
Why is there trade?

Why are there always demonstrations against meetings of the World Trade Organization?

Does trade protection policy protect all the citizens?
 Are the prospects for external trade in Hong
Kong promising?
1

Through the following simulation game, students may have a better understanding of the reasons for trade, international division of labour and the conditions for trade to take place among countries.
：
Dear students:
Why do countries trade with each other? Is trade really mutually beneficial? Is free trade really beneficial to everyone involved? Let’s find out the answers together through a simulation game!
Grouping
Divide into two groups of around 18-20 students. Students of each group become the people of “Womm Republic”and “Hamm Statelet”respectively.
Game Rules
The people of both countries will go through two rounds of production under the instructions given by their governments, record the outputs and discuss whether they should trade with their neighboring country.
Products to be produced
Garments, bead strings
The following is the background information of the two countries:
Womm Republic Hamm Statelet
Population: 1 million
People’s average education level: primary education
Major occupations of the People: farmer, factory worker, driver, etc
Womm Republic is self-sufficient with rich natural resources. It seldom communicates and trades with other countries.
Population: 0.5 million
People’s average education level: senior secondary education
Major occupations of the people: factory worker, clerk, salesperson, waiter, etc.
Hamm Statelet seldom communicates with other countries because of its remote location. It is also a self-sufficient country.
These two countries are self-sufficient, while garments and bead strings are the products that their people need most in their daily life. Therefore, the governments wish to start production immediately!
2

Through this part of the activity, students may have a good understanding of productions in the countries when they are self-sufficient.
Note:
Manpower should be equally allocated. Half of them should produce garments and half of them should produce bead strings. All people must produce goods in accordance with the design made by the government and no personalised design will be allowed.
The products will go through a final quality control process, by which only those meeting the specification given by the government will be counted.
Time limit: 8 minutes
Form teams of 4 people, and each team will have the following tools:
Garment Production Team
•
Scissors x 2
•
Glue x 1
•
Garment paper mould (A4) x 4
•
Heart -shaped paper mould (A4 Orange in colour) x 1
•
Sample of garment x 1
Bead String Production Team
•
Fishing line x 1 roll
•
Beads in different colours
•
Paper ruler x 2
•
Sample of bead string x 1
(Note: It will be faster to use fishing line rather than needle and thread)
Record the output of each team in the following table:
Garment Production Team
Number of
Participants
Output of
Round 1
Production
Bead String Production Team
3

Summary:
Calculate the total outputs of garments and bead strings of “Womm Republic” and “Hamm Statelet” when they are self-sufficient.
Womm Republic
Hamm Statelet
Total Outputs of the Two
Countries
Output of Garments Output of Bead Strings
Suppose the people of “Womm Republic” and “Hamm Statelet” wish to enhance their living quality.
Can you suggest any method, with resources remain unchanged, to increase the total outputs of garments and bead strings of the two countries?
4

Through this part of the activity, students may understand the productions of countries when they are self-sufficient.
Note:
Manpower should be equally allocated. Half of them should produce garments and half of them should produce bead strings. All people must produce goods in accordance with the design made by the central government. No personalised design will be allowed. The products will go through a final quality control process, by which only those follow the specification given by the central government will be counted.
Time limit: 8 minutes
Form teams of 4 people, and each team will have the following tools:
Garment Production Team
•
Scissors x 3
•
Glue x 2
•
Heart-shaped paper punch x 1
•
Garment paper mould (A4) x 4
•
Orange paper x 1 piece
•
Sample of garment x 1
Bead String Production Team
•
Needle and thread x 1box
•
Beads in different colours
•
Paper ruler x 1
•
Sample of bead string x 1
Record the output of each team in the following table:
Garment Production Team
Number of
Participants
Output of
Round 1
Production
Bead Chain Production Team
5

Summary:
Calculate the total outputs of garments and bead strings of “Womm Republic” and “Hamm Statelet” when they are self-sufficient.
Output of Garments Output of Bead Chain
Womm Republic
Hamm Statelet
Total Outputs of the Two
Countries
Suppose the people of “Womm Republic” and “Hamm Statelet” wish to enhance their living quality.
Can you suggest any method, with resources remain unchanged, to increase the total outputs of garments and bead strings of the two countries?
6

