2024 H2 International Economics Lecture Notes PDF

The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) Catholic Junior College THEME 3: THE NATIONAL AND INTERNATIONAL ECONOMY 3.3 GLOBALISATION AND THE INTERNATIONAL E...

The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) Catholic Junior College THEME 3: THE NATIONAL AND INTERNATIONAL ECONOMY 3.3 GLOBALISATION AND THE INTERNATIONAL ECONOMY ENDURING UNDERSTANDING International trade allows countries to focus on the industries in which they can be most productive and efficient to achieve economic growth and low unemployment. Globalisation has enabled countries, including Singapore, to enjoy higher economic growth and standards of living. However, globalisation has also led to several economic challenges. ESSENTIAL QUESTIONS a) Why do countries trade? b) What are the impacts of the external sector on the domestic economy? c) What are the government policies to address problems caused by the external sector? d) What are the intended and unintended outcomes as a result of the government intervention? UNIT SUMMARY We start by understanding a major aspect of globalisation - the international trade. The Principle of Comparative Advantage explains why countries trade. Aside from enhancing their consumption possibilities, they also enjoy an increase in economic growth and employment. Access to the global market as well as technology and resources around the world have also benefited the producers and consumers as well as achieve governments’ aim of economic growth and low unemployment. On the other hand, international trade can also have its detrimental effects such as structural unemployment and economic instability. This gave rise to countries implementing protectionist measures. Hence, we have to ask ourselves, is trade truly and globalisation beneficial for everyone? Should we be pro or anti- trade? We then look at some economic co-operation and trade agreements such as FTA, WTO and ASEAN, and their impact on the member countries’ consumers, producers, governments and the whole economy. Finally, we will also examine the effects of globalisation on the Singapore economy –the costs and benefits, and make an assessment as to Singapore’s gains from globalisation, explaining the impact and relevance of free trade areas on Singapore. 1 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) CONTENT 1. Globalisation 1.1 Factors contributing towards Globalisation 2. Globalisation through International Trade 2.1 Reasons for Free Trade 2.2 Principle of Comparative Advantage 2.2.1 Understanding the Principle of Comparative Advantage 2.2.2 Evaluation of the Principle of Comparative Advantage 2.2.3 Dynamic Comparative Advantage 2.2.4 Patterns of Trade 2.3 Impacts of International Trade 2.3.1 Advantages of Free Trade 2.3.2 Disadvantages of Free Trade 3. Globalisation through International Movement of Capital Flow 3.1 Impacts of International Movement of Capital Flow 4. Globalisation through International Movement of Labour 4.1 Impacts of International Movement of Labour 5. Globalisation in the context of Singapore 5.1 Key Features of Singapore’s Trade Structure 5.2 Singapore’s Changing Comparative Advantage 6. Use of Policies in Addressing Macroeconomic Issues caused by Globalisation 6.1 Protectionism 6.1.1 Arguments for and against Protectionism (Advantages and Disadvantages of Protectionism) 6.1.2 Methods of Protectionism 6.1.3 Effects of Protectionism 6.2 Economic Cooperation and Trade Agreements 6.2.1 Free Trade Areas 6.2.2 Customs Union 6.2.3 Common Market 6.2.4 World Trade Organisation 6.2.5 Benefits and Costs of Economic Cooperation and Trade Agreements 6.2.6 Impact and relevance of free trade area on Singapore 7 Singapore’s Trade Policies 2 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) H2 9570 SYLLABUS REQUIREMENTS H2 SYLLABUS REQUIREMENTS  Explain the basis of free trade and specialisation  How trade is possible based on differences in opportunity costs and beneficial exchange ratio (terms of trade) between Free Trade countries  Principle of Comparative Advantage  Dynamic Comparative Advantage  Explain the gains from free trade using the concept of comparative advantage, from the perspectives of economic agents (and also the costs of globalisation) Benefits from o Consumers: prices, choice and variety of goods and services Free Trade o Producers: size of markets, degree of competition, costs of production and innovation o Governments: Macroeconomic objectives and policy choice  Awareness of other possible benefits of trade is useful.  Explain why protectionism exists.  Evaluate both the arguments for free trade and the motives for protectionism. Barriers to  Consideration of both the benefits and costs of protectionism Trade from the perspectives of the economic agents  Immobility of factors of production (FOP) is the main motive, when analysing the underlying factor in all arguments for protectionism. Political motivation is also another factor.  Explain the trend towards globalisation  Examine the impact of globalisation on the trade in goods and services, international flows of capital and labour, infrastructure and technology.  Examine the economic impact of globalisation on the Singapore economy  Examine economic issues of globalisation in general i.e. effects on Singapore and other countries.  Highlight equity issues when discussing the impact of globalisation on the international movement of labour and relative earning power of individuals. Globalisation &  An understanding of how economic agents might mitigate Free Trade the impacts of globalisation. Agreements o Producers: change their production decisions in view of (FTAs) competition from foreign producers. o Government: introduce policy measures, such as subsidies for R&D, in order to improve the competitiveness of domestic producers in the international market.  An awareness of the role of World Trade Organisation (WTO) in promoting free trade, and the forms of economic co-operation and trade agreements between countries is sufficient.  The benefits and costs of economic co-operation and trade agreements between countries should be considered from the perspectives of economic agents (as above)  Explain Singapore’s trade behaviour with the rest of the Trade between world and recent developments (e.g. FTAs) and the impact Singapore & the of globalisation on Singapore. rest of the world 3 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) Flow of Key Content Part I: Globalisation and Part II: Policies its effects to address macroeconomic issues caused by globalisation International International International Against Flow of Pro Free- Flow of Flow of Free Trade Goods and Trade Labour Capital Services Positive and Negative Positive and Negative Positive and Negative Economic Cooperation Protectionism (e.g. Impacts on Impacts on Impacts on and Free Trade Tariffs, Quotas, Export 1. Economy (Macro 1. Economy (Macro 1. Economy (Macro Agreements Subsidies etc.) Aims) Aims) Aims) 2. Households, 2. Households, 2. Households, - How do they work? - How do they work? 3. Firms 3. Firms 3. Firms - What are some pros - What are some pros 4.Government 4.Government 4.Government and cons? and cons? 4 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) 1. GLOBALISATION An important branch of Macroeconomics is the study of how and why an economy interacts with other economies in the world – the International Economy. We shall begin by learning about the main facets of Globalisation and finding out how this phenomenon has impacted the international movement of: i. Raw materials and Goods and services (Free trade); ii. Capital flows; and iii. Labour flows between countries. Definition of Globalisation Globalisation refers to the process of economic integration around the world, affecting the markets for output (goods and services) and inputs (capital and labour flows) and the diffusion of knowledge and information. Note: Globalisation occurs through the channels of trade, capital and labour flows. Globalisation has led to increasing interdependence, integration and interaction amongst people and organisations of different nations. There has been greater international movement of goods and services, capital and labour. The following subsection will account for this emerging trend: 1.1 FACTORS CONTRIBUTING TOWARDS GLOBALISATION i. Growth of Economic Co-operation There has been a growing trend towards greater economic integration of countries both within and across continents, such as the Association of Southeast Asian Nations (ASEAN), Asia-Pacific Economic Cooperation (APEC) and the European Union (EU). Such economic co-operation between countries has eased trade as well as movements of resources and technology between countries. This growth in economic cooperation was also aided by the efforts of the World Trade Organisation (WTO), which helps to promote free trade by persuading countries to abolish import tariffs and other barriers to open markets. ii. Technological Factors The trend towards globalisation is also driven by the rise of technology. Advances in Transportation Technology In the area of transportation, the advancement of commercial air and maritime travel greatly increased the efficiency in which goods, raw materials and people can be transported at lower transport costs. This has resulted in increasingly free flows of goods and services, as well as people. With reduced transport costs, businesses find it increasingly more cost efficient to break up their supply chains to locate different parts of their operations in different countries. Advances in Telecommunication Technology With the rapid advancement of telecommunication technology such as the 5G technology, information can now be transmitted around the world instantly at low costs. The fall in telecommunication costs expands global demand and supply for goods and services and increases international trade flows. Improvements in information and communication technology have also increased the flows of 5 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) international capital as financial capital can be transacted across countries with negligible costs and time. iii. Political and Policy Changes As China, India, and the Eastern European countries have opened up, world markets and opportunities to export have expanded considerably for advanced economies and developing countries alike. Due to cheaper their production costs, there has been growing investment flows into developing countries. With the relaxation of migration laws in these countries, there have been greater flows of people in the global economy resulted. 