Globalisation
Unit 4: Global Business
Globalisation
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Globalisation is businesses buying, selling, investing and employing across national borders on a growing scale — and this unit asks what causes that and what it does to firms.
This topic is not a description of the world. It is five questions about firms, and the unit says so: the effects of globalisation are to be understood in relation to businesses. Everything below is about what a manager can now do, and now faces.
Globalisation is the growing scale on which businesses trade, invest, produce and hire across national borders. You can read that definition off this chapter list: firms sell into economies that were too poor to buy from them, buy parts made better or more cheaply somewhere else, build plants abroad, and hire people who have moved.
One firm runs through all five. Lumina Electronics assembles electronic units in a Southeast Asian country: it buys a module in at $22, adds $18 of its own work, and ships the finished unit abroad for $2.50. Every figure below comes from that one unit, so you can watch what each chapter does to it.
Real Example: A contract assembler is a good test case because it is exposed at both ends: it imports most of what it builds with and exports almost everything it builds.
Exam Matters: Appendix 6 defines Explain as requiring a brief explanation of cause or effect supported by details or examples. Here the effect must land on a business: "world trade grew" is a cause with its effect missing.
The three labels describe income a head and what an economy produces, not its size — and a big economy can be a poor market.
The specification's first requirement is the characteristics of developed, developing and emerging economies. The characteristic that does most work is income a head, because that is what decides whether a market can buy what a firm sells.
Put three economies side by side and the labels stop being vocabulary. The developed one produces $2,400bn a year, the emerging one $400bn and the developing one $40bn. That looks like the whole story until you divide by the people: 50m, 25m and 40m respectively.
Income a head is then $48,000, $16,000 and $1,000 — a factor of 48 between the first and the last. For Lumina Electronics, selling a unit that lands at $42.50, that difference decides which of the three is a market at all and which is somewhere to produce.
The word emerging is doing something the other two are not. It is not a middle point on a scale; it says the economy is MOVING, and a firm entering it is betting on where it will be.
Real Example: A scooter manufacturer entering an emerging market prices for the income a head it expects in five years, and takes a thin margin until then. The same firm entering a developed market is competing on features, not price.
Exam Matters: Appendix 6 defines Define as requiring students to define a term or phrase. Two marks needs two separate things — the income level and the direction — and the second is the one students leave out.
Economic power is shifting towards countries in Asia, Africa and elsewhere — and fast growth and low income a head are both true at once.
The next requirement names it directly: the growing economic power of countries within Asia, Africa and other parts of the world. It is a statement about change rather than about level, and the two get confused constantly.
Take the same three economies over one period. The emerging economy's output rose from $250bn to $400bn, which is 60%. The developed one rose from $2,000bn to $2,400bn, which is 20%. The emerging economy grew 3 times as fast.
And it is still 3 times poorer a head: $16,000 against $48,000. Both sentences are true, and an answer with only one of them is half an answer. Fast growth is why a firm enters; low income a head is why it changes what it sells when it gets there.
For a business the shift has three consequences, and they are not the same thing. New customers appear as incomes cross the level at which a product becomes affordable. New suppliers appear, because economies that grow build capability. And new competitors appear, because the firms that grew up serving those customers eventually come looking for yours.
The third is the one firms in developed markets underestimate. Lumina Electronics exists because its economy became able to build electronics to an export standard — and the firms it now undercuts did not see it coming.
Real Example: A European appliance maker that opened a sales office in a fast-growing Asian economy found its main rival there ten years later was a local firm that had started as a parts supplier.
Exam Matters: Appendix 6 defines Calculate as requiring a calculation based on given data, with workings given. A percentage change is (new − old) ÷ old × 100, and dividing by the new figure is the commonest slip.
Growth creates customers a firm could not previously reach, and the opportunity arrives in a sequence rather than all at once.
The specification asks for the implications of economic growth for individuals and businesses, and names two. The first is trade opportunities for businesses.
An opportunity is not the same as a bigger market. It appears when income a head crosses the level at which a particular product stops being unaffordable, and that happens at a different moment for every product. When the emerging economy above went from $10,000 a head to $16,000, it did not become 60% more attractive to every firm at once.
So the practical question is never "is this market growing" but "has it reached my product yet". A firm that enters too early spends years funding an office that sells nothing; a firm that waits for the answer to be obvious finds a local competitor already there.
Growth also creates opportunities on the buying side. Lumina Electronics's module supplier exists because an economy grew enough to build it, and the $10 a unit that saves is as real as any sale.
Real Example: A refrigerator maker tracks income a head in each market it is considering and enters when the figure passes the point at which a household in that country typically buys its first fridge, rather than when total output passes some threshold.
Exam Matters: Appendix 6 defines Analyse as requiring a brief chain of reasoning and says it does not include evaluation. The chain runs from growth to income a head to affordability to a named product.
