Eco Today - Mar10:ET Master Page 2007 - ASKnLearn

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trade. Indeed, the WTO (previously GATT), has spent the past 65 years encouraging nations to reduce trade barriers through a series of rounds of talks. The last US president, George Bush, pledged that: of welfare to the country concerned, might they still be justified in terms of equity/fairness? 4. Research and evaluate the argu - ments involved in (a) the ‘Banana War’, (b) President Obama’s decision to impose a tariff on the import of tyres from China. 5. Is it necessarily correct to say that the imposition of a tariff will improve the balance of payments on current account? ❝The United States is ready to eliminate all tariffs and subsidies and other barriers to the free flow of goods and services as other nations do the same. On 1 January 2010, China joined South East Asia to create a free-trade zone with a population of 1.9 billion people. Nevertheless, trade disputes abound and the current round of WTO talks, the Doha Round which began in 2001, still has no end in sight. Special circum - stances continue to provide govern - ments with grounds for the use of protectionist policies. For example, in November 2009, the USA imposed tariffs on Chinese oil well pipes, citing the antidumping argument. In your answers, the examiners will expect you not only to outline the arguments for and against free trade and protectionism, but to evaluate the relative strengths of these arguments. Assessing the welfare losses that result from protectionism is, of course, far from easy. However, one study has estimated that a 40% reduction in all tariffs would result in an annual increase in global GDP of $70 billion, and that around 75% of this would accrue to less developed countries. A US study has suggested that trade barriers of all kinds are costing its citizens as much as $19 billion a year in higher prices. Another study argues that agricultural subsidies in the EU, aimed largely at discouraging imports, cost $360 billion per year, ‘enough to send all of the 56 million cows in the EU around the world on a first class airline ticket each year’. Questions for discussion 1. What questions might we ask about the study that suggests that a 40% cut in tariffs would raise global GDP by $70 billion per annum? 2. Evaluate, in greater detail, one of the arguments raised in the article in favour of protectionism. 3. Although economic theory suggests that tariffs result in a deadweight loss Summary of key points There are overwhelming economic arguments in favour of free international trade, most notably those based upon specialisation and the Laws of Absolute and Comparative Advantage. A country that specialises in the production of products in which it has a comparative advantage can consume beyond its production possibility curve, as illustrated by the concept of the consumption possibility curve. Arguments in support of protectionist policies such as the infant industry argument, the industrialisation and diversification argument, the job protection argument and the anti-dumping argument, although superficially plausible, are generally flawed in economic terms. Despite the energies and achievements of the WTO and the increase in the number and size of Free Trade Areas, trade disputes involving protectionist policies continue to abound. There is an ever growing body of evidence to show that significant increases in global welfare would result from further reductions in barriers to free trade. with Chief Examiner, Robert Nutter 1. The ‘Buy American’ clause in the $800bn (£567bn) economic recovery package introduced by President Obama in early 2009 caused controversy in the European Union. Investigate the details of the clause and why the EU were so opposed to it. http://news.bbc.co.uk 2. China and the Association of South-East Asian Nations (ASEAN) established the world's biggest free trade area in December 2009, covering a market of 1.7 billion consumers. (i) Investigate the key principles and objectives of ASEAN. (ii) What are likely to be the economic benefits of China’s agreement with ASEAN? http://www.aseansec.org 3. All members of the European Union (EU) are members of the European <strong>Eco</strong>nomic Area (EEA) but there are some non-EU countries in the EEA. Research the origins of the EEA and why countries such as Norway are EEA members but not members of the EU. http://en.wikipedia.org/wiki/European_<strong>Eco</strong>nomic_Area 4. Mercosur was created in 1991 by the Treaty of Asuncion and encompasses four Latin American countries: Argentina, Brazil, Paraguay and Uruguay. Investigate the aims and objectives of Mercosur. en.wikipedia.org/wiki/Mercosur 26 M ARCH 2010
Key words Gross domestic product Deflation Output gap Aggregate demand and supply Commodity prices The Prospect Ahead: Deflation or Inflation Quintin Brewer, a Chief Examiner and teacher at North London Collegiate School, considers a data response question concerning the prospects for deflation or inflation. A s the UK and world economy moves out of recession and into recovery in 2010, there is discussion about whether there is a danger of deflation or a likelihood of inflation. Obviously, this has important implications for monetary policy, in terms of decisions made by the Bank of England’s Monetary Policy Committee with regard to both interest rates and its policy of quantitative easing. Much of this is highly topical and you should remember that examiners are always impressed by those candidates whose responses reflect understanding of current economic issues together with an ability to apply relevant economic theory in discussing them. N.B. Although much of the material is relevant to AS, some of the answers would only be covered in your A2 course. Extract 1: The danger of deflation Reduced spending by consumers and an extended period of high unemployment mean that there is likely to be a continuation of the negative output gap (see Figure 1). In the USA that gap has been estimated to be between 8% and 10% while in the UK, it has been estimated to be over 3%. This is likely to result in significant competition for sales and for jobs and so place a downward pressure on prices. In the UK’s case the output Figure 1: The output gap and unemployment in the UK gap is bigger than in the recessions of 1981 or 1991 which led 10.0 to inflation falling by more than six percentage points. A repetition of these experiences would result in deep deflation. 7.5 It will take a considerable time to absorb the enormous surplus labour and production capacity created by the most severe recession since the 1930s. Wage rate growth has been subdued and there has been a decline in the average hours worked. Until production and employment grow enough to push up wages the most serious concern will be deflation 5.0 % 2.5 0 Unemployment rather than inflation. -2.5 In conclusion, the consensus view is that there is much Output Gap slack in the economy. With factories facing lower orders, -5.0 producers will not raise prices and workers will not demand ’88 ’90 ’92 ’94 ’96 ’98 ’00 ’02 ’04 ’06 ’08 ’10 ’12 higher wages. Source: tutor2u.net Unemployment – claimant count measure Extract 2: The threat of inflation There are several reasons for questioning the view that deflation is a real danger, the first of which is that the authorities slashed interest rates to 0.5% in March 2009 (see Figure 2) while also embarking on a programme of quantitative easing which effectively increases the money supply. Secondly, the UK’s fiscal deficit is heading for nearly 13% of GDP and the national debt is increasing at an alarming rate. Several other factors also suggest that inflation might be a problem in the future. Thirdly, rising commodity prices in 2009 coupled with the weakness of sterling have increased inflationary pressures. Fourthly, UK inflation is increasingly affected by international inflation so the UK’s output gap is less significant than the global output gap. The rapid recovery in other economies, especially those in emerging markets and in developing countries, implies that the global output gap is falling even if the output gap in the UK is not. A further factor is that the surplus labour implied by the increase in unemployment may not result in falling wages because those out of work tend to be younger and less experienced than those with jobs. Figure 2: Bank of England interest rates, Aug 2008-Jan 2010 % 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Aug ’08 Oct ’08 Source: tutor2u.net Dec ’08 Feb ’09 Apr ’09 Jun ’09 Aug ’09 Oct ’09 Unemployment – claimant count measure Dec ’09 Feb ’10 M ARCH 2010 27
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