2012 RVHS EC 8819

Name:_________________________ Class: ______ This document consists of 8 printed pages. [Turn over ECONOMICS 8819/01 Paper 1 10 September 2012 3 hours Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your index number and name on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer all questions. Section B Answer one question. At the end of the examination, fasten your answers for each question separately. The number of marks is given in brackets [ ] at the end of each question or part question. RIVER VALLEY HIGH SCHOOL YEAR 6 Preliminary Year Examination in preparation for General Certificate of Education Advanced Level Higher 1

2 © RVHS 2012 8819/01 Section A Answer all questions in this section. Question 1 Rare Earth Minerals Extract 1: Value of China’s rare earth exports rockets China's exports of vital rare earth minerals used for numerous high -tech goods slipped almost one-tenth last year but the overall value rocketed as quota cuts lifted international prices. China, which produces about 97 per cent of the global supply of the minerals, cut export quotas for the minerals by 40 per cent last year, a move that alarmed buyers and trading partners. Compared to the first half of last year , China will be cutting export quotas by 35 per cent for the first half of 2011. China says the quota cuts will prevent reckless mining of deposits. China is also stepping up its controls over rare earth mining and plans to release new industry standards to combat pollution in its mining industries. China's moves have raised objections from major trading partners such as the United States, European Union and Japan. The U S Trade Representative office threatened last month to take China to the World Trade Organization (WTO) about its export restraints. With these export restraints, 17 elements , which are critical for the manufacturing of smartphones, computers, wind turbines an d hybrid cars in the US and Western countries, have been identified by analysts to face a global supply crunch as demand swells. Source: Reuters, 19 January 2011 Extract 2: Global suppliers respond to China's rare earth policies Since China set quotas to restrict its rare earth exports, global suppliers have made considerable headway in reducing dependence on Chinese supply. For example, US-based Molycorp MCP has begun pr oduction at its California mine and Avalon Rare Metals AVL is developing a deposit in Canada's Northwest Territories. Japan and Australia have also started mine production and are considering reopening mines. These responses have resulted in rising private stockpiles and have dented international trade in these commodities in the past year. Source: The Wall Street Journal, 24 July 2012 Extract 3: Differing views on China’s restrictions on rare earth exports China’s cabinet issued its first white paper on rare earth industry policies, acknowledging that poorly regulated and excessive mining of rare earth minerals had caused landslides, clogged rivers and environmental pollution, causing great damage to the ecological environment and also posed as safety and health hazards to her citizens. In addition, the paper highlighted the need to protect the scarce non-renewable resources.

3 © RVHS 2012 8819/01 As such, China pledged to tighten regulation on its rare earth industry with in the WTO guidelines. Some of the policies that China has implemented include production caps, export quotas and higher rare earth taxes on production. The white paper comes after the US, the EU and Japan jointly filed a case in March at the WTO that challenged China’s restrictions on rare earth exports, which were imposed in 2006 and have been repeatedly tightened since then. These countries argue that the export quotas are trade protectionism and these export quotas violate free trade rules by putting pressure on companies to move their factories to China if they want to tap China’s vast supply of rare earth minerals. On the other hand, Chinese o fficials defended that despite export controls in place, China has met global market demand as actual exports totalled just 18,600 tonnes , which is lower that the export quota of 30,200 tonnes set for rare earth products in 2011. Source: New York Times, 20 June 2012 Extract 4: China, a rare earth giant, set to start importing the elements China, the world’s biggest producer of rare earth minerals, is expected to become an importer of some of the materials as early as 2014 as it continues to develop its high - technology industries. Today, appetite for rare earth is growing fast in China. Efforts to expand the industrial chain mean that China, whi ch produces more than 90 per cent of the world’s rare earth, is now consuming 65 per cent of global output, up from 25 per cent a decade ago. The Chinese approach to coke, a raw material for steel, offers lessons for rare earth. In a bid to supply coke to its own steel mills rather than shipping most of the material abroad, China increased export taxes, rode out trade disputes and by 2008 , China turned from being the world’s biggest exporter of coke into one of the world’s biggest importers. Today, China imports one-fifth of its annual consumption of coke, which is more than half a billion tons. The US Geological Survey estimates that China holds about half of the world’s reserves of rare earth, with 55 million tons, compared with 19 million tons in Russ ia and 13 million tons in the United States. China, meanwhile, says that its reserves represent on ly a quarter of global reserves and that churning out 90 per cent of world production is unsustainable. China hopes to dominate products like magnets, which can be made smaller and more powerful with rare earth. These are then u sed in renewable energy, satellites, medical equipment and natural gas drilling. Chinese producers like Zhenghai Magnetic Materials contribute more than 80 per cent of global output, up from close to zero two decades ago. While China’s Ministry of Industry said China was still behind in technologies that refine or make use of the minerals, export curbs are playing a role in its effort to catch up and have encouraged fore ign companies to bring technology into China. Examples of these foreign companies include glass makers and producers of energy-saving light bulbs. Source: Reuters, 11 July 2011

4 © RVHS 2012 8819/01 Figure 1: Rare Earth Minerals Index and Gold Mines Index Source: Bloomberg Questions (a) With reference to Figure 1, (i) Compare the trend in prices of rare earth minerals with that of gold mines between September 2010 and January 2012. [2] (ii) Using demand and supply analysis, account for the trend in prices of rare earth minerals over this period. [5] (b) (i) Explain what is meant by the term ‘negative externality’. [2] (ii) Explain how negative externalities arise in th e market for rare earth minerals. [3] (c) Explain the likely values of price elasticity of demand and supply for rare earth minerals. [4] (d) Explain why the quota placed on rare earth minerals by China can be justifiable in terms of the theory of comparative advantage. [4] (e) Discuss the extent to which export quotas and rare earth taxes help to reduce negative externalities in China. [10] [Total: 30] Rare Earth Minerals Index Gold Mines Index

5 © RVHS 2012 8819/01 Question 2 The questionable US policies Extract 5: The international currenc