6.2.2 Causes & consequences of changes in globalisation

Greater globalisation occurs when international trade, investment, and other economic links between countries become stronger. In contrast, reduced globalisation occurs when economies become less internationally integrated, perhaps due to geopolitical conflicts and international trade disputes.

Changing patterns of globalisation occur when multinational companies redirect trade and investment towards different countries. A reduction in trade between two countries does not necessarily mean that world trade falls overall.

The Cambridge IGCSE syllabus specifies the following four causes of changes in globalisation:

• changes in trade restrictions
• changes in transport costs
• changes in communication costs
• movement of multinational companies (MNCs)

1. Changes in trade restrictions

Lower trade restrictions (freer international trade) make it easier and cheaper for individuals and firms to exchange goods and services internationally. For example, reducing tariffs lowers the tax imposed on imports, while relaxing quotas allows access to a greater quantity of imports.

Foreign products may become more competitive, encouraging consumers and firms to purchase them. Domestic producers may also gain access to larger overseas markets,  strengthening international trade links and increasing their sales revenue.

In contrast, higher trade restrictions can have the opposite effect. Tariffs, quotas, and embargoes (bans) may reduce trade between affected countries. However, firms may respond by buying from alternative suppliers or moving production to another country.

Trade disputes and embargoes can weaken global economic links

2. Changes in transport costs

Falling transport costs make it more profitable to trade over longer distances. Containerisation, larger ships, improved ports, and more efficient transport networks can reduce the cost of moving each unit of output. Containerisation involves packing goods into large, standardised metal boxes that transfer easily between ships, trains, and lorries, reducing handling costs, loading times, and damage to goods.

Lower transportation costs mean that firms can purchase inputs (raw materials and component parts) from overseas suppliers and sell products internationally at more competitive prices. It also becomes easier to divide production between countries.

In contrast, rising transport costs can weaken these global links. For example, higher fuel prices, congestion, conflict, or disruption to shipping routes increase delivery costs and uncertainty. Therefore, firms may switch to suppliers closer to their customers.

3. Changes in communication costs

Broadband, mobile networks, email, video conference calls, and other online platforms allow information to move quickly and cheaply. Some services can even be supplied internationally without either the producer or consumer travelling. For example, software development, online tuition, and accounting services can be delivered remotely.

Lower communication costs make it easier for firms to find customers and suppliers, compare prices, and coordinate activities across countries.

In contrast, higher communication costs or reduced access can make international operations more difficult. Expensive internet connections, unreliable networks, or restrictions on communication may discourage firms from serving overseas markets.

4. Movement of multinational companies

Multinational companies (MNCs) strengthen international connections when they establish or expand overseas operations. Their activities can create flows of foreign direct investment (FDI), raw materials, components, finished products, technology, and specialist skills knowledge between countries.

Multinational companies may also choose to relocate production to gain access to lower costs, skilled workers, raw materials, and/or growing markets.

However, MNCs may also close overseas operations or move them elsewhere for reshoring or nearshoring purposes. Reshoring means bringing production back to the home country, while nearshoring means moving it closer to the main market. Such decisions can reduce some international links while strengthening others.

Note that these four causes of changes in globalisation often reinforce one another. For example, lower tariffs may encourage FDI from MNCs, while cheaper transport and communication costs make the resulting supply chains easier to operate, thereby strengthening globalisation.

The Cambridge IGCSE syllabus specifies the following six effects of changes in globalisation:

• international trade
• competition
• the environment
• migration
• income distribution
• economic development

1. International trade

Greater globalisation can further increase international trade by giving producers access to larger markets and consumers access to more overseas products. Countries can specialise in activities in which they are relatively cost efficient. Firms may also import cheaper or better-quality inputs, improving their international competitiveness.

However, stronger international connections increase exposure to overseas disruptions. A shortage of components in one country, for example, can interrupt production elsewhere.

Reduced globalisation may encourage firms to buy from domestic suppliers, reducing the reliance on overseas deliveries. However, domestic alternatives may be more expensive or offer less choice for consumers and firms, while retaliatory trade restrictions can reduce export opportunities. For example, US tariffs in 2018–2019 and 2025–2026 protected some American manufacturers but also raised imported input costs and exposed exporting countries like Canada and China to retaliatory tariffs.

Tariffs increase costs of imported goods and services

2. Competition

Greater globalisation exposes domestic firms to more overseas competitors. This can have both positive and negative consequences. For example, greater globalisation may encourage:

• Lower prices, as firms compete for customers.
• Higher quality and better service, as consumers gain from increased choice and more alternatives.
• Greater efficiency, as firms seek to reduce costs (to remain internationally competitive).
• Innovation, as firms develop new products and production methods to entice customers.

However, less competitive domestic firms may lose sales or even close, causing unemployment in the domestic economy. Large MNCs may eventually dominate markets if smaller competitors disappear.

In contrast, reduced globalisation may protect some domestic firms and jobs - at least in the short run. Nevertheless, weaker competitive pressures may allow higher prices and reduce incentives for domestic firms to improve their productive efficiency.

3. The environment

Greater globalisation and international trade can damage the environment when expanding production and transport increase pollution, greenhouse gas emissions, and resource depletion (such as deforestation). Firms may also relocate environmentally damaging activities to countries where regulations are weaker or less effectively enforced.

Deforestation is a common consequence of globalisation

However, globalisation can improve access to cleaner technologies (such as solar energy sources), environmental knowledge, and less expensive renewable energy equipment. International investment may also introduce more efficient production methods.

Whilst reduced globalisation may shorten some supply chains, locally produced goods are not necessarily greener (environmentally friendly). Their environmental impact also depends on specific production methods, energy sources, and transport efficiency.