Suggested answer:
Suppose the people of “Womm Republic” and “Hamm Statelet” wish to enhance their living quality.
Can you suggest any method to increase the total outputs of garments and bead strings of the two countries, with resources remain unchanged?
The countries may focus on the production of products that they have competitive advantage or with lower costs of production compared to that of the other countries. “Womm Republic” may try to specialise in the production of bead strings, while “Hamm Statelet” in garments to increase the total outputs of garments and bead strings. They may then reallocate their products through trade to enhance the consumption and quality of living of their people.
Therefore, we suggest there should be division of labour in production between the two countries, then both of the countries can enjoy more outputs through trade.
Guidelines for Teachers:
This learning activity could have different levels of learning targets. First of all, students should be able to understand that country can benefit from specialisation and international trade. Secondly, teachers may have a basic introduction to students over the idea that countries may specialise in producing the product that they are good at or have a lower production cost compared to other countries, while the concept of “cost of production” is not required to be clearly defined at this stage. Finally, for students with better comprehension skills, (economics) teachers may try to apply the concept of
“comparative advantage” in explaining to students the considerations for a country to choose a product to specialise in production. However, for S3 students, this is not necessary.
Teachers are also reminded that the accurate economic concept, and hence the correct economic term, used in trade theory is “comparative advantage”. However, this concept is rather complicated and difficult for students, the term “competitive advantage” is used instead for simplicity.
7

Note:
According to the conclusions in Worksheet 1, you need only to specialise in the production of bead strings in this round.
All people must produce goods in accordance with the design made by the central government. No personalised design will be allowed. The products will go through a final quality control process, by which only those follow the specification given by the central government will be counted.
Time limit: 8 minutes
Form teams of 4 people, and each team will have the following tools:
Bead String Production Team
•
Fishing line x 1 roll
•
Beads in different colours
•
Paper ruler x 2
•
Sample of bead string x 1
Record the output in the following table:
Number of Participants
Output of Round 2 Production
Bead Strings
Summary:
Calculate the total outputs of garments and bead strings of “Womm Republic” and “Hamm Statelet” when there is international division of labour.
Output of Garments
Womm Republic
Output of Bead Strings
Hamm Statelet
Total Outputs of the Two
Countries
8

Note:
According to the conclusion in Worksheet 1, you need only to specialise in the production of garments in this round.
All people must produce goods in accordance with the design made by the central government. No personalised design will be allowed. The products will go through a final quality control process, by which only those follow the specification given by the central government will be counted.
Time limit: 8 minutes
Form teams of 4 people, and each team will have the following tools:
Garment Production Team
•
Scissors x 3
•
Glue x 2
•
Heart-shaped paper punch x 1
•
Garment paper mould (A4) x 4
•
Orange paper x 1
•
Sample of garment x 1
Record the output in the following table:
Number of Participants
Garments
Output of Round 2
Production
Summary:
Calculate the total outputs of garments and bead strings of “Womm Republic” and “Hamm Statelet” when there is international division of labour.
Output of Garments
Womm Republic
Output of Bead Strings
Hamm Statelet
Total Outputs of the Two
Countries
9

1. Review the whole process of the activity. What are the conditions for trade to take place?
- Each country has its own competitive advantage in the production of certain product, it may due to reasons, such as amount of resources, tools owned or amount of talents who are good at producing a particular product
- Trade must be mutually beneficial. If any one of the party involved cannot gain from trade, it will withdraw and back to self-sufficient condition.
Guidelines for Teachers in respect of Question 1:
This activity aims to discuss the conditions for trade to take place from the perspective of production. However, teachers may further explain that different countries may have different preference for products. It could also be another reason for trade.
Guidance Note: Teacher may simply apply the output data from the production activity for the following calculation and analysis if the outputs meet the expected results.
2. Answer the following questions with reference to the following context and data.
Source 1: Outputs of both countries when they are self-sufficient
Womm Republic
Hamm Statelet
Total
Outputs of
Garments
5
20
25
Outputs of Bead
Strings
20
5
25
Source 2: Outputs of both countries with international division of labour
Womm Republic
Hamm Statelet
Total
Outputs of
Garments
0
40
40
Outputs of Bead
Strings
40
0
40
10

a. What are the changes in the total outputs of garments and bead strings of the two counties with international division of labour?
Both of the outputs of garments and bead strings had increased by 15 units. b. If both countries distribute the outputs with international division of labour equally. Explain how “Womm Republic” may benefit from the trade compared to that of self-sufficient situation.
Womm Republic
Outputs when self-sufficient
Amounts available for consumption
(self-sufficient)
Outputs with international division of labour
Amounts available for consumption
(with trade)
Benefits from trade
Amounts of Garments Amounts of Bead Strings
5 20
0 40 c. Based on the above information and what you know, what are the benefits of international trade?
- International division of labour would lead to an increase in global outputs.
- Countries involved in trade may have access to more products and enhance quality of living of their people.
(Note: Teachers may further explain to students that countries may have access to more products in terms of “quantity” and “variety” through trade. The learning activity has its limitation that it only describes the benefit from trade in terms of more “quantity”. In the real world, however, countries may acquire products they cannot produce through trade.)
- Through specialization in production, countries involved in trade may enhance their production efficiency while they may be able to produce higher quality product through practice makes perfect.
- The two countries may promote cultural exchanges and introduce new technologies through trade.
Note: The term “competitive advantage” is used instead of “comparative advantage” throughout the module so as to avoid touching on the theoretical
Economics concept, which is not required for the junior form students.
11

