| Date | November 2020 | Marks available | 4 | Reference code | 20N.2.HL.TZ0.2 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 2 | Adapted from | N/A |
Question
The Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP), Australia and Japan
- In 2018, Australia signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)*. The agreement creates the third largest free trade area in the world, covers nearly 500 million people and is worth more than US$12 trillion. The members of the agreement have stated that economic integration and free trade is important to help foster good political relations and inclusive growth for all nations.
- The trade agreement will aim to gradually eliminate most trade protection within the member countries. The agreement will see tariffs eliminated for Australian cheese and beef exports to Japan, and increased quotas for the export of rice to Japan from 4400 to 8400 tonnes. Nikkei Asian Review reported that “Fast-food restaurants in particular are embracing the import as a way to cut costs to cope with rising wages.” Additionally, Japanese food manufacturers will be able to lower production costs for rice-based meals and benefit from increased stability of input prices. The benefits from the agreement for Japan’s economy are projected to exceed US$70 billion, but some industries would be negatively affected.
- Japanese farmers are worried about the increase in imported food from Australia. Furthermore, the Japanese government is concerned about the effects of the CPTPP on Japan’s food self-sufficiency—Japan relies on other countries for over 60 % of its food. In response to these concerns the Japanese government has offered support for domestic farmers to diversify production into other crops. The government also plans to subsidize the rice farmers through the initial phase of lowering trade barriers.
- The agreement is said to be worth more than US$37 billion to Australian agricultural exports. It is hoped that CPTPP and the falling value of the Australian dollar will help Australia to reduce its current account deficit, but some economists have argued that this can take a long time. According to some estimations, the short-run price elasticity of demand (PED) for Australian exports is 0.2 and the short-run PED for imports in Australia is 0.4. However, the long-run PED for Australian exports is 1.1 and the long-run PED for imports in Australia is 1.3.
- There have also been concerns about the CPTPP from trade unions in Australia. They argue that it deregulates the labour markets and gives corporations from other countries an ability to take legal action against governments for implementing laws that raise wages or protect the environment, if the foreign corporation can prove that the law hurt their commercial interests. One university lecturer said that the future costs to the taxpayer could be significant if foreign companies take the Australian government to court.
- The trade agreement would allow workers from other countries to work in Australia without employers being required to check if Australian citizens are available to fill the jobs before the migrant workers are employed. It is estimated this may risk 39 000 jobs in Australia. Furthermore, environmental activists have expressed concerns that the negative environmental and social effects of the agreement have not been well considered. This may lead to conflicts with Australia’s commitment to the United Nations’ Sustainable Development Goals.
Adapted from Karp, P., 2017. Revived Trans-Pacific trade deal undercuts Australian jobs market, unions say. The
Guardian, Copyright Guardian News & Media Ltd 2021, https://www.theguardian.com/australia-news/2017/dec/19/
revived-trans-pacific-trade-deal-undercuts-australian-jobs-market-unions-say; Kodachi, H., 2019. Australian rice
finds favor in Japan as cheaper option, Nikkei Asian Review, https://asia.nikkei.com/Business/Markets/Commodities/
Australian-rice-finds-favor-in-Japan-as-cheaper-option.
* The CPTPP includes eleven member countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
Define the term free trade area indicated in bold in the text (paragraph [1]).
Define the term quotas indicated in bold in the text (paragraph [2]).
Using price elasticity of demand (PED) data from the text and the J-curve effect, explain the most likely impact of “the falling value of the Australian dollar” on Australia’s current account (paragraph [4]).
Using an international trade diagram, explain how “increased quotas for the export of rice to Japan” will affect the price of rice in Japan (paragraph [2]).
Using information from the text/data and your knowledge of economics, evaluate the view that free trade is beneficial to Japan’s economy.
Markscheme
Answers may include:
- explaining that in the SR PEDx+m is <1
- due to time lags/contracts/relatively unresponsive to price changes, therefore, the depreciation will worsen the CA in the SR / improve in the LR
- however, in the LR the PEDx+m>1 resulting in an improvement in the CA
- SR PED=0.6 and LR PED=2.4
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. The world supply curve must be labelled Sw, or Sworld. 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 current account surplus.
Economic analysis may include:
- economic integration theory
- economies of scale
- balance of payments
- protectionism
- externalities
- AD/AS
- economic growth
- employment
- inflation
- comparative advantage.
For free trade:
- Third largest free trade area in the world (paragraph [1]) larger market leading to possible economies of scale.
- Encourages good political relations and inclusive growth (paragraph [1]).
- Worth in excess of US$70 billion to Japan’s economy (paragraph [2]) – exports increasing, may lead to economic growth.
- Lower prices of imported products, such as Australian cheese and beef for restaurant owners (costs of production), reducing the impact of higher wage costs in Japan. (paragraph [2]).
- Lower prices of rice for Japanese consumers.
- Farmers may access an opportunity to diversify into other crops (paragraph [3]).
- Japanese may have job opportunities in Australia (paragraph [6])
- May help with trade imbalances between Japan and other countries like Australia.
Against free trade:
- Concerns of food self-sufficiency/food security (paragraph [3]), over 60 % already imported. This may have long-term implications if there is an overreliance on food imports.
- Subsidies for Japanese farmers are needed to help diversification (paragraph [3]), results in opportunity costs and production inefficiencies.
- Removing some forms of trade barrier may only be replaced by others – subsidies (paragraph [3]) and the benefits may be mitigated.
- Some industries negatively affected (paragraph [2]), may lead to structural unemployment issues.
Any reasonable evaluation.
Examiners report
Most students provided a limited definition as they did not include that FTAs allow members to set their own barriers to non-members. A few students did not read the question carefully, thus defining 'free trade' as opposed to 'free trade area'.
Most students got full marks, but a few omitted to make a specific reference to the amount of goods/services, thus only getting one mark.
This produced a mixed bag of answers. There were some very simple, but highly effective responses showing a clear understanding of the M-L condition and effectively linking it to the J-curve. Better candidates noted that the question demanded the use of the data from the text. Many did not, losing marks.
Most candidates included a J-curve diagram in the explanation, although this is not specifically asked in the question. When the J-curve was included without complete explanation of the effects of depreciation in the SR and LR, no additional mark was given.
Many students lost marks by not explaining why PEDx + PEDm was inelastic in the short run and elastic in the long run.
This proved surprisingly challenging for many. Some answers did demonstrate a good understanding of quotas in terms of an accurate diagram and explanation. Less successful answers provided diagrams showing the introduction of quotas rather than increased quotas and incorrect labelling. A few students did not include the world supply curve and a few students tried to explain the effects using a tariff diagram. This suggests that there is the limited understanding of quotas and their effects.
Many candidates were able to explain and analyse the effects of free trade/protectionism on the different stakeholders directly mentioned in the text, that is from increased Australian imports, but most ignored the potential benefits for Japan from increased exports (not stated explicitly in the text but implied). Too many candidates relied on their knowledge of free trade and produced generic/textbook type answers largely unrelated to the question. A few students included impacts on Australia, which did not address the demands of the question.
