Global Systems: Trade and Investment

Spec mapping (AQA 7037): Paper 2, §3.2.1 — global trade and foreign direct investment as the economic structure of globalisation; the form and nature of economic interdependence; the role of TNCs; the contribution of trade and investment to a globalising economy and the consequences of an increasingly unified world economy. Synoptic links run to §3.2.2 (Changing Places — FDI and trade remake the economy and identity of particular places, from Sunderland's Nissan plant to Ethiopia's industrial parks) and §3.2.4 (Resource Security — trade in primary commodities). AOs: AO1 (trade patterns, FDI, TNC behaviour, theory — Wallerstein, Dicken, Ricardo), AO2 (explaining why trade is unequal and applying core–periphery across scales) and AO3 (interpreting trade-share tables, FDI data and value-chain breakdowns).

Global trade and investment flows are the economic arteries of globalisation. Understanding the patterns, processes, and theories that underpin international trade is essential for analysing how the global economy functions and why some countries benefit far more than others.

Key Definition: A global system is a set of interconnected components — states, institutions, TNCs and flows — that operate at a planetary scale, creating complex patterns of interdependence (mutual reliance, such that a shock in one place transmits to others).

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Patterns of Global Trade

Global trade has grown dramatically since 1945. World merchandise exports grew from approximately US$58 billion in 1948 to over US$25 trillion in 2022 — an increase of more than 400-fold, and far faster than population or output. This trade is, however, highly concentrated:

Region	Share of World Merchandise Exports (2022)
Europe	36%
Asia	35%
North America	13%
Middle East	6%
CIS (Russia and neighbours)	4%
South America	3%
Africa	3%

Key patterns include:

• Intra-regional trade dominates — approximately 68% of European trade is with other European countries
• South–South trade has grown significantly — trade between developing countries now accounts for over 25% of world trade, driven by China's demand for raw materials
• Africa and South America remain marginal — together accounting for just ~6% of world exports despite containing over 25% of the world's population
• China has become the world's largest exporter of manufactured goods, with merchandise exports of approximately US$3.6 trillion in 2022

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The Theory of Trade: Comparative Advantage and its Critics

The intellectual foundation of free trade is David Ricardo's theory of comparative advantage (1817). Ricardo showed that two countries can both gain from trade if each specialises in producing the goods in which it has the lowest opportunity cost — even if one country is absolutely more efficient at everything.

Worked illustration. Suppose Portugal and England each produce cloth and wine. The gain from trade arises from relative not absolute efficiency. If Portugal sacrifices fewer units of cloth to make a unit of wine than England does, Portugal has the comparative advantage in wine even if it is also better at cloth. Both nations end up able to consume more of both goods by specialising and trading. Formally, country A should export good X if its opportunity-cost ratio is lower:

$\frac{\text{cost}_X^{A}}{\text{cost}_Y^{A}} < \frac{\text{cost}_X^{B}}{\text{cost}_Y^{B}}$costYA​costXA​​<costYB​costXB​​

Why comparative advantage is powerful. It explains the gains from specialisation and underpins the entire WTO/free-trade project: total world output rises when countries specialise.

The geographical critique. Geographers are wary of treating comparative advantage as a justification for the existing division of labour, for several reasons:

• It assumes factors of production are immobile between countries — but capital (FDI) and labour (migration) are now highly mobile, undermining the static model.
• It is silent on who captures the gains. Specialising in low-value primary commodities (the "advantage" of many peripheral economies) may lock a country into the declining terms of trade described by Prebisch–Singer (Lesson 3).
• It ignores the path-dependent and political construction of advantage — South Korea did not have a "natural" advantage in electronics; it built one through deliberate state industrial policy, contradicting the idea that nations should simply accept their inherited specialism.
• It assumes full employment and frictionless adjustment; in reality, deindustrialised regions (the US "Rust Belt", northern England) bear concentrated losses while gains are diffuse.

Exam Tip: A sophisticated answer presents comparative advantage as the orthodox case for trade and then evaluates it against the structuralist critique (Wallerstein, Prebisch–Singer). This pairing — orthodox theory versus its critics — is exactly the AO2 evaluation examiners reward.

