ACJC H2 ECONS P2 essay Q6 answer

6. US has embarked on protectionist policies by imposing high tariffs on imports from China and EU to reduce its trade deficit and unemployment as its economic growth continues to pick up. a) Explain why an economy’s pattern of trade might change over time. [10] Approach to Question 6a: • Explain what is meant by pattern of trade • Explain how comparative advantage principle explains an economy’s pattern of trade • Analyse the factors that can lead to change in an economy’s pattern of trade using relevant examples Introduction Pattern of trade refers to the direction, volume and composition of trade between countries. Composition of trade refers to what is being exported or imported, while volume of trade refers to the real value of goods and services that is being exchanged. Lastly, direction of trade refers to the direction of exports and import flows. Body: • Change in pattern of trade due to change in comparative advantage (Supply factor) o One factor that causes a change in an economy’s pattern of trade is the change in its comparative advantage. According to the principle of comparative advantage, a country should specialise in the good it has comparative advantage in, i.e. the good it can produce at lower opportunity cost than its trading partners, ceteris paribus. o Change in comparative advantage can be due to changes in factor endowment, technological advancement and government policies. - A change in an economy’s pattern of trade due to changes in its or its trading partner's state of technology . The US, for example, may have lost its CA on manufactured products due to China's rapid technological development and advancement enabling China to produce some manufactured goods at lower opportunity cost than its trading partners. - Government policies to encourage the development of certain industries can also change the economy’s pattern of trade. China's government policies in subsidising firms in its manufacturing industry to innovate and develop new technology advancement has helped to change the economy’s pattern of trade from being a export of cheap labour-intensive manufactured goods to being an exporter of high-end manufactured goods. - China's rising number of highly skilled and efficient workers has led to rising productivity and hence the ability to produce high quality goods at lower opportunity cost than its trading partner, making it an exporter of higher end manufactured goods instead of being largely an importer in precious years. • Changes in demand preferences (demand factor) Increase in economic growth is a factor that can change an economy’s pattern of trade. For China, the high economic growth in the last decade or so has led to a rising number of middle income earners, hence rising affluence and changing lifestyles. The higher income group has changed the economy’s consumption pattern in favour of high-end branded luxury goods

e.g. the luxurious Mercedes and B&W cars as well as Louis Vuitton luxury leather products. The large increasing in the volume of import of such exclusive luxury brands has changed in China’s pattern of trade to being a major importer of luxury goods. • FTAs and government trade policies o Bilateral and regional free trade agreements such as ASEAN Economic Community (AEC), North America Free Trade Agreement (NAFTA) and the EU Customs Union have led to trade creation between member countries, thereby changing the direction of patterns of trade of member countries. - The Zero-tariff policy agreement among members of NAFTA, for example, has seen greater trade among the north American countries and less trade between north and south American countries. - EU’s common high tariff on non-members has artificially increased the prices of imports from non-member countries, enabling them to be each other’s major trading partners. o Increase in protectionist policies such as increase in import tariffs and increase in subsidies to stimulate domestic firms’ production, will artificially increase import prices and lower domestically produced goods , leading to a fall in import of the affected goods. For example, an US increase in import ta riffs of solar glass panels will artificially raise the price of imported solar glass panels as consumers’ demand shift to the domestically produced one. This will lower its import of solar glass panels, hence changing the direction of its trade pattern. Knowledge, Application / Understanding and Analysis L 3 Well-developed answer that thoroughly analyses the factors that change an economy’s pattern of trade, with scope and rigour, with goods use of concept of comparative advantage and other relevant economic concepts, and good use of relevant examples. . 8 – 10 L 2 Answer that explains the factors that change an economy’s pattern of trade, using relevant economic concepts and some relevant examples but is not developed. 5 – 7 L 1 For an answer that shows some basic but largely unexplained knowledge of pattern of trade. 1 – 4

b) Assess whether the use of protectionist po licies to correct the country’s trade deficit and employment can ever be justified. [15] Approach to Question 6b: • Explain what is meant by trade deficit and unem ployment and how protectionist policy can help to correct trade deficit and unemployment. • Explain and assess the conditions in which protectionist policy to correct trade deficit can be justified and the conditions in which protectionist policy is not justifiable. Introduction: • Trade deficit occurs when a country’s import expenditure is greater than its export revenue. Trade deficit is a cause of concern as it affects both the country’s domestic and external economy. Trade deficit leads to a wo rsening of BOP and eventually the stability of its currency. It also leads to falling AD, falling production, rising unemployment as well as economic slowdown. • Unemployment is a situation where workers are able and willing to work at the going wage rate but cannot find paid employment despite an active search for work. High unemployment means that the economy is producing below full capacity, i.e. there is low output being produced in the economy leading to low economic growth hence lowers material standard of living. • Hence measures have to be taken in correcting trade deficit and rising unemployment in the economy. One such measure is the use of protectionist tools such as imposing import tariffs and subsidising domestic firms to make imports artificially more expensive than domestically produced goods. • Provision of subsidies to domestic firm will lower the cost of production of goods for exports, thereby reducing price of export and making ex port more competitive both in the domestic market as well as in the international market. At the same time, tariff on imports will artificially increase import prices, leading to fall in demand for import as consumers switch their demand to domestically-produced substitutes. These tw o policies will improve the economy’s trade balance. Thesis: Conditions in which protectionist policies is justifiable to correct trade balance • Domestic economic performance is affected by trading partner’s unfair trade practices o Protectionist policies is justifiable when the country’s trade deficit is caused by its trading partner’s unfair trade practices, e.g. superficially low currency, large subsidies given to firms in export industries . Such unfair practices will lower the economy’s exports competitiveness both in its own domestic market and the global market. o Protectionist policies are also necessary to prevent dumping by foreign producers that can affects the domestic firms’ ability to increase production and enjoy economies of scale . The lack of demand in its own domestic market, and the inability to enjoy economies of scale to re