AJC Prelims 2015 Q6:

The Trans-Pacific Partnership (TPP) is a proposed trade agreement that aims to expand the
flow of goods, services and capital among its members. Its critics, however, warned of
damage to domestic workforce from outsourcing and offshore and are clamoring for more
protection for workers.

Assess the economic case for these two approaches amidst the current global economic
uncertainty. [25]

FTA address benefits and impacts on all three flows, labour, capital and trade
Outsourcing/off-shoring  Someone else does the work for us/ the work is done overseas
(relevant for international flow of labor)

C
Two approaches globalization, protectionism
- Trade, capital and labor
C global economic uncertainty: possible external issues

C
Asses: with the use of a criteria, consider various perspectives or impacts and come to a
reasoned stand
Economic case: link to macro aims. Economic analysis—is it desirable/justified/valid. How to
determine? Desirable/valid pertaining to?

Introduction
Body part 1: TPP  advantages and disadvantages [make ref. to 3 flows of globalization,
capital, labor and trade flows]
Body part 2: Protectionism  advantages and disadvantages
Conclusion

Intro:
-define globalization and state briefly what is TPP
-set context
-state 2 approaches
-overview
-determine criteria of assessment

BP1: TPP- positive and negative effects

-1: higher consumption possibilities
-2. sustained economic growth
-4. EOS
-5. Removal of tariffs
-6. Structural unN
-7.instability affects growth [susceptibility to hot money outflow

Body: Protectionism- positive and negative effects

-1.prevents structural unN
 -2.CA argument
-3.Costlier goods(inflation), less choice, lower growth

Conclusion: stand + justification

BP2: explain how TPP affects the macroeconomy; increase capital flows which allows for
greater investments, improvement to BOP
P: TPP will affect the macroeconomic conditions vs the capital flows
1. FDI increase I component of AD and shifts AD1 to AD2, RNY increases more than
proportionately due to KAEG
(FDI directed to the purchase of direct goods)
- With FDI quantity of capital goods increaseproductive capability increase
LRAS shift from AS1 to AS2 PEG
- PEG+AEG=sustainable growth
2. Link to Qn:
a. FDI inflows are good for the economy as it achieves non-inflationary
sustained economic growth. As a result of TPP, there will be increase capital
flows due to the ease with which companies can invest in the member
countries of TPP.

BP3: leads to structural unN

TPP could bring about negative unintended consequences on countries such as structural
unN due to outsourcing and changing trade patterns
E. TPP would lead to increase labor and capital mobility. Developed member
countries with higher wage cost, such as the us and japan may offshore/outsource their
lower end production process to lower wage countries such as Mexico and Peru to lower
their COP and boost their export price competitiveness. However, this will lead to loss of job
opportunities

BP4: TPP may affect the stability of the economy via hot money flows
1. TPP allows for easier flow of fundsmember countries are more vulnerable to hot
money outflows
If a country like Mexico has a higher interest rates relative to to other
countriesinflow of hot money into Mexicoappreciation of tis currencyexports
less competitiveX-M falls adversely affecting actual growth
The volatility of hot money flows may result in capital flight  create immobility in
the economyloss of investor confidencesubsequent fall in I and RNY…

Mini synthesis for TPP

use criteria to assess TPP, consider context of global economic uncertainty

BP6: protectionism can be a useful approach to help an economy achieve its aims
- Free trade threatens the survival of sunset industries who may be increasingly
unable to withstand the competition of the foreign competitors
- Inability to surviveworkers get laid offcannot find other job due to occupational
immobilityhigh structural unN
 - Protectionismallows them to be trained yet employed
- Counterarg.--? Workers may be complacent and not go for training in lieu of the
protection given

Conclusion: protectionism may be valid in the SR but not in the LR. The TPP may be more
favourable long term policy option

With the expansion of the flow of goods, services and capital among its members, the Trans-
Pacific Partnership (TPP) would augment the trend towards globalisation and free-er trade.
A free trade agreement (FTA) is a legally binding agreement between two or more countries
to bring about closer economic integration. Its critics are however, advocating for
protectionism to maintain home employment.

There is strong economic case for the TPP as it helps countries achieve their economic
goals, which is made difficult by the current global economic uncertainty. Firms and
households across countries have cut spending in view of the uncertain economic outlook.
This has led to fall in outward investment and demand for exports from trading partners. The
fall in export revenue would lead to a fall in aggregate demand (AD) and if the fall in AD
persists, firms would cut production and lay-off workers.

