Tut #21 - International Trade (Answers)_no CSQ

62
HWA CHONG INSTITUTION Year Two H2 Economics 2013 Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics TUTORIAL #21: INTERNATIONAL TRADE Section A: Essay Practice NOTE TO STUDENTS: You are to come up with a detailed essay plan for every ESSAY question. Refer to the Skills Package for Essays and bring it for tutorials. PART (I): COMPARATIVE ADVANTAGE, FREE TRADE & PATTERN OF TRADE On Pattern of Trade Question 1: TYS N2008 Q6 – attempt Part (a) (a) Explain the determinants of the pattern of trade between Singapore and the rest of the world. [10] (b) Discuss whether the Singapore government should change its policies for managing the balance of payments. [15] [attempted in Tut #19] Examiner’s Report: Surprisingly, given the importance of trade to Singapore, this was the least popular of the questions within Section B of the paper. In general it was also the worst answered. Answers tended to be theoretical rather than applied and as such showed a surprising lack of awareness of Singapore’s pattern of trade. (a) The majority mentioned that Singapore was a small country with few natural resources leading to a large import of raw materials, but only a few candidates gave itemised examples of the pattern of trade. In the main, however, the examples given were insufficient to illustrate the Hwa Chong Institution. All Rights Reserved. Tutors' Copy 1

description

-

Transcript of Tut #21 - International Trade (Answers)_no CSQ

Page 1: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

TUTORIAL #21: INTERNATIONAL TRADE

Section A: Essay Practice

NOTE TO STUDENTS: You are to come up with a detailed essay plan for every

ESSAY question. Refer to the Skills Package for Essays and bring it for

tutorials.

PART (I): COMPARATIVE ADVANTAGE, FREE TRADE & PATTERN OF TRADE

On Pattern of Trade

Question 1: TYS N2008 Q6 – attempt Part (a)

(a) Explain the determinants of the pattern of trade between Singapore and the rest of the world. [10]

(b) Discuss whether the Singapore government should change its policies for managing the balance of payments. [15] [attempted in Tut #19]

Examiner’s Report:Surprisingly, given the importance of trade to Singapore, this was the least popular of the questions within Section B of the paper. In general it was also the worst answered. Answers tended to be theoretical rather than applied and as such showed a surprising lack of awareness of Singapore’s pattern of trade.

(a) The majority mentioned that Singapore was a small country with few natural resources leading to a large import of raw materials, but only a few candidates gave itemised examples of the pattern of trade. In the main, however, the examples given were insufficient to illustrate the points made later.

Whilst most recognised that comparative advantage was relevant in explaining the pattern of trade, very few went beyond that simple statement to explain the opportunity cost ratios for relevant product groups. The examples, where given to illustrate the points made, were largely theoretical and many of the products in those examples that were claimed to be produced by Singapore are not of importance to Singapore’s pattern of trade.

Very few candidates explained how comparative advantage leads to Singapore’s pattern of trade and, where tables were used, these all too often demonstrated absolute rather than comparative advantage.

In consequence only a small number of candidates accessed Level 3 marks.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy1

Page 2: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Hwa Chong Institution. All Rights Reserved. Tutors' Copy2

Page 3: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Simple Schematic Plan

Lesson plan and essay prepared by Swee Chu

Review Questions Command: When you see the command word what do you think the examiner requires you to do? Content: Which chapter of the lecture notes would provide appropriate content in answering this

essay question? Context: What is the context in this question?

Questions to assess thinking Clarity – What is Singapore’s current pattern of trade with the rest of the world? Accuracy – Where can I find these information? Depth – How does the theory of theory of comparative advantage explain Singapore’s pattern of

trade with the rest of the world Breadth – What are the other determinants of pattern of trade in general? Relevance – Do these other factors apply to Singapore? Logic – Which is the most important determinant in Singapore’s context

Note: Theoretical understanding may not be enough to do well. This question is not recommended if the candidate has little knowledge of applications to

Singapore’s trade. Teach the students to use schematic planning to answer this question. Lead them to come up with a few determinants. Highlight to students the directive word ‘explain’ and its requirements.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy3

Page 4: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Introduction

Clarify key words: The pattern of trade refers to the composition of a country’s exports and imports as well as her trading partners. In other words, in the context of international trade it is about “who sells what to whom”

Address the question: Singapore engages in both inter industry trade and intra Industry trade which are determined by the theory of comparative advantage, tastes & preferences and government policies.

Determinants of Inter industry Trade (trading between countries due to differences in comparative advantage based on factor endowments)

Determinants of Intra industry Trade(trading between countries which have similar comparative advantage)

State: Theory of Comparative advantage

Explain:

Exemplify with itemized examples:

State: Taste and preferences, Economies of scale

Explain:

Exemplify with itemized examples:

Other factors affecting pattern of trade e.g government policies i.e FTAs

Conclusion

SUGGESTED ANSWERS

INTRODUCTION

Clarification The pattern of trade refers to the composition of a country’s exports and imports as well as her trading partners. In other words, in the context of international trade it is about “who sells what to whom”

Linking to context and nail down the concepts and provide an approach to the question

Typically for Singapore there are 2 distinctive pattern of trade viz. Inter-industry and intra-industry trade. These patterns of trade depend on factors such as a country’s factor endowment, taste and preference and government policies.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy4

Page 5: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

BODY(1) Inter-Industry Trade (case of DIFFERENCES in CA based on Factor endowment):

Use ‘SEE’: State, Explain (with economic analysis), Exemplify (illustration with examples/diagrams.

State First and foremost, for inter-industry trade, the POT is best explained by using the theory of CA.

According to the theory of CA, a country should export products in which it has a CA and imports those products in which it does not have a CA. CA refers to the ability to produce a good or product at a lower opportunity cost.

Explain CA differs amongst countries due to the fact that factor/resource endowment differs across countries. Some countries have factors/resources that are better suited to produce agricultural goods (e.g. plentiful land, suitable climate) whilst others have resources that are better suited for manufacturing.

Thus, a country specializes and produces for export goods that reflect the type of resources it has in relative abundance. On the other hand, the type of goods imported by a country reflects the lack of the availability of the necessary resources or the required technology to produce them efficiently.

Exemplify (1) with numerical e.g.

Let us use a simple numerical example to illustrate what is meant by CA.

To illustrate the concept of lower opportunity cost:Country Rice

(units)Microchip

(units)Opportunity Cost of

Producing 1 Unit of ROpportunity Cost of

Producing 1 Unit of MSpore 120 480 480/120=4 units of M 120/480=0.25unit of RThailand 100 100 100/100 = 1 unit of M 100/100 = 1 unit of RTotal 220 580

To produce a unit of microchip, Thailand has to give up 1 unit of rice while Singapore has to give up 0.25 unit of rice. Likewise to produce rice, Singapore and Thailand have to give up 4 units and 1 unit of microchip(s) respectively.

As a result, Singapore has comparative advantage in producing microchip as it incurs a lower opportunity cost than Thailand while Thailand has comparative advantage in producing rice as it incurs a lower opportunity cost as compared to Singapore.

Emphasize the need to explain the theory clearly using the table. As this essay is not solely on CA theory, there is no need to go into details in the notes.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy5

Page 6: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Exemplify (2) with good examples

With reference to our key exports, it can be said that Singapore’s pattern of trade closely conforms to the principle of CA.

SG resource endowment : Examples of exports Well-educated and trained

labour force – suitable for knowledge-intensive high-value add manufacturing.

Good infrastructure e.g. industrial Parks; R&D; communication and transport facilities

Advanced technology e.g. IT; robotics; automation

Such resources are best suited to produce:

High-end High-tech High value-added Knowledge-based products

Electronics: Disk-drives, wafer fabsBiomedical: PharmaceuticalsChemicals: PetrochemicalsMarine: Oil rigs and ship repair

Value-added products:Intermediate products such as electronic valves and telecommunication equipment are imported to Singapore, re-processed and are then re-export out as value-added products for final assembly in countries such as Malaysia and China.

High-end services: Water management (iconic example

Hyflux) Hospital management (e.g. Parkway

Healthcare services) Airport/Seaport management (e.g.

PSA and Changi International Airport)

What SG does not have Examples of imports(1) Natural resources:

Shortage of land No mineral deposits Favourable climate for

agricultural activities.

(2) Cheap and low-skilled/unskilled labour In short, our natural resource endowment does not favour nor support such forms of economic activity.

Agriculture/Fresh ProduceVegetables; poultry; meat; fruits; eggs.

Primary CommoditiesOil; metals like copper, aluminium and steel

Low-end manufacturesCheap slippers footwear e.g. sports shoes, bicycles and toys

Emphasize the need to illustrate with APPROPRIATE EXAMPLES.

Note: 70% coverage of essay should focus on the key concept CA. Notice the examiner report is focused almost entirely on CA theory.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy6

Page 7: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

(2) Intra-trade (Case of SIMILAR CA)

State Besides, inter-industry trade, Singapore also engages in intra-industry trade with countries that have similar CA.

Explain &exemplify with good examples

Intra-industry refers to the exports and imports of the same type of products where there are no differences in CA. Taiwan and other Asian tiger economies like South Korea and Hong Kong have almost similar CA in the production of high-tech manufactured products and services like civil aviation; banking and finance and tourism.

In such cases, despite no CA, international trade in goods and services still take place because between both countries because of differences in tastes and preferences. Consumers of both countries benefit from access to a wider choice or product differentiation. For instance, Singaporean residents get access to travel by different foreign airlines or use the services of foreign banks like HSBC . Besides, the 2 integrated resorts (IRs), they can also visit as tourists, the other casinos in other parts of the world such as Macau or Malaysia.

