NMIMS Global Access

School for Continuing Education (NGA-SCE)

Answer to Ques 1
The study, Trade and Trade Diversion Effects of us Tariffs on China, shows that the continued
US-China trade war has resulted during a sharp decline in bilateral trade, higher prices for
consumers and trade diversion effects.

By analysing the recent trade statistics, we can see that the buyers within the US are bearing the
heaviest brunt of the US tariffs on China, as their associated costs have largely been passed right
down to them and importing firms within the sort of higher prices.

However, the study also finds that Chinese firms have recently started absorbing a part of the
costs of the tariffs by reducing the prices of their exports.

Trade war leaves both US and China in a bad economic and political condition.
“The results of the study function a worldwide warning. This lose-lose trade war is not only
harming these two countries but it also compromises the steadiness of the worldwide economy
and future growth,” cautioned UNCTAD’s director of international trade and commodities,
Pamela Coke Hamilton. “We hope a possible trade agreement between the US and China can de-
escalate trade tensions.”

The analysis shows that US tariffs caused a 25% export loss, inflicting a US$35 billion blow to
Chinese exports within the US marketplace for tariffed goods within the half of 2019.

While China loses, other economies gain

US tariffs on China have made other players more competitive within the US market and led to a
trade diversion effect.
Of the $35 billion export that China has lost within the US market, about $21 billion (or 63%) of
the trade was diverted to other countries, while the remaining of $14 billion was either lost or
captured by US producers.

According to the report, US tariffs on China resulted in Taiwan (province of China) gaining $4.2
billion in additional exports to the US in the first half of 2019 by selling more office machinery
and communication equipment.

Mexico increased its exports to the US by $3.5 billion, mostly within the agri-food, transport
equipment and electrical machinery sectors.

The European Union gained about $2.7 billion due to increased exports, largely in the
machineries sectors.

Viet Nam’s exports to the US swelled by $2.6 billion, driven by trade in communication
equipment and furniture.

Trade diversion benefits to Korea, Canada and India were smaller but still substantial, ranging
from $0.9 billion to $1.5 billion.

The remainder of the benefits was largely to the advantage of other South East Asian countries.

Trade diversion effects favouring African countries are minimal.

The debate is about the extent to which countries should control their flow of foreign goods and
investments across their borders is not a new issue but very old problem. Governments continue
to control trade. To better understand how and why, let’s examine a hypothetical case. Suppose
you’re responsible of a little country during which people do two things—grow food and make
clothes. Because the standard of both products is high and therefore the prices are reasonable,
your consumers are happy to shop for locally made food and garments. But at some point, a
farmer from a close-by country crosses your border with several wag"art-23">on an equivalent
day, a far off clothes maker arrives with an outsized shipment of garments. These two
entrepreneurs want to sell food and garments in your country at prices below people who local
consumers now buy domestically made food and garments. At first, this looks like an honest deal
for your consumers: they won’t need to pay the maximum amount for food and garments. But
then we realise that the people in your country also grow food and make clothes. If nobody buys
their goods (because the imported goods are cheaper), what is going to happen to their
livelihoods? Will everybody be out of work? And if everyone’s unemployed, what is going to
happen to your national economy?

That’s once you plan to protect your farmers and garments makers by fixing trade rules. Maybe
you’ll increase the costs of imported goods by adding a tax to them; you would possibly even
make the tax so high that they’re costlier than your homemade goods. You might help your
farmers to grow food more cheaply by giving them financial help to defray their costs. The
government payments that you simply give to the farmers to assist offset a number of their costs
of production are called subsidies. These subsidies will allow the farmers to lower the worth of
their goods to some extent below that of imported competitors’ goods. The better thing is that the
lower costs will allow the farmers to export their own goods at attractive, competitive prices.

The United States has a long history of subsidizing farmers. Subsidy programs guarantee farmers
(including large corporate farms) a particular price for his or her crops, no matter the market
value. This guarantee ensures stable income within the farming community but can have a
negative impact on the planet economy. How? Critics argue that in allowing American farmers to
export crops at artificially low prices, U.S. agricultural subsidies permit them to compete unfairly
with farmers in developing countries. A reverse situation occurs within the industry, during
which variety of countries—China, Japan, Russia, Germany, and Brazil—subsidize domestic
producers. U.S. trade unions charge that this practice gives an unfair advantage to foreign
producers and hurts the American industry, which can’t compete on price with subsidized
imports.

