International Economics, Coursework Example

Article 1

Major European trade associations have written to Vice-Premier Ma Kai calling on China to restart talks on expanding the scope of a global pact to remove tariffs on a range of information and communications technology products.

Negotiations were suspended on November 21 after China declined to make further concessions on the number of products it wanted excluded from an expanded Information Technology Agreement (ITA), a tariff-cutting scheme established in 1996 under the World Trade Organisation (WTO).

However, Hosuk Lee-Makiyama, director of the European Centre for International Political Economy, a Brussels-based think tank, said any effort to revive ITA talks this month is not realistic.

“The negotiations are now effectively over, as China has made its choice,” he told the South China Morning Post.

In a letter sent to Ma late on Friday, four European trade groups requested that China “substantially reduce” the number of information and communications technology products on its “sensitivities” list, which included items for longer tariff phase-out periods.

“Constructive compromises, in the spirit of balanced giving and taking, are needed to achieve a commercially significant outcome, which would bring concrete benefits to the European Union and China alike,” the letter said. “Important progress has been made already, and an agreement is now within reach. We hope the remaining stumbling blocks that currently undermine the advancement of the ITA talks will be successfully addressed to achieve the ambitious, comprehensive agreement that was originally contemplated.”

The trade groups were DigitalEurope, representing the continent’s digital technology industry; BusinessEurope, acting on behalf of companies of all sizes from various industries; the European Semiconductor Industry Association; and Semi Europe, which serves the manufacturing supply chain for the micro- and nano-electronics industries.

China, which joined the ITA in 2003, was among 27 participants in Geneva last month trying to broaden the agreement’s scope.

About 70 WTO member countries are party to the ITA and account for 97 per cent of global trade in information and communications technology products. China is the largest exporter of such goods.

The negotiations tabled about 250 additional products to the 190 duty-free items originally covered by the ITA, which was created to abolish import tariffs to stimulate trade.

China, which had about 140 items on its sensitivities list, demanded that 57 products be excluded from the expanded ITA.

Many of the other trading partners involved in the talks also had products they wanted excluded from a broader ITA, but none on a scale of China’s list, according to DigitalEurope.

The US sought to exclude one item: fibre-optic cables. Japan did not want anything excluded.

The ITA’s “core list” does not include recent innovations, including video-game consoles, smartphones, media tablets and advanced semiconductors.

“China’s demands for exclusion are cluttered by low-value parts and components that every economy must import to effectively export products of higher value,” Lee-Makiyama said.

“The Ministry of Commerce seems unable to convince domestic protectionist interests that China needs to promote a policy for its technological upgrade and economic growth.”

Expansion of the ITA would slash tariffs on about US$1 trillion in annual global sales – about 7 per cent of total world trade, according to estimates by the European Commission.

In a statement released on November 24, Commerce Minister Gao Hucheng blamed the debacle in the ITA talks on the US. Gao said the terms sought by the US “were far beyond” what the mainland’s industry can bear.

“I need to stress that the development levels of the [ITA] participants are different,” Gao said. He said it was “unacceptable for China” that the US “ignored the appeal of Chinese enterprises”, which still needed to boost competitiveness globally.

Despite the suspension of ITA talks for the second time this year, Gao said there was a way forward. “All the participants should make joint efforts in the right direction, finding a way out and reaching agreement as soon as possible,” he said.

Commentary 1

In theory, free trade makes countries better off in the aggregate.  That is, the total gains that accrue from trade liberalization exceed the total losses.  This maxim, however, ignores the substantial distributional effects that arise from trade liberalization: while consumers are usually net beneficiaries of trade liberalization paying lower prices for a wider selection of goods, domestic businesses are often times left worse, even bankrupt, as a result of greater competition. This article illustrates the economic effects of trade liberalization, and why many domestic businesses may welcome import tariffs as a means to protect their existing economic rents from foreign competition.

The Information Technology Agreement (ITA), a tariff cutting scheme established in 1996, is a multilateral agreement for WTO members that exists out of the larger multilateral negotiation process. Unlike other more sensitive, industries such as agriculture and good manufacturing, the fluid nature of IT manufacturing means that countries and manufacturers alike may be more open to the benefits of free trade. Indeed, since most IT products are composed of a multitude of different parts, which is extremely hard for one country to produce them all, let alone at an efficient price, most countries seek to reduce tariffs as electronic manufacturers are both importers and exporters of IT components globally.

This article focuses on the latest round of ITA negotiations.  European countries have written to China in the hope of convincing the government to increase the number of products included in tariff reduction.  China, however, has a different position:

• That is, although the current round of negotiations includes 250 additional products to the existing 190 duty-free items, China has stated that it wants 57 products to be excluded from the list.

From an economic perspective, this article presents two converging visions of the global market for IT goods. The first vision is a completely free market from the perspective of a country in the world economy.  In graph A, a country is presented for good x:  the domestic price for the good in this country is greater than the world price; thus, the country would import the good in the amount of q2-q1. The country in this example would likely be one other than China; that is because China’s demand and supply for the electronic good in question would likely be the opposite; that is, the domestic price of the good would be lower than the world price, meaning that the country would be a net exporter of the good.

Graph A. The Free Market Vision of Global IT Trade

In the second graph, the market dynamic is changed to reflect what would happen to the same country if the tariff was added.  With a tariff added, the world price of the good has increased in the proportion from Pw to Pw+T.  As a result of the tariff, there is now deadweight losses in the economy: the dead weight loss of the tariff on the economy is shown in triangles “c” and “f”.  This deadweight loss arises from the increase in price without the corresponding ability to import more goods.

Graph B: Market with Tariffs

In addition to understanding the potential impact of not removing existing tariffs on the efficiency of an economy, one also might want to understand why Chinese electronic manufacturers would not want to open the market.

That is, Chinese IT manufacturers currently receive a price above the world equilibrium in China. A further opening of the world market would lead to lower prices for Chinese manufacturers both at home and abroad, particularly as they had to compete with other electronic manufacturers in their home market.  This impact may be one of the reasons that domestic stakeholder groups oppose the Chinese government entering negotiations on IT products with higher rents.

Overall, this article crystalizes the reason why some countries may support lowering trade barriers, and other countries may support keeping existing trade barriers where they are.  European countries, and the manufacturers they represent, likely see potential gains for liberalization, particularly in the products that the Chinese government wants to keep off the tariff list; European manufacturers may be more efficient in this area and  a lowering of the domestic tariff in China, although good for consumers, may decimate electronic manufacturers.  This helps us to understand why there may be aggregate gains to trade in certain areas, there are also substantial distributional effects that must be taken into consideration.