Growth moves people between kinds of work, which changes who a firm can hire, at what wage, and what its own customers do for a living.
The second named implication is employment patterns. As an economy grows, the kinds of work people do change, and that reaches a business through three doors at once.
What it can hire. Work moves out of farming and raw materials into factories and then into offices and services. For Lumina Electronics, an economy at that middle stage is exactly why the plant is there: enough people trained for assembly work, and wages that have not yet risen to developed levels.
What it pays. The same shift raises wages over time, because the workers a firm wants now have other employers to go to. A plant built for low labour cost has a clock running on it, and firms know this when they build.
Who its customers are. People in steadier, better-paid work buy differently: more services, more branded goods, more things bought on a plan rather than in cash. A firm reading a market only through income a head misses that the composition of spending changes as well as the amount.
For individuals the implication is the one the specification puts first: some kinds of work grow and some shrink, and the people in the shrinking kind do not automatically move into the growing kind. That is a real cost of growth and it belongs in a balanced answer.
Real Example: An assembly plant that opened in a low-wage economy fifteen years ago now competes for the same workers with call centres and logistics firms that did not exist when it arrived, and pays accordingly.
Exam Matters: Appendix 6 defines Explain as requiring a brief explanation of cause or effect supported by details or examples. One door followed properly beats three mentioned.
GDP is the size of an economy and GDP per capita is GDP divided by the people in it — and only the second one tells a firm whether anybody can afford its product.
The specification names two indicators of growth under this heading, and the second is the first divided by something.
Gross domestic product (GDP) is the total value of what an economy produces in a year. GDP per capita is that figure divided by the population. The division is the whole point: it turns a measure of SIZE into a measure of how much there is a head.
The developed economy here produces $2,400bn and the emerging one $400bn — six times as much. But the developed one has 50m people and the emerging one 25m, so per capita it is $48,000 against $16,000, a factor of 3 rather than six.
Which figure a firm should read depends on what it sells. Total GDP matters for a product bought by organisations — machinery, freight, construction — because what counts is how much building and producing the economy does. GDP per capita matters for anything sold to households, because it approximates what one buyer has.
Both hide the same thing: an average says nothing about the spread. An economy at $16,000 a head might have a large group at twice that and a larger one at half, and a firm selling to either has been told very little by the average.
Real Example: A crane hire firm reads total output, because cranes are hired by builders. A shampoo brand in the same country reads output a head, because shampoo is bought one household at a time.
Exam Matters: Appendix 6 defines Calculate as requiring a calculation based on given data, with workings given. GDP per capita is GDP ÷ population, and the scaling has to be done or the unit is wrong.
HDI combines income, schooling and how long people live into one figure, so two economies with the same income a head can score differently.
The second indicator the specification names is the human development index (HDI). It exists because income a head answers one question and a firm entering a market has three to ask.
HDI combines how long people live, how much schooling they get, income a head into a single figure between 0 and 1, where a higher number means more human development. It is an index: the value has no units and only means something next to another value.
For a business the two non-income parts are the operationally useful ones. Schooling is a rough guide to the workforce a firm could hire and how long training will take. How long people live tracks health and infrastructure, which reach a firm as absence, productivity and whether a distribution network functions.
So two economies at $16,000 a head can present a firm with quite different problems. One has schools and clinics and a workforce ready to be trained in weeks; the other does not, and the plant that looked identical on an income comparison takes a year longer to reach full output.
What HDI does not tell you is which industries are growing, which is the thing a firm most wants to know. It is a measure of development, not a market forecast, and an answer that uses it as one has over-read it.
Real Example: Two markets with similar income a head can differ sharply on schooling and health, and a firm planning to train a local workforce will find one of them much slower to reach full output than the other.
Exam Matters: Appendix 6 defines Define as requiring students to define a term or phrase. A definition of HDI needs what it combines and that it is one index figure.
Exports are what a country sells abroad and imports what it buys in — and most exporting firms are importers too, which is why the two are one topic.
Exports are goods and services produced in a country and sold to buyers in another. Imports are the reverse. The definitions are short; what matters is that the same firm is usually on both sides.
Lumina Electronics is an exporter: it ships finished units abroad at a landed cost of $42.50 — $40 to build and $2.50 to deliver. It is also an importer: $22 of that $40 is a module bought from a firm in another country.
That is 55% of its factory cost crossing a border inwards before anything crosses outwards. So a barrier its own government puts on imported components raises the price of its exports, and a policy meant to protect somebody else's jobs lands on its own.
This is why the specification treats trade and business growth as one requirement. A firm that grows by exporting usually grows its imports at the same time, and its exposure is at both ends: to what happens to the module it buys and to what happens at the border it sells across.
