Exercises: International trade and economic integration

Define exports and imports and explain what the balance of trade is. When do we say that a country has a trade deficit or a trade surplus?

Explain the difference between free trade and protectionism. Then solve: a pair of imported trainers costs $50\ \text{€}$ and the country applies a tariff of $20\ \%$, what final price do consumers pay?

The figure shows the exports and imports of an imaginary country over three years, in billions of euros.

1. a) Calculate the trade balance for each year.
2. b) In which years was there a deficit, and in which years a surplus?

What is the exchange rate between two currencies? If $1\ \text{€} = 1,10\ \text{dollars}$, calculate how many dollars a $20\ \text{€}$ book costs and how many euros a pair of trainers costing $110\ \text{dollars}$ costs.

A country exports goods worth $300.000$ million euros and imports goods worth $350.000$ million.

1. a) Calculate its trade balance.
2. b) Does it have a trade deficit or a trade surplus? Explain what that sign means.

Besides tariffs, there is the import quota: a limit on the quantity of a product that can enter the country. Explain the difference between taxing an imported product with a tariff and putting a quota on it, and reason what effect each one has on the price and the available quantity.

The European Union is a customs union: inside it there are no tariffs and outside it the same common tariff applies. Explain with an example what that means for a Valencian orange travelling to Germany, as opposed to an orange from a third country entering through the port of Valencia.

Country A produces $1\ \text{kg}$ of cheese with $2$ hours of work and country B, with $4$ hours.

1. a) Which country has an absolute advantage in cheese? Justify your answer.
2. b) According to the theory of absolute advantage, what does it recommend each country do? Explain the logic of specialisation.

The country Vega produces wheat with half the labour of Olma, and Olma produces wine with half the labour of Vega.

1. a) Explain what absolute advantage is and who has it for each product.
2. b) Reason why both countries can benefit if they specialise and trade with each other.

Explain what belonging to the European Single Market means for a Spanish company when selling to France compared to selling to a country outside the EU. Mention tariffs, common standards, and the free movement of goods.

An exporter from Valencia sells oranges to Germany and to a country outside the eurozone.

1. a) Explain what advantages the euro gives it when selling to Germany.
2. b) What additional problem does it face when selling to the other country? Explain what exchange rate risk is.

With one hour of work, the country Norte produces $6$ metres of cloth or $2$ litres of wine; the country Sur produces $4$ metres of cloth or $4$ litres of wine.

1. a) Who has an absolute advantage in each product?
2. b) Calculate the opportunity cost of producing one litre of wine in each country (in metres of cloth) and state who has a comparative advantage in wine.
3. c) Explain how specialisation according to comparative advantage can benefit both countries.

The euro depreciates against the dollar: from $1\ \text{€} = 1,10\ \text{dollars}$ it moves to $1\ \text{€} = 1,00\ \text{dollar}$.

1. a) Explain what happens to the price American tourists pay in Spain and to the price Spaniards pay in the United States.
2. b) Analyse the effect on Spanish exports of goods and tourism, and on Spanish imports of products priced in dollars (oil).

A country has a goods trade deficit of $40.000$ million euros and a services surplus (tourism, transport) of $25.000$ million.

1. a) Calculate the total balance of goods and services and state its sign.
2. b) Explain which sectors drive each balance in a country like Spain and what "offsetting" the goods deficit with tourism means.

A fictitious country leaves the customs union it belonged to. A strawberry-exporting firm used to sell to its neighbours with no paperwork.

1. a) List what changes for the firm (tariffs, sanitary controls, customs, delivery times).
2. b) Reason why perishable products suffer more than others from border controls and what the firm can do to adapt.

A country sells its steel abroad below the cost of production, subsidised by its government, and sinks the steel mills of competing countries.

1. a) What is "dumping" and why is it considered unfair competition?
2. b) What response do the affected countries usually give (anti-dumping duties) and what risk of trade escalation is there?

The government of a country decides to levy a 20% tariff on steel imports to protect its domestic steel mills, whose market share has fallen in the face of cheaper foreign imports.

1. a) Using surplus analysis (consumers, producers, and the State), predict the consequences of this measure on overall economic welfare and explain why domestic car manufacturers are radically opposed to it.
2. b) The main steel-exporting country decides not to appeal to the WTO and prepares immediate retaliation. If you were its Trade Minister, would you tax the steel sold to you by the first country, or would you choose other strategic goods from politically sensitive sectors? Design and justify a retaliatory strategy and predict the dynamic of the protectionist spiral that would be triggered.

A Galician textile company manufactures shirts at an average cost of 22 € per unit. Shirts of similar appearance and design from Southeast Asia are sold in Spain for 8 €, due to lower labor and regulatory costs at origin.

