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Showing posts with label tariffs. Show all posts
Showing posts with label tariffs. Show all posts

To what extent does "traditional" or "standard" economic theory explain Singapore's FTAs? [15]


A Free Trade Area (FTA) refers to a trade bloc where more than two countries agree to engage in free trade with one another while maintaining members’ own individual levels of external barriers against non-member nations; for instance, the North American Free Trade Area (NAFTA) and the ASEAN Free Trade Area (AFTA). This economics paper discusses the extent to which economic theory, in particular trade creation and trade diversion, explains Singapore’s FTAs, while arguing that non-traditional and other non-economic considerations also play a role in explaining Singapore’s FTAs. 

First, how do the standard economic theories of trade creation and trade diversion explain FTAs in theory? Trade creation arises when entry into a FTA causes the production of a good to be shifted from a less efficient to a more efficient producer, while trade diversion arises when entry into a FTA causes the production of a good to be shifted from a more efficient to a less efficient producer. A country joins a FTA if it expects to benefit from overall trade creation; economic theory suggests that a country chooses whether or not to enter a FTA based on whether trade creation outweighs trade diversion. When countries join a FTA, the country gains from a rise in export demand and export prices, resulting in an improvement in the terms of trade. When there is trade creation, the country benefits from importing a good at a cost that is lower that what it could produce domestically. Hence when there is trade creation, the country benefits from joining a FTA. Conversely, when there is trade diversion, the country ends up paying more for its imports as it is now importing from a relatively more inefficient foreign producer and this worsens its terms of trade. If the rise in import prices exceed the rise in export prices, the terms of trade worsens, hence the country should not join the FTA. 

However, despite standard economic analysis, since Singapore has no initial trade barriers for almost all goods and services, it experiences neither trade creation nor trade diversion, so Singapore’s decision to join an FTA must be based on other considerations other than trade creation and trade diversion, such as gaining new export markets, creating more transhipment business, attracting FDI, enhancing bilateral relations with its neighbours, and improving cooperation on security issues. 

This economics paper now discusses other possible reasons that could suggest why countries choose whether or not to enter an FTA with Singapore. The first alternative reason could be that the signing of an FTA with Singapore enables the country’s exports to bypass trade barriers and gain access to a third party market that also has an FTA with Singapore. For example, China may get to enjoy tariff-free access (or at least tariff reductions) to the USA if they were to export their goods through Singapore rather than exporting their goods directly to the USA. 

Secondly, Singapore may also be offering some other benefits to a FTA partner. For example, Singapore could offer to transfer knowledge and technology to the other country, and this would result in the signing of FTAs despite the fact that other countries already know that Singapore has little or no trade barriers on their goods. 

Thirdly, extradition treaties and cooperation in security issues could also be part of the agreement. For instance, countries could sign FTAs in Singapore in order to ensure that wealthy tax evaders do not escape the law in their country by bringing their wealth to Singapore, and these tax evaders can be extradited back home to face trial in their home countries. Hence, political considerations also come into play alongside economic ones.

Fourth, and arguably most importantly, by negotiating a vast network of FTAs, Singapore enhances its position as a shipping hub because Singapore’s transhipment is an important aspect of the Singapore economy. Transhipment refers to the shipping of goods to an intermediate destination, on their way to their final destination, and this is a major aspect of Singapore’s maritime trade. Transhipment increases Singapore’s earnings from port and shipping related services as more ships stop at Singapore to offload the goods that are meant for re-export. The FTAs also draw in foreign investments because foreign firms need to set up processing operations here in order to meet the requirements stipulated by the Rules of Origin. Hence, transhipment operations could explain why Singapore has signed so many FTAs.

In conclusion, trade creation and trade diversion go a small way to explain why Singapore enters FTAs, and it can be argued that non-economic reasons go a longer way in explaining why Singapore enters FTAs with other countries, because Singapore’s lack of tariffs does not permit her to have trade creation, which suggests that other considerations are more important. Thus, standard economic theory based on trade creation and diversion only explains at best a small part of Singapore's FTA networks, whereas practical real world considerations like third parties bypassing trade barriers, technological transfer, political considerations, and transhipment explain why Singapore signs FTAs to a very large extent. In my view, the most important explanation for Singapore’s FTAs is the rise of globalisation, which has led to the need for third parties to bypass trade barriers, increased international mobility, and led to the rise of the importance of non-economic, political reasons for such agreements.

