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RUSSIA UKRAINE WAR AFFECTED

INTERNATIONAL ECONOM
QUESTION NO 1:

HOW DOES THE PROBLEM OF DE-

INDUSTRIALIZATION AFFECTS COUNTRY’S TRADE?
EXPLAIN USING APPROPRIATE DATA

ANSWER NO 1:

The government is in continuous dialogue with exporters

to address the problems and challenges that are
emerging due to the ongoing Russia-Ukraine war and
could lead to some kind of disruption in trade,
Commerce and Industry Minister Piyush Goyal said on
Wednesday.

He said that there are challenges of commodity prices,

inflation, disruption in shipping lines, and container
shortages.

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"Those challenges are there before us and that certainly
may lead to some kind of disruption because it is coming
along with Covid, which is also rearing its head. But we
are completely on top of these issues and are in
continuous dialogue and hand holding our exporters on
a regular basis," Goyal told reporters.

Bilateral trade between India and Russia stood at USD

9.4 billion so far this fiscal, against USD 8.1 billion in
2020-21. The bilateral trade with Ukraine stood at USD
2.3 billion so far this fiscal, as against USD 2.5 billion in
the last fiscal.

Due to the war, challenges would definitely increase, but

"we would deal with that".

When asked about the implementation of India-UAE free

trade agreement, Goyal said the UAE has formally
ratified the pact. "It (implementation of the pact) could
happen anytime in the next six weeks time," he added.
When asked about the proposed India-Australia trade
pact, the minister said negotiations are going on and
"we are working towards" concluding the talks for interim
trade pact.
About the new SEZ law, he said that the ministry will
start consultations with stake holders from the next
month.

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On disruptions in shipping lines and container
shortages, Director General of Foreign Trade Santosh
Kumar Sarangi said that the shipping ministry is holding
fortnight meetings on the issue and is monitoring the
situation.
Russia’s invasion of Ukraine, which began on February
24, has resulted in a full-blown war. The Western world’s
condemnation of Vladimir Putin’s actions has been
reflected, among other things, in the implementation of
significant economic sanctions against the Russian
regime.

It is still too early to tell how the conflict’s repercussions

will fully unfold, but the initial economic consequences
are already being felt. What do these economic impacts
consist of? And what can we expect, over the coming
months, in countries affected-directly or indirectly-by the
Russia-Ukraine conflict? Eric Chaney, Economic Advisor
to Institute Montaigne, shares his analysis. 

QUESTION NO 2:

IF NATIONS GAIN FROM INTERNATIONAL TRADE

WHY DO YOU THINK MOST OF THEM IMPOSE
SOME
RESTRICTIONS ON THE FREE FLOW OF
INTERNATIONAL TRADE?
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ANSWER NO 2:

Probably the most common argument for tariff

imposition is that particular domestic industries need
tariff protection for survival. Comparative-advantage
theorists will naturally argue that the industry in need of
such protection ought not to survive and that the
resources so employed ought to be transferred to
occupations having greater comparative efficiency. The
welfare gain of citizens taken as a whole would more
than offset the welfare loss of those groups affected by
import competition; that is, total real national income
would increase. An opposing argument would be,
however, that this welfare gain would be widely diffused,
so that the individual beneficiaries might not be
conscious of any great improvement. The welfare loss,
in contrast, would be narrowly and acutely felt.

Although resources can be transferred to other

occupations, just as comparative-advantage theory
says, the transfer process is sometimes slow and painful
for those being transferred. For such reasons,
comparative-advantage theorists rarely advocate the
immediate removal of all existing tariffs. They argue
instead against further tariff increases—since increases,
if effective, attract still more resources into the wrong
occupation—and they press for gradual reduction of
import barriers.

A tariff is a tax that a governing authority imposes on

goods or services entering or leaving the country. Tariffs

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typically focus on a specified industry or product, and
are set in place in a controlled effort to alter the balance
of trade between the tariff-imposing country and its
international trading partners.

