The Case of China From 2006 to 2007, US trade deficit with China grew from $232. 6 billion to about $256. 3 billion. In 2007, US exports to China amounted to about $65 billion while US imports from China valued at $321. 5 billion. In order to lessen this trade deficit, the US government urged the Chinese government to “float” the Chinese currency. The Chinese currency is expected to appreciate following the implementation of the “floating principle. ” This will in effect reduce the overall value of Chinese exports to the United States by about a third.
The indifference of the Chinese government to this issue forced the United States to bring WTO cases against China in 2007. The United States challenged several subsidy programs that benefit a significant portion of China’s manufactured goods. Included to the subsidy programs were some of the uncompetitive sectors of the Chinese economy. The United States also noted the existence of import quotas in selected US goods. The Chinese government also applied legal prohibitions to foreign direct investments; a form of protectionist policy.
The imposition of either an import quota or export subsidy will lead to a generalized deadweight loss. In the case of an export subsidy, the gainers will be the exporters. There is an incentive for exporters to increase the supply of exports in the world market. The domestic price for the export good increases as its price in the world market decreases. Consumers are the losers in the long-run. The society as a whole loses. In the case of an import quota, the gainers will be the licensed importers and the government. The licensed exporters pay a specified import fee to the government.
The effect is worse than with either an export tax or an import tax. Consumers lose a significant part of their aggregate social utility, since the general price of imports increases. Exporters also experience losses, as production shifts from the more efficient export goods to the less efficient imported goods. Both the licensed importers and the government earn. The society as a whole loses. In the case of China, the real gainers of the policy (export subsidy) are the exporters. Domestic consumers lose a significant part of their CS (consumer surplus).
The United States will also be a loser, as the quantity of exports increases (relative to its price). References 2008 National Trade Estimate Report on Foreign Trade Barriers. 2008. China. Retrieved from <http://www. ustr. gov/Document_Library/Reports_Publications/2008/2008_NTE_Report/Section_Index. html? ht> on March 9, 2009. Dunn, Robert, et al. 2000. International Economics. 5th Ed. New York: Routledge. Lipsey, Richard and K. Alec Chrystal. 2005. An Introduction to Positive Economics. New York: MacMillan Publishing Company,