This is where the TPP may be able to mitigate the negative impact of the global uncertainty.
The TPP connects member countries to major economies and new markets and enhance
trade and investment flows through the removal of trade barriers and improvement to
custom procedures. With the removal of trade barriers, a greater degree of specialisation
based on comparative advantage (CA) is encouraged when countries specialise and trade in
industries which they have CA in, shifting consumption away from high-cost producers
towards low-cost producers. The theory of CA states that so long as a country has
comparatively lower opportunity cost in the production of a good, specialisation and trade
can benefit itself and its trading partner.

The access to an enlarged market afforded by the TPP and specialisation according to CA
will enable countries to reap the gains of improved resource allocation and economies of
scale, resulting in lower average cost and higher efficiency and thus a lower price for
consumers. Consumers no longer have to pay high prices for domestically produced goods
in which the country has a comparative disadvantage. The goods can now be obtained more
cheaply from other members of the TPP. In return, the country can export goods to them in
which it has a comparative advantage in. World output increase and more trade takes place.
Thus free trade is needed to bring up the level of world output which would otherwise have
declined because of the global economic uncertainty.

The easier access to foreign markets could also lead to an increase in foreign direct
investment and hence, an increase in the level of income, employment and standard of living
for member countries. The TPP facilitates the inflow of FDI and also enables member
countries to gain higher export revenue from producing and exporting to an enlarged market.
The increase in investment and net

exports will increase AD. This will offset the fall in AD from reduced consumption and
investment expenditure due to the economic uncertainty that reduced households’ and firms’
confidence. The increase in FDI also allows for an increase in capital goods leading to
greater productive capacity in the economy. There can also be a transfer of technology and
expertise together with the inflow of foreign capital. In the long run, investments also help to
improve productivity levels and thus lead to potential growth. Thus the increased trade and
capital flows between member countries help to mitigate the negative impact of the global
economic uncertainty.

Another good reason for the TPP is that it will bring about increased competition between
member countries as trade barriers are removed and foreign firms could enter domestic
markets more easily. Increased competition puts pressure on domestic firms to be more cost
efficient and to engage in research and development to improve product quality and
production processes. This will stimulate efficiency, encourage investment and reduce
monopoly power. If cost savings are passed on to consumers in terms of lower prices of
goods, it will help to ensure that that there is still demand for their exports despite the global
economic uncertainty.

Notwithstanding the gains that the TPP could bring to its member countries, there are some
calls for protectionism amidst the global economic uncertainty. Protectionism refers to any
action that the government may take to influence market forces to provide an advantage to
domestic industries over foreign producers.

The current global economic uncertainty has made the achievement of macroeconomic
goals difficult. As firms and households across countries cut spending, there will be a fall in
demand for exports from trading partners. An export-led decline for countries which rely
heavily on export demand would lead to a significant fall in national income and demand-
deficient unemployment. As net exports fall and aggregate demand (AD) falls, firms have
unplanned increase in stock levels which will prompt them to cut production in the next
cycle. If the uncertainty persists and demand remains low, firms would have to retrench
workers because of a lack in global demand for their goods rather than a loss of comparative
advantage. Thus at this point, they cannot enjoy the benefits of trade. In such a case,
protectionist measures are used to ensure that income is spent on domestically produced
goods to prevent massive unemployment in the country. For example, the government may
impose tariffs on imports which would make imports more expensive. This will cause a fall in
the quantity demanded of imports as consumers switch to the cheaper domestically
produced goods. This will maintain the level of domestic production and protect home
employment. Otherwise, massive unemployment would cause a further drop in consumer
and investor confidence, leading to a fall in consumption and investment expenditure and
consequently fall in AD, deepening the uncertainty.

Furthermore, with global economic uncertainty, prevalence of dumping may increase. With
the fall in AD, firms are likely to have excess stock which they may try to sell in overseas
market at prices below their marginal cost of production. Domestic firms which are unable to
match the lower prices would be driven out of business and workers would be retrenched.
Thus protectionism may be justified in such circumstances to protect home employment

Moreover, free-er trade such as that proposed by the TPP could potentially bring about
negative impact on economies, chiefly on unemployment, and worsen the already higher
level of unemployment caused by the global economic certainty.

The TPP would lead to increased labour and capital mobility. Developed member countries
with higher wage cost, such as the US and Japan may offshore their lower-end production
processes to lower-wage countries such as Mexico and Peru to lower their cost of
production and boost their exports price competitiveness. However, this will lead to loss of
job opportunities for domestic workers and if they lack the skills to take on jobs in other
industries, they face structural unemployment.
The increased competition afforded by the TPP could also lead to unemployment. Smaller
domestic industries in some member countries may be unable to compete effectively against
the larger MNCs, in terms of prices or quality of their products. Domestic firms which are
unable to compete will have to leave the industry. Domestic workers are laid off and if they
do not have the skills to take up jobs in other industries, structural unemployment will result.
In view of the possible adverse impact on unemployment, protectionist measures are used
to protect domestic industries and hence employment.

