Topic 1 Globalisation

contagion

Rapid development of negative economic conditions from one country/region which quickly transfers to another

Developed countries

• OECD — 38 Countries

• Take up 15% of the population, but are 55% of the GWP

• Characterised by high GDP, advanced technological infrastructure, robust industrial and service sectors, high HDI scores, a high standard of living.

Developing countries

• 150+ Countries

• 85% of the population

• 45% of the GWP

Globalisation

The process leading to the emergence of a Global Economy. It refers to the increasing level of economic integration between individual countries that creates a global market place through trade liberalisation by increasing cross border

• Creates structural change in the economy

How does economic integration occur?

1. Removal of trade barriers

2. Promotion of trade agreements

3. Standardisation of G and S

4. Use of electronic communication and commerce

These cause globalisation

Economic integration

Refers to the liberalisation of trade between countries, occurring from

1. Removal of trade barriers

2. Promotion of trade agreements

3. Standardisation of G and S

4. Use of electronic communication and commerce

The global economy

the sum of all market exchange interactions within and between all countries

trade liberalisation

the process of reducing or removing govt imposed barriers to international trade

GWP

the aggregate value of all G and S produced in an economy over a period of time

• 100 trillion dollars in 2023

• The high value of global trade reflects the face that economies do not produce all the goods and services

Key drivers of globalisation

• Governments

• Deregulation

• Households

• Businesses

• Technology

Consequences of self sufficiency

1. Australia’s output would be low

2. Most people work in primary or secondary industry which do not require high skills

3. Most goods are not where our expertise lies, quality would be low, low productivity, low wages

4. Choice limited, small populations can’t make ETMs or multiple product ranges → low standards of living

5. Limited by continent’s Factor Endowments (elements of factors of production in land)

financial flows

the movement of money, capital, and financial assets between economic agents, sectors, or countries over a period of time.

foreign exchange market

network of buyers and sellers exchanging one currency for another in order to facilitate flows of finance between countries

foreign direct investment

the movement of funds between global economies for the purpose of creating new economies or investing a large amount of shares (more than 10%)

foreign portfolio investment

involves purchasing ownership rights (equity) to foreign assets without gaining significant control of the assets (<10%)

transnational corporations

global companies that dominate global product and factor markets

• Have production facilities in at least two countries and are owned by residents of at least two countries

  • Different tasks will occur in different countries

international division of labour

the way that tasks in the production process are allocated to different people globally

migration

individuals moving to other countries on a long term or permanent basis, often more than 12 months

regional business cycles

fluctuations in the level of economic activity in a geographical region of the global economy over time

free trade

a situation where governments impose no artificial barriers to trade that restrict the free exchange of G and S between countries, where there is no discrimination of imports and exports

absolute advantage

one country is more efficient in the production of a G or S than another

specialisation

production of G and S with the least opportunity cost

comparative advantage

economic principle that nations should specialise in the production of G and S for which they have a comparative advantage 

• Countries can trade to get other goods, which in turn enables other nations to exceed their productive capacities (in reference to the PPF) 

• Can maximise the citizens standards of living 

  • This increases GWP

  • Measured by opportunity cost of producing each good in the country

Goals of the WTO

Establish and improve trade liberalisation through round of negotiation (each round has a different name + the consequences of the rounds) between member nations at a global or regional level

What is the WTO

• Forum for settling trade disputes between regional members

  • Member govts to negotiate trade agreements and to settle trade disputes

To join, a nation must agree to their liberalising trade principles and rules(multilateral free trade agreement)

How many members in the WTO

166

Five principles of the WTO

• Without Discrimination: A country should not discriminate between its trading partners (giving them equal most favoured nation or MFN status)

• National treatment: Should not discriminate between its own and foreign products, services, nationals 

• Free of barriers: Bring down through negotiation

• Predictable: Foreign companies, investors and govt should be confident that trade barriers will not be raised arbitrarily (bound by WTO rules)

• Increased Competition: Discouraging unfair practices such as export subsidies and dumping products at below cost

  • You can sign individual trade agreements with other countries, but they must strive to improve trade conditions

What is the IMF and what do they do

• International agency that oversees the stability of the global financial system

• Ensure stability of:

  • The global system of exchange rates (adjustment, convertibility)

  • Facilitate international payments system between countries (balance of payment issues)

How many members in the IMF

190

What is protection

Protection is any policy that gives domestic producers an artificial advantage OR any artificial barriers to trade over foreign competitors

• Countries usually impose protection to protect local producers and industries

What is dumping

occurs when foreign producers export below domestic market price, often below the cost of production.

