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Arguments for and against trade control/protection Paper 2

IBDP Economics  HL – 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 IBDP Economics HL- Arguments for and against trade control/protection -Paper 2

Canadian drywall tariffs will continue

  1. Recently imposed Canadian tariffs on drywall imports have pushed up the cost of building a new home by thousands of Canadian dollars (CA\($\)) in the last four months. Drywall is a pre-made wall section that is used in the construction industry for building houses. Doubt as to whether the tariffs will remain is causing uncertainty for building firms, drywall manufacturers and homeowners.

  2. For now, higher prices will continue following a ruling by the Canadian International Trade Tribunal (CITT) this week. The tribunal found that United States (US) firms had been dumping drywall products into Western Canada over the past few years, harming the Canadian drywall industry.

  3. The ruling will end preliminary tariffs of up to 276 % imposed by Canada on imports of drywall from the US. However, they will be replaced by permanent, variable tariffs that would be imposed on imported drywall products whose prices fall below the minimum prices determined by the CITT.

  4. “The preliminary tariff was very damaging to homebuilding,” said a building industry spokesperson. “Not just homebuilding, but hospitals, commercial buildings, indeed any new construction,” he said. “It’s a cost that someone had to pay for. It lowered the profits of house builders.” It has been estimated that the immediate sharp increase in variable costs, following the imposition of the preliminary tariff, resulted in an extra CA\($\)3000 to CA\($\)5000 on the cost of building some homes.

  5. The preliminary tariffs were imposed after a dumping complaint by CertainTeed Gypsum Canada (CTGC), the last drywall manufacturer in Western Canada. CTGC has three major production sites and two gypsum quarries. Gypsum is a main component of drywall.

  6. A CTGC spokesperson had said previously that its plants and quarries could be closed, at the cost of 200 jobs, if the dumping of US drywall products continued. However, since the preliminary tariffs were imposed, the firm has announced that it has hired 30 new employees.

  7. In a separate report, the CITT found that the preliminary tariffs had been “substantially reducing competition” in Western Canada, to the detriment of Canada’s homebuilders. In response, supporters of the tariff have suggested that revenue from the tariffs may be used to help areas that lost large numbers of homes and other structures in devastating forest fires.

Question

Define the term dumping indicated in bold in the text (paragraph [2]).

▶️Answer/Explanation
An explanation that it is the selling of goods in another country:
  • at a price below the cost of production, OR
  • below the price charged in the home market.

Free Trade Agreement between the European Union and Indonesia

  1. The European Union (EU) and Indonesia are currently negotiating a free trade agreement (FTA). The agreement will aim to increase trade, avoid trade protection and expand foreign direct investment (FDI). Indonesia has the largest economy and population in Southeast Asia. The EU is Indonesia’s third-largest trading partner.

  2. The FTA could see the clothing and footwear industry in Indonesia increase by over 10 %. However, the labour-intensive manufacturing industry has historically been known for poor working conditions and low wages. On the other hand, increased output could decrease the high unemployment in Indonesia (currently at 12 %). The EU expects its car industry to benefit from the FTA. The agreement would encourage the EU to specialize in cars, and Indonesia to specialize in clothing, therefore both countries could benefit from comparative advantage.

  3. Since Indonesia’s main competitors already have trade agreements with the EU, establishing an FTA is a priority for the Indonesian government. The EU has a potential market of 510 million consumers, and may offer areas for growth during a time of lower global trade and uncertainty due to the trade war between the United States and China.

  4. However, recent trade issues between the EU and Indonesia have slowed down negotiations. The EU announced that palm oil biodiesel is unsustainable and will phase these fuels out by 2030. Experts say that palm oil causes excessive deforestation and contributes to climate change. Indonesia is the world’s largest exporter of palm oil.

  5. The EU has imposed tariffs on biodiesel exports from Indonesia, which may result in Indonesia losing a market worth over US\($\)450 million. Palm oil represents 12 % of Indonesia’s total exports, contributes approximately 2.6 % to gross domestic product (GDP), and the industry employs more than 15 million people. The EU is Indonesia’s largest palm oil customer. Additionally, some EU manufacturing businesses are unhappy with the tariffs as they rely on palm oil to produce their products, such as processed foods.

  6. In response, Indonesia filed a lawsuit with the World Trade Organization (WTO), stating that the EU’s policy on biodiesel is unfair and is damaging the international image of palm oil. Indonesia claims it is committed to sustainable production practices and to protecting its forests.

  7. To make up for losing the EU’s market, Indonesia is actively exploring other markets to boost its exports of palm oil. Other countries like China, India and Russia have a more relaxed policy on palm oil and have growing demand for it. Indonesia has also retaliated to the tariff through an investigation into whether EU dairy products exported to Indonesia benefited from subsidies, and has recommended a 20 %–25 % tariff on EU dairy products.

  8. However, the EU has tried to lower tensions by offering a US\($\)17 million grant to improve trade conditions and capacity in preparation for the FTA. Experts have said that the FTA could support the development of legal and sustainable palm oil production through supporting good governance and capacity building. Indonesia has stated it would welcome help to decrease any market failure caused by palm oil.

Question

Using information from the text/data and your knowledge of economics, discuss the economic effects on Indonesia of establishing a free trade agreement with the EU.

▶️Answer/Explanation

Answers may include:

  • definition of free trade agreement.

Economic models/theory may include:

  • AD/AS diagram
  • economies of scale diagram
  • PPC
  • market failure
  • trade creation / trade diversion.

Positive economic effects may include:

  • Larger market, increased output, leads to economies of scale (paragraph [3]).
  • More exports increases aggregate demand which increases real GDP, which may help the unemployment rate of 12 % (paragraph [2]).
  • Increased FDI, increases AD, increases real GDP (paragraph [1]).
  • The EU wants to help Indonesia and has offered grants (17 million) help improve trade conditions and capacity, this could lead to improved quality and quantity of resources (paragraph [8]).
  • Relationship could help with development of legal and sustainable palm oil production, decreasing market failure (paragraph [8]), allow for long term growth and development.
  • To be competitive, as other main competitors already have an agreement (paragraph [3]). Indonesia may risk losing export customers if they do not establish an FTA.
  • Comparative advantage gains (paragraph [2]), better allocation of resources.
  • Buffers problems with trade war between US and China (paragraph [3]).
  • Already the two countries appear to be engaging in the trade war. An agreement might help with relations.
  • To avoid trade protection (paragraph [1]).
  • Trade creation.
  • Lower prices, more variety for Indonesian consumers.
  • Allows Indonesia to get foreign exchange.
  • Access better/cheaper technology.

Negative economic effects may include:

  • The trade might be restricted by the EU’s stance on biofuel from palm oil (paragraph [5]). This may restrict benefits from the trade agreement as it is a large part of Indonesia’s economy.
  • The areas of predicted growth from the agreement are industries that face low wages and poor working conditions, this may be further exploited (paragraph [2]).
  • FDI associated problems (paragraph [1]).
  • Could be a problematic negotiation (time consuming and costly), considering the trade war that appears to be occurring with the countries (paragraph [5] and [6]).
  • Trade diversion.
  • Infant industry argument.
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