IGCSE®/O Level Economics 8.1 International trade and specialization

What is globalization? The increasing social, technological, political and economic interdependence and interaction between people, firms and entire economies around the world, through: increasing ease of travel growing international trade in an increasing variety of goods and services increasing opportunities for firms to buy and sell products in any country in the world increasing opportunities for labour and capital to move anywhere in the world the growth of global financial markets Value of global trade in physical goods, 1960–2010

International specialization Economies specialize in the production of those goods and services they are best able to produce because they have the natural, human or man-made resources to do so Specialization allows an economy to produce a greater volume of their goods and services more efficiently. It therefore increases output, incomes and living standards Economies then trade with each other to obtain the other goods and services they need and want US aircraft Spanish olive oil Italian shoes Some examples of international specialization

Absolute and comparative advantage A country has an absolute advantage in the production of a product when it can produce that product at a much lower cost per unit than any other country is able to Average cost per unit $100 Average cost per unit $130 X Y A country has a comparative advantage in the production of a product relative to other countries when its opportunity cost of producing that product is lower than in any other country To produce 100 more cars, country X must give up 4,000 televisions To produce 100 more cars, country Y must give up 7,000 televisions

The gains from free trade International trade involves the movement and exchange of physical goods such as materials, component parts, equipment and finished products as well as services, ideas, money and labour, across international borders Arguments for free trade It allows countries to benefit from specialization They can produce what they are best able to and then trade their surplus It increases consumer choice Consumers can enjoy a greater variety of goods and services from across the world It increases competition and efficiency Firms must improve their costs and product quality to compete with overseas producers It creates additional business and employment opportunities New and existing firms can expand their sales to growing consumer markets overseas It allows firms to access the best workforces, materials and technologies from anywhere in the world

Arguments against uncontrolled trade Why control trade? Trade with low-cost economies is threatening jobs in many developed economies and reducing opportunities for less-developed economies to grow their industries Trade is increasing the rate at which we are depleting natural resources Trade may increase the exploitation of workers and the environment in many less-developed economies as multinationals are attracted to them by low wages and taxes It has increased the gap between rich and poor nations because developed and rapidly developing economies dominate global demand for many natural resources, including foodstuffs, timber and metal ores, and have used their purchasing power to force down their market prices

Trade barriers Tariffs Trade barriers are indirect taxes on the prices of imported goods to discourage domestic demand But imposing them often results in affected overseas countries imposing tariffs of their own in retaliation

Non-tariff barriers Subsidies Quota Embargo These are government grants paid to domestic producers to reduce their production costs, enabling them to sell their products at lower prices than overseas producers Quota This is a limit on the volume of an imported good allowed into a country Embargo This is a ban on the importation of a product or products from overseas Unreasonable quality controls, standards and licensing requirements for imported products These make the import of goods into a country more difficult and costly Size and weight restrictions Import licence Test certificates Product labelling requirements

Arguments for trade protection To protect infant (or sunrise) industries Protecting new firms from overseas competition gives them the time and chance to develop, grow and become more globally competitive To protect sunset industries Protection from overseas competition will help to slow down the rate of decline in and loss of jobs from some major industries, allowing time for other industries to develop to provide new jobs and incomes To protect strategic industries, such as agriculture, energy and defence equipment So that a country is not entirely dependent on such important supplies from overseas countries To protect domestic firms from dumping Dumping is a form of predatory pricing. It involves one country ‘flooding’ another with a product at a price significantly below its market price to force rival producers out of business To limit over-specialization Trade barriers can help a country to maintain a wider range of different industries to reduce the risk of its main industry failing or declining due to overseas competition To correct a trade imbalance By reducing the amount of imports coming into a country

Arguments against protectionism It reduces the gains from trade It restricts consumer choice It restricts new business opportunities Inefficient domestic firms protected from overseas competition will continue to be inefficient Other affected countries will retaliate against trade barriers Trade liberalization involves the removal of barriers to trade between different countries to improve the global allocation of resources and allow economies to realize gains from increased trade and market access