Economic integration Paper 2

IBDP Economics  SL –  The global economy – Economic integration -Paper 2  Exam Style Practice Questions

IBDP Physics
IBDP Biology
IBDP Chemistry
IBDP Maths
IBDP - All Courses

Economic integration Paper 2? 

Exam Style Questions..

Subject Guide IBDP Economic IBO

IBDP Economic SL- All Topics

Exam Style Question for Economic integration -Paper 2

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.

Question

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).

▶️Answer/Explanation

Responses may include:

A definition of:

  • tariffs
  • quota
  • trade protection
  • trade agreement.

Strengths of the trade agreement:

  • The trade agreement could raise the EU’s exports to Japan by 34 % and Japan’s to the EU by 29 %, increasing AD and thus creating economic growth and jobs in all economies involved (paragraph [1]) (candidates may argue that the impact on growth is indeterminate since net exports may fall with downward pressure on growth in the short run).
  • The trade agreement marks a determined effort to overcome problems associated with trade protection (paragraph [1] – combat rising trade protectionism) such as higher prices.
  • Will make Japanese car producers more competitive with European and Korean producers, increasing employment in the Japanese car industry (paragraph [2]).
  • Lower prices for Japanese consumers of meat, dairy products and wine (paragraph [4]).
  • The loss of trade protection for producers, eg Japanese farmers, will force them to become more efficient (paragraph [4]) if they are to remain competitive.
  • The deal will also resolve non-tariff barriers, such as technical requirements and regulations, which will increase trade (paragraph [3]).
  • The proposed deal also addresses sustainability (paragraph [6]).
  • It would be easier to sell to European/Japanese consumers, which creates a larger market, resulting in expansion of production.
  • Consumers in both countries will have access to a wider variety of goods at lower prices as a result of freer trade.

Limitations of the trade agreement:

  • Trade agreement still allows for some tariff barriers and some non-tariff barriers (paragraph [4]).
  • JEEPA faces challenges, as it will have to be passed by the Japanese Parliament, the European Parliament and European national governments (paragraph [6]), so there is no guarantee that it will happen.
  • The agreement will disadvantage some producers in all economies.
  • Possible unemployment in industries where trade protection is reduced, eg the EU car industry (paragraph [2]) and farmers in Japan (paragraph [4]).
  • Korean car manufacturers may lose market share in the EU market to the Japanese producers (paragraph [2]).
  • US beef and pork producers might lose market share in Japan because EU producers would have better access to the Japanese market (paragraph [5]).
  • Governments will have their tariff revenues reduced.
  • Possible infant industries, such as the cheddar cheese industry in Japan, may not be able to compete (paragraph [4]).

Trade strategies in the Philippines

  1. For more than 20 years the Philippines has been limiting the volume of rice it imports. However, the agreement with the World Trade Organization (WTO) that permitted these restrictions expired in 2017. In early 2019, the government replaced the quantity restrictions with tariff protection. A 35% tariff on imported rice from the Association of Southeast Asian Nations (ASEAN)* was imposed to protect the domestic rice industry in the Philippines. Following the replacement of the quota with a tariff, rice prices are expected to fall significantly. However, urban households want the president to allow rice to be imported without any tariffs to reduce food bills even further.
  2. The poorest quintile of households in the Philippines consumes nearly twice as much ordinary rice and 20 times more National Food Authority (NFA) rice compared to the richest quintile. Rising food prices are pushing up inflation as a result of increasing salaries in urban areas. The daily minimum wage in Manila, the Philippine capital, will increase by 4.9 %, the highest hike in six years, to the equivalent of US$10.11. Farming and fishing provide the livelihoods for around one-third of the labour force in the Philippines. Land reform programmes are slowly being implemented to change the current situation of unfair ownership of land and resources by a few individuals. However, uncertainty continues to discourage investment in adequate irrigation systems in the countryside. As an agricultural country, irrigation in the Philippines is very important. Improvements in the quality of infrastructure services will help cut the cost of doing business, attract more investment, and enhance productivity around the country. Food manufacturing, including food and beverage processing, remains the most dominant primary industry in the Philippines. This has become a focus in the hope of increasing farm incomes, because this part of the economy is currently dominated by big international companies. Major exports of processed fruits and nuts include mangos, pineapples, bananas and peanuts.
  3. The Philippine Export Development Plan (PEDP) 2018–2022 calls for boosting the export of services, increasing export competitiveness, and exploring new markets. Efforts have already been made to harmonize the country’s standards, testing, certification and quality accreditation of products to improve trade and comply with standards in the European Union. The PEDP aims to increase the volume and value of exports by encouraging investment in production processes and supply chains. Another strategy to achieve the plan’s objective is to exploit existing and new opportunities from trade agreements.
  4. The Philippines lacks the infrastructure needed to attract export-oriented manufacturing. To support the PEDP, the government needs to increase its spending on new airports, roads and bridges. These public works are critical to boosting the incomes of people in poorer areas by connecting them better to Manila. To allow for this extra spending, a series of tax reforms was started: the income tax for the highest income earners has been raised from 30 % to 35 %, and indirect taxes have been increased.

