AQA GCSE Economics: Free trade, the EU and globalisation (8136) – Revision Notes

These notes condense sections 3.2.4.3 Free-trade agreements including the European Union and 3.2.4.4 Globalisation: benefits and drawbacks of the AQA GCSE Economics (8136) specification for first teaching from September 2017. The specification has no tiers. The benefits of trade and exchange rates are in the international trade and exchange rates revision notes, and moral and ethical points in general in the government objectives revision notes. Course links: AQA GCSE Economics hub, checklist and free diagnostics. Worked-example figures are invented unless a real UK fact is stated.

Part A: Free trade and free-trade agreements (3.2.4.3)

Key terms

Term	Meaning
Free trade	Trade between countries with no barriers imposed by governments
Protectionism	Using barriers to shield domestic producers from foreign competition
Tariff	A tax on imports, which raises their price
Quota	A limit on the quantity of a good that can be imported
Free-trade agreement	A deal between countries to remove or cut tariffs and quotas on trade between them
Customs union	A free-trade area whose members also charge the same tariff on imports from outside
Single market	A customs union that also allows free movement of services, capital and people, with shared rules on products

Other barriers include embargoes (bans on trade with a country), subsidies to domestic producers and regulations such as product standards and paperwork at borders.

Arguments for and against free trade

For	Against
Lower prices and more choice for consumers	Jobs lost in industries that cannot compete with cheaper imports
Larger markets and economies of scale for firms	Infant industries (new ones) may need protection until they can compete
Competition makes firms more efficient	Strategic industries (food, energy, defence) may be protected to avoid relying on others
Countries specialise, so world output rises	Some countries may dump goods (sell below cost) to drive out rivals
Cheaper imported inputs cut firms’ costs	Imports from countries with weak labour or environmental rules can undercut fair producers

Calculation: the effect of a tariff

A car is imported for £20,000. A 10% tariff adds 0.10 × 20,000 = £2,000, so it sells for £22,000 (before any other taxes). UK-made cars at £21,000 are now cheaper than the import, so UK producers gain. Consumers pay more, and the government gains tariff revenue.

The European Union and the UK

• The EU is a single market and customs union. There are no tariffs on trade between members, and one common tariff on goods from outside.
• The UK was a member from 1973 until it left on 31 January 2020. Since 1 January 2021 UK–EU trade has been under the Trade and Cooperation Agreement: no tariffs or quotas on goods that meet its rules on origin, but new customs checks and paperwork, which are non-tariff barriers.
• The EU remains the UK’s largest trading partner, because it is a large, wealthy market close to the UK.
• Since leaving, the UK has made its own agreements, for example with Australia and New Zealand, and has joined the CPTPP, a trade group of Pacific countries.

Significance and benefits of free-trade agreements

• Firms gain access to a much larger market with lower costs of selling there.
• Consumers get lower prices and wider choice.
• More competition and more foreign investment, as firms can serve the whole area from one base.
• Members can negotiate together, with more bargaining power.
• Drawbacks: members give up some control over trade policy, some industries face tougher competition, and trade may be diverted away from cheaper producers outside the agreement.

Part B: Globalisation (3.2.4.4)

Main features

Globalisation is the growing integration of the world’s economies. Its main features are:

• rapid growth of international trade in goods and services
• global supply chains, with parts made in several countries
• the spread of multinational companies (MNCs): firms that produce in more than one country
• large flows of investment and money between countries
• movement of workers between countries, and the spread of ideas and culture.

Factors behind the growth of globalisation

• New technology: the internet, mobile communications and computers let firms manage operations worldwide and sell online.
• Cheaper transport: container shipping and air freight have cut the cost of moving goods.
• Multinational companies looking for new markets, cheaper labour and resources.
• Fewer trade barriers: trade agreements and the World Trade Organization (WTO).
• Freer movement of capital, so firms can invest abroad easily.
• Growth of emerging economies such as China (which joined the WTO in 2001) and India.

Multinational companies

Possible benefits to a host country	Possible drawbacks
Jobs and training	Profits may be sent back to the home country
Investment and new technology	Local firms may be driven out
Exports and tax revenue	May pay low wages or harm the environment in poorer countries
Spending with local suppliers	May close plants and move if costs are lower elsewhere

UK example. Nissan has built cars in Sunderland since 1986, creating thousands of jobs in the plant and among local suppliers.

