The Importance of Globalisation

Reasons for globalisation

Reasons for globalisation

• Globalisation is the economic integration of countries through increased cross-border movement of people, goods and services, technology and finance

• In recent years there has been rapid globalisation and growing international business expansion

• Businesses that trade internationally import and export goods and services

  • Imports are goods and services bought by people and businesses in one country from another country

    • In 2022, the UK’s biggest import was cars, valued at approximately £3.25 billion

  • Exports are goods and services sold by domestic businesses to people or businesses in other countries

    • In 2022, China’s biggest export was smartphones, valued at approximately $21.4 billion

• Exports generate extra sales revenue for businesses selling their goods abroad

• Imports result in money leaving the country, which generates extra revenue for foreign businesses

Why globalisation has accelerated

• Improved transport links have made it easier and cheaper to move goods, services and people between countries

  • This allows businesses to expand into global markets and operate international supply chains

• Technological change, including advances in communication, has made it quicker and cheaper to share information across the world

  • Businesses can now manage international operations, hold virtual meetings and advertise to global audiences more easily

• Free trade agreements between countries have reduced or removed tariffs and other trade barriers

  • This encourages international trade by making imported goods more affordable and increasing access to foreign markets

• The growth of newly industrialised countries has created new markets for goods and services

  • These countries also offer lower-cost labour and production, attracting businesses to invest and set up operations there

Opportunities and threats of globalisation for businesses

Opportunities and threats of globalisation for businesses

• Globalisation offers businesses the chance to grow beyond their home country

  • By trading internationally, they can increase sales, lower costs and access valuable resources

Opportunities of globalisation

Threats of globalisation

Increased competition

• Globalisation exposes businesses to multinational competitors with greater economies of scale

  • This makes it harder for smaller firms to compete on price and distribution

Greater exposure to global risks

• Businesses become more vulnerable to global shocks such as supply chain disruption, exchange rate volatility and rising commodity prices

Pressure on costs and standards

• Competing globally can increase costs linked to regulation, ethical sourcing and sustainability, which may squeeze profit margins, especially for small businesses

Import tariffs and quotas

Import tariffs and quotas

• A tariff is a tax placed by a government on imported goods from other countries 

  • For example, tennis rackets imported into the UK from China have a tariff of 4.7%

• An import quota is a government-imposed limit on the amount of a particular product allowed into a country 

  • For example, China has set an import quota on Cambodian rice of approximately 5.32 million tonnes per ye

The effects of import tariffs and quotas on businesses

The effects of import tariffs and quotas on businesses

The effects of tariffs

• A tariff increases the price of imported goods, which helps shift demand for that product or service from foreign businesses to domestic businesses

• American customers are more likely to purchase American cheese as the tariff has made British cheese more expensive

Advantages of tariffs

• They protect infant industries so they can eventually become more competitive globally

• An increase in government tax revenue 

• Reduces dumping by foreign businesses as they cannot sell below the  market price 

Disadvantages of tariffs

• Increases the cost of imported raw materials, which may affect businesses that use these goods for production, leading to higher prices for consumers 

• Reduces competition for domestic firms, who may become more inefficient and produce poor-quality products for their customers 

• Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them

The effects of quotas

• Restricting the physical quantity of imports using a quota means that domestic businesses face less competition and benefit from a higher market share

  • More domestic demand is met by domestic businesses

Advantages of import quotas

• To meet extra demand, domestic businesses may need to hire more workers, which reduces unemployment and benefits the wider economy

• The higher prices for the product may encourage new businesses to start up in the industry

• Countries are able to easily change import quota as market conditions change

• Foreign countries view quotas as less confrontational to their business interests than tariffs

  • Their exporters can still sell their goods at a higher price in domestic markets (but a limited amount of it)

Disadvantages of import quotas

• Quotas limit the supply of a product and whenever supply is limited, the price of the product rises

• They may generate tension in the relationship with trading partners

• Domestic firms may become more inefficient over time as the use of quotas reduces the level of competition