For example, when a government imposes an import

tariff, it adds to the cost of importing the specified goods
or services. This additional marginal cost will
theoretically discourage imports, thus affecting the
balance of trade.

If there is a point on which most economists agree, it

is that trade among nations makes the world better
off. Yet international trade can be one of the most
contentious of political issues, both domestically and
between governments.

When a firm or an individual buys a good or a

service produced more cheaply abroad, living
standards in both countries increase. There are
other reasons consumers and firms buy abroad that
also make them better off—the product may better fit
their needs than similar domestic offerings or it may
not be available domestically. In any case, the
foreign producer also benefits by making more sales
than it could selling solely in its own market and by
earning foreign exchange (currency) that can be

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 used by itself or others in the country to purchase
foreign-made products.

Still, even if societies as a whole gain when

countries trade, not every individual or company is
better off. When a firm buys a foreign product
because it is cheaper, it benefits—but the (more
costly) domestic producer loses a sale. Usually,
however, the buyer gains more than the domestic
seller loses. Except in cases in which the costs of
production do not include such social costs as
pollution, the world is better off when countries
import products that are produced more efficiently in
other countries.

Those who perceive themselves to be affected

adversely by foreign competition have long opposed
international trade. Soon after economists such as
Adam Smith and David Ricardo established the
economic basis for free trade, British historian
Thomas B. Macaulay was observing the practical
problems governments face in deciding whether to
embrace the concept: “Free trade, one of the
greatest blessings which a government can confer
on a people, is in almost every country unpopular.”

QUESTION NO 3:

HOW CAN WE DEDUCE THAT NATIONS BENEFIT

FROM THE VOLUNTARILY ENGAGING IN
INTERNATIONAL TRADE?
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ANSWER NO 3:

Every advanced economy engages in considerable

international trade and reaps significant benefits for its
citizens. Trade supports economic growth, efficiency,
technical advancement, and, most importantly,
consumer welfare. Trade benefits middle- and lower-
income people by cutting prices and expanding the
product diversity available to them. It's critical to
remember these fundamental facts when debating
specific trade deals.

The United States is the world's largest importer and the

world's second largest exporter. International trade has
increased the average American household's annual
income by $10,000 or more during the last half-century.
However, in comparison to the size of its domestic
economy, the US trades internationally far less than its
peers. The United States has the lowest import-to-GDP
ratio in the OECD, at 16.5 percent. Imports account for
more than 30% of domestic output in three-quarters of
the 34 OECD nations.

The public interest should be served by US trade policy,

which entails improving consumer welfare and economic
efficiency.

1) Policymakers should carefully guard the benefits of

international trade, which are long-term and cumulative,

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and focus policy action on the costs of adjustment,
which are only transitory.

2) Policymakers should keep in mind that postponing

trade liberalisation is not free. Protected sectors are
inefficient and technologically behind the times, and
economies that trade less gain less.

3) In our market economy, policymakers should

acknowledge the freedom to acquire and sell goods and
services as a fundamental right. Citizens' ability to buy
the goods and services they want is in their best
interests as long as commerce is voluntary, and it
should be their right as long as the goods and services
are lawful. Contrary justifications should be scrutinised
in the pursuit of certain goals.
Vital Findings
 Increasing the rate of economic growth:- 
According to Frankel and Romer, trade raises GDP
by as much as 2% for every percentage point
increase in the trade-to-GDP ratio (1999).
 Improving consumer welfare:-  Consumer
advantages from imports amounted for
approximately 6% of median family income in 2002,
according to a 2005 study by Langenfeld and
Nieberding.
 Consumer prices are being lowered.:-Trade
reduces domestic pricing, improves resource
allocation through specialisation, decreases
domestic producer profit margins, and increases

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 domestic firm operating efficiency through
increased competition.
 According to a research by the Bank for International
Settlements (2008), after a 1% rise in import market share,
producer prices fell by 2.35 percent.
 According to the CATO Institute (Mad About Trade, Daniel
Griswold), the prices of many common products tend to
grow in the non-tradable segment of the economy while
falling in the tradable sector.

