Practise evaluating trade protection with IB Economics SL questions that weigh infant-industry, dumping, growth, stakeholder and retaliation arguments against free trade.
Study the extract and data below and answer the questions that follow.
Ecuador sees 2014 trade deficit falling with new import rules, but at what cost?
(1) In the period from January to May 2014, Ecuador posted a trade surplus of US$483 million, moving from a deficit of US$626 million one year before.
(2) The government has been implementing an import-substitution policy to reduce the trade deficit. On 4 December 2013, Ecuador's Foreign Trade Committee established new quality control measures for the importation of 293 items, including cosmetics, toys, toothpaste, meat and cereals. In order for goods on the list to be imported a certificate needs to be obtained, ensuring that the products meet quality control standards. There are up to 13 steps to be taken before a product may enter as a result of the excessive regulations holding up the certificates.
(3) The import-substitution policy also involves a move to provide support to domestic industries. The president firmly believes in the benefits of sheltering infant industries. He has complained about imports such as coconut water, banana puree or cornflakes, which he believes could be produced by domestic industries, supported by appropriate policies. In addition, he points out that Ecuador is a top exporter of fine aroma cocoa, but imports approximately US million worth of chocolate per year. Other measures to protect domestic industries include anti-dumping measures and higher tariffs on raw materials and capital equipment that are available in Ecuador.
(4) In the month since this intervention started, different businesses have begun to feel both the advantages and disadvantages. Pica, one of the largest companies in the plastic industry, has taken advantage of the policy. The reduction in the importation of certain products has allowed them to increase their own production.
(5) In contrast, Toni Industries, one of the most important dairy businesses in the country has suffered. It has complained that cornflakes, which the company uses as a complementary good to one of its key products, could not get through customs because it did not have the quality control certificate.
(6) Many industry analysts and economists argue that closing off imports will isolate the country and create a false sense of competitiveness. They are also concerned that the government seems to be assuming that other countries will not react. Some argue that the government should seek to create incentives for investment, like tax benefits, or legal security, which would allow the entry of new competitors into the Ecuadorean markets.
Table 1: Selected exports and imports for Ecuador, January to May 2014
www.latinvex.com, 19 March 2014 and www.blogs.wsj.com, 14 July 2014]
Define the term infant industries indicated in bold in the text (paragraph 3).
Study the following extract and answer the questions that follow.
China's trade reforms
(1) 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).
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
Define the term trade war indicated in bold in the text (paragraph (1)).
Using information from the text/data and your knowledge of economics, evaluate the impacts of free trade measures on China's economy.