China is an industrialized country and it exports lots of goods to other country. International trade involves the exchange of goods and services across international boundaries. The country depends on its sales abroad to develop its country. The textile industry is a massive industry in china, depends a lot on its exports to make its profits. But the United States (U.S) also has a text tile industry and so to protect their industry they use quotas to protect its industry. The quota is worth “$6 billion annual quota” and U.S is reducing its quota on the import of Chinese textiles by $9 million because U.S thinks that China is using a third country to get its goods to U.S. China’s government is not pleased with this and it is try to protect its industry.
U.S is using protectionism, which is the restriction of international trade. It prevents consumers and producers reaching the equilibrium price and quantity that would happen in a free market. One way to enforce protectionism is Quotas take the form of a physical limitation on the quantity of a commodity which is allowed to enter the country in a given year. What U.S is doing to Chinese textiles is that it is dropping its quota by $ p million dollars from the “$6 billion annual quota”. The “world supply” falls; and this gives the Chinese firms to supply more to the U.S market, directly. The decrease in the quota also leads to consumer surplus to rise.
Consumer surplus is the difference between the prices that a consumer is prepared to pay the actual price paid. This is because the consumers were willing to pay for the Chinese textiles price with the quota and so now it is cheaper. Therefore the consumer surplus rises from ADE to ABC. Consumer surplus which is gained is areas 1, 2, 3 and 4. Area 1 is the loss of domestic producers benefit from selling more at a higher price. Area 3 is the windfall gain; it is part of the revenue that the foreign traders get, in this case China. The total revenue for Chinese textiles sold in the U.S is are area 3, 5, 6 and 7 together, before dropping the quota, area 3 was the only amount that China was allowed to sell. Area 2 and 4 are a net loss to society (deadweight loss).
China has comparative advantage over U.S in the textile industry. A country is said to have a comparative advantage in the production of a good if it can produce it at a lower opportunity cost than another country. “The labor-intensive industry is one where China has an advantage over other producing nations,” therefore China has specialized in the textile industry and they would import other goods into the country.
The Chinese officials are not pleased with the quota reducing; this is because the textile industry in China is a strategic industry and is trying to protect it. To protect a strategic industry is to protect an industry that employs a large proportion of the population and/or maybe the industry has strong roots in the country and it contributes to the nation’s identity. These are the two reasons why China does not like what U.S is doing to them, because other country might lose its trust to China and would try to prevent trading with them. Another reason for China not liking the actions taken by U.S is because “china hopes anticipated gains in the textile industry will offset huge losses in employment capacity in other economic sectors.” China wants all of its industry to grow at the same time and equally, and so this reduced quota will harm their industries, this is why China takes this matter very seriously.
China does not like what U.S has done to their textile industry as this might break trade relations, and this may well be loses for both sides. Their relation would get worse, and then China would retaliate as they want to protect its industry and this would lead to more problems. As exports represent an injection into the circular flow of income and are subjected to the multiplier effect. And also unemployment would rise in other industry within China, and even some firms in U.S, as they might not be able to compete with the Chinese industries.