Question

The ASEAN-China Free Trade Area (ACFTA) entered into force in various phases, starting as early as 2005. This FTA comprises the ten ASEAN countries and China. Today, the Free Trade Area is virtually tariff-free.

Suppose, hypothetically, that before ACFTA, Singapore imposed an import tariff on all imports.

Singapore also trades with Country X, which is not part of ACFTA. As such, even after ACFTA, Singapore continues to impose an import tariff against Country X.

• Analyze the occurrence of both trade creation and trade diversion effects (i.e., static effects), with reference to the ACFTA, China, and Country X.

Present your response systematically from Singapore’s perspective, discussing all the economic effects (i.e., price, import quantity, consumer surplus, producer surplus, and other welfare areas):
– Before the implementation of the ACFTA
– After the implementation of the ACFTA
– And show both trade creation and trade diversion effects

• With the setting up of ACFTA, there are also two other possible outcomes:
  – there is only a trade-creation effect but no trade-diversion effect, or
  – there is only trade-diversion effect but no trade-creation effect.

Explain and examine how only a trade-creation effect but no trade-diversion effect might be possible with reference to the ACFTA, China, and Country X.

Present your response systematically from Singapore’s perspective, discussing all the economic effects (i.e., price, import quantity, consumer surplus, producer surplus, and other welfare areas):
– Before the implementation of the ACFTA
– After the implementation of the ACFTA
– And show that there is only a trade-creation effect but no trade-diversion effect

• Discuss how the third outcome, only the trade-diversion effect but no trade-creation effect, might be possible with reference to the ACFTA, China, and Country X.

For this question, you will only have to explain logically in words and with intuition, without the need for a detailed step-by-step analysis as in questions 1a and 1b). Graphs are not required.

Given the context of question 1, which of the three outcomes do you think is most likely in reality, and why?