An introduction to globalisation and protection

The gains from trade is the same concept as “why nations trade” and these gains lie behind the trend towards increasing globalisation.

• Comparative advantage. To simplify greatly, it means that a country does what it is best at! This is the main source of the gains from trade.

• A country will lack something that it cannot produce for itself, e.g., bananas in Britain. So a country trades to get what it lacks but wants. This is a minor reason.

• There is a gain in the variety of goods and services offered and wider consumer choice if one can buy from abroad. The country pays for the imports by exporting what it produces.

Generally, international trade increases incomes, fosters economic growth, improves the standard of living, and allocates resources better, both within a nation and globally.

The globalisation process

Globalisation comes about by a reduction in protection, especially by the developed countries, and the general freeing up of markets. Globalisation involves countries specializing in what they are good at and exporting in exchange for goods or services they are poorer at. It requires a reduction in protection in order to allow the increase in trade which is necessary. It also needs the freer movement of capital and the ability to invest in another country. A company in country “A” can then either set up a factory or firm in a different country, “B”, or else buy an existing one there. As an example, the British company Lever Brothers has operating companies and factories on every continent in the world, has a research laboratory in China (among other places), and is a genuine and long-established multinational company.

The motives for reducing protection are:

• To increase a country’s efficiency in production and hence improve the domestic standard of living, resource allocation and growth.

• To reap the gains from trade (comparative advantage).

• To help the poor countries of the third world. This is not really an important motive! The goods that the third world wishes to sell are often kept out of developed countries by high levels of protection in order to assist their own producers. Imports of agricultural produce in particular are often heavily restricted for the sake of a relatively small number of farmers.

• Pressure from multi-national corporations on the various governments to allow freer movement of goods and capital (in order to increase their own profits).

International Exchange

This really means why countries trade! If Britain can run an insurance service more cheaply, say, than New Zealand, then it should do so, and sell it to the world (Lloyds of London does this). In this example, we would buy back something, for instance mutton and lamb. It is not necessary or even desirable to try to balance exports and imports with a single country. We wish to balance multi-laterally, on a global basis.

The global trading pattern:

The developed world trades more with itself than with third world countries, which seems surprising to some.

But this is reasonable really! Because:

• Income elasticities are high for services and fancy expensive manufactured products, but low for raw materials (revise elasticities and what this means in Unit 1 if you are a bit hazy). The developed world has high incomes, so it imports such things as video cassette recorders and TV sets from Japan.
However, few poor developing countries produce such items. Instead they tend to produce raw materials and agricultural products, such as bananas, coconuts, sugar, sisal and hemp all of which have low income elasticities. Where poor countries
do export hi-tech goods, like TV sets from China, these are inevitably made in joint-ventures, set up with foreign capital and know-how and owned in part by foreign developed countries anyway. Many Japanese products are now made in third world countries like China, as Japan has exported much of its manufacturing capacity, a process known there as “hollowing out” the economy.

• Comparative advantage and wider consumer choice mean that, if we take motor cars as an example, the Germans make Mercedes and BMW; the French make Citroens and Peugeots; the Italians make Ferraris and Alfa Romeos …. and they all sell motorcars to each other.

• The demand for primary produce (often produced in third world countries) grows only slowly, so trade with third world countries does not expand rapidly. At the same time, technological improvements in the rich world often reduce the quantity of raw material needed. As an example, Brazil produces much iron ore but less of this goes into a typical motor car built in the UK now than it did fifty years ago.

• An additional factor on the demand side is that most developed countries protect their domestic agriculture, which severely limits the amounts that poor countries can sell to them (remember?)

• The long-term price of many primary products does not increase much, in part for the three reasons above which limit the growth in demand. A further reason lies
on the supply side: output of primary produce has increased over time. This is partly through increases in yield but also because of the extra supply coming from newly developing third world countries as they increase their exports. With reasonably rapid growth in supply and little growth in demand, the long term
price must fall. At best it will increase but slowly.