Core World Trade

Module Foundation Part: Trade: Conditions,

19 Gains and Disputes

Why is there trade?

Why are there always demonstrations against
meetings of the World Trade Organization?
Does trade protection policy protect all the
citizens?
Are the prospects for external trade in Hong
Kong promising?

1
 Through the following simulation game, students may have a better
understanding of the reasons for trade, international division of labour
and the conditions for trade to take place among countries.

Worksheet (1) Stimulation Game- Why is there trade?

Dear students:
Why do countries trade with each other? Is trade really mutually
beneficial? Is free trade really beneficial to everyone involved? Lets
find out the answers together through a simulation game!

Guidelines:
Divide into two groups of around 18-20 students. Students of each group become
Grouping
the people of Womm Republicand Hamm Stateletrespectively.
The people of both countries will go through two rounds of production under the
Game Rules instructions given by their governments, record the outputs and discuss whether
they should trade with their neighboring country.
Products to be
Garments, bead strings
produced

The following is the background information of the two countries:

Womm Republic Hamm Statelet

Population: 1 million Population: 0.5 million

Peoples average education level:
primary education
Major occupations of the People:
farmer, factory worker, driver, etc
Womm Republic is self-sufficient
with rich natural resources. It seldom
communicates and trades with other
countries.
Peoples average education level:
senior secondary education
Major occupations of the people:
factory worker, clerk, salesperson,
waiter, etc.
Hamm Statelet seldom
communicates with other countries
because of its remote location. It is
also a self-sufficient country.

These two countries are self-sufficient, while garments and bead strings are the products that their
people need most in their daily life. Therefore, the governments wish to start production
immediately!

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 Through this part of the activity, students may have a good understanding of
productions in the countries when they are self-sufficient.

Activity Worksheet 1: Round 1 Production

Activity of Womm Republic

Note:
Manpower should be equally allocated. Half of them should produce garments
and half of them should produce bead strings. All people must produce goods
in accordance with the design made by the government and no personalised design will be allowed.
The products will go through a final quality control process, by which only those meeting the
specification given by the government will be counted.

Time limit: 8 minutes

Form teams of 4 people, and each team will have the following tools:
Garment Production Team Bead String Production Team
Scissors x 2 Fishing line x 1 roll
Glue x 1 Beads in different colours
Garment paper mould (A4) x 4 Paper ruler x 2
Heart -shaped paper mould (A4 Orange in Sample of bead string x 1
colour) x 1 (Note: It will be faster to use fishing
Sample of garment x 1 line rather than needle and thread)

Record the output of each team in the following table:

Garment Production Team Bead String Production Team
Number of
Participants

Output of
Round 1
Production

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Summary:
Calculate the total outputs of garments and bead strings of Womm Republic and Hamm Statelet
when they are self-sufficient.
Output of Garments Output of Bead Strings

Womm Republic

Hamm Statelet

Total Outputs of the Two

Countries

Suppose the people of Womm Republic and Hamm Statelet wish to enhance their living quality.
Can you suggest any method, with resources remain unchanged, to increase the total outputs of
garments and bead strings of the two countries?

4
 Through this part of the activity, students may understand the
productions of countries when they are self-sufficient.

Activity Worksheet 1: Round 1 Production

Activity of Hamm Statelet

Note:
Manpower should be equally allocated. Half of them should produce garments and half of them
should produce bead strings. All people must produce goods in accordance with the design made by
the central government. No personalised design will be allowed. The products will go through a final
quality control process, by which only those follow the specification given by the central government
will be counted.

Time limit: 8 minutes

Form teams of 4 people, and each team will have the following tools:
Garment Production Team Bead String Production Team
Scissors x 3 Needle and thread x 1box
Glue x 2 Beads in different colours
Heart-shaped paper punch x 1 Paper ruler x 1
Garment paper mould (A4) x 4 Sample of bead string x 1
Orange paper x 1 piece
Sample of garment x 1

Record the output of each team in the following table:

Garment Production Team Bead Chain Production Team

Number of
Participants

Output of
Round 1
Production

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Summary:
Calculate the total outputs of garments and bead strings of Womm Republic and Hamm Statelet
when they are self-sufficient.