The figures to keep hold of: $22 in, $18 added here, $2.50 to ship, $42.50 landed. Every chapter after this one changes one of those numbers and leaves the rest alone.
Real Example: An assembler whose government raised the duty on imported components found its own export prices rose, because the components were most of what it built with.
Exam Matters: Appendix 6 defines Analyse as requiring a brief chain of reasoning, and says that where it is applied to given data it includes interpretation. With $22 of a $40 unit imported, the interpretation is the 55%, not the two figures repeated.
Countries and firms increasingly do one part of the job and buy the rest, because doing one part well is cheaper than doing every part adequately.
The specification asks for the implications of increasing specialisation by countries and businesses. The first implication is a subtraction and it is worth doing before anything is said about it.
If Lumina Electronics made every part of its unit itself, the unit would cost $50. Buying the module in at $22 and adding $18 of its own assembly costs $40.
The saving is $10 a unit, or 20%. Across 150,000 units a year that is $1,500,000 — the difference between a business and a hobby, on one decision about what not to make.
The mechanism is the same for a country as for a firm. A producer that makes one thing repeatedly gets better at it, buys equipment that only makes sense at volume, and trains people who only do that. A producer that makes everything cannot do any of the three, because each of them needs concentration on one job.
Increasing specialisation is the word the specification uses, and it matters. The unit above used to be made in one factory; now the module is one firm's whole business and the assembly is another's. Each step is a step of the same kind, and each takes the cost down again.
Real Example: A firm that once cast, machined and assembled its own components now buys castings from a specialist foundry, and its own costs fell even though it added a supplier's margin to the price it pays.
Exam Matters: Appendix 6 defines Calculate as requiring a calculation based on given data, with workings given. Here the saving is $50 − $40 = $10, and as a percentage it is divided by the ORIGINAL cost, not the new one.
The same decision that cut the unit cost by a fifth made most of that cost somebody else’s to control.
The specification says implications, plural, and the second one is the price of the first. It is the half students leave out, and it is visible in the same two numbers.
Lumina Electronics saved $10 a unit by buying the module in. The module is $22 of a $40 unit — 55% of what it costs to build. So the firm has taken 20% off its cost and handed control of the majority of what remains to a supplier in another country.
For a country the shape is the same at a larger scale: an economy specialised in a narrow range of exports is efficient and exposed at once, and when demand for that range falls there is nothing else earning.
So the balanced answer is not that specialising is good or bad. It is that specialising trades cost for control, and whether that is worth doing depends on how reliable the supplier is and how easily the firm could find another.
Real Example: An assembler that had cut its costs by buying a single specialist component discovered during a shipping disruption that its efficiency was irrelevant for as long as the component was on a ship.
Exam Matters: Appendix 6 defines Discuss as requiring logical chains of reasoning in context showing causes and effects, with a brief assessment of competing arguments. This leaf supplies both sides from one pair of figures.
FDI is a firm investing in productive assets in another country — a plant or a business, not a parcel of shares — and it is how a firm grows across a border.
Foreign direct investment (FDI) is investment by a firm in productive assets in another country: building a factory, buying a local business, or taking a controlling stake in one. The word that does the work is direct. Buying shares in a foreign company as an investment is not FDI; buying enough of it to run it is.
The specification asks for FDI and link to business growth, and the link is easiest to see from the money. Lumina Electronics's parent invested $9,000,000 to build the plant. The plant can make 150,000 units a year. That is $60 of investment behind every unit of annual capacity.
The growth is the capacity; the FDI is how it was paid for. A firm wanting to sell 150,000 more units a year could have made them at home and shipped them, and the reason it did not is in the next chapter.
FDI flows both ways, and the host economy gets something too: the plant employs people, buys local services and trains a workforce. That is why governments compete for it.
What FDI is not is free money. $9,000,000 is committed and cannot be moved if the market disappoints, which is precisely the difference between direct investment and the kind you can sell on a Tuesday.
Real Example: A manufacturer choosing between exporting to a region and building there compares the shipping and barrier costs it would keep paying against a one-off investment it cannot take back.
Exam Matters: Appendix 6 defines Explain as requiring a brief explanation of cause or effect supported by details or examples. The chain is FDI to capacity to output; a definition without it has not answered.
Trade liberalisation is the deliberate lowering of the barriers governments put between their economies, and it is the first factor the specification names.
The specification lists nine factors contributing to increased globalisation. This chapter takes the first five and the next takes the rest. They are not interchangeable, and an answer that names one and describes another has lost the mark.
Trade liberalisation is governments agreeing to lower the barriers between their economies — tariffs, quotas and the rules that keep foreign goods out. It is a deliberate act of policy, which is why it can be undone, and chapter 5 is about what happens when it is.
