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3 Nov 2020

2. Which of the following is not used as an argument for trade restrictions?

a. Emerging domestic industries, especially those with economies of scale, could not gain entry in some world markets without protection during the early years

b. Trade restrictions are required to prevent some countries from exporting a commodity at a price below its cost of production.

c. Consumer surplus is maximized when import tariffs and quotas promote exports over imports.

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Discusssing the Arguments in Support of Restricting Imports

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After reading the February 19th, 2009 Economist article, "Turning their backs on the world," do you believe it is wise for world governments to shy away from globalization during a period of economic crisis?

Globalisation

Turning their backs on the world

Feb 19th 2009 From The Economist print edition

The integration of the world economy is in retreat on almost every front

Illustration by Claudio Munoz

THE economic meltdown has popularised a new term: deglobalisation. Some critics of capitalism seem happy about itâlike Walden Bello, a Philippine economist, who can perhaps claim to have coined the word with his book, "Deglobalisation, Ideas for a New World Economy". Britainâs prime minister, Gordon Brown, is among those who fear the results will be bad.

But is globalisation really ending? The worldâs economies are certainly slowing fast. And the speed and scale of this recession are raising doubts about the assumptions that had underpinned the drive to integrate world markets. At the end of 2008 the IMF said the world economy would grow 2.2% in 2009, less than half the rate in 2007. Now it thinks growth will be just 0.5% this year, the lowest for 60 years. Even that may be optimistic; in the last quarter of 2008, some economies shrank at annualised rates of over 10%.

Nobody ever said globalisation had ended economic ups and downs, but this feels different: prima facie evidence of big problems at least, and possibly of the failure of globalisation to deliver many of its advertised benefits, especially to the poor. True, economic slowdown is not the same as deglobalisation. And the slowdown has yet to affect one thing. For years, poor countries have been growing faster than rich ones; so far, they still are. The gap between real GDP growth in emerging markets and in rich countries widened from nothing in 1991 to about five points in 2007â

and, says the IMF, it will stay at 5.3 points in 2008 and 2009. Helping poorer countries catch up has long been among the benefits touted for globalisation.

And yet the process is going into reverse. Globalisation means the global integration of the movement of goods, capital and jobs. Each of these processes is now in trouble. World trade has plunged. As recently as the first half of 2008, boosted by rising commodity prices and a falling dollar, trade was growing at an annualised 20% in dollar terms. In the second half of 2008, as commodities sagged and the dollar rose, growth slowed fast; by September, says the IMF, it was in reverse. In December, says the International Air Transport Association, air-cargo traffic (responsible for over a third of the value of the worldâs traded goods) was down 23% on December 2007âalmost double the fall in the year up to the end of September 2001, a result affected by the 9/11 terror attacks.

The downturn has been sharpest in countries that opened up most to world trade, especially East Asiaâs tigers. Singaporeâs exports are 186% of GDP; its economy shrank at an annualised rate of 17% in the last three months of 2008. Taiwanâs exports are over 60% of GDP; and its economy may fall as much as 11% this year. The downturn has also hurt rich countries that specialise in staid old-fashioned manufacturingâsupposedly a safer activity than the reckless delusions of finance. On average, says the IMF, rich countries will contract 2% this year. But Germany and Japan, big exporters of capital goods, cars and electronics, will do worse, their economies shrinking by 2.5% and 2.6% respectively. In the last quarter their economies contracted alarmingly, falling at an annualised rate of 8% in Germany and by 13%âthe worst since 1974âin Japan.

Small countries which went into businesses that grew in globalisationâs wake, like tourism, are also suffering. The World Tourism Organisation says international tourist arrivals fell 1% in the second half of 2008, which may not sound bad, but compares with growth of more than 5% a year for the previous four years. In the Caribbean, visitors may fall by a third this season; in some islands hotels are half empty, flights are being cancelled and national budgets, reliant on tourism, are strained.

