1. IGCSE®/O Level Economics
8.1 International trade and specialization

2. What is globalization?
The increasing social, technological, political and economic interdependence and interaction between people, firms and entire economies around the world, through:
increasing ease of travel
growing international trade in an increasing variety of goods and services
increasing opportunities for firms to buy and sell products in any country in the world
increasing opportunities for labour and capital to move anywhere in the world
the growth of global financial markets
Value of global trade in physical goods, 1960–2010

3. International specialization
Economies specialize in the production of those goods and services they are best able to produce because they have the natural, human or man-made resources to do so
Specialization allows an economy to produce a greater volume of their goods and services more efficiently. It therefore increases output, incomes and living standards
Economies then trade with each other to obtain the other goods and services they need and want
US aircraft
Spanish olive oil
Italian shoes
Some examples of international specialization

4. Absolute and comparative advantage
A country has an absolute advantage in the production of a product when it can produce that product at a much lower cost per unit than any other country is able to
Average cost per unit
$100
Average cost per unit
$130 X Y
A country has a comparative advantage in the production of a product relative to other countries when its opportunity cost of producing that product is lower than in any other country
To produce 100 more cars, country X must give up 4,000 televisions
To produce 100 more cars, country Y must give up 7,000 televisions

5. The gains from free trade
International trade involves the movement and exchange of physical goods such as materials, component parts, equipment and finished products as well as services, ideas, money and labour, across international borders
Arguments for free trade
It allows countries to benefit from specialization
They can produce what they are best able to and then trade their surplus
It increases consumer choice
Consumers can enjoy a greater variety of goods and services from across the world
It increases competition and efficiency
Firms must improve their costs and product quality to compete with overseas producers
It creates additional business and employment opportunities
New and existing firms can expand their sales to growing consumer markets overseas
It allows firms to access the best workforces, materials and technologies from anywhere in the world

6. Arguments against uncontrolled trade
Why control trade?
Trade with low-cost economies is threatening jobs in many developed economies and reducing opportunities for less-developed economies to grow their industries
Trade is increasing the rate at which we are depleting natural resources
Trade may increase the exploitation of workers and the environment in many less-developed economies as multinationals are attracted to them by low wages and taxes
It has increased the gap between rich and poor nations
because developed and rapidly developing economies dominate global demand for many natural resources, including foodstuffs, timber and metal ores, and have used their purchasing power to force down their market prices

7. Trade barriers Tariffs
Trade barriers are indirect taxes on the prices of imported goods to discourage domestic demand
But imposing them often results in affected overseas countries imposing tariffs of their own in retaliation

8. Non-tariff barriers Subsidies Quota Embargo
These are government grants paid to domestic producers to reduce their production costs, enabling them to sell their products at lower prices than overseas producers
Quota
This is a limit on the volume of an imported good allowed into a country
Embargo
This is a ban on the importation of a product or products from overseas
Unreasonable quality controls, standards and licensing requirements for imported products
These make the import of goods into a country more difficult and costly
Size and weight restrictions
Import licence
Test certificates
Product labelling requirements

9. Arguments for trade protection
To protect infant (or sunrise) industries
Protecting new firms from overseas competition gives them the time and chance to develop, grow and become more globally competitive
To protect sunset industries
Protection from overseas competition will help to slow down the rate of decline in and loss of jobs from some major industries, allowing time for other industries to develop to provide new jobs and incomes
To protect strategic industries, such as agriculture, energy and defence equipment
So that a country is not entirely dependent on such important supplies from overseas countries
To protect domestic firms from dumping
Dumping is a form of predatory pricing. It involves one country ‘flooding’ another with a product at a price significantly below its market price to force rival producers out of business
To limit over-specialization
Trade barriers can help a country to maintain a wider range of different industries to reduce the risk of its main industry failing or declining due to overseas competition
To correct a trade imbalance
By reducing the amount of imports coming into a country

10. Arguments against protectionism
It reduces the gains from trade
It restricts consumer choice
It restricts new business opportunities
Inefficient domestic firms protected from overseas competition will continue to be inefficient
Other affected countries will retaliate against trade barriers
Trade liberalization involves the removal of barriers to trade between different countries to improve the global allocation of resources and allow economies to realize gains from increased trade and market access