3. Read the comments of the following persons. What are the harmful effects caused by trade?
Since we have traded with “Womm Republic”, my business performed much poorer than before. The government hopes that we can switch to the production of garments, but my workers only have the experience and skills for producing bead strings. It’s very difficult for them to learn for it and cope with the change!
A bead string manufacturer in Hamm Statelet
A craftsman in Hamm
Statelet
My family insists on passing the art and cultural heritage in our country by making the bead string in local family factory.
However, the bead strings from “Womm Republic” have flooded into our country at a lower price after the opening-up of our market. We have lost a lot of customers! Should we keep working on this craftsmanship?
Although we have access to more products and enjoy a better living quality after trading with
“Womm Republic”, the unstable political situation in “Womm Republic” may affect our trade.
Citizens of Hamm Statelet
12

- Under international division of labour, the country will specialise in production of certain products. Meanwhile, other businesses that are less competitive could be disappeared in competitions.
- Under international division of labour, labour engaged in the industries in downturn will be unemployed as they didn’t have the skills required for the new business.
- Consumers would prefer to buy lower price imported goods from overseas. Therefore, some local cultures would be eroded by these imported goods and even disappear.
- The country will centralise the resources to produce certain products in order to exchange for other imported goods. If there is any obstacle to trade, we may not be able to import goods from other countries, there will be a great impact on the living of the people.
Trade is an activity where a buyer and a seller are involved to exchange products or services in the market. In modern world, the buyer in a trade will usually pay money to the seller for goods or services. The buyer and the seller in a trade may be an individual, an institution or a country. With technological advancement, trade may be taken place at a global or multinational level with the support of global logistics and internet. A country will specialise in its production of goods that they have competitive advantage. It makes good use of its resources and the benefit of mass production so as to increase its total output and enhance economic efficiency.
Benefits of Trade
Through trade, production unit may specialise in the production of goods in accordance with their own competitive advantages. Generally, there are three benefits of trade:
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1) Enhancing production efficiency: Through trade, a country produces products that it has competitive advantage. They do not need to produce all goods. They will have specialisation in production and production efficiency will be enhanced.
2) Providing more choices for consumers: Through trade, a country may obtain more variety of goods. So, consumer can have more choices.
3) Fostering economic development: Through trade, countries have to compete in the market. They have to improve product quality or production technology for competing customers. This will foster economic growth and economic development.
Harmful effects of Trade
In the process of trade, a country will specialise in producing goods or services with competitive advantage. In global competition, both labour and countries have to face many challenges from trade.
In summary, there are three harmful effects of trade:
1) Risk of Unemployment: In global competition, a country will centralise its resources for the industries with competitive advantage. This will lead to the concentration of job opportunity in these industries. If labour engaged in other disadvantaged industries cannot switch to the industries with competitive advantages, they will become unemployed.
2) Less competitive industries will be displaced: For industries that are less competitive, as their production cost are higher than that in other countries, these industries can hardly exist in the domestic market due to the competition of the imported products. Many of these industries are embedded with local cultural heritage which would then be affected.
3)
“Unfair Trade” affects social stability
: In terms of national power, there has been a large gap between countries due to historical and economic reasons. Those powerful countries may set the terms of trading agreements in their own interest and harm the interest of the disadvantaged countries. Such trading relation would widen the gap between the rich and the poor, which destabilises the global community.
14

1. Recently, many people of Hamm Statelet have joined a street protest, as they have lost their jobs after trading with “Womm Republic”. The livelihoods of the people were seriously affected.
Suppose you were the Director of the Trade Development Department, what measures would you take to deal with this issue?
In respect of the requests of the people, I will
_________________________________________________________
_________________________________________________________
_________________________________________________________
The Director of the
Trade Development
Department of
Hamm Statelet
15