 Increasing the number of products available to

consumers:- Particularly among trading countries
with equal resource endowments and technologies,
trade enhances product variety. In 1972, Broda and
Weinstein reported 71,420 import varieties, which
increased to 259,215 in 2001. Variety is really
important to customers. Consumers would have
paid 2.6 percent of their income in 2001 to preserve
the higher number of types than in 1972, according
to Broda and Weinstein.
 Assisting low-income families:- According to
Hausman and Leibtag (2005) and Furman (2005),
big box shops are among the greatest importers
and provide significant benefits to a wide spectrum
of people.

The Meaning and Measurement of Trade Gains

In the same way that two traders in the same country

engage in commerce in the hopes of making a profit,
two countries engage in trade in the hopes of making a

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profit. Economists have looked at the benefits of trade
from many perspectives. Gains from trade, according to
classical philosophers, resulted from increased
production and specialisation.

Despite the compelling theoretical justification for free

international trade, every government on the planet has
imposed at least some trade obstacles. Typically, trade
restrictions are imposed to safeguard domestic
businesses and workers from foreign competition.
A country's protectionist policy prohibits the importation
of goods and services produced in other countries. The
slump in the US economy in late 2007 and early 2008
sparked a new wave of protectionist sentiment, which
played a role in the 2008 presidential election.
The United States, for example, implements
protectionist policies to limit the amount of sugar
imported from other countries. The result of this
approach is a reduction in sugar supply in the US
market and a rise in sugar prices in the US. The U.S.
Farm Bill of 2008 made things sweeter for sugar
farmers.
It increased the guaranteed price they will receive and
prohibited foreign sugar imports, ensuring that American
sugar growers will always have at least 85% of the local
market. For the first time, the measure established an
income limit: only growers with annual earnings of less
than $1.5 million (for couples) or $750,000 (for
individuals) will receive direct subsidies (The Wall Street
Journal, 2008).

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Sugar is about three times more expensive in the United
States than it is in the rest of the world, decreasing the
amount consumed in the country. Sugar beet and sugar
cane growers benefit from the programme at the
expense of consumers.

FOR WAR, THE WORLD FACE AN ECONOMIC CRISIS

A battle that accelerates inflation, disturbs markets, and

foreshadows catastrophe for everyone from European
consumers to leveraged Chinese developers and
African households facing skyrocketing food prices is
just what the international economy needed.

Russia's war on Ukraine and the West's retaliatory

sanctions may not signal the start of a new global
recession. The combined gross domestic output of the
two countries is less than 2% of the global total. Many
regional economies are still in shambles.
BAN OF RUSSIA

Western governments have placed a slew of penalties

on Russia, including restrictions on oil purchases and
sanctions against billionaire oligarchs linked to President
Vladimir Putin.

Around 48 countries, including the United States and the

European Union, will be affected.
Export exemptions might be granted to Georgia's
breakaway regions of South Ossetia and Abkhazia, as
well as members of the Russian-led Eurasian Economic
Union, according to the directive.
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The restriction will encompass exports of goods created
by foreign enterprises operating in Russia, according to
Russia's Prime Minister Mikhail Misusing. Automobiles,
railway waggons, and containers are among the items
on display.
It comes after Dmitry Medvedev, Russia's previous
president, warned that assets controlled by foreign
corporations that have left the country could be
nationalised.

Industrial and mining behemoths like Caterpillar and Rio

Tinto, as well as Starbucks, Sony, Unilever, and
Goldman Sachs, have been leaving en masse or
suspending investment.

Moscow passed legislation on Wednesday that took the

first step toward nationalising the assets of international
companies that leave the country.

COST OF THE WAR

According to a new analysis, the daily cost of the war in
Ukraine could top $20 billion for Russia.
According to the analysis, which was done by the Centre
for Economic Recovery, CIVITTA, and Easy Business,
direct losses in the first four days of the war were $7
billion, including military equipment and troop casualties.

