| Date | November 2018 | Marks available | 4 | Reference code | 18N.2.SL.TZ0.1 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 1 | Adapted from | N/A |
Question
South Africa’s grain millers oppose corn tariff
- A battle is taking place between South African corn farmers and the corn millers who process corn. Grain South Africa (Grain SA) is the organization that represents the interests of corn farmers. It has asked the country’s International Trade Administration Commission (ITAC) to protect local corn farmers from low global corn prices by imposing a tariff on corn imports.
- South Africa’s corn millers are opposing the request by Grain SA to implement the tariff on corn imports. The corn millers argue that a tariff will cause a burden for consumers and cattle farmers. In South Africa, corn is an essential food and also a source of feed for livestock.
- According to Reuters news service, South Africa is “Africa’s largest corn producer and is relied upon by neighboring Sub-Saharan nations to [reinforce] their own corn supplies and feed their people.” A drought in South Africa has dramatically increased the price of corn. In addition, the reduced supply has prompted the need for imports. “South Africa [has traditionally been] a net exporter of corn ... [but] for the second year in a row, [the economy] will become a net importer of corn.” The need to import corn has shocked both the corn farmers and the government.
- The United States (US) is the world’s largest corn producer. An unusually large harvest has increased US supply and more than halved the price of US corn to its current price of US$145 a ton. However, in South Africa, because of the drought, prices for domestically produced corn have more than doubled to reach an all-time high of US$348 a ton. The low import prices of US corn have made it very difficult for South African corn farmers to earn sufficient income to survive the drought, which is why they have asked ITAC for protection.
- However, a spokesperson for the corn millers said “we are strongly opposed to any attempt to apply a tariff. Why do we need protection for a commodity in which we are so self-sufficient?” However, Grain SA have claimed that corn farmers cannot compete with the big corn-exporting countries, such as the US and Mexico, because their governments are subsidizing corn farmers. According to Grain SA, South African farmers get almost no assistance. This is why they have requested that ITAC implement the tariff to protect corn farmers from these unfair trade practices.
- According to economists, South Africa will probably need to import about 970 000 tons of corn this year and a further 3.8 million tons in the following 12 months. To make matters worse, the rand (South Africa’s currency) has experienced a sharp depreciation against the US dollar. Combined, the need to import corn and the depreciation are likely to negatively impact South Africa’s current account.
Define the term depreciation indicated in bold in the text (paragraph [6]).
Define the term current account indicated in bold in the text (paragraph [6]).
Using an exchange rate diagram, explain how “the need to import corn” will affect the value of the South African rand (paragraph [3]).
Using a demand and supply diagram, explain the effect of government subsidies on the US corn market (paragraph [5]).
Using information from the text/data and your knowledge of economics, evaluate the economic impacts of trade protection in the South African corn market.
Markscheme
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For an exchange rate diagram the vertical axis may be exchange rate, price of rand in dollars, or US dollars per rand, or USD/rand, or rand/USD. The horizontal axis should be quantity or quantity of rand or quantity of rand traded. A title is not necessary.
Candidates may include a World Supply Curve/Line and should not be penalized for doing so. It may be positioned in such a way as to impede imports or to promote exports. Both are valid approaches. So long as the explanation and diagram explain why the domestic supply line shifts right and the correct effects on the price and the quantity of corn produced in the USA, the answer can receive full marks.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
The use of P and Q on the axes is sufficient for a demand and supply diagram.
A title is not necessary.
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.
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:
- a definition of trade protection
- an international trade diagram to explain impact of requested tariff on consumers, producers and importers (paragraph [1]).
Advantages:
- US subsidies distort the functioning of the free market and can result in an inefficient allocation of resources.
- Helps to protect South African corn farmers from unfair practices since US subsidies artificially lower the price of US corn imported into South Africa (paragraph [5]).
- It would prevent a deterioration of South Africa’s current account balance since import expenditure falls as the result of decreased corn imports and the depreciation of currency (paragraph [6]).
- Tariff allows domestic corn farmers to maintain higher revenues / incomes to help them to survive the drought (paragraph [3]).
- Corn farmers can compete with subsidized US corn that has caused the global glut and subsequent low prices.
- May only be a short-term measure.
- A source of tax revenue for the South African government.
- Agriculture is a strategic industry.
Disadvantages:
- Domestic supply of corn in South Africa is likely very price inelastic so the tariff would not increase domestic production significantly.
- Tariff will increase input costs for millers and food-related businesses requiring corn as an input (paragraph [2]).
- Impact of rising corn prices on low income households when corn is an essential food (paragraph [2]).
- Tariff will cause rising input costs for livestock producers further increasing food prices (paragraph [2]).
- Corn is likely to be a major input to food manufacturing hence tariff could cause decrease in SRAS due to rising input costs and thus cause cost-push inflation and lower real GDP.
- Price of South African food exported to other countries will rise in trading partner countries.
- Trading partners might retaliate by imposing their own protectionist measures.
- The corn industry is not an infant industry (paragraph [5]).
- The depreciation of Rand is already reversing the low price of imports.
