The Global Economy

Real World Examples

A student-made website that explains diagram theories and collect real-world examples for IB Economics 15-mark questions

Chapter 14 International Trade: Part I

1. Limitations of the Theory of Comparative Advantages (HL Only)

2001-2011

USA 🇺🇸 China 🇨🇳

Case Context: When China joined the World Trade Organization (WTO) in 2001, global trade reorganized heavily around comparative advantage. China specialized in labor-intensive manufacturing, while the U.S. specialized in high-skill services, tech, and finance. According to Ricardo’s theory, both nations should have experienced absolute gains with displaced U.S. manufacturing workers simply moving to the booming tech/service sectors.

The Reality & Consequences: The transition was not smooth. Workers in the U.S. "Rust Belt" (states like Ohio, Michigan, and Pennsylvania) lacked the specific skills (occupational immobility) and the financial means to relocate to tech hubs like Silicon Valley (geographical immobility).

The Data: A landmark economic study by MIT economist David Autor (often referred to as the "China Shock" paper) revealed that between 1999 and 2011, U.S. markets exposed to Chinese import competition lost roughly 2.4 million manufacturing jobs.

The Breakdown of the Theory: Instead of finding new jobs in sectors where the U.S. held a comparative advantage, these workers experienced lower lifetime incomes, increased reliance on government disability/welfare programs, and regional economic decay. The theory failed to account for the friction and human cost of reallocating labor.

2. Trade Protection

(1) Tariff: Section 232 Tariffs on Steel and Aluminum

2018

USA 🇺🇸

According to a report released by the U.S. International Trade Commission (USITC), additional U.S. tariffs imposed under Sections 232 and 301 on steel, aluminum, and selected Chinese imports led to a decline in U.S. imports of these products while increasing domestic production and prices. These changes had significant effects on industries that manufacture, sell, or rely on these goods as production inputs.

Advantage 1: Raise government funds

In the United States, customs duties (taxes collected by customs authorities on imported (and sometimes exported) goods) have contributed an increasing share of federal revenue in recent years, indicating how tariffs can directly raise government funds.

Advantage 2: Flexible

The tariff is partially exempted in Canada and Mexico, while applying quotas or alternative measures to countries including Argentina, Brazil, and South Korea. It also introduced a product exclusion process, allowing specific goods to be exempted from tariffs. This demonstrates that tariffs can be modified and targeted to achieve different policy objectives.

Disadvantage 1: Higher production price

The USITC found that U.S. importers bore nearly the full cost of the tariffs between 2018 and 2021. While steel tariffs reduced affected imports by 24%, they increased domestic steel prices by 2.4%. As a result, industries using steel and aluminum faced higher production costs, causing downstream output to fall by an average of 0.6%.

Disadvantage 2: Trade conflicts and retaliations

After the United States imposed tariffs on steel and aluminum imports in 2018, several major trading partners—including Canada, China, the European Union (EU), and Mexico—responded with retaliatory tariffs on U.S. exports. China, for example, imposed additional tariffs on U.S. soybeans, contributing to a sharp decline in U.S. soybean exports to China.

(2) Quotas: Sugar

1980s

USA 🇺🇸

The U.S. sugar programme uses tariff-rate quotas (TRQs) to restrict the supply of sugar available in the domestic market. By limiting both imports and domestic sales, the programme helps maintain domestic sugar prices above world market levels and protects domestic sugar producers.

Advantage 1: Direct control over quantity

TRQs allow the government to precisely control the quantity of sugar imported at a low tariff rate. This gives policymakers flexibility in managing domestic supply and stabilising the sugar market.

Advantage 2: Market protection

By restricting imports, domestic sugar producers face less foreign competition. As a result, U.S. sugar prices are typically maintained above the world price, which helps protect and support domestic farmers and producers.

Disadvantage 1: Higher prices

According to the U.S. Government Accountability Office (GAO), in 2022 U.S. sugar consumers — including food manufacturers — paid prices roughly twice the world market price. This shows that while the policy benefits producers, it imposes significantly higher costs on consumers and firms that use sugar as an input.

Disadvantage 2: Further allocation inefficiency of resources

The program also restricts the amount of sugar entering the U.S. at a low tariff. The tariff restrictions are applied using a method based on 40-year-old data that doesn't reflect current market conditions. This has led to fewer sugar imports than expected.

(3) Export Subsidy: China’s New Energy Vehicle (NEV) Subsidies

2009-2023

China 🇨🇳

China has implemented long-term support for the new energy vehicle (NEV) industry, including buyer subsidies, sales tax exemptions, infrastructure investment (e.g. charging stations), R&D funding, and government procurement policies. According to CSIS, total government support for the EV sector between 2009 and 2023 was estimated at around $230.9 billion, showing the scale of state involvement in the industry.

Advantage 1: Supports emerging industries

NEVs are considered a strategic industry. Subsidies help firms cover high initial production and R&D costs, allowing them to expand output and benefit from economies of scale over time.

Advantage 2: Competitiveness and long-term growth

Subsidies have contributed to rapid industry expansion. By 2024, China’s EV sales exceeded 11 million units, accounting for nearly half of total vehicle sales in China. China also produces over 70% of global EVs, showing that policy support has helped build strong international competitiveness.