In contrast, the biggest emerging markets are doing less badly so far. In India, where exports are around 15% of GDP, the government recently said growth in the year to April 2009 would be 7.1%; most forecasters put growth for the 2009 calendar year lower, but still about 5%. In Brazil the economy has been harder hit by falling commodity prices and declining exports. Most economists still think output grew a bit in the year to the fourth quarter, and put growth for 2009 at 1.5% to 2%. China was still growing by 6.8% in the year to the fourth quarter, though like Brazil it is probably stagnating. Chinese exports fell 18% and imports 43% in the year to January. All three countries have large domestic markets and relatively stable banking systems, which have not been liberalised.

The gap between toothless tigers and friskier BICs (ie, BRICs minus Russia, a special case because of oil) raises questions not so much about globalisation as a wholeâafter all, Brazil, India and China have been beneficiariesâas about particular aspects. Can one be too dependent on trade? How far should one liberalise banking? Is there a trade-off between taking advantage of good times and providing shock absorbers for bad ones?

Emerging marketsâ trade problems have been worsened by shifts in capital flows, globalisationâs second big plank. According to the World Bank, net private debt and equity flows to developing countries will fall from $1 trillion in 2007 to $530 billion in 2009, or from 7.7% to 3% of those countriesâ GDPs. The Institute for International Finance sees an even steeper fall; it says that this year banks will extract more from emerging markets in debt repayments than they inject in new loans. Bond markets in those countries collapsed in the last quarter of 2008, doing less than $5 billion of business; in the second quarter, they had issued about $50 billion of bonds.

As with trade, financial deglobalisation is hitting countries in a variety of ways. In this case, East Asia has been less affected because most countries there are net creditors. But eastern Europe and Russia have been hammered because local banks went on a foreign-borrowing binge, foreign banks piled into their markets (and piled out again) and because some countries lacked insurance policies against tough times. Although many big emerging markets have built up foreign-exchange reserves and cut their external debts, in eastern Europe reserves have been flat, external debts have risen and current- account deficits have grown considerably in the past decade. In these countries, the reversal of globalisation has exacerbated problems that were building up anyway.

People in emerging markets have mixed feelings about financial liberalisation and may not regret its reversal. But foreign direct investment (FDI) is different. Most people welcome new factories and new jobs. FDI is also one of the commonest routes by which skills and technology are transferred from rich to poor countries.

This, too, is falling. The United Nations Conference on Trade and Development (UNCTAD) says worldwide FDI inflows shrank 21% in 2008 to $1.4 trillion. The World Association of Investment Promotion Agencies says FDI will contract by a further 12-15% this year.

In contrast to trade, the investment impact of the global downturn has so far been hardest on the countries where the woes began: rich ones. They have seen FDI falls of one-third on average and by half or more in Britain, Italy and Germany. Finland and Ireland have seen net outflows. FDI flows to developing countries were still growing in 2008, albeit by only 4%, after a rise of 21% in 2007. Flows to big South American countries were up by about a fifth; those to India more than doubled, though they may ebb as GDP falters.

The third of the three main aspects of globalisationâjobsâis following the other two, with a lag. The International Labour Organisation forecasts that unemployment worldwide will rise by around 30m above 2007âs level in 2009. Most of that rise will be the result of recession, not deglobalisation, but some will be attributable to the fall in trade (exporting companies will lay off workers) and some to declining investment (if expansion plans are cut, new jobs will not be created).

Deglobalisation will have a dire impact on migrants. In the past decade, more people have been moving voluntarily than ever before; now, some are going home. Those who provided labour for the housing boom in America (notably Latinos), Ireland (Poles) and China (rural Chinese going to cities on the eastern seaboard) have been among the first to be laid off. In Spain newly jobless builders are competing with migrants there for jobs picking fruit.

This will surely have an effect on the flow of remittances from rich countries to poor ones, although it has so far (see article) been quite resilient. In any case, economies that absorbed large numbers of foreign workers may take fewer. Some of the millions of South Asians who work in the Gulf, or the young Africans who flock to South Africa, or the Central Asians who work in Russia, may have to stay at home.