Moreover, there are gains from economies of scale if a country exports goods or services abroad. Exporting overseas increases the producers’ volume of output or scale of production. Economies of scale enable producers’ to lower unit costs through various forms of cost savings such as bulk purchasing and administrative costs. The advantage is consumers get to enjoy lower prices whilst producers get to reap better profits. For this reason many Singaporean firms have ventured abroad to export their services to overseas markets e.g. private hospitals and banks.

Others – 10% coverage FTAs (Preferential trading arrangements)

State Bil-lateral or regional trade agreements such as FTAs promote trade between member countries.

Explain &exemplify with good examples

Singapore has forged many FTAs (about 18) with various trade partners round the world. Thus trade promoted through such FTAS partly explain our POT

Although FTA are theoretically a form of arrangement to promote so-called “free trade” amongst members and could be assumed to be based on theory of CA, it is nevertheless not always the case. This is because such form of trade liberalization discriminates against non-member countries and thus may result in trade diversion i.e. trade diverted away from an efficient non-member country to an efficient member country.

Note: Since the signing of her first FTA under the ASEAN Free Trade Area (AFTA) in 1993, Singapore's network of FTAs has expanded to cover 18 regional and bilateral FTAs with 24 trading partners. Singapore's FTAs have been instrumental in helping Singapore-based businesses strengthen cross-border trade by eliminating or reducing import tariff rates, providing preferential access to services sectors, easing investment rules, improving intellectual property regulations, and opening government procurement opportunities.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy7

Page 8: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

CONCLUSION – summarized key points and if possible with some form of judgment.In conclusion, from the above explanation it can be inferred that the most important determinant of Singapore’s pattern of trade is the principle of CA. This is because a large part of Singapore‘s trade is based on the inter-industry model. Currently, Singapore’s comparative advantage lies in the exports of high-end manufactured goods and services. This pattern is clearly aligned with our resource endowment. Relatively speaking, Singapore is resource poor in terms of cheap land and labour but resource-rich in terms of capital, technology, knowledge and a well-trained and skilled labour-force.

Highlight to students the importance of concluding the essay. ANALOGY: A conclusion is likened to the last 5 minutes of the last episode of a movie/drama series or last few line of the final chapter of a novel.

It is not just simply a summary of the major points but a ‘FINAL STAND’.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy8

Page 9: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Question 2: TYS N2000 Q11

(a) Explain the theory of comparative advantage. [10]

Answers to (a) can be found in Lecture #21. Tutors can use Bee Qn1 to go through this part of the question. Remember to remind students to state the assumptions and to exemplify appropriately and not just Country X, Country Y with Good A and Good B.

(b)To what extent does this theory explain the pattern of trade between Singapore and the rest of the world? [15]

Key Points from the Examiner’s Report:

Candidates were expected to show knowledge of the pattern of trade between Singapore and the rest of the world. Candidates were then expected to explain which if any of these identified patterns of trade might be explained by the theory of comparative advantage, evaluative comments were expected to refer to other reasons for this trade pattern.

(+) (-)nil Many failed to describe the pattern of trade between Singapore and the rest of the world and relate this

pattern of trade to the theory of comparative advantage and to draw an evaluative comment on the relevance of this theory.

Most candidates simply described the advantages of free trade to Singapore or something similar and/or listed some potential sources of comparative advantages, such as a highly skilled and motivated workforce. There were also a large number of comments on the lack of natural resources. These observations were NOT, in the main, linked to Singapore’s pattern of trade. Weak responses commented on the need for Singapore to adopt a restrictive trade policy to protect the country from dumping cheap goods from neighbouring countries. These answers were very poorly directed to the question set.

Simple Schematic PlanINTRODUCTION

BODYTHESIS ANTI-THESES

This theory explains inter-industry trade between Singapore and the rest of the worldsubject to the assumptions governing the theory of CA

Anti-thesis 1:It does not explain the pattern of trade of Singapore and the rest of the world due to limitations of the assumptions:(a) No trade barriers/protectionism, i.e. Free trade model(b) No high transport costs.(c) Perfect factor mobility.

Too idealistic in reality.

Note: Select 2 limitations will do due to time constraint under exam condition.

Anti-thesis 2: The pattern of trade of Singapore and the rest of the world can be explained by other reasons:(a) Intra-industry trade(b) FTAs (preferential trading arrangements)(c) Strategic reasons

CONCLUSION

Hwa Chong Institution. All Rights Reserved. Tutors' Copy9

Page 10: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

INTRODUCTIONKey Words The pattern of trade refers to the composition of a country’s exports and imports as well as her

trading partners. In other words, in the context of international trade it is about “who sells what to whom”

IssueApproach

The theory of CA is often used as a model to explain the pattern of trade. However, in reality the CA theory cannot be used as the sole explanation for any country’s pattern of trade including Singapore. This is because though useful, the CA theory has got its limitations which shall be elaborated.

Note: Some students may define CA since it is a key concept. However, it is clear for this question defining CA is best done in part (a). So it is critical to see both part (a) and (b) as a question.

BODYThesis: This theory explains the pattern of trade between Singapore and the rest of the world.

(1) Inter-Industry Trade (case of DIFFERENCES in CA based on Factor endowment):

Note: CA theory is already covered in part (a) so do not need to bring in tables/numbers. The focus in part (b) should be on application to SG POT.

State With reference to our key exports, it can be said that Singapore’s pattern of trade closely conform to the principle of CA (details are explained in part a).

Exemplify with good examples

SG resource endowment : Examples of exports Well-educated and trained labour force

– suitable for knowledge-intensive high-value add manufacturing.

Good infrastructure e.g. industrial Parks; R&D; communication and transport facilities

Advanced technology e.g. IT; robotics; automation

Such resources are best suited to produce: High-end High-tech High value-added Knowledge-based products

Electronics: Disk-drives, wafer fabsBiomedical: PharmaceuticalsChemicals: PetrochemicalsMarine: Oil rigs and ship repair

Value-added products:Intermediate products such as electronic valves and telecommunication equipment are imported to Singapore, re-processed and are then re-export out as value-added products for final assembly in countries such as Malaysia and China.

High-end services: Water management (iconic example Hyflux) Hospital management (e.g. Parkway Healthcare

services) Airport/Seaport management (e.g. PSA and Changi

International Airport)What SG does not have Examples of imports(1) Natural resources:

Shortage of land No mineral deposits Favourable climate for agricultural

activities.

(2) Cheap and low-skilled/unskilled labour In short, our natural resource endowment does not favour nor support such forms of economic activity.

Agriculture/Fresh ProduceVegetables; poultry; meat; fruits; eggs.

Primary CommoditiesOil; metals like copper, aluminium and steel

Low-end manufacturesCheap slippers footwear e.g. sports shoes, bicycles and toys

Note: Although similar in content to N2008(a) there is a difference in terms of presentation (different angle). There is more focus on application than explanation of the technicalities of CA theory.

To what extent is it true?

Hwa Chong Institution. All Rights Reserved. Tutors' Copy10

Page 11: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Anti-thesis 1: It does not wholly explain the pattern of trade of Singapore and the rest of the world due to limitations of the assumptions.

Anti-thesis 1(a): Trade barriers/ProtectionismState The theory of CA assumes that countries are able to specialize and trade freely without any form of

trade barriers such as tariffs, quotas or even restrictive rules and regulations. This is clearly unrealistic in practice because protectionism is a fact of life.

Explain In reality, every now and then countries may be pressured by their domestic producers or workers to restrict imports in order to prevent job losses in times of recession. Sometimes, countries may slap tariffs to correct trade imbalances e.g. trade deficit or even duties to counter perceived dumping by their trade partners. Countries may also resort to protectionism for political reasons.

Exemplify For example, Malaysia and Indonesia ban sale of sand to Singapore. Also in the recent global financial crisis, the government in Malaysia started a campaign to encourage the people to buy Malaysian products instead of imported goods.

For all these reasons, Singapore firms and exporters have experienced from time to time such protectionist measures imposed by our trade partners.

Anti-thesis 1(b): Prohibitive transport costsState Despite the availability of cheap imports due to differences in CA, countries might not trade due to

the prohibitively high transport costs for countries that are separated by vast geographical distances.

Exemplify Thus, in reality despite the availability of relatively cheap oil from Alaska Singapore imports oil mainly from countries closer to us such as the Gulf states. Similarly, despite the availability of cheaper agricultural produce from countries like Vietnam, Singapore trades or import relatively more from Malaysia. Malaysia is our closest neighbour and hence transport cost is not a big issue.

Note: The ‘explain’ portion is clearly missing. For less important/obvious/straight-forward points, at times, a clear statement will do.

Anti-thesis 1(c): Factor immobility.State In order for a country to benefit from trade, she must be able to contract the industries in which she

has a comparative disadvantage, whilst expanding those which she has comparative advantage. However, factors of production may not be able to move quickly or efficiently into another use due to factor immobility.

Exemplify E.g. Singapore’s labour force may not be able to move that quickly from manufacturing sectors to service sectors such as the hotel and airline industries.

Evaluation: Due to globalization and good government planning, factors of production especially labour has improved greatly over the years.

Anti-thesis 2: The pattern of trade of Singapore and the rest of the world can be explained by other factors/determinants :

Anti-thesis 2(a): The intra-industry model (vs CA Theory – inter-industry trade)

State The intra-industry model could also explain why Singapore exports similar goods that it imports. Intra-industry trade has in recent years made up an increasing share of Singapore's total trade with all the major regions. Examples: thumb drives and biomedical.

