South-Western College Publishing - Economics  
It's the Dollar General...Town...
Subject Chinese town boasts world's biggest bazaar and largest discount outlet made up of thousands of small vendors.
Topic Economic Analysis; Perfect Competition
Key Words

price competition; China; market; profit

News Story

Go to Yiwu, China, just south of Shanghai in Zheijiang province, and you'll find the largest collection of vendors willing to engage in serious price competition. International Commodity Trade City, located in Yiwu, is a "modern market that snakes nearly two miles long, with 14 aisles across, a truck-access road running along the back of each of its four floors." It's currently home to about 10,000 vendors, some with trading areas as small as 110 square feet.

Last year, Yiwu completed $730 million in trade, up 80% from 2002--not bad for a town of 650,000. Traders are looking to make Yiwu THE discount outlet of the globe, as almost anything can be purchased there. You can find name-brand products as well as cheap knock-offs here. Most of the products are produced in surrounding villages, where people are less concerned about branding than they are about simply producing extremely high-volume, low-profit-margin products. A six-foot tall Christmas tree that would retail in the US for about $50 sells here for $6. Heavy wool socks can be bought for $0.30 here. It's becoming the mecca for international buyers and other sourcing companies to purchase their products in whatever volume they desire.

Speaking of socks, the US sock industry isn't too happy about Yiwu's success. The US Hosiery Association argues that China has used dumping practices to increase their share of the US sock market from 1% in 2001 to 21% this year. As a result, the average retail price of socks in the US has been cut in half to $4.21 per pair, and the Hosiery Association has been lobbying the Bush Administration to administer tariffs on Chinese sock imports. The Chinese merchants don't care about such geopolitical issues; they just want to sell socks. And sell them cheaply.

Trade City is expanding, also. A four-star hotel is planned in the center of the City for next year. Meanwhile, a hardware section has just been added, and several more vendors have been granted space to sell their products.

Questions
1.

The article mentions that the price of socks in the US has fallen to $4.21 per pair, about a 50% decline. Why? Explain, using a graph of supply and demand. Is the dumping charge fair? Why or why not?

2. With the increasing competition coming from vendors in this Trade City, what will happen to any economic profits these firms earn? Why?
3. With so many vendors wanting to gain space in the Trade City, what conclusion, if any, can you draw about the relative opportunity cost of production in China? What will happen to production costs elsewhere in the world as a result?
Source James T Areddy. "Chinese city hosts low-price bazaar." The Wall Street Journal. 8 November 2004. A12.

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