Econ 4401
International Economics
Country Study
-ChinaGroup members: Paola Ancona and Francesca Zilio
Agenda
1. Summary……………………………………………………Page 3
2. China’s Economy…….…………………………………….Page 4
2.1 Some History…………………………………………...Page 4
3. The Policy……………………...…………………………...Page 9
4. Recommendations…………………………………….......Page 13
5. Bibliography………………………………………………Page 15
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Summary
In this paper, we are try to describe and analyze the Chinese economy and, in particular, one
specific trade measure that the government implemented recently.
In the current Chinese economic situation, we found a particular issue that we consider
interesting and important to analyze. On 9 October 2012, the National Development and
Reform Commission (NDRC) of the People’s Republic of China announced the 2013 import
quota on wheat, corn and rice(Wheat 9,636,000 tons for wheat, 7,200,000 tons for corn and
5,320,000 tons for rice). A quota is a limitation of either the quantity or the value of trade in a
product and one of the important consequences of this instrument is the deadweight cost. This
loss, which concerned both consumers and producers, is the value of wasted resources
devoted to raise the domestic production plus the value of lost satisfaction due to a higher
price.
We think that this measure is really significant especially with respect to the huge Chinese
population and its demand of agricultural items. Moreover, we would say that imposing this
kind of policy is not good for the population and also not really efficient and flexible.
For these reasons, we would recommend China to still be partially and not completely open
to international trade in order to keep giving a kind of protection to the internal industry.
However, we would argue that China needs to be more open to international trade and more
flexible to demand’s changes; so, we suggest to implement a tariff with a lower restrictive
effect on the trade, especially regarding to population’s wellbeing.
3
China’s economy
China is the world's second largest
economy
by
nominal
GDP
(US$
8,358,363,135,690 in 2012) after the
US, but it is the 87th by nominal GDP
per capita (US$ 6,188.2), due to a
population of about 1.3 billion people.
Its
economy
has
grown
at
rates
averaging 10% over the past 30 years:
this makes China the world's fastest-growing major economy (look at the graph).
Regarding to our issue, we know that the world's greatest supplier to China for agricultural
items is Canada, with an average market share of 67%. The United States is the second major
supplier, with an average market share of 31%. The third is Australia, whose average market
share was 14%.
Some history
Maoist era.
In 1949, when People’s Republic of China was created, Chinese economy was fragile and
with little infrastructure because of continuous foreign invasions, frequent revolutions and
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civil wars. The government tried to improve Chinese economy by nationalizing the country's
banking system and regulating prices with trade association; government revenues were
increased by collecting agricultural taxes. Mao tried in 1958 to push China's economy to new
heights. He implemented the “Great Leap Forward”; it was an economic and social
campaigns whose purpose was the transformation of the country from an agrarian economy
into a communist society through rapid industrialization and collectivization. Unfortunately,
the Great Leap Forward caused a severe economic crisis and led to the Great Chinese
Famine, especially in the rural areas.
For the next several years, China experienced a period of relative stability.
1978-1990.
In the late 1970s, China's citizens had to face barely sufficient food supplies, rationed
clothing, inadequate housing and an inefficient service sector. Since the Third Plenary
Session of the Eleventh CPC Central Committee convened in December 1978, the party
leaders decided to undertake a program of reform of the economic system. They concluded
that the Maoist version of the centrally planned economy had failed to produce economic
growth. The purpose of the reforms was making communism work better by increasing the
role of market mechanisms in the system and by reducing government planning and control
(shift from planned to market economy). By 1987, the program had achieved remarkable
results in increasing supplies of food and other goods and had created a new climate of
dynamism and opportunity in the economy.
1990-today.
In 1997, the central government adopted the “grasping the large and letting the small go”
policy. The “grasping the large” component indicated that policy-makers should focus on
maintaining state control over the largest state-owned enterprises. “Letting the small go”
meant that the central government should relinquish control over smaller state-owned
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enterprises by giving local governments authority to restructure the firms, privatizing them or
shutting them down. In the late 90s, the Asian financial crisis had a huge impact on China: in
1998, China's economic growth rate slowed down due to a sharp decline in the growth rate of
exports and inadequate domestic demand to keep the economy growing. To address this
problem, the central authorities decided to adopt a pro-active fiscal policy.
In 2000s, the rapid economic ascendance has brought on many challenges, including high
inequality, rapid urbanization and challenges to environmental sustainability. The 2011-2015
Five-Year Plan wants to address these issues; it highlights the development of services and
measures to face environmental and social imbalances, setting targets to reduce pollution, to
increase energy efficiency and to expand social protection. Its annual growth target of 7
percent signals the intention to focus on quality of life, rather than pace of growth.
International Trade.
For the first thirty years of the People's Republic foreign trade did not account for a large part
of the Chinese economy: the amount of commerce with other nations was small relative to
domestic economic activity. It is meaningful to analyze the data about the total value of
foreign trade: it was only about 2 percent of the GNP during 1950s and 1960s, then in the
1970s trade grew rapidly but in 1979 still amounted to only about 6 percent of GNP. The
importance of foreign trade, however, was greater than its volume. Foreign imports helped
the government to alleviate critical shortages of food and agricultural products and lacks of
essential items, including raw materials.