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Wallerstein's World-Systems Theory (1974)

Immanuel Wallerstein (1974) developed world-systems theory to explain persistent inequalities in the global economy. He argued the world operates as a single capitalist system with a clear spatial hierarchy:

graph TD
    A[Core Countries] -->|Exploit cheap labour and resources| B[Semi-Periphery]
    A -->|Extract raw materials, enforce unequal trade| C[Periphery]
    B -->|Intermediate role: exploited by core, exploits periphery| C
    B -->|Some upward mobility possible| A
    C -->|Provides cheap resources and labour| A
    C -->|Limited mobility| B

Zone	Characteristics	Examples
Core	High-skill, capital-intensive production; control of finance and technology; high wages; political power	USA, UK, Germany, Japan
Semi-periphery	Mix of core and peripheral characteristics; industrialising; intermediate wages	China, Brazil, India, Mexico
Periphery	Dependent on primary exports; low wages; politically weak; exploited by core	Many sub-Saharan African and Central American countries

Wallerstein argued the global system is structured to benefit the core at the expense of the periphery: the periphery provides cheap raw materials and labour, while the core retains the highest-value activities (finance, technology, design, branding). Crucially, the semi-periphery is a political stabiliser — it gives the periphery something to aspire to and deflects systemic discontent.

Strengths and Limitations

Strengths	Limitations
Explains persistent global inequalities	Oversimplifies — countries rarely fit neatly into three boxes
Recognises the systemic nature of exploitation	Underestimates the agency of peripheral states
Allows for mobility between zones (China's rise)	Marxist framing may overweight economic factors
Structural explanation, not victim-blaming	Does not explain why some peripheral states develop (South Korea) and others do not

Exam Tip: When using Wallerstein, always evaluate. Compare with Rostow's modernisation theory (1960) and Frank's dependency theory (1967) (covered in Lesson 9) to demonstrate synoptic command of the development-theory debate.

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Foreign Direct Investment (FDI)

Foreign Direct Investment occurs when a company invests in productive capacity in another country — building factories, acquiring businesses or establishing operations. FDI is distinct from portfolio investment (buying shares) because it involves a lasting interest and direct control of assets.

Patterns of FDI

• Global FDI flows totalled approximately US$1.37 trillion in 2022
• Historically the majority of FDI flows between developed countries — the USA, EU and Japan have accounted for over 60% of global FDI
• FDI to developing countries has grown — China alone received around US$189 billion in 2020
• Africa receives the smallest share — roughly 3–5% of global flows — reinforcing marginalisation

Impacts of FDI

Positive Impacts	Negative Impacts
Creates employment and transfers technology	May create low-wage, low-skill "screwdriver" jobs
Generates tax revenue for host governments	TNCs may use transfer pricing to shift profits and minimise tax
Develops infrastructure and human capital	Profits may be repatriated rather than reinvested locally
Integrates host country into global markets	Can create dependency on continued foreign investment
Multiplier effects stimulate local economies	May outcompete and destroy local firms

Case Study: FDI in Ethiopia. Between 2010 and 2020 Ethiopia attracted significant FDI, particularly from China, in textiles, garments and leather. The Hawassa Industrial Park (opened 2016) employs over 30,000 workers producing garments for brands including PVH (Calvin Klein, Tommy Hilfiger). It illustrates both sides of FDI: real job creation and integration into global value chains, but wages of only around US$26–30 per month — among the lowest of any garment-exporting country — and documented concerns over labour conditions and turnover. Ethiopia chose this "race-to-the-bottom" cost advantage deliberately as an industrialisation strategy.

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Transnational Corporations (TNCs)

TNCs are the primary agents of economic globalisation. A TNC operates in at least two countries, typically with headquarters in a developed economy and subsidiary operations spread across the globe. Dicken (Global Shift) treats them, alongside states, as the "primary movers" of the world economy.

Scale and Power of TNCs

• The largest TNCs have revenues exceeding the GDP of many countries — Walmart's revenue (around US$611 billion in 2023) exceeds the GDP of all but roughly 25 countries
• The top 100 TNCs employ over 16 million people worldwide
• TNCs control approximately two-thirds of world trade, and roughly one-third of world trade is intra-firm (transfers within the same TNC across borders)

Why Do TNCs Operate Globally?

