| Date | May 2017 | Marks available | 4 | Reference code | 17M.2.SL.TZ0.01 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 01 | Adapted from | N/A |
Question
Relief as Kenya raises tariff for steel and iron imports
- Steel manufacturers in Kenya are set to benefit as the government moves to protect the local manufacturing industry from cheap steel and iron imports.
- In 2014 a government official announced an increased tariff on steel and iron imports. “Our steel mills are closing down due to unfair competition from cheaper imported iron and steel products,” he explained. “To protect and create more jobs in the iron and steel industries, tariffs on a wide range of imported iron and steel products will be increased from 0 % and 10 % to 25 %,” he said. The government official further stated that as well as protecting the local industries from cheaper imports, the protectionist measures would raise an additional 2.6 billion Kenyan shillings (Kenya’s currency) annually in government revenue and support economic growth.
- The potential of local industries to expand and create jobs through trade has been held back by a number of administrative barriers. The government remains focused on improving the business environment. Over the past six months, the government has made it easier to register a company and trade across borders. The time taken to move goods out of the main harbour has fallen sharply; non-tariff barriers such as roadblocks have also been reduced. Importers of refined industrial sugar and wheat are also pleased after the government scrapped requirements to pay unnecessary administrative charges.
- However, there is a belief among manufacturers that there is a need for more deregulation to lower their costs of production and in effect reduce the cost of doing business.
Kenya sees gross domestic product (GDP) growth picking up but current account a concern
- Good economic growth rates in neighbouring countries like Uganda help to boost Kenyan exports, particularly for agriculture that makes up nearly a quarter of the Kenyan economy. The government suggests that the main risks to growth are the slow performance of developed economies that are key export markets for Kenyan goods and services, and Kenya’s large and persistent current account deficit of over 10 % of gross domestic product (GDP) in the last three years. This is a major concern for sustained economic growth and the value of the Kenyan shilling.
[Sources: adapted from www.standardmedia.co.ke, 13 June 2014; www.af.reuters.com, 25 July 2014 and www.cnbcafrica.com, 25 November 2013]
Define the term tariff indicated in bold in the text (paragraph 2).
Define the term economic growth indicated in bold in the text (paragraph 2).
Using an international trade diagram, explain the impact on the Kenyan government of implementing a tariff on steel imports.
Using an exchange rate diagram, explain why a deficit in the current account may result in downward pressure on the Kenyan shilling (Kenya’s currency) (paragraph 5).
Using information from the text/data and your knowledge of economics, evaluate the claim that trade protection measures will support economic growth in Kenya.
Markscheme
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is a barrier to trade or a tax.
2 Accurate definition. [2]
An explanation that it is a tax on imported goods.
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is a growing economy (or an increase in GDP/output).
2 Accurate definition. [2]
An explanation that it is one of the following:
- an increase in real GDP
- an increase in the real value of output (over time)
- an increase in potential output.
N.B. The term “over time” is not necessary for [2].
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled tariff diagram showing a shift upwards of the world supply curve, with enough labelling so that it is possible to indicate, in some way, the area representing government revenue or for providing an explanation that the tariff causes the world supply curve to shift upwards (or the tariff causes the price to rise), creating government revenue [1] with the amount referenced to the diagram [2].
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled tariff diagram showing a shift upwards of the world supply curve (with enough labelling so that it is possible to indicate, in some way, the area representing government revenue) and for providing an explanation that the tariff causes the world supply curve to shift upwards (or the tariff causes the price to rise), creating government revenue [1] with the amount referenced to the diagram [2].
Candidates who incorrectly label diagrams can receive a maximum of [3].
The use of P and Q on the axes is sufficient for an international trade diagram. The world supply curve must be labelled Sw, or Sworld. A title is not necessary.
Candidates who use P and Q values to indicate the government revenue, eg (Q2Q3 x PW+T – PW), should be fully rewarded.
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled exchange rate diagram showing a shift of the supply curve to the right and a fall in the exchange rate or for an explanation that a current account deficit means that there will be more currency leaving the country to pay for imports, than coming in from the sale of exports, and so the supply of the shilling on the international money market increases, lowering its value.
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled exchange rate diagram showing a shift of the supply curve to the right and a fall in the exchange rate and for an explanation that a current account deficit means that there will be more currency leaving the country to pay for imports, than coming in from the sale of exports, and so the supply of the shilling on the international money market increases, lowering its value.
Candidates who incorrectly label diagrams can receive a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of shilling in another currency, other currency/shilling or other currency per shilling. The horizontal axis should be quantity, or quantity of shillings. A title is not necessary.
Candidates may state that the deficit means that overall there has been less demand for the currency because there has been less demand for the country’s exports, thus causing a shift in the demand curve to the left and a fall in the value of the shilling. If properly explained, with a correct diagram, then this approach may be fully rewarded.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the information provided.
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized.
There is basic knowledge/understanding. [1–2]
2 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis. [3–5]
3 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence. [6–8]
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
- definition of economic growth
- definition of trade protection measures.
Strengths of protectionist measures:
- infant industry argument – allows steel and iron industry time to become internationally competitive, which can bring about growth
- helps diversify economy away from over reliance on primary exports, which is necessary for sustained growth (paragraph 5)
- create more jobs thus increase consumption, AD and growth (+ diagram) (paragraph 2)
- raises government revenue (paragraph 2) that can be invested by the government in ways that will promote growth
- if imports are being unfairly subsidized, protectionism will level the playing field (paragraph 2)
- can help correct the persistent current account deficit, which is hindering growth (paragraph 5).
Limitations of protectionist measures:
- does not encourage long term efficiency, which may be better achieved through deregulation (paragraph 5)
- inefficient allocation of resources argument
- protected industries can become over-reliant on government support and so may not contribute to economic growth
- politically difficult to remove protectionist measure once in place
- revenue from tariffs can be subject to corruption
- potential problems of retaliatory tariffs from trading partners, which could damage Kenya’s exports and thus threaten future growth
- removing barriers and deregulation (administrative barriers) rather than protectionism could encourage domestic entrepreneurship and FDI which will support growth
- tariffs increase “cost of doing business” (paragraph 4) for those producers reliant on imported components
- higher prices on steel and iron which will increase input costs for construction and infrastructure projects – necessary for economic growth
- higher input costs may reduce SRAS, causing a reduction in real GDP, threatening growth.
Any reasonable discussion.