What it does to a firm is arithmetic. Lumina Electronics lands a unit at $42.50. Against a 20% tariff that becomes $51, which is $3 above the $48 a domestic rival charges. Remove the tariff and the same unit is $5.50 below the rival. Nothing about the product changed.
That swing — from $3 over to $5.50 under — is what liberalisation means to a business. It does not make a firm better; it decides whether being better is enough.
The reduction of trade barriers happens two ways: between two governments that agree it, and among a group of them that agree it together. The second is a trading bloc, and it is chapter 6.
Real Example: An exporter that had never been able to compete in a neighbouring market found its landed price undercut the local producer's the month a tariff was removed, without changing anything it made.
Exam Matters: Appendix 6 defines Analyse as requiring a brief chain of reasoning, including interpretation where data is given. The interpretation here is the swing from $3 over to $5.50 under, not the two prices restated.
The WTO is the body through which member governments agree rules for trade between them and settle disputes about those rules — it does not set any country’s tariffs.
The specification names the WTO inside the same requirement as trade liberalisation, and this is the only place in the course a student meets it. So it is worth being exact about what it is, because most wrong answers claim more for it than it claims for itself.
The World Trade Organization is a body whose members are governments. It does three things.
What it does not do matters as much. It does not set any country's tariffs — governments do that. It cannot compel a government to open a market. And membership is not free trade: members maintain tariffs, quotas and rules, and chapter 5 is entirely about those.
For a firm like Lumina Electronics the value is predictability rather than zero barriers. Knowing that a tariff is 20% and will not become 40% without a process is what makes it possible to price a contract for next year at all.
Real Example: An exporter facing a sudden new barrier in a member market has a route through which its own government can challenge it — slow, but a route, which a firm exporting to a non-member does not have.
Exam Matters: Appendix 6 defines Define as requiring students to define a term or phrase. The WTO's role needs what it is and what it does; "it promotes free trade" supplies neither.
Governments decide whether foreign firms may sell, build and own inside their borders, and when that decision changes a market opens or closes at a stroke.
The second factor is political change, and it is the one that moves fastest. Trade barriers come down over years of negotiation; a government's attitude to foreign firms can change with an election.
What a government decides reaches a business in four ways: whether foreign firms may sell into the market, whether they may build there, whether they may own a local business outright or must take a partner, and whether profits may be sent home.
Each of those is a yes-or-no that sits above every calculation a firm makes. Lumina Electronics's parent committed $9,000,000 to a plant in a country that permits foreign ownership of it. Had the answer been no, the arithmetic about $42.50 against $48 would never have been reached.
Political change has driven globalisation because the direction of travel across several decades has been towards opening: more countries allowing foreign firms to sell, build and own than closing to them. That is a fact about a period, not a law, and a firm planning a plant that takes fifteen years to repay is making a judgement about politics whether it admits it or not.
This is also where the risk in FDI actually lives. A plant cannot be moved. If the rules change after it is built, the firm's options are to accept the new terms or to write off $9,000,000.
Real Example: A retailer that entered a market where foreign firms could not own stores outright operated through a joint venture with a local partner until the rule changed, and restructured when it did.
Exam Matters: Appendix 6 defines Assess as requiring a well-contextualised chain of reasoning with balanced awareness of competing factors, leading to a supported judgement. In Unit 4 it carries 12 marks.
When moving a unit and coordinating a job across a border both became cheap, where a thing is made stopped being decided by where it will be sold.
The third factor is the reduced cost of transport and communication, and it is the one most easily asserted and most easily priced. Price it.
Lumina Electronics builds a unit for $40 and ships it abroad for $2.50. Freight is 6.25% of what the unit cost to make. At that level, the cost of distance has almost stopped being a factor in where to produce.
Run the counterfactual, because it is the argument. If shipping cost $20 a unit rather than $2.50, the landed cost would be $60 against a rival at $48, and the plant would not exist. Production would have stayed near the customer, which is where it was for most of history.
Communication is the half that is less visible and did as much. Building a unit in one country for a customer in another means agreeing a specification, inspecting quality, tracking a shipment and fixing a fault, all at a distance. When each of those cost a great deal in time and money, only high-value goods were worth making far away. Now they cost almost nothing.
Together the two mean a firm can put each stage of its work wherever that stage is done best or most cheaply, rather than putting all of it wherever it can be coordinated. That is what makes the specialisation in chapter 2 possible.
Real Example: A firm whose freight bill is a small single-digit percentage of its unit cost chooses a production site on labour, skills and barriers, and treats distance as a rounding error.
Exam Matters: Appendix 6 defines Analyse as requiring a brief chain of reasoning, and says it includes interpretation where data is given. $2.50 on a $40 unit is 6.25%, and the interpretation is what that proportion permits.