Motivation	Explanation
Market seeking	Accessing new consumers — Unilever sells in over 190 countries
Resource seeking	Securing raw materials — Shell operates in Nigeria's oil-rich Niger Delta
Efficiency seeking	Cutting production costs through cheaper labour — Apple's supply chain relies on Foxconn factories in China
Strategic asset seeking	Acquiring technology, brands or expertise — China's Geely acquired Volvo (2010)

Global Value Chains and the "Smile Curve"

Gary Gereffi (1994) developed the concept of global commodity chains (refined as global value chains, GVCs) — the sequence of activities involved in producing and distributing a product, typically governed by lead TNCs in the core.

graph LR
    A["Raw Material Extraction<br>Periphery"] --> B["Component Manufacturing<br>Semi-Periphery"]
    B --> C["Assembly<br>Semi-Periphery/Periphery"]
    C --> D["Design, Marketing, Branding<br>Core"]
    D --> E["Retail and Distribution<br>Core"]

The critical insight — often drawn as the "smile curve" — is that value is captured unequally along the chain. High value sits at the two ends (pre-production R&D/design and post-production branding/retail, both in the core); low value sits in the middle (assembly, in the periphery). Countries doing the physical making capture the least.

Case Study: The iPhone value chain. Although an iPhone is "assembled in China" by Foxconn, China captures only a small share of the final value — independent teardown studies suggest assembly labour accounts for only a few per cent of the retail price, while Apple's design, software and brand (US-based) capture the largest margin. This is the smile curve made concrete: assembly is geographically mobile and low-value; intellectual property is sticky and high-value.

Case Study: The coffee value chain. An Ethiopian farmer earns roughly 1–3% of the final retail price of a cup of coffee sold in a London café. Roasting, branding and retail — overwhelmingly controlled by core-country firms (Starbucks, Nestlé) — capture over 90% of the value, illustrating how the periphery's primary-commodity role yields minimal value capture.

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The Core–Periphery Model Across Scales

The core–periphery model describes the unequal spatial distribution of economic activity, wealth and power:

Feature	Core	Periphery
Economic activity	High-value manufacturing, services, finance, technology	Primary sector, low-value manufacturing
Wages	High	Low
Infrastructure	Well-developed	Limited
Political influence	Strong in international institutions	Weak
Terms of trade	Favourable (high-value exports)	Unfavourable (low-value raw materials)
Skilled labour	Attracts skilled workers	Loses skilled workers (brain drain)

The model operates at multiple scales:

• Global: developed North vs developing South
• National: London / South East vs northern England and rural areas
• Regional: urban centres vs rural hinterlands

Exam Tip: Always apply core–periphery at multiple scales. Showing that the same structural pattern of unequal exchange recurs globally, nationally and regionally demonstrates the "scale literacy" that distinguishes top-band answers.

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Changing Patterns of Trade and Investment

Global trade and investment are not static; several profound shifts have reshaped the system in recent decades, and a strong answer can track these changes rather than treating the geography as fixed.

1. The rise of China. China's accession to the WTO in 2001 was a watershed. From a closed economy in 1978, China became the world's largest exporter of manufactured goods, its share of world GDP rising from around 2% (1980) to roughly 18% (2023). China is now simultaneously the "workshop of the world" (assembly) and, increasingly, a core economy investing abroad — through outward FDI and the Belt and Road Initiative, a trillion-dollar-scale infrastructure programme connecting over 140 countries. China thus straddles Wallerstein's categories, exemplifying upward mobility through the semi-periphery.
2. The growth of South–South trade. Trade between developing countries has grown from under 10% of world trade in 1990 to over 25%, driven especially by China's demand for African and Latin American commodities. This partially reconfigures the old North–South flow geography.
3. The shift to services and digital trade. Services now account for roughly a quarter of world trade and grow faster than goods. Digital platforms and data flows ("the globalisation of the intangible") are the fastest-growing frontier, allowing even small firms to trade globally.
4. Regional integration. Trade blocs (the EU, USMCA, ASEAN, AfCFTA) concentrate trade within regions, partially offsetting purely global integration.
5. The reconfiguration of supply chains. Since 2018, geopolitical tension and shocks have driven reshoring, "friend-shoring" and "China + 1" diversification (Lesson 10).

These shifts matter analytically because they complicate any static core–periphery reading: the hierarchy is real but mobile, with China the standout case of ascent and much of sub-Saharan Africa the standout case of continued marginalisation.

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TNCs in Depth: Two Contrasting Models

The specification rewards detailed knowledge of how specific TNCs organise production, so it is worth contrasting two classic models of TNC behaviour.