2. In order to ease the discontent of the people, the Director has established an ad hoc committee to study the practices of other countries before making decision. The committee members have visited some countries and have studied a number of cases. With reference to the following information, match the cases with the relevant trade protection policy.
Case 1
The US government provides cotton farmers with a subsidy of around US$4 billions every year to help them to install huge mobile sprinklers and advanced tractors for maintaining the competitiveness of exported cotton. This measure may secure the attractive yield of cotton of the US every year and lower the global price of cotton. Meanwhile, this measure causes harmful effects to the livelihood of 11 million cotton farmers in West Africa and directly cut the number of rivals.
Source: Oxfam Hong Kong
Trade Protection Policy: Export subsidy
Case 2
In order to protect the local automobile industry in Brazil, the Brazilian government has imposed a tax on imported cars at a rate of 55%, which eventually led to an increase of 25% in the prices of imported cars. Following the implementation of the new tax policy that aims to protect the local automobile industry, consumers’ preference for buying imported cars slumped and the sales of local mobile industry increased.
Source: news round-up
Trade Protection Policy: Import tariff
16

Case 3
Hong Kong became the leading exporter of garment and textiles in the 1970s. The garments made in
Hong Kong had taken a large market share in the US for their low price and high quality. In order to protect the domestic garment industry, the US government had decided to impose an import quota on garments made in Hong Kong. The import quota on textiles and garments was abolished on 1
January 2005. Following the abolishment, textile products and garments from Hong Kong can be freely imported to markets like the US, EU, Canada,etc.
Source: news round-up
Trade Protection Policy: Import quota
Case 4
The US government imposed a trade embargo against Cuba in 1962 to attain its political objective against the Cuban government. Enterprises in the US were not allowed to trade with Cuba.
Meanwhile, economic sanctions were imposed on Cuba. Cuba simply could not sell sugar, which is its major output and source of income, as a result of these sanctions. During the 50 years embargo period, the Cuban government provided daily necessities to its people through rationing due to the tight supply of goods. The situation remained the same until October 2000, when the U.S. President
Clinton allowed the sales of US agricultural goods and medical supplies to Cuba for solving its food shortage. However, the US government did not announce to lift the embargo entirely.
Source: news round-up Trade Protection Policy: Embargo
17

The Director of the Trade Development Department of Hamm Statelet has not made any decision after studying the trade protection policies in other countries. He hopes that the proposal adopted can attain the following objectives in addition to improving the quality of life of the people of Hamm
Statelet. With reference to the trade protection policies mentioned in the previous two pages, what are your suggestions?

Objective 1: avoid the retaliatory measures taken by other countries

Objective 2: reduce the amount of imports immediately

Objective 3: may increase the tax revenue of Hamm Statelet at the same time

Objective 4: may enhance the quality of imported goods
Students should assess the policies with reference to the priority list so that they may have a better understanding of the effects of different trade protection policies and make reasonable suggestions.
3. After careful consideration, the Director of the Trade Development Department of Hamm
Statelet has decided to advise the Hamm Government to impose an import quota on bead strings from “Womm Republic” with immediate effect. Following the implementation of an import quota, the monthly exports of bead strings from “Womm Republic” to Hamm Statelet has been limited to 50.
I believe that following the import quota imposed on bead strings from Womm Republic, the quality of life of our people will be enhanced!.
Director of the Trade Development
Department of Hamm Statelet
After implementing the import quota for three months, the Director has interviewed the general public for collecting their views on this policy. Analyse the comments of the people carefully. What are the effects of this policy to different stakeholders?
18

Following the import quota, the quality and style of the imported bead strings become better than before. However, the quantity of imported bead strings reduced and the price increased.
Consumers are forced to buy more local bead strings now!
Mr. Black
Local bead string manufacturer
Black Pearl
Bead string buyer
Following the implementation of the import quota, the sales of my bead strings have increased and backed to the level in the past. Before that, I was worried about my business and had considered ways of competing with the distinctive bead strings from the Womm. But I do not face any competition now. I think the government should further tighten the import quota to limit the imports of bead strings from other countries, in supporting “local people using local goods”!
How wonderful it is! I have been a bead string craftsman for more than 20 years. Before implementing the import quota, I have well prepared to look for another job as the bead strings from the Womm were flooding into our country! The import quota imposed by our government can now protect the development of our bead string industry and I can work in this industry till retirement!
Dark Plum
Bead string importer
Black Bull
Local worker
Most of the bead strings I sold are imported from “Womm
Republic”. Many local residents like buying those bead strings from Womm as they are very distinctive. My business has been badly hit by the implementation of the import quota. The volume of imports of bead strings from
Womm decreased and the price of the imported goods kept rising. My business has suffered a drastic decline. Does the government think of the impact of it on our lives?
19