A multinational corporation owns productive operations in more than one country, and the money that builds them is the FDI flow — the two factors are one mechanism seen twice.
Factors four and five are the increased significance of global (multinational) corporations and increased investment flows (FDI). They are separate requirements and it is worth knowing why, because they are the same mechanism from two ends.
A multinational corporation (MNC) is a firm that owns productive operations in more than one country. Not a firm that exports — an exporter operates in one country and sells into others. An MNC has plants, offices or subsidiaries abroad and runs them.
FDI is how it got them, and it is the flow the fifth factor is about. Lumina Electronics's parent is an MNC precisely because it spent $9,000,000 on a plant outside its own country; the money is the flow, the plant is the operation, and the firm is the multinational.
Why "increased significance"? Because an MNC makes decisions a national firm cannot. It can build where costs are lowest, sell where incomes are highest, and choose which side of a trade barrier to stand on — $42.50 inside a bloc against $51 outside it.
The consequence for other firms is competitive. A national producer now competes with rivals that can source, produce and price across several countries at once — which is 3i, and it is the last subsection of the next chapter.
Real Example: A firm that built assembly plants on both sides of a trade barrier supplies each market from the plant inside it, and neither plant pays the barrier.
Exam Matters: Appendix 6 defines Explain as requiring a brief explanation of cause or effect supported by details or examples. The chain runs from the FDI flow to a decision a national firm cannot take.
People move for work, within a country and across borders, and for a business that is a question about who it can hire and at what wage.
The sixth factor is migration within and between economies. The specification names both kinds and a business feels them differently.
Within an economy, people move from where work is scarce to where it is plentiful — usually from rural areas towards cities and industrial areas. This is how a plant in a growing economy staffs itself: Lumina Electronics can hire 150,000 units' worth of assembly labour because people moved to where the plants are.
Between economies, people move across borders for work. For a firm in the country they leave, that is a labour supply reduced and wages under pressure in the occupations that lose people. For a firm in the country they arrive in, it is the reverse — a wider pool, and skills that would have taken years to train.
Migration is a factor contributing to globalisation, rather than only a consequence of it, because it moves the thing that could not previously move. Goods and money crossed borders long before people did in these numbers, and a workforce that can move makes a firm's choice of where to produce a real choice.
The business question is always specific: which occupations, in which direction, and does it reach the ones this firm employs? An answer about migration in general has not reached a business decision.
Real Example: A plant in an industrial region hires most of its assembly staff from people who moved there from farming areas, and competes for its engineers with employers in other countries entirely.
Exam Matters: Appendix 6 defines Explain as requiring a brief explanation of cause or effect supported by details or examples. "Migration increases the labour supply" is a cause with no effect on a firm.
More of the world’s people are available to work for firms trading internationally, which widens where production can go and increases competition for the work.
The seventh factor is the growth of the global labour force. It is separate from migration because nobody has to move: the labour force available to a firm trading internationally grows when economies open, when populations grow, and when people who were not previously in paid work enter it.
For a firm the consequence is choice. Where production could once go to a handful of industrialised countries, there are now many places with a workforce able to do the work — which is why Lumina Electronics's plant is where it is rather than in the country of the firm that owns it.
For workers the consequence is competition, and it runs in both directions. Assembly work that was done in a high-wage economy can now be done in a lower-wage one, and the workers in the lower-wage economy compete with each other and with workers in a third.
The effect on wages is not uniform, and a good answer says so. Where the global labour force grows in an occupation, wage growth in it is held down wherever it is done. Where the work cannot be moved — fitting a kitchen, treating a patient — none of this applies.
So the practical test is: can this work be done somewhere else? If it can, the global labour force is in the room whether or not the firm has ever traded abroad.
Real Example: A firm choosing between three countries for a new plant finds all three have a workforce able to do the work, so wages and trade barriers decide it.
Exam Matters: Appendix 6 defines Discuss as requiring logical chains of reasoning in context showing causes and effects, with a brief assessment of competing arguments — here the firm's choice against the worker's competition.
Structural change is a shift in which industries an economy’s output and jobs come from, and it turns a firm’s customers into its competitors over time.
The eighth factor is structural change: a lasting shift in which industries an economy's output and employment come from. Not a good year or a bad one — a change in what the economy is made of.
The pattern as economies grow is familiar. Output and jobs move out of farming and raw materials, into manufacturing, and then towards services. Each step changes what the economy buys and what it can make.
The consequence for a business is that a market's role changes. An economy that bought finished goods from abroad while its own output was in raw materials starts making those goods itself. Lumina Electronics's economy is at exactly that point: it once imported electronic units and now exports them.
So a firm's customer becomes its competitor, and usually in that order. The exporter that served the market while it could not supply itself taught it what the product should be, and is then undercut by a local producer without the freight and with lower wages.