Output of Garments Output of Bead Chain

Womm Republic

Hamm Statelet

Total Outputs of the Two

Countries

Suppose the people of Womm Republic and Hamm Statelet wish to enhance their living quality.
Can you suggest any method, with resources remain unchanged, to increase the total outputs of
garments and bead strings of the two countries?

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Suggested answer:

Suppose the people of Womm Republic and Hamm Statelet wish to enhance their living quality.
Can you suggest any method to increase the total outputs of garments and bead strings of the two
countries, with resources remain unchanged?

The countries may focus on the production of products that they have competitive advantage or with
lower costs of production compared to that of the other countries. Womm Republic may try to
specialise in the production of bead strings, while Hamm Statelet in garments to increase the total
outputs of garments and bead strings. They may then reallocate their products through trade to
enhance the consumption and quality of living of their people.

Therefore, we suggest there should be division of labour in production between the two countries,
then both of the countries can enjoy more outputs through trade.

Guidelines for Teachers:

This learning activity could have different levels of learning targets. First of all, students
should be able to understand that country can benefit from specialisation and
international trade. Secondly, teachers may have a basic introduction to students over the
idea that countries may specialise in producing the product that they are good at or have a
lower production cost compared to other countries, while the concept of cost of
production is not required to be clearly defined at this stage. Finally, for students with
better comprehension skills, (economics) teachers may try to apply the concept of
comparative advantage in explaining to students the considerations for a country to
choose a product to specialise in production. However, for S3 students, this is not
necessary.
Teachers are also reminded that the accurate economic concept, and hence the correct
economic term, used in trade theory is comparative advantage. However, this concept
is rather complicated and difficult for students, the term competitive advantage is used
instead for simplicity.

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 Activity Worksheet 2: Round 2 Production
Activity of Womm Republic

Note:
According to the conclusions in Worksheet 1, you need only to specialise in the production of bead
strings in this round.
All people must produce goods in accordance with the design made by the central government. No
personalised design will be allowed. The products will go through a final quality control process, by
which only those follow the specification given by the central government will be counted.

Time limit: 8 minutes

Form teams of 4 people, and each team will have the following tools:
Bead String Production Team
Fishing line x 1 roll
Beads in different colours
Paper ruler x 2
Sample of bead string x 1

Record the output in the following table:

Bead Strings
Number of Participants

Output of Round 2 Production

Summary:
Calculate the total outputs of garments and bead strings of Womm Republic and Hamm Statelet
when there is international division of labour.
Output of Garments Output of Bead Strings
Womm Republic

Hamm Statelet

Total Outputs of the Two

Countries

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 Activity Worksheet 2: Round 2 Production
Activity of Hamm Statelet

Note:
According to the conclusion in Worksheet 1, you need only to specialise in the production of
garments in this round.
All people must produce goods in accordance with the design made by the central government. No
personalised design will be allowed. The products will go through a final quality control process, by
which only those follow the specification given by the central government will be counted.

Time limit: 8 minutes

Form teams of 4 people, and each team will have the following tools:
Garment Production Team
Scissors x 3
Glue x 2
Heart-shaped paper punch x 1
Garment paper mould (A4) x 4
Orange paper x 1
Sample of garment x 1

Record the output in the following table:

Garments

Number of Participants
Output of Round 2
Production

Summary:
Calculate the total outputs of garments and bead strings of Womm Republic and Hamm Statelet
when there is international division of labour.
Output of Garments Output of Bead Strings

Womm Republic

Hamm Statelet

Total Outputs of the Two

Countries

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 Activity Worksheet 3: Discussion after
Round 2 Production Activity

1. Review the whole process of the activity. What are the conditions for trade to take place?

- Each country has its own competitive advantage in the production of certain product, it may due

to reasons, such as amount of resources, tools owned or amount of talents who are good at

producing a particular product

- Trade must be mutually beneficial. If any one of the party involved cannot gain from trade, it

will withdraw and back to self-sufficient condition.

Guidelines for Teachers in respect of Question 1:

This activity aims to discuss the conditions for trade to take place from the perspective of
production. However, teachers may further explain that different countries may have different
preference for products. It could also be another reason for trade.

Guidance Note: Teacher may simply apply the output data from the production activity for the
following calculation and analysis if the outputs meet the expected results.