Explain &Exemplify

Intra-industry refers to the exports and imports of the same type of products where there are no differences in CA. Taiwan and other Asian tiger economies like South Korea and Hong Kong have almost similar CA in the production of high-tech manufactured products and services like civil aviation; banking and finance and tourism.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy11

Page 12: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

In such cases, despite no CA, international trade in goods and services still take place because between both countries because of differences in tastes and preferences. Consumers of both countries benefit from access to a wider choice or product differentiation. For instance, Singaporean residents get access to travel by different foreign airlines or use the services of foreign banks like HSBC. Besides, the 2 integrated resorts (IRs), they can also visit as tourists, the other casinos in other parts of the world such as Macau or Malaysia.

Moreover, there are gains from economies of scale if a country exports goods or services abroad. Exporting overseas increases the producers’ volume of output or scale of production. Economies of scale enable producers’ to lower unit costs through various forms of cost savings such as bulk purchasing and administrative costs. The advantage is consumers get to enjoy lower prices whilst producers get to reap better profits. For this reason many Singaporean firms have ventured abroad to export their services to overseas markets e.g. private hospitals and banks.

Anti-thesis 2(b): FTAs (Preferential trading arrangements)Bi-lateral or regional trade agreements such as FTAs promote trade between member countries. Singapore has forged many FTAs (about 18) with various trade partners round the world. Thus trade promoted through such FTAS partly explain our POT Although FTA are theoretically a form of arrangement to promote so-called “free trade” amongst members and could be assumed to be based on theory of CA, it is nevertheless not always the case. This is because such form of trade liberalization discriminates against non-member countries and thus may result in trade diversion i.e. trade diverted away from an efficient non-member country to an efficient member country.

Anti-thesis 2(c): Strategic Reasons.

Note: This factor explains why instead of importing, Singapore chooses to produce the good ourselves or alternatively why we should not have produced for exports and yet we did.

State Singapore chooses to produce certain goods ourselves instead of importing due to strategic importance.

Explain &Exemplify

There is the need to be self-reliant in times of war and the desire not to be dependent on insecure sources. As a result, instead of importing all the water and agricultural produce, Singapore has invested in high technology plants such as hydro-phonics in agricultural products and water treatment plants. The outcome has been successful in producing vegetables and water to supplement domestic consumption but the cost would definitely higher than that produced or processed in countries such as Malaysia.

Evaluation: Singapore started investing in water treatment and hydro-phonics out of a NEED. But over the years, we have gained CA in water treatment as Hyflux is exporting the technology to other countries.

CONCLUSION/JUDGMENTDespite the limitations, the comparative advantage theory can be said to be the most important determinant of Singapore’s pattern of trade. This is because the bulk of Singapore‘s trade with the rest of the world is based on the inter-industry model. Currently, Singapore’s comparative advantage lies in the exports of high-end manufactured goods and services. This pattern is clearly aligned with our resource endowment. Relatively speaking, Singapore is resource poor in terms of cheap land and labour but resource-rich in terms of capital, technology, knowledge and a well-trained and skilled labour-force.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy12

Page 13: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

On Benefits of Free Trade

Question 3: TYS N2003 Q4

For many years the USA did not conduct normal trading relations with Vietnam. In 2001 a trade agreement was signed between the two countries which reduced tariffs, encouraged foreign direct investment and opened up export markets.

(a) How does the theory of comparative advantage explain why a developed country such as the USA might wish to trade with a developing country such as Vietnam?

[12] Answers to (a) can be found in Lecture #21. Remember to remind students to state the assumptions (as a learning point) and to exemplify appropriately using the correct goods that USA and Vietnam is likely to produce (more critical).

(b) Discuss what effect such a trade agreement might have on the economies of the participating countries. [13]

Key Points from the Examiner’s Report:

Although most candidates made a reasonable response to this question, part (b) of the question once againproduced a generally disappointing discussion. Part (a) discriminated well, with a number of well-prepared candidates producing the top (Level 3) marks

(+) (-)nil First, many candidates failed to apply their answers to the specific countries i.e. Vietnam and the USA.

Secondly, points were often stated rather than explained. Weaker answers tended to give one side of the argument only. The best answers in contrast gave good well-balanced discussion, which, as required, was clearly applied to the developed, and developing, economy cases. Many answers were spoilt by too much generalized comment.

Simple Schematic PlanINTRODUCTION

BODYTHESIS

Such a trade agreement brings about benefits to the economies of the participating countries.

Effects on economy: One should think of the impact on 4 macro goals (namely impact on growth, employment, general price and BOP) and 2 micro goals (resource allocation and income disparity).

ANTI-THESESSuch a trade agreement brings about problems to the economies of the participating countries.

1. Trade Creation

2. An extended market and greater output levels because:

i) Regional economic integration increases balance of trade and increasing NI via increase in AD.

1. Possible trade diversion which means trade is being diverted from a more efficient non-member producer to a less efficient but tariff-free member nation of the free trade area.

2. Externally induced recession and increase in unemployment:

Hwa Chong Institution. All Rights Reserved. Tutors' Copy13

Page 14: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

ii) Regional economic integration increases Foreign Direct Investment (FDI) and thus increasing NI via a rise in both AD and LRAS.

3. Possible improvement in Balance of Payments

Evaluation: Can look at the how Vietnam and US would benefit from FTA differently. Extent of benefits may also differ. For eg, Vietnam would experience greater improvement in economic growth as compared to US. Reason: Higher influx of FDI from US to take advantage of its cheaper land and labour. In addition, Vietnam experience greater improvement in its infrastructure as well as productive capacity via transfer of skills and knowledge from US.

i) Cyclical unemployment: Susceptible to External Shocks (recession)

ii) Structural Unemployment

3. Possible trade deficit for Vietnam as USA’s exports are mainly manufactured goods which are income elastic as compared with Vietnam’s exports of primary products which are income inelastic.

4. Widening income disparitiesAny evaluation/Critical Comments?

CONCLUSION

INTRODUCTION

Key Words A trade agreement or to be exact, a free trade area (FTA) agreement is one whereby member countries agree to remove tariff and non-tariff barriers among themselves but each can retain whatever restrictions she wants for non-member countries.

IssueApproach

An FTA between USA, a developed economy, together with Vietnam, an emerging economy, brings about benefits and costs to both participating economies.

BODYThesis: Such a trade agreement brings about benefits to the economies of the participating countries.

(1) Trade CreationState Trade creation occurs when the production by a member of an FTA is now replaced by low-cost

tariff-free imports from another member nation and welfare is increased.Explain When no FTA is signed, Vietnam might not be trading with USA due to high tariff imposed on her

goods. With FTA, there will be elimination or lowering of tariffs which will benefit Vietnamese exporters and also the American consumers will pay a lower price for imports. There is also efficient allocation of resources.

Exemplify withDiagram

Show that deadweight loss areas are eliminated with ‘tariff-removed’ diagram.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy14

Figure 1: Increase in imports due to removal of tariff

Sd

Sw + tariffP1

Price

A C

PE

Page 15: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Referring to Figure 1 above, Dd represents the domestic demand for computers and Sd represents the domestic supply of

computers and SW represents the world-supply. When there is protectionism, the price is at P1 and USA imports Q1Q2.of goods from Vietnam. After an FTA is signed, the price will fall from P1 to P2. Imports from Vietnam will increase to

Q3Q4. The American consumers are better off as they are able to consume more at a lower price

thus increasing their consumer surplus by area A+B+C+D. The deadweight loss due to the protective and consumption effects will also be eliminated.

(2) An Extended Market and Greater Output Levels – both actual and potential growth

As an LDC, Vietnam could leverage on trade/investment with USA as a source of GROWTH & DEVELOPMENT e.g. US market is an engine of growth for Vietnam.

In the short-run: X+I rises AD rises k effect: generate higher income, output, employment In the long-run: FDI LRAS rises potential growth

USA - as an advanced developed country could leverage on Vietnams cheap labour /resources for offshoring.

(i) Regional economic integration increases balance of trade and thus increasing NI via increase in AD

The establishment of free trade between USA and Vietnam means that producers in each country now face a much larger market. Both countries open up their markets to each others’ goods and services. This results in larger markets for both producers and consumers, resulting in higher expenditures and revenues. The higher incomes and expenditures will stimulate economic growth and increase the living standards for both countries.

Thus the reduction of trade barriers leads to an increase in (X-M). AD increases and NI increases via k, leading to actual economic growth. With more real output, more factors of production are hired,

Hwa Chong Institution. All Rights Reserved. Tutors' Copy15

Page 16: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

leading to higher employment levels. At the same time, there is greater efficiency as the firms grow and reap economies of scale. Also, with

the removal of trade barriers, producers are exposed to greater competition and hence come under pressure to be as efficient as possible.

With FTA, USA which will export hi-tech manufactures e.g. cars; electronics chips and high value-added services e.g. financial services; shipping and aviation to Vietnam. On the other hand, Vietnam will export low-cost labour- intensive manufactures e.g. footwear; clothings and agricultural products e.g. rice, Heritage tourism to USA.

(ii) Regional economic integration increases Foreign Direct Investment (FDI), and thus increasing NI via a rise in both AD and LRAS

With FTA, new ideas, technology & skills can be expected to flourish upon closer contact. Transfers will come about when the American producers relocate their operations in Vietnam.

An increase in FDI increases AD and NI via k leading to actual economic growth, higher employment levels. It also increases the LRAS leading to an increase in potential growth. Investment and Transfer of technology

With potential growth, price stability is achieved as general price levels are brought down when LRAS shifts right. The economy is less at risk of facing demand-pull inflation when LRAS shifts in tandem with increase in AD.

