Free Trade Area Of The Asia-Pacific

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APEC Study CentreThe Chinese University of Hong KongFree Trade Areaof the Asia-PacificBy:Cheng Ying TaiChin Sze HiuChu Chi ChiuLau Chak Tin

FTAAP - APEC Study CentreContent12AcknowledgementExclusive Summary33341. Teaching Objectives2. Learning goalsIIntroduction1. Background of FTAAP552. Framework and details of FTAAP84. Additional resources13v 16International Trade Theoryv 173. Analysis of the tariff profile of the 21 countriesII171. Definition2. Barriers in Tradev 203. Additional resourcesv 24III Effectiveness and Limitations of FTAAPv26261. Feasibility of FTAAP - Case Studies and Learning Corner2. Benefits of FTAAP – Case Studies and Learning Cornerv3. Shortcomings of FTAAP – Case Studies and Learning Corner29v 334. Additional resourcesv 36IV More Topics on FTAAPv 392. FTAAP and COVID-1939v 413. Additional resourcesv 451. How does FTAAP affect Hong Kong from the perspective of Hong KongV Conclusionv462

FTAAP - APEC Study CentreAcknowledgementWe would like to extend our heartfelt gratitude to Hong Kong Trade and IndustryDepartment for their generous funding on this project.We are also grateful to have the dedicated guidance from Professor Wallace Mok whoenlightened us along the way.And at last, the APEC Study Centre would like to thank the following student helpers fortheir contributions – Cheng Ying Tai, Chin Sze Hiu, Chu Chi Chiu and Lau Chak Tin for bothcontent and Design.Teaching ObjectivesSince the proposal of the Free Trade Area of the Asia Pacific (FTAAP) at the 13th APECEconomic Leaders’ meeting in 2005, the realization of free trade has been top of theagenda among APEC member economies.This teaching case provides a comprehensive overview of FTAAP and thought-provokingmaterials to inspire our students on free trade issues3

FTAAP - APEC Study CentreLearning GoalsWe established 5 general learning goals for students to accomplish through learning thiscase.Framework ofImplementationIssues ensued fromFTAAPof FTAAPFTAAPTariff profile of 21Effectiveness &APEC countriesLimitations of FTAAPThis teaching case provides holistic contents and materials for interactive teachingand active learning. Teachers can find useful materials when designing assignmentsand projects for students1.Clear teaching theme & learning goal are stated for each section.2.Additional notes on relevant concepts are provided.3.Additional multi-media learning support is also provided for different topics.4.Suggested assignments and projects are provided after each chapter.4

IFTAAP - APEC Study CentreIntroductionI-I Background of the FTAAPBogor Declaration1 in 1994 marked the APEC members’ commitmentBogor GoalsEnhancingcompetition policiesto the realization of a free trade area in the Asia Pacific region by 2010for the industrialised economies and 2020 for the developingeconomies2, The regional consensus on achieving Bogor Goals showsthat the liberalisation of trade and investment, and facilitation ofLowering restrictionson governmentprocurementReducing businesscostseconomic integration are essential to the region’s economic growth.Continuousexpansion of tradeagreementsFactors like the ever-changing economic landscape, complex businessTariff reductionenvironments, and obsolete growth model, have sent a wake-up callNon-tariff measuresto the highly interdependent region that in order to achieveImproving marketaccesssustainable economic growth, trade cooperation is genuinely needed.Recognizing the potentials through free trade, the APEC BusinessAdvisory Council introduced FTAAP and envisioned a future of a moreinclusive and integrated Asia-Pacific economy3.1Bogor Declaration: The Bogor Declaration was in 1994 in Bogor, IndonesiaAPEC’s Bogor Goals Progress Report3Free Trade Area of the Asia Pacific2To find out more about:APEC’s Bogor GoalsProgress ReportRelaxing conditionsfor foreignownershipFacilitating customsprocedures5

