Question

Use the following information to work. Before \(2015,\) trade between China and South Korea was subject to tariffs. In \(2015,\) China and South Korea signed a free trade agreement that aims to remove most barriers to trade between the countries. Explain how the price that Chinese consumers pay for goods from South Korea and the quantity of China imports from South Korea have changed. Who are the winners and who are the losers from this free trade?

Short answer

Chinese consumers pay lower prices and import more from South Korea. Winners: Chinese consumers and South Korean exporters. Losers: Chinese producers competing with imports.

Step-by-step solution

- Understand the Tariffs Impact

Before the 2015 free trade agreement, tariffs were applied to goods traded between China and South Korea. These tariffs increased the price of South Korean goods for Chinese consumers and decreased the quantity of imports from South Korea.

- Analyze the Free Trade Agreement Effects

In 2015, China and South Korea signed a free trade agreement that removed most barriers to trade. As a result, tariffs on South Korean goods were reduced or eliminated.

- Determine Changes in Prices

With tariffs removed, the price of South Korean goods for Chinese consumers decreased. This is because the extra cost added by tariffs no longer applies.

- Evaluate Changes in Quantity

The decrease in prices made South Korean goods more affordable for Chinese consumers. As a result, the quantity of imports from South Korea to China increased.

- Identify Winners and Losers

Chinese consumers and South Korean exporters benefit from the free trade agreement. Chinese consumers pay lower prices and have more variety, while South Korean exporters gain increased market access. Conversely, Chinese producers who compete with South Korean imports may lose market share.

Key concepts

tariffs

Tariffs are taxes imposed on imported goods. Before 2015, China applied tariffs on South Korean products. This made these products more expensive for Chinese consumers. Higher prices can lead to reduced demand. When tariffs are in place, fewer people buy imported goods because they cost more. Tariffs also protect local producers from foreign competition by making imported goods pricier.

free trade agreement

A free trade agreement (FTA) is a deal between two or more countries to reduce or eliminate trade barriers. In 2015, China and South Korea signed such an agreement. This agreement aimed to remove most tariffs and other trade barriers. Removing these obstacles helps increase trade between the countries. It makes it easier for businesses in both countries to sell their goods and services to each other. An FTA benefits both nations by promoting economic cooperation and growth.

import prices

Import prices refer to the cost of goods brought into a country from abroad. After the China-South Korea free trade agreement took effect, import prices for Chinese consumers decreased. Without the additional costs from tariffs, South Korean goods became cheaper. Reduced import prices mean consumers can buy more for less money. This increase in affordability often leads to a higher quantity of imports.

trade barriers

Trade barriers are restrictions that limit the flow of goods between countries. Examples include tariffs, quotas, and import bans. Before the 2015 free trade agreement, there were significant barriers to trade between China and South Korea. Reducing or eliminating these barriers helps increase trade. Lower trade barriers improve market access, making it easier for companies to export and import goods. This can lead to economic growth and increased consumer choices.

market access

Market access refers to the ability of a company or country to sell goods and services in a foreign market. The 2015 free trade agreement greatly improved market access for South Korean exporters in China. With fewer trade barriers, South Korean companies could sell their products more easily and at lower prices. This increased competition in the Chinese market. Enhanced market access benefits exporters by expanding their customer base. It also benefits consumers by giving them more options and better prices.