2. GLOBALISATION THROUGH INTERNATIONAL TRADE Since globalisation includes the integration of economies through the movement of goods and services among other things, we start by looking at that movement, which is known as trade. Trade generally refers to the exchange of goods and services. Definition of International Trade Definition: International Trade refers to the exchange of goods and services across international borders without any restrictions. In recent years, globalisation of the world economy inevitably implies that most nations are heavily exposed to trade flows in goods and services. Trade and specialisation are closely linked. A country should specialise in the goods/services in which she is able to produce relatively more cheaply and then trade with other countries for goods/services where it is relatively costly for the original country to produce. International trade enables countries to obtain goods/services from abroad while providing income for those who produce them. Overall, all the countries involved in such trade will benefit from a higher level of production and consumption. The reasons why countries trade can be categorised as demand- and supply-side reasons, and these will be elaborated in the next section. 2.1 REASONS FOR FREE TRADE (a) Demand-side Reasons i. Differences in Tastes & Preferences  Even if countries have identical resource endowments and combined those resources with equal efficiency, they may still engage in trade if their tastes for goods were different. - E.g. Suppose Norway and Sweden produce fish and meat in about the same amounts, but the Swedes prefer meat while the Norwegians prefer fish. Both countries would benefit if Norway exports meat to, and imports fish from Sweden.  Differences in preferences also explain why countries seem to export and import the same goods (Intra-industry Trade). The products may be differentiated by brand names and other distinguishing features. 6 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) - E.g. While Germany and Japan both produce and export cars (e.g. Toyota in Japan & Volkswagen in Germany), consumers in these countries may still choose to import cars from other countries due to diverse preferences. ii. Stimulates economic growth and development  International trade lead to larger market size as the demand is created from more countries instead of just the domestic market.  This would lead to a rise in net exports of the country, assuming unchanged import expenditure. The rise in net exports would also increase AD.  This acts as an incentive to invest more in different sectors of the economy, especially the foreign sector. This increase in investment further raises AD.  The overall increase in AD would lead to increase in production and employment, leading to a higher level of national income, hence achieving actual economic growth. Thus, trade is an engine of growth for many small and open economies, e.g. Singapore, where domestic sources of AD are too low to promote economic growth. (b) Supply-side Reasons i. Differences in Endowment of Resources Note: This is the most important reason why countries trade. Students must be very familiar with this point and the related section on Theory of Comparative Advantage. Different countries possess different quantities and qualities of factors of production. This results in differences in opportunity cost of production, hence leading to different Comparative Advantage in producing goods and services and thus calls for international specialisation. (This will be covered in greater detail in the Principle of Comparative Advantage). These give rise to differences in the types and prices of goods and services produced. a. Natural Resources - Land-abundant countries, such as Australia and the USA, are able to produce land-intensive products such as agricultural products, more cheaply than land-scarce countries, like Hong Kong and Singapore. In the latter, the use of land for land-intensive products have higher opportunity cost. - Some countries have abundant mineral resources- Oil in Saudi Arabia and gold/diamonds in South Africa. Countries generally export products they can produce more cheaply in return for those that are unavailable domestically or are more costly to produce as compared to buying from other countries. b. Labour resources - Labour abundant countries, such as China and India, are able to produce labour-intensive products, such as clothing and footwear, more cheaply than developed countries, like USA and Britain, where labour costs are much higher. c. Capital stock: Developed countries with a strong technological and capital base. As such, they are more competitive globally in producing ‘high-tech’ products, such as computers, high-end electronics and transportation 7 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) equipment, that require high-skilled labour and sophisticated machinery and technology. ii. Immobility of Resources  Land, natural resources and climatic conditions are not transferable from one country to another. Labour may also face a significant degree of geographical immobility. This may be due to social ties, differences in culture and language, and also the presence of immigration restrictions.  While capital is generally mobile within the country, its movements between countries may be hampered by political instability or governmental restrictions as well as inadequate financial, legal and physical infrastructure.  Since the international mobility of resources is generally limited, the alternative is for countries to specialise in goods in which they produce most efficiently and exchange for those goods they do not produce with other countries. iii. Potential to Reap Internal Economies of Scale (iEOS)  Large market size due to access to external market, firms are able to expand their scale of production, hence enjoy large iEOS, lowering their average costs. Access to wider external market is essential for small countries like Singapore because the domestic market is often too small for EOS to be reaped. iv. Differences in Technology  This arises because different countries have different intensities of research and development (R&D) activities and different speeds of adoption of new technologies. Economies which are able to adopt more advanced technology can better combine factors of production to produce the good more efficiently and at a lower opportunity cost than other economies which use relatively old technology. 2.2 PRINCIPLE OF COMPARATIVE ADVANTAGE (Recall: Supply-side reason for free trade) To understand how and why countries trade, we need to understand the Principle of Comparative Advantage. Definition of Comparative Advantage Definition: A country has a comparative advantage over another in the production of a good when it can produce it at a lower opportunity cost than the other countries. To illustrate the concept of Comparative Advantage Australia, with its vast land favourable for rearing cows, has the ability to produce dairy products like milk at lower opportunity cost than other land- scarce countries such Singapore. Singapore, on the other hand, due to its highly skilled workers and availability of technology, has the ability to produce high-end IT products at lower opportunity cost than Australia. dairy products. Hence Australia has comparative advantage in the production of dairy products whereas Singapore has comparative advantage in the production of high-end IT products. 8 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) How then should Australia and Singapore trade with one another? Based on the differences in opportunity costs of production, countries should trade in accordance to the Principle of Comparative Advantage. 2.2.1 UNDERSTANDING THE PRINCIPLE OF COMPARATIVE ADVANTAGE Definition: The Principle of Comparative Advantage states when countries specialise and produce goods they have comparative advantage in and then trade with one another, there will gains from trade for the countries and increase in world output. The Principle of Comparative Advantage is based on the following assumptions. A. ASSUMPTIONS i. There are 2 countries in the world (e.g. Japan & Thailand) and 2 goods being production and consumption (e.g. car and rice). ii. Each country initially uses half its resources for the production of each good. iii. Resources are fully employed and perfectly mobile within each country (factor immobility still exists between countries) iv. Constant opportunity costs of production of the goods. v. No barriers to trade vi. No transport costs which might outweigh the benefits of trade. B. NUMERICAL ILLUSTRATION OF PRINCIPLE OF COMPARATIVE ADVANTAGE Before Trade: Table 1: The Production Possibilities Before Specialisation Total Output Car (million units) Rice (million kgs) Japan 100 50 Thailand 5 10 Total 105 60 Table 1 above shows how many units of cars and rice each country can produce, assuming that each country allocates half its available resources to the production of each good. We can see that Japan can produce more of both cars and rice than Thailand (absolute advantage). Even so, it is still beneficial for Japan and Thailand to trade. From Table 1, we are able to derive the opportunity cost ratios (Table 2). Table 2: Opportunity Cost Ratios Opportunity Cost Ratios of 1 unit of Car (C) 1 unit of Rice (R) 0.5 R 2C Japan [= 50 / 100] [= 100 / 50] 2R 0.5 C Thailand [= 10 / 5] [= 5 / 10] 9 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) To produce each unit of car,  Japan has to forgo 0.5 units of rice; hence the opportunity cost of 1 unit of car is 0.5 R whereas Thailand has to forgo 2 units of rice; thus the opportunity cost of 1 unit of car is 2 R.  