JC Economics Essays - H2 Economics essay on trade creation and trade diversion, and Singapore's Free Trade Agreements. This economics essay was crafted by two co-authors to explain the economics ideas and concepts of trade creation and trade diversion for an economics tutorial on economic integration (a topic closely related to international trade and globalisation). Remember to reflect on the essay as you read it. Focus on the evaluative conclusion for a moment. What is good about the evaluation, and what can be made even better? What would be a better way to craft the evaluative conclusion? Thank you for reading and cheers! 

Discuss whether the use of protectionist policies can ever be justified during a period of worldwide recession or whether governments should follow Chinese Premier Wen Jiabao’s advice to adopt a policy of greater free trade. [N2013 25]


Protectionism refers to the imposition of economic policies aimed at restricting trade between countries, designed to protect domestic businesses and workers from foreign competition, while free trade refers to the exchange of goods and services across international boundaries. Recently, governments have been adopting protectionist measures in the belief that this would offset the impacts on their economies from the worldwide recession. Fundamentally, the question is: during a period of worldwide recession, can protectionism be justified, or should governments adopt a policy of free trade, to address the macroeconomic problems of rising unemployment and lack of economic growth? This economics paper argues that, while some would argue that protectionist policies can be justified during a worldwide recession, governments should still follow Premier Wen’s economic advice to pursue a policy of greater international free trade.  

There are many methods used by various countries to protect their economies, but fundamentally these methods either discourage imports or encourage a country’s own exports.  For example, a tariff is a tax levied on imports, where a specific tariff is levied as a fixed charge per unit while an ad valorem tariff is levied as a fraction of the value of a unit. A tariff raises import prices, hence causing consumers to switch from imports to locally produced goods. An import quota is a direct restriction on the quantity of imports. The quota is typically enforced by issuing licenses to a group of individuals or firms. The quota directly reduces the availability of imports, hence pushing up prices of imported goods. Per unit output subsidies can be given to help local producers lower their production costs, which enable them to better compete with more efficient foreign producers. These methods, among others, arguably can protect the domestic economy during a period of recession. 

On the one hand, it can be strongly argued that protectionism can be justified on grounds of employment protection. Protectionism arguably helps the economy against both demand-deficient and structural unemployment. First, during a period of recession, protection may be used to reduce demand-deficient unemployment, where there is insufficient AD to fully utilise the unemployed resources in the economy, because imports are discouraged while exports are encouraged, which theoretically boosts AD, shifting it to the right. Furthermore, trade restrictions are sometimes imposed during an economic downturn to reduce cyclical unemployment. For example, under trade union pressure, governments may decide to curb imports that are in direct competition with domestically-produced goods in order to preserve the jobs in these industries. 

Second, protectionism can also be given to declining sunset industries to slow down their contraction, thus allowing more time for labour to be retrained and re-channelled to other growing sunrise industries. This reduces the degree of structural unemployment, which can be defined as the unemployment arising from the mismatch of skills in the industry as the structure of the economy changes. Many developing countries, especially China, and developed economies, such as Singapore, face structural unemployment as the production structure of the economy as well as demand conditions change and mature. Hence, protectionism can be justified through employment protection. 

However, there are many limitations of protectionism in addressing a situation of worldwide recession. First, protectionism creates a “beggar-thy-neighbour” effect whereby the exports, output, and employment of its trading partners are reduced, which in turn curbs the exports, output, and employment of the country initiating the protectionist measures. Secondly, with protectionism, trading partners are likely to “retaliate” and impose their own import restrictions, again further causing the initiating country’s exports, output, and employment to subsequently suffer even more. For instance, China may face countermeasures if it were to implement protectionist measures on the USA, which would not benefit both countries. 