It seems that the implementation of an import quota on bead strings would have nothing to do with me. However, I am worried that “Womm Republic” will revenge and impose a high tariff on our exported garments. The government should also protect our interests!!
Black Ian
Local garment exporter
According to the comments of these five people of Hamm Statelet, do they support the import quota imposed on the bead strings from “Womm Republic” by their government? What are the reasons for their opinions?
Black Pearl
(Bead string buyer)
Object Increased price and reduced choices
Mr. Black
(Local bead string manufacturer)
Support
Black Bull
(Local worker)
Support
Dark Plum
(Beading string importer)
Black Ian
(Local garment exporter)
Object
Object
Less competition from foreign countries
Secure local employment
Sales drop because people spend less on imported goods as the price increases.
Worried about revenge measures imposed by foreign countries on his products.
20

Faced with the trade protection policy by “Hamm Statelet”, what would be your ways to deal with it if you were a government official of “Womm Republic”?
Revenge measures
Negotiation/cooperation
Participate in international trade organizations(e.g. The World Trade Organization)
In order to protect the interests of certain domestic industries and stakeholders, such as those less competitive industries in global markets, the government will usually introduce some trade protection policies to support the development of those disadvantaged industries. Common trade protection policies include import tariff, import quota, export subsidy and embargo.
Import tariff: It refers to the duties imposed on certain imported goods for raising the prices of imported goods and protecting the similar local products.
Guidance notes: Countries may also impose export tariff in order to restrain the volume of export of certain essential raw materials.
Import quota: It refers to the limit on quantity of imports for the purpose of protecting the products produced domestically.
Export subsidy: It is a financial subsidy for some exported goods with an aim to support the local exports in the competitive global market.
Embargo: It refers to a restriction imposed on the imported goods of foreign countries. A country may restrict the import of particular goods due to its sub-standard in areas such as health, safety and environmental protection. The embargo may even be extended to all products from a certain country.
These four trade protection policies are different in terms of flexibility. Among them, import tariff and export subsidy are relatively flexible. The former one can earn more tax revenue, while the later
21

one can help to provide more trade opportunities. On the other hand, import quota and embargo are of a lower flexibility. The maximum limit for imports has been fixed beforehand. Also, the imported goods must meet certain specified standards before they could be imported. Accordingly, the government may have a greater control on the imported goods. A government may implement appropriate trade protection policies according to its different policy objectives.
The trade protection policies may have different effects on local manufacturers, consumers and importers. Generally, the purpose of various trade protection policies is to protect domestic industries.
Effects on local producers: trade protection policies may help to reduce the competition facing the local producers, protect local industries and create more job opportunities for those industries.
Effects on local consumers: the price of a product made in overseas countries may rise due to the difficulty in importing it. As a result, consumers will have to pay more to buy the goods and have fewer choices.
Effects on local importers : local importers may have to buy overseas products at a higher price.
That could lead to a higher operating cost and thus lower competitiveness. So, their revenues will decrease as local consumers may spend less on imported goods.
To deal with trade protection policies, countries or regions may revenge, negotiate or participate in international organizations. Taking revenge measures means a country may impose the same or more rigid trade protection policies against the country that implements trade protection policies. Holding negotiation is that two countries or territories may discuss over the arrangements for trade through negotiations. It aims at reducing the effects of trade protection policies on both sides. Through participating in international organizations, the countries involved can negotiate on an international platform. Agreements in trade may be reached and some trade protection policies may be abolished as a result.
The World Trade Organization is an international organization which is responsible for formulating trade agreements and ensuring the rules of international trade are correctly applied and enforced among its member states. It also provides a platform for mediation of international trade disputes.
The World Trade Organization has been working in eliminating trade barriers among countries to ensure that global trade can be made in a free and open environment.
22

After investigating the situation in Hamm Statelet, the Hong Kong Government also wants to look into its present situation of trade, including the trading of goods and services, for seeking ways for trade development. The Chairman of the Hong Kong Trade Development Council has invited you to analyse the situation and give advice.
Source 1: Hong Kong’s External Merchandise Trade between 1980 and 2010
HK$ million
Imports
Domestic exports
Re-exports
Source: The Census and Statistics Department of the Hong Kong Government
1. With reference to Source 1, describe the trends of imports, domestic exports and re-exports in
Hong Kong between 1980 and 2010.
According to Source 1, there had been rising trends in the imports and re-export between 1980 and 2010, while the domestic export edged up between 1980 and 1995, but then declined between 1995 and 2010.
23

