China Complains to WTO about EU Tariffs



China Complains to WTO about EU Tariffs

a)

i) Dumping is the practice of selling/exporting goods in/to foreign markets at prices below the costs of production.

ii) Tariffs are taxes placed upon imports, levied both to increase the price of imports (and thus protect domestic producers) and to raise revenue for the government.

b) The EU alleges that shoe companies (many of them European) manufacturing shoes in China receive a wide variety of tax breaks, low-interest loans and other subsidies from the Chinese government that permits them to sell shoes in Europe at prices below the true cost of production. These subsidies can be expressed in a diagram as follows:

Price

S1

S2

P1

P2

Demand

Q1 Q2 Quantity

As you can see, without subsidies, shoe manufacturers in China would be able to produce shoes according to the supply curve S1, and so produce Q1 shoes at a price of P1. However, with the aid of the alleged subsidies, Chinese firms are able to produce shoes according to the supply curve S2. This allows them to sell Q2 shoes at a price of P2. The EU claim is that this price is below the cost of production.

c) The EU has responded to these subsidies by slapping an anti-dumping duty, or tariff, on shoe imports from both China and Vietnam. This tariff is designed to raise the price of imported shoes from these countries, thereby negating the cost/price advantage they enjoy thanks to the alleged subsidies. As a diagram:

Price

Supply (European Producers)

P1

P3 Supply 2 (Asian Producers)

Tariff

P2 Supply 1 (Asian Producers)

Demand (European Consumers)

Q3 Q4 Q1 Q5 Q2 Quantity

We can see that in the absence of imports, Q1 European-made shoes will sell for a price of P1. However, thanks to the imports of subsidized Asian-made shoes, European consumers could enjoy Q2 shoes at a lower price of P2. The only drawback was that the share of the European shoe market served by European factories had shrunk to 0-Q3, with the remainder of the market, Q2-Q3, being satisfied by imports.

With the imposition of the tariffs, the domestic share of the market will rise to 0-Q4. The portion of the shoe market satisfied by imports will fall to Q5-Q4, as the higher price (P3) caused by the imposition of the tariff will cause total shoe sales to fall to Q5.

d) The decision by the EU to protect its shoe manufacturers through the imposition of an anti-dumping duty on Chinese and Vietnamese-made shoes will likely be an effective means of protecting European (actually, mainly Italian) shoemakers in the short-run, but looking at the probable other impacts of this policy, overall this is not a good decision on the part of the EU.

Looking at the short-run, yes, the imposition of the duty will raise the price of imported shoes and should result in more sales revenue going to European shoe makers, more jobs in the European footwear industry, and as well, some tariff revenue going to the EU government. However, against this, we must weigh the fact that European consumers will now be paying higher prices for shoes. Generally, the welfare loss to consumers of protectionism is many times greater than the welfare gain enjoyed by protected producers.

As well, in the short run, the Chinese are threatening retaliatory measures which could end up damaging other sectors of the European economy. In the medium to longer term, if the WTO rules against the tariffs, Europe’s reputation and credibility with its trading partners will have been tarnished, and the tariffs will have to be removed anyway.

The big question is, at what cost is it acceptable to protect EU footwear manufacturing?

The fact is that footwear manufacturing is a low-skill and low-technology industry that seems increasingly out of place in a high-wage and high labour productivity economy like the EU. It is a sunset industry that Europeans should be happy to shift to lower wage countries.

From the point of view of efficient resource allocation, the tariffs could lead to Europeans continuing to invest in their footwear industry, while their economy needs to move towards ever more highly skilled and technologically advanced industries. The tariffs could cause the EU to miss out on developing the industries of tomorrow in favour of holding on to the industries of yesterday. Youths who should be preparing for careers in biotechnology or some other field of the future may direct their energies towards careers in shoes, and so move Europe further and further away from developing the industries in which it enjoys a comparative advantage.

Most worryingly, the tariffs seem to have been passed by the EU parliament only after intensive political lobbying by the Italians. This suggests another long-run risk of enacting these tariffs, which is dependency. Once enacted, the Italian shoe lobby will do almost anything to keep the tariffs in place, regardless of the impact the duties have on European consumers or other export-oriented sectors of the EU economy.

Overall, the imposition of the tariffs seems like a knee-jerk reaction that may save some jobs and firms in the short-run, but which may in the long-run cost a great deal in terms of consumer welfare, efficient resource allocation, and political goodwill with important Asian trading partners like China.

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