"The entire daily cost of war for Russia is expected to

exceed $20-25 billion given logistics, troops, rocket
launches, and other factors," CIVITTA said, citing the
report.
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The study also emphasised budgetary strain on the
Russian economy, stating that "as a result of sanctions
pressure, Russia's banking industry has sustained
irreversible losses."
While the value of the Russian ruble has been declining
since the start of the war, the Russian stock market was
halted this week due to huge losses.

Many multinational businesses, including the European

Space Agency, Oracle, BMW, Apple, MAERSK, and
Airbus, have indicated that they will cease activities or
investments in Russia.

Several Russian banks were removed from the SWIFT

system this week, and Russia's largest lender,
Sberbank, exited the EU market.

FOR THE RUSSIA-UKRAINE WAR, RESAPE THE

WORLD MARKET

The big question that has the entire world on edge is,
"How does this end?"
Russian President Vladimir Putin's decision of war in
Ukraine is a world-historical event, signalling the end of
the post-Cold War era and the beginning of an unwritten
new era.

A volatile new cold or hot war involving the US, Russia,

and China, a frozen conflict in Ukraine, or a post-Putin
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solution in which Russia becomes part of a redesigned
European security architecture are all possibilities. We
are in uncharted ground, with the West imposing
enormous sanctions on Russia in record time and the
real possibility of a nuclear war. It's tough to understand
how Putin "wins" in this situation.

He, on the other hand, is unable to accept loss.

The following are four scenarios for how this war might
end, as well as alternate geopolitical futures that could
affect international relations during the next two to three
years.

We create scenarios to aid decision-makers in imagining

what might happen next and devising strategies to avoid
the worst-case situation. The one certainty in the
Ukraine war is that it has broken all previous ones.

QUESTION NO 4:

SPECIALIZATION IS THE MAIN CRITERIA TO JUDGE

WHETHER A COUNTRY WILL EXPORT OR NOT.TO
WHAT A NATION CAN SPECIALIZE?

ANSWER NO 4:
The exchange of capital, goods, and services across
international borders or territories is known as
international trade. When trading partners specialise on

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commodities for which they have a comparative
advantage and then trade for other things, they benefit
mutually. To put it another way, each country should
produce items for which its domestic opportunity costs
are lower than those of other countries, and then trade
those goods for products with higher domestic
opportunity costs than those of other countries.

Factor endowment differences: Varied countries have

different amounts of land, labour, and capital. Saudi
Arabia may have plenty of oil, but it lacks in lumber. As a
result, it will have to exchange for wood. Japan may be
capable of producing high-quality technology items, yet
it may be short in natural resources. It's possible that it'll
exchange inputs with Indonesia.

Gains from specialisation: Specialization may lead to

economies of scale, resulting in long-run average cost
reductions as output rises.

Political advantages: Countries can use trade to

strengthen cultural and political ties. International ties
also assist in the promotion of diplomatic (rather than
military) solutions to international issues.

Gains in efficiency: In order to compete in the global

market, domestic enterprises will be obliged to improve
their efficiency.

Benefits of increased competition: Consumers benefit

from increased competition because prices are cheaper,
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companies are more attentive to their demands and
requirements, and there is a wider range of products.

To summary, international commerce helps almost

everyone and contributes significantly to the global
economy.

The production possibility frontier (PPF) is a graph in

economics that depicts the many combinations of two
commodities that could be produced with the same total
number of production factors. Given the current levels of
the factors of production and the state of technology, it
illustrates the maximum potential production level of one
commodity for any production level of another.

PPFs are typically depicted as a circle spreading

outward from the origin, but they can also be displayed
as a straight line. An economy based on the PPF is
productively efficient, which means that it is impossible
to produce more of one good without reducing the
production of the other.

For example, in an economy that only produces

weapons and butter, the production of guns would have
to be sacrificed in order to increase butter production.

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If production is efficient, the economy can select
between the following PPF combinations (i.e., points): B
for guns, C for more butter, or D for an equal mix of
butter and guns.

