South-Western College Publishing - Economics  
We'd like to increase Chinese production, but the (Chinese) government won't let me!
Subject Firms want to increase production in China, but are thwarted by US and Chinese government restrictions.
Topic Production and costs; International trade
Key Words

production, China, export restrictions

News Story

Chinese textile firms have been seeking sites to build larger factories to meet production demands, but are finding that the Chinese government is reluctant to lease land to firms. The government is also taking steps to ensure that natural resources are not stretched any further than they currently are. Inflationary pressures also loom over the Chinese economy: an issue that has the government's intense attention.

Further, U.S. firms are becoming increasingly reluctant to request additional production from its Chinese suppliers. These firms are concerned that the U.S. government will impose quotas on Chinese exports to the US. Firms such as Perry Ellis and Liz Claiborne are not willing to increase production in China lest they be unable to bring the goods back into the U.S.

As the Chinese economy grows, incomes will increase. As incomes increase, workers will begin to request higher wages, pushing up labor costs and reducing these firms' comparative advantage. Already, some firms along China's coast are having difficulty finding workers, requiring increased wage to ensure a flow of rural workers coming into the urban areas for employment.

(Updated December, 2004)

Questions
1.

If the US decides to impose import quotas on Chinese goods, what will happen to the price of such imports? Illustrate your answer with a supply and demand graph. Does this phenomenon represent a movement along a supply or demand curve, or a shift in the curve itself? Why?

2. What is happening to these firms' average production costs when they must increase production without moving to larger facilities? What will happen once they succeed in constructing larger factories?
3. As Chinese workers begin requesting higher wages, what will happen to the prices of Chinese-made clothing? What will happen to the prices of U.S.-made clothes? Use a graph of supply and demand to illustrate your answer.
Source Rebecca Buckman. "Navigating China's Textile Trade." The Wall Street Journal, 10 September 2004, http://www.wsj.com.

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