2. Answer the following questions with reference to the following context and data.

Source 1: Outputs of both countries when they are self-sufficient

Outputs of Outputs of Bead
Garments Strings
Womm Republic 5 20
Hamm Statelet 20 5
Total 25 25

Source 2: Outputs of both countries with international division of labour

Outputs of Outputs of Bead
Garments Strings
Womm Republic 0 40
Hamm Statelet 40 0
Total 40 40

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a. What are the changes in the total outputs of garments and bead strings of the two counties with
international division of labour?

Both of the outputs of garments and bead strings had increased by 15 units.

b. If both countries distribute the outputs with international division of labour equally. Explain
how Womm Republic may benefit from the trade compared to that of self-sufficient situation.
Womm Republic Amounts of Garments Amounts of Bead Strings
Outputs when self-sufficient 5 20
Amounts available for consumption
(self-sufficient)
Outputs with international division
0 40
of labour
Amounts available for consumption
(with trade)
Benefits from trade

c. Based on the above information and what you know, what are the benefits of international
trade?

- International division of labour would lead to an increase in global outputs.

- Countries involved in trade may have access to more products and enhance quality of living of

their people.

(Note: Teachers may further explain to students that countries may have access to more products

in terms of quantity and variety through trade. The learning activity has its limitation that it

only describes the benefit from trade in terms of more quantity. In the real world, however,

countries may acquire products they cannot produce through trade.)

- Through specialization in production, countries involved in trade may enhance their production

efficiency while they may be able to produce higher quality product through practice makes

perfect.

- The two countries may promote cultural exchanges and introduce new technologies through

trade.
Note: The term competitive advantage is used instead of comparative
advantage throughout the module so as to avoid touching on the theoretical
Economics concept, which is not required for the junior form students.

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 Discussion Activity: Problems Caused By Trade

3. Read the comments of the following persons. What are the harmful effects caused by trade?

Since we have traded with Womm Republic, my business

performed much poorer than before. The government hopes that we
can switch to the production of garments, but my workers only have
the experience and skills for producing bead strings. Its very
difficult for them to learn for it and cope with the change!

A bead string manufacturer

in Hamm Statelet

My family insists on passing the art and cultural heritage in our

country by making the bead string in local family factory.
However, the bead strings from Womm Republic have
flooded into our country at a lower price after the opening-up
of our market. We have lost a lot of customers! Should we keep
A craftsman in Hamm working on this craftsmanship?
Statelet

Although we have access to more products and

enjoy a better living quality after trading with
Womm Republic, the unstable political situation
in Womm Republic may affect our trade.

Citizens of Hamm Statelet

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- Under international division of labour, the country will specialise in production of certain

products. Meanwhile, other businesses that are less competitive could be disappeared in

competitions.

- Under international division of labour, labour engaged in the industries in downturn will be

unemployed as they didnt have the skills required for the new business.

- Consumers would prefer to buy lower price imported goods from overseas. Therefore, some

local cultures would be eroded by these imported goods and even disappear.

- The country will centralise the resources to produce certain products in order to exchange for

other imported goods. If there is any obstacle to trade, we may not be able to import goods from

other countries, there will be a great impact on the living of the people.

: What is Trade?

Trade is an activity where a buyer and a seller are involved to exchange products or services in the
market. In modern world, the buyer in a trade will usually pay money to the seller for goods or
services. The buyer and the seller in a trade may be an individual, an institution or a country. With
technological advancement, trade may be taken place at a global or multinational level with the
support of global logistics and internet. A country will specialise in its production of goods that they
have competitive advantage. It makes good use of its resources and the benefit of mass production so
as to increase its total output and enhance economic efficiency.

Benefits of Trade
Through trade, production unit may specialise in the production of goods in accordance with their
own competitive advantages. Generally, there are three benefits of trade:

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1) Enhancing production efficiency: Through trade, a country produces products that it has
competitive advantage. They do not need to produce all goods. They will have specialisation in
production and production efficiency will be enhanced.

2) Providing more choices for consumers: Through trade, a country may obtain more variety of
goods. So, consumer can have more choices.