Japan incurs a lower opportunity cost (0.5 R) compared to Thailand (2 R). Thus, Japan has a comparative advantage in producing cars. To produce each unit of rice,  Thailand has to forgo 0.5 units of cars; thus the opportunity cost of 1 unit of rice is 0.5 C whereas Japan has to forgo 2 units of cars; hence the opportunity cost of 1 unit of rice is 2 C.  Thailand incurs a lower opportunity cost (0.5 C) compared to Japan (2 C). Thus, Thailand has a comparative advantage in producing rice. Thus, according to the Principle of Comparative Advantage, Japan should specialise in the production of cars while Thailand should specialise in the production of rice. AFTER SPECIALISATION: Assuming that, since Japan is able to produce more of both goods using its available resources, it transfers 10% of its resources from rice production to car production. We also assume that Thailand diverts all resources to rice production. (Column B in Table 3 below illustrates the quantity of cars and rice produced after specialisation) TABLE 3: GAINS AFTER SPECIALISATION AND TRADE Column A Column B Column C Output Before Specialisation After Specialisation After Specialisation Before Trade Before Trade After Trade [Same as Table 1] Car Rice Car Rice Car Rice (million (million (million (million (million (million units) kgs) units) kgs) units) kgs) 110 45 103 (+3) 52 (+2) Japan 100 50 [=100 + 10% of 100] [= 50 – 10% of 50] [= 110 – 7] [= 45 + 7] 7 (+2) 13 (+3) Thailand 5 10 0 20 [= 0 + 7] [= 20 – 7] World 105 60 110 (+5) 65 (+5) 110 (+5) 65 (+5) We see from Table 3 that after Japan partially specialises in cars and Thailand fully specialises in rice, world output of both goods has increased – world output of cars has increased by 5 million units and world output of rice has increased by 5 million kgs. However, the extent of trade and benefits between countries depends on their terms of trade with each other. Definition: The Terms of Trade (TOT) is the rate at which exports can be exchanged for imports (rate of exchange of exports for imports).  For both countries to benefit from trade, the TOT must fall between the opportunity cost ratios of the countries for each good. 10 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) Referring to Table 2 (opportunity cost ratios),  Japan would not accept less than 0.5R for 1C exported to Thailand (otherwise they might as well produce their own within their domestic country).  Similarly, Thailand would not give up more than 2R for 1C imported from Japan.  Hence, for mutually beneficial trade to take place, the TOT must lie between 0.5R and 2R for each car i.e. 0.5R < 1C < 2R In other words, for every unit of car, the TOT will lie between 0.5 to 2 units of rice. AFTER TRADE:  Let us suppose the TOT is agreed at 1C for 1R.  Referring to Column C in Table 3, assuming Japan exports 7 million units of cars to Thailand in exchange for 7 million units of rice (assuming that there are no barriers to trade and no transport costs).  We can see that after specialisation and trade, Japan gains 3 million units of cars and 2 million kg of rice while Thailand gains 2 million units of cars and 3 million kg of rice.  Therefore, with specialisation and trade, we can see that both countries benefit from trade with each other. Both countries now can consume higher than their production. Consumers in both countries get to enjoy a greater amount of both cars and rice resulting in higher material standard of living in both countries. In conclusion, the theory of CA explains that countries can mutually benefit from specialization and trade in terms of higher consumption, based on a favourable terms of trade, which further increase the material standard of living of these countries 2.2.2 EVALUATION OF THE PRINCIPLE OF COMPARATIVE ADVANTAGE Although according to the theory both countries should benefit from higher consumption possibilities, in reality, certain assumptions may not hold and countries may be prevented from reaping the full benefits of free trade. a. Increasing Opportunity Cost In reality, a country is likely to experience increasing opportunity costs (i.e. give up increasing amounts of other goods to produce a good) as she specialises further in the production of a particular good. This is because all resources are not equally suitable and efficient in the production of another good. b. Factor Immobility within the Country To benefit from trade, each country should try to scale down those industries in which she has no comparative advantage and divert resources into industries that she has comparative advantage in. However, factors are not perfectly mobile occupationally and geographically e.g. it is neither possible nor easy to transfer resources, e.g. labour, from sheep farming into the production of computer chips even if the country has comparative advantage in producing computer chips. c. Factor Mobility between Countries Increased factor mobility between countries will reduce international trade. E.g. developed countries, e.g. the UK, rather than exporting finished high-value goods to developing countries, e.g. India, may instead invest capital in developing 11 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) countries to enable the production to take place there. In that case, the finished goods will be available in developing countries at almost equal prices as is available in the developed countries. Thus, there will be no further need for trade. d. Transport Costs In reality, transport costs exist, and it may outweigh any comparative advantage. This is especially the case for countries that produce bulky/heavy, low value products e.g. bricks. For such goods, transportation costs are high. This will add on to their final price and may offset any advantage gained through specialisation. e. Trade Restrictions Many countries often take actions to ‘protect’ their domestic industries and discourage imports by imposing tariffs or quotas. As a result, some countries may produce goods in which it does not have a comparative advantage in, thereby reducing the gains from trade. In addition, countries might not be able to export as much as it desires (this will be elaborated further in Section 6.1 on Protectionism). 2.2.3 DYNAMIC COMPARATIVE ADVANTAGE A country’s comparative advantage is not static and can change over time. For example, in the 1970s, due to its large number of cheaper unskilled workers, Singapore had CA in cheap electronic products. But overtime, as its workers are more educated and more highly skilled, Singapore’s CA has evolved to high-end highly capital- intensive technological products. Definition: Dynamic Comparative Advantage refers to a country’s comparative advantage changing over time due to changes in factor endowments. Comparative advantage enjoyed by a country may improve due to: i) Discovery of new source of non-renewable raw materials; ii) Investment in physical capital, human capital and technology. For example, the Singapore government implemented supply-side policies to encourage upgrading of skills in knowledge-based industries as well as improve infrastructure to develop the new industries. These efforts also improved the quality of labour in the economy. iii) Government policies to promote targeted inflows of FDIs and foreign labour A country may lose their comparative advantage if: i) Its productivity growth falls behind that of foreign competitors; ii) Its factor endowment is depleting / depleted (e.g. exhaustion of non-replaceable raw materials (natural resources) in primary producing countries); iii) It experiences increasing opportunity cost as it specialises in the production of a good; and/ or iv) Government policies. 12 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) 2.2.4 Patterns of Trade Definition: Pattern of trade refers to the direction, volume and composition of trade between countries. Composition of trade refers to what is being exported or imported, while volume of trade refers to the real value of goods and services that is being exchanged. Lastly, direction of trade refers to the direction of exports and import flows. Factors affecting Patterns of Trade are: Demand Factors a) Increase in economic growth For countries like China, the high economic growth over the last decade and a half has led to an expanding size of middle-income earners, hence rising affluence and changing lifestyles. The rising affluence has changed the economy’s consumption pattern in favour of high-end branded luxury goods e.g., the luxurious Ferraris and BMWs as well as high end luxury clothing leather products from brand like Gucci, Prada. These have resulted in a steep increase in the volume of imported luxury goods, changing China’s pattern of trade towards importing luxury goods. b) Changing Demographics & Taste and Preferences Where there are changes in population sizes as well as population demographics, the global demand pattern will also change. For example, ageing countries like Japan will demand more healthcare goods and services like medical tourism and wheelchairs for the elderly from Singapore. This is likely to result in more of such goods imported into Japan and/or produced and exported by Japan, changing Japan’s pattern of trade. Supply Factors c) Change in pattern of trade due to change in comparative advantage Another factor that can cause a change in an economy’s pattern of trade is the change in its comparative advantage. According to the principle of comparative advantage, a country should specialise in the good it has comparative advantage in, i.e., the good it can produce at lower opportunity cost than its trading partners, ceteris paribus. Changes in comparative advantage can be due to changes in factor endowment, technological advancement and government policies. It can also occur due to changes in its or its trading partner's state of technology. The US, for example, may have lost its CA on high end manufactured products due to China's rapid technological development and advancement enabling China to produce some high-end manufactured goods at lower opportunity cost than its trading partners like US. Government Trade Policies d) Bilateral and regional free trade agreements ASEAN Economic Community (AEC), North America Free Trade Agreement (NAFTA) and the EU Customs Union have led to trade creation between member countries, thereby changing the direction of patterns of trade of member countries. 