Exercises: Globalisation, free trade, and protectionism

Explain what globalisation is and name two factors that have made it possible (cheap container transport, the internet). Then, play label detective: find three products at home or in your school bag and their country of manufacture, and comment on anything that surprised you.

Define export and import with a Mexican example of each (selling avocados to the United States; buying cell phones manufactured in Asia or gasoline). Explain the two reasons why a country buys goods from abroad: because it lacks the product or because others produce it more cheaply.

The figure shows the trade balance of Exportia, an imaginary country, over two years: what it sold abroad (exports) and what it bought (imports), in billions of pesos. In $2024$, it imported $280$ and had a deficit of $40$: it bought $40$ more from abroad than it sold.

1. a) Calculate Exportia's exports in $2024$, which is the missing figure in the chart.
2. b) Calculate the balance for $2023$ and state whether it was a surplus or a deficit.

Last year, Naranjania exported goods worth $8\,000$ billion pesos and imported $7\,000$.

1. a) Calculate its trade balance and state whether it was a surplus or a deficit.
2. b) This year it exports $7\,600$ and imports $8\,600$: calculate the new balance and explain what has changed.
3. c) Reason why a deficit is not always bad news: what is the difference between importing candy and importing machinery for factories?

Zapatilandia produces sneakers, but imported ones are cheaper: costing $\$1\,000$ compared to $\$1\,100$ for local ones. The government introduces a tariff of $20\ \%$ on imported sneakers.

1. a) Calculate the new price of the imported sneakers.
2. b) Explain who wins and who loses from the tariff: the local factory, its workers, and the buyers.
3. c) What could the neighboring country do in response, and what is this risk called (retaliation, trade war)?

Spain is part of the European Union and the single market: goods, people, services, and money move freely between member countries, and $20$ of them share the pesos.

1. a) Explain two concrete advantages for an EU citizen (traveling or studying in another EU country, shopping online at a European store without customs duties, not having to exchange currency).
2. b) Give an example of a product that Spain buys from another EU country and another that it sells to them, and explain why trading within the union is easier than outside it.

A bicycle company in your region announces that it is offshoring its assembly plant to Vietnam, reducing its wage costs by $65\,\%$. Following the relocation, the retail price in Spain drops from $\$400$ to $\$300$, but $120$ direct jobs are lost in the area.

1. a) Analyse the distributional impact of this decision: identify which economic agents win and which lose with this measure, justifying in detail the benefits or harms for each.
2. b) A local group proposes imposing a $35\,\%$ tariff on the import of these bicycles to penalise offshoring. Predict what effects this protectionist measure would have on the retail price, the welfare of consumer households, and the long-term competitiveness of the company.
3. c) Design an alternative business strategy so that a bicycle factory located in an upper-middle wage country like Spain can compete in the global market without resorting to tariffs or wage cuts.

The government of "Nordia" approves a $25\,\%$ tariff on imported steel to protect its traditional steelmaking industry from cheap foreign competition. Six months later, the steel employers' association celebrates that $3,000$ blast furnace jobs have been saved; however, the automotive and home appliance employers' associations announce mass layoffs and a $15\,\%$ drop in their exports.

1. a) Explain the economic mechanism connecting the tariff applied to steel with the crisis triggered in Nordia's automotive and home appliance sectors.
2. b) If steel-exporting countries respond by imposing retaliatory tariffs on Nordia's agricultural products, analyse who ultimately bears the final net cost of the trade war that was started.
3. c) Evaluate under what very specific theoretical conditions (such as the 'infant industry' argument or 'national strategic security') a temporary tariff could be justified, and determine with reasoning whether Nordia's traditional steelmaking industry meets these requirements or not.

During an international logistics crisis, the collapse of major Asian ports disrupted the supply of microchips to Europe, halting automotive assembly lines, making new vehicles $20\,\%$ more expensive, and forcing temporary layoffs (ERTE).

1. a) Contrast the 'just-in-time' production model (lean production with near-zero inventory to minimise costs) with the 'just-in-case' model (precautionary stockpiling). Why did hyperglobalisation massively incentivise the former, and what structural vulnerability did it create in the face of supply shocks?
2. b) The European Union is considering two options to secure the supply of strategic components:

• Option A: Subsidise the construction of semiconductor plants in Europe, which requires billions of pesos of public money and will yield chips that are $30\,\%$ more expensive than Asian ones.

• Option B: Continue importing from Asia, but mandate by law that companies diversify suppliers across at least four different countries and finance a joint warehouse with a six-month reserve stockpile.

Compare the costs, benefits, and risks of each alternative for taxpayers, businesses, and consumers, and defend which one you would adopt.