FTAAP - APEC Study CentreIn 2006, the APEC Leaders officially announced the vision of a FTAAPin response to the proposal of ABAC in Hanoi meeting4. Since then, theFTAAP has been seen as a key instrument to APEC’s Regional EconomicInitiatives towardREIThe Free Trade Areaof the Asia-Pacific(FTAAP)Integration (REI) agenda, streamlining cross-border procedures ofImproving Ease ofDoing Businesspeople, goods and services.StreamliningCustoms ProceduresThroughout the past few decades, APEC has been transforming theFTAAP from an aspirational vision to a more concrete establishment.4The Beijing Roadmap for APEC’s Contribution to the Realization of the FTAAPTo find out more about:APEC News releaseBeijing Roadmap forissued by the ABACAPEC’s ContributionImplementation ofStructural ReformProjects in MemberEconomies6

FTAAP - APEC Study CentreDevelopment andAchievement of FTAAP20042006The concept of FTAAP was first proposed by ABACThe APEC Leaders made the first formal statementon FTAAP2007The APEC Leaders agreed to explore prospects andoptions for FTAAP2008APEC published ‘Further Analytical Work on theLikely Economic Impacts of FTAAP’2010The APEC Leaders agreed to continuously pursueFTAAP by further contributing in areas likeInvestmentE-CommerceServicesRules of OriginStandards andConformanceEnvironmental goods and servicesTrade Facilitation2013APEC released a report on FTAAP Capacity BuildingPrograms in Rules of Origin and FTAImplementation2017The implementation of the Lima Declaration on theFTAAP and the ASCRTo find out more about:FTAAP Capacity BuildingProgram in ROO and FTAAPEC in Chart 2019With FTAAP andothers ambitiousinitiatives, the 21countries, with 38%of global population,contributed around60% of the globalGDP (48 trillion) in2017.7

FTAAP - APEC Study CentreI-II Framework & Details of FTAAPTo APEC economies, FTAAP is crucial to regional economic integration.Once wholly realized, the FTAAP will be the most diverse and thelargest trade agreement in the world (Petri, Findlay, Plummer andWignarajia, 2015). It is also recognized as a comprehensive initiativethat could not only achieve trade liberalization but also address the‘next generation’ trade issues.FTAAP has been operated under a consensus-based and step-by-stepapproach. The 21 member countries have been contributing to theoverall prosperity in the region by committing to the realization of freetrade in the region.The followings are the framework set by the APEC Leaders.To find out more about:Progress Report on Implementationof the Beijing RoadmapHow can FTAAPcontribute todeeper integration?The 4 ansparency8

FTAAP - APEC Study CentreAPEC Beijing RoadmapCommon views of the leaders5 The FTAAP should be pursued with complementing andsupporting the multilateral trading system. The FTAAP should achieve liberalization in a broader sense; itshould be high quality, comprehensive and incorporate.Meanwhile, “next generation” trade and investment issuesshould be addressed. Achieving the Bogor Goals by 2020 has always been APEC’s coreobjective, and progress towards the goals will contributesignificantly to the realization of FTAAP. The FTAAP will be realized parallel with the APEC process, outsideof APEC. APEC should uphold its principles of non-binding,voluntary cooperation in its contributions to the FTAAP’srealization. APEC will continue its role as an incubator of theFTAAP by encouraging more unilateral trade and investmentliberalization, and provide intellectual input and leadership to itsrealization. Greater efforts should be made to exploring the possiblepathways to the FTAAP, including the RCEP and TPP. To help interested APEC economies with participating inpreparation for the FTAAP’s realization, APEC should continue toprovide effective technical and economic cooperation activitiesthat assist developing economies, including in human resource,structural reform, SME development and integration.5The Beijing Roadmap for APEC’s Contribution to the Realization of the FTAAPWhat is spaghettibowl phenomenon?Spaghetti bowl effect isa term describing thereare multilateralcrisscrossing FTAs FreeTrade Agreements(FTAs) signed acrossnations. To determinethe preferential tariffsfor goods, countriesimposed specificrequirements for Ruleof Origin (RoO) andthe Rule of cumulation(RoC) in each FTAs.However, the rules maybe found to becontradictory whencountries signedmultiple FTAs. This mayincur highadministrative cost ofenforcing thesecomplex andnumerous rules andlead to economicinefficiency.9

