Causes of changes in globalisation: changes in transport costs
Globalisation and Trade Restrictions
What is Globalisation?
Globalisation is the growing connection between countries through trade, investment, technology, and culture. Think of it like a giant web where every country is a node connected by roads (trade routes) and bridges (technology).
Why Do Transport Costs Matter?
Transport costs are the money spent to move goods from one place to another. Lower costs mean goods can travel farther for less money, making it cheaper for companies to sell abroad. Higher costs do the opposite.
How Transport Costs Affect Global Trade
- Cost per unit: The cost of shipping one kilogram of goods is often calculated as $C = \frac{F}{Q}$, where $F$ is the fixed transport fee and $Q$ is the quantity shipped.
- Price competitiveness: Lower $C$ makes a product cheaper abroad, boosting exports.
- Market reach: Cheap transport lets firms reach distant markets, like a pizza delivery that can reach a whole city instead of just the neighbourhood.
- Choice of transport mode: Air freight is fast but expensive; sea freight is slow but cheap. Changes in fuel prices can shift the balance.
Transport Cost Trends Over Time
| Year | Cost per ton (USD) | Key Driver |
|---|---|---|
| 1990 | $120 | High fuel prices |
| 2000 | $80 | Improved logistics |
| 2020 | $60 | Digital tracking & low fuel |
Trade Restrictions: Tariffs vs Non‑Tariff Barriers
| Barrier Type | Example | Effect on Trade |
|---|---|---|
| Tariff | Import duty of 10% | Raises price of imported goods |
| Quota | Limit of 5,000 units per year | Restricts supply, can increase prices |
| Non‑Tariff | Strict safety standards | Can be a barrier if hard to meet |
How Transport Costs Interact with Trade Restrictions
• When transport costs fall, the relative impact of a tariff (a fixed percentage) becomes smaller. • Conversely, high transport costs can make even a low tariff a significant barrier. • Example: A 5% tariff on a product costing $100 to ship is $5, but if shipping costs rise to $200, the tariff becomes $10, a bigger chunk of the final price.
Exam Tip Box
Remember: In exam questions, you’ll often be asked to explain how a change in transport costs can alter trade patterns. Use the cost per unit formula and link it to price competitiveness and market reach. Also, consider how transport costs can interact with tariffs and quotas.
Example answer structure:
- Define transport cost and give the formula.
- Explain how lower costs reduce the final price of exported goods.
- Show how this can increase demand in foreign markets.
- Discuss the interaction with tariffs (percentage vs absolute).
Quick Quiz (for fun!) 🎉
- What happens to the price of a product in a foreign market if transport costs drop by 20%?
- How might a country use a quota to protect a domestic industry when transport costs are low?
- Explain why a high transport cost can make a low tariff a bigger problem for exporters.
Revision
Log in to practice.