Case Study 6 - The growing use of solar panels

China illustrates how globalisation can support cleaner energy while creating environmental costs. The International Energy Agency's (IEA) 2022 report found that China had more than 80% of the world’s capacity to make solar panels. Chinese solar exports exceeded $30 billion in 2021, supplying equipment to overseas markets - equivalent to approximately $82.2 million per day or $3.42 million per hour!

Government support, investment, innovation, and large-scale production helped lower unit costs. Economies of scale allowed Chinese producers to spread costs over greater output, making solar equipment more affordable internationally. Cheaper solar panels can encourage households and firms to install solar power, reducing reliance on fossil fuels in the long run.

However, manufacturing panels requires energy and raw materials. The IEA's report estimated that coal generated over 60% of the electricity used in solar manufacturing worldwide. Production therefore created carbon emissions even though the finished panels generated low-carbon electricity.

Nevertheless, the IEA estimated that panels typically needed four to eight months of operation to offset manufacturing emissions, compared with a lifespan of approximately 25 to 30 years.

4. Migration

Migration refers to the movement of people from one area or country to another to live there temporarily or permanently, typically due to greater economic opportunities. Greater globalisation can encourage migration by making overseas employment opportunities easier to identify and reach. MNCs may also transfer employees between countries.

For destination countries, immigration (the movement of people into a country) can increase the domestic labour supply, fill job vacancies, and bring additional employment skills. However, rapid population growth caused by migration may increase demand for housing, healthcare, education, and transport. This may lead to higher rents, longer healthcare waiting times, overcrowded classrooms, and greater traffic congestion.

For origin countries, emigration  (the movement of people out of a country) can reduce unemployment if people who cannot find jobs leave to work abroad. Those working overseas may send part of their earnings to relatives at home. These payments, called remittances, increase household incomes and help families pay for food, housing, healthcare, and education. However, the loss of skilled workers may create labour shortages, sometimes described as a “brain drain”.

In contrast, reduced globalisation or tighter migration restrictions may limit the international mobility of labour. Nevertheless, trade and migration do not always move together. For example, remote work (such as work from home) can allow services to cross borders without workers having to physically migrate.

Case Study 7 - Migration within the European Union

The EU’s free movement of workers allows citizens within the European Union (EU) to seek employment and work in another member country without a work permit. This reduces legal barriers to migration, making it easier for workers to move towards available jobs.

The scale of this is substantial. According to Eurostat, on 1 January 2025, around 14 million EU citizens lived in another EU country. These figures include workers and other residents, such as family members. 

5. Income distribution

The gains and losses from globalisation are unlikely to be shared equally. Within a country, owners and workers in successful exporting firms may gain higher incomes, i.e., wages and profits. Consumers may benefit from cheaper imports, including lower-income households whose purchasing power increases, as well as greater choice.

However, workers may lose their jobs if consumers switch to cheaper imports or firms move production overseas to reduce costs. For example, a domestic clothing factory may close because it cannot compete with lower-priced imported clothing, leaving its workers unemployed.

Meanwhile, workers with skills needed in growing industries, such as artificial intelligence (AI) and software development, may receive higher wages as demand for their labour increases. As the unemployed factory workers may lack these skills and struggle to find new jobs without retraining, this can widen income differences between the two groups of workers.

Between countries, globalisation can narrow income differences if lower-income economies attract foreign direct investment (FDI) and sell more goods and services overseas. For example, a foreign firm opening a factory can create jobs, provide training, and increase workers’ earnings in the host country.

However, political instability or a lack of appropriate infrastructure may discourage FDI because firms fear disruptions to their operations. Countries facing these barriers may attract less investment and experience slower income growth, widening the gap with more successful economies.

Reduced globalisation can protect some workers from foreign competition. For example, tariffs on imported clothing may help domestic factories retain customers and jobs. However, consumers may pay higher prices. Also, if trading partner countries impose tariffs in retaliation, domestic exporters may lose overseas customers, reducing their sales and employment.

6. Economic development

Greater globalisation can support economic development through:

• Employment and higher income, helping more households to be able to afford necessities. For example, a foreign MNC opening a clothing factory can provide paid work for people who were previously unemployed. Their earnings can help families afford better food, housing, healthcare, and education.
• Investment and technology transfer, increasing productivity. For example, an MNC may introduce modern machinery and train local workers to use it, enabling them to produce more output per hour. These skills can also benefit domestic firms when trained workers move to new jobs.
• Access to larger markets, allowing domestic firms to expand. For example, a domestic coffee producer that begins exporting can sell to overseas customers rather than relying only on local buyers. Higher sales may allow it to hire more workers and purchase better equipment, supporting employment and productivity.
• Additional government revenue, which may be used to finance public services. For example, expanding firms may pay more tax on their profits, while newly employed workers may pay income tax. The government can use this tax revenue to build schools, improve hospital services, and provide clean water, thereby raising living standards in the economy.
• Access to goods and services, including machinery, medicines, and educational resources. For example, imported medical equipment can help hospitals diagnose illnesses, while online courses can give students access to subjects unavailable locally. These benefits depend on whether households and public services can afford the products and have the electricity, internet access, or trained staff needed to use them.

Improved education is a vital aspect of economic development

However, the benefits of economic development may be limited if employment is insecure, working conditions are poor, profits of multinational companies are sent abroad, or environmental damage harms local communities.

Also, over-dependence on a narrow range of exports or foreign MNCs for employment can also leave an economy highly vulnerable to overseas shocks.

On the other hand, reduced globalisation may allow some domestic industries to develop, but it can restrict access to investment, technology, and affordable products from overseas.

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