Global Trade & Tariffs

Definition (1 mark): A tariff is a tax levied by a government on imported goods, raising their domestic price relative to home-produced substitutes.

Reason — any one of (1 mark): To protect domestic manufacturing from lower-cost Chinese competition; to reduce the US–China bilateral trade deficit; to retaliate against alleged unfair practices (dumping/subsidies); to raise government revenue; or to reduce strategic dependency on Chinese supply chains (e.g. semiconductors, rare earths).

Consumer surplus (2 marks): A tariff raises the domestic price above the world price (Pw → Pw+t). Consumers face higher prices and reduce quantity demanded. The consumer surplus triangle — above the price line and below the demand curve — shrinks. J.P. Morgan data confirms this: tariffs cost US households approximately $1,000 each.

Producer surplus (2 marks): Domestic producers benefit from the higher tariff-inclusive price: they can sell more output at a greater margin. Producer surplus expands as firms move up the domestic supply curve. However, this gain is smaller than the consumer surplus loss, creating a net deadweight welfare loss overall.

Chain 1 — Export revenues & current account (2 marks): A slowdown in world trade reduces demand for commodity exports (e.g. oil, copper, agricultural goods). Export revenues fall, worsening the current account of the balance of payments. This reduces foreign currency inflows, potentially destabilising the exchange rate and limiting the ability to service foreign debt.

Chain 2 — Aggregate demand and growth (2 marks): Lower export earnings reduce the injection into the circular flow of income (X falls). Via the multiplier, national income falls by a larger amount than the initial export decline. Firms face lower profits and cut investment; unemployment rises. Government tax revenues fall while welfare spending rises, widening the fiscal deficit.

Chain 3 — Development constraints (2 marks): The Prebisch-Singer hypothesis predicts that commodity prices tend to decline relative to manufactured goods over time. A global trade slowdown intensifies this, compressing fiscal space for infrastructure, education and health spending — all key drivers of long-run LRAS growth. UNCTAD notes that smaller economies have "limited capacity to absorb higher costs or redirect exports."

Government failure argument (4 marks): Government failure occurs when intervention produces a net welfare loss. Evidence supports this interpretation: (i) Unintended consequences — tariffs intended to protect US industry raised costs for downstream manufacturers dependent on Chinese inputs (e.g. Apple's $900m restructuring costs; near-shutdown of auto supply chains when China restricted rare earths). (ii) Consumer welfare loss — $1,000 per household in higher prices; inflation rose despite the Fed's efforts, creating a stagflationary dilemma. (iii) Trade diversion, not creation — supply chains shifted to Vietnam and India, not necessarily to US producers. (iv) Legal overreach — the Supreme Court ruled key tariffs unlawful (Feb 2026), suggesting the policy lacked proper authority, adding further regulatory uncertainty.

Counter-argument / nuance (4 marks): The case for government failure is not unambiguous. Proponents argue tariffs pursued legitimate strategic objectives: reducing dependency on Chinese rare earths and semiconductors addresses national security concerns that markets under-provide for (a classic market failure). Some US manufacturing employment rose in early 2025. Moreover, China's own use of export controls (rare earths weaponisation) suggests the market was already failing to deliver efficient outcomes. The policy may be better characterised as government intervention with mixed results rather than clear-cut failure. Brief evaluative judgement required for full marks.

Introduction / context: Global protectionism has surged: the WTO reports nearly 20% of world imports are now subject to new restrictive measures — the highest in 15+ years. For developing countries, this represents a major external shock affecting trade, investment, and long-run development.

Argument 1 — Deteriorating export prospects (3 marks): Trade liberalisation has historically underpinned export-led growth in developing economies (e.g. East Asia). Rising tariffs in developed nations reduce market access for developing-country exporters. Smaller economies with less diversified export bases (commodity-dependent ones, per Prebisch-Singer) are most exposed. Falling export revenues reduce AD, government revenues, and the foreign exchange needed for capital-good imports that drive LRAS growth.

Argument 2 — Supply chain relocation: opportunity or threat? (3 marks): The rerouting of supply chains away from China created opportunities for Vietnam, India, and Mexico. This represents potential FDI inflows, employment creation, and technology transfer for some developing nations. However, UNCTAD warns that "more peripheral economies risk being sidelined unless they improve logistics, skills and the investment climate" — suggesting the benefits are unevenly distributed and conditional on existing infrastructure and institutions.

Argument 3 — Fiscal and debt constraints (3 marks): Rising tariff revenues in developed countries reduce developing-country export income, lowering their tax revenues. This limits public investment in education, healthcare, and infrastructure — all critical to long-run human development (HDI). Countries reliant on IMF/World Bank support may face conditionality constraints that limit policy space to respond. Capital flight becomes more likely in an uncertain environment, further constraining development finance.

Evaluation (5 marks): The impact depends critically on: (i) whether the developing country is a commodity exporter or a low-cost manufacturer (the latter may gain from supply chain shifts); (ii) the quality of domestic institutions and infrastructure; (iii) whether regional trade agreements (e.g. AfCFTA, ASEAN) can partially substitute for lost developed-market access; (iv) the duration of protectionism — if tariffs are temporary, negative effects may be short-lived. On balance, most evidence points to net harm for developing economies, particularly the most vulnerable, while acknowledging heterogeneous outcomes.