Economics HL
Portfolio on International Trade
School: Rydal Penrhos
Candidate Name: Sina Frenzel
Candidate Number: 001489-0006
School Number: 001489
Word count:
China Has a Steely Reminder for Donald
Trump
by Reuters NOVEMBER 24, 2016, 4:25 AM EST
E-mailTweetFacebookLinkedin
Share icons
The government is hitting back at Donald Trump’s tariff threat.
China will defend its rights under World Trade Organization tariff rules if
U.S. President-elect Donald Trump moves toward executing his campaign
threats to levy punitive duties on goods made in China, a senior trade
official said on Wednesday.
Zhang Xiangchen, China’s deputy international trade representative, also
told a news conference that a broad consensus of academics, business
people and government officials have concluded that China is not
manipulating its yuan currency to gain an unfair trade advantage as
Trump has charged.
“I think after Mr. Trump takes office, he will be reminded that the United
States should honor its obligations as a member of the World Trade
Organization,” Zhang said through an interpreter. “And as a member of
the WTO, China also has the right to ensure its rights as a WTO member.”
Trump has said China is “killing us” on trade and that he would take
steps to reduce the large U.S. goods trade deficit with China, including
labeling Beijing as a currency manipulator soon after he takes office on
Jan. 20, 2017, and levying duties of up to 45 percent on Chinese goods to
level the playing field for U.S. manufacturers.
Trump said on Monday he will formally exit the 12-country Trans-Pacific
Partnership trade deal in January.
Zhang, who spoke at the closing news conference for a two-day technical
meeting of U.S. and Chinese trade officials in Washington, was not
specific on what steps that China would take to protect its rights under
WTO.
The global trading body prohibits members from unilaterally raising
tariffs above levels that they have committed to maintain.
China’s state-run Global Times newspaper last week warned that a 45
percent Trump tariff would paralyze U.S.-China bilateral trade.
“China will take a tit-for-tat approach then. A batch of Boeing orders will
be replaced by Airbus. U.S. auto and (Apple) iPhone sales in China will
suffer a setback, and U.S. soybean and maize (corn) imports will be
halted,” the newspaper warned.
During the U.S.-China Joint Commission on Commerce and Trade
meetings, officials from both countries said that China agreed to treat
imported and domestic medical devices equally in procurement policies.
U.S. Commerce Secretary Penny Pritzker said Chinese officials confirmed
that state semiconductor investment funds would not require technology
transfers as part of their investments in foreign firms.
In the past, economists had widely viewed the yuan as artificially
undervalued, but China during the past year has spent hundreds of
billions of dollars in foreign currency reserves to keep the yuan from
falling further – prompting the U.S. Treasury to ease its warnings on
Beijing’s currency practices.
According to this article, the president of the U.S. wants to impose a “45
percent Trump tariff” on China as “economists had widely viewed the
yuan as artificially undervalued”. A currency is seen as undervalued, if its
value in foreign exchange (based on economic conditions) is less than it
would be in a free market. Due to the undervalued yuan, imports into
China had been relatively expensive, which might have led to lower living
standards. However, exports into foreign countries had been cheap
compared to U.S. prices, and therefore, might have worsened U.S. trade.
A tariff is a tax which is imposed on imported goods and services. If a
tariff is imposed, this means that prices of products and services will rise,
which might have a negative effect on the demand for them, as customers
would have to pay higher prices.
Looking at the graph below, there is an output of Q2 at the world price
(Pw). If we impose a tax of 45%, the world supply curve shifts up to
Pw+45% tax and sales decrease to Q4. Imports will fall from Q2-Q1 to
Q4-Q3. This helps balance of trade because this will increase domestic US
supply from Q1 to Q3. Before the tariff was imposed, Americans received
area g for American firms. However, after the tariff was imposed, they
now receive area gabch. As area hc represent the increase in costs of
production, there is a producer surplus of only area ab for the U.S. The
demand for Chinese products in the U.S. will decrease from 0Q2 to 0Q4
as the price increases due to the tariff. There will be a loss in consumer
surplus f, as this quantity is not now purchased, hence, causing a dead-
weight loss of welfare.
Price S (domestic)
(¥)
Pe
Pw+45% tax S (world) + tariff
b
a c d e f
Pw S (world)
Output
Graph 1: Consequences of a Trump tariff
All this might lead to inflation in the U.S., as prices increase, which will then cause a negative
income effect. People would create uncertainties towards spending and therefore, reduce
investment, causing a negative multiplier effect as people spend less on the economy.
http://budgeting.thenest.com/mean-currency-undervalued-32198.html
http://www.economicsonline.co.uk/Global_economics/Tariffs_and_quotas.html
http://www.economicshelp.org/blog/315/inflation/inflation-advantages-and-disadvantages/
http://fortune.com/2016/11/24/donald-trump-china-trade-tariff/
this helps B of t
domestic US supply increases
rise in producer surplusof ab )h+c increase in costs of production
but loss in cons surplus
inflation due to rising prices
this causes a negative income effect – therefore a neg multipler effect as people spend less
on the economy
- plus it’s likely that US firms become less productively efficient as they shelter the
higher tariff- SD for U.S firms shifts up and may lead to further calls for protection in
LR
- retaliation – impact on other sectors a tariff might affect- overall tariff is bad for the
economy because…
increase in costs of production