1. a) Design a strategic turnaround plan for the Galician company that allows it to survive without competing on price or resorting to offshoring. Economically justify which competitive advantages it would rely on and why a segment of consumers would be willing to pay the price premium.
2. b) The local textile employers' association demands a 150% tariff from the government on imported clothing to "save industrial jobs". Assess the aggregate impact of this measure on the national economy: to whom would the tariff transfer income, and what side effects would it have on household disposable income and on the exports of other sectors?

Analyze the following statement: "International trade increases the overall economic pie, but the way it is distributed can ruin entire regions."

1. a) Drawing on the comparative advantage model and the imperfect mobility of labor, justify why trade liberalization can simultaneously generate net gains at the macroeconomic level and prolonged structural unemployment in single-industry regions (for example, regions dedicated to ceramics or footwear).
2. b) Design a package of two economic policies to compensate workers harmed by import competition without resorting to protectionist barriers. Assess the budgetary difficulties of financing these policies with taxes collected from the domestic exporting sectors that have gained from trade.

A latest-generation smartphone costs 900 € in the European market. Its value-added breakdown per unit is as follows: R&D and design in the US (350 €), screen and processor manufactured in South Korea and Taiwan (280 €), optical components from Germany (70 €), final assembly in Vietnam (50 €), and marketing margin in Europe (150 €).

1. a) The EU decides to apply a 20% tariff to electronic devices "originating in Vietnam". Interpret which value this tariff would be applied to under traditional customs regulations and predict the unintended harmful consequences that European businesses and consumers, or those from allied countries, would suffer.
2. b) Trade agreements establish "rules of origin" requiring, for example, that at least 50% of the value added be generated in the exporting country to obtain a tariff exemption. Demonstrate whether this smartphone would meet that rule to be considered from Vietnam, and deduce what logistical decision the multinational would make to circumvent the tariff if it does not exceed that threshold.

A bloc of countries decides to totally embargo oil and gas imports from a neighboring power in retaliation for a geopolitical conflict. The power had previously supplied 40% of the bloc's hydrocarbons.

1. a) Using the concepts of price elasticity of demand and supply in the energy sector in the short and long run, predict the initial asymmetric impact on inflation in the sanctioning countries compared to the budgetary resilience of the sanctioned country.
2. b) In the global oil market, "trade diversion" quickly occurs: the sanctioned power sells crude oil to emerging economies at a 15% discount, while the sanctioning countries buy from distant suppliers, paying record prices and high maritime freight rates. Interpret why this dynamic may weaken the objective of the sanction and what factors will determine its effectiveness in the long term.

During a period of strong growth, the price and wage level in Country A (a member of the eurozone) rises by 18 % more than that of its trading partners, causing a severe external deficit as its exports collapse.

1. a) Lacking its own currency, Country A cannot resort to a devaluation of the nominal exchange rate. Predict how the mechanism of «internal devaluation» operates and compare its impact on employment, consumption, and the real burden of debt (public and private) against what depreciating an independent national currency would have entailed.
2. b) An economic commentator claims: «If Country A had kept its independent national currency, it would have solved the competitiveness imbalance immediately and at no cost to the population». Reasonably refute this claim by pointing out the costs and risks brought about by a monetary devaluation (imported inflation, risk premium, and loss of credibility).

The European Union is negotiating a free trade agreement with a non-EU bloc that boasts a huge low-cost agricultural and livestock capacity (with lower labour and environmental standards), but which currently levies tariffs of between 20 % and 35 % on European industrial machinery and automobiles, and restricts access for European services to its market.

1. a) Identify the intersectoral distributive conflict that this agreement generates within Spain. Justify comparatively what impact consumers and the capital goods industry will experience versus the domestic livestock and citrus farming sectors.
2. b) As an advisor to the European negotiating team, design two specific clauses (such as gradual tariff-rate quotas or mirror clauses on phytosanitary and animal welfare standards) to balance the agreement. Justify how your proposals correct unfair competition without causing the ratification of the trade agreement to fail.
3. c) Refute the following claim with economic arguments: «Any trade agreement that increases a country's aggregate GDP is automatically desirable for its society as a whole».

In the face of recent supply chain crises and geopolitical tensions, Western economies are reconsidering offshoring (producing where costs are lowest) to bet on nearshoring (relocating to neighbouring countries) and friendshoring (trading preferentially with allied countries).

1. a) Analyse the economic dilemma or trade-off underlying this reconfiguration: what efficiency losses (comparative advantage and economies of scale) are accepted in exchange for mitigating strategic risks? Predict the structural impact of this shift on prices and the inflation rate in the medium term.
2. b) If the Spanish State had limited public funds to subsidise the relocation of strategic sectors, choose and contrast two of the following fields: advanced microelectronics (chips), basic active pharmaceutical ingredients, textile assembly, or solar panel production. Justify which one you would prioritise based on the difficulty of substitution in the event of a crisis and the opportunity cost of the invested capital.