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Unit 6 - Foreign - UK in Global Economy

Unit 6 - Foreign - UK in Global Economy

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11/03/2010

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Copyright © Kevin Bucknall
Module 2881 Unit 6, The UK in the GlobalEconomy: “Globalisation and Protection”
6-1. AN INTRODUCTION TO GLOBALISATION AND PROTECTIONThe gains from trade
is the same concept as “why nations trade” and these gains lie behind the trend towards increasing globalisation.Comparative advantage. To simplify greatly, it means that a country does what itis best at!
This is the main source of the gains from trade
.A country will lack something that it cannot produce for itself, e.g., bananas inBritain. So a country trades to get what it lacks but wants.
This is a minor reason.
There is a gain in the variety of goods and services offered and wider consumer choice if one can buy from abroad. The country pays for the imports by exportingwhat it produces.Generally, international trade increases incomes, fosters economic growth, improves thestandard of living, and allocates resources better, both within a nation and globally.
The globalisation process
Globalisation comes about by a reduction in protection, especially by the developedcountries, and the general freeing up of markets. Globalisation involves countriesspecializing in what they are good at and exporting in exchange for goods or servicesthey are poorer at. It requires a reduction in protection in order to allow the increase intrade which is necessary. It also needs the freer movement of capital and the ability toinvest in another country. A company in country “A” can then either set up a factory or firm in a different country, “B”, or else buy an existing one there. As an example, theBritish company Lever Brothers has operating companies and factories on everycontinent in the world, has a research laboratory in China (among other places), and is agenuine and long-established multinational company.The motives for reducing protection are:To increase a country’s efficiency in production and hence improve the domesticstandard of living, resource allocation and growth.
Chap 6 - 1
 
To reap the gains from trade (comparative advantage).To help the poor countries of the third world.
This is not really an important motive!
The goods that the third world wishes to sell are often kept out odeveloped countries by high levels of protection in order to assist their own producers. Imports of agricultural produce in particular are often heavilyrestricted for the sake of a relatively small number of farmers.Pressure from multi-national corporations on the various governments to allowfreer movement of goods and capital (in order to increase their own profits).
International Exchange
This really means why countries trade! If Britain can run an insurance service morecheaply, say, than New Zealand, then it should do so, and sell it to the world (Lloyds of London does this). In this example, we would buy back something, for instance muttonand lamb. It is not necessary or even desirable to try to balance exports and imports witha single country. We wish to balance multi-laterally, on a global basis.
The global trading pattern:
The developed world trades more with itself than with third world countries, which seemssurprising to some.But this is reasonable really! Because:Income elasticities are high for services and fancy expensive manufactured products, but low for raw materials
revise elasticities and what this means inUnit 1 if you are a bit hazy). The developed world has high incomes, so itimports such things as video cassette recorders and TV sets from Japan.However, few poor developing countries produce such items. Instead they tend to produce raw materials and agricultural products, such as bananas, coconuts, sugar,sisal and hemp all of which have low income elasticities. Where poor countriesdo export hi-tech goods, like TV sets from China, these are inevitably made in joint-ventures, set up with foreign capital and know-how and owned in part byforeign developed countries anyway. Many Japanese products are now made inthird world countries like China, as Japan has exported much of its manufacturingcapacity, a process known there as “hollowing out” the economy.Comparative advantage and wider consumer choice mean that, if we take motor cars as an example, the Germans make Mercedes and BMW; the French makeCitroens and Peugeots; the Italians make Ferraris and Alfa Romeos …. and theyall sell motorcars to each other.
Chap 6 - 2
 
The demand for primary produce (often produced in third world countries) growsonly slowly, so trade with third world countries does not expand rapidly. At thesame time, technological improvements in the rich world often reduce thequantity of raw material needed. As an example, Brazil produces much iron ore but less of this goes into a typical motor car built in the UK now than it did fiftyyears ago.An additional factor on the demand side is that most developed countries protecttheir domestic agriculture, which severely limits the amounts that poor countriescan sell to them
remember 
?)
The long-term price of many primary products does not increase much, in part for the three reasons above which limit the growth in demand. A further reason lieson the supply side: output of primary produce has increased over time. This is partly through increases in yield but also because of the extra supply coming fromnewly developing third world countries as they increase their exports. Withreasonably rapid growth in supply and little growth in demand, the long term price must fall. At best it will increase but slowly.
Trade Protection and Trade Liberalisation
Trade protection means reducing or preventing imports from foreign countries by meansof measures like tariffs, quotas and non-tariff barrier (ntb’s).An import tariff is a tax, e.g., 20 per cent (being set as a percentage it is referredto as anadvaloremlevy) or £30 (as a set absolute amount it is called a specificlevy) which is placed on each item imported.A quota is a fixed quantity, such as 20 tons; only that amount in total can beimported.Ntb’s, as they are usually called, are often rather subtle and clever ways of reducing imports by the tricky use of laws or regulations. As an example, healthregulations may be used to reduce or prevent wheat imports; or peculiar safetyregulations, such as the minimum distance between brake pedal and clutch pedalin a motor vehicle, may be invented and used to prevent the import of certainvehicles. Note that in order to reduce protection we:Reduce or eliminate tariffs (so importers pay less or nothing).But increase quotas (so a larger physical amount may be imported).
Chap 6 - 3

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