JC Economics Essay Free Trade Agreements Model Answers
Free Trade Agreements (FTAs) are economic treaties which make trade and investment between Singapore and the rest of the world easier. Singapore has an open economy which is driven by trade in goods and services. Over the years, she has forged an extensive network of over 20 implemented FTAs, allowing more integration between SG and her trading partners.
With FTAs, Singapore-based firms who are exports goods and services enjoy a variety of benefits like tariff concessions or eliminations, preferential access to agreed-upon sectors, seamless entry into overseas markets and even Intellectual Property (IP) protection.
(See list of Free Trade Agreements forged by Singapore here.)
It has been asserted that “the signing of more free trade agreements (FTA) brings about benefits to consumers at the expense of local producers”. (
(a) Explain how the signing of more FTA can help the Singapore economy to achieve its macroeconomic goals.
(b) Discuss whether you agree with the above assertion.
JC Economics Essay – Free Trade Agreements of Singapore
Define FTAs (S’pore’s Free Trade Agreements)
Define macroeconomic objectives
Reduction of trade barriers leads to an increase in (X-M). AD increases and NY increases via k, leading to actual economic growth. With more real output, more factors of production are hired, leading to higher employment levels.
Increase in FDI increases AD and NY via k leading to actual economic growth, higher employment levels. It also increases the LRAS leading to an increase in potential growth.
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.
The increase in FDI may lead to an improvement in the capital and financial account (assuming that the capital inflow exceeds the capital outflow) and the increase in (X-M) may lead to an improvement in the current account, thereby leading to an improvement in the BOP.
Signing of more FTAs helps Singapore to achieve the 4 macroeconomic objectives, especially economic growth.
JC Economics Essay – Macroeconomic Impacts of FTAs
Detailed Answer Outline:
Signing of more FTAS may help to achieve the 4 macroeconomic objectives but it may benefit consumers at the expense of producers
Thesis: The signing of more FTAs brings about benefits to consumers at the expense of local producers because:
Consumers gain in the form of the following:
- greater variety of goods and services
lower prices: (increase in consumer surplus)
improved quality / freebies due to non-price competition
Local producers lose. In the form of the following:
- loss of market share to rival firms with close substitutes
- loss of market power
- increase in costs of production if they engage in non-price competition
Antithesis: The signing of more FTAS MAY NOT bring about benefits to consumers at the expense of local producers because:
(1) Consumers may benefit BUT NOT AT THE EXPENSE of local producers (because local producers may also benefit). FTAs also reduce tariffs on exports of local producers and therefore revenue for them may increase significantly.
Output for local producers may thus increase and they may reap substantial economies of scale (EOS)
(2) Both consumers and local producers may suffer . Too much competition may result in costs to BOTH local producers and consumers. Also, if MNCs compete with local producers for factors of production, bidding up costs and harming producers’ profits, there may also be an increase in prices which will harm consumers.
For Singapore to embrace globalisation fully, singing FTA is a must! (developing economies, small and open economies may gain more)
Depends on how fast trading partner also embrace globalisation and competition
Synthesis: Whether or not the signing of more FTAs brings about benefits to consumers at the expense of local producers depends on:
Type of industry / Nature of product
Extent of competition / Ability of local producers to cope with competition