IJC H2 ECONS Essay Q6 SuggestedSolution

Discuss the view that signing more FTAs is the best approach to sustain economic performance in an economy [25] Thinking Map: Introduction A Free Trade Agreement (FTA) is a l egally binding agreement between two or more countries to reduce or eliminate barriers to trade, and facilitate the cross border movement of goods and services between the territories of the Parties. Sustained economic perfo rmance could imply sustained achievement of macroeconomic goals over time. It could mean sustained rate of growth which can be maintained without trade-offs with other goals of the government. Thesis Yes, signing more FTAs is the best approach to sustain economic performance in an economy - The pursuit of free tra de policy, such as signi ng of FTAs could be the best approach to sustained economic performance in small and open economies such as Singapore. - These economies are import dependent (relies on imports for survival) as well as export driven (relies on X for growth). Hence STAGE 1: 5Cs to A APPROACH Stage 1: Understanding Question Requirements Question 6: Command Word Discuss which requires thesis and anti thesis on whether signing FTA is the best approach to sustain economic performance in an economy. Content Word Signing FTA Sustained economic performance Context Word Policies must be contextualised to different economies Comparison Best – implies a need to compar e with other policies to suit different economies

expanding trade linkages with re st of the world promotes connection to new markets and firms in these countries investors stand to enjoy a myriad of benefits like tariff concessions, preferential access to certain sect ors and faster entry into these new markets. This promotes sustained economic performance with the achievement of macroeconomic goals such as healthy BOP, economic growth, low cyclical unem ployment etc to be achieved. Especially necessary for s mall economy with a small domestic market like Singapore based firms to invest overseas in order to gain access to a larger foreign market and earn more revenue. - Best approach in sustaining eco nomic performance when existing trading economies such as US and EU are suffering from debt problems and recession. Trad e expands new markets, mitigate exposure of these economies to external economic risks with diversifying of trading partners (decoupling effect)  thereby enjoying sustained demand for X and incoming FDI  macroeconomic goals achieved. - Using free trade diagram and AD/AS analysis, explain how o FTA reduces trade barriers such as tariffs  increases exports of exporting count ry to importing country  increase in X  increases AD  increases actual growth  reduces cyclical unemployment. o FTA expands domestic, regional and international markets enable investment and sharing knowledge, increasing trade opportunities and improvi ng the competitiveness of enterprises unlocks new areas of growth As an advanced developing economy, Singapore is still developing the SMEs, FDI from other countries are necessary to drive competition in the industries and to enhance technological transfer which enhances the fixed capital investment simultaneously. o Small economy with a lack of natural resources, only equipped with human resources. Therefore essential to ensure long term growth via fix ed capital investments. This will ensure that not all resource s will be fully utilized in the short run, both the current and future goals sustained. Furthermore with more fixed capital investments from improved access by capital, it encourages an improvement in productivity that enhances an increase in output in the long run and reduces unit cost of production in the short run. o AD increases in SR, SRAS fa lls in SR and LRAS in LR  sustained economic performance o Also, BOP is improved wit h increase in X and FDI. - Eg: GULF COOPERATION COUNCIL-SINGAPORE FREE TRADE AGREEMENT (1 Sep 2013 enters into force) o Gulf Cooperation Council (GCC), consisting of six countries

in the Middle East – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) o Singapore is the first non-Middl e East country to have a FTA with the GCC o Benefits ( Increase TRADE)  Approximately 95% of all GCC tariff lines will qualify for tariff-free concessions. An additional 2.7% of tariff lines will qualify for the same tariff-free concessions by 2018.  S$3.98 billion worth of Singapore goods will qualify for immediate tariff-free treatment, while S$49.1 million worth of Singapore goods will qualify after 2018. Major sectors that will benefit from the elimination of tariffs are telecommunications, electrical and electronic equipment, petrochemicals, jewellery, machinery and iron and steel-related industries. o Benefits ( Increase INVESTMENT)  Services: The GSFTA allows Singapore-based companies, Singapore Nationals and Permanent Residents to hold majority stakes in key sectors of the GCC markets. In particular, Singapore gained enhanced access in UAE, Saudi Arabia and Qatar for construction services, computer and related services, environmental services and professional services, such as legal, architec tural, engineering, urban planning.  Singapore has Investment Guarantee Agreements (IGAs) in force with five out of six GCC countries, giving stronger protection to investments made in the markets on both sides. Singapore is currently negotiating an IGA with Qatar. Evaluation - Time lag as policy is carried out in phrases and development takes time. Hence medium term policy. - Selected sectors so impact could be limited to them - Impact depends on closeness to the economies in terms of trade and investment linkages i.e GCC is an important trading partner to Singapore as The GCC is currently Singapore’s fifth largest trading partner and accounts for 35% of Singapore’s oil imports. - More FTA may not be good. They should be focused on regions that are emerging and developing and beneficial to the economy. - Persistent development in the fi xed capital investments without improving on the skills of the labour may also lead to structural unemployment especially when FTA brings about changes in comparative advantage of the economy.This is especially true in the case of Singapore as an open economy with exposure to rapid industrial evolutions.

Anti the sis – Other policies are needed to enhance benefits of FTA to achieve sustained economic performance . FTA improves access to markets in terms of trade and capital but other policies are needed for the benefits of FTA to be realized and economic performance to be sustained. For exam ple, with rising competition by emerging economies and the enhanced mobility of capital investment, FDI will be attracted to wherever the profits are and would not persistently stay and contribute to growth in the economy.  other policies could affect firm’s profitability and are needed to ensure continued competitiveness of the economy. - Fiscal Policy o Increase in G to improve infras tructure to facilitate incoming FDI and trade o Competitive tax rates to attract FDI o Explain FP using AD/AS framework - Exchange rate policy o Explain either depreciation during recession or appreciation during recovery in Singapore’s case. Anti the sis 2- Other policies needed to manage conflicts of goals brought about by FTA. Excessive increase in AD brought about by X and FDI can pose risks of demand pull inflation and st ructural unemployment to economies growing at a fast pace. - Supply side policy needed in the long run to manage o Structural unemployment (retraining policies ) o Demand pull inflation (PIC to enhance innovation and technology in Singapore) - Microeconomic policies o Taxes on pollution