Furthermore, although the initial intention may only be to offer temporary protection to help smoothen the adjustment and reallocation of resources, protection is politically difficult to remove, once it has been put in place. Vested interests are created and the industries concerned will inevitably resist any removal of trade barriers. In the long run, the country might end up having resources being locked in inefficient ‘sunset’ industries, hence depriving its expanding ‘sunrise’ industries of precious economic resources. For instance, this occurred in Latin America after WWII under the system of Import Substitution Industrialisation, as contrasted with the success of the East Asian countries which pursued Export Oriented Industrialisation. All these limitations reduce the usefulness of protectionism in addressing a situation of worldwide recession. 

On the other hand, other than the limitations of protectionism, international trade might in fact help a country tide a recession. First, developing economies sometimes lack sufficient domestic demand to enable full utilisation of resources. Trade allows such countries to overcome domestic demand constraints by giving them access to larger world markets. With additional demand coming from exports, greater utilisation of otherwise unemployed resources raises output, income, and employment. For instance, Singapore, a small and open economy, depends upon trade as an engine of growth for her national income and employment. Furthermore, rising export demand further stimulates investments, causing the AS to shift outwards faster. These investments, for example in infrastructure facilities like ports and storage warehouses and export industries, in fact allowed Singapore to expand its export sector. Seen from these perspectives, trade arguably acts as an engine of growth as it enables both AD and AS to increase faster than under autarky, and therefore possibly contributes to a country’s long run sustained economic growth.

Second, accompanying the development of merchandise trade would be the development of services like shipping and airfreight, air travel, banking and finance, and tourism. With time, a developing economy experiences structural change and becomes less dependent on merchandise trade and manufacturing, instead diversifying into services, thus becoming more like a developed economy. For instance, countries like Singapore have developed from a third world to a first world country by experiencing structural change from international trade. Therefore, governments like China should also pursue a policy of free trade to benefit from economic diversification, maturation, and structural change, which could arguably ameliorate the impacts of recession. 

In conclusion, while protectionism can be politically expedient and may even ameliorate unemployment – both demand-deficient and structural unemployment – in the short run, it should not be used as an active policy to address recessions. This is because of the limitations of protectionism as well as the foregone benefits of international trade as an engine of growth that can also provide fundamental structural change to the economy, which would put it in good stead when the world economy recovers. Alternatively, large economies like China could also encourage local, domestic demand through the use of expansionary monetary and fiscal policies, and that could drive their economic growth during periods of recession, because they have the option to depend on domestic demand, whereas smaller and more open economies like Singapore would have to depend on international trade and globalisation to drive their economies. Thus, in the final analysis, the policy options taken to address the problems really depend on the countries involved, but to a large extent international trade is a much better policy than protectionism.

JC Economics Essays: This economics essay is a sample answer to an adapted economics question from the H2 Economics A Level paper, November 2013. The response was co-written by two economics lecturers for a tutorial class, in order to teach about protectionism and international trade for the A levels examination. However, this particular economics essay is only one possible response to the question - what could be done differently? Furthermore, how would you improve upon this answer, what real world examples could you use to buttress your arguments, and what can you do to improve this essay? Remember to think through the answers and how you can make economics arguments better. Thanks for reading and cheers. 

“Protectionism is better than free trade.” Discuss the validity of this statement. [25]


Adapted from an actual H2 'A' Level Economics Examination

Introduction to Protectionism

What is protectionism? Protectionism is the government policy of imposing economic policies aimed at restricting international trade between countries, designed to protect domestic producers and workers from foreign competition brought about by trade. International trade, on the other hand, is the free and competitive exchange of goods and services across international boundaries. 

There are many methods of protectionism, namely, import tariffs, import quotas, subsidies, voluntary export restraints, foreign exchange restrictions, physical barriers such as making it difficult to clear unnecessary and bureaucratic custom checks and technical barriers such as differences in technical and safety standards to justify the prevention of foreign goods from being imported. Import tariffs are either levied as a fixed amount of charge per unit or levied as a fraction of the value of a unit. Thus, tariffs artificially raise import prices and reduce the quantity demanded of imports. 