13 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) The Zero-tariff policy agreement among members of NAFTA, for example, has seen greater trade among the north American countries and less trade between north and south American countries. EU’s common high tariff on non-members has artificially increased the prices of imports from non-member countries, enabling them to be each other’s major trading partners. 2.3 IMPACTS OF INTERNATIONAL TRADE 2.3.1 ADVANTAGES OF INTERNATIONAL TRADE (The Case for Free Trade ) The benefits of international trade can be examined in terms of the following: - Macro impacts on the economy (i.e. macroeconomic goals) - Micro impacts on different stakeholders such as consumers, firms and government’s microeconomic objectives Effects on Criteria Government/  Macroeconomic goals (Sustainable & inclusive economic Economy growth, Price stability, Full employment, Favourable BOP  High SOL  Microeconomic Goals Producer  Costs, Revenue, Profits  Producer surplus Consumer  Variety & quality of goods  Prices & Consumer surplus To the GOVERNMENT/ECONOMY, Potential benefits in terms of govt’s macro-aims are as follows: a. Growth and Development of Economies  With a greater access to global markets, domestic firms are able to expand their scale of production, reaping economies of scale. This reduces the unit cost of production and this enables firms to be able sell exports at lower prices. Assuming that the demand for exports is price elastic, a fall in export prices will lead to a more than proportionate rise in the quantity demanded for exports and export revenue will rise.  This will lead to increase in net export, thereby increasing AD and hence increases real national income, causing increase in actual economic growth. Therefore, the government’s macroeconomic aim of positive economic growth can be achieved through free trade.  Trade also can lead to full utilisation of otherwise underemployed or unemployed resources. The increase in AD due to increase in net export will lead to the creation of more jobs as more workers are required to increase production of output to meet the increase in AD, reducing the country’s unemployment level. Using the PPC diagram, such production of output to meet AS is reflected in the movement from a point within the PPC outwards to a point on the PPC. The government’s aim to achieve low unemployment is therefore achieved. b. Price Stability  Through trade, countries can import resources and raw materials from cheaper sources around thus allowing for a fall in the cost of production for domestic firms. 14 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) This increases the country’s SRAS (SRAS shifts down), leading to fall in general price level, thereby curbing imported inflation. This helps the government achieve its macroeconomic aim of price stability. c. Faster Rate of Technological Advancement and Diffusion and Potential Economic Growth  In order to maintain their competitiveness with their foreign counterparts, firms may look to enhance their products e.g. through Research & Development (R&D). Experimentation with new processes and products provide workers with a learning-by-doing environment, which contributes to rapid economic development.  Countries exposed to international trade can gain access to modern technology. International trade also allows for the transmission of ideas, technical expertise and managerial skill etc. that are essential for the economy to develop. This can lead to higher productivity and increase the country’s productive capacity, hence increase the country’s LRAS (LRAS shifts rightwards). This increases the country’s full employment level of output and therefore potential economic growth is achieved.  Potential benefits in terms of micro-economic aims are as follows: d. This is also greater productive efficiency due to specialisation and large-scale production that allow firms to reap greater internal economies of scale, thus reducing average cost of production, also possibly leading to lower domestic prices. e. The presence of overseas competition can help to reduce allocative inefficiency by stopping domestic monopolies from exploiting their positions. Without trade, a domestic monopoly may be able to raise prices and restrict output, resulting in underproduction and therefore allocative inefficiency. However, trade exposes domestic firms to overseas competition and therefore helps to keep such monopoly powers in check, therefore reducing allocative inefficiency. It also gives more incentive to the domestic firms to remain efficient and competitive. To PRODUCERS, potential benefits are as follows: f. Increased profits  By gaining access to foreign markets, firms’ demand increases as they expand their market size into these foreign market and hence enjoy additional source of revenue through exports on top of the sale of goods and services within the domestic economy.  Trade also enables firms to lower their average cost of production - When firms expand their scale of production, they can reap greater internal economies of scale, thus reducing average cost of production, enabling them to compete better in the export market. - Through international trade, firms have access to cheaper sources of resources from various countries, hence able to lower their cost of production  Hence, firms can enjoy higher demand and fall in unit cost at the same time. This can result in higher level of profit, the primary objective of producers. g. Increase efficiency and innovation in production due to competition from imports  Free trade increases competition for domestic firms. 15 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570)  The entrance of imported goods and services reduces domestic firms’ market share the the country  motivate them to streamline their production towards more efficient production methods. May even embark into new technology and innovations to lower average cost to maintain their market share in the economy. This also helps increase the level of profits. To CONSUMERS, potential benefits are as follows: h. Higher Consumption Possibilities  Trade provides the ability to consume beyond a country’s production possibilities. Based on the principle of comparative advantage, we have shown that the quantity of world output is higher when countries specialise. Consumers will then enjoy an improvement in the quantity and quality of goods and services. (Refer to Section 2.2 of this lecture notes) i. Gain in Consumer Welfare  With trade, consumers can now enjoy lower prices and higher consumer surplus especially in goods their country do have have comparative advantage in (refer to Section 2.1 on the Principle of Comparative Advantage). - Before trade: Figure 1 above shows that equilibrium price of cars in Thailand is at PThai and equilibrium quantity at QThai. Price of cars Figure 1 A SSdomestic PThai B Pw C SSw DDdomestic Qsdom QThai Qtrade Quantity of cars - After free trade: Assuming that there are an infinite number of firms in the world market willing and able to produce cars at Pw, the world supply is perfectly price elastic and price is at Pw. With trade, the domestic car producers will now have to lower their price to match the world price at Pw. Hence after trade, the equilibrium price of cars in Thailand now falls from PThai to Pw and equilibrium quantity now rises from QThai to Qtrade. Domestic firms are willing able able to produce Qsdom number of cars, while (Qtrade- Qsdom) is quantity of cars imported. - Hence with trade, consumers get to enjoy lower price at Pw, and higher quantity at Qtrade. Consumer surplus increases from APThaiB to APwC. There is a gain in consumer surplus of PThaiBCPw  With trade, countries can now import goods and services from different countries and regions. - This enhances consumer choice since there is now a tremendous range and variety of goods and services that they can choose from. E.g. consumers in tropical countries can enjoy imports from temperate countries. 16 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) - It is also likely that as countries specialise in the production of goods/services, the quality of goods/services produced will improve. - The availability of large variety as well as higher quality products together with lower prices and higher consumer surplus lead to higher consumer welfare. j. Diversifying the Source of Products  With international trade, countries can import goods from different parts of the world. Thus, any supply disruptions in the home country or in another country will have fewer disturbances to the amount of goods available in the home country.  In addition, diversifying sources of products may also help to reduce prices, which benefits the consumers. 