Yet for all the economic pain, the social and political fallout from deglobalisation has not yet been severe. Protests may still come. Or maybe national governments are absorbing most of the ire. In December, Greece saw riots after a police bullet killed a teenager. In France, unions brought over 1m people onto the streets for a one-day strike, and a riot in Latvia over economic policy ended in more than 100 arrests. But only in Britain, where workers have picketed refineries and power stations over the hiring of foreigners, has protest had a very anti-global tone.

This lag may be explained by residual support for globalisation, especially in emerging markets. A poll in 2007 by the Pew Global Attitudes Project found that majorities in 47 countries saw international trade as good for them; majorities in 41 out of 46 welcomed multinational firms; in 39 out of 47, most felt better off with a free market. In more than half the countries where changes could be tracked, support for free markets was rising.

When consensus wobbles

But is that still true? Last summer, on the eve of the meltdown, European Union pollsters reported that two-thirds of EU citizens saw globalisation as profitable only for large firms, not citizens. In 2002, according to the Pew poll, 78% of Americans thought foreign trade helped the country; by 2007 it was only 59%. A CNN poll in July 2008 showed that, for the first time, a small majority of Americans saw trade as a threat, not an opportunity.

Of the few worldwide polls to have been completed since then, one by Edelman for the World Economic Forum found that 62% of respondents in 20 countries said they trusted companies less or a lot less now. Manifestly, popular opinion backs more state regulation.

So far, this has mostly taken the form of pouring public money into banks and selected industries, notably cars. Last week Barack Obama set out plans for another vast bank rescue, and the French government promised â¬6 billion ($7.8 billion) in preferential loans to Renault and Peugeot-CitroÃ«n in return for pledges that no car factories would be closed in France.

There has been somewhat less evidence of trade protectionism. India has raised some steel tariffs. The EU has reintroduced export subsidies for some dairy products. Russia has raised import duties on vehicles. But there has also been movement the other way. The American Senate softened the "Buy America" provisions of the stimulus bill. Mexico said that by 2012 it would cut tariffs on thousands of kinds of manufacture. And some countries have sought a safe harbour, rather than embracing pure nationalism. East Europeans are even keener on the shelter of the euro; Iceland has applied to the EU; the Irish are more likely than they were to vote for the EUâs Lisbon treaty.

Despite the downturn, the nations of the world have not shunned globalisation. It has been protected by the belief of firms in the efficiency of global supply chains. But like any chain, these are only as strong as their weakest link. A danger point will come if firms decide that this way of organising production has had its day.

31. A country's tax system influences the attractiveness of investing in that country and affects the relative level of profitability for an MNC.

a. True

b. False

32. Points inside a production possibilities frontier represent

a. unattainable production combinations

b. efficiency

c. situations where supply exceeds demand

d. unemployment of resources

33. Firms in a high-wage nation like the U.S. can compete effectively with imports from low-wage nations if

a. the U.S. reduces tariffs on imports

b. low-wage nations impose tariffs on U.S. made goods

c. labor productivity is higher in the low-wage nation

d. labor productivity is higher in the U.S.

34. Assume that production in the United States is valued at $100,000. National income is therefore $100,000. Of their income, workers save $2000, pay $6,000 in taxes, spend $89,000 on consumer goods, and spend $2000 on imports. Businesses spend $5,000 in new investment spending. And, foreigners spend $1000 on exports. To avoid any problems of inflation or unemployment, the government should have a budget deficit or surplus of:

a. $2,000 surplus

b. $1,000 deficit

c. $2,000 deficit

d. $1000 surplus

e. $0 deficit

35. Autarky means-----------------------------------------------------------------

a. the absence of government

b. lack of agriculture

c. self-sufficient, in the absence of international trade

d. short of exchange rates

36. The more people there are----------------------, the less the public as a whole will spend on goods and services.

a. unemployed

b. underemployed

c. employed

d. as discouraged workers

37, Which of the following theories holds that countries will produce and export products that use large amounts of production factors that they have in abundance?

a. Mercantilism

b. The theory of absolute advantage

c. The factor endowment theory

d. None of the above.

