Traditionally, China's economy has been extremely protectionist - that is it imposes high barriers to trade. In order to obtain membership to the World Trade Organisation, China has lowered its trade barriers for Australia and many other countries.

Fig.1

The economic effects of a protective tariff.

A tariff of PwPt will reduce domestic consumption from Qd to Qc. Domestic producers will be able to sell more output (Qb rather than Qa) at a higher price (QPt rather than QPw). Australia will lose income because we are able to sell less output (bc rather than ad) in China. The shaded area represents the amount of tariffs payed by Chinese consumers.

Australian industries such as agriculture and mining that have suffered from high Chinese tariffs and quotas (Fig.1) will now benefit from the reduction in trade barriers. Australian producers will be able to increase their exports to china, and thus increase its revenues and profits. Likewise, China will also benefit in the form of social welfare increases as more goods and services are supplied at a lower world price. Lowering trade barriers will see prices decrease and quantity consumed increase. Fig. 2.

Fig.2

Social Welfare Increases

As the domestic price changes to the significantly lower world price, social welfare increases as more is goods and services are supplied at a lower price: Q1 shifts to Q2.

Through comparative advantage, China can also benefit though trade as the country can produce many goods cheaply through inexpensive labour, and thus, other countries will import more of their products.

The article, however, also mentions that in the short term millions of Chinese people could lose their jobs. This is as millions of Chinese have inefficient family farms, and will be unable to compete at the new, lower equilibrium price. Fig. 3.

Fig.3

Loss of Jobs

The move from Q1 to Q2 illustrates the decrease in the amount of goods and services supplied domestically. Less goods and services from domestic output will lead to loss of jobs, and a shut down of firms etc.

Entering the WTO would cause a change in China’s market structure from an agricultural based structure to a more manufacturing based one. Along with growth of the manufacturing sector, more firms will switch to the sector, creating more jobs, thus “Chinese leaders are convinced that foreign investment and greater access overseas for Chinese exports will create jobs and prosperity”. However, the skills involved in farming and manufactory are different, therefore, the transitional period may be long, and the economy will slump before is recovers.

Commentary word count:  402  words.