What Economics diagram should be applied here? Based on the description below, what is the likely diagram here?

By examining the concept of protectionism through import tariffs, assuming that the country is a price taker as it is too small to affect world markets and prices, a small country can import as much as it wants at world price, Pw. Sw is the supply of imports and is infinitely price elastic at Pw. At Pw, domestic production is at Q1 while domestic consumption is at Q4. Thus, there is a shortage, DC, is solved by importing the goods to satisfy consumption. When there is a tariff on imports, the world supply curve shifts upwards from Sw to SW+t, with the area between Sw and SW+t being the tariff. Domestic production has now increased from Q1 to Q2 while domestic consumption has fallen from Q4 to Q3. The volume of imports has shrunk from Q1Q4 to Q2Q3. Before the tariff, consumer surplus was ACPw and producers’ surplus at ODPw.  The presence of the tariff caused the consumers’ surplus to fall from ACPw to ABPw. Therefore there is a welfare loss, a deadweight loss in area (2+4). This shows that protectionism results in a loss in welfare to society. [Tutor's Note: this is a very detailed analysis of a diagram. Always try to give analysis of diagrams that you draw in an examination.]

The Theory of Comparative Advantage

International trade operates on the basis of the theory of comparative advantage, where a country produces a good that it can produce at a lower opportunity cost compared to other countries, given its factor endowments. Here, it is assumed that the factors of production are perfectly immobile between countries and from one sector to another within countries as well as that the transportation costs of goods and services are negligible. Referring to figure 2, we use a hypothetical example between USA and Mexico’s comparative advantage. 

Figure 2 refers to two different economies, both depicting differently shaped PPCs (Production Possibilities Frontiers). How would you draw this Economics diagram?

Thus, international trade, as can be seen from the diagram, specifically by the theory of comparative advantage, enables consumers to enjoy higher consumption possibilities. 

Benefits of International Free Trade

Other benefits of international or free trade include lower prices and better product quality, greater product variety, developing countries being able to enjoy technical transfers, trade being an engine of growth for an economy and providing economic diversification. 

Firstly, countries that trade freely will enable domestic firms to face competition from foreign imports. If it is the case of intra-industry trade, it will pressure domestic firms to become more efficient and innovate new methods of production to increase efficiency, reduce cost of production and ultimately pass down the lower cost to consumers in the form of lower prices as well as better quality products from innovation in a bid to differentiate their products from rival foreign imports. If it is a case of inter-industry trade, it enables consumers to enjoy goods that the country are enable to produce due to the lack of factors of production required to produce the particular product, thus increasing product variety. For example, in Singapore, due to the tropical climate, we are not able to produce apples but owing to free trade, we are able to import apples from other temperate countries like New Zealand and USA and as a result, able to enjoy greater product variety, i.e.: enjoy a wider range of fruits, ranging from not only tropical fruits but also fruits grown in temperate climate.

Free Trade is also an engine of growth for the country. Developed and small economies like Singapore lack sufficient domestic market. Trade then exposes Singapore firms to a larger world market and enable us to fully utilise resources that are otherwise unemployed. This in turn increases output, income and employment, shifting both the AD and AS outwards. 

Limitations of International Trade

However, while free trade and specialisation may seem ideal, there are also some limitations. 

Free trade using comparative advantage may mean that in the event firms in other countries become more efficient at producing the product the first country has as a comparative advantage, the first country will become less competitive and lose its comparative advantage, which may lead to an economic crisis for the country since the country is largely dependent on the trade of this particular good. It makes the situation worse since the country is only adept at producing the particular product at a lower opportunity cost compared to other country, its initial focus on producing this good would mean that most of its workers are only trained in producing this good, leading to a case of structural unemployment when the country loses its comparative advantage. This has a somewhat similar result when the country is faced with supply problems from its sole supplier who specialise in supplying the raw materials.  This not only affect the livelihood of the people, as well as cost-push inflation due to a spike in prices of goods stemming from shortage of raw materials to manufacture the goods.  Trade restrictions due to natural disasters and war could also affect a country that depends on international trade via comparative advantage theory and thus is not independent. 

