South-Western EconNews

Trade Organization More Worldly

Subject

Production possibility frontiers, Gains from Trade

Topic

International Trade

Key Words

World Trade Organization, tariffs, imports, subsidies, state-owned industries, regulations, investment, exports, market, producers, growth, trade, businesses, consumers, workers

News Story

The World Trade Organization has cleared the way for China and Taiwan to join the 141-strong trade body. Membership means that China will have to reduce its tariffs on imports to 8 percent from 21 percent and will have to eliminate subsidies to farmers and state-owned industries. Worldwide regulations on copyrights will have to be respected, which means software pirating must be stopped. It will be easier for foreign countries to invest in China. They will be able to own greater shares of Chinese companies. They will be able to set up operations there.

As a result, China will be able to export more of its basic goods, such as textiles and clothing, while the U.S. will be able to export more of its advanced goods, such as electronics, and will be able to manufacture goods inside China. With fewer regulations, Chinese producers will be freer to be entrepreneurial. Greater access to the 1.3 billion Chinese consumers widens the market for producers around the world.

Taiwan, being much smaller and in its worst economic shape in three decades, will have less of an impact. Nevertheless, its membership in WTO will strengthen the region, which has been weakened by Japan's slow growth.

President Bush welcomed the decision, observing that the increase in trade and investment will bring benefits to businesses, workers, and consumers in all economies.

(Updated December 1, 2001)

Questions

Trade between the U.S. and China is expected to increase. Use the law of comparative advantage to explain why China will export more textiles and clothing, while the U.S. will export more electronic goods.

Assume that the U.S. and China produce two goods - textiles and electronics - and that China has a comparative advantage in the production of textiles, while the U.S. has a comparative advantage in the production of electronics. Draw production possibility frontiers for each country.
a) Show where each country might be on their respective production possibility frontiers in the absence of specialization and trade.
b) Explain how your diagram shows that China has a comparative advantage in textile production.
c) Show where China and the U.S. might be on their respective frontiers after increases in trade as a result of China joining the WTO. Explain what you have drawn.
d) Why will both countries be better off?

Source

John Waggoner, "Taiwan joins China in WTO," USA Today, November 12, 2001