Four reasons for protection

infant industry argument, domestic employment, dumping, defence

When is the infant industry argument valid?

when protection is clearly temporary, and the industry has strong potential for efficiency gains

What happens if protectionist policies are not removed for infant industries

there is no real incentive for the company to reach economies of scale

What are the two reasons why the infant industry argument exists

1. Support young or emerging industries that have the potential to be highly competitive, but have not yet reached economies of scale

2. Small new firms cannot match established foreign producers, so temporary protection allows them to develop capacity and efficiency 

What is the goal for infant industry protection

• Help new industries achieve economies of scale and comparative advantage

• Can be achieved through govt support and subsidies to help grow the industries

Example of infant industry protection

Global aviation policies, where national airline and aircraft manufacturers had strong government backing 

• Protection measures such as subsidies, research grants, export financing, and govt procurement contracts 

• Although these firms are global leaders, they still receive significant govt support today

  • Boeing benefits from US defense contracts and federal export financing

  • COMAC continues to receive state funding and guaranteed domestic orders to compete with Western manufacturers

    • Commercial Aircraft Corporation of China

Four benefits of protecting infant industry

1. Encourages growth of new industries 

2. Creates employment and builds high technical skills in high value sectors

3. Economical diversification, reducing reliance on imports in key sectors

4. Greater choices for consumers

Three costs of protecting infant industry

1. Rent seeking behaviour: Any businesses which want to make more money without actually doing anything, makes businesses productive but unmotivated

2. Risk of long term dependance: reducing govt’s incentive to improve efficiency 

3. Misallocation of resources: funds and labour may shift to inefficient industries

emerging economies

economies experiencing the fastest rates of growth as they undergo rapid industrialisation

When does the domestic employment argument become popular?

Argument becomes most popular during recessions when unemployment rises

What is the logic behind the argument for domestic employmemt

If local producers are protected from competition from cheaper foreign imports, the demand for local goods will be greater and this will create more domestic employment

What is the effect of domestic employment argument on the government

They face pressure to project local jobs even though factors such as technology and automation cause more job losses than trade

What is the effect of the domestic employment argument in the short run

Employment ↑ in protected industries help stabilise the economy during downturns 

What is the effect of the domestic employment argument in the long run

Protection can cause higher unemployment as inefficient industries decline and economic growth weakens

• Could trigger trade wars

Three risks/limitations of domestic employment argument

1. Misallocation of resources: decrease in allocative efficiency

• We could redistribute land, labour and capital, but in the long term, this will decrease our GDP

  • However jobs are lost (blue collar, middle aged, low skill workers) but the jobs created are high skill, young people jobs → ultimately, this increases inequality

2. Reduction of productivity: slows long term economic growth

3. Creates dependence on industries that cannot compete without ongoing govt support

Example of domestic employment protection

 US-China trade war (2018-present)

• US imposed tariffs on China

• Objective was to revive US labour and to protect domestic jobs

• Effect: higher prices for consumers and retaliatory tariffs from China

Why does dumping occur (two reasons)

• Overproduction and excess stock

  • Firms may have surplus goods they need to offload quickly usually of a temporary nature 

  • Often linked to govt subsidies that lower production costs and encourage oversupply

• Market dominance strategy

  • Firms may sell cheaply overseas to gain market share or force competition out of the market 

  • Once the competition is eliminated, they can raise prices again in the long run

What are two short term effects of dumping

• Cheaper prices for consumers in the short term

  • Imported goods are cheaper and improve affordability

• Increased import competition

  • Local producers face pressure to lower prices or improve efficiency

What are five long term effects of dumping

1. Domestic firms close down to unfair competition, unable to compete with artificially low priced imports

2. Job losses and less production

3. Market dominance by foreign firms and higher prices once competition is gone

4. Loss of self sufficiency

5. More dependant on imports, making its economy more vulnerable to global supply disruptions and foreign control

Example of dumping

Oxfam has criticised the EU’s Common Agricultural Policy for providing subsidies to farmers, risking over production

1. These surplus goods are dumped in developing countries, undercutting local farmers who cannot sell their products as cheaply

2. Causes rural unemployment and worsens poverty, as local agricultural industries struggle to survive

   1. an international non-profit organization and global movement that works to end the injustice of poverty.

Who are the initiators and accused exporters of dumping 

• Top initiators: India, EU, USA, Argentina, Australias, Brazil

• Most accused exporters: China, South Korea, Taiwan, USA, India 

• Common sectors affected, base metals, chemicals, plastics 

What is the argument for defence

To safeguard national security and essential supply chains

How does the defense argument operate

• Restrict M → protect domestic industries that produce essential or strategic goods

• Restrict X → during crises, to preserve domestic supplies of critical goods

• Invest in local production → strengthen self sufficiency and ensure readiness during wars, pandemics, major supply disruptions

Reasons for defense argument and include examples

• Technology and security

  • Aus and the US restricted HUAWEI from 5G networks due to cybersecurity and espionage concerns

  • In 2024 the US introduced laws requiring TikTok’s sale to an approved American company, citing risks of data access by the Chinese Government

    • They don’t want people to know information about the other, spreading propaganda, impacting political views 

• Global supply

  • Russia’s invasion of Ukraine (2022) led to agriculture export restrictions, disruption 8% of global food trade and exposing the risks of dependency of foreign supply

