Contents
International Economics – US Tariffs and Trade Policy
Section A
Question 1
In recent years, the United States government has been increasingly proposing and implementing trade restrictions including tariffs, export controls, and border adjustment policies. One recent example of such protectionism measures is the 25% tariff on AI chips (see https://www.reuters.com/world/us/trump-imposes-25-tariff-imports-some- advanced-computing-chips-2026-01-14/).
- Explain the policy and the stated objectives behind this measure. Relate the policy with at least THREE (3) arguments for trade restrictions (not limited to the stated policy objectives) with elaboration. Do you think that these arguments are valid in the given context, and to what extent? Cite sources (e.g., news, academic literature) to substantiate your answer.
- In a hypothetical world, suppose that Singapore faces economic volatility as a result of global retaliation to the above tariff and a global trade shock. Explain and appraise how the Singapore’s monetary authority would operate the managed float exchange regime to stabilize the economy.
Question 2
Empirical observations suggest that China tends to respond to economic downturns (i.e., internal imbalance) primarily through expansion of fiscal policies, whereas the United States typically relies on monetary policy stimulus. Analyse and explain why these policy choices are relatively effective given the respective exchange rate systems and the states of their balance of payments.
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Policy and objectives 25% tariff on AI chips
25% tariff as imposed by US on imported advanced computing AI chips is to protect its domestic semiconductor industry, reduce its reliance on foreign technology, protect technological leadership and address any trade imbalances.
Arguments for trade restrictions
The important arguments supporting the trade restrictions are infant industry arguments whereby the restrictions protect the domestic chip manufacturers until they become highly competitive. It is partially valid because the chip industry in the United States is already very advanced and it will have limited impact. Another argument is in relation to the National Security argument, as this restriction would prevent any kind of dependence on the foreign suppliers for critical technologies. This is a valid and a strong argument supporting such restrictions. The third important argument is the protection of jobs/ anti dumping, as the restrictions act as a protective shield against domestic employment and prevents any unfair competition. This is a weak argument as it will result in an increase in the cost for firms and consumers.
Overall evaluation
The analysis leads to conclusion that some arguments such as national security are valid ones while the other one such as infant industry and job security are less convincing. The risk as a result of these tariff decisions would be in terms of retaliation, higher prices and global supply chain disruption.
Singapore’s managed float response
The Monetary Authority of Singapore would consider appreciating its SGD to reduce the imported inflation, and depreciate SGD to boost exports especially during downturns. It would also intervene in the FX market for buying and selling SGD.
Appraisal – the decisions are highly effective because Singapore is a trade dependent economy and the initiatives above would help in stabilizing inflation and growth simultaneously. However the limitation is the less control over domestic interest rates.
Why China uses fiscal policy
China makes use of fiscal policy because of managing or controlling float, ensuring large current account surplus and reserves, and strong government control over spending. The decision is highly effective because China is a state driven economy and controls capitals.
Why the US uses monetary policy
To ensure the exchange rate remains free floating and has an independent Central Bank. It allows for flexible and fast response to downturn.
The analysis indicates that the fiscal policy of China is highly effective because of exchange rate management whereas the monetary policy is effective because of the market based system and floating exchange rate.
| This model answer is reviewed by Dr Enze Huang, familiar with international economics concepts and theories. Disclaimer: This answer is a model for study and reference purposes only. Please do not submit it as your own work. |
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