Merchandise Trade Balance is the difference between the values of total exports (including domestic exports and re-exports) and total imports of a country (territory) in a period.
Merchandise
Trade Balance
=
Value of Total
Domestic Exports of goods
(Revenue)
+
Value of Total
Re-exports of goods
(Revenue)
-
Value of Total
Imports of goods
(Expenditure)
A deficit in merchandise trade balance means that the total imports is greater than the total exports in the territory. On the contrary, a surplus in merchandise trade balance means that the total exports is greater than the total imports in the territory.
2. The table below shows the information of Hong Kong’s external merchandise trade between
2002 and 2010. Read carefully and answer the following questions.
Year 2002 2004 2006 2008
(HK$ billion)
2010
Imports 1,619 2,111 (a) 2600 3,025 3,365
Domestic
Exports
131 126 135 91 (e) 70
Re-exports 1,430 (b) 1893 2,327 2,733 2,962
Merchandise
Trade Balance
(c) -58 -92 -138 (d) -201 -333 a. Fill in the above blanks based on the equation on top of this page. b. Describe the Merchandise Trade Balance of Hong Kong in recent years.
The Merchandise Trade Balance of Hong Kong is always less than zero. It means that there has been a trade deficit in Hong Kong’s merchandise trade for the years. It reflects that the revenues from domestic exports and re-exports have been less than the expenditures on buying imported goods .
24

3. Based on question 2 and your knowledge of Kong Kong’s economy, explain for the situation of
Hong Kong’s Merchandise Trade Balance in the past two decades.
Import: As Hong Kong is short of natural and productive resources, it has to import a lot of goods from overseas for people to consume. Therefore, the total imports have been rising.
Export: Service industry has become the pillar of Hong Kong’s economy due to the ongoing economic restructuring. Therefore, domestic exports have been decreasing.
Source 2 : Top merchandise suppliers of Hong
Kong in terms of value for 2003 and 2010
Source 3 : Value of External
Merchandise Trade by End-use
Categroy - Imports (2010)
Source: The Census and Statistics Department of the Hong Kong Government
25

1. Compare the figures of 2003 and 2010. What is/are the change(s) in Hong Kong’s total imports of goods?
Source 2 shows that there was an increase in Hong Kong’s imports of goods.
The value of goods imported from the mainland increased most during this period. However, in terms of percentage increase in the value of imported goods, Singapore out performed other countries.
2. With reference to the above chart, which country/territory is the biggest supplier for Hong
Kong?
The mainland of China
3. Hong Kong is a place with limited land and natural resources but accommodating a population of over 7 million. Source 3 reveals that foodstuffs only account for 4% of the total imports of
2010 when both capital goods and raw materials and semi-manufactures account for over 30%.
Why?
Hong Kong has limited land and natural resources. It’s true that we have to import a large amount of foodstuffs to meet the needs of the large population. On the other hand, Hong Kong has to import large amounts of raw materials, semi-manufactures and machineries for producing exportable goods and services in order to earn foreign exchange. Moreover, with close economic ties between Hong Kong and the mainland, certain imported raw materials and semi-manufactures and machineries are to be ‘exported’ to factories in the mainland for production. With massive imports for domestic use and re-exports, the value of imports of foodstuffs is relatively small.
26

Source 4 : Total Exports of Goods to Main Destinations of
Hong Kong in terms of value for 2003 and 2010
According to the information published by the Census and Statistics
Department, Hong Kong’s exports of principal commodity divisions include plastics, electrical machinery, apparatus and appliances, and electrical parts thereof, medicinal and pharmaceutical products, telecommunications and sound recording and reproducing apparatus and equipment and articles of apparel and clothing accessories, which account for 47% of Hong Kong’s total exports of goods.
Source: The Census and Statistics Department of the Hong Kong Government (2011)
4. Which countries / region are the two main destinations of Hong Kong’s exports of goods?
The mainland of China, the USA
5. Compare the figures of 2003 and 2010. Which country/region has a marked decline in imports of goods from Hong Kong? Explain the reason(s).
The USA. The US has switched to other lower-cost locations for importing the goods needed.
Some lower-cost locations are the mainland of China and Southeast Asian countries.
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Source 5 : Total Exports and Total Imports of Services between 1980 and 2010
Source 6: Major destinations for Hong
Kong’s exports of services in 2010
Source 7: Percentages of value of exports of services by Service Group in 2010
Source: The Census and Statistics Department of the Hong Kong Government
Note: The information in Sources 5, 6 and 7 have not considered the change made by the
Census and Statistics Department on the implementation of the new international standards in
September 2012. As the incorporation of the new revised estimation methods is still in progress, the information above has not taken into account the change accordingly.
28

