Practise evaluating trade protection with IB Economics SL questions that weigh infant-industry, dumping, growth, stakeholder and retaliation arguments against free trade.
Study the extract and data below and answer the questions that follow.
Ecuador sees 2014 trade deficit falling with new import rules, but at what cost?
(1) In the period from January to May 2014, Ecuador posted a trade surplus of US$483 million, moving from a deficit of US$626 million one year before.
(2) The government has been implementing an import-substitution policy to reduce the trade deficit. On 4 December 2013, Ecuador's Foreign Trade Committee established new quality control measures for the importation of 293 items, including cosmetics, toys, toothpaste, meat and cereals. In order for goods on the list to be imported a certificate needs to be obtained, ensuring that the products meet quality control standards. There are up to 13 steps to be taken before a product may enter as a result of the excessive regulations holding up the certificates.
(3) The import-substitution policy also involves a move to provide support to domestic industries. The president firmly believes in the benefits of sheltering infant industries. He has complained about imports such as coconut water, banana puree or cornflakes, which he believes could be produced by domestic industries, supported by appropriate policies. In addition, he points out that Ecuador is a top exporter of fine aroma cocoa, but imports approximately US million worth of chocolate per year. Other measures to protect domestic industries include anti-dumping measures and higher tariffs on raw materials and capital equipment that are available in Ecuador.
(4) In the month since this intervention started, different businesses have begun to feel both the advantages and disadvantages. Pica, one of the largest companies in the plastic industry, has taken advantage of the policy. The reduction in the importation of certain products has allowed them to increase their own production.
5 In contrast, Toni Industries, one of the most important dairy businesses in the country has suffered. It has complained that cornflakes, which the company uses as a complementary good to one of its key products, could not get through customs because it did not have the quality control certificate.
(6) Many industry analysts and economists argue that closing off imports will isolate the country and create a false sense of competitiveness. They are also concerned that the government seems to be assuming that other countries will not react. Some argue that the government should seek to create incentives for investment, like tax benefits, or legal security, which would allow the entry of new competitors into the Ecuadorean markets.
Table 1: Selected exports and imports for Ecuador, January to May 2014
www.latinvex.com, 19 March 2014 and www.blogs.wsj.com, 14 July 2014]
Define the term infant industries indicated in bold in the text (paragraph 3).
Study the following extract and answer the questions that follow.
Japan-European Union Economic Partnership Agreement (JEEPA)
(1) In July 2017, the Japan-European Union Economic Partnership Agreement (JEEPA) was announced and it may come into force in 2019. Jointly, Japan and the European Union (EU) currently account for 28 % of global gross domestic product (GDP). The trade agreement could raise the EU's exports to Japan by 34 % and Japan's exports to the EU by 29 %. Economists say that this trade agreement marks a determined effort to combat rising protectionism and sends a powerful signal that cooperation, not trade protection, is the way to tackle global challenges.
(2) The largest benefit to Japan will be for Japanese car manufacturers, as Europe will gradually lower tariffs from 10 % on Japanese cars. Car tariffs are a big concern for Japanese car manufacturers, who struggle to compete with South Korean car manufacturers. South Korean cars are sold to the EU tariff-free thanks to a free trade agreement signed in 2011. Within Europe, car manufacturers are one of the largest sources of jobs. Car manufacturers in the EU are concerned that cutting tariffs on car imports from Japan may lead to a large increase of Japanese cars into the European market.
(3) The trade agreement will also resolve non-tariff barriers, such as technical requirements and regulations. More importantly, however, the EU and Japan will make their environmental and safety standards on cars the same, which will make trade easier.
(4) Japanese politicians have been defending their relatively inefficient farmers for a long time. Now, Japan will lower tariffs on European meat, dairy products and wine, cutting 85 % of the tariffs on food products coming into Japan. This includes removing the current 30 % tariff on some European cheeses, such as cheddar and gouda cheese. However, imported camembert cheese will face a quota. This may be because Japan produces some camembert cheese.
(5) JEEPA is particularly alarming for United States (US) beef and pork farmers because Japan has been the biggest export market for US beef and the second biggest export market for US pork. Any preferential tariff that EU farmers receive will make it much tougher for American farmers to sell meat in Japan.
(6) With this trade agreement, the EU and Japan are trying to promote the values of economic cooperation and environmental conservation, which are both important for long-term economic growth and sustainability. However, JEEPA faces significant challenges because it will have to be passed by the Japanese Parliament, the European Parliament and European national governments. There is no guarantee that all governments will agree to the economic partnership. 15 July 2017; Japan-EU trade agreement may hurt U.S. meat producers, by Katherine Hyunjung Lee, Jul 12, 2017, Medill News Service, https://dc.medill.northwestern.edu; and A new trade deal between the EU and Japan, The Economist (London, England), Jul 8th 2017, https://www.economist.com/finance-and-economics/2017/07/08/a-new-trade-deal-between-the-eu-and
japan. © The Economist Newspaper Limited, London, July 8th 2017]
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Using information from the text/data and your knowledge of economics, evaluate the possible consequences of the trade agreement between Japan and the EU (JEEPA).