Although it is still too early to predict how the dispute will

play out in its entirety, the initial economic ramifications
are already being felt.

What are the economic ramifications? What can we

expect in the coming months in countries affected by the
Russia-Ukraine crisis, whether directly or indirectly? Eric
Chaney, Institute Montaigne's Economic Advisor,
discusses his thoughts.

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QUESTION NO 5:

THE WORLD’S POOREST COUNTRIES CANNOT

FIND ANYTHING TO EXPORT.THERE IS NO
RESOURCE THAT IS ABUNDANT-CERTAINLY NOT
CAPITAL OR LAND, AND IN SMALL POOR NATIONS
NOT EVEN LABOUR IS ABUNDANT .DISCUSS?

ANSWER NO 5:

The lack of integration of weaker economies into the

global economy is a major cause to widespread
poverty. Although trade is only one element of the
solution, poorer economies would gain greatly if they
could sell more commodities to established and
growing nations.
Exporters in poorer economies, on the other hand,
confront challenges both outside and at home.
Import obstacles sometimes limit access to overseas
markets, while inadequate infrastructure and weak
local regulations regularly frustrate firms wanting to
compete internationally. As a result, the poorest
countries' exports have remained well below their
potential. The 49 poorest countries (LDCs; see box)
contribute for about 1% of world GDP but less than
0.5 percent of global non-oil exports, a proportion
that has remained virtually stable over the past 15
years (see chart). Only 1% of the world's advanced
economies
The United Nations classifies 49 nations as "least
developed," indicating that they are severely

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 impoverished, have weak economies, and lack
economic potential.
Africa: Angola, Benin, Burkina Faso, Burundi, Central
African Republic, Chad, Comoros, Democratic
Republic of the Congo, Djibouti, Equatorial Guinea,
Eritrea, Ethiopia, The Gambia, Guinea, Guinea-
Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali,
Mauritania, Mozambique, Niger, Rwanda, São Tomé
and Príncipe, Senegal, Sierra Leone, Somalia, Sudan,
Togo, Uganda, Tanzania, and Zambia.
Asia: Afghanistan, Bangladesh, Bhutan, Cambodia,
Kiribati, Lao People’s Democratic Republic, Maldives,
Myanmar, Nepal, Samoa, Solomon Islands, Timor-
Leste, Tuvalu, Vanuatu, and Republic of Yemen.
Western Hemisphere: Haiti.
There are initiatives that the world's poorest
economies may do to enhance exports, such as
lowering anti-trade bias in trade, tax, customs, and
exchange rate regimes; publishing more transparent
trade and customs laws; and improving essential
service sectors like communications and
transportation (see World Bank, 2010).
However, the poorest exporting economies would
greatly benefit if developing and advanced
economies provided them with better trade
possibilities, which would improve their development
and productivity prospects (see Elborgh-Woytek,
Gregory, and McDonald, 2010). There are several
steps that better-off countries could take to increase
the export potential of underdeveloped economies.
Some are well-known to policymakers, such as the
conclusion of the current World Trade Organization
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 (WTO) trade-negotiation discussions, dubbed the
Doha Round. Multilateral trade liberalisation on a
large scale could boost economy and promote
secure and open global trade. Poorer nations would
benefit from a successful completion of the Doha
Round by having easier access to advanced and
emerging export markets.
Although broad-based multilateral trade liberalisation
is the ultimate policy goal, there are less obvious
intermediate paths—such as the extension and
improvement of duty-free and quota-free (DFQF)
trade preferences by both advanced and emerging
economies—that could add nearly $10 billion to the
coffers of poorer countries each year. These
preference systems are intended to compensate the
poorest countries for some of the high trade barriers
in sectors like light manufacturing and agriculture,
which are likely to be exported by LDCs.

