Build your IB Economics HL Global Economy foundation by evaluating international evidence, diagrams and policy trade-offs across countries.
Study the following extract and answer the questions that follow.
Free Trade Agreement between the European Union and Indonesia
(1) The European Union (EU) and Indonesia are currently negotiating a free trade agreement (FTA). The agreement will aim to increase trade, avoid trade protection and expand foreign direct investment (FDI). Indonesia has the largest economy and population in Southeast Asia. The EU is Indonesia's third-largest trading partner.
(2) The FTA could see the clothing and footwear industry in Indonesia increase by over 10 %. However, the labour-intensive manufacturing industry has historically been known for poor working conditions and low wages. On the other hand, increased output could decrease the high unemployment in Indonesia (currently at 12 % ). The EU expects its car industry to benefit from the FTA. The agreement would encourage the EU to specialize in cars, and Indonesia to specialize in clothing, therefore both countries could benefit from comparative advantage.
(3) Since Indonesia's main competitors already have trade agreements with the EU, establishing an FTA is a priority for the Indonesian government. The EU has a potential market of 510 million consumers, and may offer areas for growth during a time of lower global trade and uncertainty due to the trade war between the United States and China.
(4) However, recent trade issues between the EU and Indonesia have slowed down negotiations. The EU announced that palm oil biodiesel is unsustainable and will phase these fuels out by 2030. Experts say that palm oil causes excessive deforestation and contributes to climate change. Indonesia is the world's largest exporter of palm oil.
(5) The EU has imposed tariffs on biodiesel exports from Indonesia, which may result in Indonesia losing a market worth over US$450 million. Palm oil represents 12% of Indonesia's total exports, contributes approximately 2.6 % to gross domestic product (GDP), and the industry employs more than 15 million people. The EU is Indonesia's largest palm oil customer. Additionally, some EU manufacturing businesses are unhappy with the tariffs as they rely on palm oil to produce their products, such as processed foods.
(6) In response, Indonesia filed a lawsuit with the World Trade Organization (WTO), stating that the EU's policy on biodiesel is unfair and is damaging the international image of palm oil. Indonesia claims it is committed to sustainable production practices and to protecting its forests.
(7) To make up for losing the EU's market, Indonesia is actively exploring other markets to boost its exports of palm oil. Other countries like China, India and Russia have a more relaxed policy on palm oil and have growing demand for it. Indonesia has also retaliated to the tariff through an investigation into whether EU dairy products exported to Indonesia benefited from subsidies, and has recommended a 20 %-25 % tariff on EU dairy products.
(8) However, the EU has tried to lower tensions by offering a US$17 million grant to improve trade conditions and capacity in preparation for the FTA. Experts have said that the FTA could support the development of legal and sustainable palm oil production through supporting good governance and capacity building. Indonesia has stated it would welcome help to decrease any market failure caused by palm oil.
Define the term tariffs indicated in bold in the text (paragraph 5).
State two functions of the World Trade Organization (WTO) (paragraph 6).
Using a production possibilities curve (PPC) diagram to illustrate comparative advantage, explain why the EU would export cars to Indonesia and Indonesia would export clothing to the EU (paragraph 2).
Using information from the text/data and your knowledge of economics, discuss the economic effects on Indonesia of establishing a free trade agreement with the EU.
Read the extracts and answer the questions that follow.
Text D - Overview of Indonesia and palm oil production
(1) Indonesia is the largest economy in Southeast Asia and its gross domestic product (GDP) has grown strongly. The proportion of those living in absolute poverty in Indonesia decreased from 37.4 % in 1999 to 2.7% in 2019.
(2) The palm oil industry is a major contributor to the Indonesian economy, accounting for 4.5 % of GDP and providing employment for over three million Indonesians. Palm oil production is technologically simple and profit margins are large. As a low-cost producer, Indonesia produces over 50 % of the world's output. Palm oil is the most widely used vegetable oil in the global market. It is an ingredient in many products (including foods, cosmetics, cleaning products and biofuel) and demand continues to increase.
(3) In 2015, despite a widening budget deficit, the Indonesian government began subsidizing biodiesel (a type of renewable fuel) made from palm oil to make it more price competitive with conventional diesel. The subsidies were aimed at reducing Indonesia's dependence on fossil fuel imports and at increasing exports of high-value refined palm oil products.
