Protectionism |Model Answers
A-level Economics
Using the data in the extracts and your economic knowledge, evaluate the view that the use of protectionism is inevitably damaging to economies.
This question has been pulled from the AQA Paper 2 Specimen | Link Here
Let’s see how you get on with this question. I have provided some insight about how you might answer this question below. You can use the following two pages to help you on the economic knowledge. Read the extracts pasted in below to help you answer this question more effectively.
Extract B:
Transatlantic free trade? David Cameron today confronted his critics by making the positive case for continuing European Union membership as he held talks with President Barack Obama over a giant USEU trade deal that could provide a £10bn annual boost to the UK economy. With his party in renewed turmoil over Europe, the Prime Minister sought to reassure the White House (where senior figures in the Obama administration have insisted they regard the UK as a crucial member of the union) that the UK are not looking to leave the EU. The planned agreement would establish a free trade area between the world’s two largest trading blocs, creating a transatlantic market of 800 million consumers. Writing in today’s Wall Street Journal, Mr Cameron says: “This deal could add as much as £10bn to the UK economy and £63bn to US GDP. But the rest of the world would benefit too, with gains that could generate €100bn (£84bn) worldwide”. The Government last night released research suggesting a US-EU agreement sweeping away trade barriers would particularly benefit the automotive, financial and chemical sectors. It claimed the deal could be worth £380 a year for each British family. Karel de Gucht, the European Commissioner for Trade, has cited the deal as a prime reason for the UK staying in the EU, telling The Independent last week that it would be “clear madness” for the UK to leave in light of such a deal. 1 5 10 15
Source: Adapted from: © www.independent.co.uk 13 May 2013
Extract C:
China and Europe risk trade war China this week responded to EU anti-dumping tariffs on solar panels with a levy on European wine. However, by attacking wine producers, Beijing has potentially turned a straightforward dispute over state subsidies between Germany and China into a full-blown European trade war. France has effectively been targeted in retaliation for a levy designed to protect German manufacturers in what appears to be a deliberate attempt to increase tensions within the EU. In doing so, experts said that China, which is relatively new to the politics of global trade, has demonstrated smart tactics. The danger is that China may decide to target other seemingly innocent parties if the row escalates, and that might mean the UK. Increased protectionism could be damaging as the UK is placing much of its hope for export success on the growing Chinese market. In the last five years, UK goods exports to China have virtually doubled to £15.9bn and, three years ago, David Cameron set a $30bn (£20bn) target by 2015 as part of a bilateral deal with Beijing. Including Hong Kong, China is now the UK's fifth largest net trading partner. However, China’s influence in the UK stretches wider. At the end of 2011, foreign direct investment into the UK from China totalled £1.3bn, the second largest in the EU after Germany. In the last six months alone, China’s telecoms giant Huawei has announced plans to invest £1.3bn in a new plant while ABP (a large Chinese investment group), plans to spend £1bn developing the Royal Albert Dock in London. The Government also hopes to attract Chinese money to invest in UK infrastructure as part of George Osborne's ‘Plan for Growth’. In other words, China is a key part of the Government’s economic recovery plan.
Source: ©Telegraph Media Group Ltd 2013
Model Answer Insights
Example Points for your Model Answers
‘China this week responded to EU anti-dumping tariffs on solar panels with a levy on European wine’
This quote from Extract C shows a disadvantage of protectionism straight out of the gates. The key is that China has ‘responded’ to EU anti-dumping tariffs. Why is this a disadvantage? It is a disadvantage because it is a signal of a trade war between the EU and China. This is one of the textbook arguments against protectionism that you should know by reading my revision pages.
However, in the same extract it also says this was a ‘deliberate attempt to increase tensions within the EU’. ‘China may decide to target other seemingly innocent parties if the row escalates, and that might mean the UK’.