From Figure 2, we can see that national income increases from Y0 to Yfe when aggregate demand increase from AD0

to AD1 and general price level increases to P2. But when the economy productive capacity also increases from LRAS0

to LRAS1, national income further increase to Y1 and price drops to P1 achieving non-inflationary growth.Evaluation: Can look at the how Vietnam and US would benefit from FTA differently. Extent of benefits may also differ. For eg, Vietnam would experience greater improvement in economic growth as compared to US. Reason: Higher influx of FDI from US to take advantage of its cheaper land and labour. In addition, Vietnam experience greater improvement in its infrastructure as well as productive capacity via transfer of skills and knowledge from US.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy16

Page 17: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

(3) Improvement in Balance of Payment (BOP)

Trade of goods & services:For both USA and Vietnam, the increase in balance of trade improves the current account.

FDI: When US firms relocate the factories (offshore not outsource) to Vietnam, there is an outflow in the financial

account from US to Vietnam’s (inflow). When profits are ultimately remitted back to US, not only the property income from abroad increases and

improves the GNP, the current account will also improve.

Assuming inflows outweigh outflows, the BOP will improve.

Anti-thesis: Such a trade agreement brings about problems to the economies of the participating countries.

(1) Possible Trade DiversionTrade is being diverted from a more efficient non-member producer to a less efficient but tariff-free member nation of the free trade area e.g. USA could be buying rice from Vietnam because of the FTA when rice is produced more efficiently in Thailand.

Evaluation: This FTA affected Thailand more than Vietnam and US.

(2) Susceptible to Externally-induced Recession and increase in Cyclical Unemployment(i) Increase in Cyclical Unemployment

Countries that are open to free trade will be more prone to other countries’ economic crisis. These shocks can be transmitted from one country to another through various channels - trade, financial and mechanical spillovers.

In the most recent subprime mortgage crisis started in the USA, Vietnam’s economy was badly affected. With recession in USA, income of the Americans fell which led to a fall in demand for goods and services

which included that of Vietnam’s exports. With net exports falling, Vietnam’s AD fell and thus leading to a fall in NI and resulted in cyclical unemployment in the country.

Evaluation: To avoid being over-reliant on another economy, it is important for the government to diversify the exports and trading partners so as to spread the risk.

(ii) Structural Unemployment As a result of some firm USA firms relocating their plants to Vietnam, some US citizens will experience

structural unemployment. Also, as Vietnam economy develops and moves up the value chain, workers without the appropriate skills

will not be able to find jobs.

Evaluation: As a result, it is crucial for the government to provide necessary education and training to the people so as to prepare them for the new industries.

(3) Trade DeficitAmerican's exports to Vietnam are mainly high tech K/manufactured goods and are more income elastic. Vietnam's, on the other hand, exports mainly primary products which are income inelastic BOT for Vietnam is likely to worsen with USA.

Evaluation: This may not be true as an FTA creates a ‘new’ market with USA which allows the demand for her exports to rise significantly.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy17

Page 18: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

(4) Widening income disparitiesWorkers that are employed in growing sectors will earn higher incomes than those in declining sectors.

Evaluation: This problem is unavoidable as the economy grows. HOWEVER, the government can come up with policies to have to minimize the gap such as subsidies for training for the poor.

CONCLUSION/JUDGMENT

In conclusion, such a trade agreement brings about more benefits than costs as the costs can be mitigated through appropriate government policies. HOWEVER, countries should not pursue free trade agreements at the expense of global trade talks advocated by WTO as there is always the possibility of trade diversion occurring in the case of free trade agreements.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy18

Page 19: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

PART (II): GLOBALISATION & PART (III): PROTECTIONISM

On Globalisation

Question 4: TYS N2007 Q6

Discuss whether Singapore is among the economies that have most to gain from globalisation. [25]

Key Points from the Examiner’s Report:

(+) (-)The good answers (L3) were the ones that considered in detail the potential gains and losses of globalisation to Singapore. There was a well-balanced discussion and arguments were well presented and backed by analytical depth.

The best was clearly applied to the developed, and developing, economy cases.

Biggest weakness would be the lack of focus on other economies that might have a great deal to gain from globalisation. Few candidates offered a comparison with other countries and consequently the overall evaluation as to whether Singapore may be among the economies with most to gain was not fully considered

Simple Schematic PlanINTRODUCTION

BODYTHESIS: Singapore is among the economies that have most to gain from globalization in view of her unique characteristics

ANTI-THESES: However, there are costs of Globalisation to SG

Benefits of globalization measured in terms of macro goals(Make comparison between Singapore and other economies among the economies that have MOST to gain)Actual growth Open up/provide access to markets for our exports

External demand or Export-led growth strategy Open up to inflow of FDI

Changes in supply (Linked to potential economic growth) Open up/provide access for importing resources for domestic

production as well as for exports Increase in productive capacity

Increase in SOL Open up/access markets for importing consumer goods for

domestic consumptionEvaluate where possible

Vulnerability to external shocks

Domestic problems related to globalisation

Widening income inequality Worsening Gini coefficient Congestion/pollution (Harms

non material SOL, efficiency)

Other economiesCompare with other countries – DCs (China/India), Emerging Economies in SEA

Evaluate where possible

CONCLUSION/SYNTHESIS: Does Singapore have most to gain from globalization compared to other countries?

INTRODUCTION

Hwa Chong Institution. All Rights Reserved. Tutors' Copy19

Page 20: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Globalization refers to the integration or inter-connectedness of national economies through trade of goods and services, foreign direct investment, capital flows, spread of technology and labour migration. Singapore is one of the most highly globalised countries in the world today. In fact, according to the World Globalisation Index 2010 compiled by Ernst and Young, Singapore ranked third just behind Hong Kong and Ireland. This essay aims to discuss whether Singapore is among the economies that have most to gain from globalization.

BODYThesis Singapore is one of the economies that has most to gain from globalization in view

of its unique characteristics.

Sub-Thesis (1) Economic growth (AG & PG) Export as an engine of growth Access to foreign resources for potential growth

State First and foremost, globalisation helps to drive economic growth thus benefiting the Singapore economy.

Elaborate/ Exemplify using Diagram(s) where appropriate

Characteristics of Singapore economy → need to depend on external economy for economic growth

Countries with small domestic markets like Singapore face severe growth constraints.Singapore currently has population of about 5million whereas large countries such as US has 313.9million people. Once the domestic demand is saturated there is not much room for output to grow. In fact, domestic consumption only takes up about 40% of GDP vs US which has 70% of GDP. However, globalisation overcomes this constraint by providing domestic producers access to large/huge global export markets. For this reason growth can be driven by exports (i.e. external demand).Singapore is a good example of a country that has adopted an export-led or export-driven growth strategy. In fact, external demand for X constitutes 150% of Singapore’s GDP. Together with imports, total trade to GDP ratio is around 3.5 to 4. This ratio clearly indicates the high degree of openness and dependence of the SG economy on external trade.

The intersection of the AD0 and AS0 curves represents the current equilibrium output or GDP. Let us assume initially the economy is in equilibrium at point E0, producing an output Y0.

The actual level of output can be expanded in the short run by increasing AD and being a small and open economy, the major component of AD comes from external demand. Whenever export increases due to say a global economic upturn, ceteris paribus, the AD0

function shifts rightwards to AD1 causing real GDP to expand to Y1.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy20

AD1

GPL

P2

P1

P0

P1

P0

LRAS0 LRAS1

Figure 3:Non-inflationary Growth E0

E1

E2

AD0

Page 21: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Exemplify

For instance whenever the global economy booms especially the economies of our major trade partners such as EU and USA and so did Singapore too. This is called the coupling effect as these major economies served as global locomotive or engines of growth.

Access to foreign resources for potential growth

Globalisation enables countries with resource constraints to tap on foreign resources. Singapore has been relying on imported inputs (raw materials) to produce goods for exports. In fact, the import-content of our exports is relatively high by international standards. For every $1 of exports about $0.60cents is made of imported inputs. Globalisation allows Singapore to benefit by increasing the ease of obtaining imported raw materials to increase our productive capacity.

In a globalised world, countries can also tap on foreign capital to drive growth through the influx of FDI. Any inflow of FDI resulting from globalization will stimulate AD via an increase in total Investment expenditure (I). With reference to figure 3, the AD function shift rightwards in the same manner as an increase in X expenditure. Hence, in the short run, it will stimulate greater output and employment level until the economy reaches its full potential output. In the long run, more FDI inflows enhance the nation’s productive capacity, thus shifting the potential output level rightwards. Such an expansion in productive capacity provides even more room for the economy to grow without overheating.

Other developing countries are able to gain from globalisation. With the speed of the transfer of technology and information, it is easier for emerging economies to catch up with the developed economies. Poorer developing economies can now learn lessons and use technologies from the developed countries to catch up and narrow the “digital divide” between the rich and poor countries. For example, the spread of the internet and mobile telephony has enable people in poor countries to improve their daily lives in terms of access to information; education and business opportunities, which enables them to improve their productive capacity

From Figure 3, we can see that real national income increases from Y0 to Yfe when aggregate demand increase from AD0 to AD1 and general price level increases to P1. But when the economy productive capacity also increases from LRAS0 to LRAS1, real national income further increase to Y1 and price goes back to P0 achieving non-inflationary growth.

For labour short economies like Singapore, globalisation has enabled us to tap on imported or foreign labour to drive our economic growth. In fact today about a third of our labour force is made up of foreign workers. At the same time, the influx of young migrants could

Hwa Chong Institution. All Rights Reserved. Tutors' Copy21

Page 22: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

help to rejuvenate our population and mitigate problems associated with an ageing population. The influx of foreign talent represents a brain gain to our economy, contributing to the development of a knowledge-based and innovation-driven economy. They also contribute significantly to our productive capacity.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy22

Page 23: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Sub-Thesis (2) Increase in SOL

State Trade and FDI inflows are both drivers of growth and employment. The increase in growth & employment raises current living standards in the country.

