Paper 3 question on tariffs, export subsidies and protectionism
Paper 3 sample question
IB Economics Paper 3 includes two compulsory questions. This is a sample Paper 3 question. The time allowed for Paper 3 is 105 minutes so students should spend 52.5 minutes on each question.
This paper 3 style question is on tariffs, export subsidies and protectionism.
Questions
AnswersThe EU and the US respond to growing Chinese imports of electronic vehicles
The market for electric vehicles (EVs)continues to grow globally, with annual growth of 35% in 2023, with 14.2 million units sold worldwide. There is also growing tension between countries as the international trade in EVs becomes increasingly protectionist. Many countries see the threat posed by cheap Chinese EVs as a particular problem for their car makers. [Paragraph 1]
China dominates the world's EV market, with 66% of the global manufacturing capacity. Many in the automotive industry believe Chinese EV producers benefit from government subsidies. The US-based Centre for Strategic and International Studies claim the Chinese government have paid $100 billion in subsidies to the EV industry in the country since 2009, although Chinese government officials dispute the figures. [Paragraph 2]
What is seen as a ‘flood’ of EVs from China is being met by trade barriers from the EU and the US. The EU has announced a 38% tariff on EVs imported from China, and the White House is considering a 100% tariff. The Chinese government has responded aggressively to the US and EU’s tariffs, threatening to lodge legal action with the World Trade Organisation and responding with their own trade barriers. The use of tariffs by different countries in the EV markets risks a trade war between the EU and China and the US and China. If this happens, protectionism could run over into other sectors, such as consumer electronics and agricultural markets. [Paragraphs 3]
In many ways, a surge in the global supply of EVs is a good thing for consumers as prices fall, and if more people replace their petrol and diesel cars with EVs, it has to be good for the environment with reduced carbon emissions. Using tariffs will reduce the benefits to buyers of EVs that come from lower prices. However, as is often the case with protectionism, political factors come into play. Lobbyists from the EU and US automotive sectors will pressure politicians to protect the profits of car manufacturers and the jobs of workers threatened by cheap Chinese EVs. [Paragraph 4]
Diagram 1 shows the market situation for EVs in the Chinese Economy (based on forecasted data for 2024 from an economic consultancy). [Paragraph 5]
Questions
a. (i) Define the term export subsidy. [2] Paragraph 2
An export subsidy is a payment made to a country's export producers to encourage them to increase the quantity they supply in overseas markets.
(ii) Using the data in diagram 1, calculate the value of China’s exports of EVs. [2]
7.8m - 5.4m = 2.4m
2.4m x $30,000 = $72,000m or $72bn
If the Chinese government puts a $5,000 export subsidy on its EVs, the quantity supplied of Chinese EVs in China increases to 8.5 million units, and the quantity demanded of Chinese EVs in China decreases to 5.1 million units. Calculate the following:
(iii)The quantity of Chinese EVs exported. [2]
8.5m - 5.1m = 3.4m
(iv) The value of the subsidy paid by the Chinese government. [2]
3.4m x $5,000 = $17,000m or $17bn
The US government has proposed a $12,000 tariff on the imported EVs from China, which decreases the US quantity demanded of EVs from 9.2 million to 8.6 million units, and the quantity supplied of EVs from US manufacturers has increased to 3.8 million units from 3.5 million units. Using this data, calculate:
(v) The value of the EV tariff revenue raised by the US government. [2]
8.6m - 3.8m = 4.8m
4.8m x $12,000 = $57,600m or $57.6bn
(vi) The decrease in the value of EV consumer surplus in the US resulting from the $12,000 tariff. [2]
($12,000 x 8.6m) + ($12,000 x 0.6 / 2) = $103,200 + $3,600 = $106,800m or £106.8bn
(vii) Using a tariff diagram, explain what you would expect to happen to the EV producer surplus of US EV producers following the decision of the US government to impose a tariff. [4]
US tariff on imported cars from China would increase the world price by $12,000, increasing the producer surplus of US EV producers from area ABC to area CDE.
(viii) Explain the two types of welfare loss that might occur because of the tariff imposed on imported EVs. [4]
The two types of welfare loss resulting from the tariff imposed by the US government on EVs are:
- The welfare loss of US producers as less efficient US firms enter the US market because of the tariff on EVs.
- The welfare loss of consumer surplus of US consumers who no longer buy an EV because of the higher price resulting from the tariff.
b. Using the text/data provided and your knowledge of economics, recommend a policy that may be implemented by the US government to reduce the imports of Chinese-made EVs. [10]
Policies might include:
- Tariffs
- Quotas
- Subsidies
- Administrative barriers
Sample policy answer
The US government could impose tariffs on imports as a way of reducing imports. Tariffs are a tax on imported goods such as electric vehicles. ‘The White House is considering a 100% tariff.’
A tariff on imported EVs from China will increase their price in the US which will decrease the US quantity demanded and increase the US quantity supplied leading to a decrease in imports of EVs into the US. This is shown in the tariff diagram below where the quantity of imports falls from Q – Q1 to Q3 – Q2 million units.
Evaluation
The advantages of this policy include:
Using tariffs raises tax revenue for the US government which can be used to fund public spending. This is shown by the blue area on the tariff diagram.- The tariff will increase the producer surplus of US EV manufacturers from area BGF to area FEH which could increase their profits and create employment. ‘Protect the profits of car manufacturers along with the jobs of workers’
The disadvantages of this policy include:
- The price of imported EVs for US consumers will increase and this decreases their consumer surplus. The decrease in the consumer surplus is shown by area EDCB on the tariff diagram. This could also lead to a welfare loss of consumer surplus from those buyers who no longer purchase an EV because of the tariff. This is shown by the yellow area on the tariff diagram. ‘The use of tariffs is going to reduce the benefits to buyers of EVs that come from lower prices.’
- If the tariff brings inefficient US producers into the EV market it could lead to a welfare loss. This is shown by the red area on the tariff diagram.
- The use of tariffs by the US government could lead to retaliation by the Chinese government which could lead to a trade war and could adversely affect other markets. ‘The Chinese government has responded aggressively to the EU’s tariffs’