Definitions:

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Free trade: no restrictions or trade barriers exist that might prevent or limit trade between countries.
Tariffs: taxes imposed on imported goods to make them more expensive than they would otherwise be.
Quotas: limits on the physical quantity or value of certain goods that may be imported.
Voluntary export limits: an exporting country agrees to limit the quantity of certain goods sold to one
country (possibly to discourage the setting of tariffs /quotas).
Protectionism: using barriers to free trade to protect a country’s own domestic industries
Globalisation: the increasing freedom of movement of goods, capital, and people around the world.
Multinational business: business organisation that has its headquarters in one country, but with operating
branches, factories, and assembly plants in other countries
Privatisation: selling state-owned and controlled business organisations to investors in the private sector.

Local, national, and international businesses

Local businesses operate in a small, defined part of the country and do not have expansion as an objective
as well as make no attempt to expand to obtain customers across the whole country. National businesses
have branches or operations across most of the country and make no attempt to establish operations in
other countries. International businesses operate in more than one country and can also be known as
multinational businesses.

Nature and scope of international trading links

All countries engage in international trade with other countries and occurs no matter which economic
system is in place as the growth of world trade in recent years has been very rapid. The huge expansion in
trade has had a great impact on economic development and helps countries build up improved political
and social links. Trading internationally can also have drawbacks, however these need to be considered
carefully by governments.
Risks of international trade
Potential risks from international trade include:
 There may be loss of output and jobs from those domestic firms that cannot compete with
imported goods.
 There may be a decline, due to imports, in domestic industries that produce very important
strategic goods which could put the country at risk if there were a conflict between countries
 The switch from making goods that cannot compete with imports to those in which the country has
a comparative advantage may take a long time. This, again, will cause job losses and factory
closures before other production increases.
 Newly established businesses may find it impossible to survive against competition from existing
importers. This will prevent ‘infant industries’ from growing domestically.
 Some importers may price goods below cost price in order to eliminate competition from domestic
firms.
 If the value of imports exceeds the value of exports for several years, then this could lead to a loss
of foreign exchange.

Free trade and globalisation

What are the benefits of free trade between nations?
  By importing products, consumers have a much wider choice of goods and services. Many of these
would not have been available to them at all without international trade because the farming or
production facilities might not have existed in their own country.
 The same principle applies to raw materials – the UK steel industry depends entirely on imports of
foreign iron ore.
 Imports of raw materials can allow a developing economy to increase its rate of industrialisation.
 Importing products creates additional competition for domestic industries and this should
encourage them to keep costs and prices down and make their goods as well designed and of as
high quality as possible.
 Countries can begin to specialise in those products they are best at making if they import those that
they are less efficient at as compared to other countries.
 Specialisation can lead to economies of scale and further cost and price benefits
 The living standards of all consumers of all countries trading together should increase as they are
able to buy products more cheaply than those that were produced just within their own countries.
There have been moves towards free trade by reducing international trade restrictions.

The free-trade movement and the increasing use of the Internet are reducing the differences that once
existed between national markets, reducing the importance of national borders and making it easier for
firms to trade with and locate in many countries and become internationally competitive. The recent
moves towards free trade have been driven by:
 The World Trade Organization (WTO): This is made up of countries committed to the principle of
freeing world trade from restrictions. It holds regular meetings to discuss reductions in tariffs and
quotas and these have to be agreed by all members.
 Free-trade blocs: These are groups of countries, often geographically grouped, that have arranged
to trade with each other without restrictions. The danger with these blocs is that they may agree to
impose trade barriers on other groups of countries in order to attempt to gain competitive
advantage against imports from these other group

Multinational businesses
These firms have benefited greatly from the freedoms offered by globalisation and they actually produce
goods and services in more than one country. The biggest multinationals have annual revenues exceeding
the size of many countries’ entire economies. The power and influence multinationals can bring may lead
to many problems for nations that deal with such firms. Multinationals have their head offices in Western
European countries or in the USA yet have many of their operating bases in less-developed countries with
much smaller economies.

Why become a multinational?

There are several reasons why businesses start to operate in countries other than their main base.
1. Closer to main markets – this will have a number of advantages, such as:
 Lower transport costs for the finished goods.
 Better market information about consumer tastes as a result of operating closer to them.
 It may be viewed as a local company and gain customer loyalty as a consequence.