Elaborate/ Exemplify using Diagram(s) where appropriate

EVALUATION

The earnings of foreign currency from exports enable Singapore to buy imports to meet our consumption demand. As Singapore hardly produces any good for local consumption e.g. food, energy. The ability to import to sustain consumption and welfare is crucial for maintaining current living standards.

Globalisation would mean local consumers can reap the following benefits: (focus on 2 points) Ability to consume beyond their production possibility frontier. Higher consumption level

means the residents or people can get access to more material goods and services and hence enjoy a better standard of living.

Access to a wide variety of goods for consumption. Economies of scale: Access to global markets means exporters can produce goods on

a big scale and hence enjoy cost savings via economies of scale. The end result is consumers benefit from lower prices.

Greater Competition: Globalisation involves the opening of home or domestic markets to foreign competition. More competition spurs efficiency and prevents exploitation of consumers by monopoly firms with substantial market power. At the end of the day consumers get to enjoy cheaper and better products made possible by increased competition.

However, greater competition may edge out smaller domestic firms which do not have the financial ability to compete with large foreign firms. Hence, while consumers may enjoy high material standard of living through lower prices of goods and service, some producers and workers may lose out.

In addition, the extent of improvement in SOL might be more significant than some developing countries as the latter may face the possibility of exploitation of labour in view of low wages and poor working conditions.

Anti-Thesis Despite being among the countries that have the most to gain from globalization, there are still costs of globalization for Singapore. Retreating from globalization is not an option for us, hence policies need to be implemented to counter these problems.

Sub-anti-thesis (1)

Externally induced cyclical unemployment

State Globalisation increases the threat of the contagion effect. As a result economies that are open to globalisation such as Singapore are vulnerable to external shocks. Such external shocks could destabilise the economy and/or derail growth.

Elaborate/ Exemplify using Diagram(s) where appropriate

In reality, the tide of globalization can recede or can be reversed anytime. For example, trade flows can be subject to various forms of protectionist measures (e.g. anti-dumping duties; quotas; anti-trade regulations). Capital movements can also be restricted by capital controls (e.g. tax may be imposed on funds taken out or coming into the country or subject to exchange controls). Countries can also restrict inflow or outflow of labour (e.g.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy23

Page 24: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Indonesia banning maids bound for Malaysia).

Thus countries such as Singapore that are overly dependent on external trade, capital or labour inflows may be subject to economic instability due to uncertainty; price volatility and sudden disruptions to growth.

In a globalised world, any national economic crisis e.g. USA sub-prime mortgage crisis 2007-2009, can easily spread to other parts of the world. This contagion effect resulted in a sudden collapse in external demand for Singapore’s exports to USA and other major trade partners like the EU. As US home consumers cut back their spending, invariably it will affect also the demand for our exports to their country. Thus, workers employed in manufacturing goods for these markets lost their jobs. Moreover, the banking crisis due to the sale of toxic assets also affected some local banks e.g. DBS sale of Lehman Brothers Minibonds. Many investors lost their hard earning savings.

In such situations, small and externally driven economies like Singapore tend to experience a more drastic decline in economic growth as compared to large economies like China. The latter’s large domestic market helps to cushion the collapse in external demand.

Sub-anti-thesis (2)

Structural unemployment

State Besides the contagion effect, there is also the constant threat of competition from new rivals for a share of global export markets, hence putting workers at risk of becoming structurally unemployed. This may happen if the workers skills become obsolete e.g. low-skilled workers in advanced economies lose their jobs to cheaper workers in emerging economies via offshoring/relocation or outsourcing.

Elaborate/ Exemplify using Diagram(s) where appropriate

In a globalised world, structural changes occur more frequently due to rapid changes in comparative advantage. As a result certain sectors of the economy which have lost their comparative advantage declined and become “sunset industries”. Unlike they are occupationally and geographically mobile, workers in these declining sectors face the threat of structural unemployment. This is not unique to Singapore. Both developing and developed countries face this problem. The extent of the problem would be negated by the government intervention such as retraining of workers to rising industries. Singapore implements workfare training scheme. China, as a developing country, on the other hand implements college training problems for lower skilled workers so that they can learn relevant skills and knowledge to gain employment.

Sub-anti-thesis (3)

Worsening income disparities

State Globalization may also lead to a worsening of the income disparities in the economy.Elaborate/ Exemplify using Diagram(s) where appropriate

Low-skilled, uneducated or lowly-educated workers across the developed world are ‘losers’ for their real wages tend to stagnate or even fall. This is because in a globalised world employers have access to a vast pool of cheap unskilled labour coming mainly from poor developing countries. The abundance of an international pool of cheap labour makes it difficult for the real wages of such workers to rise in tandem with the rest of society.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy24

Page 25: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

On the other hand, the global demand for highly-skilled talented workers e.g. CEOs far exceed the available supply. Thus such talented skilled workers command very high wages. Thus, over time the income gap between the low-wage earners and the rest of society tends to widen.

This phenomenon has in recent years become an issue in Singapore. The Gini-coefficient is used by economist to measure income inequality. The lowest value is 0 (representing perfect equality) and the highest value is 1 (representing perfect inequality). In Singapore the Gini-Coefficient has risen to 0.48 in 2009, placing the country at the bottom 29 th in the world in terms of income inequality.

If the trend continues unabated the worsening income-disparity may reach the point where social harmony is threatened. Those at the bottom of the income ladder may feel disaffected, marginalised and “unfairly” treated and hence may resort to crime, violence and other anti-social acts to hit back at society. Such social conflicts and discontent in turn may scare away foreign investors thus crippling economic growth.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy25

Page 26: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Sub anti-thesis (4)

Singapore may not be among the economies with most to gain from globalisation

State/ elaborate/ exemplify

With the increasing globalised world, more economies are becoming integrated with other countries. Benefits to these economies such as China & India are significant in the areas of economic growth. By opening up their economies to the rest of the world, they have seen an increase in exports which encourages growth. They have also benefitted from an increase in imports which allows their consumers a wider choice of goods and services, increasing the standard of living in the countries.

However, given their big population (consumer base) and vast resources (potential for growth) they can weather external shocks better than Singapore. For example, in the light of the financial crisis and trade disputes with her trade partner USA, it is easier for China to reduce her dependence on export-led strategy and shift towards more reliance on domestic demand to power her economic growth.

CONCLUSIONDespite the downsides, Singapore economy is among the economies like China and India which have much to gain from globalisation. As a trade and resource-dependent economy retreating from globalisation is simply not an option. The Singapore government has been introducing policies to build resiliency into the economy to better withstand external shocks. As a result, Singapore has been able to leverage on globalisation to increase the free flow of trade, capital and labour to spur and sustained economic growth as well as improve the living standards of its residents as evident by the robust economic growth and relatively high standard of living enjoyed by Singapore and other globalised economies in recent times.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy26

Page 27: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Question 5: TYS N2009 Q6

An economist stated ‘The trend towards globalization leaves no room for protectionism.’

(a) Account for the trend towards globalization. [10]Answers to (a) can be found in Lecture #21 (Pg 21.38)

(b) Discuss whether you agree with the economist’s view. [15]

Key Points from the Examiner’s Report:

Candidates were expected to show knowledge of the pattern of trade between Singapore and the rest of the world. Candidates were then expected to explain which if any of these identified patterns of trade might be explained by the theory of comparative advantage, evaluative comments were expected to refer to other reasons for this trade pattern.

(+) (-)Well discussed reasons for protectionism as candidates put forward a long-term argument for totally free flow of products and productive factors whilst recognising that, in practice and over the short term, protective measures might be considered necessary to produce a level playing field. A good structure plus strong evaluation therefore produced some good marks for this question.

Mid-range answers, although showing knowledge of reasons for protection in general, lacked clarity of structure. These therefore tended to describe the reasons for protection and came to broad and largely unsubstantiated evaluative comments that free trade was best.

There were regrettably few attempts at introducing analysis through, for example, the standard tariff diagram, which can be used to show both the loss and potential welfare gains from protectionism.

Weak responses simply listed some reasons for protectionism.

Simple Schematic PlanINTRODUCTION

BODYTHESIS ANTI-THESES

Trend towards globalization leaves no room for protectionism

Explain how globalization brings about benefits to an economy and stress that protectionism would attenuate the benefits.

Export as an engine of actual growth

Access to foreign resources for potential growth

Higher employment and SOL

Protectionism is still necessary despite globalization , i.e. Protectionism will mitigate the possible threats & negative effects of globalization in the short-run

Protection of infant industry Protection against dumping Protection of declining or "sunset” industries Protection of strategic industries

Note: Under exam conditions, candidates may be able to cover only 2 points. Remember: Don’t sacrifice depth/analysis for breath.

Any evaluation/Critical Comments?

CONCLUSION

Note: A pitfall to this essay is candidates failed to link the reasons for protectionism IN VIEW OF GLOBALISATION.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy27

Page 28: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

INTRODUCTIONAddress the issue: Establish the link between globalization and protectionism.

Key Words The freer trade in goods and services and the international movement of capital and labour due to globalization has been achieved through the breakdown of protectionist barriers to trade and capital movement.

IssueApproach

In this regard, protectionism, which is the restriction of the international movement of goods and resources across countries, apparently appears to be at odds with the trend towards globalization.