(4) In Indonesia, 80% of the palm oil produced is exported, contributing substantially to export revenue and to government tax revenue. However, palm oil prices are volatile, due to changes in supply, making planning difficult and causing fluctuations in the exchange rate. For example, studies show that, due to the low price elasticity of demand (PED) for primary commodities, an increase in the price of palm oil results in greater export revenue. Consequently, the rupiah (Indonesia's currency) may appreciate.
(5) In 2019, the European Union (EU) decided to impose an 18 % tariff on imports of palm oil based biodiesel from Indonesia, partly due to concerns that palm oil production damages the environment. The EU also claimed the tariff was necessary to offset the effects of the biodiesel subsidy.
Text E - Sustainable Development Goal (SDG) 12 and concerns about palm oil production in Indonesia
(1) In the past, the Indonesian government supported the rapid growth of palm oil production in order to increase GDP and employment. This policy often resulted in an inefficient use of land and high carbon emissions, as a result of deforestation.
(2) Sustainable Development Goal (SDG) 12 (responsible consumption and production) requires resources to be used more efficiently and sustainably through changes in production methods. Unsustainable use of Indonesia's natural resources will probably reduce long-term economic growth. Forests are necessary for food security, fuel, shelter and jobs. They also reduce the carbon in the atmosphere and protect against floods.
(3) Rates of deforestation in Indonesia have decreased recently. The World Bank's Forest Carbon Partnership Facility is providing US$110 million in aid to help reduce deforestation. Protecting forests from agricultural expansion will significantly reduce emissions. Profits will be lower, but the reputation of the palm oil industry will be improved and its long-term future made more secure.
(4) More than 50 multinational companies (MNCs) which use palm oil in their products have pledged to ensure that their suppliers do not contribute to deforestation. Pressure from the MNCs is encouraging Indonesian producers to use natural resources more sustainably.
Text F - Small-scale farmers and the Indonesian Sustainable Palm Oil (ISPO) certificate
(1) Small-scale farmers manage approximately 40 % of Indonesian plantations, but produce only 30 % of Indonesia's palm oil, because of poor farming techniques, low quality seeds, and a weak banking system, which limits their access to finance. In addition, land disputes occur due to a lack of property rights. To make up for their low productivity, farmers sometimes illegally clear more land for planting.
(2) The Indonesian Sustainable Palm Oil (ISPO) certification system requires that palm oil producers only occupy land legally, that they do not plant in areas designated as forest, and that they use sustainable agricultural practices. Initially, only large plantations had to get certification. However, the system was extended in 2020 and now small-scale farmers also have to obtain certification. Participating in the system should improve the productivity of small-scale farmers and reduce deforestation.
Table 3: Economic data for Indonesia
Table 4: Development data for Indonesia
Table 5: National income statistics for Indonesia
Define the term property rights indicated in bold in the text (Text F, paragraph 1).
Using an exchange rate diagram, explain how a rise in palm oil prices may cause an appreciation of the Indonesian rupiah (Text D, paragraph 4 ).
Using an international trade diagram, explain the effect of the EU tariff on the imports of palm oil based biodiesel from Indonesia (Text D, paragraph 5).
Using information from the texts/data and your knowledge of economics, discuss whether there is a conflict between meeting Sustainable Development Goal 12 (responsible consumption and production) and the objective of economic growth in Indonesia.
Study the following extract and data and answer the questions that follow.
Figure 1: Mexico unemployment rate
Figure 2: Mexico inflation rate
Figure 3: Mexico interest rate
Define the term exchange rate indicated in bold in the text (paragraph (1)).
Define the term trade war indicated in bold in the text (paragraph (1)).
Given that Mexico has a current account deficit, explain why "a rapid rise in foreign direct investment (FDI) reduced Mexico's reliance on portfolio investment, which has been diminishing" (paragraph (3)).
Using information from the text/data and your knowledge of economics, discuss the possible consequences on the Mexican economy of an undervalued Mexican peso.
Study the extract and data below and answer the questions that follow.
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Define the term bilateral trade agreements indicated in bold in the text (paragraph (1)).
Define the term infrastructure indicated in bold in the text (paragraph 6).
Using a comparative advantage diagram, explain why "China's exports tend to be concentrated in manufactured goods and the African countries mostly export primary goods" (paragraph 2).
Using information from the text/data and your knowledge of economics, discuss the extent to which trade between China and African countries is a more effective way of achieving economic development than Chinese aid to African countries.