Comprehensive Study Notes on Globalisation and Protectionism

Defining Globalisation and the Global Trade-to-GDP Ratio

• Globalisation is characterized by the increasing integration of national economies through various channels, including trade, financial flows, the movement of factors of production (such as labour and raw materials), and the flow of technology.

• A vital metric for measuring the extent of globalisation is the Global trade-to-GDP ratio, which tracks the openness of an economy at a national level. It is calculated as follows:

$\text{Global trade-to-GDP ratio} = \frac{X+M}{\text{GDP}} \times 100\%$

• Components of Globalisation Flows:

  • Trade: Includes the flow of both goods and services (Exports and Imports).

  • Financial Flow: Encompasses Foreign Direct Investment (FDI) and "Hot money" (short-term speculative capital).

  • Movement of Factors of Production: Includes labour (leading to phenomena like Brain Drain or Brain Gain and the use of foreign workers) and raw materials.

  • Technological Flow: The cross-border movement of technical knowledge and innovations.

Principal Drivers and Factors Affecting Globalisation

Globalisation is propelled by the profit motives of firms and the desire of governments to achieve macroeconomic and social objectives.

• Gains from Specialisation and Trade (Theory of Comparative Advantage): Trade occurs due to differences in resource endowments and technological capabilities, which create variations in opportunity costs.

  • The Theory of Comparative Advantage: A country should specialise in producing goods with a lower opportunity cost than other nations and export them in exchange for goods that it would produce at a higher opportunity cost.

  • Consumption Possibilities: This specialisation allows countries to expand consumption beyond their production possibilities, leading to higher material Standards of Living (SOL).

• Numerical Illustration of Comparative Advantage:

  • Scenario: Singapore vs. Indonesia producing Palm Oil ($P$) and Computers ($C$).

  • Indonesia: A resource-abundant economy that can produce more of both goods than Singapore. However, Indonesia has a comparative advantage in Palm Oil because its PPC is gentler ($1P = 4C$), whereas Singapore's is steeper ($1P = 10C$).

  • Singapore: Has a comparative advantage in Computers because it forgoes less Palm Oil per computer ($1C = 1P$) compared to Indonesia ($1C = 0.25P$).

  • Specialisation: If Singapore fully specialises in Computers (producing $200C$) and Indonesia partially specialises in Palm Oil (producing $7P$ and $120C$), trade becomes beneficial.

  • Terms of Trade (TOT): For trade to be mutually beneficial, the TOT must fall between the opportunity cost ratios ($1P = 4C$ and $1P = 10C$). An example TOT is $1P = 6C$. The formula for TOT is:

$\text{Terms of Trade (TOT)} = \frac{\text{Index of export prices}}{\text{Index of import prices}} \times 100$

• Sources of Comparative Advantage:

  • Resource Endowment and Productivity: Singapore is skilled-labour abundant, making it productive in skilled-labour intensive exports like semiconductors and pharmaceuticals. Indonesia is unskilled-labour abundant, favouring unskilled-labour intensive goods like palm oil.

  • Technological Advancement: Economies with high R&D intensity (e.g., South Korea’s "Fourth Industrial Revolution" strategy) gain cost advantages through efficiency.

  • Internal Economies of Scale: Specialising in a narrow range allows firms to reach the Minimum Efficient Scale (MES), lowering long-run average costs ($LRAC$). This is crucial for small markets like Singapore.

  • Dynamic Comparative Advantage: Comparative advantage is not static. It can change through investment in human capital, technology adoption, or government policy. Singapore transitioned from unskilled manufacturing to high-value services through targeted education and manpower policies.

Technological and Political Drivers of Globalisation

• Transportation Technology: Improvements such as containerisation and advanced infrastructure (Suez and Panama Canals) have reduced transport costs. Jet engines with ultra-long-range capabilities facilitate international travel and tourism (export of services).

• Information and Communication Technology (ICT):

  • Disaggregation of Services: Enables outsourcing/offshoring. For example, firms in the US or Singapore (e.g., DBS, Grab) outsource call centres to India and the Philippines.

  • E-commerce: Platforms like Shopee, Amazon, and Taobao facilitate cross-border transactions. Global logistics (DHL, FedEx) allow direct delivery from small manufacturers (e.g., Shein/Temu in China) to global consumers.

• Economic Policies:

  • Trade Liberalisation: Reduction of protectionist measures (tariffs/quotas) through multilateral (WTO, CPTPP) or bilateral (US-Singapore FTA) agreements.

  • Investment Liberalisation: Removing capital controls, allowing 100% foreign equity ownership, and deregulating financial markets (e.g., MAS Equity Market Development Programme).

  • Tax Systems: Competitive tax regimes and Double Taxation Agreements (DTA) attract MNCs.

• Global Value Chains (GVC): Breaking up production into sub-processes allows countries to specialise in specific activities. For example, 80-90% of iPhones are assembled in China, but the high-tech components are imported from Japan, Korea, and Germany.

Macroeconomic and Microeconomic Benefits of Globalisation

• Macroeconomic Objectives:

  • Balance of Trade (BOT): Access to larger foreign consumer bases increases export demand and revenue ($X$).

  • Economic Growth and Employment: Inflow of FDI increases Investment ($I$) and Net Exports ($X-M$), raising Aggregate Demand ($AD$). This leads to actual growth and reduced demand-deficient unemployment. Technological transfer and access to foreign talent increase the productive capacity (Potential Growth).

