International Trade and International Money & Finance

Answer

FOREX Market

Question 1

Trade discrimination among international groupings is one of the most common phenomena that have existed in the modern world. Individual nation states as well as international groupings engage in trade discrimination for various reasons. Free-trade area and customs union are some of the most common forms of trade discrimination. The term 'free-trade area' refers to a situation in which trade barriers are removed with respect to member states and the parties are able to freely trade among themselves, yet maintain separate national barriers with respect to trade with the outside world (Pugel, 2015). An example of this is the "North American Free Trade Area (NAFTA)" (Pugel, 2015, p. 252). The term 'customs union', on the other hand, refers to a situation in which members eliminate trade barriers among themselves and they go further to adopt a common set of rules that address how trade with the outside world will be limited (Pugel, 2015). Based on the foregoing, it is apparent that the distinction between the two forms of trade discrimination arises by reference to whether or not there is a common agreement relating to how trade with the outside world will be limited.

Question 3

When customs unions are formed, trade barriers between members are eliminated and this provides a substantial incentive for increased trade between members and reduced trade with the outside world. Through this process, trade creation is seen to arise. Due to the formation or expansion of an already existing trading bloc, coupled with the subsequent removal of trade barriers, better specialization is achieved depending on a country's comparative advantage and this accords the opportunity for trade creation among member states (Pugel, 2015). This may in turn lead to losses for the outside world. Trade diversion, on the other hand, is defined as a situation where there is decreased trade due to the formation of a trading bloc since trade with low cost countries is replaced with trade with high cost bloc members (Pugel, 2015). This can lead to gains for the outside world since the vacuum created by the customs union will be exploited by other countries which will seek to trade with the low-cost country.

Question 5

1. Cost of DVD recorder from Furrinerland to Homeland;

$100 + $30 = $130

Cost of all the DVD recorders;

$130 multiplied by 10 million = $1.3 billion

Cost of similar quantity of DVD recorders after the free-trade area has been formed;

$110 multiplied by 10 million = $1.1 billion

Cost of the trade diversion;

$1.3 billion - $1.1 billion = $200 million

11. The extra imports that would need to be demanded to off-set the trade diversion cost is 11.8 million DVD recorders.

Question 7

The US consumers will profit because they are likely to purchase the shoes at a lower cost due to the elimination of trade barriers. Instead of purchasing the shoes at $30 they are likely to purchase them at $25.

Forming the trade bloc will be costly for the US government because a high magnitude of trade would be diverted form low-cost to high-cost suppliers. The US government will also be at a loss because of the elimination of the 50% tariff.

It is plausible that the US producers will largely remain unaffected since whereas they were getting the shoes from China at a significantly low cost, they were paying high amounts of tariff thus getting the shoes from Mexico at an additional cost would serve to cancel out the tariff cost.

Question 11

1. imposing a countervailing duty against an existing foreign export subsidy.