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Global Trade

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What is globalisation?

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Globalisation is the process by which businesses, economies and societies operate on an international scale to provide or produce goods and services. As we have seen, the UK imports a large volume of goods and services from all across the globe.

Expanding into foreign markets continues to be one the most popular way to grow a business.

Globalisation has changed the various aspects of daily life and the way consumers shop. Harvard Business School estimates that 70% of Americans now shop online.

Additionally, globalisation has made post-pandemic remote working conditions possible for so many businesses.

Advantages and Disadvantages of Globalisation

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Advantages:

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Growth - Businesses are able to tap into international markets, significantly expanding their customer base beyond domestic boundaries. This access to new markets and broad consumer groups can drive substantial revenue growth and encourage business expansion, enabling companies to achieve levels of growth that might be unattainable within their home markets alone.

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Spreading Risk - If a business has operations in various international markets, they can balance potential downturns in one area with growth opportunities in others. Overall stability and resilience in performance is enhanced.

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Opportunities for Poorer Countries - These developing nations are able to access global markets, allowing them to sell their products and services to a diverse range of wealthy countries. This opens up new opportunities for economic growth and development.

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Cooperation - Globalisation encourages international cooperation, as countries must collaborate to reap its economic benefits. This increased interdependence and mutual interest in economic prosperity has been associated with a decrease in global conflicts, although it has by no means completely eliminated them.

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Technical Knowledge - The international exchange of technical skills and information accelerates technological progress as companies are able to access and benefit from diverse expertise and innovations.

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Access to Labour - Nations are able to access a wider pool of labour. Developing countries can attract skilled professionals to boost their industries, while developed nations can outsource certain tasks to regions with lower labour costs, as a means to reduce production expenses and consumer prices.

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Disadvantages:

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Language and Cultural Barriers - Language and cultural barriers can hinder effective communication and collaboration in international trade. These barriers can lead to misunderstandings, complicate negotiations and require significant investment in translation and localisation efforts. This can potentially hinder the efficiency and success of cross-border transactions and relationships.

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Local Laws - Businesses can be exposed to complex legal frameworks across different countries which can create challenges. The varying legal requirements can introduce additional compliance costs and limit the company’s ability to standardise its practices globally.

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Increased Competition - Globalisation means local businesses now have to compete with multinational corporations offering cheaper goods. This increased competition, coupled with greater consumer choice, drives prices down and raises quality expectations. This puts pressure on businesses to constantly innovate and adapt to the evolving consumer demands.

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Domestic Job Loss - Domestic jobs decline in certain kinds of work as companies decide to outsource work to regions with lower labour and production costs. This shift often affects workers in traditional industries like manufacturing, textiles, clothing and metals.

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Unequal Economic Growth - Bigger, more developed nations often have an advantage because they can produce things cheaper in large quantities and have more power in negotiations.

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Increased global recession risk - With the global economy being so tightly interconnected, economic troubles in one country can quickly spread to others, like a domino effect. This increased the potential risk of widespread economic downturn or a global recession.

⛔ Suez Canal Blockage ⛔

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The Suez Canal is a man made canal built in 1869 in Egypt to connect the Mediterranean Sea with the Indian Ocean. It’s crucial for world trade as the efficiency gains from this shorter route is significant.

Between the 23rd-29th of March, ‘When the Ever Given’ one of the largest container ships ever built and nearly as long as the Empire State Building is tall, got stuck in the Suez Canal.

The global supply chain was thrown into chaos. About 12% of worldwide trade, around one million barrels of oil and roughly 8% of liquefied natural gas pass through that canal each day (BBC).

It froze almost $10 billion of trade a day. That’s roughly $400m and 3.3 million tonnes of cargo an hour, or $6.7m a minute! (BBC). Additionally, the backlog of crude oil drove the gas prices in the US up by $0.40 on the day of the accident.

Due to the blockage, other ships decided to change their route to avoid the canal. This shows just how important this canal was for world trade.

This event highlighted the vulnerability of global supply chains and the UK’s dependence on efficient international shipping routes. It demonstrated how a single incident across the world can rapidly affect prices, product availability, and business operations around the world.

Having explored the various pros and cons of globalisation, it’s important to understand why countries engage in international trade in the first place.

Two important economic theories explain why countries specialise in producing certain goods or services: absolute advantage and comparative advantage.

What is absolute advantage?

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Absolute advantage is when one country can produce a good more efficiently than another country. They can make more of a product using the same amount of resources.

Let’s look at two countries who both produce coffee:

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Country A - 100 workers make 100 bags of coffee per day

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Country B - 100 workers make 80 bags of coffee per day

Country A has an absolute advantage in coffee production because it can produce more coffee (100 bags) with the same number of workers as Country B (80 bags).

What is comparative advantage?

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Comparative advantage is when a country can produce a good at a lower opportunity cost than another country. Remember, opportunity cost is the cost of what you give up to produce something else.

Let’s look at two countries who both produce coffee and rice:

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Country A - can produce 100 bags of coffee OR 60 bags of rice

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Country B - can produce 100 bags of coffee OR 100 bags of rice

Even though both can produce 50 bags of coffee, Country A has a comparative advantage in coffee production. Why? Because to make 100 bags of coffee, Country A gives up 60 bags of rice and Country B gives up 100 bags of rice. Country A sacrifices less to produce the same amount of coffee, thus has comparative advantage.

🇬🇧 Does the UK have absolute and/or comparative advantage?

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As we saw last chapter, the UK imports and exports a diverse range of goods and services.

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UK has strong comparative advantages in services, particularly in financial services, insurance, and cultural services (including education and publishing).

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This specialisation in services is more pronounced in the UK than in other developed economies

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UK shows strengths in pharmaceuticals, beverages, aircraft, and art

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These advantages have remained relatively stable over the past 30 years

The UK’s position is enhanced by factors like its top universities, the global dominance of the English language, and London’s role as a financial center.

The comparative advantage of the UK’s goods and services have remained similar over the last 30 years.

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Now, looking specifically at Scotland, the Fraser of Allander conducted research into Scotland’s economic strengths.

Revealed Comparative Advantage (RCA) is a transparent measure for examining the competitiveness of a country in exporting a good, relative to the rest of the world. A RCA greater than 1 would indicate that Scotland proportionally exports more in this particular sector than other countries in the world.

The table below provides a selection of sectors where Scotland is currently thought to have such an advantage. So, the RCA of 23.4 for Scotland’s beverages means that Scotland proportionally exports 23.4 times more beverages than other countries do. While petroleum and petroleum products are easily Scotland’s most exported product group, it ranks 4th in revealed comparative advantage.

To see the Fraser of Allander’s full report, follow this link ⬇️