Question

State two functions of the World Trade Organization (WTO) (paragraph [1]).

▶️Answer/Explanation

A clear understanding demonstrated by listing two of the following functions of the WTO for its member countries:

  • to set and enforce rules for international trade
  • to provide a forum for negotiating trade liberalization
  •  to monitor further trade liberalization
  • to resolve trade disputes
  •  to increase the transparency of decision-making processes 
  • to help developing countries benefit fully from the global trading system.

Text A — Overview of North Macedonia

  1. North Macedonia is a small, landlocked nation that shares borders with five countries, including Bulgaria and Greece. Bulgaria and Greece are members of the European Union (EU) common market, which North Macedonia hopes to join soon. Since the country began negotiating for EU membership, trade with the EU has increased rapidly and now accounts for 75 % of North Macedonia’s exports and 62 % of its imports.
  2. Despite its small market, with a population of approximately 2 million, North Macedonia’s proximity to the EU, low wages and expected entry into the common market have attracted foreign investors. Greece, its richest neighbour, was its third highest source of foreign investment in 2019. The lower cost of living also appeals to Greek tourists.
  3. EU companies have invested in the financial, telecommunication, energy and food processing industries in North Macedonia. Many of the most profitable companies are from the EU. If EU membership is granted, foreign direct investment (FDI) inflows may increase as firms located in North Macedonia will be allowed to bypass all custom checks and enjoy tariff-free trade within the common market. One particular challenge for North Macedonia, however, is that most of the profits of foreign companies are likely to be repatriated (sent back to the companies’ home countries).
  4. In 2018, North Macedonia’s export revenue was US$7.57 billion and its import expenditure was US$9.56 billion. The country’s main exports are iron and steel, clothing and accessories, and food products. Food, livestock and consumer goods account for 33 % of imports while the remainder are machinery, petroleum and other materials needed for the industrial production process.
  5. The manufacturing sector, which now employs 31 % of the labour force, has gained more importance. The agricultural sector remains strong, contributes over 10 % of North Macedonia’s gross domestic product (GDP) and employs about 16 % of the country’s workforce.
  6. The unemployment rate decreased from over 30 % in 2010 to 17.3 % in 2019. However, youth unemployment is almost 40 %. Over 20 % of the population lives below the poverty line. Unemployment and poverty contribute to high rates of emigration. More than 20 % of the North Macedonian population have emigrated since 1994, mostly to the EU. As a member of the EU, North Macedonia will enjoy free movement of labour which will make it easy for its citizens to live and work in other EU countries.