Whether they push up the worth of imports or down the worth of local goods, such initiatives
will help locally produced goods compete more favorably with foreign goods. Both strategies are
sorts of trade controls—policies that restrict trade. Because they protect domestic industries by
reducing foreign competition, the utilization of such controls is usually called protectionism.
Answer to Ques 2

The amount of regional trade arrangements (RTAs) among the lowest-income developing
countries is surging, the literature on their welfare effects remains scarce, and therefore the few
that exist fail to provide conclusive results. Furthermore, these RTAs are dominated by countries
with a little share of total exports destined for intraregional trade flows. Our study focuses on the
welfare effects of RTAs (pertaining to trade creation and trade diversion) among this group of
nations. We use a theoretically justified gravity model to estimate welfare effects, focusing on
trade creation and trade diversion and deviating from the norm in related studies, accounting for
heterogeneity in third countries. Using

Along with India-ASEAN CECA, the India-Korea CEPA also became operational from January
01, 2010. During 2009-10 to 2018-19, the bilateral trade between the two countries has increased
from about US$ 12 billion to US$ 21.5 billion and grew at a pace more or less almost like that of
India’s trade with the earth . However, Indian imports from Korea have surged much faster than
the exports thereto country. While India’s imports increased at a CAGR of around 8%, the
exports to Korea rose at a CAGR of but 4%. Also, while the imports from Korea have grown
faster than imports from the earth , the expansion rate of exports to Korea has been much slower
than India’s exports to the earth . This again has led to a considerable increase in India’s deficit
with Korea from US$ 5 billion in 2009-10 to US$ 12 billion 2018-19 and an outsized increase
within the share of Korea in India’s overall deficit from 4.7% to 6.5% during the same period.

At the time when India is negotiating FTAs with a number of countries/groups, including the
mega Regional Comprehensive Economic Partnership (RCEP), and has decided to commence
the review of India-ASEAN FTA, it's pertinent to look at the progress of trade between India and
its key FTA partners. The major FTAs signed and implemented by India also include South Asia
trade Agreement (SAFTA), India-ASEAN Comprehensive Economic Cooperation Agreement
(CECA), India-Korea Comprehensive Economic Partnership Agreement (CEPA) and India-Japan
CEPA.

A broad analysis of trade between India and its major FTA partners, mentioned above, shows a
big increase in trade since the agreements became operational. The SAFTA became effective
from January 01, 2006 and as per Ministry of Commerce and Industry data the bilateral trade
between India and other SAFTA member countries has increased from US$ 6.8 billion in 2005-
06 to US$ 28.5 billion in 2018-19. India’s trade with SAFTA has grown faster than its total trade
with the planet. As a result, the share of SAFTA countries in India’s international trade has
increased from 1.6% in 2005-06 to 2.5% in 2018-19. During an equivalent time, the Indian
exports to SAFTA countries have increased faster than its imports from them resulting in a big
rise in trade surplus with these economies from about US$ 4 billion to US$ 21 billion. The
maximum growth in exports to SAFTA region has been with Bangladesh and Nepal.
Along with India-ASEAN CECA, the India-Korea CEPA has become operational from 1 st
January, 2010. During 2009-10 to 2018-19, the bilateral trade between the two countries has
increased from about US$ 12 billion to US$ 21.5 billion and grew at a pace more or less similar
to that of India’s trade with the world. However, Indian imports from Korea have surged much
faster than the exports thereto country. While India’s imports increased at a CAGR of around 8%,
the exports to Korea rose at a CAGR of but 4%. Also, while the imports from Korea have grown
faster than imports from the world, the growth rate of exports to Korea has been much slower
than India’s exports to the world. This again has led to a considerable increase in India’s deficit
with Korea from US$ 5 billion in 2009-10 to US$ 12 billion 2018-19 and a large increase in the
share of Korea in India’s overall trade deficit from 4.7% to 6.5% during the same period.

The India-Japan CEPA became effective from August 01, 2011. The bilateral trade between the 2
countries witnessed sharp growth within the year of its implementation e.g. 2011-12 compared to
that in the previous year, 2010-11. However, the bilateral trade flow has not only contracted
afterwards but witnessed tons of volatility during 2011-12 to 2018-19. Also, while exports to
Japan continued to extend during the year of implementation e.g. 2011-12, they have contracted
afterwards. Imports from Japan, on the other hand, have increased but witnessed a lot of
fluctuations. As within the case of ASEAN and Korea, however, India’s deficit with Japan has
not only increased during2011-12 to 2018-19 but grown faster than India’s deficit with the
planet.

