Arguments for and against trade control/protection Paper 2

IBDP Economics  SL – The global economy – Arguments for and against trade control/protection-Paper 2  Exam Style Practice Questions

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Arguments for and against trade control/protection Paper 2? 

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Exam Style Question for Arguments for and against trade control/protection -Paper 2

South Africa’s grain millers oppose corn tariff

  1. A battle is taking place between South African corn farmers and the corn millers who process corn. Grain South Africa (Grain SA) is the organization that represents the interests of corn farmers. It has asked the country’s International Trade Administration Commission (ITAC) to protect local corn farmers from low global corn prices by imposing a tariff on corn imports.
  2. South Africa’s corn millers are opposing the request by Grain SA to implement the tariff on corn imports. The corn millers argue that a tariff will cause a burden for consumers and cattle farmers. In South Africa, corn is an essential food and also a source of feed for livestock.
  3. According to Reuters news service, South Africa is “Africa’s largest corn producer and is relied upon by neighboring Sub-Saharan nations to [reinforce] their own corn supplies and feed their people.” A drought in South Africa has dramatically increased the price of corn. In addition, the reduced supply has prompted the need for imports. “South Africa [has traditionally been] a net exporter of corn … [but] for the second year in a row, [the economy] will become a net importer of corn.” The need to import corn has shocked both the corn farmers and the government.
  4. The United States (US) is the world’s largest corn producer. An unusually large harvest has increased US supply and more than halved the price of US corn to its current price of US$145 a ton. However, in South Africa, because of the drought, prices for domestically produced corn have more than doubled to reach an all-time high of US$348 a ton. The low import prices of US corn have made it very difficult for South African corn farmers to earn sufficient income to survive the drought, which is why they have asked ITAC for protection.
  5. However, a spokesperson for the corn millers said “we are strongly opposed to any attempt to apply a tariff. Why do we need protection for a commodity in which we are so self-sufficient?” However, Grain SA have claimed that corn farmers cannot compete with the big corn-exporting countries, such as the US and Mexico, because their governments are subsidizing corn farmers. According to Grain SA, South African farmers get almost no assistance. This is why they have requested that ITAC implement the tariff to protect corn farmers from these unfair trade practices.
  6. According to economists, South Africa will probably need to import about 970 000 tons of corn this year and a further 3.8 million tons in the following 12 months. To make matters worse, the rand (South Africa’s currency) has experienced a sharp depreciation against the US dollar. Combined, the need to import corn and the depreciation are likely to negatively impact South Africa’s current account.

Question

Using information from the text/data and your knowledge of economics, evaluate the economic impacts of trade protection in the South African corn market.

▶️Answer/Explanation

Responses may include:

  • a definition of trade protection
  • an international trade diagram to explain impact of requested tariff on consumers, producers and importers (paragraph [1]).

Advantages:

  • US subsidies distort the functioning of the free market and can result in an inefficient allocation of resources.
  • Helps to protect South African corn farmers from unfair practices since US subsidies artificially lower the price of US corn imported into South Africa (paragraph [5]).
  • It would prevent a deterioration of South Africa’s current account balance since import expenditure falls as the result of decreased corn imports and the depreciation of currency (paragraph [6]).
  • Tariff allows domestic corn farmers to maintain higher revenues / incomes to help them to survive the drought (paragraph [3]).
  • Corn farmers can compete with subsidized US corn that has caused the global glut and subsequent low prices.
  • May only be a short-term measure.
  • A source of tax revenue for the South African government.
  • Agriculture is a strategic industry.

Disadvantages:

  • Domestic supply of corn in South Africa is likely very price inelastic so the tariff would not increase domestic production significantly.
  • Tariff will increase input costs for millers and food-related businesses requiring corn as an input (paragraph [2]).
  • Impact of rising corn prices on low income households when corn is an essential food (paragraph [2]).
  • Tariff will cause rising input costs for livestock producers further increasing food prices (paragraph [2]).
  • Corn is likely to be a major input to food manufacturing hence tariff could cause decrease in SRAS due to rising input costs and thus cause cost-push inflation and lower real GDP.
  • Price of South African food exported to other countries will rise in trading partner countries.
  • Trading partners might retaliate by imposing their own protectionist measures.
  • The corn industry is not an infant industry (paragraph [5]).
  • The depreciation of Rand is already reversing the low price of imports.