FTAAP - APEC Study CentreActions undertaken to pursue FTAAP Launch a comprehensive strategic study on issues related to FTAAP’s realization,oProvide an analysis of potential social and economic benefits and costsoAnalyze the various pathways towards FTAAPoAssess effects of the “spaghetti bowl” phenomenon on the economiesoIdentify trade and investment barriersoIdentify challenges economies may face in realizing FTAAPoConsider recommendations based on the study’s findings.Continue the capacity building work in pursuit of the FTAAP under the Action PlanFramework of the 2nd Capacity Building Needs Initiative (CBNI). The results of the programsconducted under the 2nd CBNI will be reviewed periodically with the goal of building up thecapacity of economies to participate in ongoing regional undertakings and realize the FTAAP. Advance “at the border” trade facilitation and liberalization efforts, enhance the businessenvironment “behind the border”, and improve regional connectivity “across theborder”.oThis includes advancing initiatives in areas such as:InvestmentEnvironmentalgoods and servicesE-commenceRules of OriginNext generation tradeand investment issuesand more 10

FTAAP - APEC Study CentreLima Declaration on FTAAPGoals and Principles6 Reaffirmation the commitment to better the process in a systematic and comprehensivemanner towards the realization of the FTAAP as a major instrument to pursue APEC’sregional economic integration agenda. Recognition of APEC’s critical role to play in nurturing and shaping regional economicintegration, upholding the principles of inclusiveness, openness and cooperation, advocatingprofound economic restructuring, strengthening and deepening regional economicintegration, and give impetus to the Asia-Pacific’s sustainable development. APECencourages unilateral economic reforms and the conclusion of comprehensive and highquality RTAs/FTAs.5Lima Declaration on FTAAPTo find out more about:Lima Declaration on FTAAP11

FTAAP - APEC Study CentreLima Declaration on FTAAPThe APEC affirm their commitment that the FTAAP would be built upon ongoing regionalintegration undertakings, and through multiple pathways like the Regional ComprehensiveEconomic Partnership (RCEP) and Trans-Pacific Partnership ustralia, Brunei, Canada,Brunei, Cambodia, Indonesia,Chile,The 21 countriesinvolvedChile, Japan, Malaysia,Laos, Malaysia, Myanmar,Colombiaof Asia PacificMexico, New Zealand, Peru,the Philippines, Singapore,, MexicoEconomicSingapore and VietnamThailand and Vietnamand PeruCooperationGoals Promote mutually beneficial trade among the members Strengthen economic cooperation and eliminate trade barriers among the parties Raise living standards and lower poverty in the countriesFTAAPFTAAP Free Trade Area of the Asia- PacificTPPNAFTANEASAPARCEP Regional Comprehensive Economic PartnershipNAFTA North America Free Trade AgreementAPEC Asia- Pacific Economic Cooperation ForumTPP Trans- Pacific PartnershipASEAN Association of Southeast Asian NationsRCEPPA 4 members Pacific Alliance (including Colombia)APECCJK China- Japan Korea trilateralTo find out more about:Summary of the Trans-PacificGuiding principles and objectivesPartnership Agreementfor negotiating the RCEPWhat is the Pacific Alliance?12

FTAAP - APEC Study CentreI-III Tariff Profile AnalysisTo protect the interest of domestic industries (which this concept will be further elaborated in thenext chapter), countries usually impose trade barriers like tariff on imported goods and services.This tariff profile7 analysis helps presenting the tariff charged among the member countries, andthereby demonstrating the trade condition without FTA.Total simple average final bound tariffs (%)40353025201510It is the simple averageof final bound duties(for both theagricultural and nonagricultural products)excluding unboundtariff lines.HongKongUn , ChiniteadStatesJapanCh CaninadesaeTaipeiRusSin siagapoAu reNe straliwZe aalandChinaReVpu ietNablicof mKoreaMalaysi aBruneiDa ChilerTh ussaePh lamilippineTh sailandPapuaNe PeruwGuineaMexicoIndonesi a50Total Simple AverageFinal BoundTotal simple average MFN applied tariffs (%)161412108642It is the simple averageof most favourednation (MFN) appliedduties for both theagricultural and nonagricultural products.HongKong,ChinBrun Sing aapeiorDaerusNe salawmZealandPeAu rusUntrite ali adStatPaespuCaaNe nadwaGuineaJapanMalaysi aThCePh hileilipChin pineesseTaipeiRussiaMexIn icodoneVi si aetNaTh mailandRepuCblhinicof aKorea0Total Simple AverageMFN AppliedTotal trade weighted average tariffs (%)It is the HS six-digit MFNtariff averages weightedwith HS six-digit importflows for both theagricultural and nonagricultural products.sePeruTaiUnite peidStatesNe JapanwZealandCanadaMalaysAu i astrali aMexicoChinaVietNamThailaIn nddonesi aThRuePh ssiailippinesRepuCblhiiclof eKoreaTotal Simple AverageMFN AppliedChineHongKong,ChinaBrSun ingapeiorDaerussalam9876543210Being one of the world’s freest economy, Hong Kong imposes zero tariff among all the three tariffcategories, while others have different extent of tariff measures.7World Tariff Profile 201913