Other than SAFTA, the experience of India in trade with its major FTA partners has not been
very encouraging. While India has gained substantially in terms of exports from its FTA with
SAFTA countries, CEPA with Korea and CECA with ASEAN are more beneficial to those
economies. In the case of CEPA with Japan, however, bilateral trade has either declined or
stagnated after the first year of implementation but there has been a considerable rise in trade
deficit with that country also.
Answer to Ques 3 (a)
The outbreak of the new coronavirus, COVID-19, that began in Wuhan, China, may well turn
into a global pandemic. More than 50 countries have confirmed cases of the virus, with the
precise nature of the mechanism remaining unclear.
It is actually a time to think seriously about the growing movement of individuals across borders,
whether for purposes of supply chains and distribution networks, international finance and
therefore the flow of cash, employment, study or tourism. But this globalization has also allowed
the whole world to be far more conscious of the spread of the coronavirus, and it's going to
ultimately be a strong force for its own undoing.
There are two sides to the globalization coin. On the positive side, the cross-border flow of
individuals, goods, money and knowledge creates new wealth and opportunity. On the negative
side, though, it can exacerbate global disparities, enable terrorism and cross-border crime, and
permit for the rapid spread of disease.
Countries round the globe are now responding by restricting the movement of individuals,
blocking the entry of individuals from countries particularly hard hit by the coronavirus or
requiring inbound travelers to self-quarantine for a period of time. Of course, once the pandemic
has eased, these restrictions will surely be removed. But with this new awareness of the risks
related to the free movement of individuals, there are some who may avoid future life, business
or leisure plans that need crossing borders.
In particular, the coronavirus pandemic has devastating repercussions for companies and
businesses that have benefited from economic interdependence supported by cross-border supply
chains. China is that the world’s largest production base, and lies at the guts of the many supply
chains. Since the outbreak of this coronavirus, many companies that had come to depend upon
China were hard hit. Meanwhile, the tourism sectors of Japan and many other countries that had
profited from the large influx of Chinese tourists in recent years have been severely impacted by
plummeting inbound numbers. The challenge for the manufacturing and tourism industries in
many countries is to determine to what extent dependence on China and Chinese people can be
reduced.
What is ominous is that this trend towards strengthening national borders was already manifest
during a number of nations. Brexit, the increase of populism amid anti-foreigner sentiment in
multiple European countries, and therefore the America First policy of the Trump Administration
were spurred by a way of increased disparity and the rising burden on certain segments of the
population from advances in globalization.

The liberal international order has already taken some body blows, and physical and
psychological national borders became more rigid than before. Even in Asia, domestic pressure
is increasing, with rising nationalism that emphasizes the prevalence of the ethnic and non
secular majority of a given country, as seen within the increased oppression of the Uyghurs and
other minorities and the attempts to block the free flow of information in China or in rising
Hindu nationalism in India.
Answer to Ques 3 (b)

For the multinational companies, political risk means the danger that a country will make any
such political decisions that might have adverse effects on corporate profits or goals.

Adverse political actions can range from very detrimental, like widespread destruction thanks to
revolution, to those of a more financial nature, like the creation of laws that prevent the
movement of capital.

Instability affecting investment returns could stem from a change in government, legislative
bodies, other foreign policymakers, or occupation.

The study of political systems is extensive and sophisticated. A form of government is essentially
the system of politics and government during a country. It governs an entire set of rules,
regulations, institutions, and attitudes. A main differentiator of political systems is each system’s
philosophy on the rights of the individual and therefore the group also because the role of state.
The philosophy of each political system impacts the policies that govern the local economy and
business environment.

In general, there are two sorts of political risk: macro risk and micro risk. Macro risk means
those adverse actions which will affect all foreign firms, such as expropriation or insurrection,
whereas micro risk refers to adverse actions which will only affect a particular industrial sector
or business, like corruption and prejudicial actions against companies from foreign countries.

All in all, no matter the sort of political risk that a multinational corporation faces, companies
usually will find you losing tons of cash if they're unprepared for these adverse situations.

How to Minimize Exposure to Political Risk

So how can multinational companies minimize political risk? A few measures are often taken
even before making an investment.
The simplest solution is to research the riskiness of a rustic, either by paying for reports from
consultants that concentrate on making these assessments or doing research yourself using the
various free sources available on the web. Then you'll have the more informed choice to not
found out operations in countries considered political risk hot spots.

While that strategy are often effective for a few companies, sometimes the prospect of entering a
riskier country is so lucrative that it's worth taking a calculated risk. In such cases, sometimes the
companies can negotiate the terms and conditions of compensation with the host country, so
there would be a legal basis for recourse if something happens to disrupt the company's
operations.

However, the matter with this solution is that the system within the host country could also be
substantially different from the company's country, and in some places, foreigners rarely win
cases against a number country. Even worse, a revolution could spawn a replacement
government that doesn't honor the actions of the previous government.