Globalisation, Free Trade and Protection
CIE IGCSE EconomicsΒ· Section 6.2Β· 25 min read
1. 1. Definition, Causes and Impacts of Globalisationβ β ββββ± 6 min
Globalisation
The increasing integration and interdependence of national economies across the world through increased flow of goods, services, capital, labour and information.
Example:
A smartphone designed in the US, assembled in China, with components sourced from 15 different countries is a product of globalisation.
Key drivers of globalisation include: advances in low-cost transport (container shipping, air freight), improvements in digital communication (internet, video conferencing), reduction of trade barriers via the WTO and free trade blocs, and the growth of multinational corporations (MNCs) operating across borders. Impacts vary by economy type: for LEDCs, globalisation can bring job creation and faster economic growth, but also risks exploitation of low-wage workers. For MEDCs, it brings lower consumer prices but can lead to deindustrialisation and job losses in traditional manufacturing sectors.
Describe two negative impacts of globalisation on a developed country like the UK.
- 1
First negative impact: Deindustrialisation and job losses in manufacturing sectors. Low-cost imports from lower-wage economies mean domestic manufacturing firms cannot compete, leading to factory closures and structural unemployment in traditional industries like textiles and steel.
- 2
Second negative impact: Increased income inequality. High-skilled professional workers benefit from global job opportunities and higher wages, while low-skilled workers in declining industries see stagnant wages or job losses, widening the gap between high and low income groups.
2. 2. Advantages and Disadvantages of Free Tradeβ β β βββ± 7 min
Free Trade
International trade that occurs without any government restrictions or barriers imposed on imports or exports.
Example:
Free trade between EU member states means goods can be sold across borders without tariffs or quotas.
Key advantages of free trade include: greater product choice for consumers, lower prices from increased global competition, access to larger international markets for domestic firms, more efficient allocation of resources via specialisation, and improved political relations between trading nations. Disadvantages include: over-specialisation that makes countries vulnerable to global price shocks, new domestic 'infant industries' being unable to compete against large established foreign firms, decline of uncompetitive domestic industries leading to unemployment, and risk of 'dumping' where foreign firms sell goods below production cost to undercut domestic producers.
Explain two benefits of free trade for consumers in a small island economy.
- 1
First benefit: Greater variety of goods and services. A small island economy has limited capacity to produce a wide range of products, so free trade allows consumers to access food, electronics and other goods produced in other countries that would not be available domestically.
- 2
Second benefit: Lower prices. Free trade removes import taxes, and increased competition from foreign firms forces domestic producers to keep prices low, so consumers pay less for goods than they would under protected markets.
3. 3. Types of Protectionist Policies and Their Effectsβ β β βββ± 6 min
Protectionism
Government policies designed to restrict international trade and protect domestic industries from foreign competition.
The most common protectionist policies tested in IGCSE exams are: tariffs (tax on imports, which raise import prices, reduce demand for foreign goods, raise government revenue, and protect domestic firms but increase consumer prices), import quotas (physical limit on the quantity of imports, which restricts supply, raises prices, protects domestic firms, but generates no government revenue), subsidies (government payments to domestic firms to lower production costs, making them more competitive against imports, but use taxpayer money and can encourage overproduction), and embargoes (total ban on trade of a good or with a country, used for political reasons, which creates shortages and sharp price rises).
Distinguish between a tariff and an import quota, using one example of each.
- 1
A tariff is a tax charged on imported goods, for example a 20% tariff on imported cars means a car imported from Japan costing \2000 tax added, making its selling price \$12,000 to domestic consumers. This raises government revenue while making foreign cars more expensive than domestic ones.
- 2
An import quota is a physical limit on the quantity of a good that can be imported, for example a quota that allows only 50,000 imported computers to enter the country per year. Once the limit is reached, no more computers can be imported, so supply is restricted, raising prices and protecting domestic computer manufacturers. No government revenue is raised from quotas.
4. 4. Evaluating Arguments for and Against Protectionismβ β β β ββ± 6 min
Common arguments for protectionism include: protecting infant industries (new domestic firms need time to grow to compete with large foreign firms), protecting domestic jobs from low-wage foreign competition, preventing dumping of cheap foreign goods, improving the current account balance by reducing import spending, protecting national security by ensuring domestic production of essential goods like food and energy, and protecting workers from exploitation in low-income countries. Arguments against protectionism include: higher prices and reduced choice for consumers, risk of retaliatory trade barriers from other countries leading to trade wars that hurt export sectors, inefficient resource allocation by supporting uncompetitive domestic firms, and slower overall economic growth.
