This article deals with the removal of tariffs by the Chinese government on steel products in May 2021 to protect domestic businesses. Tariff can be defined as a tax that is imposed on goods and services being imported from another country. This commentary will be exploring and evaluating this policy while highlighting the key concept of change. Change refers to the manner in which continually shifting economic circumstances can have an impact on the actions of stakeholders.
1. Impact of removing tariffs on Chinese steel products industry
The change brought about by the imposition of tariffs has created problems that the Chinese government is aiming to solve to protect domestic businesses. In Figure 1, the government’s previously imposed tariff created a higher world supply and increased the price of steel products to Pwt by the tariff amount (1%, as per the article). Chinese Demand is low at Q3 due to higher prices (law of demand) while quantity supplied by Chinese producers is at Q2. After tariff removal, price will fall to Pw , which will cause quantity demanded to increase to Q4 because of lower prices. World supply will shift downwards by 1% (tariff amount) and quantity supplied by Chinese producers will fall to Q1. Due to the absence of tariffs, imports from Australia will become attractive and increase from Q2Q3 to Q1Q4.
Chinese producers will see a fall in revenue (from Q2aPwt0 to Q1cPw0) in the short term, as they sell lower quantities at a lower price. Australian producers, however, may see an increase in revenue as they supply larger quantities (increases from Q2Q3 to Q1Q4), albeit at lower price Pw. However, this increase in revenue will occur only if demand for steel is price elastic. The government will have to forego the revenue received from levying tariffs on imports, which is denoted by box E in Figure 1. Consumer surplus increases from AB to ABCDEF after tariff removal, whereas producer surplus decreases from CG to G. Overall, community surplus increases from ABCG to ABCDEFG after the removal of tariffs. Furthermore, the previously imposed tariffs created welfare loss (D + F) due to lost value from reduced consumption. This welfare is regained after tariff removal, as consumption increases and levels the deadweight loss.
Chinese producers are worse off in the short term because of lower supply and demand for steel products. However, the tariff removal and the associated lower demand may enable steel producers to reduce energy consumption and promote high quality development of their sector (as per the article). Chinese consumers will benefit greatly in the short and long term as the removal of tariffs will result in lower prices, enabling them to purchase more steel products. Australian suppliers may see short term benefits in the form of increased revenue because of lower prices. However, this may not be applicable in the long term as it relies on the assumption that there are no disruptions in international trade such as deteriorations in diplomatic relations and increased possibilities of a trade war given the ‘escalating diplomatic spat’ mentioned in the article. Furthermore, potential quality improvement of Chinese steel products may result in increased future competition and resultant revenue loss.
Due to this change (tariff removal), the government is losing revenue (E) which they could have invested in modernizing Chinese iron ore and steel industries. Furthermore, while tariff removal may benefit consumers through reduced prices and greater choice in the long term, it may negatively impact trade relations with Australia, who may be unhappy with the tariff removal as it causes reduced prices that limit the profits of Australian producers (as per the article). An alternate policy could be providing subsidies to Chinese producers using the revenue generated by tariffs, which would alleviate high production costs and ensure steady supply. This will not only strengthen Chinese steel industries, but will also prevent escalating trade relations with Australia as mentioned above. However, it may eliminate the will to become self-sufficient and competitive with foreign producers and can lead to over-reliance on the government. Furthermore, it is difficult to accurately estimate the amount of subsidy required by producers.
Change is an integral part of the economic world, as seen in the Chinese government’s efforts to adapt their policy to suit the stakeholders affected by changing economic circumstances. In summary, the Change caused by the removal of tariffs significantly impacts the stakeholders in the Chinese economy. Chinese consumers are benefitting from the lower prices whereas Chinese steel producers will be worse off due to lower quantity demanded and the government will lose revenue that it was earning from previously imposed tariffs. However, despite the short term drawbacks, this Change is important as it aims to achieve a future which increases production and consumption of Chinese iron ore - which will positively impact economic growth and the stakeholders in the Chinese economy.
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