3) Fostering economic development: Through trade, countries have to compete in the market. They
have to improve product quality or production technology for competing customers. This will foster
economic growth and economic development.

Harmful effects of Trade

In the process of trade, a country will specialise in producing goods or services with competitive
advantage. In global competition, both labour and countries have to face many challenges from trade.
In summary, there are three harmful effects of trade:
1) Risk of Unemployment: In global competition, a country will centralise its resources for the
industries with competitive advantage. This will lead to the concentration of job opportunity in
these industries. If labour engaged in other disadvantaged industries cannot switch to the
industries with competitive advantages, they will become unemployed.

2) Less competitive industries will be displaced: For industries that are less competitive, as their
production cost are higher than that in other countries, these industries can hardly exist in the
domestic market due to the competition of the imported products. Many of these industries are
embedded with local cultural heritage which would then be affected.

3) Unfair Trade affects social stability: In terms of national power, there has been a large gap
between countries due to historical and economic reasons. Those powerful countries may set the
terms of trading agreements in their own interest and harm the interest of the disadvantaged
countries. Such trading relation would widen the gap between the rich and the poor, which
destabilises the global community.

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 Worksheet (2): Common Trade Protection Policies and
their effects on different stakeholders

1. Recently, many people of Hamm Statelet have joined a street protest, as they have lost their jobs
after trading with Womm Republic. The livelihoods of the people were seriously affected.
Suppose you were the Director of the Trade Development Department, what measures would
you take to deal with this issue?

In respect of the requests of the people, I will

_________________________________________________________

_________________________________________________________

_________________________________________________________

The Director of the

Trade Development
Department of
Hamm Statelet

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2. In order to ease the discontent of the people, the Director has established an ad hoc committee
to study the practices of other countries before making decision. The committee members have
visited some countries and have studied a number of cases. With reference to the following
information, match the cases with the relevant trade protection policy.

Import Import Export Embargo

tariff quota subsidy

Case 1
The US government provides cotton farmers with a subsidy of around US$4 billions every year to
help them to install huge mobile sprinklers and advanced tractors for maintaining the
competitiveness of exported cotton. This measure may secure the attractive yield of cotton of the US
every year and lower the global price of cotton. Meanwhile, this measure causes harmful effects to
the livelihood of 11 million cotton farmers in West Africa and directly cut the number of rivals.

Source: Oxfam Hong Kong

Trade Protection Policy: Export subsidy

Case 2
In order to protect the local automobile industry in Brazil, the Brazilian government has imposed a
tax on imported cars at a rate of 55%, which eventually led to an increase of 25% in the prices of
imported cars. Following the implementation of the new tax policy that aims to protect the local
automobile industry, consumers preference for buying imported cars slumped and the sales of local
mobile industry increased.

Source: news round-up Trade Protection Policy: Import tariff

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 Case 3
Hong Kong became the leading exporter of garment and textiles in the 1970s. The garments made in
Hong Kong had taken a large market share in the US for their low price and high quality. In order to
protect the domestic garment industry, the US government had decided to impose an import quota on
garments made in Hong Kong. The import quota on textiles and garments was abolished on 1
January 2005. Following the abolishment, textile products and garments from Hong Kong can be
freely imported to markets like the US, EU, Canada,etc.

Source: news round-up Trade Protection Policy: Import quota

Case 4
The US government imposed a trade embargo against Cuba in 1962 to attain its political objective
against the Cuban government. Enterprises in the US were not allowed to trade with Cuba.
Meanwhile, economic sanctions were imposed on Cuba. Cuba simply could not sell sugar, which is
its major output and source of income, as a result of these sanctions. During the 50 years embargo
period, the Cuban government provided daily necessities to its people through rationing due to the
tight supply of goods. The situation remained the same until October 2000, when the U.S. President
Clinton allowed the sales of US agricultural goods and medical supplies to Cuba for solving its food
shortage. However, the US government did not announce to lift the embargo entirely.

Source: news round-up Trade Protection Policy: Embargo

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 Challenge

The Director of the Trade Development Department of Hamm Statelet has not made any decision
after studying the trade protection policies in other countries. He hopes that the proposal adopted can
attain the following objectives in addition to improving the quality of life of the people of Hamm
Statelet. With reference to the trade protection policies mentioned in the previous two pages, what
are your suggestions?

