South-Western College Publishing - Economics  
Note to China: Trade is a Two Way Street
Topic International Trade
Key Words International Trade, Chinese Exports, and Trade Barriers
Full Article

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Reference ID: A153271487

News Story The European Union has warned China that the Chinese may face increased trade barriers on exports such as cloths, shoes, and electronic goods if they do not do more toward creating a two- way trading street for E.U. members. China's boom, fueled by its comparative advantage for relatively cheap labor in producing clothing and electronics has produced and exported record numbers of products in recent years. At the same time, China's monetary policy has pegged its currency, the yuan, at artificially low rates, placing China's trading partners at a disadvantage.

Economist use this term "comparative advantage" to explain the benefits of trade. Comparative advantage is one trade partner's ability to produce a good or service at a lower opportunity cost compared to other products. If each country specializes in producing what it does best and then trades with other countries, the total production of goods and services increases.

The E.U.'s large and growing trade deficit with China is a signal of the looming problems between the two sides. 2005 Chinese exports to Europe were worth 158 billion euros ($198 billion). At the same time, Europe exported only 52 billion euros ($64 billion) worth of products to China. "There is a growing risk that the E.U.-China trading relationship will not be seen as genuinely reciprocal," the Union said. "A range of obstacles to market access and skewed conditions of competition need urgent attention." The two sides have already clashed over exports of cheap clothes, leather shoes, car parts and plastic bags from China.

Even the Europeans are split on the trade conditions. Some European countries want open trade with China, while others want to protect their own manufacturing with tougher trade barriers. Many southern Europeans manufacturers-typically the poorest of the E.U. members--fear being crushed by Chinese imports and favor trade barriers such as tariffs on Chinese imports. But in northern Europe, many retailers like department stores and large sporting goods stores see profit and benefit to consumers in reselling the low cost Chinese imports.

European trade commissioner Peter Mandelson has the job of reconciling the two sides of the issue. He has attempted to diffuse the issue by reminding E.U. countries that they can be most competitive in innovative and high-quality products, the ones they have a comparative advantage in producing.

Actually there might be something to learn from China. China "is not a globalization scare story," Mr. Mandelson said in Strasburg, France. "It is a globalization success story."

Discussion Questions:
1. Discuss the notion of comparative advantage. With what kinds of products do you think the U.S. has a comparative advantage?
2. Use any source available to research the topic of trade barriers. Name and discuss two trade barriers and their respective effectiveness.
Multiple Choice/True False Questions:
1. Utilizing comparative advantage leads trading partners to a larger total production of goods and services.
  1. True
  2. False
2. A tariff is a tax on exported goods.
  1. True
  2. False
Source James Kanter, "China Trade Policies Draw a Warning From Europe", The New York Times Online, October 25, 2006.
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