2.3.2 DISADVANTAGES OF INTERNATIONAL TRADE (Case against free trade) To the GOVERNMENT/ECONOMY Possible costs of international trade in terms of govt’s macro-aims are as follows: a. Vulnerability to External Shocks affecting Economic Growth & Price Stability Countries may be vulnerable to external shocks such as recessions in trading partners. This tends to affect countries that are trade-dependent more. For example, during the 2008 sub-prime crisis, national income in USA and many European countries fell. Thus, they had lesser purchasing power to buy from other countries, including imports from Singapore. Hence Singapore’s exports decline. As Singapore is heavily export-reliant, the significant fall in exports leads to a fall in the value of net exports and therefore AD decreases. Through the multiplier process, this leads to a decrease in real national output and hence fall in economic growth, and a rise in demand-deficient unemployment. Similarly, for an import-dependent country, the economy will be vulnerable to imported inflation due to fluctuations in global prices of goods such as agricultural products and raw materials. With a rise in the prices of agricultural products like wheat and raw materials like metals, costs of production for firms will rise since these are factor inputs for many production processes. The SRAS will fall (SRAS curve shifts up) and the GPL will increase, contributing to imported inflation. As such, the government’s aim of price stability is not attained. For example, in Nov 2021, United Nations announced that the world food prices reached the highest level in more than a decade. As Singapore needs to import most of our food items, this means the price of imported food will inevitably increase, leading to imported inflation. b. Immobility of Resources and Structural Unemployment Economic theory assumes there is free mobility of labour and that countries should mobilise their labour from less efficient industries to industries they have comparative advantage in in order to benefit from trade. However in reality, there is occupational immobility due to the mismatch between the skills that the unemployed possess and the skills that the vacancies in the industries which the country possesses a comparative advantage in. For certain types of labour to be transferred from one industry to another, retraining is often required. Such retraining may be very costly. A considerable time period may also be required for such retraining. 17 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) Furthermore, workers, especially those who are older may be reluctant to be retrained and employers reluctant to spend on their training. These various reasons may result in significant and even prolonged structural unemployment. This is especially seen in cases of sunset industries. For example, when developed countries experience a loss in comparative advantage in low value-added manufactured goods to developing economies, workers retrenched from the sunset industries do not possess the relevant skills to be transferred to higher value-added industries. This results in structural unemployment which needs to be addressed by the government. c. Environmental Degradation, the ‘Race to the Bottom’ With globalisation, countries take advantage of the opportunities to benefit from trade and hence specialise in the production of goods that they enjoy comparative advantage. With rising exports, more goods are produced. This inevitably involves more power generation for industrial production, leading to problems of pollution. Some ‘anti-globalist’ economists believe that trade encourage firms to move to countries that have weak pollution controls and export from there. This further weakens controls and aggravates environmental degradation, lowering non- material standard of living. This problem is more prevalent among developing countries which went through industrialization relying on the conventional sources of energy such as coal. To PRODUCERS, possible costs are as follows: d. Domestic producers may earn lower profits when faced with greater competition When a country allows imports into the domestic market, it will be opening up its domestic market to foreign competition. While some domestic firms are able to survive the strong competition, other firms that lack the ability to produce at lower costs may not be able to compete in terms of price or quality. This could be due to their inability to reap iEOS, or lacks the machinery, technological know-how or access to cheaper resources  hence unable to lower price to compete. Domestic firms may possibly face a lower demand as their market share is reduced. This will reduce their total revenue and therefore adversely affect their profits. e. Dumping and Unfair Foreign Competition Dumping occurs when foreign producers sell their goods at prices below marginal cost. Such predatory pricing is made possible if the foreign producer use their past profits or obtain government subsidies. By practising dumping, foreign producer seeks to drive the domestic firms out of competition and gain monopoly power in the market. The domestic firms operating in smaller scale compared to the multinational companies will not be able to compete at such low prices. Consequently, domestic producers may have to shut down, resulting in loss of jobs among domestic workers. To CONSUMERS, possible costs are as follows: f. Over-Dependence on Other Countries 18 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) It is very possible that due to unforeseen circumstances such as war and global pandemic like the COVID-19, movement of goods and services in and out of a country is hindered. A country which depends on imports of essential products like weapons, oil, food and important raw materials can experience shortages of such goods. Consumers may face rising prices of essential goods, and hence fall in material standard of living. As such, for security reasons, some countries would rather continue to produce such products than to rely totally on imports despite facing a comparative disadvantage in such productions. Singapore’s “30 by 30” plan: During the COVID-19 pandemic, supermarket shelves were emptied as people panic bought. This brought to attention Singapore’s overreliance on food imports and its subsequent food security. To address this concern, Singapore government made plans in 2019 to reduce its dependence on food imports with its “30 by 30” vision (To achieve 30% of Singapore’s nutritional needs to be met locally by 2030). g. Lower consumer welfare and choice due to dumping Although the domestic consumers enjoy lower prices and higher consumer surplus as a result of foreign firms’ dumping practices, this is only in the short run. Consumers will eventually lose out in the long run by paying very high prices when the foreign firms eventually gain large monopoly power. Also, when domestic producers are driven out of competition through dumping, there will be fewer substitutes available. Consumers are worse off due to less choice. Summary of advantages and disadvantages of International Trade Advantages Disadvantages Govt/Economy (Macroeconomic aims) Govt/Economy (Macroeconomic aims) Higher net export increases AD  Economic instability as economic increases actual economic growth. growth largely depend on external Technological diffusion  increase factors (like net exports) productive capacity  increase Structural unemployment as country LRAS  potential economic growth. shifts focus to more export led As export sector grows demand economic growth for labour increases  Trade encourages firms to set up unemployment falls and better factories in developing countries utilisation of resources. pollution levels go up in those countries non-material standard of living drops. Producers Producers Larger market size as some goods Domestic producers may have to are exported  increases export shut down if foreign firm practices revenue. dumping may cause Reap IEOS due to large scale unemployment and wastage of production  lower long run average resources in the country costs Domestic firms cannot compete on Incentive to be dynamic efficient and such low price. invest in R&D to remain competitive Technological diffusion  firms learn new processes  increases efficiency lowers cost 19 © Catholic Junior College Economics Department 2023  The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) Consumers Consumers Trade based on CA higher Over-reliance on imported goods  consumption possibility imports of essentials may fall during More efficient production and IEOS crisis  material SOL may fall. due to larger scale of production  Dumping  may lead to may translate to lower prices monopolisation by foreign firms, as More variety and choice  due to local firms cannot compete at the low import and export from different parts prices foreign monopolies exploit of the world the consumers by charging high Opens domestic market to more prices. competition drives efficiency  Excessive reliance on imports  better quality, lower price and higher faced with imported inflation in the consumer surplus. case of a weak currency. 