Moonsung  Kim  (SID  20431229)     Article Summary: Chinese official announced to investigate dumping of poultry products exported from US as a reaction to a recent imposition of US import tariffs on tires from China. The WTO explicitly prohibits member countries from dumping exports underhand. As  China   is   a   major   net   importer   of   US   chicken,   Chinese   producers   and   consumers   welfare   depends  heavily  on  the  trade  policy  of  US  with  about  90%  of  imported  is  from  US.  In the recent years, Chinese dependency on imported chicken has exponentially grown due to poultry producers having been struggling over the past couple of years. After the break out of bird flu and with the additions of cheap imports and the financial crisis, producers made losses went out of business. When the poultry and tire industries united to outcry against US trade policy, Chinese officials launched an investigation on US dumping case. If the accusation of dumping proves to be true, China would be able to mitigate US poultry dumping. However, any action taken by the Chinese government without the consent of WTO could initiate a trade war between two countries. Source of Article:

‘MOC:  

Anti-­dumping  

probes  

(http://www.chinadaily.com.cn/china/2009-09/16/content_8693709.htm);

'based  

on  

facts'’

‘China   Probes   ‘Unfair   Trade’   in   U.S.  

Chicken  and  Auto  Products’  (http://www.bloomberg.com/apps/news?pid=20601080&sid=a9igRzOC55wE) Question 1.

The article states US is dumping poultry products into Chinese market. What are

the assumptions drawn from the article? What model is appropriate to clear and accurately show underlining conditions in China, US, and World markets on chickens? What are explanations for the initial conditions? Assumption 1.

China is a major net importer and US is a major net exporter of chicken because

the article states, “about 90 percent of imported chicken came from the U.S”. To further simplify, world market is consist of two countries, China and US, in the model. Assumption 2.

US poultry industry has a monopoly power and ability to segregate domestic

market. To assume the China’s dumping accusation as true, US poultry industry must be able to charge monopoly price in US while given marginal cost in world market. Initial Autarky Condition China – Left Diagram: China has a comparative disadvantage in poultry production because it is a major importer. Its autarky price, PA, is above world price, PW0. US – Right Diagram: US has a comparative advantage because it is a major exporter. Its autarky price, P*A, is below world price, PW0.

Moonsung  Kim  (SID  20431229)    

World – Middle Diagram: The world import demand curve, MD, is derived from China’s domestic supply, S, and demand curves, D. The world export supply curve, XS*, is derived from US’s domestic supply, S*, and demand curves, D*. World equilibrium is given at the world price of PW0 where the China will import M0 = D0 – S0 units which is equal to US’s exports of X*0 = S*0 – D*0. Where China’s quantity imported, M0, equal to US’s quantity exported, X*0, gives the world quantity traded, QW0. Question 2.

Now, assuming that US poultry production is a monopoly and is dumping in the

world market, show graphically on the diagram in RED. Explain. With US dumping poultry exports, US domestic producer will increase supply from S0 to S1 where PW0 intersects Supply Curve at the world price W0. MC* = PW0 Domestic price will increase from PW to P*D, and domestic quantity demanded would decreased to D*D where MC* = MR*. At the world price W0, US dumping created excess supply of S1 – D1. This excess supply would shift XS curve to the left, XS1, and push down the world price to W1. With decreased world price, Chinese domestic supply has decreased from S0 to S1, and domestic demand has increased from D0 to D1. As a result US export has increased from X0 to X1 and Chinese import has increased from M0 to M1. At world price W1, quantity traded has increased from QW0 to QW1. Question 3. CS change PS change Gov change Net welfare

What are the welfare effects of the dumping? What is the net effect? China +A+B+C+D –A ø +B+C+D Net gain for China

US –a–b–c–d +c+d+e ø –a – b +e Ambiguous result

China has a net gain in national welfare.

However,

due

to

producer’s complaints and the retaliation on Tire tariff, the

Moonsung  Kim  (SID  20431229)     China is making a case. US has an ambiguous net change in national welfare. If the PS gain from dumping production is greater than CS loss, the US gains as a whole. However, if the PS gain is smaller, the country losses. Question  4.

The article states, “Chinese  poultry  companies  have  been  struggling  …  amid  bird  

flu   and   a   flood   of   imports,   and   the   financial   crisis   is   making   that   worse.”   What   are   the   consequences   of   each   event?   Could   this   be   an   alternative   explanation   for   the   hike   in   Chinese  poultry  imports?   With   the   outbreak   of   bird   flu,   Chinese poultry industry faced toughened Chinese health department passed new rules and regulations on poultry production, processing, transportation, and storage. The new rules and regulations permanently increased fixed cost and marginal cost of producing chicken. There are two consequences arising from increased marginal costs and fixed costs. Higher price due to increased cost of production leads to increased import demand. Because Chinese producers, now, have to invest in new equipment and maintain higher standard, cost of producing has increased. “A flood of imports” suggest that price of imports are cheaper than domestically produced chicken, thus increasing import demand. New producers are deterred from entering poultry industry due to higher fixed costs and financial crisis. Consumer confidence and bank credit have not been able to fully recover from the financial crisis. New producers are having hard time getting poultry business start up because of banks being wary of the industry requiring more loans yet generating less profit. Reduction of domestic quantity supplied in China would increase domestic price of chicken. If drawn on the graph, the domestic supply of chicken in China would shift to the right representing increased cost of producing chicken and reduced supply of chicken. In Chinese domestic market, quantity supplied would decrease while quantity demanded remains unchanged at any given price. As a result, Import demand curve in the world market would shift to the right. Chinese imports and US exports would increase. World quantity traded would increase. As opposed to US dumping, if the increased dependency on imported poultry were due to Chinese producer’s financial hardship, the world price would increase.

Moonsung  Kim  (SID  20431229)     Question 5.

So far, there are two probable explanations for the China’s claim, US dumping

and financial hardship of Chinese poultry producers. Which is more realistic? Explain your answer, and provide evidences to support your explanations. For the past decades, US production and exports have been steadily increasing, while China has been demanding more imports. Both US dumping and China’s increased production costs could be feasible explanations for import trend in China. However, the fluctuation of chicken price does not give a clear indication to a single explanation. Looking at the chicken price trend from 2000 to now, three time periods correspond to either event. In the early 2000 when the bird flu broke out, the price of chicken has increase. Many Chinese producers took in the cost of infested and potentially infested poultry products. At the same time, China increased food safety and health regulation standards. As a result, numerous poultry producers went out of business and supply decreased dramatically. It concurs with the increased cost explanation. The financial crisis took a hit on financial markets around the world on 2008. Consumer confidence has dipped and getting credit became difficult for small businesses. This period coincides with financial hardship explanation as the price poultry has been rising since the financial crisis. During the period from 2002 to 2006, the price of poultry fell. To examine the effects more realistically, the initial assumption needs to be modified. Although there are only a handful of producers in the US, the possibility of dumping or monopoly pricing is improbable with 7 firms are holding 90% of production. On the other hand, the fact that 3 firms hold more than 68% of the market could suggest a possibility of oligopoly cartel. However, not only the law prohibits cartel but also the non-differentiable characteristic of poultry products makes it unrealistic. As an alternative hypothesis, the Chinese producers have been recovering from the bird flu during this period. Because the financial market was working properly, producers easily borrowed money to manage losses and re-invest in the capital equipments. Thus, supply of chicken increased and price of chicken fell. With given evidences and analysis, the result shows that the possibility of US dumping chicken in world market is unrealistic and is not supported by any evidence. Thus, Chinese government is giving false accusation and empty-threats to provoke a trade war.