FTAAP - APEC Study Centre14Exports to major trading partnersFor all the 21 APEC economies, their major trading partners (for both the agricultural productsand the non-agricultural products), are the rest of the APEC members. Therefore, any tradebarrier imposed in the trade within APEC would affect the trade and the benefits of the countriesseverely.AustraliaAgricultural products1) China2) Japan3) USA4) Indonesia5) Republic of KoreaBrunei DarussalamNon-agricultural products1) China2) Japan3) Republic of Korea4) EU5) IndiaNon-agricultural products1) USA2) EU3) China4) Mexico5) JapanChinaAgricultural products1) Japan2) EU3) Hong Kong, China4) USA5) Republic of KoreaNon-agricultural products1) USA2) EU3) Hong Kong, China4) Japan5) Republic of KoreaNon-agricultural products1) China2) USA3) EU4) Japan5) Republic of KoreaAgricultural products1) China2) USA3) Macao, China4) Singapore5) EUNon-agricultural products1) EU2) Switzerland3) India4) China5) USAJapanNon-agricultural products1) Japan2) China3) USA4) Singapore5) EURepublic of KoreaAgricultural products1) Japan2) China3) USA4) Hong Kong, China5) Chinese TaipeiAgricultural products1) USA2) EU3) China4) Hong Kong, China5) JapanHong Kong, ChinaIndonesiaAgricultural products1) India2) EU3) China4) USA5) MalaysiaNon-agricultural products1) Japan2) Republic of Korea3) India4) Thailand5) AustraliaChileCanadaAgricultural products1) USA2) China3) Japan4) EU5) MexicoAgricultural products1) Egypt2) Canada3) Malaysia4) South Africa5) ThailandAgricultural products1) Hong Kong, China2) Chinese Taipei3) USA4) China5) EUNon-agricultural products1) China2) USA3) EU4) Republic of Korea5) Chinese TaipeiMalaysiaNon-agricultural products1) China2) USA3) EU4) Hong Kong, China5) VietnamAgricultural products1) China2) India3) Singapore4) EU5) USANon-agricultural products1) China2) USA3) Singapore4) EU5) Hong Kong, China

FTAAP - APEC Study CentreMexicoAgricultural products1) USA2) Canada3) EU4) Japan5) USANew ZealandNon-agricultural products1) USA2) Canada3) EU4) China5) JapanPapua New GuineaAgricultural products1) US2) Malaysia3) USA4) Philippines5) AustraliaNon-agricultural products1) Australia2) Japan3) China4) Chinese Taipei5) SingaporeNon-agricultural products1) China2) Thailand3) Hong Kong, China4) USA5) JapanNon-agricultural products1) China2) EU3) USA4) Malaysia5) IndonesiaNon-agricultural products1) China2) USA3) EU4) Japan5) Hong Kong, ChinaNon-agricultural products1) USA2) EU3) China4) Japan5) Republic of KoreaTo find out more about:World Tariff Profile 2019Agricultural products1) Turkey2) EU3) Egypt4) Kazakhstan5) BelarusNon-agricultural products1) EU2) China3) Belarus4) USA5) JapanAgricultural products1) China2) USA3) Japan4) Hong Kong, China5) EUNon-agricultural products1) China2) Hong Kong, China3) USA4) EU5) SingaporeThe United State of AmericaVietnamAgricultural products1) EU2) China3) USA4) Japan5) PhilippinesNon-agricultural products1) China2) USA3) EU4) Switzerland5) CanadaChinese TaipeiThe ThailandAgricultural products1) China2) Japan3) EU4) USA5) IndonesiaAgricultural products1) EU2) USA3) Canada4) China5) EcuadorRussiaSingaporeAgricultural products1) Australia2) Malaysia3) Japan4) Philippines5) ChinaNon-agricultural products1) China2) Australia3) USA4) Japan5) EUPeruThe PhilippinesAgricultural products1) USA2) Japan3) EU4) China5) Republic of KoreaAgricultural products1) China2) USA3) Australia4) EU5) JapanAgricultural products1) USA2) Canada3) Mexico4) Japan5) EUNon-agricultural products1) EU2) Canada3) Mexico4) China5) Japan15