3. GLOBALISATION THROUGH INTERNATIONAL MOVEMENT OF CAPITAL FLOW Previously we understood ‘capital’ to be ‘capital goods’. The term ‘capital’ can also be used more generally to refer to the money for various investment purposes. Here, ‘capital’ refers to the money for investment purposes. There are various forms of international capital flows, they are: Foreign Direct Investment Portfolio Investment Other Investments Definition: FDIs are Definition: Portfolio Short-term monetary investment of foreign assets investments are flows between Singapore into domestic structures, investments in securities and the rest of the world, equipment and that are intended for typically known as ‘hot organisations. financial gain only and do money’; more short term not create a lasting and volatile Flow of money to acquire interest in or effective E.g. When Singaporeans physical (real) assets; more management control sell SGD to buy foreign long-term and more stable over an enterprise currency and place E.g. When foreign MNCs (unless it is for the deposits in foreign build plants in Singapore. purpose of banks. acquisition of firms As firms seek to maximize Similar to that of portfolio profits, some key Flow of money to investment, investors determinants attracting FDI acquire paper asset seek to obtain the are political stability, rather long term highest returns. infrastructure, corporate tax E g The purchase or rate, cost of production, sale of company shares The key determinants quality of labour, and government bonds are relative interest rate As investors seek to and expected changes in achieve the highest exchange rate. Hot returns from holding money inflows occur financial assets, the key when the interest rate for determinants are a currency is relatively expected higher than other change in price of currencies or when the financial assets and currency is anticipated to expected change in appreciate in the future. exchange rate. Foreign 20 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) investors will purchase domestic financial assets when the price of company share or government bonds is expected to rise 3.1 IMPACTS OF INTERNATIONAL MOVEMENT OF CAPITAL FLOW POSITIVE IMPACTS To the GOVERNMENT/ECONOMY, potential benefits in terms of govt’s macro- aims are as follows: a. FDI is an engine of growth and creates job opportunities Increase both actual and potential economic growth - Foreign direct investments contribute to the country’s overall investment thereby increases the country’s AD and, through the multiplier process, will lead to increase in RNY. - This increase in I increases the AD, leading to increase in RNY through the multiplier process  economic growth is achieved. - At the same time, the rise in AD causes a rise in production which increases the demand for labour as firms hire more workers to increase output. This lowers the country’s demand-deficient unemployment. - When foreign firms offshore part of their production process to developing countries, more jobs are created for the workers in the country. - The entrance of foreign firms leads to growth not just in the industry but also in other related industries such as the logistics and construction industries  more jobs are created  further reduce the country’s unemployment rate. E.g. the popularity of India as a call centre is prevalent amongst many multi-national corporations. This has led to increase in employment in this sector in India. - Also, the inflow of capital goods and technology as well as transference on knowledge brought into the economy by FDIs leads to increase in productivity and productive capacity of the country, increase the country’s LRAS  resulting in an increase in the full employment level of output increases potential growth. - Hence FDIs spur both actual and potential economic growth which helps to achieve sustained growth. b. Increase in “hot money” resulting in economic growth An increase in inflows of hot money into the economy leads to an increase in availability of funds for borrowing at lower interest rates. This provides cheap funds for domestic firms to borrow to increase production as well as increase domestic investment. This increase in I increases AD, leading to increase in RNY through the multiplier process  economic growth is achieved. To PRODUCERS, potential benefits are as follows: b. Higher profits enjoyed by firms Globalisation has encouraged firms from developed countries to relocate their production to countries where wage costs and hence unit labour costs are lower, typically developing countries. They will also be able to gain access to cheaper 21 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) raw materials. These will reduce unit cost of production for these multi-national corporations (MNCs), resulting in higher profits. Another gain from FDI is higher revenue by tapping on the potential markets. For instance, when China became more open to FDI, many foreign firms undertook direct investment in China to take advantage of the rising income of consumers in the emerging economy (e.g. European car manufacturers like Volkswagen) In addition, industries and sectors with intensive FDI tend to have higher average labour productivity due to the use of more efficient machines. The higher labour productivity may benefits firms as this can translate to lower unit cost of production, resulting in higher profits. c. Foreign producers stimulates growth of domestic firms Domestic producers get to learn from the foreign MNCs and gain access to the technical expertise and effective business management skills brought in by these foreign firms. This can greatly help the domestic producers to grow, leading to the growth of the whole industry.  In fact, competition from foreign firms in the country act as motivation for domestic producers to innovate and embark on R&D towards greater efficiency in their attempt to compete better and maintain their market share in the domestic market.  The presence of foreign firms in the country brings businesses to domestic producers in other related industries that supports the MNCs such as transportation and even F&B industries. Such domestic producers enjoy larger demand, hence higher revenue and profit. 22 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) To CONSUMERS, potential benefits are as follows: d. Increase household income and improves material standard of living Industries and sectors with intensive FDI tend to have higher average labour productivity due to the use of more efficient machines. Such higher productivity could result in higher wages for workers, giving consumers a greater purchasing power to access goods and services. As such, their material standard of living improves. NEGATIVE IMPACTS To the GOVERNMENT/ECONOMY, possible costs are as follows: a. Economics instability caused by short-term capital flows (hot money) due to speculative activities There may be increased volatility in the economy due to speculative activities. This will negatively impact the country’s economic stability. The volatility in capital flows due to globalisation was clearly seen in the 1997 Asian Financial Crisis and the European Debt Crisis in 2009. Unstable exchange rate - Hot money can destabilise the country’s demand and supply of currency - Short-term capital inflows caused by hot money flowing into the country will lead to increase in demand for domestic currency, causing appreciation of the country’s currency. - On the other hand, short-term capital outflows will cause increase in the supply of the country’s currency, causing its currency to depreciate - Such rapid changes in the country’s exchange rate will lower confidence in the country’s exchange rate. Negative impact on trade and economic growth. - The unstable exchange rate caused by the volatility in capital flows will have negative impact on business confidence on the country’s economy. - Net-exports will fall as unstable exchange rate lowers foreigners’ confidence in trading with the country. - Foreign I will also fall due to fall business confidence. The fall in net- exports and I will lead to fall in AD and, through the multiplier process, will lower national output. This will slow down economic growth and may even lead to recession. - Depreciation of domestic currency due to large capital outflow will lead to unfavourable terms of trade i.e. the country needs to export more in exchange for import. This will lead to fall in net-export  worsens Balance of Trade Imported inflation - When hot money flow out of the economy causing massive capital outflow, the supply of the domestic currency will increase significantly in the forex market and the country’s currency will depreciate markedly. - This will increase import prices for the domestic country. Imported resources will be more expensive, raising the cost of production for domestic firms. SRAS will fall and the SRAS curve will shift up, causing GPL to rise. This can lead to imported inflation. This is especially so for open and import-dependent countries like Singapore. 23 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) b. Widening of income inequality and threatening inclusive economic growth Although it cannot be denied that foreign investments have positive impact on the country’s employment and economic growth, there is a preference for skilled workers over the unskilled workers. The sectors which attract FDI are generally the modern and more advanced sectors in the developing countries. Hence, they tend to employ more skilled workers and are willing to pay them higher wages than what they would have otherwise earned. As such, FDI tends to widen the inequality/imbalances between the modern and the backward sectors of the economy as well as between skilled and low-skilled workers. The restructuring to higher value-added industries as well as relocation and outsourcing/offshoring* of lower skilled production process in many developed countries leads to an increase in demand for skilled workers and a fall in demand for lower skilled workers. This has resulted in a wider income disparity between those with relevant skills while low or even no income for those who are displaced in developed countries. Outsourcing and Offshoring are cost-cutting measures *Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were done by company's own employees. *Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. c. Shifting of highly polluting industries by developed countries  Developed countries may very likely shift some of their more polluting industries into the developing countries. Residents may have to put up with more pollution and suffer from a lower quality of life.  