Structural change also works backwards through a firm's own economy. As output moves towards services at home, the manufacturing workforce shrinks, the suppliers thin out, and a firm that wanted to produce at home may find it can no longer find the skills — which sends it abroad for reasons that have nothing to do with wages.
Real Example: An economy that imported assembled electronics for a decade now exports them, and the firms that used to supply it are competing with the customers they trained.
Exam Matters: Appendix 6 defines Analyse as requiring a brief chain of reasoning and says it does not include evaluation. Take the chain to a business consequence.
The same forces widen the market a firm sells into and widen the field it competes against, so the answer is always "for which business".
The last of the nine is a requirement rather than a summary: the impact on businesses of increased globalisation. Eight factors have been described; this asks what they add up to for a firm.
What opens. A larger market, because growing economies contain customers who could not previously afford the product. Cheaper inputs, because a firm can buy the best-value component anywhere — $10 a unit here. Somewhere better to produce, because capital, labour and the cost of distance are all now choices. And access to skills a firm could not find at home.
What closes in. Competition from firms that have every one of those advantages too, including ones the firm has never heard of. Dependence on suppliers it does not control, which is 55% of a unit's cost here. Exposure to decisions taken by governments elsewhere. And a cost advantage that erodes as the economy it was built on grows.
The two lists are the same forces read twice, which is the point. A firm cannot take the first without the second, and the specification's framing — impact on businesses — is asking which firms gain and which lose rather than whether the world is better off.
The pattern that usually holds: firms that can move gain most, firms that can specialise gain if they choose the right thing to specialise in, and firms whose advantage was simply being the only supplier within reach lose it entirely.
Real Example: A national producer with a protected home market and one factory faces a competitor that buys components from four countries, assembles in a fifth, and sells in all of them.
Exam Matters: Appendix 6 defines Evaluate as requiring fully developed chains of reasoning showing a range of causes and effects, with awareness of competing factors and a perceptive conclusion. Name which firm.
Protectionism is a government raising barriers against imports, and the reasons for it are arguments with real costs on both sides.
Protectionism is a government using barriers to make imported goods harder or more expensive to sell than domestic ones. The previous chapter was about barriers coming down; this one is about the same governments putting them back, and why.
The specification asks for the reasons, and gives no list, so here they are as arguments rather than as vocabulary to memorise.
Each argument has a cost the same government pays. A barrier that protects a producer raises the price paid by every buyer of that good, including firms using it as an input — and Lumina Electronics, importing 55% of what each unit costs, is one of those buyers.
There is a second cost and it is the one exam answers forget: other governments respond. A country that raises barriers may find its own exporters facing new ones, so the jobs protected in one industry are paid for by jobs in another.
Real Example: A government that raised the duty on imported steel protected its steelmakers and raised costs for every domestic firm that builds with steel, which employed far more people.
Exam Matters: Appendix 6 defines Discuss as requiring logical chains of reasoning in context showing causes and effects, with a brief assessment of competing arguments — here, the downstream buyer.
A tariff is a tax on an imported good, charged at the border, and it raises the landed cost of every unit that enters.
A tariff is a tax a government charges on a good as it is imported. It is usually a percentage of the value, and it is paid before the good can be sold.
Take the unit this section has been following. Lumina Electronics lands it at $42.50 — $40 to build and $2.50 to ship. A tariff of 20% adds 20% of $42.50, which is $8.50.
Two things about that sequence are worth holding onto. First, the tariff is charged on the landed value, so it taxes the freight as well as the goods. Second, it does not have to make the import impossible — it only has to close the gap. Lumina's unit was $5.50 cheaper than the rival's; a 20% tariff turned that into $3 dearer, and that is sufficient.
Who ends up paying depends on the market. The importer may absorb it and accept a thinner margin, or pass it on and sell fewer units. Either way the government collects $8.50 on every unit that still comes in, which is one of the reasons for protectionism in the previous subsection.
Real Example: An exporter whose unit was comfortably the cheapest in a market became the dearest overnight when a percentage duty was applied at the border, without its own costs changing at all.
Exam Matters: Appendix 6 defines Calculate as requiring a calculation based on given data, with workings given. A tariff is a percentage OF the landed value, including the freight.
A quota caps the number of units that may be imported, so it is measured in units rather than money and cannot be absorbed by accepting a thinner margin.
An import quota is a limit on the QUANTITY of a good that may be imported in a period. Not a tax — a cap. That difference decides how a firm responds to it.
Lumina Electronics plans to sell 150,000 units a year into a market. A quota caps imports of that product at 120,000. So 30,000 units cannot enter at any price — 20% of what the firm planned to sell, worth $1,440,000 at the $48 the market pays.