 Text B — North Macedonia’s economic reforms

  1. To be considered for EU membership, North Macedonia implemented a series of supply-side policies to reform its economy. The EU imposes strict requirements for membership but provides financial assistance to countries preparing for membership. North Macedonia has received 633 million euros (the currency of the EU) to help with the reforms.
  2. Most of the supply-side policies seek to improve the international competitiveness of North Macedonia’s industries. The authorities are increasing access to education and training for workers. The expansion of the transport network and other infrastructure is also expected to increase efficiency.
  3. Protection of the environment is also on the list of requirements for EU membership. North Macedonia aims to reduce its dependence on coal and to instead promote the use of solar, wind and hydropower technologies. These low-carbon energy sources would help decrease its air pollution, which is among the worst in Europe.
  4. The reforms, which started in 2014, have shown progress. Exports and manufacturing output are more diversified and more concentrated on high-value products. To attract FDI, North Macedonia maintains one of the lowest tax rates on corporate income in the region. The central bank also prevents the denar (North Macedonia’s currency) from appreciating against the euro through managing foreign reserves. However, skill shortages and a mismatch of skills with those required by companies discourage foreign firms from investing. Important investment gaps in public infrastructure also remain.

Text C — North Macedonia’s trade agreements

North Macedonia participates in five free trade agreements (FTAs), that together cover 95 % of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net importer of agricultural and food products. All protectionist measures on EU products would be removed upon entry into the common market.

Question

Using information from the texts/data and your knowledge of economics, discuss the likely economic effects on North Macedonia of its entry into the European Union (EU) Common Market

▶️Answer/Explanation

Responses may include:

  • The impact on the unemployment rate may be mixed:
    • it could be argued that the inflows of FDI (Text A, paragraph [2]; Table 2) and greater exports to the EU could lead to job creation.
    • The lower wages may attract EU firms which may help reduce the high unemployment rate (Text A, paragraph [6]; Table 2).
    • Jobs may be lost in the agricultural sector (Text C) which still employs 16 % of the population (Text A, paragraph [5]).
    • Funds from the EU have helped increase access to education and workers’ training which could help reduce the skills mismatch (Text B, paragraph [4]) and hence reduce the high (structural) unemployment rate (Text A, paragraph [6]).
  • The impact on economic growth:
    • the increase in trade could close the current account (balance of trade) deficit (Table 2, answer to b(ii)), lead to increase in AD and hence actual growth.
    • more trade may raise efficiency in North Macedonia through increased competition, economies of scale from larger markets, and improved resource allocation
    • it could be argued that trade may not increase significantly since North Macedonia is already enjoying free trade with the EU over most goods and services (Text C).
    • as North Macedonia currently suffers a deficit in the balance of trade (Text A, paragraph [4], answer to b(ii)) and a current account deficit (Table 2), the removal of quotas may worsen its balance of trade position and could lead to a fall in AD.
    • the various supply-side policies needed to meet the requirements for EU membership have allowed potential growth and kept the inflation rate low (Table 1).
    • the net FDI inflow throughout the 4-year period (Table 2) reflects potential growth.
  • Access to seaports would be easier since North Macedonia is landlocked (Text A, paragraph [1]). This would further attract investment.
  • The free movement of labour which comes with the common market may worsen the emigration problem and contribute to a ‘brain drain’ problem (Text A, paragraph [6]).
  • The EU is providing North Macedonia with financial assistance to finance supply-side policies, which will allow them to become more globally competitive (Text B, paragraph [1]).
  • Increased trade with the EU has allowed for diversification (Text B, paragraph [4]) and the growth of the manufacturing sector (Text A, paragraph [5]).
  • Once North Macedonia no longer receives financial assistance from the EU, it may have difficulties financing government expenditure.
  • The removal of quotas may have some impact on the local agricultural sector (Text C) which could worsen the incidence of poverty (Text A, paragraph [6]) and lead to over-reliance on other countries for food security since North Macedonia is already a net importer of food (Text C).
  • As a member of the EU common market, North Macedonia will continue to have unrestricted access to imported capital goods, enhancing productivity and potential growth (Text A, paragraph [4]). 
  • North Macedonia will have to adopt EU external tariffs which may negatively impact its trade position with non-members (3 neighbouring countries are not part of the common market – Text A, paragraph [1]).
  • The repatriation of foreign firms’ profits (Text A, paragraph [3]) may lead to a worsening of the balance of payments and a shortage of financial capital.
  • There could be a loss of sovereignty as North Macedonia will need to give unrestricted access to EU firms which have already invested in essential services (Text A, paragraph [3])
  • Compliance with EU standards for environmental protection could lead to less pollution and an improved quality of life (Text B, paragraph [3]).
  • Greater competition due to exposure to foreign firms may lead to innovation.

