A-Level Economics May/June 2024 Q1(d): Assess whether the removal of all protectionism is likely to reduce the balance of trad…

1 answer

• ▲0
  accepted ✓

  A trade deficit occurs when the value of a country's imports exceeds the value of its exports (M > X). The removal of all protectionism, such as tariffs and quotas, would have conflicting effects on the balance of trade.

  On one hand, removing protectionism could worsen the trade deficit. Tariffs make imported goods more expensive for domestic consumers. Their removal would lower the price of imports, likely leading to an increase in the quantity demanded and a rise in total import expenditure. This would widen the trade deficit, ceteris paribus. Furthermore, protectionism is often used to shield infant industries or declining strategic sectors from foreign competition. Removing this protection could lead to the collapse of these domestic firms, reducing domestic output and increasing reliance on imports to meet demand, further worsening the deficit. [M1, M1]

  On the other hand, removing protectionism could help reduce the trade deficit. Firstly, it would eliminate the risk of retaliatory tariffs from trading partners. If other countries also lower their barriers, this country's exports become cheaper and more competitive abroad, leading to a potential increase in export revenue. Secondly, many domestic firms rely on imported raw materials and components for their production processes. Removing tariffs on these inputs would lower their costs of production. This could translate into lower prices for their final goods, making their exports more price-competitive on the global market and boosting export revenue. [M1, M1]

  In conclusion, whether the removal of all protectionism is likely to reduce a trade deficit is uncertain and depends on several factors. The net effect on the trade balance (X-M) hinges on the relative price elasticities of demand for imports and exports. If demand for exports is highly elastic, the fall in their price (due to lower input costs or removal of retaliation) could lead to a proportionally larger increase in quantity sold, significantly boosting export revenue. Conversely, if demand for imports is inelastic, the fall in their price will not cause a large increase in import expenditure. [E1]

  Furthermore, the time frame is critical. In the short run, the removal of protectionism is very likely to worsen the trade deficit as consumers switch to cheaper imports and domestic firms struggle. However, in the long run, the increased competition may force domestic industries to become more efficient, innovative, and internationally competitive. This long-run improvement in efficiency could lead to a sustainable increase in exports that eventually reduces the trade deficit. Therefore, the policy is more likely to succeed in the long run, provided the domestic economy can adapt successfully. [E1]

  ---

  How the marks are awarded

  • M1 — Explaining an advantage of retaining protectionism: removing it would make imports cheaper, increasing import expenditure and worsening the deficit. This is linked to the first point in the second paragraph.
  • M1 — Explaining a further advantage of retaining protectionism: it shields infant/declining industries, and removing it could cause them to collapse, increasing import dependency. This is the second point in the second paragraph.
  • M1 — Explaining an advantage of removing protectionism: it avoids retaliatory tariffs from other countries, which can make a country's exports more competitive and increase export revenue. This is the first point in the third paragraph.
  • M1 — Explaining a further advantage of removing protectionism: it lowers the cost of imported raw materials for domestic firms, reducing their production costs and making their exports more price-competitive. This is the second point in the third paragraph.
  • E1 — Providing evaluation by considering the conflicting effects on imports and exports and reaching a conclusion based on the concept of price elasticity of demand (PED) for both. This is covered in the fourth paragraph.
  • E1 — Providing further developed evaluation by distinguishing between the short-run and long-run effects, concluding that the deficit may worsen initially but could improve in the long run due to increased efficiency and competitiveness. This is covered in the final paragraph.

  Common mistakes

  • Providing a one-sided answer, typically only focusing on how removing tariffs increases imports and worsens the deficit.
  • Confusing the balance of trade deficit with the government's budget deficit, for example by discussing the loss of tariff revenue for the government.
  • Failing to provide any evaluation, instead just listing points for and against without a concluding judgement.
  • Making assertions without explanation, e.g., stating 'exports will rise' without explaining the mechanism (such as lower input costs or removal of retaliation).

  Examiner tip: For any 'assess' or 'evaluate' question, always structure your answer by presenting both sides of the argument before reaching a justified conclusion that considers key economic concepts like elasticity or time periods.

  ---

  AI-generated model answer, grounded in the official Cambridge mark scheme and reviewed by the MarkScheme team. Mark your own answer to this question →

  @markscheme_answers

Your answer

Sign in to answer this question.