suspects that a trading partner is practising dumping, it should have the right to impose tariffs or quotas in order to limit imports of the subsidised, or dumped good.

According to this argument, restrictions on imports are needed to protect domestic employment. Import restrictions cause consumers to shift consumption away from imports and towards goods produced domestically. As domestic production increases, unemployment falls, since firms need to hire more labour in order to increase their supply of goods.

LIMITATIONS:-

The problem with this argument is that if unemployment in the domestic economy falls due to import restrictions, this means that unemployment increases in the countries that are forced to export less. The foreign countries that are hurt may retaliate by imposing import restrictions of their own, which will create unemployment in the domestic country's export industries.

• HIGHER PRICES: When the tariffs, quotas, etc are imposed the price of all imported goods will rise, meaning that domestic consumers will have to pay more for these goods or switch to slightly cheaper domestic products, either way, they will be spending more. on these goods than before Alternatively, they will just have to go without.

• LESS CHOICE: As the prices of imports go up, many of the importers may decide not to sell in the country and this will reduce the choices available to consumers.

• DOMESTIC PRODUCERS USING IMPORTED INPUTS: Domestically produced goods that use imported raw materials will see their costs of production rise, which means they will have to raise their prices, which makes them less competitive both domestically and internationally (if they are exporters) and this will lower the quantity demanded.

• DOMESTIC UNEMPLOYMENT MAY RISE: As domestic exporting firms that use imported raw materials become uncompetitive on the world market, as well as the fact that the governments of those countries whose firms are being protected against, may RETALIATE, by imposing barriers of their own which will reduce the quantity demanded of domestic export producers, the likelihood of jobs being lost and domestic unemployment rising is high.

• TARIFF REVENUE WILL INCREASE: In the case of tariffs the government will receive these funds and can use them to fund merit good provision such as HEALTHCARE and EDUCATION services, however as mentioned if the protectionism results in greater unemployment then the government will need to spend more of these funds on welfare programmes such as unemployment benefits, thus countering any gains.

• INEFFICIENCY INCREASES: The idea of INTERNATIONAL SPECIALISATION is based on the premise that countries will specialise in the production of the good or service that they can make at the lowest relative cost, which results in the most productive nation specialising and trading their surplus, however protectionism will often result in MORE OUTPUT BEING PRODUCED BY INEFFICIENT, HIGH-COST DOMESTIC PRODUCERS AT THE EXPENSE OF OUTPUT FROM THE MORE EFFICIENCT LOW COST FOREIGN PRODUCERS, therefore resulting in a misallocation of global resources.

• Define ‘multinational company’.

• Define an ‘export quota’. 

• Define ‘free trade’. 

• Identify 2 reasons why government place an embargo on imports

• Define trade protection. 

• Define import tariff. 

• Define import quota. 

• Define protectionism. 

• Explain 2 benefits that a firm gains from producing in another country.

• Explain how two methods of trade protection may reduce imports.  

• Explain two benefits consumers may gain from free trade. 

• Explain two methods of trade protection.

• Explain two reasons why a government imposes a tariff on imported gold.

• Analyse how free trade can reduce firms’ costs of production.

• Analyse how the removal of import tariffs increases a country’s output.

• Analyze the impact on an economy of the removal of import quotas imposed by other countries. 

• Discuss whether a reduction in a country’s trade protection will improve its economic performance.

• Discuss whether an economy would benefit from an MNC setting up

• Discuss whether imposing tariffs will benefit an economy.

• Discuss whether a country’s economy would be harmed if an MNC moved out.

• Discuss whether consumers would benefit from an increase in imports.

• Discuss whether protectionism saves jobs.

• Discuss whether multinational companies (MNCs) will always locate in countries with a high GDP per head.

• Discuss whether a country which engages in free trade is likely to have a higher economic growth rate than one which uses trade protection. 

• Discuss whether low unemployment in a country will encourage multinational companies to set up there. 

• Discuss whether or not a developing country will benefit from the removal of trade restrictions. 

• Discuss whether or not MNCs are likely to set up in countries with low unemployment