Set the two barriers side by side and the difference is stark. A tariff of 20% costs $8.50 a unit and lets every unit in: a firm with a big enough margin absorbs it and carries on. A quota lets 120,000 in at the ordinary price and refuses the rest, and no margin, however large, buys a way past it.
So which barrier hurts more depends on the firm. A high-margin producer fears the quota; a thin-margin one fears the tariff. And a quota makes the firms INSIDE the cap more profitable, because it removed the competition the other 30,000 units would have brought.
The strategic answer to a quota is different too. A tariff can be met by cutting cost. A quota can only be met by producing inside the market — which is FDI, and it is one of the main reasons firms build plants where they do.
Real Example: An exporter that had already hit a volume cap by August built an assembly plant inside the market, because no cost saving could move another unit across that border.
Exam Matters: Appendix 6 defines Analyse as requiring a brief chain of reasoning, including interpretation of given data. The chain runs from a cap in units to a decision about where to produce.
Government legislation raises the cost of getting an imported good into a market, and a domestic subsidy lowers the rival’s price without touching the importer’s cost at all.
The specification names two more barriers, and they work in ways the first two do not.
Government legislation is a rule an imported good must satisfy before it may be sold: a safety standard, a labelling requirement, a certification. Some of it is genuinely about safety and some of it is a barrier wearing a safety coat, and from the exporter's side the two feel identical.
For Lumina Electronics, meeting a certification requirement costs $180,000 a year. Across 150,000 units that is $1.20 a unit — small next to the $8.50 tariff, but with a sting: the cost is fixed, so it falls hardest on a small exporter. A firm shipping a tenth of the volume pays $12 a unit for the same certificate.
A domestic subsidy is a payment to the home producer for each unit it makes, and it is the barrier students misread. It does not touch the importer's cost. Lumina's unit still lands at $42.50. What changes is the rival: a subsidy of $4 a unit lets it sell at $44 instead of $48.
The effect is to cut Lumina's advantage from $5.50 to $1.50 without anything of Lumina's having changed. And it is invisible in the importer's own accounts, which is exactly why a firm that only watches its own costs does not see it coming.
Real Example: A small exporter and a large one meeting the same certification requirement pay the same fee, which is a rounding error for one of them and a serious cost a unit for the other.
Exam Matters: Appendix 6 defines Explain as requiring a brief explanation of cause or effect supported by details or examples. A subsidy's cause and effect run through the RIVAL's price.
A barrier can end a firm’s access to a market without its costs changing — and the firms it protects at home are not always the ones a government expected.
The final requirement of this sub-topic is the impact on businesses of protectionism, and there are three kinds of business to answer for.
The exporter facing the barrier. Lumina Electronics lands at $42.50 against a rival at $48 — $5.50 cheaper, and the market is winnable. With a 20% tariff it lands at $51, $3 dearer, and the market is gone. Its costs, its quality and its efficiency are all exactly as they were.
The protected domestic producer. It keeps sales it would have lost, which is what the policy was for. What it also keeps is a cost base it no longer has to fix: a producer facing a cheaper competitor has a reason to get cheaper, and one behind a tariff does not.
The domestic firm that BUYS the protected good. This is the one governments underweight and exams reward. A barrier on components raises costs for every firm downstream that uses them. 55% of Lumina's unit cost is an imported module, so a tariff its own government placed on components would raise its export prices — protection for one industry paid for by another.
So "protectionism helps domestic business" is not a claim that survives the question which domestic business. A good answer names the three positions and says which dominates in the case in front of it.
Real Example: A duty on imported components protected a small number of component makers and raised costs for a much larger number of manufacturers that bought from them.
Exam Matters: Appendix 6 defines Assess as requiring a well-contextualised chain of reasoning with balanced awareness of competing factors, leading to a supported judgement. In Unit 4 it carries 12 marks.
A trading bloc is a group of countries that have agreed to lower the barriers between them, and the EU and its single market is the one the specification names first.
A trading bloc is a group of countries that have agreed to reduce or remove the trade barriers between them, while each keeps barriers against countries outside the group. The specification names three, and asks about their expansion and their impact on businesses.
The EU and its single market is the first. Its member states have removed tariffs at the borders between them, so a unit made in one member state can be sold in the others without a duty on the way. For a business inside, several national markets behave more like one.
"Single market" says more than "no tariffs". Members work to a common set of product rules, so a good made to those rules can be sold in any of them without being re-certified for each — which, after the previous chapter, is worth as much as the tariff saving.
Expansion is what the requirement actually asks about. A bloc that adds members enlarges the barrier-free area for every firm already inside, and moves the border outwards — so a firm outside can find itself inside without moving.
For a firm the question is always the same one and it has a number attached: which side of the boundary am I on, and what does that cost? The last subsection of this chapter puts the number on it.