Integration's main paths

The more advanced and emerging economies have

three main options for assisting LDCs in their
integration into the global economy:
•All tariffs and quotas on products from LDCs should
be eliminated.
•Make the rules that determine whether a product is
deemed to originate from an LDC more flexible and
consistent, such as relaxing so-called cumulation
rules, which govern the extent to which inputs from
other countries affect LDC exporters' compliance
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 with rule-of-origin requirements; and •tilt preference
benefits more specifically toward poorer economies.
First, removing all taxes and restrictions on LDC
exports in advanced and emerging markets would
have a significant impact. Preference benefits to
LDCs from major developing market nations could
be quite beneficial and assist them enhance their
export performance. During the period 1999–2009,
exports from LDCs to Brazil, China, and India
increased by more than 30% annually on average,
accounting for a third of total LDC exports. China
surpassed the European Union as the largest single
importer of LDC goods in 2008, purchasing 23% of
their exports. These emerging nations have
decreased average tariff rates for practically all trade
partners to around 11% since the 1990s, but tariffs
remain around 6 percentage points higher than
those of the major advanced economies'
marketplaces.
The proportion of exports from LDCs eligible for
special treatment has risen from 35% in the late
1990s to over 50% today. Preference programmes,
on the other hand, vary greatly in terms of product
and country coverage, with substantial gaps in
coverage and considerable administrative
expenditures. Because of their recent development,
gaps in emerging market economies' preference
programmes are frequently greater than those in
developed countries' systems. Agriculture and labor-
intensive low-wage industries, where LDCs have a
competitive advantage and where 90% of their non-

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 oil exports are concentrated, continue to face high
tariffs.
"A policy of duty- and quota-free access for virtually
all exports from the least developed nations" is a
commitment made by industrialised economies.
Following up on this pledge, WTO members agreed
in the Hong Kong Ministerial Declaration of 2005 that
developing countries "in a position to do so" should
make the same pledge. Many advanced and
emerging market economies have agreed to give
DFQF market access for LDC products under at
least 97 percent of tariff lines in practise. While the
difference between 97 percent and 100 percent may
appear modest, many LDCs export such a small
number of product categories that even a few
exclusions can significantly reduce the benefits of
trade preference programmes.

Exports would increase dramatically

LDC exports to both advanced and emerging

markets would increase dramatically if all exports
from developing nations were exempt from tariffs
and quotas—on the tune of $10 billion per year, or
about 2% of their combined GDP. Increased exports
from LDCs of around $2.2 billion per year, or about
6% of net official development assistance from
industrial countries to LDCs, might be generated by
expanding the coverage of preferences by major
advanced markets. The potential growth in exports
to emerging markets is significantly greater—
approximately $7 billion in additional shipments each
year. The positive impact on LDCs would be
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 significant, while the negative impact on advanced
and emerging economies would be minor due to the
low volume of LDC exports.

Second, if more developed countries made origin

regulations more flexible, LDCs would profit as well.
If a good "originates" in a country that benefits from
a preference system, it is determined by rules of
origin. The guidelines describe the minimum quantity
of economic activity that must be carried out in the
country receiving the preference, as well as whether
contributions from other countries are counted
toward that minimum. The rules of origin vary greatly
amongst countries' preference systems. They are
typically based on the amount of value added or the
transformation an item undergoes in the preference-
eligible country (measured by a change in tariff
classification). These constraints have a big impact
on where an LDC buys its inputs, which has an
impact on the overall economics of a preference
programme.

To qualify for a preferential programme, LDC

exporters must frequently limit input sourcing to
domestic or foreign providers, even if it is cheaper to
buy components elsewhere. For less-diversified
LDCs that rely on intermediate commodities,
techniques, or patents from other nations, this can
be challenging. If exporters use less-efficient, more
expensive input sources to qualify for preferential
treatment, rules of origin might cause distortion.
Furthermore, complying with complex laws of origin
can be a significant administrative burden, costing

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 up to 3% of export. As a result, between a quarter to
a third of qualified imports are denied preferential
treatment, and some commerce that would have
benefited from better-designed preferences is
unlikely to take place.

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