Thanks to the pragmatic modernization driven in 1970s and thanks to China’s growing
contact with Western nations, Chinese international trade experienced a sharp acceleration.
Trade more than doubled between 1970 and 1975, reaching US$13.9 billion. As a proportion
of GNP, trade grew from 1.7 percent in 1970 to 3.9 percent in 1975.
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In the 1980s, China reversed the Maoist economic development strategy and started to be
more open to the outside world and to wide foreign economic relations and trade (for some
data, look
at the chart). The opening up policy led to
Period
Two-way trade Exports Imports
1980s
+12.8%
+8.6%
1990s
+19.5%
+19.1% +19.9%
2000-05 +24.6%
+25.0% +24.0%
2006-08 +25.6%
+20.8% +23.4%
different results: the reorganization and
decentralization
of
foreign
trade
institutions; the adoption of a legal
+16.1%
framework to facilitate foreign economic
relations
and
trade;
direct
foreign
investment; the importation of foreign
technology and management methods;
involvement in international financial markets; participation in international foreign
economic organizations. These changes not only benefited the Chinese economy but also
integrated China into the world economy.
China has adopted a variety of measures to promote its foreign economic relations,
maximizing the role of imports, exports and foreign capital in economic development.
Foreign trade organizations were reorganized, and control of imports and exports was relaxed
or strengthened depending on the balance of trade and the level of foreign exchange reserves.
Moreover, China joined a number of international economic organizations, becoming a
member of the World Bank, the International Monetary Fund, the Asian Development Bank,
the General Agreement on Tariffs and Trade (GATT), and the Multi-Fiber Agreement. China
became an observer of GATT in 1982 and formally applied to participate as a full member in
July 1986 (Uruguay Round).
In order to understand the present importance of foreign trade for the Chinese economy it is
meaningful to look at the data about exports and imports. China is the largest exporter
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($2.021 trillion) and second largest importer of goods in the world ($1.78 trillion). Today,
China's main export markets, in order of importance, are the European Union (20.4%),
United States (17.7%), Hong Kong (13.4%), and Japan (8.1%). China's main import markets,
in order of importance, are Japan (13.3%), European Union (11.7%), South Korea (10.9%),
Taiwan (9.1%), and the United States (7.2%).
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The policy
In this country study, we are going to analyze a nontariff barrier to international trade that
China announced in 2012 and then imposed in 2013. The Chinese government wanted to set
the amount of some agricultural items’ imports (wheat, corn, rice and cotton), probably in
order to
protect
the
domestic
industry. This measure is a quota,
that is a government-mandated
limitation on either the quantity
(our Chinese case) or the value of
trade in a product. The quota
restricts the amount of foreign
competition in the marketplace and
so, after it is imposed, it makes the
domestic prices rise.
The issue that we are going to study is important because of the type of products that are
subject to the trade measure: agricultural items. Even if agricultural trade represents only the
8% of international trade in merchandise, it constituted and keep constituting a main issue in
the GATT’s (General Agreement on Tariffs and Trade) and then WTO’s (World Trade
Organization) rounds where trading concessions and trade liberalizations are discussed
between countries. In particular in 1986, the countries that participated in the Uruguay round
(also China was one of them) agreed to convert the complicate agricultural trade legislation
into equivalent tariffs to create a basis for future negotiations.
So far, we have identified the importance of the issue. Now, we are going to analyze the
policy itself (the quota) and we are going to explain the reasons that make us not well-judge
this Chinese trading measure.
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Quotas are typically viewed as being a very restrictive measure (more restrictive than tariffs)
and, moreover, they encourage a big amount of graft and corruption; in fact, since the
disposition of quota rights is arbitrary, there is an incentive to bribe authorities to make
specific decisions. Furthermore, even when authorities can resist bribes, there are many legal
methods of persuasion campaign contributions or weekend vacations with lobbyists) that can
be exploited by potential beneficiaries of the quota. As a consequence, corruption and bribery
can lead to a considerable economic waste due to expenditures of resources for removing
valuable quota rents.
After these general problems of the quotas, we can now deeply and specifically focus on the
Chinese case. We know that China is the most populated country in the world with a
population of 1.3 billion. Due to this fact, China has to face constantly with problems of
resources procurement (especially food) in order to satisfy the huge domestic demand; many
times, in fact, the domestic industries and suppliers cannot manage to provide enough
products for the internal population (this is one of the reasons that pushed the government to
introduce the famous and controversial one-child policy back in the late 1970s). As an
evidence, in its past history, as we said in the previous pages, this country had experienced
critical shortage of food and agricultural products and lacks of essential items: the
government opened to foreign trade in order to solve these problems.
