Globalisation » Globalisation and Why It Happened

What is globalisation?

Look at the phone in your pocket. It may be designed in one country, built from parts made in several others, put together in a different country again and then sold all over the world. No single country makes it alone. That is globalisation in action.

Key terms:

• Globalisation: the increased integration and interdependence of economies.
• Integration: economies becoming more closely linked through trade, investment and the movement of people and ideas.
• Interdependence: countries relying on each other for goods, services, money and markets.

Be careful with the two big words. Integration is about economies joining up. Interdependence is about what happens next: they need each other. If a factory in one country closes, firms in other countries that buy its parts can be hit too. Globalisation is also a process that has grown over time, not something that is either on or off.

Reason 1: fewer tariffs and quotas

Governments can limit trade with other countries. A tariff is a tax on imports. A quota is a limit on how many of a good can be imported. Both make imports dearer or scarcer, so they hold trade back. You will study them in detail in a later lesson, Tariffs, Quotas and Subsidies.

Over recent decades many countries have agreed to cut their tariffs and quotas. With fewer barriers, imported goods are cheaper and easier to sell. Firms can sell to customers in more countries, and consumers can buy goods from more countries. Trade grows, and economies become more linked.

Reason 2: reduced cost of transport

Trade is only worth it if the goods can be moved at a sensible price. Transport has become cheaper and faster. Goods are packed into standard metal containers that are lifted straight from ship to lorry or train. Bigger ships and aeroplanes carry more goods at a time, so the cost for each item is smaller.

Lower transport costs mean a firm can make something on the other side of the world and still sell it at a low price. Fresh fruit, clothes and electronics can now travel thousands of miles and stay affordable. This makes it worth trading over longer distances.

Reason 3: reduced cost of communication

Firms need to talk to suppliers, customers and staff in other countries. Years ago, a letter could take days or weeks and international phone calls were expensive. Today the internet, email and video calls allow instant contact at very low cost.

Cheap communication also lets firms move money, share information and trade services such as customer support across borders.

Reason 4: increased significance of multinational corporations

A multinational corporation (MNC) is a business that operates in more than one country. Many MNCs have grown very large. They make and sell in many countries, buy parts from suppliers around the world and move goods between their own sites abroad. Because they work across borders, they link economies together.

As MNCs have become more important, more of the world's trade and production happens through them. This pushes globalisation further. How MNCs work, and the investment they make, is covered in the lesson Multinationals and Foreign Direct Investment.

How the reasons work together

The four reasons support each other. Lower tariffs let firms sell abroad, cheaper transport and communication make it practical, and MNCs take advantage by spreading across the world. Their activity then creates more trade and more reliance on other countries, which is globalisation growing.

• Fewer tariffs and quotas: imports are taxed and limited less, so they are cheaper and easier to sell.
• Cheaper transport: containers, bigger ships and planes let goods travel further for less.
• Cheaper communication: the internet, email and video calls make it easy to run and sell across borders.
• More important MNCs: firms operating in many countries create more trade and production across borders.

Exam-style question

Country Marlow has cut its tariffs on imports and ended most quotas over the last 20 years. During this time, shipping costs have fallen and most firms now use the internet to deal with overseas customers. Several multinational firms have set up in Marlow.

(a) Define globalisation. [2 marks]

(b) Which of the following is a reason for globalisation? A: Higher tariffs. B: Cheaper transport. C: Stricter quotas. D: Dearer communication. [1 mark]

(c) Explain two reasons why Marlow has become more involved in globalisation. [4 marks]

Recap

• Globalisation is the increased integration and interdependence of economies.
• Four reasons: fewer tariffs and quotas, reduced cost of transport, reduced cost of communication, and the increased significance of MNCs.
• The reasons support each other and together make trade across borders easier and cheaper.
• Reasons explain why globalisation happened. Impacts come in the next lesson.