Economics · Secondary 4 · International Trade and Globalisation · Semester 2

Reasons for Limiting Trade

Exploring common arguments for why a country might want to restrict international trade.

• MOE Syllabus Outcomes
• MOE: International Trade and Globalisation - S4

About This Topic

The exchange rate is the price of one currency in terms of another. For Secondary 4 students, this topic is about understanding how exchange rates are determined in the foreign exchange market (FOREX) through the forces of demand and supply. They learn about fixed, floating, and managed float systems, and how changes in the exchange rate affect a country's exports, imports, and overall trade balance.

In Singapore, we use a 'managed float' system where the MAS allows the Singapore dollar to fluctuate within a secret policy band. This is a central part of our macroeconomic management. Students learn how an appreciation of the SGD can help curb inflation but may hurt export competitiveness. This topic comes alive when students can track real-time currency fluctuations and simulate the impact on a Singaporean business. Active learning helps them connect global events to the value of the money in their pockets.

Key Questions

1. Explain why some people argue that limiting imports can protect local jobs.
2. Discuss the argument that certain industries (e.g., defense) need protection for national security.
3. Analyze the potential downsides of limiting trade, such as higher prices for consumers.

Learning Objectives

• Analyze the argument that tariffs protect domestic employment by comparing job creation and job loss figures in protected versus unprotected industries.
• Evaluate the national security argument for trade protection by identifying industries critical to defense and assessing the risks of foreign reliance.
• Explain how import quotas can lead to higher consumer prices and reduced product variety using specific examples.
• Compare the economic impacts of subsidies versus tariffs on domestic producers and consumers.

Before You Start

Principles of Supply and Demand

Why: Students need to understand how prices are determined by supply and demand to analyze the impact of trade restrictions on prices and quantities.

Introduction to International Trade

Why: Students must have a basic understanding of what international trade is and the concept of comparative advantage before exploring reasons for limiting it.

Key Vocabulary

Tariff	A tax imposed on imported goods, increasing their price and potentially discouraging consumption.
Quota	A government-imposed limit on the quantity of a good that can be imported into a country during a specific period.
Subsidy	Financial assistance provided by the government to domestic producers, lowering their production costs and making them more competitive.
Protectionism	The economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations.

Watch Out for These Misconceptions

Common Misconception

A 'strong' currency is always a sign of a 'strong' economy.

What to Teach Instead

While a strong currency can reflect investor confidence, it can also be a problem if it makes a country's exports too expensive, leading to a trade deficit and slower growth. Peer discussion about 'export-led growth' in countries with relatively weak currencies (like China in the past) can help clarify this.

Common Misconception

The government can set the exchange rate at any level it wants forever.

What to Teach Instead

In a floating or managed float system, the market forces of demand and supply are very powerful. Even in a fixed system, a government may run out of foreign reserves if it tries to keep its currency artificially high. A simulation of a 'currency crisis' can help students see the limits of government intervention.

Active Learning Ideas

Simulation Game: The FOREX Market

Students are divided into 'Singaporean Exporters', 'Foreign Tourists', and 'Investors'. They must 'buy' and 'sell' Singapore dollars based on their needs (e.g., a tourist needs SGD to visit Marina Bay Sands). As the demand for SGD changes, students observe how the 'price' (exchange rate) on the board shifts.

40 min·Whole Class

Inquiry Circle: Currency Shifters

Groups are given different scenarios (e.g., a rise in US interest rates, a boom in Singapore's tourism, or a global recession). They must draw the shift in the demand or supply of the SGD and explain the resulting impact on the exchange rate and the Singaporean trade balance.

35 min·Small Groups

Think-Pair-Share: The Holiday Planner

Students plan a hypothetical holiday to Japan or the US. They look up the current exchange rate and compare it to last year's. They pair up to discuss whether their holiday has become 'cheaper' or 'more expensive' and how this might change their spending behavior. The class then connects this to the concept of 'import spending'.

20 min·Pairs

Real-World Connections

• The United States has historically placed tariffs on imported steel and aluminum to protect domestic manufacturers, leading to debates about the impact on downstream industries like automotive and construction.
• Singapore's government provides subsidies to its semiconductor industry to maintain its competitive edge globally, influencing job security and export revenues.
• During times of geopolitical tension, countries may consider restricting exports of critical technologies or raw materials, impacting global supply chains and national security assessments.

Assessment Ideas

Discussion Prompt

Present students with a scenario: 'A small island nation relies heavily on imported rice, but a major rice-producing country imposes export restrictions. Discuss two potential arguments for why the island nation might consider imposing its own trade restrictions in response, and one argument against it.'

Quick Check

Provide students with a short case study about a country considering a tariff on imported solar panels. Ask them to identify: 1. The primary argument for the tariff. 2. Two potential negative consequences for consumers. 3. One potential benefit for domestic producers.

Exit Ticket

On an index card, have students define 'protectionism' in their own words and then list one specific industry where protectionist policies might be argued for, and one reason why.

Frequently Asked Questions

What factors cause the demand for a currency to shift?

The demand for the Singapore dollar shifts due to changes in the demand for our exports, changes in domestic interest rates (attracting foreign investors), and changes in 'speculation' about the future value of the currency. For example, if Singapore's electronics become more popular globally, the demand for SGD will increase.

How does a depreciation of the SGD affect the trade balance?

A depreciation makes Singapore's exports cheaper for foreigners and imports more expensive for Singaporeans. This should, in theory, increase the quantity of exports and decrease the quantity of imports, improving the trade balance (assuming the Marshall-Lerner condition holds).

How can active learning help students understand exchange rates?

Active learning, like the 'FOREX Market' simulation, helps students see that the exchange rate is just another 'price' determined by buyers and sellers. When they have to 'act' as a tourist or an exporter, they understand *why* someone would want to buy or sell a currency. This makes the abstract 'demand and supply of currency' graphs much more intuitive.

What is a 'managed float' exchange rate system?

A managed float is a system where the exchange rate is primarily determined by market forces, but the central bank intervenes occasionally to prevent excessive volatility or to keep the rate within a desired range. This is the system used by Singapore to maintain price stability while allowing for market flexibility.