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Nik Marina Nik Ahmad Kamal (26 October 2015)

Using your knowledge of economics and the information in the article, evaluate the
consequences of the trade dispute on the Chinese economy.
Trade dispute refers to the dispute when protectionism is placed in the exchange of goods
and services between two countries. China is currently facing a threat of losing its main
customers in US since US has placed tariffs on Chinas passenger-car tyres.
Such situation will definitely affect the Chinas economy since Chinas export is one of the
key elements of its GDP. According to the text, Chinas August exports were 23% below
year-ago figures This will affect Chinas export tyre industry, causing the firms involved to
close down if firms are unable to sustain themselves. For the firms who are able to do so,
they will face an over-production of goods and need to find alternatives to reduce their
massive stocks of tyres. Chinese government may buy the tyres to help these firms away
from shutting down and this requires the Chinese government to increase its expenditures.
However, it is unlikely for Chinese government to be able to purchase most of the overproduction of tyres produced by Chinas producers. Thus, Chinas economy will face
structural unemployment, where firms have to lay off workers to sustain themselves in the
industry, eventually leading to a recession.
Nevertheless, China has the ability to recover quickly from this imposition of tariffs on its
tyres by imposing tariffs on US products in China instead. The tariffs gain by China will be
used to compensate the losses made when US imposed tariffs in Chinas goods. These
corresponds to the text where, In the short run, this could fairly easily spiral out of
control Both countries are somewhat backed into a corner. Through this, China will be
able to shift back its economy back to its normal state in the short run where the economy is
producing at the full-employment rate, meeting one of the macroeconomic goals of a low
unemployment rate.
Besides that, Chinas heavy-dependent on US market to increase its economic growth will
take its toll when this imposition has taken into placed. With fewer Chinese goods being sold
in US market, less returns in revenue for China. Nonetheless, China will be able to sell their
export goods to other places such as the European Union, Australia, Africa and Asian
countries. Last year, China shipped to USA auto tyres and threads worth $2 billion This
requires competing with other countries that are able to sell tyres with low costs production
such as India or Brazil. Other than that, China may not be able to regain its profitability as
much when selling to their places compared to their sales in US due to the many years of
trading between countries.
In conclusion, China may face losses and an increase in structural unemployment in the short
run due to the direct effect of USA imposing tariffs on Chinas tyres. Yet, in the long run,
China will recover from this as China will also impose tariffs on USAs goods in China. This
in the end will lead to both China and USA coming into terms on the price of tyres being
sold and price on other goods that China has imposed tariffs on.