In this light, protectionism may seem like a better solution despite it causing a welfare loss as explained earlier in the tariff diagram. As countries need to protect its strategic industries and be self-sufficient to prevent the above situation from occurring and thus debilitating the country’s economic progress. Some examples are the agriculture and defence related industries. 

Furthermore, protectionism enables the country to protect domestic infant industry to better develop the economy of the country in future. New domestic industries have the potential to develop a comparative advantage in a certain product. However, due to high start up costs and a lack of economies of scale due to smaller scale of production compared to giant foreign firms, prices of the domestic goods are less price competitive compared to foreign imports. Thus, protection enables infant industries to grow and become internationally competitive in future before the protectionist measures are taken away. Nevertheless, such an argument may not be foolproof because firstly, it is difficult to identify the correct new industries which have potential to develop a comparative advantage and also politically difficult for the government to remove the protectionist measure from an infant industry which have grown up. Also, with protectionist measures, it reduces the domestic firms’ incentive to be efficient and respond to consumers demand or to reduce average costs, thus, these infant industry may never develop and build a comparative advantage in the world market because the firms are assured of being protected by the government if it does not grow.  For example, Malaysia protects its national car firm, Proton. It has been under protection from the Malaysia government and has not improved in technology unlike other Japanese car firms. 

Protection of declining industries can be another reason for protectionism as stated earlier how a country could lose its comparative advantage and be entrapped in serious structural unemployment as workers are only equipped with skills to manufacture to previous product that used to be a comparative advantage to the country. This gives time for workers to learn a new skill and find a new job in a new industry, mitigating structural unemployment. However, critics say that such protection is not perfectly viable because overtime, these declining industries are protected for too long and never change and adjust, creating a burden to the country’s economy as well as adversely affect the standard of living of the consumers as they are denied access to cheaper foreign imports. For example, Singapore used to be labour intensive but owing to the decline of the primary and manufacturing sector in Singapore, it quickly decline, go through training and move into the tertiary industry quickly without protectionist measures. 

Other reasons for protectionism includes protection from unfair foreign competition and raising employment in domestic firms and improving trade position of the country. 

Evaluation/ Conclusion

In conclusion, although both protectionism and free trade and specialisation has both its pros and cons, free trade is ultimately better because protectionism only serves as a temporary measure to problems caused by free trade , with many arguments for protectionism debatable in the long run. Welfare losses stemming from protectionism are also borne by consumers as consumers would have benefited from increased trade and suffer from retaliation if protectionist measures were imposed. Instead, countries should take a pro-trade stance and use macroeconomic policies like supply-side policies, improving education and retraining, better infrastructure to develop infant industries and strategic industries as well as ensure smooth transition out from structural labour rigidity from declining sectors.     

JC ECONOMICS ESSAYS: Economics tutor's comments: A more direct approach to this economics question on protectionsim would be to directly tackle the statement: first, in what cases would protectionism be better than free trade? Then, second, write the anti-thesis: how is free trade better? Finally, conclude with an evaluative statement with a justification for the viewpoint. However, this economics essay does a more exploratory and discussion-based kind of approach, which makes for an interesting reading, but may not be the most time effective or efficient strategy in an Economics examination. How would you rearrange these economics content and materials to make the essay address the question more directly, clearly, and efficiently? As a quick reminder, also remember to draw relevant economics diagrams and also to think of how you could make the essay better. What can you learn from the strengths of this economics paper, in a similar vein? Do think through the essay as you read and reflect on it. Thanks for reading and cheers!

Analyse the impact of FTAs on the Singapore economy and assess the extent to which the impact of FTAs has been positive. [25m]


Free Trade Agreements (FTAs) are highways that connect Singapore to major economies and markets. With FTAs, Singapore-based exporters stand to enjoy many benefits like tariff concessions, preferential access to certain sectors, and faster entry into markets.

