Question

In: Economics

4. The Chinese government’s tobacco monopoly accounts for 12% of the government’s revenue. It sells to...

4.

The Chinese government’s tobacco monopoly accounts for 12% of the government’s revenue. It sells to China's 310 million smokers, 1/4 of the world's smoking population, who consume 1700 billion cigarettes a year, about 30% of global consumption

By imposing a 230% tax rate on foreign cigarettes, and by imposing import quotas and restrictions, the government limited legal foreign cigarette sales to less than 2% of total Chinese sales in the late 1990s. However, by 2003 the foreign cigarette share was only 10%. To appease the World Trade Association, China agreed to lift restrictions on the retail sale of imported cigarettes by January 2004, to reduce the tariff on cigarettes from the current 65% to 24% , and to phase out the tariff over the next two years. Thus, the state's monopoly will be eroded.   Expectations were that the price of imported cigarettes would drop by half and imported cigarettes would gain a major share of the Chinese market.   

  1. In this case study discuss the impacts of the quotas, tariffs and restrictions on Entry into the Chinese market. What was the intended end result? Explain.

  1. Given your answer in (a), use a graphical analysis to demonstrate and explain what occurred after the restrictions were lifted.

Solutions

Expert Solution

(a) Tariffs and quotas are ways for governments to protect domestic firms and industries. These economic trade tactics ultimately lead to higher prices of goods and fewer choices or quantity of imported goods for the consumer. Because of higher prices, consumers ultimately can buy fewer goods and services.

Here in the given case study when chineese government imopsed greater taxes in the import of foreign cigarettes, restricting their entry into the chineese market resulted into the downfall of foreign trade market of cigarettes as by 2003, it is mentioned that the sale was down to 10% as a result of 65% tariff on the foreign cigarettes.

  • THis would have helped the small businesses of inner chineese market that were strugling to get a space inside the market as China is the largest market for smoking cigarettes.
  • One of the major impact would be the raise of domestic firms that were earlier had to compete with foreign traders as well, now just have to compete with the domestc market businesses.
  • By restricting foreign competition and hence the simple economic principle of supply and demand, imported goods artificially rise in price and stimulate the demand for higher priced domestic goods.

(b) After restrictions were lifted, the foreign traders would have had some difficulty at first to get into the local market but soon they would have regain their orginal postion back as they already have people's trust to thier brand name.


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