Real Example: A manufacturer inside a single market designs one product to one set of rules and sells it across every member state, where a competitor outside clears the boundary each time.
Exam Matters: Appendix 6 defines Define as requiring students to define a term or phrase. A trading bloc needs both halves, or it describes something that does not exist.
ASEAN is the Southeast Asian bloc the specification names, and for a firm producing in a member state it is the reason a unit can reach neighbouring markets without a duty.
ASEAN is the Association of Southeast Asian Nations, a bloc of Southeast Asian countries including Malaysia, Singapore, Thailand, Indonesia and Vietnam.
Its members have agreed to cut tariffs on most goods traded between them. For a firm assembling in one member state, that turns the neighbouring members into markets it can reach at its ordinary landed cost rather than at a tariffed one.
This is the bloc Lumina Electronics is inside, and it is the reason the plant is where it is. Its unit lands in a fellow member state at $42.50, against a local producer at $48 — $5.50 cheaper. The same unit sent to a market outside any bloc Lumina belongs to meets the 20% tariff and lands at $51.
ASEAN is also the clearest illustration of expansion as a business fact rather than a diplomatic one. As the bloc has widened and deepened what it covers, the area a member's exporter can sell into without a duty has grown, and each step has changed where it makes sense to build a plant.
For a firm outside, the same growth is a widening area it cannot reach on equal terms — which is one of the strongest reasons for the FDI in chapter 2. Building inside the bloc is how a firm outside it buys its way in.
Real Example: An assembler in a Southeast Asian member state supplies neighbouring member markets from one plant, and a competitor outside the bloc supplying the same markets pays a duty on every shipment.
Exam Matters: Appendix 6 defines Explain as requiring a brief explanation of cause or effect supported by details or examples. Membership is the cause and the landed cost is the effect: $42.50 inside against $51 outside, on the same unit.
NAFTA is the North American bloc the specification names — Canada, Mexico and the United States — and it shows why firms build plants inside a bloc rather than exporting into it.
NAFTA, the North American Free Trade Agreement, is the third bloc the specification names. Its members are Canada, Mexico and the United States. It was replaced by a successor agreement between the same three countries in 2020; the specification names NAFTA, and that is the term for an answer.
What it did for business is the pattern this chapter is about, at a large scale. A plant in one member country could supply all three without a duty at their shared borders, so a firm's choice of where to build stopped being a choice about which market to serve.
That produced exactly the behaviour chapter 2 described. Firms from outside the bloc built plants inside it, because a plant in a member country sells into all three at the member price, while exports from outside meet the barrier at the boundary. FDI is how a firm outside a bloc gets inside it, and this is the clearest case of it.
It also shows the cost. Production moved to wherever inside the bloc was cheapest, because the barrier holding it in place was gone. The bloc did not create the cost difference; it removed what was suppressing it, and the employment effects fell on particular regions.
Three blocs, one lesson: a bloc redraws where the barrier is, and firms move to the profitable side of the new line.
Real Example: A vehicle manufacturer from outside a North American bloc built one assembly plant inside it and supplied all three member markets with no duty at their shared borders.
Exam Matters: Appendix 6 defines Evaluate as requiring fully developed chains of reasoning showing a range of causes and effects, with awareness of competing factors and a perceptive conclusion. Say for whom.
The same unit, unchanged, is competitive inside a bloc and uncompetitive outside it — which is what membership is worth to a business, in dollars.
The last requirement of the topic is the impact on businesses of trading blocs. It is a subtraction, and it has been assembling all section.
One unit. $22 of bought-in module, $18 of assembly, $2.50 of freight: $42.50 landed. A domestic rival in the destination market sells at $48.
That swing of $8.50 a unit is the impact of a trading bloc on this business, and it is bigger than anything its own managers could achieve in a year of cost reduction. It is also the reason 150,000 units a year of capacity got built where it was.
For firms inside, a bloc is a larger market at the ordinary price and one set of rules to meet. For firms outside, it is a boundary to be paid at or produced behind. And competition inside a bloc is harder, because every member's producers arrive on the same terms.
So the balanced judgement is that a bloc does not make a firm competitive. It decides where its existing competitiveness counts — and, as the subsidy in chapter 5 showed, being $5.50 ahead is not the same as being safe.
Real Example: A firm comparing two destination markets with identical demand found its price competitive in one and not the other, and the only difference was a trade agreement.
Exam Matters: Appendix 6 defines Construct as requiring an accurately labelled diagram, and says the type may be stated. A bar comparison inside and outside the bloc is what this asks for.
Globalisation is businesses buying, selling, investing and employing across national borders on a growing scale — and this unit asks what causes that and what it does to firms.
The three labels describe income a head and what an economy produces, not its size — and a big economy can be a poor market.