Evaluate the argument that protectionism is a good policy for a developing country that wants to grow its manufacturing sector (8 marks).
- 1
First, explain the supporting argument: Protectionism in the form of tariffs or quotas on imported manufactured goods will protect infant domestic manufacturing firms from competition with established, low-cost foreign firms. This gives domestic firms time to grow, increase efficiency, and create jobs for local workers, leading to long-term industrialisation and economic growth.
- 2
Next, explain the counterargument: Protectionism will lead to higher prices for manufactured goods for domestic consumers, reducing their living standards. Other countries may retaliate by imposing tariffs on the developing country's exports, hurting its agricultural or raw material export sectors that rely on global markets.
- 3
Conclude with a balanced judgement: Protectionism can be beneficial in the short term to support infant industries, but it should be removed gradually as domestic firms become competitive, to avoid the negative effects of higher prices and trade retaliation in the long term.
5. Common Pitfalls
Wrong move:
Stating that all impacts of globalisation are positive for all countries
Why:
Globalisation creates winners and losers: for example, low-skilled manufacturing workers in MEDCs often lose jobs while workers in LEDC manufacturing sectors gain jobs
Correct move:
Always specify the group or type of economy you are referring to when discussing impacts of globalisation or trade policies.
Wrong move:
Confusing tariffs and quotas, or stating that quotas raise government revenue
Why:
Tariffs are taxes that raise revenue for the government, while quotas are quantity limits that do not generate any government income
Correct move:
When describing protectionist policies, explicitly state if they generate government revenue and what their primary effect is (price vs quantity).
Wrong move:
Only giving one side of the argument for 8 mark evaluation questions on protectionism
Why:
Evaluation questions require balanced analysis of both advantages and disadvantages, plus a conclusion, to access full marks
Correct move:
Structure 8 mark trade questions as 2 points for, 2 points against, and 1 justified conclusion.
Wrong move:
Using A-Level concepts like comparative advantage calculations or consumer surplus in answers
Why:
These are outside the scope of the CIE IGCSE Economics 0455 syllabus, and examiners will not award marks for content beyond the specified syllabus
Correct move:
Stick to IGCSE-level explanations of specialisation, price impacts and employment effects when answering trade questions.
Wrong move:
Assuming free trade always reduces unemployment
Why:
Free trade can lead to job losses in domestic industries that cannot compete with cheaper imports, even as it creates jobs in export sectors
Correct move:
Discuss both job creation and job loss impacts when explaining the effects of free trade on employment.
6. Quick Reference Cheatsheet
Concept | Key Facts for Exam |
|---|---|
Globalisation | Key causes: better transport/communication, lower trade barriers, MNC growth. Impacts differ for MEDCs vs LEDCs. |
Free Trade Benefits | Lower consumer prices, more choice, larger markets for firms, more efficient resource allocation. |
Free Trade Costs | Job losses in uncompetitive sectors, vulnerability to global shocks, risk of dumping. |
Tariffs | Tax on imports: raises consumer prices, protects domestic firms, raises government revenue. |
Quotas | Quantity limit on imports: raises prices, protects firms, no government revenue. |
Protectionism Arguments | For: protect infant industries, domestic jobs, national security. Against: higher prices, trade retaliation, inefficiency. |
7. Frequently Asked
Do I need to draw diagrams for trade questions in Paper 2?
Unless explicitly asked, you do not need to draw diagrams for trade questions, but you can refer to demand and supply shifts for tariffs if it supports your explanation for higher marks.
What is the difference between a tariff and an embargo?
A tariff is a tax on imported goods, while an embargo is a total ban on trade of a specific good or with a specific country. Embargoes are the most extreme form of protectionist policy.
Going deeper
What's Next
Now that you have mastered globalisation, free trade and protectionism, you are ready to move on to more advanced topics in international trade for your CIE IGCSE Economics 0455 exam. Next, you will learn about exchange rate systems, current account balances, and trade blocs, which are frequently tested alongside trade policies in 6-8 mark structured questions. Make sure to practice answering past paper questions on this topic, focusing on balanced evaluation for higher-mark questions, and refer back to this guide when revising key definitions and policy impacts ahead of your exam.