This is especially undesirable for a country like Japan which exports cars and various
electronic products to the world economy. If they do not adopt protectionist measures, they
will face massive unemployment. This is because of a possible large fall in demand as the
YED value is likely to be greater than 1. This means a fall in world income will lead to a more
than proportionate fall in demand for such luxury goods, leading to a large increase in
demand deficient unemployment. Therefore, there is a need to adopt protectionist policies to
protect local employment.

Amidst the uncertainty, governments may try to identify and develop new growth areas.
Thus in the short term, protectionist measures to protect infant industries with potential
comparative advantage may be a valid reason. A country may have a potential comparative
advantage in a certain industry i.e. a new industry (infant industry). However, it cannot
compete with the established foreign industries due to a lack of economies of scale that the
rivals enjoy. At the initial stage of operation, the infant industry faces a high initial cost of
production as it has only a small share of the market. Thus, establishing an infant industry
can be quite difficult in the early years, especially if the new industry faces keen competition
from a long established firm operating at lower costs in the international market. If the infant
industry does have the potential comparative advantage, then protection may well be
justified as it means the development of an export revenue earning industry. The future
increase in net exports from the infant industry would increase aggregate demand bringing
an increase in national income. This would provide long term employment and eventually
economic growth. Examples of infant industries in Asia include electronics in Taiwan,
automobile industry in the early stage of Japan’s economic development and shipbuilding in
South Korea. .

valid reasons for protectionist measures.

However, by protecting their industries and employment in the midst of the global economic
uncertainty, countries are merely passing their problem on to their trading partners who in
turn may retaliate, leading to further contraction in world trade and fall in global income. On
the other hand, the inter-connectedness of world trade means that when a recovery does
begin, the flow-on benefits to all countries will spread quicker without protectionism.

Protectionism, even of infant industries with potential CA, should only be a temporary
measure. The reality however, is that once a tariff is imposed, it is not easily removed Thus,
protection should not be indiscriminately given to local industries.

Free-er trade such as that proposed by the TPP would impact member countries differently.
Some would gain more while some would gain less, depending on their relative CA and also
the nature of their economy. Small and open economies dependent on external demand and
investment would gain more from free trade than protectionism. In addition, member
countries which are able to correctly identify their CA and seize the opportunities afforded by
the TPP while putting in place appropriate policies to mitigate the threats would gain more.
Policies that could mitigate the challenges include supply-side policies to equip workers with
continued skills upgrading, as well as grants to encourage product and process innovation to
build comparative advantage and improve cost efficiency of production.
ECONS GROUP B WEEK 7

IJC Prelims 2017 Q6:

Globalisation has brought about greater exchange of goods and services, capital and labour between
countries. Some countries embraced it while others resisted it.

a. Explain the reasons for increasing globalisation

b. Evaluate why different countries may have different responses towards globalisation

TPJC Prelims 2017 Q6:

The withdrawal of United Stated from the Trans-Pacific Partnership(TPP) and Britain’s Brexit are
outcomes powered by anti-globalisation sentiments. Some countries have adopted anti-globalisation
measures such as imposing higher tariffs on imported goods, higher taxes on domestic firms moving
abroad and implementing anti-immigration laws to address the challenges of globalisation.

a. Explain the underlying reasons why some countries are embracing the move towards anti-
globalisation. (10)
b. Discuss whether countries should adopt anti-globalisation policies to address the challenges
of globalisation.(15)

a.: Protectionism is the economic policy of restricting trade between countries through a
variety of government regulations designed to discourage free trade. It is a policy of
sheltering domestic industries from foreign competition through the imposition of trade
barriers on imports. A country would wish to restrict imports due to the benefits of
protectionism which includes the protection of infant industries, reducing BOP deficits,
protection against unfair competition and dumping and certain social benefits.

Overview

This essay will explain reasons for protectionism supported with examples and evaluative
comments for each reason.

Body Paragraph 1

P: Governments may engage in protectionism when there is a need to protect infant

industries in the country.

E: Newly established industries need help in initial stages due to heavy initial costs. They
need

time to develop skilled management, reputation and exploit efficient technologies to be able
to

compete with developed competitors in other countries. These industries may have
comparative advantage but they need time to develop it. Without protectionism, a potentially
efficient source of supply may be cut off. Protectionism buys these industries some time to
grow, develop and gain efficiency as if a country learns enough through producing products
in which it currently has a comparative disadvantage and has lower costs in the long run

Paragraph 2
P: Another reason why there is a need for protectionism is to reduce the BOP deficit

E: For example US expenditures on laptop computers made in Taiwan count towards a

deficit in the US current account. To correct its BOP deficit, the government might implement
a protectionist measure on imports. UK had a persistent current account deficit since the mid
1980s and there may be a need for the British government to impose protectionist measure
on imports and “Buy British goods.”