Objective 1: avoid the retaliatory measures taken by other countries

Objective 2: reduce the amount of imports immediately
Objective 3: may increase the tax revenue of Hamm Statelet at the same time
Objective 4: may enhance the quality of imported goods

Students should assess the policies with reference to the priority list so that they may have a better

understanding of the effects of different trade protection policies and make reasonable suggestions.

3. After careful consideration, the Director of the Trade Development Department of Hamm
Statelet has decided to advise the Hamm Government to impose an import quota on bead strings
from Womm Republic with immediate effect. Following the implementation of an import
quota, the monthly exports of bead strings from Womm Republic to Hamm Statelet has been
limited to 50.

I believe that following the import quota imposed on bead

strings from Womm Republic, the quality of life of our
people will be enhanced!.

Director of the Trade Development

Department of Hamm Statelet

After implementing the import quota for three months, the Director has interviewed the general
public for collecting their views on this policy. Analyse the comments of the people carefully. What
are the effects of this policy to different stakeholders?

18
 Following the import quota, the quality and style of the imported
bead strings become better than before. However, the quantity of
imported bead strings reduced and the price increased.
Consumers are forced to buy more local bead strings now!

Black Pearl
Bead string buyer

Following the implementation of the import quota, the sales of

my bead strings have increased and backed to the level in the
past. Before that, I was worried about my business and had
considered ways of competing with the distinctive bead strings
from the Womm. But I do not face any competition now. I
think the government should further tighten the import quota
to limit the imports of bead strings from other countries, in
Mr. Black
supporting local people using local goods!
Local bead string
manufacturer

How wonderful it is! I have been a bead string craftsman for

more than 20 years. Before implementing the import quota, I
have well prepared to look for another job as the bead strings
from the Womm were flooding into our country! The import
quota imposed by our government can now protect the
Black Bull
development of our bead string industry and I can work in
Local worker
this industry till retirement!

Most of the bead strings I sold are imported from Womm

Republic. Many local residents like buying those bead
strings from Womm as they are very distinctive. My
business has been badly hit by the implementation of the
import quota. The volume of imports of bead strings from
Womm decreased and the price of the imported goods kept
rising. My business has suffered a drastic decline. Does the
Dark Plum
government think of the impact of it on our lives?
Bead string importer

19
 It seems that the implementation of an import quota on
bead strings would have nothing to do with me. However, I
am worried that Womm Republic will revenge and
impose a high tariff on our exported garments. The
government should also protect our interests!!

Black Ian
Local garment
exporter

According to the comments of these five people of Hamm Statelet, do they support the import quota
imposed on the bead strings from Womm Republic by their government? What are the reasons for
their opinions?

Stakeholder Support/Object Reason

Black Pearl
Object Increased price and reduced choices
(Bead string buyer)

Mr. Black
(Local bead string Support Less competition from foreign countries
manufacturer)

Black Bull
Support Secure local employment
(Local worker)

Dark Plum
Sales drop because people spend less on imported
(Beading string Object
goods as the price increases.
importer)

Black Ian
Worried about revenge measures imposed by foreign
(Local garment Object
countries on his products.
exporter)

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 Challenge

Faced with the trade protection policy by Hamm Statelet, what would be your ways to deal with it
if you were a government official of Womm Republic?

Revenge measures

Negotiation/cooperation

Participate in international trade organizations(e.g. The World Trade Organization)

: Common Trade Protection Policies

Common Trade Protection Policies

In order to protect the interests of certain domestic industries and stakeholders, such as those less
competitive industries in global markets, the government will usually introduce some trade
protection policies to support the development of those disadvantaged industries. Common trade
protection policies include import tariff, import quota, export subsidy and embargo.

Import tariff: It refers to the duties imposed on certain imported goods for raising the prices of
imported goods and protecting the similar local products.
Guidance notes: Countries may also impose export tariff in order to restrain the
volume of export of certain essential raw materials.
Import quota: It refers to the limit on quantity of imports for the purpose of protecting the products
produced domestically.

Export subsidy: It is a financial subsidy for some exported goods with an aim to support the local
exports in the competitive global market.