  • Inflation Control: Access to cheaper imported raw materials and foreign labour reduces unit costs, shifting the Short-Run Aggregate Supply ($SRAS$) downward and lowering cost-push inflation.

• Microeconomic Objectives:

  • Allocative Efficiency: Exposure to competition reduces monopoly power. In Diagram 3, a firm face a more price-elastic demand curve ($D_1$ to $D_0$), reducing the ability to mark up prices above Marginal Cost ($MC$).

  • Dynamic and Productive Efficiency: Competition pressures firms to innovate and avoid profligacy (X-inefficiency). Access to larger markets allows firms to move down the $LRAC$ curve by reaping technical economies of scale.

  • Equity: Increased demand for unskilled labour in developing countries can raise low-income wages. In developed nations, governments can use increased tax revenue from growth to fund education bursaries for the poor.

• Standard of Living (SOL):

  • Material SOL: Increased purchasing power due to cheaper imports and higher real national income.

  • Non-Material SOL: Greater variety of goods (imports of fruits like cherries/grapes to Singapore) and access to green technology (Singapore importing Liquefied Natural Gas/LNG) to reduce pollution.

Macroeconomic and Microeconomic Costs of Globalisation

• Macroeconomic Instability:

  • External Shocks: Recession in trading partners reduces export revenue (Contagion Effect).

  • Exchange Rate Volatility: Large outflows of "hot money" can cause rapid currency depreciation in floating systems.

  • Structural Unemployment: Developed economies lose CA in unskilled-intensive production, leading to sunsetting industries. Displaced workers often lack occupational mobility.

  • Imported Inflation: Import-reliant economies like Singapore are vulnerable to global supply shocks (e.g., a hypothetical 2026 Iran war causing energy prices to soar by 11%).

• Microeconomic Inefficiency and Inequity:

  • Negative Externalities: Rapid production in developing nations can lead to deforestation, overfishing, and pollution because they lack abatement technology, causing deadweight losses.

  • Widening Income Gap: As shown in Diagram 7, the demand for skilled labour ($D_2 \rightarrow D_3$) increases while demand for unskilled labour ($D_0 \rightarrow D_1$) falls. Because the supply of skilled labour is price-inelastic, their wages rise significantly, increasing the Gini coefficient.

  • Crowding Out: Large MNCs may outcompete local SMEs for resources and market share, leading to the shutdown of domestic firms.

Understanding Protectionism: Definitions and Types

Protectionism refers to trade barriers designed to shelter domestic producers from foreign competition.

• Import Tariffs: Taxes on imports. For a small price-taking economy, a tariff ($t$) shifts world supply ($S_w$) to $S_w + t$, raising domestic price to $P_t$. This increases domestic production ($Q_a \rightarrow Q_b$) and reduces consumption ($Q_d \rightarrow Q_c$).

• Welfare Effects of Tariffs:

  • Consumers: Lose surplus by area $P_w P_t C D$.

  • Producers: Gain surplus by area $P_w P_t B A$.

  • Government: Gains tariff revenue (Area $F B G C$).

  • Societal Deadweight Loss (DWL): Area $A B F$ (production inefficiency) + Area $G C D$ (consumption inefficiency).

• Other Protectionist Measures:

  • Devaluation: Deliberately lowering currency value to make exports cheaper and imports expensive (e.g., China designated as a currency manipulator 2019-2020).

  • Subsidies: Cash grants or tax concessions to domestic firms (e.g., EU Common Agricultural Policy or China's EV subsidies).

  • Quotas: Direct quantity restrictions.

  • Embargoes: Complete bans (e.g., Singapore's ban on commercial chewing gum).

  • Technical Specifications: Using safety or hygiene standards (e.g., unique EU standards) to limit market access.

  • Administrative Regulations: Bureaucratic delays or "local content requirements" (e.g., US Inflation Reduction Act).

  • Voluntary Restraint Arrangements (VRA): Self-imposed export limits by nations to avoid harsher restrictions (e.g., Argentina's agricultural exports to the EU).

Evaluation of Protectionism and Globalisation

• Arguments for Protectionism:

  • Infant Industry: Protecting new industries with long-run CA so they can reach economies of scale (e.g., historical protection of automotive sectors in South Korea/Taiwan). Risks include moral hazard and perpetual dependency.

  • Preventing Dumping: Countering foreign firms that sell below marginal cost to monopolize a market.

  • National Security: Diversifying production to ensure self-sufficiency in strategic sectors like food or semiconductors.

• Arguments Against Protectionism:

  • Retaliation: "Tit-for-tat" trade wars (e.g., 2018 US-China trade war involving steel/aluminum and soybeans).

  • Self-Defeating Nature: Reducing trading partners' income lowers their demand for your exports.

• Policy Evaluation (Singapore Case Study):

  • Small, open economies mitigate globalisation risks through specific policies: Strong currency (gradual SGD appreciation) to curb imported inflation, Enterprise Development Grant (EDG) to help SMEs, and the COMPASS system to regulate foreign labour quality.

  • Supply-Side Alternatives: Rather than tariffs, use SkillsFuture to enhance occupational mobility and the Progressive Wage Model (PWM) to support low-wage workers directly.

  • Sustainability: Managing growth dividends via GIC and Temasek (NIRC contributions) while implementing green taxes (e.g., 5-cent plastic bag charge) to ensure long-term SOL.