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 quantity of China's exports to South Korea and the tariff revenue made by the Chinese government from trade with South Korea have changed.

Short answer

China's exports to South Korea increased, and China's tariff revenue from these exports decreased or was eliminated.

Step-by-step solution

Understand the Free Trade Agreement (FTA)

In 2015, China and South Korea signed a free trade agreement (FTA) that removed most barriers to trade between them, including tariffs. This means that tariffs, which are taxes on imports, were significantly reduced or eliminated.

Determine Impact on Exports

With the removal of tariffs, the price of Chinese goods in South Korea likely decreased. Lower prices typically lead to higher demand for these goods. Hence, the quantity of China's exports to South Korea likely increased post-FTA.

Analyze Tariff Revenue

Before the FTA, the Chinese government collected revenue from tariffs on goods exported to South Korea. After the FTA, with tariffs reduced or removed, the revenue from these tariffs would have decreased or gone to zero.

Summarize the Changes

Combining these points, after the implementation of the FTA, the quantity of China's exports to South Korea increased due to lower prices, while the tariff revenue collected by the Chinese government from trade with South Korea decreased or was eliminated.

Key concepts

The Role of Tariffs in International Trade

Tariffs are taxes imposed by a government on goods and services imported from other countries. These tariffs serve several purposes including raising government revenue, protecting domestic industries from foreign competition, and sometimes retaliating against policies of trading partners.
Before 2015, China imposed tariffs on goods exported to South Korea, which made Chinese products more expensive for South Korean consumers. The higher prices discouraged some trade and generated revenue for the Chinese government. However, the signing of a Free Trade Agreement (FTA) between China and South Korea removed or significantly reduced these tariffs.
As a result, the cost of Chinese goods in the South Korean market decreased, making them more affordable and attractive.
This change in tariffs critically impacted both the quantity of exports and the government's revenue.

Increase in Exports

Exports refer to goods and services produced in one country and sold to another. When tariffs are lowered or eliminated, the cost of these goods in the foreign market decreases. This price reduction often leads to an increase in demand.
For instance, post-FTA, Chinese goods became cheaper in South Korea. Lower tariffs meant lower costs, which generally led to higher demand for Chinese products among South Korean consumers and businesses.
Hence, under the Free Trade Agreement, China saw a likely increase in the quantity of its exports to South Korea.
The principle here is simple: lower costs usually result in higher demand and more sales.

Impact on Trade Revenue

Trade revenue, specifically from tariffs, is a significant source of income for governments. Before the 2015 Free Trade Agreement, China collected substantial tariff revenue from goods exported to South Korea.
With the tariffs reduced or eliminated due to the FTA, this source of government revenue decreased significantly.
The reduction in tariff revenue might seem like a loss at first glance, but the overall benefits can be greater. Increased exports can lead to higher production, more jobs, and enhanced economic growth. Additionally, stronger trade relations can open doors to new opportunities and collaborations.
So, while China’s tariff revenue from trade with South Korea dropped, the overall economic impact can still be positive due to the increase in trade volume.