Both China and the United States have been gradually increasing the tariffs imposed on each other’s exports as their trade dispute continues. The IMF estimated that the trade dispute between China and the United States would reduce global GDP growth by 0.8 percentage points by the end of 2020. Evaluate the likely impact of an increase in protectionism on the global economy.

A-Level Edexcel Economics A Role of the State in the Macroeconomy: Both China and the United States

Both China and the United States have been gradually increasing the tariffs imposed on each other’s exports as their trade dispute continues - Edexcel - A-Level Economics A - Question 7 - 2022 - Paper 2

Question 7

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Both China and the United States have been gradually increasing the tariffs imposed on each other’s exports as their trade dispute continues. The IMF estimated that ... show full transcript

Worked Solution & Example Answer:Both China and the United States have been gradually increasing the tariffs imposed on each other’s exports as their trade dispute continues - Edexcel - A-Level Economics A - Question 7 - 2022 - Paper 2

Step 1

Higher prices for consumers, especially on goods/services that cannot be produced domestically

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Answer

As tariffs increase, the cost of imported goods rises. This leads to higher prices for consumers, particularly on items that cannot be produced domestically. For example, if the UK imposes tariffs on bananas, consumers will face higher prices as the cost of importing these goods is passed on.

Step 2

Higher prices for consumers due to domestic firms facing less competition from abroad

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With increased tariffs, domestic firms may face reduced competition from foreign imports, allowing them to raise prices without the fear of losing market share. This could lead to a general increase in living costs for consumers.

Step 3

Less choice for consumers as imports become too expensive

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Increased tariffs can limit the availability of imported goods, drastically reducing choices for consumers. This can lead to a situation where consumers are forced to accept more expensive substitutes.

Step 4

Fewer firms may decide to export due to increased cost/bureaucracy

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High tariffs may deter domestic firms from exporting due to increased costs and bureaucratic hurdles associated with trade licenses and compliance with international tariffs. This reduction in exports can lead to decreased global economic activity.

Step 5

Reduction in comparative advantage

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Protectionist policies can diminish a country's comparative advantage in certain sectors by encouraging over-dependence on domestic production. This may lead to inefficiencies and ultimately lower productivity and economic growth.

Step 6

Evaluation of the likely impact

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The impact of protectionism on the global economy is complex and varies by country. While it may protect certain domestic industries in the short term, it can lead to long-term economic inefficiencies, potential retaliation from trading partners, and global trade tensions. The overall effect might be a decline in GDP growth both domestically and globally, highlighting the interconnected nature of modern economies.

Both China and the United States have been gradually increasing the tariffs imposed on each other’s exports as their trade dispute continues - Edexcel - A-Level Economics A - Question 7 - 2022 - Paper 2

Worked Solution & Example Answer:Both China and the United States have been gradually increasing the tariffs imposed on each other’s exports as their trade dispute continues - Edexcel - A-Level Economics A - Question 7 - 2022 - Paper 2

Higher prices for consumers, especially on goods/services that cannot be produced domestically

Higher prices for consumers due to domestic firms facing less competition from abroad

Less choice for consumers as imports become too expensive

Fewer firms may decide to export due to increased cost/bureaucracy

Reduction in comparative advantage

Evaluation of the likely impact

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