4. Assume that Thailand and India are potential trading partners of China. Thail

Question

4. Assume that Thailand and India are potential trading partners of China. Thailand is a member of ASEAN but India is not. Suppose the import price of textiles from India (PIndia) is 50 per unit under free trade and is subject to a 20% tariff. As of January 1st 2010, China and Thailand entered into the China-ASEAN freetrade area, eliminating tariffs on Thai imports. Use the following figure to answer these questions:

a. Before the China-ASEAN free-trade area, how much does China import from each trading partner? What is the import price? Calculate the tariff revenue.

b. After the China-ASEAN free-trade area, how much does China import from each trade partner? What is the import price? What is the total tariff revenue of China?

c. Based on your answer to part (b), what is the impact of the China-ASEAN free-trade area on the welfare of China?

d. What is the effect of the China-ASEAN free-trade area on the welfare of Thailand and India?

e. As mentioned in the Headlines: China-ASEAN Treaty Threatens Indian Exporters, the China-ASEAN agreement may lead to a similar one between China and India. How would this affect China

Explanation / Answer

After the China-ASEAN free-trade agreement, the relevant supply curve for Thailand is SThai because it is able to sell to China duty-free. Without the tariff, imports from Thailand increase to 40 units with price remaining constant at PIndia + t. Price is unchanged because the rise in production results from increasing marginal costs as given along Thailands supply curve. Although China continues to import from India, the amount purchased has decreased to 20 units. The total tariff revenue of China is now 200.

c. Based on your answer to part (b), what is the impact of the China-ASEAN freetrade area on the welfare of China?

Answer:

China is paying the same import price as before, but has lost the tariff revenue on the 30 units that it used to import from India and now imports from Thailand. In addition, it loses the tariff revenue on the 10 units that it imported from Thailand all along, so the total loss is (a + b + c) = 400. Therefore, China is worse off due to this trade diversion.

d. What is the effect of the China-ASEAN free-trade area on the welfare of Thailand and India?

Answer: India is selling less, but because it still receives the same price as before (50 net of the tariff), we cannot calculate any loss. Thailand has a rise in producer surplus of the amount (a + b) due to selling more to China, so Thailand is better off. But the gain for Thailand of (a + b) is less than the loss of tariff revenue for China, which is (a + b + c). e. As mentioned in the Headlines: China-ASEAN Treaty Threatens Indian Exporters, the China-ASEAN agreement may lead to a similar one between China and India.

How would this affect Chinas imports from each country?

What would be the effect on welfare in China, Thailand, and India if such an agreement was signed?

If China and India sign a free-trade agreement, the relevant supply curves are SIndia and SThailand, which means trade diversion will be eliminated and production in Thailand will be restored to the pre-free-trade area levels, with China importing 10 units from Thailand. However, since the price in China is $50, total demand has grown to 70 units so now China imports 60 units from India. Welfare in China increases because consumer surplus has grown by the area (a + b + c + d + e) and tariff revenues only decrease by (d) so welfare has increased by (a + b +c + e).

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.