Subsidy Diagram
Above is the diagram of Subsidy, an amount of money paid by the government to a firm per unit output, for improving output and supporting domestic product to compete over foreign product. The initial domestic quantity of goods provided is Q1, and the quantity of foreign goods in the domestic market is Q1-Q2. By having a subsidy supporting domestic firms, more goods can be provided at lower price. This shifts the domestic supply curve (Sd) to Sd+subsidy. Then the quantity of domestic goods increases from Q1 to Q3, and the imported products will decrease from Q1-Q2 to Q3-Q2.
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Tariff Diagram
Tariff Diagram
Above is the Diagram of a tariff, a trade barrier by protectionism, set on imported goods from foreign country to protect inefficient domestic suppliers from low price foreign goods. The price of foreign goods imported in to domestic country is Pw. However, the government sets a tariff on imported goods and the supply curve shifts from Sw to Sw+tariff, increasing the price from Pw to P1. The increase in price of imported goods will increase the quantity of domestic product from Q1 to Q3, and decrease the quantity of imported goods from Q1-Q2 to Q3-Q4. There is a dead weight loss, which is the waste of economic resources.
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Previously, China has used a fixed exchange rate (a exchange rate regime where the value of a currency is fixed, to the value of another currency) as their exchange rate system, but they have turned their policy for using a floating exchange rate (a exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and the supply of, the currency on the foreign exchange market) in 2005. However, the new floating exchange rate is not completely dependent on the demand for, and the supply of, the currency on the foreign exchange market because Chinese government heavily intervenes to control their currency. Therefore, United States claims that China is manipulating their currency.
US claim that China manipulates its currency by having a current account surplus and have appreciation of Yuan against US dollars. One big reason why China is able to have a current account surplus is because, China’s export is exceeding the amount of import, and the export is especially high to US because China buys American bonds, which is an investment. There is great current account surplus in China and the Chinese government is happy about this, but US is not because great amount of Chinese current account surplus results from current account deficit in US. They claim that China is creating a current account deficit in US, but China is buying US bonds and that helps to filling negativity that US has. Though, US has a deficit in current account, their demand for Chinese products and far more Yuan, does not drop for Yuan being undervalued and increasing surplus in Chinese current account. There is a vicious circle between US and China.
Chinese currency is undervalued because China keeps their currency at low level against the dollars artificially. This low level of currency then gives advantage in trade for China because US is powerful over Yuan and Chinese products are cheap for US consumers. Exports from China increases. However, domestic consumers and companies are not able to import goods from US because Yuan is weak against dollars, which means that US products are expensive for Chinese people and demand is low. US consumers, and companies that use Chinese goods for production are happy with china having weak currency because consumer can afford Chinese goods cheap and companies can produce their goods cheap for cost of production being cheap. Chinese exporters are also happy about this for foreign demanders demand more from China.
In conclusion, China is manipulating their currency. They keep their currency undervalued and low level against US dollars for having advantage in trade. The export increases, but import decrease for the difference in the power of currency. This means that there is a current account surplus.
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Now I know how US is like in their current account.
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Australia’s current account deficit increased in three month from july to september as it lowered exports. This means that the amount of surplus decreasing, while the current account was already in deficit, has increased deficit of current account. The lowering of exports results from the long term effect of appreciation of currency, which mean that the value of currency increased. Appreciation in australia happened from increase in investment.
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Russia, Country in Surplus
http://tradingeconomics.com/Economics/Current-Account.aspx?symbol=RUB
The current account of Russia has increased since 1994 to 2010. Overall, the current account of Russia is positive, and it means they have a surplus. The amount of imports to the country is lower than the amount of exports. The current account has dropped significantly between 2007 and 2010, but it still stayed positive.
Summary of Article on Russia’s Surplus :
Russia is expected to have a surplus of $30-40 billion in the current account in 2009. The export exceeds import at 2009. This will make the central bank to purchase foreign currency.
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The evaluation part of my data response can be improved by demonstrating effective evaluation supported by appropriate evidence and theory. When I evaluated on the choice of US imposing a tariff on imported steel, I looked at pros and cons, and stakeholders of the event. The problem here was that same reasons can be written in each section, and that might make the evaluation in second part pointless. To solve this, I might want to explain both at same time.
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Globalization
Globalization, which is based on free trade, can acquire needed resources for a country, for example oil. However, at the same time, the monopoly of oil by OPEC raises the price of oil and requires other country to increase their spending. Globalization, can support economic development, but has to face loss of culture. The modernization we talk about now from globalization is americanization. Everything is colored western. Globalization brings problem in Africa that they are left out in global economy. They do not have strong education system bases, so it is difficult for business leaders there to learn new language, which are usually third or fourth language, to just have access to global market.African companies are not having necessary strength to compete in global market.
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Protectionism or not?
Protectionism is an economic policy that restrains trade between countries. Tariffs (tax on imported goods), setting quota (limitation of number of goods imported), and subsidizing domestic suppliers that are inefficient enough are methods used for protectionism.
Protectionism is in contrast with free trade, which the government does minimum on restriction of trade, therefore, the flow of economy is not natural. By having tariffs, quotas, and subsidies it helps inefficient domestic suppliers and at the same time rises the equilibrium price of a good. This single change would cause a dead weight loss, which is loss of available quantity of goods. Resources are wasted through protectionism. Also, by increasing price of a good, other suppliers that uses that good as a resource of production might suffer. A support in one inefficient supplier can cause chain reaction and results other suppliers, that were efficient enough, to be inefficient. For example, subsidy on steal would rise the equilibrium price of steal in the economy, and give space for inefficient steal suppliers to supply, but this means that producers that uses steal would have to increase cost of production. This increase in cost of production may put steal used goods producers to be inefficient in the market of that specific good. Protectionism helps only the supplier of a specific good. It is not beneficial for consumers and foreign suppliers.
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Free Trade
| Free Trade | Definition | Real World Example |
| Tariff | It is tax that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government. | China imposes tariffs on poultry imports from United States. |
| Quota | It is an import barrier that sets upper limits on the quantity or value of imports that may be imported into a country. | China has cut rare earth quota by 40% in 2010 compared to 2009. |
| Subsidy | It is an amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm an advantage over foreign competitions. | China subsidizes fuel. |
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