The balance of invisible trade is the difference between total value of exports of services and total value of imports of services of a country (territory) in a period.
Balance of invisible trade = Total value of exports of services – Total value of imports of services
(Revenue) (Expenditure)
Invisible trade deficit means that the total value of imports of services is greater than the total value of exports of services in the territory. On the contrary, an invisible trade surplus means that the total value of exports of services is greater than the total value of imports of services in the territory.
1.
Calculate the invisible trade balance for the following years and indicate whether they are deficit or surplus.
Year
Invisible trade balance
(HK$ million)
41,727
Surplus/Deficit
1990
1995
2000
2005
2010
73,020
122,585
231,157
428,482
Surplus
Surplus
Surplus
Surplus
Surplus
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2. With reference to the above table and Source 5, describe the trends of invisible trade of Hong
Kong between 1990 and 2010.
There had been a rising trend in the values of invisible exports and invisible imports between
1990 and 2010. Moreover, the balance of invisible trade surplus had been increasing over this period.
3. According to Source 6, which country is the main destination for Hong Kong’s exports of services? Suggest one possible reason for that.
According to Source 6, the mainland of China is the main destination for Hong Kong’s exports of services. It is because Hong Kong is close to the mainland and they have frequent exchange.
Moreover, many Hong Kong firms have established their production lines in the mainland which need support services from Hong Kong’s service industries.
4. According to Source 7, which two service groups are the most important pillars of present invisible trade of Hong Kong? What are the industries included in these service groups? Give one example for each group.
“Merchanting and other trade-related services ” and “transportation services” groups are the two most important pillars of present invisible trade of Hong Kong.
An example for merchanting services group: Business Advisory Services.
An example for transportation service group: Logistics Management.
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Based on the above analysis, we can see that Hong Kong has frequent trade with all parts of the world. Comment the overall situation of Hong Kong’s external trade and what kind of production do we enjoy competitive advantage. Why is external trade important to Hong Kong?
A deficit in merchandise trade balance and a surplus in the balance of invisible trade have always been recorded. It suggests that Hong Kong has competitive advantages in providing services rather than in the production of goods. External trade is important to Hong Kong because it exports goods and services which it has competitive advantages to earn foreign exchanges and imports goods
(including foodstuff, consumer goods, raw materials and semi-manufactures) at a lower cost (i.e. costs of producing the goods domestically is higher than the prices of the imported goods) to meet the needs of Hong Kong population.
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Economic structure of Hong Kong has shifted towards increasingly service orientated, Hong Kong is currently an important hub for trading of services. However, there are many challenges facing Hong
Kong’s external trade. Read the information below carefully. Analyse the problems facing Hong
Kong and give some suggestions for improvement.
Rank
1
2
3
4
2000
Hong Kong Singapore Shanghai
Singapore Hong Kong Singapore
Pusan
Kaohsiung
2005
Shanghai
Shenzhen
2010
Hong Kong
Shenzhen
Source: Forbes (The world busiest ports 2011)
The competition in port facing Hong Kong is mainly due to the rapid development of ports in the mainland. In recent years, ports in Shanghai and Shenzhen reached a rapid growth of nearly 30% per year in their container throughput. Together with the Yantian Port in Shenzhen, which is close to
Hong Kong, have posed great challenges to Hong Kong. With a rapid development of the maritime sector in the mainland, Hong Kong’s re-exports and exports will be adversely affected.
Source: Hong Kong Trade Development Council
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“Hong Kong’s economy is likely to be affected by the external environment. Hong Kong’s exports are adversely affected by the recession of the global economy. European debt crisis, economic problems in the USA and the slowdown of the mainland’s economic growth reduce Hong Kong’s exports. The economic prospect is even worse than that during the financial turmoil in 2008.
According to a survey conducted by the Hong Kong Trade Development Council in 2012 for Hong
Kong manufacturers and traders, most respondents thought that Hong Kong’s performance in export orders is disappointing. Reasons that had been suggested by most of the respondents are as follows:
Weak purchasing power among target markets(e.g. Western Europe, the USA)
The products are not competitive
Fierce competition from industry players
Change in demand or market structure, or other reasons
89%*
87%
83%
60%
*Respondents may choose more than one reason.
Source: News roundup (2012), HKTDC (“Hong Kong exporters seeking solutions in tough times”.
14 June, 2012)
According to data published by the Travel Industry Council of Hong Kong, the Hong Kong Tourism
Board and the Consumer Council during 2011, 3,344 complaints were received from tourists visiting
Hong Kong. These complaints were mainly related to shopping, accounted for 2,325 cases (70% of the total number of complaints). These scandals will scare off potential tourists.
Source: the Commerce and Economic Development Bureau
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In view of the present difficult business environment of Hong Kong, an economist of the Hong Kong