In 2013, the Chinese government keeps facing these difficulties. However, the Chinese
government wants to reach a great self-reliance for agricultural items. The Chinese feel proud
of their agricultural achievement: feeding 22% of the world's population with only 7% of the
world arable land. Behind this achievement, however, lies a serious challenge to China's
future ability to feed its population. China's industrialization and urbanization have prompted
both Chinese and foreign experts to recognize the increasing difficulty for China to meet its
rising food demand. As a consequence, we do not think that closing to international trade
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(especially by imposing a quota) is a good idea for the Chinese population and for the country
in general because imports can help the economy satisfying the internal demand. To many
economists, the idea of “Self-reliance” is nonsensical. They say that, taken into account
global price disparities and China’s comparative advantages, China should import more of its
food rather than dedicate limited land and water resources to growing it all.
Additionally, a problem related with the implementation of a quota is the low flexibility of
this measure. In fact, suppose that the Chinese domestic demand increases. This hypothesis is
not unfounded: state media had recently said that China will relax its one-child policy
(couples will be allowed to have two children if one of the parents is an only child).
Moreover, Wang Feng, a Chinese population expert, said that, in his opinion, China is going
to abandon the policy a year
from now. If this supposition is
true, the demand for agricultural
and necessary items (such as
wheat and rice) will increase:
with a quota protection, no new
imports are allowed and the
market can reach equilibrium
only through a price adjustment
(higher price). In this way,
fewer consumers are going to effectively consume: this fact creates a big efficiency issue!
Furthermore, we can try to apply one of the models that we have studied during this class
(Ricardo model) to support our ideas.
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Suppose that China has a comparative
advantage at producing toys and so the
country is going to export these products;
moreover, suppose that China imports
agricultural goods. We know that the TOT
after opening to trade is higher than in
autarky. Because of the policy that China
implemented, we can see a limit to imports of agricultural goods defined by the quota. Due to
this limit, no allocation with more wheat, rice,
etc. than this limit level can be accepted. As a
consequence, the economy is not going to
achieve an higher indifference curve (that it is
better than a lower one).
In conclusion, we can say that China can achieve another TOT (the orange dashed one, with
lower price of toys and higher prices of wheat), but this is going to reduce the level of utility;
in other words, consumers well being.
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Recommendations
Based on the previous information and reflections, we think that China should follow another
path in order to gain more efficiency and to help satisfying the huge domestic demand of
food.
We would recommend to increase the degree of openness to the international trade for
agricultural goods. China's transition toward a higher dependence to world wheat, corn, rice
and cotton supply will bring a win-win situation: both China and the international community
will benefit greatly from the policy change. The United States, as all the other grain
exporters, will gain a stable market for agricultural products and trade partner instead of a
potential rival. China will be able to feed its population with lower costs and to be more
competitive on the international market. However, the implementation of this policy could be
a challenge because it will not depend only on China’s domestic circumstances but also on
what the international community will do. In fact, based on what we learnt from the New
York Times article “Economic scene: wealth depends on how nations are open to trade” by
Virginia Postrel, opening to international trade has direct and indirect advantages: more
goods and services available to everyone, reducing costs and so prices to consumers due to an
increase of competition, better knowledge of technologies and most productive business
practices. Moreover, we know that from trade a country can achieve also political gains; these
are increases in economic well-being that accrue to a country because expanded trade and
economic interdependency may increase the likelihood of reduced international hostility
(China sometimes has to face this kind of problems!).
As a consequence, in order to make China more open to international markets, without
bringing about a collapse of the domestic market of agricultural goods, we would suggest
China to implement a tariff policy. This kind of measure is a tax imposed by a government on
either imports or exports (in our case, imports). However, we want the effect of this measure
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not to be as restrictive as the actual quota on these products: we want also to achieve an
improvement for the population well-being. In fact, one of the most important distinction
between the two policies is the protective effect the policy has on the competing industries.
Quotas are more protective of the domestic industry because they limit the consequences of
import competition to a fixed maximum quantity. In contrast, tariffs simply raise the price but
do not limit the degree of competition or trade volume to any particular level.
Moreover, generally, there is another reason that made us suggesting this kind of policy. We
would say that a tariff is more efficient and flexible than a quota. In fact, we can consider our
previous hypothesis of a growth of agricultural goods domestic demand. In this case, we
know that an effect of quotas is forbidding an increase of imports and making the price rise in
order to reach an equilibrium.
And we know that with higher
prices come greater deadweight
costs.
With a tariff protection, instead,
the internal price remains the
world price plus the tariff: it
would not change. In this way,
the
increased
demand
for
agricultural goods will be met by a rise of imports (more people can reach the consumption).
In conclusion, with this policy, we would say that we can achieve our objectives. China
would be more open to international trade (gaining benefits for it) but it will still protect its
agricultural industry (less than the quota, however). Furthermore, the population well-being
would increase thanks to lower prices and more availability of agricultural goods with respect
to the initial quota.
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
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
Scott Greene, “Should China Import More Grain?”. Oct 24, 2013.
http://chinadigitaltimes.net/2013/10/china-import-grain/

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2013.
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
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
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
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
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na

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
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