Globalisation and trade restrictions

Economics · International trade and globalisation. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Globalisation is the process by which the world's economies become more closely linked through trade, investment and the movement of people and firms. It has grown because of lower transport and communication costs, fewer trade restrictions and the spread of multinational companies (MNCs), which produce in more than one country.

MNCs bring jobs, investment, skills and tax revenue to a host country, but may send profits home, use up resources, pollute and drive out local firms.

Governments limit trade through protection: tariffs, import quotas, subsidies to domestic producers and embargoes. Protection can save domestic jobs and industries, but it raises prices, cuts choice and may bring retaliation.

Rules to remember

Globalisation = the growing integration of economies through trade, investment and movement of people and firms.
MNC = a company that produces in more than one country.
Tariff = a tax on imports. Price after tariff = price before × (1 + tariff rate).
Import quota = a limit on the quantity of a good that can be imported.
Embargo = a ban on trade in a product or with a country. Subsidy = a payment to domestic producers that lowers their costs.
Dumping = selling a product abroad below its cost of production.
Reasons for protection: infant and declining industries, strategic industries, dumping, current account deficit, tax revenue, demerit goods, the environment.

Common mistake

Students mix up a tariff and a quota. A tariff is a tax, so it raises the price and gives the government revenue; a quota limits quantity and gives no tax revenue.

Worked example

An imported phone costs Rs 50,000 and a similar home-made phone costs Rs 56,000. The government puts a 20% tariff on imported phones, and all of it is passed on. Which phone is now cheaper?

Tariff = 20% of Rs 50,000 = 0.20 × 50,000 = Rs 10,000.
New price of the imported phone = 50,000 + 10,000 = Rs 60,000.
Compare: Rs 60,000 for the import against Rs 56,000 for the home-made phone.

Answer: The home-made phone is now cheaper by Rs 4,000, so demand moves from imports to domestic producers.

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