Trade Development Council (HKTDC) responded that as the production cost has been rising, Hong
Kong manufacturers can relocate their production bases to lower-cost locations. Moreover, manufacturers may also launch new products and enhance the quality of the products to stand out in the competitive environment.
In addition to enhancing products quality, Hong Kong exporters may also strengthen their marketing in exploring new markets, particularly the mainland of China and emerging markets. Many Hong
Kong companies have developed good relationships and trust with importers from all parts of the world.
Furthermore, as more and more businesses have been negotiating with the clients and manufacturers directly, Hong Kong’s role for intermediaries diminished. Though Hong Kong merchants are facing a tough time, they have been actively seeking better material suppliers and providing more value-added services on the other hand. For example, Hong Kong merchants help overseas clients in inspecting goods produced by manufacturers and supervising the manufacturing schedules.
Source: HKTDC (“Hong Kong exporters seeking solutions in tough times”, 14 June 2012,);
(“Overview of Import and Export Trade Industry in Hong Kong”, 9 May, 2011)
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Summarise the information in Source 1 to Source 3. What are the problems facing Hong Kong’s external trade? With reference to Source 4 and to your own knowledge, give some suggestions for improvement.
Source Problems facing Hong Kong Suggestions
1 Competitions from mainland ports
Enhance the port’s efficiency, e.g. provide electronic services, development of e-commerce
(suggested answers)
2 Worse global business environment
Explore emerging markets, provide products and services to meet their demand, expand sales of locally produced goods and services (suggested answers)
3
The quality of tourism players varied
Strengthen promotion and education, enhance the service performance of local tourism (suggested answers)
4 Production cost has been rising
Enhance business efficiency, provide more value-added services (suggested answers)
Trade has been one of the most important economic activities in Hong Kong. For a hundred years of development, Hong Kong had been turned into a key trading centre in the world. Trade is very important to the economic development of Hong Kong. Strengthening trade connections, shipping and logistics facilities can foster the economic development of Hong Kong. Trade can also be the driving force of the development of industries associated with trade, e.g. finance, insurance and
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shipping industry. This can enhance Hong Kong’s status as an important trading centre in the world.
Trade and its related industries can attract professionals from all parts of the world. By attracting talents, Hong Kong may enjoy stronger economic growth and develop into a diverse and international city.
1. Enhance its efficiency.
Hong Kong cannot compete with other cities in terms of price as its production and operating costs have been very high. Therefore, Hong Kong has to enhance quality of services, efficiency and productivity or strengthen the promotion of creativity to compete with other territories. Offer goods or services that are not available in other territories and strengthen training of local talents may also help to keep the competitiveness of its trading industries in the world market.
2. Restructure of Trading Services
The mainland of China, the USA and Japan have been the main trading partners of Hong Kong.
However, the rapid development of cities and ports in the mainland has resulted in the diminishing roles of Hong Kong as an entrepot. Therefore, Hong Kong has to seek other trade partners in responding to its economic restructuring. Accordingly, there is a change in Hong Kong’s external trade from visible, physical imports/exports or re-exports to offshore trade in order to provide trading services for merchants from the mainland and other countries.
3. Explore the Emerging Markets
In addition to its traditional trading partners (e.g. the mainland of China, USA and Japan), Hong
Kong has to explore new markets for business opportunities. It expands the territory for its trading services and enhances its competitiveness.
4. Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA)
The mainland and Hong Kong signed the CEPA in 2003. It opens up huge markets for Hong Kong goods and services, greatly enhancing the close economic cooperation and integration between the mainland and Hong Kong. Under CEPA, some goods of Hong Kong origin importing into the mainland enjoy tariff free treatment while Hong Kong service suppliers enjoy preferential treatment in various areas. CEPA provides a window of opportunity for Hong Kong businesses to gain greater access to the mainland market.
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Conditions for trade to take place
Factors that promote trade Trade barriers
Comparative advantage
Reach trade agreements
WTO
Eliminate ／ Reduce trade barriers
Common trade protection policies
Import tariff
Import quota
Export subsidy
Embargo
Hong Kong’s External Trade
Challenges
The effects on competition from ports and cities in the mainland and other territories
Ways to improve the situation
Polices : Eliminate trade barriers
Economic development: Explore comparative advantage
Mainland and Hong Kong Closer
Economic Partnership
Arrangement (CEPA)
Restructure of trading services, explore emerging markets, enhance efficiency
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Heart-shaped punch
Garment and Heart-shaped (orange) paper mould
Sample of garment
Scissors & Glue
Beads in different colours
Sample of bead string
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(should be orange in colour)
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