Question 21M.2.SL.TZ0.1d
| Date | May 2021 | Marks available | [Maximum mark: 8] | Reference code | 21M.2.SL.TZ0.1d |
| Level | SL | Paper | 2 | Time zone | TZ0 |
| Command term | Evaluate | Question number | d | Adapted from | N/A |
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.
[Source: According to a report on ResearchAndMarkets.com. China’s Auto Revolution, 2018 - China Poised to Become Major Auto Exporter. Available at: https://www.prnewswire.com/news-releases/chinas-auto-revolution-2018---china-poisedto-become-major-auto-exporter-300720917.html [accessed 28 September 2018]. Source adapted.]
Using information from the text/data and your knowledge of economics, evaluate the impacts of free trade measures on China’s economy.
[8]
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the information provided.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations.
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]).
Any reasonable evaluation.
Most candidates scored marks in the mid/top range of Level 2 or low range of Level 3. Arguments both for and against the free trade policies were generally well understood and explained, but some responses made minimal effective use of the text. Many candidates assumed that the US and other countries would also adopt free trade policies towards China. While that is a valid assumption, candidates should explicitly state they are making that assumption.
To reach Level 3, candidates need to use the text and their knowledge of economics to enrich arguments which are already mentioned in the text. This was sometimes done by considering that Chinese exports seem very competitive and may not enjoy much benefits from ease in tensions between China and the rest of the world. At times, candidates brought arguments that did not seem to fit in the context set in the text. In particular, the idea that free trade policies would be detrimental to infant industries in China — a valid point — but went on to identify the Chinese automobile industry as an infant industry. To be considered as effective, this argument should be supported with examples of industries which could be considered as 'infant' in China without conflicting with the information from the text.
