What this lesson teaches
I can weigh the benefits and costs of free trade and open flows for consumers, producers and governments.
Syllabus 9570, 3.3.1(c). Globalisation, International Trade and Economic Co-operation: Benefits and costs of free trade and flows of capital and labour on:; Consumers - Prices, choice and variety of goods and services; Producers - Size of markets, degree of competition, cost of production and innovation; Government - Macroeconomic objectives (and policy choice)
Make a guess
A tariff on imported fittings protects local fitting makers. What happens to a local furniture exporter that uses imported fittings?
- It gains, because protection helps local firms in the same industry chain.
- It is hurt, because its input costs rise.
- It is unaffected, because it sells its furniture abroad.
Show the answer
It is hurt, because its input costs rise.
Protection for one group of producers raises costs for firms that use the protected good as an input, making their exports less competitive.
Trade gives firms bigger markets and cheaper inputs, but exposes others to stronger competition.
Access to foreign markets lets firms sell far more than the domestic market allows, gaining economies of scale. This matters greatly for Singapore, whose home market is small.
Imported inputs and machines can lower costs and raise quality.
But firms competing with imports face stronger competition. Some shrink or close, and workers need to move to other industries.
Many Singapore exports contain imported parts, so barriers on imports can raise exporters' costs.
- Gains
- Bigger markets, economies of scale, cheaper inputs.
- Costs
- Competition for import-competing firms.
Worked example: A tariff on an exporter's inputs
A furniture maker exports abroad and imports special fittings. A proposed tariff would protect local fitting producers but raise the furniture maker's costs.
- Local fitting producers gain from protection.
- The furniture maker's costs rise, so its exports become less competitive.
- Jobs in furniture exporting may be lost.
- Protecting one group of producers can hurt another.
Watch out for this
Protecting domestic producers from imports helps all local firms.
Firms that use imported inputs face higher costs, so they can be hurt.
Check your understanding
Why does trade matter so much for Singapore's firms?
- Imported goods cost more than local ones, so firms must export to pay for them.
- Local buyers prefer foreign brands, so Singapore firms have to sell abroad.
- The domestic market is small, so exports let them reach economies of scale.
Show the answer
The domestic market is small, so exports let them reach economies of scale.
Right. Selling abroad lets them spread costs over much larger output.