United States (US) tin can manufacturers seek tariff exemption on tinplate steel

  1. The Can Manufacturers Institute (CMI) has asked the US Department of Commerce to take away tariffs and other trade protection measures that are currently applied to imports of tinplate steel. Tinplate steel is used to make tin cans as packaging for food. The CMI represents the tin can manufacturing industry and its suppliers in the US.
  2. The tin can manufacturing industry accounts for the annual domestic production of approximately 124 billion tin cans. The industry employs more than 28 000 people, with factories in 33 US states, Puerto Rico and American Samoa. It generates revenue of around US$17.8 billion. The CMI claims that the tariff on imports of tinplate steel has a severe economic impact on the tin can manufacturing industry.
  3. Approximately 2 % of all US steel is tinplate. Currently, there is excess demand that is causing a disequilibrium in the domestic US tinplate steel market. In 2016, US demand for tinplate steel was 2.1 million tons, while domestic supply was 1.2 million tons, meaning that only 57 % of domestic demand was met by US tinplate steel producers. Not only is there a domestic shortage of tinplate steel, but also the CMI claims that there has been a noticeable decline in the quality of domestically-produced tinplate steel.
  4. The CMI claims that even a small increase in the price of raw materials could create a competitive disadvantage, forcing some tin can manufacturing plants to shut down. This would create structural unemployment for 10 000 workers in regionally-based factories. The CMI also claims that the tariff puts food can producers at a competitive disadvantage with other food packaging substitutes, such as plastic and glass. These substitutes are not subject to tariffs.
  5. According to the CMI, canned fruits and vegetables cost 20 % less than fresh food. Because of this, people on low incomes consume canned foods at a higher rate than the average American. Canned food offers a low-cost solution to feeding the nation; especially the 42 million Americans who live in low-income households. The figure includes 13 million children. The CMI further claims that tariffs, or any trade barriers, have harsh consequences for those living in relative poverty.

Question

Using information from the text/data and your knowledge of economics, discuss possible economic impacts of the tariff on tinplate steel

▶️Answer/Explanation

Responses may include:

  • definition of tariff
  • international trade diagram to explain impact of the requested tariff on consumers, producers, government, importers and efficiency (paragraph [1]).

Possible impacts:

  • some candidates may question the claims of the CMI, noting that they have a vested interest in tinplate steel being exempted from a tariff (paragraph [1])
  • severe economic impacts on the tin can manufacturing industry (paragraph [2])
  • job losses and potential structural unemployment in the tin can industry (paragraphs
    [2] and [4])
  • inefficient domestic tinplate steel producers are supported (paragraph [3]), causing a misallocation of resources
  • the inferior “quality of domestically-produced tinplate steel” (paragraph [3]) may result in a decline in quality and higher price of final products
  • tariff allows domestic steel tinplate producers to maintain higher revenues / incomes to allow them to compete with higher quality imports (paragraph [3])
  • higher input prices for can manufacturers may force closures of some can producers and a consolidation within the tin can industry (paragraph [4])
  • tariff will increase input costs for can manufacturers requiring tinplate steel as an input (paragraph [4])
  • tin can producers disadvantaged when substitute packaging is not exposed to a tariff (paragraph [4])
  • impact on economic growth in communities dependent on tin can manufacturing (paragraph [4])
  • impact on low-income households as tariffs are regressive taxes and food is a staple; low income households spend a higher proportion of their income on canned food (paragraph [5])
  • trading partners might retaliate by imposing their own protectionist measures
  • tariffs provide a source of tax revenue that can be reinvested
  • as domestic production can only meet 57% of domestic demand, it might take a substantial increase in price to resolve the shortage (paragraph [3])
  • may affect the competitiveness of US exports, which require tin-plate steel as a factor input. 

Unwanted consequences of United States–China trade war

  1. In order to reduce its trade deficit, the United States (US) announced tariffs of 25 % on imports of steel and 10 % on imports of aluminium from various countries in March 2018. The US government also accused China of unfair trade practices and wants China to import more American-made products.
  2. In July 2018, the first tariff on Chinese imports took effect and the Chinese government retaliated with a ban on US soybeans. In response, the US threatened to impose additional tariffs on imports worth almost US$300 billion, including a 25 % tariff on cars and car parts. This would be very damaging to the Chinese economy, which is slowing down, and workers in some provinces have become unemployed.
  3. The trade war has also caused anxiety in the European Union and Australia, which are likely to see their trade with China affected. Global trade in goods has been slowing, with exports from trade-dependent nations (such as Japan and South Korea) to China declining. Economists have estimated that other countries could see exports to China drop by as much as 20 %. As of early 2019, Germany’s economy is almost in recession, partly because of the slowing Chinese economy. If the US imposes its threatened car tariffs, a recession in Germany is inevitable.
  4. In the US, concerns were raised that the trade war has reduced business confidence. The decrease in demand from China, which results partly from trade tensions, has hurt the profits of US companies such as Apple Inc. and Caterpillar Inc. On the other hand, consumers and producers in the US are switching to domestically-produced goods due to the higher prices of some imported products from China.
  5. In an attempt to reduce the risk of a sharp economic slowdown, China’s central bank eased monetary policy. Economic data showed that small- and medium-sized manufacturing companies saw the largest negative impact from the slowdown of its economy. Therefore, the government changed the definition of a “small business”, allowing more firms to have access to subsidized lending by state-owned commercial banks.
  6. As the impacts of tax cuts enacted in the US in 2017 are disappearing, the US government is becoming more aware that the US economy is hurt by the trade war and is heading towards slower growth.