Disadvantage 1: Fiscal burden

Large-scale and long-term subsidies require significant government spending. The CSIS estimate of $230.9 billion (2009–2023) indicates the heavy fiscal cost and potential pressure on public finances.

Disadvantage 2: Market distortion and trade tensions

Subsidies may distort global competition by artificially lowering production costs. The EU Commission has argued that China’s battery electric vehicle industry benefits from unfair subsidies, leading to the introduction of countervailing duties on Chinese EV imports. This shows how subsidies can trigger trade disputes and accusations of unfair competition.

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Chapter 15 International Trade: Part II

1. Trading Blocs

USA 🇺🇸 Canada 🇨🇦 Mexico 🇲🇽

NAFTA reduced trade barriers between the United States, Canada, and Mexico and was later replaced by the USMCA in 2020. The agreement is useful for both trade creation and trade diversion evaluation.

Advantage 1: Trade creation: trade between the United States and its North American neighbours increased strongly after NAFTA.

Advantage 2: Greater market access: firms in the three countries gained easier access to regional supply chains and neighbouring consumer markets.

Disadvantage 1: Trade diversion: a preferential agreement may shift imports from efficient non-member producers to less efficient member producers.

Disadvantage 2: Domestic adjustment costs: some workers and industries may lose from stronger regional competition.

2. Monetary Union (HL Only)

EU 🇪🇺

A monetary union involves member countries sharing a common currency and a common monetary authority. In the Eurozone, members use the euro, and monetary policy is set by the European Central Bank.

Advantage 1: Lower transaction costs

Before the euro, firms and consumers had to exchange currencies when trading or travelling between euro-area countries. The euro removed these currency conversion costs. This is especially important for firms trading frequently across borders. Moreover, the EU eliminates trade barriers, such as tariffs and quotas, which result in a lower cost.

Advantage 2: Encourage more trade within the union

Lower transaction costs, price transparency, and the elimination of exchange rate risk make cross-border trade and investment easier. Firms are more willing to invest when they do not fear sudden exchange rate movements between member countries.

Disadvantage 1: Loss of independent monetary policy

Eurozone members cannot set their own interest rates. The ECB sets one monetary policy for the whole Eurozone. If Germany is growing while Greece or Spain is in recession, one interest rate may not fit both economies.

Disadvantage 2: Loss of an independent exchange rate policy

Member countries cannot devalue their own national currency to restore competitiveness. During the Eurozone debt crisis is the clearest application, Greece could not devalue its currency. Instead, it had to use internal devaluation, such as wage and price adjustment, which is inefficient.

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Chapters 16 Exchange Rates and the Balance of Payments

1. Consequences of Appreciation

2015
Switzerland🇨🇭

In January 2015, the Swiss National Bank removed the minimum exchange rate of 1.20 Swiss francs per euro. The Swiss franc appreciated sharply. This is a strong case for the consequences of appreciation because Switzerland is a small, open economy with important export industries.

Advantage 1: Higher living standards through cheaper imports

When a currency appreciates, imported goods become cheaper in domestic currency. This raises consumers' purchasing power, especially for imported food, fuel, electronics, clothing, and holidays. In the Swiss case, research found that import prices fell after the franc appreciated. Consumers therefore benefited from cheaper imported goods.

Advantage 2: Lower import prices reduce production costs and may increase SRAS

If domestic firms use imported raw materials, components, or energy, appreciation lowers their input costs. Lower costs can shift short-run aggregate supply to the right and reduce inflationary pressure. In Switzerland, the appreciation reduced border prices for imports, which helped reduce cost pressure for firms using imported inputs.

Disadvantage 1: Harms actual growth because net exports fall

Appreciation makes exports more expensive to foreign buyers and imports cheaper to domestic consumers. This reduces net exports, thereby reducing aggregate demand. The Swiss government stated that the strong franc reduced competitiveness and worsened economic indicators. It also reduced growth forecasts after the appreciation.

Disadvantage 2: Cyclical unemployment in export and import-competing industries

If export demand falls, firms in export industries may reduce output, margins, and employment. The SNB surveyed companies after the appreciation and found that 70% reported negative effects, mainly through lower margins and lower sales prices. Manufacturing firms were especially affected. This supports the argument that appreciation can lead to increased unemployment in export industries.

2. Consequences of Depreciation

2015-2016

UK 🇬🇧

After the UK voted to leave the EU in June 2016, sterling depreciated sharply. The Office for National Statistics reported that the sterling effective exchange rate depreciated by around 20% between November 2015 and October 2016, including a record monthly fall after the referendum.

Advantage 1: Economic growth through export competitiveness

Depreciation made UK exports cheaper to foreign buyers. The Bank of England described the depreciation as a boon for many exporters. This supports the argument that depreciation can increase export demand and AD.

Advantage 2: Employment in export industries

If export demand rises, exporting firms may expand output and employment. This effect depends on the price elasticity of demand for UK exports and whether firms can increase output.

Disadvantage 1: Inflation and higher production costs

The ONS reported that sterling depreciation led to higher input costs for UK manufacturers because imported raw materials and fuels became more expensive. This is a clear cost-push inflation channel.

Disadvantage 2: Lower living standards

The Bank of England stated that the depreciation raised import prices and squeezed household real income. This means consumers were worse off because imported goods and import-intensive products became more expensive.

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