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The original news article based on which this commentary is written can be found here.
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The European Union imports optical fibre cables from China. From 2017-2019, the prices of these products fell by 23%. After “complaints” from Europacable, an “industry body”, the European Commission found that Chinese exports were being sold at “heavily undercut prices”. Export subsidies are government payments to domestic firms, partly covering costs of production, per unit exported. They intend to increase the international competitiveness of a country’s exports (Hoang et al., 2020).
In September, 2021, the European Commission imposed anti-dumping tariffs on these imports. Tariffs are taxes on imported goods, levied to protect domestic economic interests and generate government revenue. “Dumping” is the sale of products by foreign firms at prices lower than their costs of production. Dumping is seen as an unfair trade practice, is illegal and usually countered with tariffs and quotas (Tragakes, 2020).
The Chinese government intervened to increase the competitiveness of their exports, acting in their national interest. The European government intervened to regulate alleged unfair trade practices and restore a levelled competitive market.
The commission’s findings against the “expressly mandated” intervention by the Chinese government would indicate high subsidies, which neglect the ideas of “fair competition” in international markets. Graph 1 represents the Chinese domestic market for optical fibre and its changes with international trade and intervention.
It is assumed that this subsidy first ensured that domestic demand and supply met, before exporting. It would not be logical for the Chinese government to subsidise exports while importing the same good at non-subsidised prices. Alternatively, if China was already an exporting country, the subsidy would enable firms to export at prices below the world price and cost of production, leading to dumping.
Equilibrium initially forms at ‘H’, with an imported quantity of ‘Q3-Q1’. The
production subsidy of ‘T’ units first shifts the domestic supply curve, ‘S’, rightward, to ‘SA’, eliminating imports, indicating trade protectionism. The government expenditure is represented by rectangle ‘A’.
The subsidy per unit exported, of ‘U’ units, enables firms to increase their production and export a quantity of ‘Q4-Q3’, at price ‘PD’, below the world price and production costs. This shifts the supply of exports to ‘SB’, enabling intervention-supported dumping in European markets. Since this subsidy doesn’t affect the domestic market, ‘SB’ doesn’t intersect domestic demand ‘D’. The government expenditure is represented by rectangle ‘B’. If China was already an exporter, the supply curve would shift further right from ‘SA’ to ‘SB’.
This intervention renders domestic producers better-off. Their total revenue increases. Hence, national employment increases, and increased firm profits contribute to China’s GDP. Domestic consumers bear the burden of this subsidy, though they are unaffected by the constant price and quantity of goods traded. They are worse-off as the protectionist subsidy which eliminated imports increased domestic inefficiency and the global misallocation of resources. The Chinese government faces a very high opportunity cost in intervention of “strong subsidies”. These resources could have been used in domestic economic development and equity goals.
Graph 2 represents the European undisturbed market equilibrium for the product, which forms at ‘H’. Recognising the artificially lowered price, the European Union imposed a tariff of ‘T’ units, above the world price (‘E’). They gain tariff revenue shown by rectangle ‘GR’ (Graph 2). However, this “necessary step” can negatively impact domestic entities. Previously, consumers demanded (A4 – A1) imports, which were cheaper than domestic products. The tariff causes domestic consumers to pay higher prices (‘F’), hence demanding a reduced quantity of imports, (A3 – A2). Though the government prevented Chinese firms from underselling the product, protecting domestic firms and employment from “unfair advantages”, they increased prices for domestic consumers, indicating the costs and benefits of intervention.
Since tariffs make the market less competitive, each firm’s market power increases. Their incentive to produce at the lowest possible cost decreases. These inefficient firms, whose production has now increased from ‘A1’ to ‘A2’ units, contribute to a global misallocation of resources. Scarce resources would be wasted.
Tariffs create a welfare loss (△J, △K: Graph 1), reducing social surplus. They worsen domestic income distribution, as they are regressive, burdening economically weaker sections proportionately more than wealthy citizens. In the short run, this policy effectively supports domestic producers. However, if extended into the long run, it could deteriorate efficiency and competitiveness of domestic firms.
Unfair intervention leads to retaliatory policy and trade wars. Chinese intervention of export subsidies that led to dumping is internationally unaccepted, unlike the European Union’s trade protectionism policies. This is because international trade bodies don’t support export subsidies from non-economically least developed countries. Both measures of intervention have advantages and costs. Internationally, unfair intervention does not purely support economic growth and an equitable distribution of resources. To fairly increase trade competency, both governments can invest in research and development, labour market reforms and inimpacts-of-the-european-anti-dumping-duties-on-chinese-steel-products-international-economics-iaterventionist supply-side policies.
References
1. Hoang, P., Wray, S., & Chakraborty, T. (2020). Economics for the IB diploma. Hodder Education.
2. Tragakes, E. (2020). Economics for the IB Diploma coursebook with Cambridge Elevate edition. (3rd ed.). Cambridge University Press.