L: Thus it would be better if the government look at the root cause of the problem so that it
will solve the problem in the long run.

Paragraph 3:
P: A government may engage in protectionism to protect industries against unfair
competition

and dumping

E: Dumping refers to the selling of goods in overseas markets below costs of production.
The objective of dumping is to drive out rivals in importing country and eventually
monopolise the market there. This also known as predatory dumping.This is detrimental as it
would lead to reduction in domestic output and employment as domestic industries may be
unable to compete against foreign exporters. Additionally it is likely that prices would be
increased after the collapse of the home industry, leading to welfare loss. Furthermore with
some foreign production subsidised by their governments, this leads to unfair competition
with producers in importing countries as they take on a higher cost of production.

E: In the past, the EU has used antidumping measures to slap higher import duties on, for
example, shoes from China, plastic bags from Thailand, bed linens from Pakistan, television
sets from Korea and salmon from Norway. In 2012, the US filed a complaint that China was
given excess subsidies to its car industry resulting in unfair competitive advantage.

E: It is difficult to prove that foreign producers are subsidizing their exports so it will be
difficult to know when to impose trade barriers. The differences in price could be due to price
discrimination or lower production costs rather than export subsidies. Dumping causes price
distortion and thus prices no longer reflect comparative advantage. A country may even
export goods in which it has a comparative disadvantage.

L: Thus to counteract such practices, trade restrictions such as tariffs might actually be
beneficial.

feel that governments should engage in protectionism to some extent as it brings about
social benefits for some countries. Protectionism is known to be used to protect and
preserve traditional ways of life. Communities based on old traditional industries may be
destroyed by foreign competition. Thus there is a need to restrict the amount of foreign
competition and influence in traditional communities through protectionism, encouraging the
locals to purchase domestic goods and preserving the culture and tradition

b. Define globalisation and sustained economic growth

Globalisation 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. Sustained economic growth refers to the increase in real output in the
economy over time and this increase can be maintained. This is only achieved with both
actual and potential growth. Economic growth could be the result of greater and better
utilisation of existing resources (i.e. a rise in employment) or an increase in the capacity of
the economy to produce goods and services. i.e. an increase in full-employment GDP. When
the former happens, the economy is said to be experiencing actual growth; in the latter case,
the economy is experiencing potential growth.

This essay aims to discuss whether globalisation helps to achieve sustained economic
growth. I will use various examples of economies like Singapore, emerging economies like
China and India and developed countries like USA in my essay.

Globalisation helps to drive economic growth

E: Countries with small domestic markets like Singapore face severe growth constraints.
Once the domestic demand is saturated there is not much room for output to grow.
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)

ingapore is a good example of a country that has adopted an export-led or export-driven

growth strategy. In fact, Singapore’s X to GDP ratio is around 1.5. 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 leading to actual growth.

hus Singapore has benefitted from globalisation due to trade flows and have enjoyed
sustainable economic growth.

Globalisation enables countries with resource constraints to tap on foreign resources.

In a globalised world, countries can 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). 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 AS the potential output
level rightwards. Such an expansion in productive capacity provides even more room for the
economy to grow without overheating.

Globalisation has given countries like Singapore access to foreign resources for potential
growth. 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. Thus globalisation not only enables a country to achieve actual
growth but potential growth as well. Both actual and potential growth can result in sustained
economic growth.

Globalisation has enabled countries like Singapore to tap on foreign or imported labour to
drive its 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 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.
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 telephone has enabled people in poor
countries to improve their daily lives in terms of access to information, education and
business opportunities. Through the inflow of both skilled and unskilled labour via
globalisation ,Singapore is able to achieve sustained economic growth.

Globalisation increases the threat of the contagion effect. As a result economies that are
open to globalisation are vulnerable to external shocks. Such external shocks could
destabilise the economy and derail growth 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. Indonesia banning maids bound for Malaysia).

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

hese 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. The more open an economy to the rest of the world, the greater
the shock to its economy. 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.
markets, hence putting workers at risk of becoming structurally unemployed.

E: 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. 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.

E: This is especially a problem in the developed countries such as USA where they have
been losing their comparative advantage in various sectors such the steel sector and
manufacturing sector to emerging economies like China and Vietnam due to their
abundance of resources especially their lower labour cost.

L: Thus structural unemployment may disrupt economic growth due to a fall in productive
capacity and hence aggregate supply.

Globalization may also lead to a worsening of the income disparities in the economy which
may affect economic growth.

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.