IBDP Economics SL – The global economy – Benefits of international trade -Paper 2 Exam Style Practice Questions
Benefits of international trade Paper 2?
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Exam Style Question for Benefits of international trade -Paper 2
China’s trade reforms
- The Chinese government has announced a set of free trade measures, including lower import tariffs on cars, soybeans and pharmaceuticals, in an attempt to end a trade war with the United States (US).
- The US government has long accused China of engaging in unfair trade practices to maintain their current account surplus. The trade dispute between the two largest economies intensified when the US said it would impose anti-dumping tariffs on Chinese steel and aluminium.
- The trade war with the US comes at a bad time given the slowdown in China’s domestic demand. In recent years, China’s economic growth has relied less on investment and exports and more on consumption expenditure.
- Producers of many Chinese manufactured goods currently benefit from protectionist measures. In particular, imports of industrial equipment, medical devices, tractors and vehicles are subject to high tariffs.
- Automobile production capacity in China is growing. However, the domestic market is becoming oversupplied, with more cars being offered for sale than Chinese consumers want to buy. For this reason, Chinese car manufacturers are seeking to export their cars to other markets. They are therefore eager to see reduced trade tensions as increased US tariffs would make it harder to export Chinese cars to the US.
- Some Chinese car manufacturers are already focusing on adding advanced capabilities to their cars in order to be more competitive in global markets. China is increasing its efforts to become a world leader in self-driving cars. These will be intelligent cars that will improve transport efficiency and meet energy-saving and emission-reduction targets. Many believe that Chinese companies are so innovative that they no longer require protection from international enterprises.
- However, many Chinese firms remain dependent on imported factors of production. Approximately 30 % of Chinese exports are manufactured using imported equipment and components. The reduction of tariffs would therefore lower prices not only for producers but also for consumers of Chinese goods.
Question
Using information from the text/data and your knowledge of economics, evaluate the impacts of free trade measures on China’s economy.
▶️Answer/Explanation
Answers may include:
- Definition of free trade.
Benefits of reduced tariffs:
- Lower risk of retaliation and trade war (paragraphs [2] and [5])
- The increase in export revenue could help compensate for the decrease in consumption and combat the economic slowdown (paragraph [3])
- Greater choice and lower prices for Chinese consumers and in particular for agricultural producers, provider of medical services who may purchase foreign tractors and medical devices at a lower price (paragraph [4])
- Lower tariffs will reduce import prices leading to lower input costs for firms relying on imported components (potential increase in SRAS) (paragraph [7])
- Increased competition from trade and foreign firms may lead to product innovation and greater efficiency (paragraph [6])
- More efficient allocation of resources as US and China specialize and trade
- The current account surplus could be eroded (paragraph [1]) and this may prevent currency appreciation hence benefitting exporters (but at the expense of consumers who may see their real income reduced).
Limitations of reduced tariffs:
- Lower tariffs may increase the amount of imports, which could lead to lower AD. This could lower economic growth given the current slowdown in domestic consumption (paragraph [3])
- Decreased consumption of domestic products could lead to (structural) unemployment in the manufacturing sector (paragraph [4])
- There could be an opportunity cost for the government due to the loss of tariff revenue (paragraph [1])
- More competition for Chinese car manufacturers who are currently facing an oversupply and possible impact on domestic employment in the industry (paragraph [5]).