38. Suppose that a consumer has a marginal propensity to consume of 0.79. If this consumer earns an extra $1220, her saving would be expected to increase by-----------------------------

39. Many countries in Asia, Africa, and South America-----------------------

a. Are developing countries

b. Are industrialized nations

c. Have a high demand for nonessential products

d. Do not trade

40. Which two of the following are regarded as the main aims of the World Trade Organization (WTO)?

a) To eliminate discrimination in world trade

b) To provide financial assistance to countries with debt

c) To reduce tariff barriers

d) To make infant industry protection illegal

e) To help give preferences to smaller economies

b) and e) a) and c) a) and d) c) and e) b) and d)

41. Last year Sophia's nominal income increased by 12% while the price level rose by 5.5%. Consequently, Sophia's real income:

a. rose by approximately 7%

b. fell by approximately 1%

c. rose by approximately 2%

d. ------------------------------------

42. Consumer surplus

a. is always positive.

b. for a particular unit of consumption is computed by taking the difference between quantity demand and quantity supplied.

c. for all units consumed is the area below demand and below market price over all the units consumed.

d. added to producer surplus provides a measure of the net gain to society from the production and consumption of the good.

43. A decline in Real GDP for six or more consecutive months is called-------------------------------

a. A trough

b. A recession

c. An expansion

d. A recovery

44. What do we call the situation where capital grows faster than the labor force?

a. economic growth

b. technological change

c. productivity growth

d. capital deepening

45. The terms of trade are-------------------------------------------

a. the cost of transportation between countries

b. the ratio of wages in two countries

c. the terms which are used in the trade negotiations

d. the rate at which two products can be exchanged

tealtiger674

Read The Economist's articles, "The return of economic nationalism," "The battle of Smoot-Hawley," and Business Week's article, "Jobs and Protectionism in the Stimulus Package."

Do you believe the provision of "Buy America" placed in the $787 billion stimulus package by Congress was necessary during the recession to ensure American jobs and strengthen the American Economy?

Or was this Congressional provision a form of protectionism similar to the Smoot-Hawley bill passed in 1930?

The world economy

The return of economic nationalism

Feb 5th 2009

From

The Economist

print edition

A spectre is rising. To bury it again, Barack Obama needs

to take the lead

Illustration by Jon Berkeley

MANAGING a crisis as complex as this one has so far called for nuance and pragmatism

rather than stridency and principle. Should governments prop up credit markets

by offering

guarantees or creating bad banks? Probably both. What package of fiscal stimulus would be

most effective? It varies from one country to the next. Should banks be nationalised? Yes,

in some circumstances. Only the foolish and the partisan have r

ejected (or embraced) any

solutions categorically.

But the re

emergence of a spectre from the darkest period of modern history argues for a

different, indeed strident, response. Economic nationalism

the urge to keep jobs and

capital at home

is both turnin

g the economic crisis into a political one and threatening the

world with depression. If it is not buried again forthwith, the consequences will be dire.

Devil take the hindmost

Trade encourages specialisation, which brings prosperity; global capital marke

ts, for all their

problems, allocate money more efficiently than local ones; economic co

operation

encourages confidence and enhances security. Yet despite its obvious benefits, the

globalised economy is under threat.

Congress is arguing about a clause in the $800 billion

plus stimulus package that in its most

extreme form would press for the use of American materials in public works. Earlier, Tim

Geith

ner, the new treasury secretary, accused China of âmanipulatingâ its currency,

prompting snarls from Beijing. Around the world, carmakers have lobbied for support (see

article

), and some have got it. A host of industries, in countries from India to Ecuador, want

help from their governments.

