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. Suppose that in 2016 automobile producers in China lobby the Chinese government to impose an import quota on South Korean cars. Explain who in China would gain and who would lose from such a quota.

Short answer

Chinese automobile producers would gain, while Chinese consumers and related import businesses would lose.

Step-by-step solution

Understand the Context

The exercise involves evaluating the effects of an import quota on South Korean cars imposed by China. Remember that an import quota restricts the quantity of goods that can be imported into a country.

Identify the Gainers

Automobile producers in China would benefit from the import quota. Limiting the number of South Korean cars entering China reduces competition for Chinese car manufacturers, possibly leading to increased sales, higher prices and improved market share for domestically produced cars.

Identify the Losers

Chinese consumers would lose from the import quota. With fewer South Korean cars available, consumers might face higher prices, reduced choices, and potentially lower quality.

Consider Secondary Effects

Other potential losers include imports-related businesses in China, such as logistics companies or dealers specializing in South Korean cars, who would see a reduction in trade volume and revenues.

Summarize the Outcomes

Summarize that the primary gainers from the import quota would be Chinese automobile producers, while the primary losers would be Chinese consumers and possibly other trade-related businesses.

Key concepts

import quotas

An import quota is a limit set by a government on the amount of a specific good that can be imported into a country. These quotas are designed to protect domestic industries from foreign competition by restricting the market share of imported goods.

When an import quota is applied, it benefits certain groups while harming others. For instance, domestic producers, like automobile manufacturers in China, would gain significantly. They would face less competition from South Korean car producers, allowing them to increase their prices and sell more cars locally.

However, there are also drawbacks. Consumers in China would lose out, as they would have fewer options to choose from and might have to pay higher prices. Additionally, businesses involved in importing and selling South Korean cars might suffer due to reduced trade volumes.

free trade agreements

Free trade agreements (FTAs) are treaties between two or more countries aimed at reducing or eliminating trade barriers such as tariffs, quotas, and other restrictions. These agreements facilitate smoother and cheaper exchange of goods and services across borders, benefiting both producers and consumers.

Before 2015, trade between China and South Korea was subject to tariffs. In 2015, the two countries signed a free trade agreement to remove most of these barriers. This agreement allowed for better market access for both nations, fostering increased trade and competition.

The free trade agreement was advantageous for Chinese consumers, as it provided them with a wider range of South Korean goods, often at lower prices. On the other hand, Chinese producers had to face stiffer competition from South Korean imports, which could affect their profit margins and market shares.

domestic market impact

The imposition of an import quota can have significant effects on the domestic market. In our scenario, if China imposes an import quota on South Korean cars, several things happen:

• The supply of imported cars is restricted, leading to reduced competition for domestic car producers.
• Domestic car manufacturers benefit from increased market control, higher prices, and potentially greater sales.
• However, overall consumer welfare might decline due to higher prices and fewer choices. The reduction in supply could also affect the quality of available cars.

Other industries within the domestic market, such as logistics and import businesses, might also feel the pinch. Their revenues could drop due to lower volumes of trade, leading to broader economic impacts beyond the automobile sector.

consumer choice

Consumer choice refers to the range of options available to consumers in a market. When an import quota is placed on specific goods, such as South Korean cars, the variety of choices decreases. Consumers end up with fewer options and might have to compromise on quality or pay higher prices.

In the context of the Chinese automobile market, the import quota could significantly diminish the variety of cars available to Chinese consumers. With fewer South Korean cars allowed into the market, consumers might not find their preferred models or the quality they desire.

Alongside limited choices and higher prices, consumers could also experience a decrease in innovation. Competition often drives innovation and improvement in goods and services. When that competition is reduced by import quotas, the incentive for domestic producers to innovate also diminishes, potentially leading to a stagnant market with outdated models.