by Eva Chan (1) & Rity Wong (31) of F.5C
Economic News Report
Case: US panel to decide soon on mainland textile curbs
In early November, United State government considered to limit Chinese exports
on three categories of Chinese textiles, including bras, dressing gowns and knitted
products to an increase of just 7.5%, in order to protect her domestic products.
How does the policy affect China?
Before U.S. limits the increase of Chinese export, China can increase her export
to U.S., supply curve of China shifts from S1 to S2 (See diagram 1). The quantity
transacted increases, price of China product drops, cheap price of China goods attracts
U.S. consumer. As demand for China product is elastic (ED>1), percentage increases in
quantity demanded is greater than the percentage drops in price. Gain is greater than Loss.
Hence, revenue will increase. As the rate of increase in China export increases and
GDP=C+I+G+X-M, GDP increases.
If U.S. limits the increase of China export, the increase in export is lower than
that in the previous year. The supply can just shifts from S1 to S3 instead of S1 to S2.
Price decreases from P1 to P3 instead of P1 to P2. Quantity transacted of China product
decreases from Q1 to Q3 (See diagram 1). The revenue is uncertain as it depends on the
elasticity of demand. If the demand of U.S. consumers for China product is elastic (Ed>1),
percentage rises in price is smaller than percentage drops in quantity demanded. Loss is
greater than gain, revenue will decreases. However, if the demand is inelastic (Ed<1),
percentage increases in price is greater than percentage decreases in quantity demanded.
Gain is greater than lost, revenue will increase. If the demand is unitarily elastic (ED=1),
percentage increases in price equals to percentage decreases in quantity demanded. Gain
equals to loss. Revenue remains unchanged. As there is a drop of increase in export of
China, and GDP=C+I+G+X-M. Therefore, GDP still increases but the GPD growth rate
of China decreases.
How does the policy benefit U.S.A.?
Since U.S. product and China product are substitutes, when the rate of increase
of China export to U.S. is limited, people in U.S. will shift to buy domestic product
instead of China product. Suppose increase in demand for clothing is greater than 7.5%,
American consumers may substitute Chinese products by US products. Demand for U.S.
product increases, demand curve shifts right, therefore, price and quantity transacted of
U.S. product increases. Revenue will also increase (See diagram 2). By expenditure
approach, GDP=C+I+G+X-M, as people demand more domestic product, import
decreases and private consumption increases, so gross domestic product in U.S.
increases.
How does the policy affect Hong Kong?
In the first nine months of this year, Hong Kong's re-export of mainland-made
knitted fabric product to U.S. amounted to HK$92 million. When U.S. limits the rate of
increase in China export, the re-export of China's product to U.S. will also be affected.
According to expenditure approach, GDP=C+I+G+X-M, as re-export will not increase as
that in the previous year, GDP growth rate of Hong Kong will drops.In conclusion, there
is no doubt that the protective policy affects both China and Hong Kong.
Diagram 1:
For Chinese product:
(S3 : growth rate is limited to 7.5%) (S2 : growth is not limited)
Price
S1
S3
S2
P1
P3
P2
D
0
Q1
Q3
Q2
Quantity