Benefits and drawbacks for the UK and other developed countries

Group	Benefits	Drawbacks
Producers	Larger markets, cheaper inputs, economies of scale	More competition from low-cost producers abroad
Workers	Jobs in exporting firms and in MNCs locating here	Jobs lost when production moves abroad; pressure on wages in some industries
Consumers	Lower prices and more choice	Products may be made under poor conditions; less local variety

Benefits and drawbacks for less developed countries

Group	Benefits	Drawbacks
Producers	Access to world markets; new technology from MNCs	Local firms may not survive competition; reliance on a few exports
Workers	New jobs, often paying more than local alternatives; skills	Low pay, long hours and unsafe conditions in some factories
Consumers	More goods and lower prices; incomes rise over time	Gains may be uneven; local culture may be lost

Moral, ethical and sustainability considerations

• Working conditions: low wages, unsafe factories or child labour in supply chains. Is cheap clothing worth it?
• Environment: pollution in countries with weaker rules, deforestation, and carbon emissions from transporting goods long distances.
• Fair trade: schemes that guarantee producers a minimum price; some consumers will pay more for ethical products.
• Responsibility: UK firms are expected to check their supply chains, and there is pressure from consumers and campaign groups.

Exam traps

• Free trade and globalisation are linked but different: one removes barriers, the other is the wider process of integration.
• Name the group (producers, workers or consumers) and the country type (UK or less developed) in every point.
• The UK has left the EU, but the specification still expects you to know the EU’s significance and the benefits of agreements like it.
• A tariff makes imports dearer for consumers; it does not make domestic goods cheaper.

Quick self-test

1. Define free trade.
2. Distinguish between a tariff and a quota.
3. Give two arguments against free trade.
4. A £500 import faces a 20% tariff. What is its new price?
5. What is the difference between a free-trade area and a customs union?
6. When did UK–EU trade move to the Trade and Cooperation Agreement?
7. Give two factors that have contributed to the growth of globalisation.
8. What is a multinational company?
9. Give one benefit and one drawback of globalisation for UK workers.
10. Give two ethical concerns when UK firms buy from abroad.

Answers

1. Trade between countries without government-imposed barriers such as tariffs and quotas.
2. A tariff is a tax on imports; a quota is a limit on the quantity imported.
3. Any two: job losses in uncompetitive industries, infant industries need protection, strategic industries, dumping, competition from countries with weak standards.
4. 0.20 × 500 = 100, so £600.
5. In a customs union members also share a common tariff on imports from outside; in a free-trade area each sets its own.
6. 1 January 2021.
7. Any two: new technology, cheaper transport, multinational companies, fewer trade barriers, freer movement of capital, growth of emerging economies.
8. A firm with production or operations in more than one country.
9. Benefit: jobs in exporting firms or MNCs. Drawback: jobs lost when production moves abroad.
10. Any two: low pay, unsafe conditions, child labour, environmental damage, emissions from transport.

Where marks are usually lost

• Listing benefits of globalisation without saying for whom.
• Treating the EU as only a free-trade area: it is a single market and customs union.
• Ignoring the drawbacks for less developed countries, or only giving drawbacks.
• Ethical points with no economic link (cost, price, jobs or the environment).

Frequently asked questions

What is the difference between a free-trade area, a customs union and a single market? A free-trade area removes tariffs and quotas between members. A customs union also charges the same tariff on imports from outside. A single market adds free movement of services, capital and people.

What is the difference between a tariff and a quota? A tariff is a tax on imports, which raises their price. A quota is a limit on the quantity of a good that can be imported.

What factors have caused globalisation to grow? New technology, cheaper transport, multinational companies seeking new markets and cheaper inputs, fewer trade barriers, freer movement of capital and the growth of emerging economies.

Does the UK still need to know about the EU for AQA GCSE Economics? Yes. The UK left the EU, but the 8136 specification still expects you to know the EU’s significance as the UK’s largest trading partner and as a single market and customs union.

Does a tariff make domestic goods cheaper? No. A tariff makes imports dearer for consumers; it does not lower the price of domestic goods.

Official syllabus

AQA GCSE Economics (8136) specification, for first teaching from September 2017 (Version 1.0), published by AQA: sections 3.2.4.3 Free-trade agreements including the European Union and 3.2.4.4 Globalisation: benefits and drawbacks.