ChainWhat it assumes · how to break it
Start
The UK removes tariffs and quotas on trade with a partner through a free trade agreement, such as the UK–Australia agreement signed in 2021.
1
As a result, import-competing industries contract, while industries where the country has a comparative advantage expand.
comparative advantage · specialisation
comparative advantage · specialisation
Assumes: The country's costs differ from its partner's in a stable way.
But: Comparative advantage changes over time as wages, skills and technology change, so today's expanding industries may not last.
2
This means labour and capital move out of contracting industries into expanding ones.
reallocation of resources · factor mobility
reallocation of resources · factor mobility
Assumes: Factors of production are mobile.
But: Workers and machinery may be specific to one industry, so resources stay idle rather than move.
3
Consequently, for a developed economy such as the UK, output shifts further towards services such as finance and business services, and away from low-cost manufacturing.
deindustrialisation · service sector
deindustrialisation · service sector
Assumes: The UK's comparative advantage lies in services.
But: Many free trade agreements cut tariffs on goods far more than barriers to services, so services exporters may gain little.
4
Therefore, the economy becomes more specialised and more dependent on a narrower range of industries.
specialisation · diversification
specialisation · diversification
Best link to attack
Assumes: Demand for those leading industries stays strong.
Assumes: Demand for those leading industries stays strong.
But: Heavy dependence on a few industries exposes the economy to shocks in them, as the UK's reliance on financial services did in 2008.
End
The structure of the economy shifts towards industries with a comparative advantage, becoming more specialised and less diversified.
Evaluation chain
- E1However, the benefits of a more specialised structure depend on demand for its leading industries staying strong.
- E2When a country relies on a narrow range of industries, a shock to one of them hits output, jobs and tax revenue hard.
- E3As a result, there are fewer other industries to absorb workers and keep the economy growing.
- E4So liberalisation makes the structure more efficient but less diversified, which is why some governments keep protection for strategic industries such as steel or food production.
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Questions this answers
- Assess the impact of free trade on the structure of a developed economy.
- Discuss the costs of greater specialisation for a country.
- Explain how trade liberalisation can lead to deindustrialisation.
Diagram
No standard diagram. Data on the shares of manufacturing and services in output or employment make good evidence.
Reverse and related
Tariffs imposed → resources stay in protected industries and structural change slows (see tar-str).