FTAAP - APEC Study Centre16I-IV Additional ResourcesSuggested Questions for StudentsQ1. Who are the participating countries of the FTAAP? [Framework and details of FTAAP]ANS: 21 member countries of APEC.Q2. How, or through which channel, does the FTAAP benefit member countries?[Background of the FTAAP]ANS: Reducing trade barriers, such as tariffs and quotas.Q3. List 3 key areas that are targeted under the realization of FTAAP. [Actions undertaken topursue the FTAAP]ANS: Investment. E-commerce, Rules of Origin, Environmental goods and services, Nextgeneration trade and investment issues (any 3).Multi-media Learning Resources1. APEC Today in 60 seconds: Historic FTAAProadmap reached2. What is the Free Trade Area of the AsiaPacific?

IIFTAAP - APEC Study Centre17International Trade TheoryII-I DefinitionInternational TradeDavid Ricardo developed the international trade theory that explains why having trade amongcountries is better than just one country producing all the stuff, even when one country is moreefficient and productive in all kind of production.Supported by the principle of comparative advantage, the international trade theory reveals whythe FTAAP, an initiative lowering international trade barriers among the APEC countries, is crucialin improving both the economies and the well-being of us all. Comparative Advantage and Absolute AdvantageoCountry with absolute advantage on a product: it needs a smaller quantity of inputs toproduce the goodoCountry with comparative advantage on a product: the opportunity cost of producing thegood is lowerTo find out more about:Introduction to InternationalTrade

FTAAP - APEC Study Centre 18Principle of Comparative Advantage: if every country specializes in the production of goodswith the comparative advantage, the total world output will increase.This supports why the FTAAP initiative is important to all the countries for it can increase the totaloutput of the APEC economies.Example 1By how much output can one unit of resources producedClothesPhonesCost of 1Cost of 1Country A3060ClothesPhoneCountry B10040Country A2 Phones0.5 ClothesTotal Output130 Clothes100 PhonesCountry B0.4 Phone2.5 ClothesFrom the example, Country A can product phone at a lower opportunity cost (0.5 clothes 2.5clothes) while Country B can produce clothes at a lower opportunity cost (0.4 phone 2 phones).From the results, Country A has a comparative advantage in producing phone and a comparativedisadvantage in producing clothes compared with Country B. Country B has a comparative advantage in producing clothes and a comparativedisadvantage in producing phone compared with Country ATo increase the total output and better off the standard of living, Country A should then producephone while Country B should focus on the production of clothes.ClothesPhonesCountry A0120Country B2000If the two countries focus on the production ofthe products which they have the comparativeadvantage, the total output can be substantiallyincreased (200 clothes 130 clothes and 120Total Output200 Clothes120 Phonesphones 100 phones).

FTAAP - APEC Study CentreExample 2How much resources is needed to product one unit of outputHandbagComputerCountry C5h10hCountry D2h5hTotal Resources7h15hneededHandbagComputerCountry C0.5 Computer2 HandbagCountry D0.4 Computer2.5 HandbagFrom the example, Country D has an absolute advantage over Country C in the production ofhandbag and computer when it takes a smaller number of resources to produce the same amountof goods for the both products.From the results, For Country C, the cost of producing a unit of computer is lower than that of Country D.Therefore, Country C has a comparative advantage in producing computer over handbag. For Country D, the cost of producing a unit of handbag is lower than that of Country C.Therefore, Country D has a comparative advantage in producing handbag over computer.Under the international trade theory, Country C should focus on the production of computer asthe country has a comparative advantage in computer production. Country D, on the other hand,should produce more handbag as the country has a comparative advantage in handbagproduction.The above examples illustrate the benefits brought by trade cooperation, and thereby explainingthe importance of FTA, which facilitates trade via trade barriers reduction.19

