globalization, free trade and protection

define globalization

the process by which the world’s economies become increasingly interdependent and interconnected

define multinational corporation

an organization that operates in two or more countries

advantages of MNCs

job creation = better standard of living

large scale operations = EOS

more profit due to large customer base. home country benefits as profits are repatriated

spread risks as they operate in multiple markets, reducing reliance on a single economy.

avoid trade restrictions by producing in that country

reduced transportation costs

expand to countries with low corporation tax

disadvantages of MNCs

unethical cost-cutting practices like poor working conditions and wages.

local firms that are less competitive struggle to survive

exploitation of foreign government by market domination power (location, taxes etc)

overreliance on MNCs will have severe impact if they shift elsewhere.

lack of local knowledge about legal systems, tax regulations and environmental guidelines

fluctuating exchange rates

unsuccessful if products don’t align with local consumer preferences.

define international trade

refers to exchange of goods and services beyond national borders define free rade

define free trade

means that international trade takes place without protectionist measures (barriers to international trade)

advantages of free trade

access to resources that cannot be locally produced

low prices due to low trade barriers

economies of scale

greater choice: larger variety of products from different producers around the world

increased market size = higher revenue and profits

efficiency gains: competition to domestic producers forces quality increase and price decrease

improved international relations

define protection

use of trade barriers to restrain foreign trade, thereby limiting overseas competition.

different types of protection methods

tariffs

import quotas

subsidies

embargo

define import quotas

a quantitative limit on the sale of foreign goods

what are tariffs

a tax on import aimed at increasing cost of production for foreign firms.

define subsidies and their relevance

a form of government assistance to help cut production costs of domestic firms enabling them to compete against foreign firms

define embargo

a ban on trade with a certain country.

arises due to trade dispute or political conflict

reasons for protection

safeguard infant industries from foreign competition

safeguard domestic jobs

prevents foreign countries dumping goods in domestic economy

source of government revenue

overcome BOP defecit

discourage overdependence on g&s from other countries

consequences for protectionism

distorts market signals leading to global misallocation of resources

increased COP = +innovativeness

retaliation and trade barriers against this country