Question

Using an appropriate diagram, explain how the MERCOSUR-EU free trade agreement may lead to higher structural unemployment in Uruguay (Text B, paragraph 3).

▶️Answer/Explanation

For drawing a labour market diagram with demand for labour shifting to the left and a reduction in the number of workers AND for explaining that the (permanent) loss in demand for workers with specific skills (manufacturing sector) leading to workers losing their jobs (due to a lack of demand for their skills).

Question

Using information from the texts/data and your knowledge of economics, discuss the impact of economic integration on the Uruguayan economy.

▶️Answer/Explanation
Responses may include:
  • a definition of economic integration
  • a definition of a common market
  • a definition of a free-trade agreement
  • diagrams (eg AD/AS, tariff, quota).
  • The advantages of membership of the MERCOSUR common market and EU – MERCOSUR free trade agreement:
    • Greater access to a market of 290 million consumers through the MERCOSUR common market and possibility to access the markets of the 27 members of the EU; offer potential for economies of scale for Uruguayan producers who would otherwise be limited to the small size of the domestic market (Text A, paragraph 1 and Text B, paragraph 1).
    • Increase in export revenue has contributed to economic growth and higher real GNI per capita (Text A, paragraphs 2 and 3, Table 2) and poverty reduction (Text A, paragraph 5; Table 2). Although the country benefitted significantly from exports to China, which is not a member of either trade bloc (Text A, paragraph 2).
    • Membership to the EU-MERCOSUR free trade agreement may lead to greater exports to the EU (Text B, paragraphs 1 and 2) and may help restore Uruguay’s growth rate (Text A, paragraph 3). This could be contrasted with the negative/low balance of trade (table 1). But quotas, which cause inefficiencies and higher prices, remain for some items (Text B, paragraph 2).
    • With freedom of movement of labour within MERCOSUR, there are greater employment opportunities. However, the freedom of movement might have contributed to the unemployment rate (Text A, paragraph 5).
    • Uruguay’s tariff-free access to MERCOSUR and the EU makes it an attractive destination for foreign investors (Text A, paragraph 6 and Text B, paragraph 4).
    • A high common external tariff protects Uruguayan producers from cheap imports from China (Text C, paragraph 1).
    • Membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations such as the EU-MERCOSUR free trade agreement.
    • Greater political stability and cooperation.
  • The disadvantages of membership of the MERCOSUR common market and free trade agreement:
    • Uruguay is susceptible to external shocks (Text A, paragraph 3). As Uruguay is over reliant on trade of primary products and is not diversifying its exports (Text A, paragraph 4), this may explain why the Gini index and real GNI per capita have only narrowly improved since the end of the commodity boom (Table 2).
    • Increased production of meat, paper and wood for exports represent a threat to sustainability (Text B, paragraphs 1 and 4).
    • Lowered protectionist measures may lead to more structural unemployment (Text B, paragraph 3) once tariffs are removed/reduced as part of the EU- MERCOSUR free trade agreement.
    • Uruguay has suffered from a loss of sovereignty, which prevents the country from entering bilateral trade agreement(s) and reducing its tariffs (Text C, paragraphs 1 and 2).
    • Challenge to multilateral trading negotiations.
Scroll to Top