Globalisation and International Trade

First, a business can buy from overseas. A wider choice of suppliers may allow it to obtain cheaper raw materials, components or finished goods. Lower costs can increase profit if selling prices remain unchanged, or allow the business to reduce prices to attract customers. Overseas suppliers may also offer materials unavailable locally.

However, the purchase price is not the whole cost. Transport charges and longer delivery times can reduce the saving. A business needs reliable deliveries and consistent quality; delays or faulty components can interrupt production. Exchange-rate changes can also make supplies priced in a foreign currency more expensive.

Second, imports create competition from overseas. Foreign producers may have lower production costs and sell at prices a UK business struggles to match. If customers switch to imported products, the UK firm's sales fall. Cutting prices to retain customers may reduce its profit margin.

For example, a furniture workshop can benefit from cheaper imported timber and fittings while losing customers to cheaper imported wardrobes. The same international trade can help it as a buyer and harm it as a seller.

Exports open larger markets

Exports are goods and services sold to customers in other countries. Exporting gives a business access to customers beyond its domestic market, creating opportunities for higher sales revenue and growth. Services, as well as physical products, can be sold internationally.

Selling in several countries can also spread risk. If demand falls in the UK, sales elsewhere may help support the business. This does not eliminate risk, particularly if demand falls across several markets at once.

Exporting also brings additional costs and complications. Goods may need long-distance transport, and border paperwork can add time and expense. Longer delivery distances make resolving damaged deliveries or returns more difficult. Changes in exchange rates can affect the value of overseas sales or the price foreign customers pay.

Extra revenue therefore does not automatically mean extra profit. The business must compare the likely sales with the additional costs of serving overseas customers.

Changing location means balancing savings against disruption

Globalisation allows a business to move production or establish operations overseas. This can involve manufacturing, but also services such as call centres. Locating production abroad is different from simply selling to foreign customers.

Lower wages, land costs or energy costs may reduce the cost of each unit produced. Access to raw materials can reduce transport costs and delays. Alternatively, a business may locate closer to an important overseas market, shortening delivery times to its customers.

Other factors matter alongside cost:

• Labour: workers need the skills and availability required to produce reliably and maintain quality.
• Infrastructure: suitable roads, transport links, electricity and communications support day-to-day operations.
• Government and stability: grants or tax incentives may encourage investment, while political instability or complicated administrative procedures can increase risk and delay opening.
• Trade-bloc membership: a location inside a bloc may give easier access to its member countries' markets.

For example, Nissan and Toyota invested in UK manufacturing before Brexit partly to gain access to the EU market. This illustrates how access to customers, rather than cheap labour alone, can influence location.

Relocation involves spending on premises, equipment and recruitment before the benefits are received. Distant operations can also be harder to supervise, making quality problems more difficult to identify quickly. Moving production away from the UK may cause job losses and damage the business's reputation at home. A move is worthwhile only if its expected benefits justify these costs and risks.

Multinationals operate in more than one country

A multinational is a business with operations in more than one country. It may have headquarters in one country and factories, offices or shops elsewhere. Starbucks, for example, is a US-based business with outlets across many countries.

A business does not become a multinational merely by exporting: selling abroad is not the same as having operations abroad.

Multinationals can choose locations for different purposes, such as obtaining lower-cost resources or reaching customers. However, coordinating operations across countries adds management complexity, and standards need to be maintained across distant sites.

A multinational entering a country can bring investment and employment. It may buy from local suppliers and contribute taxes. Customers may benefit from greater choice, but local businesses can lose sales to a large international rival. Some profits may return to the parent company abroad rather than remain in the country where they were earned.

Tariffs raise the cost of importing

A tariff is a tax on imported goods. Governments may use tariffs to protect domestic producers from foreign competition; this is a form of protectionism.

Suppose the USA places a tariff on cheese imported from Britain. The US importer pays the tax when importing the cheese. If it passes this additional cost on through a higher selling price, British cheese becomes more expensive for American customers. Some may switch to American cheese, helping domestic producers.

The outcome differs between businesses. US cheese producers may gain sales, but a US retailer importing British cheese faces higher costs. It must either accept a lower profit margin or raise its price and risk losing customers. Similarly, tariffs on imported raw materials can increase costs for domestic manufacturers that use them.

Tariffs can raise government revenue, but they may reduce consumer choice and weaken the competitive pressure on protected businesses. Other countries may also retaliate with tariffs, making exporting harder.

Trade blocs reduce barriers within a group

A trade bloc is a group of countries that agree to reduce or remove trade barriers between members. This can make it easier and cheaper for businesses within the bloc to buy supplies and sell to a larger market.

The European Union is an example. Goods can move between EU member countries without internal customs tariffs, while the EU applies common external tariffs to imports from outside the bloc. Not every trade bloc has the same arrangements, and a common external tariff is not a feature of every bloc.

Membership creates opportunities, but also increases competition from businesses in other member countries. A business may gain overseas customers while facing more rivals at home. Businesses outside a bloc may face tariffs when selling into it, making their products less competitive.

Overall, neither globalisation nor trade barriers affect every business in the same way. The strongest judgement considers where a business sources supplies, where its customers are and whether it can manage the extra costs and competition.

Overseas locations and multinationals

• Location factors: production costs, skilled labour, infrastructure, raw materials, proximity to customers, government incentives, political stability and trade-bloc access.
• Balance savings against set-up costs, supervision difficulties, disruption, job losses and reputational damage.
• A multinational has operations in several countries; exporting alone does not make a business multinational.
• Host countries may gain jobs and investment, but local rivals face competition and some profits may go abroad.

Barriers to trade

• Tariff: raises the importer's costs. Passing it on can make imports less competitive and help domestic producers. Import-dependent businesses may lose out.
• Trade bloc: reduces barriers between members, widening markets and supplier access but increasing internal competition.
• External tariffs can disadvantage businesses outside a bloc. Not all blocs have a common external tariff.

Overall judgement

The impact depends on whether the business imports, exports or operates abroad, and whether the benefits outweigh the added costs and competition.