| Date | May 2019 | Marks available | 4 | Reference code | 19M.2.HL.TZ0.1 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 1 | Adapted from | N/A |
Question
Canadian drywall tariffs will continue
- Recently imposed Canadian tariffs on drywall imports have pushed up the cost of building a new home by thousands of Canadian dollars (CA$) in the last four months. Drywall is a pre-made wall section that is used in the construction industry for building houses. Doubt as to whether the tariffs will remain is causing uncertainty for building firms, drywall manufacturers and homeowners.
- For now, higher prices will continue following a ruling by the Canadian International Trade Tribunal (CITT) this week. The tribunal found that United States (US) firms had been dumping drywall products into Western Canada over the past few years, harming the Canadian drywall industry.
- The ruling will end preliminary tariffs of up to 276 % imposed by Canada on imports of drywall from the US. However, they will be replaced by permanent, variable tariffs that would be imposed on imported drywall products whose prices fall below the minimum prices determined by the CITT.
- “The preliminary tariff was very damaging to homebuilding,” said a building industry spokesperson. “Not just homebuilding, but hospitals, commercial buildings, indeed any new construction,” he said. “It’s a cost that someone had to pay for. It lowered the profits of house builders.” It has been estimated that the immediate sharp increase in variable costs, following the imposition of the preliminary tariff, resulted in an extra CA$3000 to CA$5000 on the cost of building some homes.
- The preliminary tariffs were imposed after a dumping complaint by CertainTeed Gypsum Canada (CTGC), the last drywall manufacturer in Western Canada. CTGC has three major production sites and two gypsum quarries. Gypsum is a main component of drywall.
- A CTGC spokesperson had said previously that its plants and quarries could be closed, at the cost of 200 jobs, if the dumping of US drywall products continued. However, since the preliminary tariffs were imposed, the firm has announced that it has hired 30 new employees.
- In a separate report, the CITT found that the preliminary tariffs had been “substantially reducing competition” in Western Canada, to the detriment of Canada’s homebuilders. In response, supporters of the tariff have suggested that revenue from the tariffs may be used to help areas that lost large numbers of homes and other structures in devastating forest fires.
[Source: adapted from Drywall tariffs will continue, www.kamloopsthisweek.com, 5 January 2017]
Define the term dumping indicated in bold in the text (paragraph [2]).
Define the term variable costs indicated in bold in the text (paragraph [4]).
Using a tariff diagram, explain the effect of the “preliminary tariffs” on Canadian consumers of drywall (paragraph [3]).
Using a demand and supply diagram, explain how the “imposition of the preliminary tariff” may have affected the market for new homes built in Canada (paragraph [4]).
Using information from the text/data and your knowledge of economics, evaluate the effect of the tariff on drywall on different stakeholders.
Markscheme
PLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
Candidates who incorrectly label diagrams can receive a maximum of [3].
The use of P and Q on the axes is sufficient for a demand and supply diagram. The world supply curve must be labelled Sw, or Sworld. A title is not necessary.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. 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:
- definition of stakeholders
- definition of tariff.
Consumers of drywall (Canadian building firms):
- will face higher costs, and thus reduced profits (paragraph [4])
- fall in the production of buildings (paragraph [4])
- may cause unemployment.
Domestic producers of drywall:
- will receive higher prices (paragraph [3]) and thus more profits
- increase in output and sales
- increase in employment (paragraph [6])
- supporting monopoly power (paragraph [5]).
US producers of drywall:
- higher costs
- reduced sales
- lower profits and possibly a decrease in employment.
The Canadian government:
- increased revenue (paragraph [7])
- possible retaliation from the US.
Canadian economy:
- reduction in competition (paragraph [7]), leading to inefficiency
- inflationary pressure in the housing market (paragraph [4]).
Any reasonable evaluation.
To reach level 3, students must be aware of the particular situation in the Canadian drywall market on specific stakeholders, not just present an evaluation of tariffs in general.
Examiners report
Many candidates had no problem in defining 'dumping' accurately in terms of exporting goods at below cost of production. However, a significant number produced imprecise or inaccurate definitions eg: ''a price below the market equilibrium''; ''a price below the world price'' or ''exporting at a low price''.
The key point in defining variable costs is that they are costs that vary with output. Simply giving examples of variable costs or stating that ''they are costs that are not fixed'' is not acceptable as an accurate definition.
Diagram: Most candidates were familiar with the tariff diagram, producing well constructed and accurate diagrams. Labelling of diagrams, however, still produces many problems. It should be emphasized to candidates that inaccurate labelling results in a loss of marks. The most common inaccuracy was the labelling of 'world supply' as 'world price'. Other unacceptable labelling included 'quantity demanded on the horizontal axis' and 'price level' on the vertical axis. Explanation: Many candidates disregarded the wording of the question ie the effect of the tariff on the consumer and used the question as a vehicle to explain all features of the diagram, explaining the effects on the Canadian producers, the US producers and the government, etc. While including other stakeholders will not lose marks, it will cost the candidate a considerable amount of time that could have been more usefully used on other questions.
Generally, this was well answered. Candidates identified that the imposition of the tariff increased costs of production to house builders and that this was a condition of supply, causing the supply curve to decrease. The best answers explained the impact on the market in a simple and concise interpretation of the diagram.
A major error by a small minority of candidates was to state that the imposition of a tariff would decrease demand. By decreasing the demand curve any explanation is likely to be inaccurate.
This question offered candidates the opportunity to develop points made in parts (c) and (d) as well as examining the impact on other stakeholders.
Use of text: The best candidates used the text appropriately in support of economic analysis. Less successful candidates relied heavily on quotes from the text with little in the way of development or value added.
Analysis: While most candidates identified the relevant stakeholders, too often they produced a generic list of the effects of tariffs on stakeholders. Many candidates took a descriptive approach, adding little value to the content of the text. Where there was analysis sometimes, it often lacked depth, relying on statements without explanation/reasoning. Such an approach is unlikely to achieve more than L1. There were, however, some outstanding answers, highlighting clear understanding coupled with a sophisticated approach.
Evaluation: There was limited effective evaluation in many of the answers. Many candidates appeared to think that evaluation involves summarising the points made in the body of the answer. On occasions when evaluating many candidates did make realistic judgements eg ''30 new jobs will significantly reduce Canada's unemployment rate''. There were, however, examples of outstanding evaluative comment.
