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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

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Deanna Hettinger
Deanna HettingerLv2
29 Sep 2019

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Related questions

Suppose with free trade, the United States importing a backpack from Mexico costs $10, and the cost of importing a backpack from China costs $9, while a backpack produced in the US costs $14. Before NAFTA (members are US-Canada-Mexico), the US maintained a tariff of $60 against all backpack imports. Then under NAFTA, all tariffs between the US and Mexico are removed, while the tariff against China remains in effect. Assume that tariff does not affect the world price of a backpack.

1. Before NAFTA, the US imported backpack from:

a. China b. Both Mexico and china c. Mexico d. Neither Mexico nor China?

2. Under NAFTA, the US imports backpack from:

a. both Mexico and china b. neither Mexico nor china c. Mexico d. china?

3. As a result of NAFTA, consumers in the US (Loses- Gains - Neither Lose nor gain)? , and the US government (Loses -Gain -Neither gains nor loses) ? tariff revenue. Mexico (neither gain nor lose - gain- lose)? And china (gain - lose -neither gain nor lose)?

4. This is an example of trade (creation - diversion)? Resulting from a regional agreement.

 

 

Which of the following is NOT criteria for member nations to use the euro as outlined in the Maastricht Treaty?

A. Specific interest rates

B. A specific level of inflation

C. A lack of price transparency

D. A specified level of debt

E. A specified level of government deficit

Which of the following statements does not describe the African Union (AU)?

A.The AU envisions a united and strong Africa.

B. The aim of the AU is to remove vestiges of colonialism and apartheid.

C. The AU aims to continue the policies of colonialism.

D. The AU aims to intensify cooperation for development.

E. On the African continent, 53 nations created the African Union (AU).

Which of the following is NOT a positive effect of regional trade agreements?

A. Corporate savings

B. Trade diversion

C. Employment opportunities

D. Political cooperation

E. Trade creation

Which of the following is NOT a fact about ASEAN that warrants consideration?

A. Corruption and shadow markets

B. Economic competition

C. Political change and turmoil

D. Diverse cultures and politics

E. Common tariffs and standards

Which of the following statements about ASEAN is FALSE?

A. ASEAN consists of five countries.

B. ASEAN seeks to promote economic, cultural, and social development.

C. ASEAN was formed in 1967.

D. ASEAN serves as a forum to resolve differences peacefully.

E. ASEAN seeks to counter China's rising strength, resources of cheap labor, and abundant raw materials.

Which of the following is NOT a provision of NAFTA?

A. Adding new countries to the European Union

B. Liberalized rules for the granting of subsidies

C. Liberalized rules regarding government procurement practices

D. Elimination of tariffs in North America

E. Trade in services, intellectual property rights, and standards of health, safety, and the environment

Which of the following is NOT a negative effect of regional trade agreements?

A. Political cooperation

B. Employment shifts

C. Trade diversion

D. Loss of national sovereignty

E. Cultural homogenization

Which of the following is NOT an effect off NAFTA?

A. The United States exports more to Mexico.

B. NAFTA has created jobs in the United States.

C. Mexico's exports to the United States have increased.

D. The United States has developed a trade deficit with Canada and Mexico.

E. Trade among Canada, the United States, and Mexico has increased.

Which of the following is NOT a main regional trading bloc?

