IB Economics 4.1.1 Benefits of international trade

Practise free-trade diagrams, import and export calculations, welfare effects and trade-agreement impacts in IB Economics HL questions.

[Maximum number: 4]

Study the extract and data below and answer the questions that follow.
American shrimp farmers taste victory

(1) American shrimp farmers have received good news from a United States (US) ruling that could lead to tariffs being imposed on imports from competing countries.

(2) US producers in the Gulf Coast were suffering from a significant oil spill in 2010. The higher fuel costs as a result of the spill have made it hard to compete with foreign shrimp farms, which they say receive government subsidies. The US producers claim such subsidies threaten to destroy the domestic shrimp business. The US imported 1200 million pounds (lb) of shrimp last year and produced 100 million pounds (lb) of shrimp domestically.

(3) The US Department of Commerce ruled that five countries - China, Ecuador, India, Malaysia and Vietnam - improperly subsidized shrimp that were exported to the American market. The department rejected accusations of improper subsidies by Thailand and Indonesia, two of the biggest US shrimp suppliers.

(4) The US International Trade Commission will now have to decide whether the subsidies harmed the American industry. If so, the US would impose tariffs on shrimp imports from the five countries. The proposed US tariffs could be as much as 54.5 %.

(5) The US shrimp farmers claim that the Indian government pays extra to cover shipping costs on shrimp going to the US and that China provides subsidized loans to its shrimp farmers. They argue that these violate World Trade Organization (WTO) rules.

(6) The five countries disputed the US Department of Commerce's decision. The Vietnamese producers state that, "This is an unfair decision affecting the lives of more than 600000 shrimp farmers and processors in Vietnam". Chinese officials have said that there was no evidence of improper Chinese subsidies and that US tariffs on Chinese shrimp would violate WTO rules.

(7) The US shrimp farmers say they need tariffs to allow them to compete fairly with Asian farmers, noting that high fuel prices are keeping some shrimp boats at the dock. "The price received by our farmers is not enough to cover their variable costs," said a lawyer, who represents the US shrimp farmers.

(8) Large US retailers and food distributors oppose the tariffs saying that the US shrimp industry had support from the oil company, BP, which has paid billions of US dollars to those affected by its 2010 oil spill.

(9) US politicians and shrimp farmers commented on problems they are facing, saying that, "not only is shrimping an industry, but it is a way of life".

Figure 1: Amount of shrimp imported to the US compared with domestic catch (thousands of tons)

Using a supply and demand diagram with international trade values from the text, explain the statement that "The US imported 1200 million pounds (lb) of shrimp last year and produced 100 million pounds (lb) of shrimp domestically" (paragraph (2)) (Does not need to be to scale).

Level

0 The work does not reach a standard described by the descriptors below.

1 There is a correct diagram or an accurate written response. For drawing a correctly labelled international trade diagram, showing a domestic supply of 100 million lb and an imported supply of 1200 million lb or explaining that at the world price, US shrimp farmers are only willing to supply 100 million lb and that the rest of the domestic demand is met by imports of 1200 million lb.

2 There is a correct diagram and an accurate written response. For drawing a correctly labelled international trade diagram, showing a domestic supply of 100 million lb and an imported supply of 1200 million lb and explaining that at the world price, US shrimp farmers are only willing to supply 100 million lb and that the rest of the domestic demand is met by imports of 1200 million lb.

The numbers do not have to be on the diagram. Full marks may be awarded if the numbers from the text are used in the explanation with correct references to the quantities indicated on the diagram (eg 0Q1 is domestic supply of 100 million lb and Q1-Q2 is the imported amount of 1200 million lb ).

The use of P and Q on the axes is sufficient for a demand and supply diagram. The world supply curve must be labelled $S_{w}$ or $S_{\text {world }}$ (to distinguish it from the domestic supply curve). S or $S_{D}$ are both fine for the domestic supply curve.

Figure for Answer to Question 4.1.1—Benefits of international trade question 1 — IB Economics HL

All question bank results loaded

4.1.1—Benefits of international trade question 1