Question

Using information from the text/data and your knowledge of economics, discuss the arguments for and against the trade protection measures imposed by the US on China.

▶️Answer/Explanation

Answers may include:

  • Definition of trade protection, tariff, subsidies.

Arguments for trade protection may include:

  • To reduce a trade deficit with China (paragraph [1]), as the imposition of tariffs should reduce import spending.
  • To allow US firms to compete against “unfair trade practices” (paragraph [1]) from China. If China uses unfair trade practices and their goods/services are relatively cheaper, then American goods will not be able to compete and unemployment may rise.
  • Import-substitution might take place due to the tariffs if consumers are able to substitute the previously imported goods with domestically-produced goods (paragraph [4]) at an affordable price, leading to increased revenue for domestic firms and economic growth for the US.
  • Trade protection may have been used for political reasons, rather than economic ones.
  • The US government will gain revenue from the tariffs.

Arguments against trade protection may include:

  • The tariffs have been harming Chinese producers and workers in some provinces have already become unemployed (paragraph [2]).
  • The reduction in Chinese incomes/growth will mean that less is imported from the US, harming US exporters (paragraph [2]).
  • US farmers are suffering from the retaliatory ban on soybeans (paragraph [2]), showing that the original intention of protecting its steel industry is backfiring on the farmers.
  • The trade war is negatively impacting global trade; as Chinese incomes fall they are importing less: export revenue for producers in the EU and Australia (paragraph [3]) is falling.
  • Germany’s economy may hit a recession if the tariffs on cars and car parts are imposed (paragraph [3]).
  • With or without import substitution, consumers are paying higher prices for domestic and imported goods.
  • Prices of inputs might rise; leading to cost-push inflation.
  • Profits of large US companies (such as Apple Inc. and Caterpillar Inc.) have been hurt (paragraph [4]), this is not good for the companies, its shareholders and possibly the workers if they become unemployed. (Since Apple Inc. has production firms in China, it will hurt the US and China alike.)
  • Small and medium-sized firms in China are most hurt (paragraph [5]), which may result in more unemployment if the trade war continues.
  • With trade protection, welfare losses exist, which means that resources are allocated to less efficient producers.

China and global trade

  1. On 15 January 2020, the United States (US) and China signed a deal that reduced some tariffs and required China to buy more from US producers. This was a first step towards resolving a trade war, which had reduced bilateral trade flows by 9 % and investment flows by 60 %. However, critics argued that the deal left most tariffs unchanged and did not deal with deeper disagreements.
  2. The US, the European Union (EU) and Japan are calling for tougher World Trade Organization (WTO) rules on government support for firms that manufacture items such as steel or solar panels. The support, which is often in the form of subsidies, has allegedly undermined competing firms overseas, either by promoting exports or by decreasing imports, and therefore distorted global trade. Other governments also give subsidies, but there are claims that China uses them more extensively.
  3. The proposed WTO rule change would require governments to prove that subsidies do not give domestic firms an unfair advantage over foreign firms and that they do not lead to excess supply in the global market. If the rules are implemented, the WTO may regain some of the authority that it has lost in recent years.
  4. One of the US government’s goals when imposing huge tariffs on Chinese-made goods was to bring back manufacturing jobs to the US. Therefore, despite the new deal, the 25 % tariff on Chinese-made furniture will stay. As a result, many US furniture firms that had used overseas factories to make their US company-branded products have reduced their imports of Chinese-made furniture.
  5. Meanwhile, Vietnam, Cambodia and Bangladesh are benefitting because US manufacturers of wood furniture are setting up factories there. Therefore, some other US producers are asking for the tariff on Chinese-made wooden furniture to apply to all wooden furniture imported into the US, regardless of where it is manufactured.
  6. China is becoming less dominant as an exporter and more integrated into the global trading system. Its current account surplus was over 10 % of gross domestic product (GDP) in 2007, but it declined to just 0.4 % in 2018. Chinese producers are increasingly buying raw materials and other inputs from overseas producers. Although most electronic devices sold in the US are assembled in China, Chinese firms are often dependent on foreign suppliers. If the US and China tried to be less interdependent, it would take more than 10 years for China to become self-sufficient in the production of computer semiconductors and for the US to shift to other suppliers of electronic devices.

Question

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

▶️Answer/Explanation

An understanding that the imposition of a trader barrier can trigger off a series of retaliations by (a) trade partner(s)

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