Developing countries utilise lax environmental standards to court MNCs, especially with the emergence of more low-cost rivals. Hence, developing countries are more likely to face environmental degradation (e.g. “Cancer Villages” in China) as compared to developed countries which impose stringent environmental regulations (e.g. carbon taxes) leading to a fall in non-material standard of living. Environmental pollution is a form of negative externalities which results in deadweight loss to society and a lack of allocative efficiency (overproduction). d. Hollowing out of industries and unemployment in countries with higher cost of production “Hollowing out” refers to the deterioration of a country’s manufacturing sector when producers move to lower cost countries. Some economists believe the world’s leading developed economies are being hollowed out. E.g. As the US firms move their production plants out of the country to developing countries such as Mexico and Vietnam, this reduces the number of jobs available in the US, leading to unemployment in the US. Hence offshoring will make it difficult for the government to attain its macro- economic aims of full employment. 24 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) To PRODUCERS, possible costs are as follows: e. Foreign control of domestic industry  As developed countries pump more capital into developing countries, e.g. large MNCs setting up production plants in these developing countries or by raising stake in company through portfolio investment, the local firms may be faced with greater foreign competition. The smaller less efficient firms may not be able to survive the competition. Not only will they lose their market share to these foreign firms, these foreign firms may even be able to eventually gain control of the domestic industry. To CONSUMERS, possible costs are as follows: f. Higher price of goods and less choice The domination of foreign producers over the smaller domestic forms will decrease the level of competition in market. These foreign producers can charge a higher price. Consumers are worse off due to higher price, lower consumer surplus and less choices. Summary of Advantages and Disadvantages of International Capital Flows Benefits Costs Govt/Economy (macro-aims) Govt/Economy (macro-aims) Rise in FDI increases overall instability of domestic currency investment leading to increase in AD, due to the speculation by foreign thus increases RNY and hence actual investors growth Sectors that receive FDIs grow Better diffusion of technology and faster and more efficient that the transference of knowledge increases other sectors widens income productive capacity  increases LRAS gap  economic growth is not  increases national output  inclusive potential economic growth Rise in pollution as firms choose Relocation/outsourcing/offshoring by locations where environmental developed countries  creation of jobs concerns are limited  economic in developing countries  reduces growth is not sustainable unemployment Hollowing out of industries in countries with higher production cost  rise in unemployment Producers Producers Learn new skills and technology from Foreign MNCs with large funds the developed counterparts lower (portfolio investments) in the country average cost of production  higher  stiff competition for domestic profits producers. Relocation/outsourcing/offshoring and access to cheaper resources  lower lower average cost of production  higher profits Consumers Consumers Better technology  better quality and Foreign control of the domestic cheaper products market  may eventually lead to Higher productivity  higher wages  higher prices higher material SOL 25 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) 4. GLOBALSATION THROUGH INTERNATIONAL MOVEMENT OF LABOUR Definition of Labour The work time and work effort that people devote to producing goods and services is called labour. With globalisation, we see people relocating internationally. This also brings benefits and costs to various economic agents. 4.1 IMPACTS OF INTERNATIONAL MOVEMENT OF LABOUR POSITIVE IMPACTS To the GOVERNMENT/ECONOMY, the potential benefits are as follows: a. Increase in remittance and income level from migrant workers  Migrant workers from developing countries stand to receive a higher income compared with what they earn in their own countries and remit a large sum of their income back. This has helped improved living standards in their domestic countries. E.g. personal remittances of Filipino workers abroad account for about 9.6% of The Philippines’ GDP in 2020.  The remittances from migrants in different countries would also bring about knock-on benefits to the local and wider economy. C rises because with an increase in remittances being sent back by the migrant workers, their families in their home country experience a rise in incomes. This increases the AD and results in a multiple increase in real national income via the multiplier effect, helping to achieve actual growth.  With these remittances from migrant workers to developed countries, I rises because their families in their home countries with small farms and businesses have more funds to invest in farm machinery and other equipment to raise productivity. This increases the quantity and quality of capital in the home country of the migrant workers. There is an increase in LRAS and therefore the full employment level of output rises. Potential growth is thus achieved. Alleviation of skill shortage can help relax constraint on economic growth  Influx of foreign talent enhances quality and quantity of labour and increases productive capacity. This will lead to an increase in LRAS resulting in potential growth.  Highly skilled segments of the population in developing countries may find opportunities and choose to work in developed countries where developed countries face skill shortages. - This increases the skilled labour supply of developed countries and developed countries enjoy an increase in quantity and quality of labour. Moreover, with the increase in supply of foreign labour, wages are depressed and cost of production falls. - This results in an increase in SRAS and LRAS, resulting in sustained economic growth in developed countries.  Higher skilled workers from developed countries also tend to move to developing countries and take on managerial roles where skills may be lacking in developing countries. 26 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) These expatriates are likely to contribute positively to the economic growth of the developing countries by sharing their expert knowledge with their local counterparts. b. Increase in skills and knowledge  Such migration of workers will also lead to an increase in skills when they return to their domestic (developing) countries and transfer their knowledge. This would raise productivity levels in the home country, resulting in lower unit cost of production and increased productive capacity, resulting in an increase in both the SRAS and LRAS, resulting in both actual and potential economic growth. c. Diversification of the economy  Influx of foreign talent allows emerging economies to develop new niche areas especially in diversifying the economy by allowing the economy to move up the higher value-added manufacturing ladder or move into the services sector. To CONSUMERS, potential benefits are as follows: d. Increase in income and standard of living Migrant workers employed overseas are attracted by higher pay and better living conditions. With higher income, their material standard of living increases. To PRODUCERS, potential benefits are as follows: e. Higher profits With greater mobility of labour among countries, firms in developed countries are able to employ migrant workers who tend to command lower wages than local workers. This helps to lower the average cost production. Ceteris paribus, producers can enjoy higher profits NEGATIVE IMPACTS To the GOVERNMENT/ECONOMY, the possible costs are as follows: a. Brain drain  The emigration of the “human capital” to the developed countries has posed severe challenges for the developing countries.  The outflow of skilled labour from developing countries leads to a fall in the quantity and quality of resources within developing countries, resulting in a loss of productive capacity and therefore reduce the LRAS. The LRAS curve will shift leftwards, therefore resulting in a fall in the full employment level of output. This reduces the potential growth of the developing country.  This loss of talented skilled labour impedes the developing country’s ability to progress to higher-value-added production in future. They may not be able to keep up with the competition in the world. b. Increase in unemployment in certain sectors in the country  When developed countries set up their companies in developing countries, the top tier management positions may be filled by those from the developed countries. This may lead to the dominance of foreigners in high skilled jobs even though there may be sufficient supply of local talent in the developing countries 27 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) that could have filled the above high skilled jobs. This may create unemployment of high skilled workers in the developing countries.  