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

List two functions of the World Trade Organization (WTO) (paragraph [2]).

Using a tariff diagram, explain the likely effect on consumer surplus of a 25 % tariff on all wooden furniture imported into the US (paragraph [5]).

Using a foreign exchange diagram, explain the possible effect of China’s large current account surplus in 2007 on the exchange rate of China’s currency (the renminbi) (paragraph [6]).

Using information from the text/data and your knowledge of economics, evaluate China’s use of subsidies as a form of trade protection.

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

Candidates may indicate the change in consumer surplus with shaded areas or numbers/letters in the diagram (e.g. a loss of consumer surplus of P₁P₂AB in the diagram below).

The use of P and Q on the axes is sufficient for a tariff diagram. World supply must be distinguished from domestic supply. If abbreviated, the world supply curve must be labelled S_w or S_world. A title is not necessary.

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

For an exchange rate/foreign exchange diagram, the vertical axis may be exchange rate, price of renminbi in another currency, other currency/renminbi or other currency per renminbi. The horizontal axis should be quantity, or quantity of renminbi. A title is not necessary.

NB: an acceptable alternative is the supply curve shifting left.

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.

Answers may include:

• definitions of trade protection, subsidy
• an international trade diagram showing the effect of a subsidy on imports and/or on exports.
  

Advantages of subsidies may include:

• goods with external benefits such as solar panels may need to be subsidised to ensure the optimum quantity is produced (paragraph [2])
• many other countries use subsidies and therefore China needs to use them to compete (paragraph [2])
• China’s trade surplus has already been reduced and might become a deficit if subsidies for key export industries are not provided (paragraph [6])
• prices of subsidised products will be lower for consumers
• reduces inflationary pressures in the economy.
  

Disadvantages of subsidies may include:

• they increase the misallocation of resources in world trade (paragraph [2])
• the complexity of supply chains makes it difficult to determine which firms are getting an unfair advantage (paragraph [6])
• they give a disadvantage to firms in competition with Chinese firms (paragraphs [2] and [3])
• they may lead to excess supply and dumping (paragraph [3])
• they make the WTO less effective, because its rules with regards to subsidies at present are too limited (paragraph [3])
• subsidies are a key component of the trade war, which contributes to reduced global trade and investment flows (paragraph [1])
• China's use of subsidies limits production in other South East Asian economies, negatively impacting their growth and development (paragraph [5])
• the cost to governments of providing subsidies is high
• the welfare loss due to subsidies
• subsidies will reduce incentives for innovation/efficiency in domestic industry and long run competitiveness may deteriorate.

Any reasonable evaluation.

Most candidates scored at least L1 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. 

The functions of the WTO were sometimes expressed too vaguely or the same function was repeated. At times it was difficult to determine where one function ended and another one was being described. Students should be more explicit in their writing when a question asks for a list of two functions.

As for past questions on tariffs, diagrams were sometimes missing the “world supply” label (Pw and Pw + tariff are not sufficient labels for a supply curve). Surprisingly, many candidates who opted for question 1 where unfamiliar with the concept of consumer surplus. Some even confused the consumer surplus and the welfare loss. Those who could identify the change in the consumer surplus often failed to identify that the consumer surplus was reduced due to the higher price AND lower quantity demanded. A considerable number of candidates explained the whole diagram (government revenue, exporters’ revenue…) rather than focusing on answering the question asked. Of all part (b) and (c) questions on this paper, this one proved the most difficult to candidates.

This question was generally well attempted. Most candidates could establish that a current account surplus would put upward pressure on the exchange rate. Some incorrectly labelled the vertical axis as the "value" of the currency rather than its "price" in terms of another currency.

Most candidates scored marks in the mid/top range of L2. Most candidates could provide arguments both for and against protectionism but few discussed subsidies specifically. Many candidates opted to draw the generic trade diagram to explain how a subsidy could reduce imports. To reach L3, 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 bringing in the concept of ‘dumping’ which the text did not mention but clearly alluded to. Some answers reached L3 through discussing the impact of the removal of subsidies on macroeconomic variables such as the current account and real GDP using information from the text. A few candidates brought in an export subsidy diagram which was often used effectively to explain the impact of subsidies on foreign markets.