This essay aims to discuss whether in a globalised world there is no room for protectionism.BODYThesis: Trend towards globalization leaves no room for protectionism [Cover 2 points for depth in analysis]Argument for totally free flow of products (free trade) and productive factors (capital & labour)Explain how globalization brings about benefits to an economy and stress that protectionism would attenuate the benefits.(1) Promotes economic growth

Boost AD via X - access to foreign markets i.e. enlarged/ bigger marketsActual growthGlobalization trade liberalization through signing of FTAs lower barriers to trade access to bigger markets for X rise in X

Freer capital flows facilitates FDI Increase I

Both rise in NX and I rise in AD rise in NI by magnified effect

Boost AS - access to foreign resources i.e. Increased resourcesPotential growthAccess to raw materials and inputs; more foreign capital and technological transfer rise in I rise in LRAS i.e. capacity to produce risesIncreased labour mobility inflow of foreign talents rise in LRAS

(2) Higher employment

Rise in X markets and freer capital flows rise in NX and I rise in AD firms hire more workers rise in employment by magnified effect.

Rise in I Rise in LRAS i.e. capacity to produce rises produce more jobs for Singaporeans in the future

Trade and FDI inflows are both drivers of growth and employment. For many developing countries like China, India and Vietnam, the presence of many foreign MNCs have provided jobs for the local population. Many international MNCs such as American and Japanese auto-makers have relocated or off-shored their manufacturing plants to these low-cost countries to take advantage of the availability of cheap labour. These countries can benefit from the rise in I and employment.

(3) To sum up:(a) Greater economic efficiency which enhances Consumers welfareWith globalization, production chain has been broken up and shifted to different low-cost producing countries (international vertical specialization). This is made possible by the openness to trade and capital and labour flows. Such movements provide greater scope for countries to specialize according to their comparative

Hwa Chong Institution. All Rights Reserved. Tutors' Copy28

Page 29: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

advantage (e.g. Singapore’s comparative advantage is in production of high value added products) and hence an efficient allocation of world resources can be achieved.

(b) Economies of scaleExpansion of market size allows firms to reap economies of scale (the fall in long run average costs as the firm expands its scale of production). Countries can also import their raw materials from the cheapest markets in the world/ import cheaper business services from abroad (outsourcing). All these enable firms to lower their unit cost of production and possible lower prices of final products.

(c) Greater CompetitionGreater competition spurs efficiency and prevents exploitation of consumers by monopoly firms with substantial market power. Hence, consumers enjoy lower prices, better quality and a wider variety of goods, standard of living improves.

Anti-thesis: Protectionism is still necessary despite globalization in some situationsArguments for protectionismJustification for protectionism + Evaluation (costs of protectionism)Protectionism will mitigate the possible threats & negative effects of globalization in the short-run

(1) Protection of Infant IndustriesProtectionist measures for an infant industry which has potential comparative advantage, especially with the trend towards globalization, in the face of more established foreign competitors, are necessary.

Infant industries face high start-up cost at their initial stage of production With the trend towards globalization, these industries are exposed to competition from

established or low cost foreign firms. Subsidies can be given to these producers to become more competitive against the more efficient

foreign producers until it matures and is able to expand its output sufficiently to reap economies of scale and establish market share that it is able to compete with the foreign firms

Hence, protectionism is necessary in the short-run to produce a level playing field

Evaluation: Protectionism is not justifiable in the long run: Local industry may become complacent and produce low-quality goods at high prices with

limited variety if protectionism is implemented as a long-term measure. Under protection the industry lacks the incentive to mature into strong and efficient producers that can compete internationally.(I.e. Industry’s growth may be stunted or firms in industry end up as “permanent” infants)

(2) Protection Against Dumping Dumping takes place when goods are sold in a foreign market at a price below cost or below that sold

at the home market. In view of globalization, dumping may be undertaken by a foreign government to drive out

local producers of another country. Hence, some countries may be unfairly victimized by competing foreign imports that are “dumped” in their markets.

E.g. USA has been blaming China for dumping their goods in their country by undervalued the Yuan. Protectionism such as tariffs is thus often used to reduce imports and increase domestic production. Use a tariff diagram to illustrate the potential welfare gains and loss to the society

Hwa Chong Institution. All Rights Reserved. Tutors' Copy29

Page 30: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Explanation with reference to Figure 4:

Sd and Dd represent the domestic supply and demand curve respectively. SW is the world supply which is perfectly elastic.

Without protectionism and under free trade, the goods will be sold at PW and Q1 will be produced by the domestic producers and Q2 will be demanded by the consumers and thus Q1Q2 will be imported.

To protect the home industry against dumping, the government levies a specific tariff on the imported good, thus raising the world supply curve from SW to (SW + tariff). The price now increases from PW to P1.

At P1, domestic production increases from 0Q1 to 0Q3, hence domestic unemployment is reduced; domestic buyers are buying less at Q4. The tariff has caused a fall in the amount of imports from Q 1Q2 to Q3Q4.

Evaluation: In such instances, the ultimate cost of protection is borne by domestic consumers, e.g. American car

consumers suffer welfare losses if their car-manufacturers end up paying higher costs for using domestically produced steel.

With reference to Figure 1, since the price is higher after the tariff, consumers are worse off compared to having free trade as consumer surplus is reduced. The loss in consumer surplus is equal to the Areas (A + B + C + D).

Though producers gain in producer in terms of increased domestic production and higher price of the good (Area A) and government can expect to collect an amount of tax revenue equivalent to Area C, the loss of consumer surplus of Areas B and D are not transferred to other sectors of the economy, they are deadweight loss to the society.

Also, in practice, countries may find it convenient to use this argument also as a pretext to keep out imported goods for other reasons. In actual fact, foreign producers may be indeed more efficient than local producers. For instance, in the face of mounting trade deficits with China in recent years, this argument has been used by the USA to pressure China to cut back its steel exports to USA.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy30

Quantity

B

Figure 4: Decrease in imports due to tariff

Sd

Sw + tariff

SW

Dd

PW

W

P1

Q1 Q3 Q4 Q2

Price

0

A C D

QE

PE

Page 31: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

(3) Protection of declining or "sunset” industriesPrevent sudden massive structural unemployment in those industries which employ a substantial proportion of the workforce

With the trend towards globalization, structural unemployment arise due to the following:i. faster rate of economic transformation and technology transfer results in new

machines and methods that make old skills obsoleteii. greater flow of cheaper imports which compete directly with domestic producers

decline in demand for domestic goods retrenchment of workers as import-substitutes domestic firms lose their comparative advantage and shut down workers face difficulty seeking employment in other industries

Protectionism such as tariffs to reduce imports and increase domestic production provides a buffer for workers in these sunset industries with the opportunity to retrain and seek employment in other expanding sectors of economy

Declining industries can also make use of the term of protectionism to reorganize and restructure themselves to compete effectively with the foreign rivals again.

Note: If point 2 is not included in the essay, you need to use a tariff diagram to illustrate the potential welfare gains and loss to the society here for point 3.

Evaluation: Protectionism is not justifiable in the long run; It delays or slows down the restructuring

process and prolong the inefficient use of the economy's resources While tariffs help to reduce unemployment, it brings about loss of consumer welfare in terms

of higher prices and fewer goods consumed and loss of societal welfare

CONCLUSION/JUDGMENTFrom the above discussion it is clear that whilst globalization promotes growth and bring other economic benefits to countries which have embraced it, nevertheless there are also drawbacks and problems that arises from time to time. If unresolved these problems might threaten the very process of globalization itself and made it unsustainable. For example, countries might withdraw from free trade if there perceived themselves as losers or victims of unfair trade.

Hence, it is too sweeping to say the trend towards globalization leaves no room for protectionism. Protectionism if used under the right circumstances e.g. discourage dumping, correct persistent trade imbalances, etc and actually helps in the long run to sustain globalization for all countries. For ultimately countries will embrace globalization only if they perceived free trade and free movement of capital and labour to be fair and beneficial (i.e. win-win) for everyone.

Nonetheless, one also has to note that protectionism at best should be practised in the short-run so as to reap the benefits of globalization in the long run.

Note: For anti-thesis, under exam conditions, candidates may be able to cover only 2 points. Remember: Don’t sacrifice depth/analysis for breath.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy31

Page 32: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Section B: Case Study Practice

NOTE WHILE ATTEMPTING A CASE STUDY:

Take note of the headings of the extracts as they may drop some hints to the coverage. As you read through the passages, HIGHLIGHT key points including statistics as you most likely

need to quote some of them in the answers and link the passages to economics concepts. You have to scrutinize (Note the year(s), units, axes and etc) the charts, figures and tables (if

any). Read through all the questions before start attempting. You have to make some form of reference to ALL THE

TABLES/CHARTS/FIGURES/EXTRACTS in the data. In other words, if you did not use info from a particular table/chart/figure/extract in the case study at all, it will mean you have left out some important information and that will lead to losing of some marks. (Refer to Case Study Skills package)

REMEMBER: Highlight the passages and link important points to economic concepts.

TYS November 2008 Case Study Q2

Issues in Trade and Globalisation

Extract 1: European Union imposes shoe penalties

The European Union (EU) has begun imposing duties on imports of shoes from China and Vietnam. Tariffs are to be phased in starting at 4% and rising to nearly 20% for China and 16.8% for Vietnam. The EU contends that these measures are a justifiable response to “unfair competition” from Asian producers who, it is alleged, enjoy state support in the form of tax exemptions, cheap finance or subsidized rents. China denies the accusation, saying the EU does not want to open up its markets to competition. The move is supported by EU nations with large shoe industries such as Italy and Portugal, but others such as the UK fear it will have a negative impact on consumers and retailers.

China has urged the EU to re-consider its action, saying the planned measures are unfair. Chinese officials say there is no evidence of dumping and question whether the measures conform with World Trade Organization (WTO) rules.

China exported 1.2 billion pairs of shoes to the EU last year, while Vietnam exported 265 million pairs.