2. Lower costs of production

  Lower labour rates, e.g. much lower demand for local labour in developing countries
compared to developed economies.
 Cheaper rent and site costs, resulting from lower demand for commercial property
 Government grants and tax incentives designed to encourage the industrialisation of such
countries.
3. Avoid import restrictions – by producing in the local country there will be no import duties to pay
and no other import restrictions.
4. Access to local natural resources – these might not be available in the company’s main operating
country

Potential problems for multinationals

 Communication links with headquarters may be poor.
 Language, legal and culture differences with local workers and government officials could lead to
misunderstandings.
 Coordination with other plants in the multinational group will need to be carefully monitored to
ensure that products that might compete with each other on world markets are not produced or
that conflicting policies are not adopted.
 The skill levels of the local employees will be low and this could require substantial investment in
training programmes

Evaluation of the impact on ‘host’ countries of multinational operations

Potential benefits
The potential benefits are clear:
 The investment will bring in foreign currency and, with exports, further foreign exchange can be
earned.
 Employment opportunities will be created, and training programs will improve efficiency of locals
 Local firms are likely to benefit from supplying services and components to the new factory and this
will generate additional jobs and incomes.
 Local firms will be forced to bring their quality and productivity up to international standards either
to compete with the multinational or to supply to it.
 Tax revenues to the government will be boosted from any profits made by the multinational
 Management expertise in the community will slowly improve when and if the foreign supervisors
and managers are replaced by local staff
 The total output of the economy will be increased, and this will raise gross domestic product.

Potential drawbacks:
The expansion of multinational corporations into a country could lead to these drawbacks:
 Exploitation of the local workforce might take place due to the absence of strict labour and health
and safety rules in some countries. Multinationals can employ cheap labour for long hours with few
of the benefits that the staff in their home country would demand.
 Pollution from plants might be at higher levels than allowed in other countries. Either this could be
because of slack rules or because the host government is afraid of driving the multinational away if
it insists on environmentally acceptable practices.
 Local competing firms may close due to inferior equipment and much smaller resources
 Some large Western-based businesses have been accused of imposing Western culture on other
societies by the power of advertising and promotion. This results in a reduction in cultural identity.
 Profits may be sent back to the home country rather than kept for reinvestment in the host nation.
  Extensive depletion of limited natural resources of some countries has been blamed on some large
multinational corporations as they have little incentive to conserve these resources, due to them
being able to relocate quickly to other countries once resources have run out.

Privatisation
The policy of privatisation includes more than the outright sale of state assets, for example making state-
owned schools, hospitals, and local authorities ‘contract out’ many services to private business. However,
the main aspect of privatisation is the transfer of ownership of state-owned industries into the private
sector by creating public limited companies. The main argument used by supporters of privatisation is that
business enterprises will use resources much more efficiently in the private sector, as they will be driven by
the motive of profit. Those against the policy argue that the state can pursue other objectives apart as it
nearly always leads to job losses in order to cut costs.

BENEFITS
The profit motive of private-sector businesses will lead
to much greater efficiency than when a business is
supported and subsidised by the state.
Decision-making in state bodies can be slow and
bureaucratic.
Privatisation puts responsibility for success firmly in the
hands of the managers and staff who work in the
organisation. This can lead to strong motivation as they
have a direct involvement in the work they do as there
is a greater sense of empowerment.
Market forces will be allowed to operate, failing
businesses will be forced to change or die and
successful ones will expand, unconstrained by
government limits on growth.
There is always a temptation for governments to run
state industry for political reasons or as a means of
influencing the national economy
Sale of nationalised industries can raise finance for
government, which can be spent on other state
projects.
Private businesses will have access to the private capital
markets, and this will lead to increased investment in
these industries
DRAWBACKS
The state should take decisions about essential
industries. These decisions can be based on the needs
of society and not just the interests of shareholders.
This may involve keeping open business activities that
private companies would consider unprofitable.
With competing privately run businesses it will be much
more difficult to achieve a coherent and coordinated
policy for the benefit of the whole country.
Through state ownership, an industry can be made
accountable to the country. This is by means of a
responsible minister and direct accountability to
parliament.
Many strategic industries could be operated as ‘private
monopolies’ if privatised and they could exploit
consumers with high prices.
Breaking up nationalised industries will reduce the
opportunities for cost saving through economies of
scale.