One could argue this is a disadvantage of free trade areas. France and the UK is part of a free trade bloc (the EU). Therefore, because China is upset with Germany, China is targeting European wine - so essentially they are bringing France into the debate, even though this has nothing to do with France. If France were more protectionist e.g. they were not in the EU, they would no have this problem right now. This point can be back by the following quote: ‘China may decide to target other seemingly innocent parties if the row escalates, and that might mean the UK’
‘Hope for export success on the growing Chinese market’
This quote suggests that as the Chinese get richer and more developed, they should buy more of our products. This point can be further evidenced with the quotes below.
‘In the last five years, UK goods exports to China have virtually doubled to £15.9bn’
‘Including Hong Kong, China is now the UK's fifth largest net trading partner.’
This is a disadvantage of protectionism. Free trade promotes more global trade and wealth. As China has been achieving economic prosperity over the decades, the UK has also done better overall. Our balance of trade has suffered, however, we have still managed to achieve strong economic growth overall. As the UK has a comparative advantage in luxury goods and services, increasing Chinese GDP per capita should mean more export revenues for Britain.
However:
‘£1.3bn in a new plant while ABP (a large Chinese investment group), plans to spend £1bn developing the Royal Albert Dock in London.’
‘At the end of 2011, foreign direct investment into the UK from China totalled £1.3bn’
While these quotes may seem like straightforward benefits at first, there is something else you have to consider; why is China investing so much money in Britain? And, where is all the money coming from?
Firstly, China is not investing in the UK to do us any favours. They are investing to get a return on investment: profit. This is understandable as profit is the reward received for risk-taking behaviour. However, these profits are unlikely to be retained within the UK, and they are instead likely to go back to China. This would show up as an outflow in our balance of payments current account.
[‘Investment income’ is recorded in the current account section of the BoP]
Secondly, where did the investment money come from? Sure, it came from China, but where did China get this money? A significant proportion of China’s GDP growth comes from global trade, so essentially China is using the money it gets from our import spending to fund its investment in other countries. Wouldn’t it be better if we encouraged more investment within our own country? Perhaps, but perhaps not. As mentioned above, profits from foreign direct investment (FDI) aren’t usually retained, so count less towards our GDP growth.
Another benefit for protectionism is as follows:
‘The UK is placing much of its hopes for export success on the growing Chinese market.’
The word ‘hope’ is something to focus on here. It suggests that the UK is relying on China to become successful and then spend their money on our exports. An argument for protectionism could be that the UK becomes more independent, rather than dependent on other countries. This would mean a wider variety of skills within the UK - this could mean less structural unemployment caused by offshoring production.
The question also asks that you use your own economic knowledge about protectionism to aid your answer. Here are the textbook arguments for and against protectionism.
Benefits of Protectionism
1. Protects jobs
2. Protects infant industries – an industry that has a lot of potential and is capable of competing with established firms in the future – but they have a high risk of going out of business early in the business’ life
3. Ban specific products that are bad for society
4. Increases independence
5. Protects against ‘dumping’ - when companies sell goods abroad at below production costs in order to put competitors out of business
6. Can correct imbalances in the Balance of Payments
Disadvantages of Protectionism
1. Increased costs for consumers
2. Decreased variety for consumers
3. Decreased global efficiency due to less specialisation and division of labour
4. Misallocation of resources
5. Trade war potential
6. Companies can grow too dependent on protectionist policies. Once they’re removed, these companies could easily go out of business
You can embed the textbook arguments listed above to give more strength to your answers.
One thing you could focus on is the word ‘inevitably’ in the question. Do you agree that protectionism is inevitably bad for economies? Surely, if that were the case then all economies would have all gone free trade by now. In trade, there are winners and losers: especially when we have things like global monopolies. Don’t forget that when you’re writing your answer.
Ultimately, there are many avenues you could go down with this question. It’s really up to you and your belief system. Just make sure when you make a point it is accurate, and you try and give alternative views to your own. It is very easy to become caught up with your own ideas and views. Applying this makes you a better economist (and politician) overall.
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