Goals of the protection argument for defence

• Maintain domestic production of essential goods such as weapons

• Reduce reliance on foreign suppliers 

Nations should be able to produce critical G and S domestically

• Food and agriculture

Risks of defense argument

Decrease GDP, however this is necessary for long term stability

• Limits agricultural export opportunities of developing economies 

  • For every job protected by EU, agriculture subsidies, 30 jobs are missed in African subsidies

tariff

Taxes on imported goods that make them more expensive than local products, imposed for the purpose of protecting domestically industries

What are the economic effects of a tariff

• Stimulates domestic production and employment

• Reallocation of resources to less efficient producers those who are unable to compete with foreign producers

• Higher price for consumers for less goods

• Revenue for the govt

What is a subsidy

Government cash payments to domestic producers to lower production costs, which enables them to compete with foreign producers

• Paid on a per unit basis

development gap

The disparity in wealth, living standards, and opportunities between developing and developed countries

export incentives

Grants, loans, or technical support to help local firms compete in global markets.

local content rules

Requirements that a certain proportion of goods must be produced domestically, otherwise tariffs have to be put on the product

quota

Restrictions or limits on the quantity of goods that can be imported over a specified period

• Can be used to reduce the amount of undesired goods entering a country

• Guarantees domestic share of goods in the market

free trade agreements

formal agreements between countries designed to break down barriers between them

• Bilateral: between two countries

• Multilateral: between three or more countries

trade bloc

a number of countries join together in a formal preferential trading agreement to the exclusion of other countries

trade diversion

Where a country’s imports of a good or service switch from coming from the most efficient producer to another country because of the protectionist impacts of a trade agreement’s provisions

Offshoring

TNCs set up overseas subsidiaries, seeking out cheaper labour options in major developing countries to increase profits.

• They are still your employees

Outsourcing

Closing internal departments and choosing more efficient or expert external independent businesses contracted to run that section of the business.

multinational corporations

Operate with a centralised management structure with a home country

• Seen as a collection of subsidiaries

vertical integration

a strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers.

backward integration

Takes over/merges with supplier firms (parts or raw materials)

• They are going BACKWARDs in the production process

Conglomerate integration

Takes over/merges with firms outside normal industry

Horizontal integration

Takes over/merges with firms in the same industry

SDR

A potential claim on the freely usable currencies of IMF members

• Created in 1969 to support fixed exchange rate system

• Provides a central member bank with options to access IMF funds that could be used to purchase the domestic currency in foreign exchange

• Right to money is converted to actual loans

Organisations

groups of countries who come together for general issues related to global trade

• Establish trade rules

• Promote trade

• Assist with economic cooperation

• Examples: WTO, World Bank, IMF, OECD

Organisation for Economic cooperation and development

International economic organisation of 38 countries aim to stimulate economic progress and world trade. The OECD defines itself as a forum of countries with its mandate covering economic, environmental and social issues

austerity measures

policies that reduce govt budget deficits through spending cuts and/or tax increases

• imposed on govt that finds it difficult to repay their debts

• reducing budget deficits is assumed to make the payment of debt easier

global corporation

large company operating in multiple countries, owning or controlling production of G and S outside its home country

• examples: multinational corporations or transnational corporations

Role of World Bank

• Provides low-interest development loans, interest free credits and grants for projects in developing countries

• Loans and technical assistance for investment projects in education, agriculture, public administration, infrastructure, health, financial and private sector development, plus environmental and natural resource development

  • Increasing standards of living and wellbeing for the planet

World price

International price of a G or S determined by the global interaction of supply and demand

embargo

Complete prohibition of import or export of certain goods

What is most favoured nation in regards to the WTO

A principle that all countries are to treat all trading partners equally and avoid discrimination, this promotes fairness and stability in international trade

Who are in the BRICS

Brazil, Russia, India, China me South Africa

Effectiveness of the WTO

• Decisions are made on consensus basis with proposals requiring all members to agree before they can be adopted

• Weakening influence: Due to the stalled Doha talks by 2016, groups of nations are instead focusing efforts on bilateral and regional trade agreements where they have more say/control over negotiations

• Dominated by EU, USA, Japan who sometimes flaunt rules with impunity

• Developing countries don’t have significant power over negotiations 

• Promotes interests of govt and TNCs over people and workers

• Policies/actions not voted by citizens

• Actions and decisions purely based on trade, endangering environments and human rights

Two reasons why countries engage in international trade

1. Countries cannot produce all the G and S they need due to factor endowments

2. Countries have different comparative and absolute advantages in the production of G and S, benefitting from specialisation and trade

Role of technology in increasing world trade

• Increased productivity and efficiency in the production process which they may receive from overseas via trade

• Better communication and less costs for transport of resources, reducing the cost of trade

Benefits of globalisation in the labour market

A country can fill shortages in its labour market

• Workers from less developed countries can migrate to countries with higher potential income and send remittances back to their home country

  • Remittances is a major source of income for many economies

    • Therefore, workers are also not restricted to the labour opportunities in their own country, they can go to a country where their skills are needed

Costs of globalisation on the labour market

• Domestic employment can plummet where global labour markets attract workers from more skilled countries, constraining economic development opportunities in that country

• Businesses may want to seek production to lower cost economies and as a result competitive economies may want to push down their standards of production to maintain competitiveness