FTAAP - APEC Study CentreII-II Barriers in TradeThough boosting trade among countries could create mutual benefits to the parties, out ofprotectionism (practice of shielding the domestic industries of a country from foreigncompetition) and other concerns, trade barriers are widely imposed on imported goods andservices. The followings are the examples of trade barriers:TariffTaxes or duties imposed on imports with the aim to raise the price level of foreign goods abovethe existing price of domestic products.SubsidyA form of governmental financial support or aid to encourage production or consumption.QuotaA maximum limit imposed on the import quantity.EmbargoThe official ban on commercial activity and trade with a specific country.How does trade barrier harm the trade?We all understand that trade barrier will bring benefits and harms to different parties of thetrading economies. Let us have a better understanding on the mechanism behind with thefollowing illustrations.To find out more about:Trade protectionism methodswith examples, pros, and cons20

FTAAP - APEC Study CentreExample 3Baseline scenario: Supply and Demand Curve of domestic country that does not trade computerwith other countriesPPrice: PeSDomestic quantity: QeQuantity transacted: QePeConsumer Surplus: APeBBProducer Surplus: Pe0BD0QQeBaseline scenario: Supply and Demand Curve of domestic country that trades computers withother countriesPPrice: from Pe to PwASDomestic quantity: supplied: from Qe to Q1Quantity transacted: Q2PeQuantity imported: Q1Q2BCPwEDSwD0Q1QeQ2QConsumer Surplus: fromAPeB to APwDProducer Surplus: fromPe0B to Pw0C21

FTAAP - APEC Study CentreThe price of computer is determined by the world demand and supply of computer. Given themuch larger size of the international market than the domestic one, the domestic consumers andproducers do not have power to influence the world price (Pw), and thus making the world supplycurve a perfectly elastic one (Sw). If the country trade with other nations, the consumers will thenbe able to buy the computer at (Pw) and the producers will then be able to sell the computer at(Pw).However, as world price is lower than the domestic equilibrium price (Pe), the domestic producerswould not produce as many computers as they can in Qe, but in a lower quantity at Qw.Due to the lower Pw, producer surplus decline as they are less competitive, in terms of their pricesfor computer, than the world market.On the other hand, consumers surplus increasesignificantly, by more than the loss in producer surplus, as they can now buy computers at a muchlower price in the international market. Therefore, with trade with the international market, thetotal economic surplus (consumer surplus producer surplus) of the domestic market increases.Gain in Consumer SurplusArea BCDLoss in Producer SurplusArea BCEOverall Net GainArea BEDFrom the above scenario, it is obvious that the domestic producers will then suffer great harmfrom the opening of the domestic market. The domestic workers will suffer from a higherunemployment rate and the producers will generate less profits, severely hitting that industry andthus the domestic production.22

FTAAP - APEC Study CentreTariffTo help with the domestic producers, government may impose tariff on the goods imported tothe country.PPrice: from Pw to P1SADomestic quantity: supplied: from Q1 to Q3Quantity transacted: fromQ2 to Q4CPeDP1PwQuantity imported: Q3Q4EFSw tariffGProducer Surplus: fromPwBF to P1BDDB0SwConsumer Surplus: fromAPwG to AP1EQ1Q3Qe Q4Q2QFor the computers being imposed with tariff, the price (P1) would be higher than the originalworld price (Pw), but still lower than that of the domestic prices, if not the foreign producers willhave no incentive to enter the domestic market at all (as they would not be competitive enoughin the market). The world supply curve will then shift upward from Sw to ‘Sw tariff’ as the priceincreases. At the new price (P1), domestic producers will be able to produce more unit ofcomputer as they do not have to pay the tariff as the foreign producers do. The domesticproduction will increase from Q1 to Q3. However, at the new price (P1), the domestic demandwould be at point E. Therefore, there will be a import of computer (Q3Q4). And this amount ofimport is fewer than the previous one (Q1Q2) as the consumers demand less units at a higherprice.23