Source: BBC News, 7 April 2006

Extract 2: New threats to global trade and investment

Hwa Chong Institution. All Rights Reserved. Tutors' Copy32

Page 33: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

In its latest report on the global economy, the International Monetary Fund (IMF) highlighted the need to resist protectionist pressures. In the US there are complaints in some quarters that Chinese manufacturers enjoy an unfair competitive advantage arising from the alleged undervaluation of the Chinese currency, the Yuan (Renminbi). Some politicians are calling for the US Treasury to declare China a “currency manipulator”, while others have called for heavy tariffs on China’s exports to the US.

In April the EU took legal action against several of its own member states considered to have breached EU free- market rules. This action was welcome in ensuring free trade within the EU’s internal market. However, the EU’s record on global trade issues is less inspiring. Last year, a ‘bra war’ dispute arose between the EU and China. The Chinese were accused of dumping bras in the EU market. This resulted in quotas being applied to textile imports from China. The footwear trade now faces similar difficulties following the EU’s decision in April to impose tariffs on shoes from China and Vietnam. In the US there is now growing doubt about globalization, and influential voices are calling for US trade policy to be focused on bilateral or regional trade deals.

Source: Meredydd Davies, HSBC Economic Review, July 2006

Extract 3: EU threatens India in whisky feud

The EU will carry out its threat to refer India to the WTO if the Indian government does not agree to remove “unfair” tariffs on imports of drinks by the end of next month. India is an open economy which generally favours free trade, but it is risking a trade war by effectively excluding whisky from its market. A recent EU investigation found that India’s duty system ‘unfairly’ distorts competition’ and includes ‘clear violations’ of WTO rules.

The threat to take action will be welcomed by the Scottish Whisky association (SWA), a strong critic of the Indian tariff policy. India has long been considered a potentially profitable market for international whisky producers, but a range of duties imposed by national and state governments means that a bottle of Scottish whisky faces a tax burden up to five times greater than its Indian-made substitutes. In contrast, the Indian-made product is not taxed when imported into Europe, although it is subject to stringent labeling requirements. Compared with Scottish whisky Indian whisky is made from different ingredients and is not allowed to be labeled as whisky in the EU. It is marketed in the EU as ‘Indian Spirit’ which Indian producers claim gives it a disadvantage when compared to ‘scotch’.

A spokesman from the SWA in support of the EU’s threat of action stated that ‘Scottish whisky producers have campaigned for years for fair market access to India. A non-discriminatory duty policy would offer Indian consumers more choice at a reasonable price, boost Indian government revenue and introduce a fair system for international producers. However, representatives of India’s domestic drinks industry claim that it will be destroyed if tariffs are removed.

Source: Conal Walsh, Observer, 13 August 2006

Hwa Chong Institution. All Rights Reserved. Tutors' Copy33

Page 34: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Table 3: Trade in Goods

Total ValueOf TradeUS$bn

Exports Imports

Annual Percentage Change Annual Percentage Change2005 2000-

20052003 2004 2005 2000-

20052003 2004 2005

World 10121 10 17 21 13 10 17 21 13USA 904 3 5 13 10 7 9 17 14Total EU: UK Italy

3988

378367

10

69

19

918

19

1418

7

94

10

810

20

1320

20

2019

8

67

China 762 25 35 35 28 24 40 36 18India 90 16 16 33 19 21 26 37 354 AsianTigers*

731 9 19 25 12 8 15 27 14

* Hong Kong, Singapore, South Korea, Taiwan

Source: World Trade Organization (WTO) World Trade Report 2006

Hwa Chong Institution. All Rights Reserved. Tutors' Copy34

Page 35: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Questions

(a) (i) How does the value of the Yuan in September 2006 compare to its value in 2000? [1]

(ii) Describe what happened to the US balance on current account over the period 1998 to 2006.

[2]

(b) Identify and explain any evidence contained in the data that suggests that the Chinese government is a ‘currency manipulator’.

[5]

(c) Explain how you would decide whether the low price of Chinese shoes in EU markets occurred as a result of ‘dumping’.

[4]

(d) Discuss whether the Indian government’s treatment of Scotch whisky and the EU government’s treatment of imported bras from China can be justified in terms of economic theory.

[8]

(e) Assess whether the ‘growing doubt about globalization’ is well founded, using both the case study and your own relevant knowledge.

[10]

Hwa Chong Institution. All Rights Reserved. Tutors' Copy35

Page 36: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Hwa Chong Institution. All Rights Reserved. Tutors' Copy36

Page 37: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

TYS 2008 Case Study 2

General comments from the examiner There was a large rise in the number of candidates entered for H2 Economics this year. Generally, the performance of candidates was very encouraging. There are signs that there is now a strong emphasis on the development of those skills that are essential for success at this level. Nevertheless, there are still large numbers of students who lose marks because they insist upon writing a great deal of material which is unnecessary to answer the question set. They fail to show the necessary analytical and evaluative skills for a good mark. Careful reading of the question set and careful consideration of the directive words is essential if the highest mark is to be achieved.

[In other words, the examiner is pointing to the importance of mastering the art of dissecting Questions using 3 Cs techniques]

Questions(a) (i) How does the value of the Yuan in September 2006 compare to its value in 2000? [1]

The Yuan has appreciated against the USD. [1m]

Evidence8.28 yuan (2000) per USD to 7.93 yuan (Sept 2006) per USD[% appreciation = 8.28-7.93 divided by 8.28 x100=4.2 %]

Examiner’s comments:Many candidates stated incorrectly that the Yuan had depreciated in 2006. With more careful consideration of the data candidates would have come to the correct conclusion that it had in fact risen or appreciated.

(ii) Describe what happened to the US balance on current account over the period 1998 to 2006.[2]The US balance on current account was in deficit (1m) and the deficit was getting larger [1m].ORThe US had an increasing (1m) deficit (1m) in its current account.

Watch Out!!! Wrong to say balance was “negative”. Expected to use the correct economic term. Wrong to say it “decrease”

Examiner’s comments:This question was generally done well by most candidates. To score both marks available it was simply necessary to state that the United States had a deficit on the current account of the balance of payments and that this deficit was becoming larger. Most candidates scored both marks, but disappointingly a significant number of candidates failed to use the appropriate economic terms and failed to score. For example, answers that stated that the balance was ‘negative’ or that it was ‘falling’, failed to score because they failed to use the appropriate economic terms in the given context.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy37

Page 38: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

(b) Identify and explain any evidence contained in the data that suggests that the Chinese government is a ‘currency manipulator’.

[5]

The foreign exchange rate of the Yuan is simply the price of the Yuan in terms of another currency e.g. US$. Like any price it is determined in a market by the forces of demand and supply. Whether the claim that China acted as a ‘currency manipulator’ would depend upon whether the Chinese authorities were fixing the price of the Yuan below equilibrium price in the market for foreign exchange in order to give Chinese exports an unfair advantage.

This is done through intervention selling of the Yuan in exchange for USD.

Evidence to show that China manipulated in the foreign exchange market to keep Yuan below its market rate:

From Table 4: The stable value of the Yuan (US$1 = 8.28 Yuan) from 2000 to June 2005 would be unlikely to occur in a free market, hinting at government intervention.

In addition, from Fig 2, there is a considerable rise in China’s foreign exchange reserves from 2000 and from Table 3, China’s trade balance is likely to have improved (note that we cannot infer that China’s trade balance is in surplus from table 3) and yet Table 4 shows a stable value of Yuan with no changes.This suggest that the Chinese authorities are selling Yuan and purchasing foreign exchange over the years to increase the supply of Yuan to exert downward pressure on the value of the Yuan [which would likely have appreciated otherwise]

Examiner’s comments:This question proved difficult for many candidates. In order to score well here it was not necessary to understand the detail of fixed exchange rate systems. This question required the simple application of demand and supply principles in the context of the foreign exchange market. The foreign exchange rate of the Yuan is simply the price of the Yuan and like any price it is determined in a market by the forces of demand and supply. Whether the claim that China acted as a ‘currency manipulator’ would depend upon whether the Chinese authorities were fixing the price of the Yuan below equilibrium price in the market for foreign exchange. There was considerable evidence in the data to suggest this. The stable value of the Yuan from 2000 to June 2005 would be unlikely to occur in a free market. This suggests that market intervention was taking place. This is linked to the changes shown in the value of China’s foreign exchange reserves which show a considerable rise from the year 2000. This suggests that the Chinese authorities are selling Yuan and purchasing foreign exchange over the years to exert downward pressure on the value of the Yuan. Such a reasoned approach was rewarded with a good mark.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy38

Page 39: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

(c) Explain how you would decide whether the low price of Chinese shoes in EU markets occurred as a result of ‘dumping’.

[4]

Definition of dumpingDumping occurs when goods are sold in overseas markets at a price below cost, more precisely marginal cost. The motive is often to drive domestic competitors out of the market with the aim of establishing monopoly power in the future.

In practice, often times domestic producers may accuse foreign competitors of dumping goods simply because they cannot match the low prices offered by them.

To assess whether the low prices of imported goods could be considered as dumping

Consider …… Whether low prices were a result of low input costs in the exporting economy, which

might simply reflect comparative advantage which China is likely to have since it has abundance of cheaper labour for the production of shoes which is more labour intensive in nature.

