Globalisation: Economics and Society

 

As you can now see, after both countries switched resources to producing goods they possess a comparative advantage in the overall output in both products has increased, therefore benefiting the economic welfare.

       Production of fridges in UK         Production of fridges in India

  £                           UK Supply       £

 

UK                               Fair Trade £                                            India Supply

 £                                  

                                                India

                                                     £

                                   UK Demand                                       India Demand  

           

                     UK Imports              Qty                          Indian Imports     Qty    

Here we can see India is capable of producing fridges at a lower relative cost and thus faces a supply curve lower than the UK’s. India has a comparative advantage in producing fridges. When free trade occurs India will focus resources on fridges and export their surplus output to the UK at a lower cost than what British consumers face at the moment. At the fair trade price level illustrated above India sell fridges below the UK equilibrium price level but still manage to sell above theirs, allowing for profit to be made. Here we can clearly see welfare nationwide being enhanced, by the reduction in protectionism and increased free trade.

Finally, free trade tends to lead to technological gains and innovation, which again would benefit welfare greatly not only on a pricing level but also in terms of greater consumer choice.

We can diagrammatically illustrate the welfare loss to society when tariffs are imposed, using the concept of consumer and producer surplus.

Student Number: 06032336

              Price    

       

                                                                                           Supply (Domestic)

                Pw + T    a                            b                c

                                                                                                   Supply (World)

                  Pw                                                                                              

                          d         g             f                 e          d

                                                                                                Demand

                      0                    Q1   Q2    ↔  Q*  Q

                                                                 Imports                                           Quatity

Here we can see the market price of the product is Pw and output Q1 is produced domestically, Q is therefore domestic quantity demanded. A tariff is now placed upon the imported product needed to satisfy the excess demand. This as you can se raises the price of imports, reducing domestic demand to Q* and increasing domestic supply to Q2. Imports have now been reduced, in turn reducing competitiveness. This action has a net welfare loss of areas bfg and cde as consumer surplus has been reduced and producer surplus has gained. Whilst this illustrates how trade barriers act against the interest of welfare, it could be argued that if the revenue earned by the government outweighed that net welfare loss, and was redistributed domestically, there wouldn’t be much welfare loss incurred.

However whilst free trade has its benefits and there is clearly an argument for the abolition of protectionist measures, tariff and non-tariff barriers still exist, and this is based on a number of issues.

Firstly many countries express the need for import controls based on the infant industry argument. Those industries that have just started up and have yet to experience economies of scales that an incumbent firm would, arguably must be protected from the competition it would experience under a completely free trade policy. This short-term protectionist measure allows the industry to develop it comparative advantage and once established the barriers will be removed and international free trade will resume without fear of the industry being driven out. This policy however is dangerous as there is a risk that if the infant industry isn’t exploited to foreign competition then it will fail in becoming fully efficient.

Student Number: 06032336

A second argument in favour of protectionist measures and a reason why trade barriers still exist today is to prevent what is called “dumping”. “Dumping” refers to the selling of goods in the short-term at a below average price, which initially benefits consumers and increases welfare. Whilst domestic producers cannot compete with this initial price set by foreign competitors they are eventually driven out of business. This now allows the foreign company to establish itself as a monopoly and effectively charge any price it wishes, generally a much higher one, exploiting the consumer. Here, we can clearly see barriers to free trade are needed to protect welfare in the long run.

Trade barriers can also be used to benefit the balance of payments of a country, by making the consumption of imports unattractive. Taxes and other non tariff barriers can be used to make the price of an imported good or service more expensive than the domestically produced equivalent. A trade of balance surplus is beneficial to aggregate demand as I already highlighted above and would thus benefit welfare.

The final economic justification for import controls are when trying to reduce even eradicate those goods or services that have negative externalities. Goods such as tobacco have tariffs imposed on them to cover the negative externalities imposed upon the third party; Cars and other polluting products also receive similar protectionist measures.

Along with these reasons many governments a keen to have barriers purely on political grounds the US has trade sanctions with the communist country of Cuba.

Finally and perhaps the most important reason for the maintenance of protectionist measures is that, the theory of comparative advantage and the idea of specialization is slightly flawed. Some countries can end up over specializing and not have another industry to turn to in the result of a slump in that industry. This has been the case in several African countries.

“Information and money flow more quickly than ever. Goods and services produced in one part of the world are increasingly available in all parts of the world. International travel is more frequent. International communication is commonplace. This phenomenon has been titled “globalisation.”” This growing interdependence and free trade ability clearly has detrimental effects on the environment. You only have to look in the papers and see talks on global warming and Kyoto Protocol to realise the severity of the problem. However there are some that argue that the benefits to standards of living and overall welfare of people outweighs those problems associated with the environment. This well publicized debate of free trade and globalisation has revolved around the claim that it clearly undermines environmental quality, especially in those less developed countries where technology used to help reduce the problem is scarcely available. Many argue that due to free trade, increased competitiveness, and therefore lower prices for goods and services, those countries unable to compete on the labour cost levels of those developing countries, are forced to cut corners, generally having detrimental effects on the environment. There is no doubt that globalization supports the increase in production, transportation, effectively high energy draining activities which are causing the environmental issue of global warming.

However there are arguments to combat this theory that many free trade advocates would be quick to make clear. Many argue that the economic benefits and prosperity that is born out of free trade will, in the long run counter act the environmental problems associated with increased consumption and production. This concept of the “technique effect” realises that the environmental harm caused will be abated by the increases in income that will call for cleaner production methods. As I already mentioned before increased global trade also allows for developing of technology that could in the long run also help combat environmental problems associated with increased trade. In contrast though, many would argue that there are some irreversible environmental problems. Pollution, fishing, deforestation can cause irreversible damage to natural resources that will eventually see growth non-sustainable.

Because trade implies the movement of goods internationally, you would be right to assume then that this would lead to increased burning of fuels, however this isn’t the case and this argument is generally over exaggerated. It has been proved that domestic trade is a greater energy drainer than that of trade on an international level. For example nowadays deforestation is generally a result of over populating an area, not the typically assumed energy resource, due to the development of other energy resources.  

In conclusion whilst the idea of free trade being the driving force behind much of the global environmental problems we witness today I believe, in the long-run, if applied with well managed government policy, the environment doesn’t have to suffer. The period of polluting transition that is inevitable, I believe is well worth the trouble in return for the increased growth, welfare, and improved living standards, especially when we consider the number of people that live in extreme poverty in this day and age.

Word count: 1,851

Bibliography:

Hartford, T (2006) ‘ Beer, chips and globalization’ (chapter 6)

Boyce, J.K (2004)  ‘ Green and Brown?’, Globalization and the environment, oxford review of economic policy, vol.20

Wolf, M. (2004) ‘Traumatized by trade’, Why globalization works, (chapter10)

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