Paper 1 Practice: Calidora’s Solar-Panel Tariff
Original practice material
Calidora and all evidence are fictional. This is one 30-mark case study, not a complete Paper 1. Suggested time: 75 minutes.
Answers: Calidora’s Solar-Panel Tariff — Answers.
Case Study: Green industry, imported inputs and adjustment
Extract 1: A new tariff
Calidora is a small importer of standard solar panels. Its government imposed a tariff of C20 per panel after two local factories announced job losses. Table 1 gives annual market estimates; quantities are thousands of panels.
| Situation | Domestic price (C per panel) | Domestic supply | Domestic demand |
|---|---|---|---|
| Free trade | 80 | 20 | 110 |
| With tariff | 100 | 40 | 90 |
The world price is assumed unchanged. Installers say that higher panel prices will slow household adoption. Domestic producers argue that temporary protection will finance worker training and automated production.
The tariff is scheduled for review after three years. Domestic firms have not published a path showing when their average costs will reach the world price, and together they supply less than half of Calidoran demand even after the tariff. Installers employ more workers than the two panel factories, but factory jobs are concentrated in one region where alternative employment is limited.
Extract 2: A regional production network
Calidoran panel factories import cells and testing equipment, while exporting some specialised mounting systems. Foreign investment has brought engineering methods and access to distribution networks, but profits are partly remitted abroad. Construction firms employ migrant technicians during seasonal peaks. Some local technicians report wage pressure; other firms say migrants relieve shortages and allow projects to finish on time.
The foreign investor requires local suppliers to meet testing standards and has funded a joint training centre. Whether this produces lasting spillovers depends on worker mobility and whether domestic firms can absorb the new knowledge. Profit remittances affect income retained by residents, while the factory, equipment and trained workforce add to domestic productive capacity as long as they remain in Calidora.
Extract 3: Retaliation and resilience
Trading partners are considering restrictions on Calidora’s mounting systems. The energy ministry worries that dependence on one overseas cell supplier creates disruption risk. It proposes diversified suppliers, strategic stocks and common regional product standards. The industry ministry instead wants a larger tariff and domestic-content requirements.
One supplier currently provides 68% of imported cells. Holding six months of stock would reduce short-run disruption risk but cells can become technologically obsolete. Domestic-content rules might stimulate local production, yet they could raise input costs and conflict with regional trade commitments. Common standards could make it easier to switch suppliers, although agreement takes time.
Extract 4: Adjustment options
Economists recommend time-limited retraining grants, portable income support, competition between domestic producers and investment in testing laboratories. Critics argue that governments cannot reliably identify industries that will become internationally competitive and that protection encourages lobbying.
The finance ministry has a fixed adjustment budget. Spending more on the tariff-protected factories leaves less for displaced installers or general technical training. A testing laboratory could benefit several export industries rather than one firm, but private investors may underprovide it if knowledge spills over. Officials must decide whether the objective is worker adjustment, a learning externality, supply resilience or permanent self-sufficiency because each objective implies a different instrument.
Questions
(a) Using Table 1, calculate:
(i) imports under free trade and after the tariff; [2]
(ii) annual tariff revenue. [2]
(b) Explain how the tariff affects Calidoran consumers and domestic panel producers. [4]
(c) Explain two ways in which the cross-border flows in Extract 2 may increase Calidora’s productive capacity. [4]
(d) Assess the infant-industry argument for maintaining the tariff. [8]
(e) Discuss the best way for Calidora to improve resilience and international competitiveness. [10]
[Total: 30]