Whether was it a deliberate policy to sell below marginal cost.? This might be with the help of the Chinese government to lower cost for domestic producers through, for example, subsidised rents and tax exemption. Under such circumstances, dumping was certainly taking place. {Extract 1… line 5}

Watch Out!!! Dumping is not just selling at low prices. But the stress must be on ‘artificially’ low with a

predatory motive. Note it is often related to subsidies (either outright grants or hidden subsidies) provided by

the state

Examiner’s comments:Many candidates lost marks here because they had an inaccurate understanding of the term ‘dumping’. Dumping occurs when goods are sold in overseas markets at a price below cost, more precisely marginal cost. The motive is often to drive domestic competitors out of the market with the aim of establishing monopoly power in the future. Many candidates seemed to think that dumping was simply selling at low prices in foreign markets. The better answers to this question provided an accurate definition of dumping. They then went on to explain how they would assess whether the low prices of imported goods could be considered as dumping. They explained that it was necessary to consider whether low prices were a result of low input costs in the exporting economy, which might simply reflect comparative advantage, or whether it was a deliberate policy to sell below marginal cost. This might be with the help of the Chinese government through, for example, subsidised rents and tax exemption. Under such circumstances, dumping was certainly taking place. As stated, without a firm grasp of the central concept, it was unlikely that a candidate would score well.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy39

Page 40: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Hwa Chong Institution. All Rights Reserved. Tutors' Copy40

Page 41: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

(d) Discuss whether the Indian government’s treatment of Scotch whisky and the EU government’s treatment of imported bras from China can be justified in terms of economic theory.

[8]

Introduction: Identify the respective measures

EU government imposed quotas on imported bras from China India slapped hefty tariffs on imported Scotch Whisky

Protectionism is often argued to be justified under certain circumstances such as(1) protection of infant industry(2) protection of domestic industry from predatory dumping by foreign exporters.(3) To correct persistent trade deficits or BOP disequilibrium(4) To protect workers in declining sunset industries from structural unemployment.(5) To reverse a worsening TOT

Trade is only beneficial if it is FREE and FAIR.Thus, from the economic standpoint the above reasons are justified or valid because they are not in any fundamental misalignment with the concept of the gains from trade based on the principle of CA.

Examine each of the measures used-

From Extract 2: Protectionistic quotas imposed by EU The EU government’s justification for the treatment (ie EU imposed quotas) of imported bras is that China is dumping. (Extract 2).

Evaluation:However, in practice it is often not easy to ascertain or prove a country is dumping goods simply because it is selling the good at very low prices which domestic producers cannot match and there is no evidence in the case study. If China is indeed able to price bras at a lower price due to its CA (Note: explained in previous part!) then EU response is NOT JUSTIFIED based on economic theory.

From Extract 3: Protectionistic tariff taken by India - Reason or argument for protection: Based on protecting jobs + retaliating against discrimination of Indian whisky imported into Europe (labeled as Indian spirits –downgrade its status hence affecting its sales)

 If indeed India’s action to slap hefty tariffs on imported Scotch Whisky is motivated by retaliation then clearly its action cannot be justified by economic theory.

This is because retaliation will only breed more retaliation leading to trade wars. Indeed, the extract seems to hint at the possibility of trade war erupting between India and EU. The end result is a no win situation for every country. Every country ends up the loser because trade is severely hindered depriving countries from reaping potential welfare gains and growth.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy41

Page 42: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

Evaluation:Unless data can be provided to justify that the whisky industry in India has for example a potential CA in this area as an infant industry (and that the Indian government is using it as a temporal measure) would the tariff be justified in terms of CA theory.

Conclusion:In reality trade may bring about complex issues as illustrated by the above cases. Unless empirical evidence can be found to justify for an infant industry with the potential to acquire comparative advantage, the use of protectionist measures will run contrary to the gains that free trade entails.However, in principle, it appears best or ideal to practice free trade as much as possible without resorting to protectionist measures.

[NB: In practice, the WTO can act as arbiter in the spirit of promoting free trade to mediate and help resolve trade disputes]

Examiner’s comments:In response to this question candidates were asked to consider the two examples of protectionismprovided in the data and assess whether they could be justified in terms of economic theory. It was expected that judgement would be made with reference to the principle of comparative advantage. This suggests that economic welfare is maximised if countries specialised in the production of those goods and services in which they have the lowest opportunity cost. This is the basis of the argument in favour of free trade. Arguments often used to justify protectionism include the so- called infant industry argument. Such industries are those that have the potential to develop comparative advantage in the future. The question was generally done well, but a disappointingly large number of candidates simply listed and explained a large number of arguments in favour of protectionism with no reference to theory at all. Inevitably, they scored poorly, usually in Level 1, and such approaches usually gained few marks for evaluation. Careful consideration of the requirements of the question would ensure a more focused answer and a better mark would result.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy42

Page 43: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

(e) Assess whether the ‘growing doubt about globalization’ is well founded, using both the case study and your own relevant knowledge.

[10]

Define Globalization:Globalization refers to the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology.

[ NB: There may be slightly different versions of the definition of globalization but at the end of the day the concept/idea boils down to the free flow of Trade, Capital, labour……]

As a result of globalization the world is said to be more inter-connected and inter-dependent.

Such inter-connectedness may bring both advantages and disadvantages to countries that are engage in international trade and investment. In other words there are winners and losers.

ThesisDisadvantages ( Growing doubts about globalization)

Explain using information provided….In the context of the case, the USA seems to be disappointed with the outcome of globalization. The information provided in extract 2 suggests that the situation has reached a point where its trade policy is moving away from free trade towards protectionism.

This is because the US perceived itself as a loser or “victim” of unfair trade practiced by its trading partners. In particular its trade with China had resulted in various problems such as:

(a) persistent and growing trade deficits(b) currency manipulation by China.(c) Dumping by China(d) Job losses in USA due to outsourcing/relocation of businesses to places like China/India

Instead of embracing multilateral free trade whole-heartedly, the US is moving towards greater “bilateral” and “regional” trade arrangements/deals. Such preferential trade deals are by their nature exclusive and may be harmful to free trade based on the principle of CA. For example it may result in trade diversion instead of trade creation.

Similarly, the EU also experienced disputes in its trade with China and India.They too perceived themselves as losers or “victims” of unfair trade practices adopted by these 2 newly emerging giant Asian economies.

Therefore, based on contextual evidence, there appear to be grounds for scepticism and “growing doubt” over the benefits of globalization for countries experiencing problems related to trade.

ANTI-THESIS[The advantages /upsides of globalization]

Hwa Chong Institution. All Rights Reserved. Tutors' Copy43

Page 44: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

StateHowever, despite the disappointing experiences of USA and EU as described in the data, globalisation has benefited many other economies in the world today.

ExplainIndeed many countries have benefited from the positive impact of globalisation. This is because globalisation has in general fuel economic growth world wide .

Exemplify using China/India as examplesIconic examples would be Singapore as well as the 2 emerging giant Asian economies of China and India. Since opening up their economies to the free flow of trade and capital such as inflow of FDI, both China and India has been experiencing phenomenal growth rates in recent times. This has also raised their per capita income and standard of living. Today, China is now considered as an Asian economic powerhouse and the second largest economy in the world with a GDP of US$5.8 trillion. Indeed, the data suggest China has taken the opportunity offered in a globalised world to aggressively export its cheap goods to the rest of the world, in particular to the rich developed markets such as the USA and EU.

Economic analysisThe underlying economic principle for such positive outcomes is the fact that globalisation enables more countries to specialise in accordance with the principle of CA. By removing trade barriers and opening up markets , consumers around the world stand to gain in terms of access to wider choices, more; cheaper and better products. Moreover, trade is an engine of growth for those economies that depend on external demand (X) to drive AE.

Exemplify using SG as exampleSG is another good example of an economy that has benefited much from globalisation. The export-led model of growth has served us well over the years.As a SOE (small and open economy with no natural resources) globalisation offers tremendous opportunities for SG to tap on global markets as well as global resources to drive her economic growth. Indeed, SG was able to develop and progress from a third world country with a per capita income of US$1, 400 in 1965 to a First world High-income country today with a per capita income of around US$40,000. Moreover, besides trade and investment, SG has also benefited from the inflow of foreign talent as well as a pool of low-skilled workers to augment our ageing and dwindling indigenous workforce

Conclusion/Possible synthesis:

Hwa Chong Institution. All Rights Reserved. Tutors' Copy44

Page 45: Tut #21 - International Trade (Answers)_no CSQ

HWA CHONG INSTITUTION Year Two H2 Economics 2013

Tutorials #19-21: Macroeconomics III – Balance of Payments, Exchange Rates & International Economics

StandThus it cannot be said with certainty that the “growing doubt about globalisation” is well founded.

JustificationWhilst the information provided in data may seem to suggest globalisation has disadvantaged certain developed economies like USA and EU, nevertheless when considered from a wider perspective it has indeed brought benefits to many other economies such as China, India and Singapore in terms of growth and development.

Moreover, the problems experienced by USA and EU over cheap imported goods from China is a reflection of changing CA in a globalised world. In accordance with the principle of CA, the USA and EU no longer have CA in producing such low-end manufactured products. Perhaps they should move out of these industries and import them from low-cost countries such as China and India. On the other hand, they should concentrate their resources to produce high-end, high value add products e.g. aeroplanes.

Examiner’s comments:This question required candidates to assess whether the ‘growing doubts about globalization’ were well founded. Candidates were asked to use both the case study and their own relevant knowledge to make this assessment. The case study contained considerable material that could be drawn upon to develop an answer alongside the candidate’s own knowledge. It was expected that good answers would give a balanced assessment of both the advantages and disadvantages of globalization and then provide some overall evaluative judgement. There were some excellent answers, but others simply repeated the material that had been learned in class. Candidates are reminded that the questions that carry a high mark allocation are designed to test the higher-order skills. Repeating class notes with little exercise of judgement will result in a poor mark. To score well, candidates need to develop answers that use the material provided as a stimulus to answer the question in the context provided by the case study. They need to reach a considered judgement after a thoughtful consideration of all the issues that are relevant.

Hwa Chong Institution. All Rights Reserved. Tutors' Copy45