The grip of nationalism is tightest in banking (see

article

). In France and Britain, politicians

pouring taxpayersâ money into ailing banks are demanding that the cash be lent at home.

Since banks are reducing overall lending, that means repatriating cash. Regulators are

thinking nationally too. Switzer

land now favours domestic loans by ignoring them in one

measure of the capital its banks need to hold; foreign loans count in full.

Governments protect goods and capital largely in order to protect jobs. Around the world,

workers are demanding help from t

he state with increasing panic. British strikers, quoting

Gordon Brownâs ill

chosen words back at him, are demanding that he provide âBritish jobs

for British workersâ (see

article

). In France more than 1m people stayed away from work on

January 29th, marching for jobs and wages. In Greece police used tear gas to control

farmers calling for even more subsidies.

Three arguments are raised in defence of economic nationalism: t

hat it is justified

commercially; that it is justified politically; and that it wonât get very far. On the first point,

some damaged banks may feel safer retreating to their home markets, where they

understand the risks and benefit from scale; but that is

a trend which governments should

seek to counteract, not to encourage. On the second point, it is reasonable for politicians to

want to spend taxpayersâ money at home

so long as the costs of doing so are not

unacceptably high.

In this case, however, the c

osts could be enormous. For the third argument

that

protectionism will not get very far

is dangerously complacent. True, everybody sensible

scoffs at Reed Smoot and Willis Hawley, the lawmakers who in 1930 exacerbated the

Depression by raising American tar

iffs. But reasonable people opposed them at the time,

and failed to stop them: 1,028 economists petitioned against their bill. Certainly, global

supply

chains are more complex and harder to pick apart than in those days. But when

nationalism is on the marc

h, even commercial logic gets trampled underfoot.

The links that bind countriesâ economies together are under strain. World trade may well

shrink this year for the first time since 1982. Net private

sector capital flows to the

emerging markets are likely t

o fall to $165 billion, from a peak of $929 billion in 2007. Even

if there were no policies to undermine it, globalisation is suffering its biggest reversal in the

modern era.

Politicians know that, with support for open markets low and falling, they must

be seen to

do something; and policies designed to put something right at home can inadvertently eat

away at the global system. An attempt to prop up Irelandâs banks last year sucked deposits

out of Britainâs. American plans to monitor domestic bank lending

month by month will

encourage lending at home rather than abroad. As countries try to save themselves they

endanger each other.

The big question is what America will do. At some moments in this crisis it has shown the

way

by agreeing to supply dollars to

countries that needed them, and by guaranteeing the

contracts of European banks when it rescued a big insurer. But the âBuy Americanâ

provisions in the stimulus bill are alarmingly nationalistic. They would not even boost

American employment in the short r

un, because

just as with Smoot

Hawley

the inevitable

retaliation would destroy more jobs at exporting firms. And the political consequences would

Protectionism

The battle of Smoot

Hawley

Dec 18th 2008

From

The Economist

print edition

A cautionary tale about how a protectionist

measure opposed by all right

thinking people

was passed

Library of Congress

Hawley and Smoot, the bogeymen of trade

EVEN when desperate, Wall Street bankers are not given to grovelling. But in June

1930 Thomas Lamont, a partner at J.P. Morga

n, came close. âI almost went down

on my knees to beg Herbert Hoover to veto the asinine Hawley

Smoot Tariff,â he

recalled. âThat Act intensified nationalism all over the world.â

According to David Kennedy, an historian, Lamont was âusually an influential

economic adviserâ to the American president. Not this time. Hoover signed the bill

on June 17th: âthe tragic

comic finaleâ, said that weekâs

Economist

, âto one of the

most amazing chapters in world tariff history...one that Protectionist enthusiasts the

worl

d over would do well to study.â

The Tariff Act of 1930, which increased nearly 900 American import duties, was

debated, passed and signed as the world was tumbling into the Depression. Its

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