Similarly, as the developed countries outsource some low wage jobs to the developing countries, there will be rise in unemployment of such jobs in their own home country. Moreover, the rise in supply of labour due to inflow of labour from developing countries will depress wage rates especially for some low skilled jobs. c. Income inequality  While outsourcing has created job opportunities in developing countries, these opportunities often benefit only a privileged minority and only exacerbated the existing income inequalities within the country. E.g. the income inequality between the Chinese in coastal cities, e.g. Shanghai, Guangzhou and Shenzhen which receives more FDI, and the inland Chinese cities. d. No incentive to climb up the value chain  Firms who make use of cheap migrant labour tend to become less driven and lack incentive to adopt new technology. Hence there is no motivation for firms to move up the value chain. To PRODUCERS, possible costs are as follows: e. Lower incentive to innovate When domestic firms have cheap migrant workers as an alternative to domestic workers, producers are less incentivised to improve the method of production or improve labour productivity through automation. To CONSUMERS, possible costs are as follows: f. Loss of income Influx of foreign workers results in the loss of jobs among domestic workers. Those affected will experience a loss of income, leading to lower material SOL Summary of advantages and disadvantages of International Flow of Labour Advantages Disadvantages Govt/Economy (Macro-aims) Govt/Economy (Macro-aims) Skilled migrant workers in Brain drain in developed countries  developed countries and developing lower quantity and quality of countries to plug shortages in skills resources  lower actual and  increase quantity and quality of potential EG resources  increase C and LRAS Migrant workers from developed  spur both actual and potential countries to fill top managerial economic growth positions in multinational companies Returning skilled workers in (MNCs) in developing countries  developing countries  transfer of unemployment among skilled skills  increase productivity  workers in developing countries increase quantity and quality of Job opportunities in cities and coastal resources  increase C and LRAS regions  increase in demand for  spur both actual and potential workers and higher wages in these economic growth areas  income inequality between urban and rural regions Producers Producers 28 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) In developed countries, migrant No incentive to innovate among firms workers are cheaper than local who use cheap migrant workers. workers  lower average cost production  higher profits Consumers Consumers Unskilled and skilled migrant workers in Loss of jobs to skilled and low skilled developed countries from developing worker in developed  loss of countries earn higher income  income  lower material SOL increase in material SOL In Summary Globalisation International Capital flows Labour Trade Foreign direct investments Final goods and services Foreign portfolio investments movements Intermediate goods Other investments Raw materials Benefits / Advantages To the producers Access to larger global markets To the consumers To the economy  larger demand hence larger revenue Lower prices, Increase actual and higher potential growth Able to reap large iEOS, access to technology, cheaper consumer Lower resources  lower production surplus unemployment cost variety Access to cheap funds from short-term capital inflows Against / Disadvantages To the economy Structural To the producers To the consumers unemployment Lower market share in Vulnerable to external domestic market Possibility of factors and global Strong competition from higher prices and shocks foreign imports and lower consumer Income inequity foreign firms in domestic surplus in the Environmental market long run degradation Hence need for government policies to mitigate the disadvantages to gain high net benefit of globalisation 29 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) 5. GLOBALISATION IN THE CONTEXT OF SINGAPORE 5.1 Key features of Singapore’s trade structure  Singapore’s economy possesses a high degree of openness to international trade and factor flows. There is rapid industrialization and export-led growth with exceptionally high import content of exports, especially petroleum-related products since all crude oil is imported.  The country has no significant natural resources except for a well-located harbour, with heavy reliance on the international market for raw materials and food, including water from Malaysia and Indonesia.  The last decade has seen rapid growth of intra-industry trade, i.e. there is an increasing propensity of Singaporeans to consume branded goods from the rest of the world while simultaneously exporting similar but differentiated goods to cater for foreign tastes.  Singapore experiences a high degree of foreign influence, evidenced by the heavy net inflows of capital, labour and technology. The net inflow of long-term capital is overwhelmingly foreign direct investment (FDI) rather than portfolio. 5.2 SINGAPORE’S CHANGING COMPARATIVE ADVANTAGE  The changes in our trade pattern can be viewed as a response mainly to our changing comparative advantage that has changed over time.  In the 1960s and early 1970s, our comparative advantage was in labour-intensive manufacturing, given an abundance in low-skilled labour.  However, by the mid-1970s, when savings accumulated and rising labour costs, capital-intensive industries became the major focus.  The efforts to upgrade manufacturing industries and promote service industries after the 1985 recessions, coupled with the then-abundant skilled labour, allowed Singapore to start exporting human-capital and technology-intensive goods and services even up to today.  After Singapore’s 50th birthday , its growth expansion is driven by deep skills and innovation, with Singaporeans and local enterprises at the core, with a push for Singaporeans to develop a mastery of skills in every vocation via the SkillsFuture initiative. There is a move from value-adding to value-creation, emphasizing the importance of SMEs and also to establish Singapore as a leading centre for value creation in the business strategies of foreign companies. Table 4: Singapore’s Changing Comparative Advantage Period Factor endowments Comparative Advantage Before 1960  Well-located harbour  Entrepôt Trade goods  Little capital 1960s – Early  Well-located harbour  Labour intensive goods 1970s  Abundant labour  Accumulating capital Mid 1970s –  Well-located harbour  Capital intensive goods Mid 1980s  Abundant capital  Upgrading technology, education and training skilled labour Mid 1980s –  Well-located  Human capital and Late 2000s transportation hub technologically-intensive  Abundant capital goods and services (high  Abundant skilled labourvalue-added activities in  Higher technology global supply chains) 30 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) Mid 2010s –  Deep Skills and  Moving from value-adding to Current Innovation value creation.  Entrepreneurship and  Five growth clusters for Local Enterprises future growth (knowledge- (SMEs) intensive sectors) – advanced manufacturing, applied health sciences, smart and sustainable urban solutions, logistics and aerospace, and Asian and global financial services. Source: Economic Policy Management in Singapore, 1996 The Business Times, 2015 6. USE OF POLICIES IN ADDRESSING MACROECONOMIC ISSUES CAUSED BY GLOBALISATION Countries enjoy the benefits of globalisation at varying degrees, depending on the extent of the adverse issues that arise from globalisation. In order to maximise the gains resulting from globalisation, while addressing the macroeconomic problems, different countries may adopt a range of policies. There are three main types of policies:  Protectionism  Regional economic integration and trade agreements  Trade and Industrialisation policies 6.1 POLICY: PROTECTIONISM Protectionism is sometimes employed to counteract the disadvantages of free trade. Definition of Protectionism Protectionism is defined as the act of imposing economic policies aimed at restricting trade between countries, designed primarily to protect domestic producers and workers from foreign competition. Note: While protectionism reduces trade, it does not eliminate it such that it results in an autarky (which means zero trade). Thus, the costs of protectionism should not be the elimination of the benefits of free trade, but rather a reduction in these benefits. 6.1.1 ARGUMENTS FOR AND AGAINST PROTECTIONISM (Advantages and Disadvantages of Protectionism) When analysing the motives for protectionism, it is useful to highlight that the arguments that countries put forth to justify the acts of protectionism tends to stem from the disadvantages of international trade (Section 2.4.2), but it does not always overlap. 31 © Catholic Junior College Economics Department 2023 The National and International Economy- Globalisation and the International Economy (H2 Economics/ 9570) a) Argument For: To Protect Infant (Sunrise) Industries  An infant industry is one which has potential comparative advantage but is too young to realise this potential in the face of more established foreign competitors.  Free trade will expose the domestic infant firms to strong competition from imported goods. Given the infancy stage of the domestic firms (thus operating at a smaller scale and higher unit cost), they may not be able to compete with the foreign firms or products.  These firms in the infant industries need to be protected so that they can reap the EOS that can help to lower their production cost, in order to grow and develop the comparative advantage and able to compete on more equal terms.  Protection of infant industries is justifiable if the protection is removed once the industries are established. Argument Against:  A temporary net welfare loss from higher domestic prices is expected from such restrictions while the industry is still developing. However, this loss may be permanent if the firms in the protected industry never realised the expected comparative advantage and thus never become competitive.  It may be difficult to determine which new industries have the potential to become internationally competitive. If industries with no potential comparative advantage are protected, it can lead to a misallocation of resources.  Protecting the industry from competition during the growing stage may reduce the pressure and incentive for it to reduce its average costs,