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Macro And Micro Economics Essay

1210 words - 5 pages

Q2 (A) Explain why free international trade can be good for countries' economies; and examine the attempts to reduce trade barriers in the past decade (maximum 1,000 words)'Free trade is the ability to undertake economic transactions with people in other countries free from any restraints imposed by governments or other regulators'. (Economist, 2013)
Selected forms of FTA

Description

Example

Bilateral Trade

Reduces trade barriers between 2 participating nations

Singapore - China
Singapore - USA

Regional Trade Groups (may take form of preferential trade)

Reduces trade barriers between participating member states

European Union
ASEAN

Multilateral Agreements

Reduces trade barriers between many participating member countries

WTO (~150 member countries)

Free international trade can help countries to:Specialize and trade based upon comparative advantagesDecrease costs by capitalizing on economies of scaleEncourage efficiency in the market through increased competitionStimulate export growth etcTo better understand the practical implications of FTAs, the country case example of Singapore and its FTA with China and USA have been used:CSFTA:Singapore-China FTA was signed after eight rounds of negotiations and was concluded on September 3 in Beijing.Realized Benefits:Engine of Growth:
Particulars

CFSTA

Benefits to Importers

Tariff Elimination

95% of Products entering China

Tariff free Importing

Rules of Origin (ROO)*

Wholly Obtained; Exclusive Product Specific Rule; Regional Value Content not less than 40% of FOB

Access to wide range of products eligible for preferential treatment

Third Party Invoicing

Yes

Originating products still qualify for preferential treatment even if the invoices for these goods were issued in third countries

* The discriminatory ROO's and tariff rates under different FTA's leads to complications in FTA and is commonly known as 'Spaghetti Bowl Effect'. It is also known as 'Noodle Effect' with respect to Asian Countries.

The above key facilitative commitments made more than 85% of Singapore exports to China at zero-tariff and thereby resulted in exports presented in graph. Key Singaporean industries that benefited include petrochemicals, processed foods and electronics/electrical products (Singapore Government, n.d.).China is currently Singapore's third largest trading partner and the third largest investment destination.Hub and Spoke Effect:A multi tier model where the hub is the country having FTAs with countries not having FTA with each other. It is an operating model where hub acts as a central point and the other countries act as the spoke.Under the Viner's model, Qs2- Qs1 represents the trade creation effect and (b+d-e) represents the welfare effect - the major benefits of being a hub (Michael G. Plummer, 2010). It is estimated that under a hub-and-spoke FTA-hub trade grows by 5.57% per year and doubles after 12.4 years. The hub countries typically have higher exports than...

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