Worked example 1
A HIC manufacturing firm relocates production to an MIC, cutting domestic employment by 2,000 but reducing consumer prices by 8%. The MIC gains 5,000 jobs and FDI of
Discuss the effects of this globalisation process on both countries and evaluate whether the HIC government should intervene. [15 marks]
Show solution outline
Effects on HIC:
Costs:
- 2,000 job losses — likely structural unemployment for semi-skilled manufacturing workers.
- Regional decline — multiplier effects on local suppliers, services.
- Wage pressure on remaining manufacturing workers (global labour market).
Benefits:
- Consumer prices fall 8% — real income gain for all consumers, especially low-income (proportionally larger benefit).
- Firm profits may rise → shareholder gains, possible reinvestment in HIC services/R&D.
Effects on MIC:
Benefits:
- 5,000 jobs — reduces unemployment, raises incomes.
- $200m FDI — capital, technology, export earnings, potential LRAS shift.
- Skills transfer if training provided.
Costs:
- Low-wage assembly — may trap in low value-added stage of chain.
- Environmental/social standards may be weaker — external costs.
- Profit repatriation to HIC parent.
Should HIC government intervene?
Arguments for intervention:
- Retraining and education for displaced workers — addresses structural unemployment (9.3).
- Regional development policy for affected communities.
- Minimum environmental/labour standards on imports — prevent race to bottom.
Arguments against heavy intervention (protectionism):
- Consumer welfare — 8% price fall benefits millions vs 2,000 job losses.
- Comparative advantage — HIC should specialise in high-value services/R&D.
- Retaliation risk — tariffs trigger trade war (6.2).
Judgement: Managed globalisation beats blocking it — active labour market policies (retraining, benefits) and regulation of standards address losers without sacrificing consumer gains. Pure protectionism protects 2,000 jobs at cost of higher prices for all — inefficient.