A. North American Free Trade Agreement

B. United Nations

C. European Union

D. Association of Southeast Nations

E. Southern Common Market

In 2003, China became the world's largest importer of iron ore. Between 2004 and 2005, China's steel production increased from by 26% from 270 to 340 million metric tons, or about one-third of world production. Fueled by rapid economic growth, production was projected to increase by a further 9% to 370 million tons in 2006. Iron ore is graded as fine and lump according to whether the majority of individual's particles have diameter of less or more than 4.75 millimeters. A third grade-pellets- is fined grained concentrate rolled into balls with diameter of 9.55 to 16.0 millimeters. Lump ore and pellets can be charged directly to a blast furnace, hence are most costly to use. Three companies- Australia's BHP and Rio Tinto, and Brazil's Companhia Vale do Rio Doce (CVRD)- control over 70 percent of worldwide exports of iron ore. By 2005, China purchased over 40% of world iron ore imports. Europe and Japan bought less than 25% and 20% respectively, in 2004, the principal sources of China's iron ore imports were Australia (78 million tons), India (50 million tons), Brazil (46 million tons), and South Africa (11 million tons). China imports a total of 5.7 million from other sources including Canada, Russia, and the USA, in 2005, China's import comprised 71% fine ore, 19% pellets, and 10% lumps. China imports of iron ore from India have been so large that Indian steel manufacturers lobbied their government to limit exports to China. To meet the burgeoning demand from China, BHP Billiton increased production by 45% from 72 million tons to about 105 million tons in just three years, 2002-05. Smaller Australian mining companies have also increased production capacity. These include Atlas Iron Ore, Fortescue Metals Group, Gindalbie Metals, Midwest Iron and Steel, Resource Mining Corporation, Golden West Resource, and Polaris. The big three iron one producer has entered into long-term supply contracts with major steel manufacturers. These contracts might specify minimum quantities that the ore producer must sell and the manufacturer must purchase. Steel manufacturers buy on free-on-board (FOB) basis. FOB buyers pay for freight. These contracts further specify that prices must be negotiated on an annual basis. European steel manufacturers buy relatively more fine ore. Prices for fine ore set the benchmark for prices for lump ore and pellets. The China Iron and Steel Association represent sixteen of China's major steel manufacturers in negotiation with iron ore producers. The association includes Baoshan Iron and Steel, which imports all of its iron ore, Maanshan Iron and Steel, which imports 75% of its iron ore, Chongqing Iron and steel, which imports 60 % and Angang New Steel, which imports relatively little iron ore. In late 2004, Nippon Steel of Japan agreed a substantial price increase with CVRD. Subsequently, CVRD and Rio Tinto negotiated a sharp 71.5% price increase with the China Iron and Steel Association for shipments in 2005-06. BHP Billiton calculated that the freight cost of shipping iron ore from Australia to China was about US $20 per ton less than shipping from Brazil. Accordingly, BHP sought a US$7.50 to $10 per ton surcharge from the China Iron and Steel Association in addition to the 71.5% price increase. The association rejected the surcharge as unreasonable and against international practice. China's Ministry of Foreign Affairs declined to intervene, saying that negotiation between BHP and Chinese steel manufacturer were commercial issue. However, China's Deputy Commerce Minister Ma Xiuhong remarked that BHP's surcharge would damage long-term relations between China and Australia. Meeting with resistance from the China Iron and Steel Association, BHP dropped its demand for the surcharge. However, Mr. Graeme Hunt, President of BHP Billiton Iron Ore, said that would raise the issue in the following year. Subsequently, BHP Billiton announced an 89% jump in profit to $6.4 billion for the year to June 2005, which was a record for an Australian company. China sales accounted for 12.6% of total revenue. BHP agreed to co-sponsor the 2008 Beijing Olympic Games by contributing money as well as golf, silver, and bronze for medals. Mr. Clinton Dines, President of BHP in China, said that the co-sponsorship would not dissuade BHP from re-opening discussions of surcharge. Meanwhile, Rio Tinto's profit increased 58% from $3.3 billion in 2004 to a record $5.2 billion in 2005. China sales accounted for 15% of total revenue.

Discussion question:

1. Why would steel manufacturers and iron ore suppliers agree to minimum purchases/sales in long-term contracts?

2. What advantage(s) would BHP Billiton gain by pricing steel manufacturers on a CIF (cost insurance and freight) rather than FOB basis?

3. What advantage(s) do Chinese steel manufacturers gain by negotiating jointly with iron ore suppliers?

4. How can Chinese steel manufacturers improve their bargaining position relative to BHP Billiton?

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