3.1.2 Trade and growth


    Increasing trade liberalisation

    Trade liberalisation is the gradual removal/reduction of restrictions on the free exchange of goods between nations. This is increasing due to a number of factors:

    • Increasing number of trade blocs
    • Rise of emerging markets e.g. China and India who want to trade.
    • More nations joining the WTO who aim to reduce trade barrier

    Trading blocs have led to trade creation between members, due to free trade within blocs. Trade has also been diverted from outside the bloc as trade barriers are imposed upon non-member countries. The WTO promotes world trade through reducing trade barriers and policing existing agreements. It also settles trade disputes, by acting as the judge, and organises trade negotiations.

    Trade liberalisation and economic growth

    Trade between different countries can help economic growth:

    • Countries can exploit their comparative advantage, which leads to a higher output using fewer resources and increases world GDP. This improves living standards.
    • Free trade increases economic efficiency by establishing a competitive market. This lowers the cost of production and increases output.
    • By freely trading goods, there is trade creation because there are fewer barriers. This means there is more consumption and large increases in economic welfare.
    • Specialising means countries can exploit economies of scale, which will lower their average costs.
    • More exports could lead to higher rates of economic growth.

    Foreign direct investment (FDI) and link to growth


    FDI –    flow of capital from one country to another in order to gain a lasting interest in an          enterprise in a foreign country


    Examples of FDI include:

    • Building factories and/or offices
    • Create distribution systems abroad
    • Mergers or joint ventures across countries
    • Buying shares in businesses


    The flow of FDI across international borders has increased due to more globalisation meaning that there is more trade between countries. This means brands have developed globally, migration is higher, and labour has been divided across countries. Also, the foreign ownership of firms has increased. There has been more investment in factories abroad. The removal of capital controls has facilitated this increase. Examples of foreign-owned businesses in the UK include Tetley which is owned by Indian company Tata Steel and Weetabix which is owned by Chinese Bright Foods.


    Advantages of FDI for business making it

    • Access to cheap labour – not always regulated labour laws in developing countries
    • Access to resources/raw materials – may invest in oil-rich countries for better access to develop oil fields
    • Avoidance of tariffs – may not have to pay foreign tariffs if they invest to a country inside a trade bloc
    • Reduced transport costs – e.g. as Nissan is producing in the UK, they have lower costs to sell in the UK as well
    • Use of local knowledge for markets – better knowledge from local workers
    • Tax exemptions – some countries offer tax-free options for businesses to encourage FDI
    • Access to markets – e.g. through location within a trade bloc


    Advantages of FDI for recipient country

    • Use of locals in employment means job creation, boosting employment in the foreign country and can increase the skill level of the country
    • Recipient country can benefit from improved knowledge and expertise of the foreign MNCs, may learn a new way of production e.g. kaizen may be transferred across economies.
    • Profits of the business are taxed, increasing Government revenue which can be used to invest in infrastructure and improve their development.
    • Corporations may pay higher wages and have better working conditions causing the economic wellbeing of citizens to improve if groups such as Fairtrade become involved.





    Disadvantages of FDI for recipient country

    • This gives MNCs controlling rights within foreign countries which may influence the politics of the country against public interest
    • The jobs created are likely to low-wage jobs with bad conditions which will only disadvantage workers
    • Most of the profits will likely return to the investing economy as there are economic leakage and profits are repatriated


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