Explain globalisation and international trade, the opportunities and threats they bring to businesses, and the role of multinational companies and trade barriers

What this dot point is asking

This outcome wants you to explain globalisation and international trade, the opportunities and threats they bring to businesses, and the role of multinational companies (MNCs) and trade barriers such as tariffs. The central idea is that the world's economies are increasingly connected, so a business can sell and source worldwide - which opens huge opportunities but also exposes it to global competition.

The answer

Globalisation and international trade

Globalisation is the growing integration and interdependence of the world's economies, as trade, investment, technology and people move more freely across borders. International trade is the buying and selling of goods and services between countries:

• Exports - goods and services sold to other countries.
• Imports - goods and services bought from other countries.

Countries trade because they can specialise in what they do best and buy what others make more cheaply.

Opportunities from globalisation

• Larger markets - sell to customers worldwide, raising potential sales.
• Cheaper resources - source materials and labour from lower-cost countries.
• Access to technology and ideas from around the world.
• Economies of scale from producing for a global market.

Threats from globalisation

• More competition - foreign firms can enter the home market.
• Pressure on prices and costs - competing with low-cost producers abroad.
• Vulnerability - global supply chains can be disrupted, and downturns spread between countries.
• Risk to local firms and jobs that cannot compete with imports.

Multinational companies (MNCs)

A multinational company produces or operates in more than one country. MNCs bring jobs, investment, technology and tax to host countries, but can also be criticised for dominating local firms, moving profits abroad, and sometimes poor labour or environmental standards. They are a major force in globalisation.

Trade barriers

Governments may use trade barriers to protect home businesses:

• Tariffs - taxes on imports, making them dearer.
• Quotas - limits on the quantity of a good imported.

Barriers protect local firms and jobs but raise prices, reduce choice, can make firms inefficient, and risk retaliation that harms exporters. Free trade (few barriers) generally lowers prices and widens choice.

Examples in context

Example 1. A Singapore exporter reaching the world. A Singapore electronics firm sells most of its output overseas, using the country's role as a global trading hub to reach customers worldwide. Globalisation gives it a market far larger than the small domestic one, supporting economies of scale and growth. But it must compete with low-cost producers and watch for tariffs in export markets, illustrating how an open economy gains huge opportunities from trade while remaining exposed to global competition.

Example 2. A multinational setting up locally. A foreign multinational opens a regional plant, bringing jobs, investment and technology to the host economy. Local suppliers gain orders and workers gain skills. However, smaller local rivals struggle to compete with the MNC's scale, and some profits flow back to the parent country. The example shows the two-sided impact of multinationals: real economic benefits alongside pressure on domestic firms, a key debate in globalisation.

Try this

Q1. Define the term international trade. [2 marks]

• Cue. International trade is the buying and selling of goods and services between countries, made up of exports (sold to other countries) and imports (bought from other countries).

Q2. State two opportunities globalisation offers a business. [2 marks]

• Cue. Any two of: access to a larger global market and more customers, cheaper materials or labour sourced abroad, access to new technology and ideas, and economies of scale from producing for a world market.

Q3. Explain one disadvantage to consumers of a government placing a tariff on imports. [4 marks]

• Cue. A tariff is a tax on imported goods, which raises their price. Consumers therefore pay more for imported products, and they may also have less choice if some foreign firms stop selling in the market. Even domestic producers may raise their prices once cheaper imports are made dearer by the tariff, so overall consumers face higher prices and reduced choice, lowering their real spending power.