ACJC International Trade Lecture Notes

©ACJC Econs Dept/2024/International Economics 1 ANGLO-CHINESE JUNIOR COLLEGE JC2 Economics H2 INTERNATIONAL TRADE Section A: TRADE POLICY DECISIONS AND THEIR IMPACT ON THE ECONOMY 1. FREE TRADE PAGE 1.1 Theory of Comparative Advantage 5 1.2 Terms of Trade 8 1.3 Dynamic Comparative Advantage 10 1.4 Benefits of Free Trade 16 2. ECONOMIC CO-OPERATION & FREE TRADE AGREEMENTS 2.1 Economic Integration (Free Trade Agreements, Regional Trade Agreements) 14 2.2 Arguments for FTAs 15 2.3 Arguments against FTAs 16 3. TRADE RESTRICTIONS (PROTECTIONISM) 3.1 Arguments for Protectionism 19 3.2 Types of Protectionism 22 3.3 Arguments against Protectionism 26 4. TRADE POLICIES 4.1 Expenditure-Reducing Policies 27 4.2 Expenditure-Switching Policies 28 4.3 Supply-Side Policies 30 Section B: GLOBALISATION AND ITS IMPACT ON THE ECONOMY 1. DEFINITION OF GLOBALISATION 31 2. FACTORS DRIVING GLOBALISATION 31 3. BENEFITS OF GLOBALISATION 32 4. COSTS OF GLOBALISATION 33 ANNEX: 1. Pattern of Trade 2. Singapore’s Pattern of Trade 3. World Trade Organisation & Singapore’s FTA Network 39 Textbook References: 1. Principles of Economics, Case, Fair & Oster, Ch 34 pg 697-702, 705-710 2. Principles of Macroeconomics, An Asian Edition, Mankiw, Quah & Wilson, Ch 31 pg 702 -711, Ch 32 pg 733-746 3. Principles of Macroeconomics , O’Sullivan, Sheffrin, Lim & Seevaratnam, Ch 29 pg 778 -820;

©ACJC Econs Dept/2024/International Economics 2 WHAT IS THIS TOPIC ABOUT? International trade allows countries to focus on the industries in which they can be most productive and efficient. In this way, free trade often raises the standard of living of both producers and consumers. International trade offers many benefits to countries: • They can increase their aggregate demand and increase national income through exports, and they can obtain goods that they cannot produce or are inefficient in, through imports. • Free trade promotes mutual benefits to countries, in terms of greater efficiency in production and use of resources, as well as improvements in economic growth and standard of living. In the real world, however, free trade may pose macroeconomic problems to trading countries. • Failure to keep up with rising competitiveness of trade partners, for example, can cause a country to lose its export competitiveness and face the problems arising from worsening trade balance, slowing economic growth and rising unemployment. • Countries may therefore resort to using tariff and non-tariff barriers to restrain the entry of imports into their domestic markets in order to achieve greater macroeconomic stability. Although free trade offers economic benefits, and protectionism leads to economic costs in various forms, the latter may exist in countries’ trade policies in varying degrees. LEARNING OUTCOMES Enduring Understanding: • Although free trade offers economic benefits, it also exposes countries to macroeconomic instability. • Although protectionism involves economic costs, countries may resort to protectionism to safeguard their domestic economic interests, and to achieve greater macroeconomic stability. Conceptual Mastery: Students will be able to explain: • The theory of comparative advantage as a basis of free trade • The arguments for free trade • The reasons, methods and consequences of trade restrictions (protectionism) • The factors affecting globalisation • The benefits and costs of globalisation on different economic agents Essential Questions: 1. Would countries be better off with free trade or protectionism? 2. How may a government respond to a dynamic international trade environment in trying to achieve its macroeconomic aims?

©ACJC Econs Dept/2024/International Economics 3 Overview: Globalisation refers to the development of an increasingly global economy. It is characterised by free trade of goods and services, free flows of capital, and labour mobility. In Section A of this set of notes, we will learn more about the benefits and costs of free trade of goods and services. The facilitation of free trade happens through economic cooperation and free trade agreements amongst different countries. In mitigating the costs of free trade, governments may turn to protectionism measures (restrictions to trade) or other trade policies. In Section B, we will explore the topic on globalisation, the factors driving it and the challenges and opportunities that arise.

©ACJC Econs Dept/2024/International Economics 4 Pre-lecture Reading – Article 1: Why Asean is good for Singapore Singaporeans should be more positive about the regional grouping, given the many benefits it offers - not just its huge market potential but also the less immediately obvious ones like peace, without which economic growth would be impossible Asean brings enormous benefits to Singapore and Singaporeans. The best way to demonstrate this is to remind Singaporeans that our domestic market consists of 5.6 million consumers. Under the Asean Economic Community, the ambition is to integrate the 10 economies into a single market and production base. This means that our domestic market is not 5.6 million but 628 million consumers. The Asean economy is one of the fastest-growing economies in the world. It is currently the world's seventh-largest economy. It is predicted that, by 2030, Asean could become the fourth -largest economy in the world. In addition, Asean has a large and growi ng middle class, and a relatively young population. Unlike the protectionist trend elsewhere, Asean remains committed to free trade, regional integration and open economies. As an example, Asean is currently driving the negotiation of a mega free trade agreement, involving Asean and six other economies, cal led the Regional Comprehensive Economic Partnership (RCEP). When concluded, RCEP will be one of the biggest free trade areas in the world. Source: The Straits Times, 9 January 2018 Article 2: Asean has benefited all living in the region: PM Lee Hsien Loong As Prime Minister Lee Hsien Loong highlighted in his speech, food items from the region - like Thai rice, Vietnamese coffee and Filipino dried mangoes - are readily available in Singapore at "very affordable prices", thanks to the free flow of goods and services among Asean countries. This is among the ways that people have benefited from the 10-nation grouping, which has brought peace, economic growth and prosperity to the people in the region since it was formed in 1967, he said. "Asean has benefited all of us who live in South -east Asia, including Singaporeans," he added, expressing the hope that Singaporeans would get to see more aspects of the grouping this year. Source: The Straits Times, 13 January 2018 Question: What are some ways Singapore has benefitted from regional economic integration? What are some challenges Singapore may face due to free trade?

©ACJC Econs Dept/2024/International Economics 5 SECTION A: TRADE POLICY DECISIONS AND THEIR IMPACT ON THE ECONOMY Previously, we studied the four macroeconomic goals of sustainable and inclusive economic growth, low unemployment, low and stable inflation, as well as healthy balance of payments. In trying to achieve these goals, the government has to consider the global context. In an increasingly interconnected world, it is important to account for the benefits and costs that arise from free trade and globalisation. 1. FREE TRADE Free trade refers to t he exchange of goods and services between countries without any barriers obstructing the flow of imports into a country, or exports out of a country. 1.1 The Theory of Comparative Advantage Countries may specialise in producing goods they have a relative advantage in, and trade with other countries for goods they have a relative disadvantage in. Engagin