Globalisation and Protectionism

Globalisation is the increasing integration of national markets that were previously much more segmented from one another. This includes the increasing dominance of multi-national corporations (MNCs) in global markets. This means that production takes place in various countries, so that components are manufactured in several countries in order to produce a finished product, which is often assembled in another country in order to sell the product worldwide on the global market. This leads to a rapid increase in international trade and growing direct investment by MNCs in several countries.

b). Since 1980 the developing countries have experienced an increase in the percentage of exports that manufactured goods account for, from approximately 29% to just over 80% of total exports. The percentage that mineral exports account for has experienced a decrease over this period from approximately 55% of total exports to approximately 10%. There has been a slight decrease in the percentage that agriculture accounts for from about 16% to about 10%. As a percentage over total exports, manufacturing overtook minerals exports in 1984.

Also, during this period the percentage that services account for has approximately doubled for developing countries from 9% to 17%. c). One way in which economies are allowed to prosper due to globalisation is through comparative advantage. The law of comparative advantage states that a country has comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost. Globalisation means that restrictions on international trade generate gains by the reallocation of resources towards those sectors in which countries have a comparative advantage.

If two countries specialise in goods, which they have comparative advantage, then both countries will benefit from trade. This is because if each country continues producing the good that it makes relatively cheaply, the countries together make more of both goods. Trade liberalisation increases the size of the market, so that the market is now on a global scale. This leads to increased competition in the domestic market, leading to increased efficiency. Due to the larger market size, firms can benefit from economies of scale, which can lead to lower costs and the increased competition stimulates investment and advances in technology.

Also, globalisation leads to the dominance of multi-national corporations (MNCs). These MNCs invest in countries, creating jobs and income as well as improving the infrastructure of the country. Also MNCs can introduce new technology into a country and train the workforce. This would mean that developing countries would begin to manufacture more and begin to lose their primary product dependency. MNCs setting up in countries would cause a positive multiplier effect in that country creating even more jobs and income.

However, globalisation can cause environmental problems and lead to an over-dependence on rich countries. d). Protectionism is the word used to describe the methods used by individual countries or regional trading blocs to restrict the level of imports into the home market. A country can protect its own economy from foreign competition is several ways. This includes using tariffs, quotas, environmental controls as well as subsidies. There are arguments both for and against protectionism. A country may want to use such measures in order to protect infant industry.

An infant industry is a newly established industry that has a potential comparative advantage. It may be unable to compete with other countries in which established rivals are already benefiting economies of scale. Governments often protect these industries during the early growth by means of tariffs and subsidies. However, there are several problems with this type of protectionism. It reduces competition and therefore can lead to price increases for consumers. Also, the industry may become inefficient due to the lack of competition.

This policy can also lead to government failure, as its intervention prevents market forces from working properly and it is also difficult for the government to know which industry to protect. Even if the government protects an infant industry, there is no guarantee that the industry will become effective in the future. Governments can also protect senile industries. These are old industries that need a period of time for restructuring and rationalisation. These are industries with a potential comparative advantage that have been allowed to run down and can no longer compete effectively.

This is an argument used to justify the protection of the US automobile and steel industries that have suffered from a lack of investment. However, an argument against this policy is that is leads to an inefficient allocation of resources, as an inefficient industry is allowed to continue operating and also there is no guarantee that restructuring will work. Protectionism can be used to reduce primary product dependency. Developing countries export primary products, which have a world demand, which is relatively income inelastic.

This means that the economy is highly susceptible to market fluctuations. Free trade results in economies becoming locked into the production of primary products and so trade does not act as an engine of growth. Protectionism may be needed to enable developing countries to establish a manufacturing sector. However, this would lead to price increases, as primary products would be less readily available. One of the stronger arguments used to justify protectionism is that it is needed to prevent dumping.

This can take two forms, one of which is when products are sold below costs of production in a foreign market as a result of a country subsidising its exports. The other is when products are sold at a price below that which they are sold in the country of origin as a result of a firm practising price discrimination. An example of this is the Common Agricultural Policy employed by the EU. Economies can also be protected in order to correct a balance of payments deficit. Also, economies may want to be protected in order to prevent unemployment.

A country may regard the cost of structural unemployment, resulting from free trade, as unacceptable. Overall, I think that countries should not be allowed to protect their own economies, even though globalisation can lead to environmental problems. This is because protectionism reduces competition and leads to inefficiency. Also, protectionism means that comparative advantage is not achieved as inefficient firms are safeguarded. Countries should not protect their economies as it prevents the development of the poorer countries, as they are prevented from gaining access to the markets of the developed richer countries.