| Date | November 2020 | Marks available | 4 | Reference code | 20N.2.SL.TZ0.2 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 2 | Adapted from | N/A |
Question
Unwanted consequences of United States–China trade war
- In order to reduce its trade deficit, the United States (US) announced tariffs of 25 % on imports of steel and 10 % on imports of aluminium from various countries in March 2018. The US government also accused China of unfair trade practices and wants China to import more American-made products.
- In July 2018, the first tariff on Chinese imports took effect and the Chinese government retaliated with a ban on US soybeans. In response, the US threatened to impose additional tariffs on imports worth almost US$300 billion, including a 25 % tariff on cars and car parts. This would be very damaging to the Chinese economy, which is slowing down, and workers in some provinces have become unemployed.
- The trade war has also caused anxiety in the European Union and Australia, which are likely to see their trade with China affected. Global trade in goods has been slowing, with exports from trade-dependent nations (such as Japan and South Korea) to China declining. Economists have estimated that other countries could see exports to China drop by as much as 20 %. As of early 2019, Germany’s economy is almost in recession, partly because of the slowing Chinese economy. If the US imposes its threatened car tariffs, a recession in Germany is inevitable.
- In the US, concerns were raised that the trade war has reduced business confidence. The decrease in demand from China, which results partly from trade tensions, has hurt the profits of US companies such as Apple Inc. and Caterpillar Inc. On the other hand, consumers and producers in the US are switching to domestically-produced goods due to the higher prices of some imported products from China.
- In an attempt to reduce the risk of a sharp economic slowdown, China’s central bank eased monetary policy. Economic data showed that small- and medium-sized manufacturing companies saw the largest negative impact from the slowdown of its economy. Therefore, the government changed the definition of a “small business”, allowing more firms to have access to subsidized lending by state-owned commercial banks.
- As the impacts of tax cuts enacted in the US in 2017 are disappearing, the US government is becoming more aware that the US economy is hurt by the trade war and is heading towards slower growth.
[Source: Adapted from Tang, F. and Wang, O., 2019. China prepares for testing 2019 by freeing up US$210 billion in latest
move to boost ailing economy. South China Morning Post, https://www.scmp.com/economy/china-economy/
article/2180758/china-prepares-testing-2019-freeing-us210-billion-latest-move; and Donnan, S., 2019. U.S.-China
Negotiations Risk Shutting Out the Rest of the World. Bloomberg Businessweek, https://www.bloomberg.com/news/
articles/2019-02-28/u-s-china-negotiations-risk-shutting-the-rest-of-the-world-out. Used with permission of Bloomberg
LLP Copyright © 2021. All rights reserved.]
Define the term tariff indicated in bold in the text (paragraph [2]).
Define the term trade war indicated in bold in the text (paragraph [3]).
Using an international trade diagram, explain the outcome on US producers of the introduction of a tariff on imports from China (paragraph [2]).
Using an AD/AS diagram, explain the desired impact of China’s “eased monetary policy” on its economic growth (paragraph [5]).
Using information from the text/data and your knowledge of economics, discuss the arguments for and against the trade protection measures imposed by the US on China.
Markscheme
PLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
Candidates who incorrectly label diagrams can be awarded 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 or SChina. A title is not necessary.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For AD/AS, the vertical axis may be average (general) price level or price level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. Any abbreviations are acceptable. A title is not necessary. “AS” is a valid label for the SRAS curve.
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
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Answers may include:
- Definition of trade protection, tariff, subsidies.
Arguments for trade protection may include:
- To reduce a trade deficit with China (paragraph [1]), as the imposition of tariffs should reduce import spending.
- To allow US firms to compete against “unfair trade practices” (paragraph [1]) from China. If China uses unfair trade practices and their goods/services are relatively cheaper, then American goods will not be able to compete and unemployment may rise.
- Import-substitution might take place due to the tariffs if consumers are able to substitute the previously imported goods with domestically-produced goods (paragraph [4]) at an affordable price, leading to increased revenue for domestic firms and economic growth for the US.
- Trade protection may have been used for political reasons, rather than economic ones.
- The US government will gain revenue from the tariffs.
Arguments against trade protection may include:
- The tariffs have been harming Chinese producers and workers in some provinces have already become unemployed (paragraph [2]).
- The reduction in Chinese incomes/growth will mean that less is imported from the US, harming US exporters (paragraph [2]).
- US farmers are suffering from the retaliatory ban on soybeans (paragraph [2]), showing that the original intention of protecting its steel industry is backfiring on the farmers.
- The trade war is negatively impacting global trade; as Chinese incomes fall they are importing less: export revenue for producers in the EU and Australia (paragraph [3]) is falling.
- Germany’s economy may hit a recession if the tariffs on cars and car parts are imposed (paragraph [3]).
- With or without import substitution, consumers are paying higher prices for domestic and imported goods.
- Prices of inputs might rise; leading to cost-push inflation.
- Profits of large US companies (such as Apple Inc. and Caterpillar Inc.) have been hurt (paragraph [4]), this is not good for the companies, its shareholders and possibly the workers if they become unemployed. (Since Apple Inc. has production firms in China, it will hurt the US and China alike.)
- Small and medium-sized firms in China are most hurt (paragraph [5]), which may result in more unemployment if the trade war continues.
- With trade protection, welfare losses exist, which means that resources are allocated to less efficient producers.
Any reasonable discussion.
Examiners report
Both concepts were generally well defined with almost all candidates scoring level 2.
Both concepts were generally well defined with almost all candidates scoring level 2.
As for past questions on tariffs, the diagram was generally correctly labelled and explained but often came with a lot of unnecessary information (such as the government revenue and welfare losses). Nonetheless, the most crucial piece of information, which was necessary to explain why US producers increased production - namely, that the price received increased - was sometimes missing, even in the very long answers. Another common problem was the absence of labels for the world supply curves (Pw and Pw + tariff are not acceptable labels).
This question was also very well answered, with most candidates identifying at least one component of AD which could increase as a result of lower interest rates. However, some candidates took the information, which was also in paragraph 5, about subsidised lending to firms and interpreted it as a reduction in the costs of production which would cause SRAS to shift down. Even if subsidised lending is viewed to be part of monetary policy, the correct shift remains a rightwards shift of AD since the intention of the subsidised lending is to increase Investment.
Most candidates scored marks in the mid/top range of level 2. Arguments both for and against the use of protectionist measures were generally well understood and explained, but many responses added minimal economic analysis to the text. For example, many stated that the trade war would affect business confidence, as taken from paragraph 4, but very few tried to explain why. To reach level 3, candidates need to use the text and their knowledge of economics to enrich arguments which are already mentioned in the text. This was sometimes done by considering the price elasticity of demand for aluminium and steel or the impact that an economic slowdown in the two largest economies could have on export-reliant nations. At times, candidates brought arguments that did not seem relevant. In particular, the idea that protectionism was necessary to protect infant industries in the US was a recurrent feature in many answers. To be considered as effective, this argument should be supported with examples of industries which could be considered as 'infant' in a mature economy such as the US.
