Globalisation involves the increased integration and interdependence of the global economy. It means there will be a rise in trade, and increase in movement of labour and capital. There are both pros and cons of globalisation. The benefits include greater competition, lower prices, economies of scale.
Critics argue globalisation can leave many left behind due to the pace of progress which gives more power to large multinationals – enabling them to avoid tax but use monopoly power to charge high prices.
Impact of globalisation on the UK economy
- Increased trade. Globalisation and increased trade mean UK firms can benefit from specialising in goods where they have a comparative advantage. For example, the UK has a comparative advantage in goods such as financial services, video gaming and nuclear power components. This comparative advantage enables higher exports which creates jobs. see: comparative advantage
- Greater choice of imports. Globalisation has significantly increased the choice of consumer goods. For example, we have become accustomed to the year-round availability of fruit and vegetables due to food imports.
- Increased competition/lower prices. Globalisation means that domestic monopolies will now face more international competition. This leads to lower prices for consumers. This is particularly noticeable in industries such as clothing, electronics and food – where the UK is a net importer.
- Lower costs for firms. Globalisation makes it easier to outsource parts of the production process (e.g. call centres, web development) to countries with lower labour costs. Firms can make use of technology to interact with people around the world. This will help reduce costs and prices.
- On the other hand, outsourcing can lead to domestic job-losses and lower quality of service.
- Migration. Globalisation makes it easier for migrants to enter and work in the UK. This free movement of labour can help the UK to fill job vacancies. This is important in industries such as fruit picking and the NHS where firms often find labour shortages.
- However, mass migration can also place greater stress on UK housing and public services because of the net migration of people into the UK. Concerns over levels of migration led to Brexit vote – widely seen as a vote against globalisation.
- Global economic cycle. The UK is more affected by the global economic cycle. For example, a deep recession in the EU/US will affect the UK, because we rely on the EU and US to export many goods. The global credit crunch had a very damaging impact on UK economy because we were affected by the financial crisis in other countries.
- On the other hand, global growth has positive benefits to the UK economy.
- Shifting sectors/structural unemployment Globalisation will lead to a shift in the sectors of the economy. For example, the UK no longer has a comparative advantage in many manufacturing industries, Developing countries now have an advantage due to lower labour costs. This process can lead to temporary structural unemployment as unemployed workers struggle to gain employment in new industries.
- A problem in US and UK is that many workers feel left behind by the process of globalisation. They feel globalisation enables firms to make more profit, but workers struggle to find new employment which matches their previous jobs in turns of job security, pay and sense of loyalty.
- Tax avoidance. Globalisation has enabled firms to shift production from high tax countries to low tax countries. Often this is just taking advantage of tax loopholes. For example, companies like Apple, Amazon and Google have taken advantage of low tax rates in countries like Bermuda, Luxembourg and Ireland. This means UK treasury loses out on tax revenue. Multinationals have very high levels of cash reserves – indicative of the fact globalisation has led to the unequal distribution of the benefits.
- Growing inequality. Recent decades have seen growing levels of inequality, with top 1% of income earners gaining a higher share of income.
- Environment. Globalisation and growing global economy have implications for the environmental state of the world and the UK. Global warming will impact the UK.
Winners and losers from globalisation
However, in recent decades, there are growing concerns globalisation doesn’t always lead to a Pareto improvement – some benefit substantially from the process of globalisation – but an increasing number are left behind – at least in relative times.
Winners from globalisation include
- Firms with comparative advantage, e.g. high-tech software firms
- High-income earners
- Wealthy who can invest abroad and take advantage of lower tax rates.
- Workers who gain employment in export industry
- Consumers who benefit from cheaper prices
- Unskilled manual labour who have seen a decline in employment opportunities with the structural change to the economy.
- Average taxpayers who lose out from tax avoidance schemes
- The environment which is experiencing global warming and loss of natural resources.
In many senses, globalisation is not a new phenomenon for the UK economy. The UK has benefitted from a more globalised world ever since first exports and imports. During the industrial revolution, global ties were important for enabling the UK to import raw materials and exports goods. Recent decades are a continuation of this process of globalisation and we often forget the obvious benefits. The benefit of a greater choice of imports, lower prices and economies of scale in production.