FTAAP - APEC Study CentreLoss in Consumer SurplusGain in Producer SurplusArea P1PwGEArea P1PwFD24Overall Net LossArea DFGEThe above theory and examples prove the significance of FTAAP realization, when it can helpboosting mutual benefits brought by increasing trade cooperation. In the next chapter, we aregoing to learn more on the feasibility, advantages and the drawbacks of FTAAP via multiple casestudies.II-III Additional ResourcesSuggested Questions for StudentsQ1a. Browse the following websites under the Observatory of Economic Complexity (OEC):United StatesBrazilClick countries, search the United States and Brazil.Now look at the figure of exports.Each color represents a category of products, and the categories are given by the icons underthe figures.What are the two largest categories of exports of the two countries?ANS:US: Machines and TransportationBrazil: Mineral Products and Vegetable productsQ1b.According to the theory of comparative advantage, the United States has lower opportunitycosts of producing/providing machines and transportation goods/services while Brazil haslower opportunity costs of producing minerals and vegetables.Could you explain thereason(s) behind?ANS: (Suggested answer only, acceptable as long as makes sense)Machines and Transportations are both capital-intensive products, while minerals and vegetablesare labour-intensive products.goodsThese mean that the previous two products require a lot of capital

FTAAP - APEC Study Centregoods relative to labour, vice versa for the latter.25From the U.S. 's perspective, given the highlabour cost relative to the cost of capital, producing one unit of mineral or vegetable has anopportunity cost of multiple units of machines or transportations.However, Brazil, having a lowerlabour cost relative to the cost of capital, can produce minerals or vegetables at a loweropportunity cost.Thus they will be specializing in products stated in Q1a.Q1c.According to OEC, China is the largest importer of soybean, while the U.S. and Brazil are twomajor exporters at the global level.The general administration of custom, China states thatfor soybeans, she has a positive tax rate for regular imports while 0 tax for most favouredcountries.Assume that she only classifies countries in the FTAAP as most favouredcountries and US soybeans are more expensive than Brazilian soybeans, explain a simpledemand and supply analysis if Brazil joins the FTAAP.ANS: (Suggested answer only, acceptable as long as makes sense)If Brazil joins the FTAAP, she would be classified as a most favoured country by China.of a positive tax rate, her soybeans would enjoy zero tax in China.soybeans to Brazilian soybeans would increase.shall increase.InsteadThe relative price of USThe quantity demanded for Brazilian soybeansMeanwhile, the supply of brazilian soybeans will increase due to tax reduction,leading to, in the overall soybean market, an increase in equilibrium quantity and a decrease inequilibrium price.Multi-media Learning Resources1. Trade Barriers3. How do tariffs work? CNBC Explains2. Tariffs and Barriers to Trade

FTAAP - APEC Study CentreIII26Effectiveness & Limitations of FTAAPIII-I Feasibility of FTAAP – Case Studiesand Learning CornerCase StudiesTask: In this exercise, students will need to read a copy of the select news articles, with referenceto the relevant concepts in the learning corner. For each article think about the followingoWhat are the key issues and broader implications?oWhat is the potential impact on different stakeholders?oWhat are the potential risks and opportunities for achieving free trade?Feasibility of FTAAPArticles: US-China trade deal at APEC would be temporary pause in ‘a growingstorm’, experts saySource: SCMP APEC leaders debate approach to trade tensions, WTO issues at PortMoresby summitSource: ICTSD APEC becomes battleground for US, ChinaSource:

FTAAP - APEC Study Centre27Key Takeaways of the Articles Imposing high tariffs on imported goods could bring huge impacts not only to bilateral

1 Bogor Declaration: The Bogor Declaration was in 1994 in Bogor, Indonesia 2 APEC's Bogor Goals Progress Report 3 Free Trade Area of the Asia Pacific I Introduction I-I Background of the FTAAP Bogor Declaration1 in 1994 marked the APEC members' commitment to the realization of a free trade area in the Asia Pacific region by 2010 for the industrialised economies and 2020 for the developing

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