ACJC International Trade Answers Essay Qns 2

2024 International Trade Tutorial – Essay Q2 Suggested Responses [2018 A Level Question 6] a) Describe two different types of protectionist policy measure and explain how each type would affect trade. [10] Question Analysis: Command Explain • Start: explain how each protectionist policy works with economic analysis to impact the export (X) and imports (M) of an economy (diagram included where relevant) • End: Link to impact of (X-M) Context Any economy Concepts DD/SS analysis, AD/AS analysis, Impact on (X -M) and link to trade position (refer to syllabus content 3.3.1) Introduction The aims and types of protectionist policy measures: • Protectionism may help an economy to achieve its macroeconomic goals such as preventing rise in unemployment, improving its balance of trade position by protecting its domestic firms/ market. • Protectionism often arises due to government’s attempt to protect it economy from unfair trading competition from trading partners that affect s its export competitiveness or expensive imports from trading partners that may impact its consumers and firms. The impact of protectionist policy measures on trade (X and M): • These measures may eventually increase countr y’s export revenues or reduce import expenditures, enabling country to improve its trade position. R1: Impact of Tariff on trade • A tariff is a tax that is imposed on importers and their imported goods. A specific tariff is a tax calculated as a fixed amount of money per unit of import. • Countries place t ariff on imported goods and services in hope of decrease reliance of imported goods and encouraging the switch to domestic markets . This may thus reduce import expenditure, improving BOT position. • If free trade were allowed, prices of goods such as shoes would be sold in US at P world. The domestic producers will have to sell their shoes at the world price Pw. This is because if domestic producers were to sell shoes at a price higher than Pw, they will lose all consumers to the foreign producers, assuming that the shoes are close substitutes to one another.

After the imposition of the specific tariff of $t per unit, • The s upply curve of imports will shift up to S world + tariff since the tariff is added to the price of every unit of import sold in the country. • Domestic prices will thus increase from Pworld to Ptariff. Tariffs reduce imports and increase domestic production as at this higher price, • Quantity demanded for shoes falls from Q4 to Q3. • More domestic firms are willing and able to sell shoes, and domestic production increases from Q1 to Q2. • O verall, the volume of imports will fall from Q 1-Q4 to Q2-Q3. • Hence, import tariffs allow domestic firms to enjoy higher domestic demand and gain greater producer surplus. This can be seen by the original producer surplus before tariffs, triangle area C, to the new producer surplus of area C + 1. • O verall, tariff has reduced country’s reliance on imports by allowing consumers to switch to domestically produced goods and services, improving the trade balance of its country. An example is the trade war between US and China, as each countries impose tariff on goods imported from one another. For instance, US has imposed tariffs on various Chinese goods ranging from steel and aluminium, semiconductors, electric vehicles etc. This could decrease import expenditure from trading with China by US, and may improve trade deficit situation in US, assuming ceteris paribus. EITHER R2: Impact of Import Quotas on trade In addition to tariff, countries could also impose import q uotas. Import quotas are quantity restrictions on imports, which leads to a fall in supply of imports. This fall in supply will raise price, subsequently reducing the equilibrium quantity. The effect of an import quota on trade can be seen in the following diagram, $t

• Before the quota is imposed, market equilibrium is at E1. • Assume the government imposes a quota of Q1Q2. Domestic producers will produce up to Q1 while Q1Q2 is imported. • However, there is now a shortage of Q2Q4 at price Pworld. This shortages creates an upward pressure on price. • Since importers are not allowed to supply more shoes, domestic producers begin to enter the market, attracted by the higher price of shoes. • The domestic supply curve shifts right to Sdomestic+ quota and a new equilibrium is reached at E2 with a price of Pquota and quantity of Q3. • Overall, domestic production increases to 0Q1 + Q2Q3 Overall, import quota has reduced country’s reliance on imports by allowing consumers to switch to domestically produced goods and services, improving the trade balance of its country. OR R2: Impact of Subsidies on trade In addition to tariff, countries could also provide subsidies for domestic firms in order to reduce import expenditure or increase export revenue, promoting economic growth in the country and improving its BOT position. Subsidy can come in the form of: • Subsidy for the home production of domestic goods: This makes prices of domestically produced goods artificially cheaper than imported substitutes. This leads to a fall in import expenditure, and an increase in domestic consumption expenditure. This is called the substitution effect. • S ubsidy for the production of exports : This will make prices of exports artificially lower, hence become more competitive in the international markets. Export revenue would then increase. For instance, for subsidy provided to home production of domestic goods,

• Before the subsidy is implemented, market equilibrium is at E1. (domestic producers sell from 0 to Q1 units, while foreign producers sell from Q1 to Q3 units) • Subsidies lower the cost of production for domestic producers, shifting the domestic supply curve to the right by the amount of subsidy given. While the market price remains at Pworld, and the total quantity demanded remains at Q 3. However, subsidy has increased the domestic producers’ production from Q1 to Q2, due to the S amount of subsidy for each unit produced. • Overall, subsidy has reduced country’s reliance on imports by allowing consumers to switch to domestically produced goods and services, reduce import expenditures and hence improving the trade balance of its country. For an example, U.S. government heavily subsidizes the domestic agricultural sector. It also subsidizes oil and energy producers etc, to protect its domestic market from external competitions. Note that - Students may also explain subsidy in the form of export subsidies. Subsidy to produce exports make prices of exports artificially lower, hence become more competitive in the international markets. Export revenue would then increase, improving trade position of its country as well. - The explanation using devaluation can also be accepted. Conclusion • Thus, protectionist policies such as subsidies and tariff improve the trade balance for countries. • However, such benefits could only be enjoyed if there is no retaliation for other countries. • In the case of US, when the Trump administration placed a tariff on Chinese goods, China retaliated by placing a tariff on US products, reducing US export to China. It is also worthy to note that given current global supply chain, protectionist policy adopt by one country will have repercussion in other countries, reducing the world trade. Marking Scheme: Level Knowledge, Application, Understanding and Analysis Marks

L3 • Well-developed analysis on both requirements: - Good use of relevant economic concepts in analysis - Good use of examples to illustrate the different types of protectionist policy measures and how the policies affect trade - Good use of diagrams to illustrate the policies. • No major conceptual inaccuracies. • Start and end point are clearly explained with no missing links in elaboration