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Date May 2021 Marks available 4 Reference code 21M.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

China’s trade reforms

  1. The Chinese government has announced a set of free trade measures, including lower import tariffs on cars, soybeans and pharmaceuticals, in an attempt to end a trade war with the United States (US).

  2. The US government has long accused China of engaging in unfair trade practices to maintain their current account surplus. The trade dispute between the two largest economies intensified when the US said it would impose anti-dumping tariffs on Chinese steel and aluminium.

  3. The trade war with the US comes at a bad time given the slowdown in China’s domestic demand. In recent years, China’s economic growth has relied less on investment and exports and more on consumption expenditure.

  4. Producers of many Chinese manufactured goods currently benefit from protectionist measures. In particular, imports of industrial equipment, medical devices, tractors and vehicles are subject to high tariffs.

  5. Automobile production capacity in China is growing. However, the domestic market is becoming oversupplied, with more cars being offered for sale than Chinese consumers want to buy. For this reason, Chinese car manufacturers are seeking to export their cars to other markets. They are therefore eager to see reduced trade tensions as increased US tariffs would make it harder to export Chinese cars to the US.

  6. Some Chinese car manufacturers are already focusing on adding advanced capabilities to their cars in order to be more competitive in global markets. China is increasing its efforts to become a world leader in self-driving cars. These will be intelligent cars that will improve transport efficiency and meet energy-saving and emission-reduction targets. Many believe that Chinese companies are so innovative that they no longer require protection from international enterprises.

  7. However, many Chinese firms remain dependent on imported factors of production. Approximately 30 % of Chinese exports are manufactured using imported equipment and components. The reduction of tariffs would therefore lower prices not only for producers but also for consumers of Chinese goods.

[Source: According to a report on ResearchAndMarkets.com. China’s Auto Revolution, 2018 - China Poised to Become Major Auto Exporter. Available at: https://www.prnewswire.com/news-releases/chinas-auto-revolution-2018---china-poisedto-become-major-auto-exporter-300720917.html [accessed 28 September 2018]. Source adapted.]

Define the term trade war indicated in bold in the text (paragraph [1])

[2]
a.i.

Define the term consumption indicated in bold in the text (paragraph [3]).

[2]
a.ii.

Using an international trade diagram, explain how US tariffs could affect the export of Chinese steel and aluminium to the US (paragraph [2]).

[4]
b.

Using a demand and supply diagram, explain how reduced tariffs on “imported factors of production” would affect the price of Chinese goods (paragraph [7]).

[4]
c.

Using information from the text/data and your knowledge of economics, evaluate the impacts of free trade measures on China’s economy.

[8]
d.

Markscheme

a.i.

a.ii.

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 may be labelled Sw, or Sworld or SChina. A title is not necessary.

b.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

The vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.

c.

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.

Answers may include:

Benefits of reduced tariffs:

Limitations of reduced tariffs:

Any reasonable evaluation.

d.

Examiners report

Most candidates scored at least Level 1 on both definitions. 

Many candidates had some idea of what a trade war is but could not structure the definition properly and/or allude to retaliatory actions. 

a.i.

Most candidates scored at least Level 1 on both definitions. 

Defining consumption also proved challenging with a significant minority explaining consumption through usage rather than expenditure. Many tended to repeat the term in the definition (e.g. consumers' spending). This should be avoided if possible. 

a.ii.

As for past questions on tariffs, the diagram was generally correctly labelled and explained but sometimes 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 Chinese exports would decrease — namely, that the price received increased — was sometimes missing. Another common problem was the absence of label for the "world" supply curves (Pw and Pw + tariff are not sufficient). 

b.

This question was generally well attempted. Most candidates could make the connection between imported inputs and the supply curve of final goods. Some candidates did not read the question properly and used an AD/AS diagram instead of a simple demand and supply diagram. The macroeconomic diagram was not accepted. 

c.

Most candidates scored marks in the mid/top range of Level 2 or low range of Level 3. Arguments both for and against the free trade policies were generally well understood and explained, but some responses made minimal effective use of the text. Many candidates assumed that the US and other countries would also adopt free trade policies towards China. While that is a valid assumption, candidates should explicitly state they are making that assumption. 

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 that Chinese exports seem very competitive and may not enjoy much benefits from ease in tensions between China and the rest of the world. At times, candidates brought arguments that did not seem to fit in the context set in the text. In particular, the idea that free trade policies would be detrimental to infant industries in China — a valid point — but went on to identify the Chinese automobile industry as an infant industry. To be considered as effective, this argument should be supported with examples of industries which could be considered as 'infant' in China without conflicting with the information from the text. 

d.

Syllabus sections

Last exams 2021 » Section 3: International economics » 3.1 International trade » Restrictions on free trade: Trade protection » Types of trade protection
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