This article discusses that China has introduced “anti-dumping security deposits” to Australian wine. Dumping occurs when the goods are exported to a country and sold at a lower cost than the costs of average production. In this case, “Australian producers are accused of selling wine below the costs of production.” Because all Australian wine importers are required to pay the deposits before their wine enter the Chinese market, these deposits work effectively as tariffs–a tax placed on imports. The tariff that China imposed on Australian wine will range from 107% to 200%.
Diagram 1: Market of Wine in China
As illustrated in Diagram 1 (Diagram is not drawn to scale), SD and DD are the domestic supply and demand curve. SW is the world supply curve and SW+T is the world supply curve after the tariff. Originally, the wine’s quantity demanded in China at price PW is Q4 (Welker). Nevertheless, the domestic producers only supply at Q1, leading to an excess demand from Q4 – Q1. In order to fix such excess demand, Australian wine imports to close up the gap. The import quantity is Q4 – Q1. However, after the implementation of the tariff (107% to 200%), the price of wine increases from PW to PW+T, causing the domestic quantity demanded decreases from Q4 to Q3 (Welker). At the same time, because the removal of the competition from Australian wine, the domestic producers are now able to increase their supply from Q1 to Q2. Therefore, the excess demand decreases to Q3 – Q2, meaning that the quantity imported also decreases from Q4 – Q1 to Q3 – Q2 (Welker).
Diagram 2: Welfare Loss Effect
After the implementation of the tariff, the price of wine will increase and the quantity received by the consumers will decrease, causing the consumer surplus to decrease from (a+b+c+d+e+f) to (a+b). For Australian producers, although the price of wine increases, their sales revenue will drop from (Q4 – Q1) × Pw to only (Q3 – Q2) PW+T. Meanwhile, the fact that “we had a reduction in export approvals of 80% to 90%” implies this tariff has impacts on the whole Australian wine industry as the majority of wine exported will be sold with low-profit margin or possibly unsalable. At the same time, because “our major competitors like EU are now given a tariff advantage to 100% – 200%”, it will make Australian producers even harder to compete in the Chinese wine market. Lastly, although Australia accounts for 35.5% of all wine imports to China (Yihan), suggesting a high preference from Chinese consumers, such an enormous level of the tariff could still turn consumers away. In fact, considering from this perspective, the Chinese consumers might need to give up the consumption on preferable wine - Australian wine. Therefore, both Chinese consumers and Australian producers are worse off.
For domestic producers, after the imposition of tariff, they will sell the wine at a higher price PW+T while selling greater quantity at Q2, indicating an improvement in their sales revenue. Hence, the producer surplus increases from g to g+c. For the Chinese government, the increase in tariff revenue e will increase the government’s revenue and can be reinvested into the Chinese economy in ways like the investment in the health care system, infrastructure and education. But most importantly, the Chines government’s initial intention to impose this tariff is that “they found that dumping exists”. As tariff is imposed, Australian producers lose their advantage of low price, and domestic wine producers become more competitive. That is to say, the issue of dumping is addressed, and the market is corrected. Therefore, both domestic producers and the Chinese government are better off.
Nevertheless, allocative inefficiency of resources may occur because Australia has the comparative advantage in the production of wine to China, meaning that Australia can produce wine at lower opportunity costs. But now Australian producers are forced to produce less. This deadweight loss is shown as d+f on Diagram 2.
In conclusion, although China’s imposition of tariff would damage the welfare of Australian wine producers, Australian wine producers is not a key stakeholder to consider from the policy’s intention. In addition, Chinese consumers’ welfare loss caused by the tariff can be comprised by the fact that there are many other alternatives, such as European wine producers, in the market. Most importantly, this policy effectively achieves its goal of addressing the issue of dumping. Hence, although it might lead to misallocation of resources, deadweight loss, the burden on domestic consumers, China’s imposition of tariff is overall successful and effective.
Sources:
Ma, Yihan, and Dec 17. “China: Wine Import Share by Exporting Country 2019.” Statista, 17 Dec. 2020, www.statista.com/statistics/1008210/china-wine-import-share-by-country/. Welker, Jason. “Pearson baccalaureate economics” Pearson, Sep 06, 2015.