Business Economics 2

Additional case study: The growth of free trade in Asia

At the start of 2010 a new free trade area was established incorporating China and the six
founding members of the Association of South East Asian Nations (ASEAN). These countries
are Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand.
The aim is to eliminate 90% of imported goods. This deal created the largest trade area in
the world, with nearly 1.9bn people. Although there are undoubted gains there have also been
warnings from South East Asia that some industries are not ready to compete with China and that
jobs will be lost.
Questions
1.
2.

What is a free trade area?

Outline the potential advantages and disadvantages of joining this area for the
member countries.
What factors determine the extent to which industries within a country gain or lose?

3.

I.

Central Problem
Why did the ASEAN (Brunei, Indonesia, Malaysia, Philippines, Singapore, and
Thailand) and China need to join a free trade are?
How will the ASEAN country (Brunei, Indonesia, Malaysia, Philippines,
Singapore, and Thailand) benefits from the ASEAN-China Free Trade Area? How
about the China?

II.

Point of View
To know the benefits of each sides in joining a trade bloc.
To know why countries like china and ASEAN country need to join in a trading
blocor free trade area.
To identify the advantages and disadvantages in joininga free trade area.

III.

Objective
ASEAN(Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand) and
China establish this agreement for them to have a better economy. ASEAN is
benefited in this agreement. The impact of cheap imports from China are a very

important benefits to ASEAN consumers and producers. It will also improve the
production-chain of ASEAN, in industry and service sector.
To fully benefit from the ACFTA, ASEAN needs to

IV.

Keep in momentum for them not to be undersized by China.

Considering the large disparity in growth among the ASEAN countries, a
greater emphasis should be aimed at reducing the income disparity within
ASEAN.
ASEAN should focus on development of human capital.
ASEAN should focus on developing their own indigenous capabilities to
complement the growing demand and industries in the region.
ASEAN should focus on behind boundary issues such as coordinating
technical regulations.

PESTLE
a. Political
In political aspect, it can make a greater economic integration which is equal to
reducing hostilities between countries due to interdependence. I will also lead a
country to be more competitive than others.
b. Economical
In economic terms, lot of aspects about this ASEAN-China free trade area will
consider as a contribution in economical appearance. It can be:
1. It will increase competition of each country that will cause of efficient
domestic producers, decrease cost for every consumers and improved
allocation of resources.
2. It can cause a larger market.
3. It will decrease in the average cost of production over the long run.
4. It makes lower prices for consumer and greater consumer choice.
5. It will increase investment, internal and external.
6. It will improved resource allocation and efficiency in production.
Free trade area had a great impact in economics of one country who participate in
this trading bloc.

c. Social
It enhanced the social quality of one country when they are participating in free
trade area. Because it reduce hostility, that lead country to be more friendly and to
communicate in other country. It will also be a disadvantage because there are
unequal distributions of gains and losses that will make a conflict between parties.
d. Technological
In technological, as an opinion, based on some advantages in joining a trade bloc,
maybe we should say that country who joined in this free trade area will provide a
better technology regarding in production.
e. Legal
Free trade area is an agreement between two or more countries. So in legal terms,
as an agreement, there are some rules and laws that are made. It is restricted to
know.

f. Environmental
In environmental aspect, it will be good because it will resource allocation.
Resources are from environment that only use for production so that when you
participate in trade bloc, environmental aspect will be good enough.

V.

Alternative Causes of Action

VI.

ASEAN must prepare for the result of this trading bloc.

ASEAN country must know the differences of each income.
ASEAN should not only focus on human capital but instead both human
capital and natural resources.
ASEAN will be important to take full advantage of the growing Chinese
markets.
ASEAN should know the differences of each domestic product, the quality
and quantity.

Recommendation
As a student, I highly recommend to ASEAN country to know what are the best
for their countries. They must develop a more efficient rather than this agreement.

VII.

Conclusion
I must conclude that in free trade area, you didnt know what are the results, what
will happen to your country and what will be the advantages and advantages of it.
ASEAN-China FTA is a good agreement between 6 countries of ASEAN and
China but there are still countries in ASEAN that are not yet include in this
agreement.

1.

What is a free trade area?

A free-trade area is the region encompassing a trade bloc whose member countries have
signed a free trade agreement (FTA). Such agreements involve cooperation between at
least two countries to reduce trade barriers import quotas and tariffs and to increase
trade ofgoods and services with each other.

2.
Outline the potential advantages and disadvantages of joining this area for
themember countries.
Advantages

Disadvantages

It will increase competition of each country that will cause of efficient

domestic producers, decrease cost for every consumers and improved
allocation of resources.
It can cause a larger market.
It will decrease in the average cost of production over the long run.
It makes lower prices for consumer and greater consumer choice.
It will increase investment, internal and external.
It will improved resource allocation and efficiency in production
Political advantage: a greater economic integration which is equal to
reducing hostilities between countries due to interdependence.

 Trading blocs may not be the best way to achieve trade liberalization
(increased discrimination toward non-bloc members).
May create obstacles to achievement of free trade on global scale.
Unequal distribution of gains & possible losses.

3.
What factors determine the extent to which industries within a country gain
or lose?

1. Differences in cost ratio: The gains from international trade depends upon the cost ratios of
differences in comparative cost ratios in the two trading countries. The smaller the difference
between exchange rate and cost of production the smaller the gains from trade and vice versa.
2. Demand and supply: If a country has elastic demand and supply gains the gains from trade are
higher than if demand and supply are inelastic.
3. Factor availability: International trade is based on the specialization and a country specializes
depending upon the availability of factors of production. It will increase the domestic cost ratios
and thereby the gains from trade.
4. Size of country: If a country is small in size it is relatively easy for them to specialize in the
production of one commodity and export the surplus production to a large country and can get
more gains from international trade. Whereas if a country is large in size then they have to
specialize in more than one good because the excess production of only one commodity can not
be exported fully to a small sized country as the demand for good will reduce very frequently. So
the smaller the size of the country, the larger the gain from trade.
5. Terms of Trade: Gains from trade will depend upon the terms of trade. If the cost ratio and
terms of trade are closer to each other more will be the gains from trade of the participating
countries.
6. Productive Efficiency: An increase in the productive efficiency of a country also determines its
gains from trade as it lowers the cost of production and price of the goods. As a result, the
country importing gains by importing cheap goods.