Analyse the impact of FTAs on the Singapore economy and assess the extent to which the impact of FTAs has been positive. [25m]

Note: The original essay was edited two-fold - first, to fit into this JC Economics Essay blog post; second, to remove diagrams/graphics. Hence it is entirely in verbal (English) form. 

A Free Trade Agreement (FTA) is a legally-binding agreement to liberalise trade and bring about closer economic integration between member countries. FTAs aim to remove barriers to trade and investment and create a free flow of goods, services, investment, and people. Under a FTA, member countries provide each other with favourable treatment for goods, services, and investment. Such favourable treatments include reduced tariffs, easier access to markets, and opening up of various sectors for investment opportunities. Thus, FTAs help to foster and facilitate the flow of trade and investment between Singapore and its trading partners with the aim of achieving economic growth and development. FTAs bring about both positive and negative impacts on the Singapore economy. However, the government has implemented policies to mitigate these negative impacts and the overall impact of FTAs on the Singapore economy is largely positive.

The Singapore economy is open to the world, in trade and investment. This openness to trade is a necessity because of its small size and lack of natural resources.

Figure 1 illustrates the effect of a tariff on imports. The original import expenditure for country A is shown by area Oaeq0, the price of imports is Oa and the quantity of imports is Oq0. For a country with price-elastic demand for imports, when the tariff is imposed, the price of imports rises to Ob and the quantity of imports fall to Oq1. Import expenditure is represented by area Obfq1. There is a reduction in import expenditure as the fall in quantity demanded of imports is greater than the rise in price of imports. For a country with price-inelastic demand for imports, when the tariff is imposed, the price of imports rises to Oc and the quantity of imports fall to Oq2. Import expenditure is represented by area Ocdq2. There is an increase in import expenditure as the fall in quantity demanded of imports is less than the increase in price of imports.

This illustrates the positive impact of free trade on the Singapore economy and is one of the key reasons why Singapore campaigns actively for the removal of tariffs and the setting up of FTAs. It has a relatively price-inelastic demand for imports since it has no natural resources and has to import both food as well as inputs for production. Imposing tariffs on such goods will have more adverse effects for its economy than gains.

On the export side, domestic producers in Singapore gain from an enlarged export market. Thus, they are able to reap internal economies of scale and earn greater export revenue. In addition, the reduction, or removal, of tariffs results in cheaper exports, which will lead to an increase in export demand and revenue. The increase in net exports increases aggregate demand and in turn increases national income, employment, and short-run growth if the economy is operating below full employment. On the other hand, if the economy is near or at full employment, the boost of net exports might lead to demand-pull inflation.

The other benefit that FTAs bring to the Singapore economy is that it allows countries to specialise in producing goods in which they have a comparative advantage in to a greater extent. Comparative advantage is the idea that relative opportunity costs of production must be taken into account when trading between countries. Consumers benefit from lower-priced goods, as Singapore’s trading partners are able to produce these goods more efficiently due to their comparative advantage. Also, there is both a greater variety of goods available and better quality of products. The removal of tariffs means that domestic producers face greater competition from foreign producers, which will boost the efficiency of domestic production and the quality of products.

Lastly, Singapore benefits from greater foreign direct investment. Foreign Direct Investment (FDI) refers to long-term capital inflows, which typically takes the form of a Multinational Corporation (MNC) investing in an enterprise that is outside the economy of the MNC. The greater inflow of capital will have a positive impact on the Balance of Payment (BOP), creating a surplus in the BOP. Foreign direct investment will also result in an increase in capital accumulation, which increases the productive capacity of the economy and short-run economic growth. In addition, the diffusion of technology from the MNCs to domestic producers will increase the level of productivity and lead to long-run economic growth.

On the other hand, FTAs bring about negative impacts on the Singapore economy. First, structural unemployment arises in industries that are in direct competition with other lower-cost trading partners due to a loss of comparative advantage.  There will be a decline in production levels and employment in some of Singapore’s sectors such as manufacturing. This results in structural unemployment, as these workers are not equipped with the skills required to work in the newly-created sectors. In addition, new technology increases the importance on skills and substitutes for relatively low-skill inputs. Technology replaces low-skilled jobs, exacerbating the problem of unemployment.

Second, FTAs cause member countries to become more vulnerable to external events. FTAs foster closer trade links among member countries, and as a result increases the interdependence of their economies. This means that a recession in one country may quickly spread to other countries, which are its trading partners, an effect known as the “contagion effect”. In the case of Singapore, higher reliance on imports makes the economy more vulnerable to the threat of imported inflation, while reliance on exports to drive economic growth may make Singapore more vulnerable to external shocks. There is also the possibility of an increase in long-term capital outflow due to greater opportunities in member countries.

The above illustrate that FTAs have both positive and negative impacts on the Singapore economy. The government has put in place measures to mitigate the negative impacts and has been largely successful in reducing the problems of demand-pull inflation, structural unemployment and vulnerability to external shocks.

To tackle the threat of demand-pull inflation due to the growth in exports and investment, as well as the threat of imported inflation, the Singapore government has put in place an exchange rate policy of gradually appreciating the Singapore Dollar. A gradual appreciation of the Singapore Dollar keeps the price of imports relatively low, reducing the possibility of imported inflation. A gradual appreciation of the Singapore Dollar also prevents excessive increases in export demand and hence aggregate demand, reducing demand-pull inflation.

To tackle structural unemployment, Singapore has adopted manpower policies to equip workers with the skills required to work in the newly created industries, for instance biotechnology. The government also spearheads Research & Development (R&D) projects to develop new areas of growth and new dynamic comparative advantage, such as the biomedical sector, in the face of the erosion of Singapore’s comparative advantage in an attempt to search for new markets.

The government uses supply side policies to deal with the third problem of vulnerability to external shocks. Singapore’s economic strategy is outward-oriented. Small and Medium Enterprises (SMEs) are encouraged to venture overseas to reduce the dependence of our current account on exports and hence, the Balance of Trade (BOT). With SMEs investing abroad, this will lead to an inflow in the current account in the long run. This helps to reduce the vulnerability of Singapore’s economy to changing global conditions.

There is evidence that the above policies have been successful. The exchange rate policy has been effective in keeping inflation at a consistently low and stable level. The government also managed to develop new high-value added industries such as biomedical and life sciences to replace jobs in the lower-skilled manufacturing sector, in which Singapore is rapidly losing its comparative advantage. The outward orientation policy has also proven to be effective in helping Singapore cope with changes in global conditions. However, it takes time for supply side policies to work. Thus, in the short run the drawbacks of FTAs appear to be large, but in the long run, the positive impact of FTAs outweighs the negative impact when the policies take effect.

In conclusion, the signing of FTAs brings about benefits and detriments. Nevertheless, the long-run benefits tend to outweigh the short-run drawbacks and the Singapore’s government policies to mitigate the negative effects of FTAs have been relatively successful. Singapore is a small economy with a lack of natural resources. It benefits from the removal of tariffs, as its demand for imports is inelastic. Domestic producers benefit from entry into the markets of its trading partners and consumer welfare increases as consumers are able to obtain lower cost goods produced by Singapore’s trading partners.  FTAs also encourage foreign direct investment and technology transfer from MNCs, which contribute towards economic development and growth of Singapore. The main negative impacts of FTAs are demand-pull inflation, structural unemployment and vulnerability to external shocks. These impacts have been mitigated by the exchange rate policy, supply side policy and outward orientation measures put in place by the Singapore government. The Singapore government continues to campaign for the setting up of FTAs as they seek new opportunities in emerging markets such as China, India, Russia, and Latin America.

JC Economics Essays - Tutor's Commentary:  Once again, note that the original was edited two-fold - first, to fit into this JC Economics Essay blogpost; second, to remove diagrams. It is well written and crafted, and was done professionally. Given that this essay was written professionally and not under examination conditions, if an Economics student could write about half the standard of this paper, he would get more than a decent grade. Having said that, the usual questions apply: how can I write an essay better? How can I improve on this paper? 

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