Embargo: It refers to a restriction imposed on the imported goods of foreign countries. A country
may restrict the import of particular goods due to its sub-standard in areas such as health, safety and
environmental protection. The embargo may even be extended to all products from a certain country.

These four trade protection policies are different in terms of flexibility. Among them, import tariff
and export subsidy are relatively flexible. The former one can earn more tax revenue, while the later

21
one can help to provide more trade opportunities. On the other hand, import quota and embargo are
of a lower flexibility. The maximum limit for imports has been fixed beforehand. Also, the imported
goods must meet certain specified standards before they could be imported. Accordingly, the
government may have a greater control on the imported goods. A government may implement
appropriate trade protection policies according to its different policy objectives.

The Effects of Trade Protection Policies on different stakeholders

The trade protection policies may have different effects on local manufacturers, consumers and
importers. Generally, the purpose of various trade protection policies is to protect domestic
industries.

Effects on local producers: trade protection policies may help to reduce the competition facing the
local producers, protect local industries and create more job opportunities for those industries.
Effects on local consumers: the price of a product made in overseas countries may rise due to the
difficulty in importing it. As a result, consumers will have to pay more to buy the goods and have
fewer choices.
Effects on local importers: local importers may have to buy overseas products at a higher price.
That could lead to a higher operating cost and thus lower competitiveness. So, their revenues will
decrease as local consumers may spend less on imported goods.

Ways to Deal With Trade Protection Policies

To deal with trade protection policies, countries or regions may revenge, negotiate or participate in
international organizations. Taking revenge measures means a country may impose the same or more
rigid trade protection policies against the country that implements trade protection policies. Holding
negotiation is that two countries or territories may discuss over the arrangements for trade through
negotiations. It aims at reducing the effects of trade protection policies on both sides. Through
participating in international organizations, the countries involved can negotiate on an international
platform. Agreements in trade may be reached and some trade protection policies may be abolished
as a result.

Functions of the World Trade Organization

The World Trade Organization is an international organization which is responsible for formulating
trade agreements and ensuring the rules of international trade are correctly applied and enforced
among its member states. It also provides a platform for mediation of international trade disputes.
The World Trade Organization has been working in eliminating trade barriers among countries to
ensure that global trade can be made in a free and open environment.

22
 Worksheet (3): An Overview of Trade of Hong Kong

After investigating the situation in Hamm Statelet, the Hong Kong Government also wants to look
into its present situation of trade, including the trading of goods and services, for seeking ways for
trade development. The Chairman of the Hong Kong Trade Development Council has invited you to
analyse the situation and give advice.

: What are the trends of Hong Kongs external

merchandise trade in recent years?
Source 1: Hong Kongs External Merchandise Trade between 1980 and 2010

HK$ million

Imports
Domestic exports
Re-exports

Source: The Census and Statistics Department of the Hong Kong Government

1. With reference to Source 1, describe the trends of imports, domestic exports and re-exports in
Hong Kong between 1980 and 2010.

According to Source 1, there had been rising trends in the imports and re-export between 1980

and 2010, while the domestic export edged up between 1980 and 1995, but then declined

between 1995 and 2010.

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 : Calculation of Merchandise Trade Balance

Merchandise Trade Balance is the difference between the values of total exports (including domestic
exports and re-exports) and total imports of a country (territory) in a period.

Value of Total
Merchandise Value of Total Value of Total
= Domestic Exports of + -
Trade Balance Re-exports of goods Imports of goods
goods
(Revenue) (Revenue) (Expenditure)

A deficit in merchandise trade balance means that the total imports is greater than the total exports in
the territory. On the contrary, a surplus in merchandise trade balance means that the total exports is
greater than the total imports in the territory.

2. The table below shows the information of Hong Kongs external merchandise trade between
2002 and 2010. Read carefully and answer the following questions.
(HK$ billion)
Year 2002 2004 2006 2008 2010
Imports 1,619 2,111 (a) 2600 3,025 3,365

Domestic
131 126 135 91 (e) 70
Exports
Re-exports 1,430 (b) 1893 2,327 2,733 2,962

Merchandise
(c) -58 -92 -138 (d) -201 -333
Trade Balance

a. Fill in the above blanks based on the equation on top of this page.

b. Describe the Merchandise Trade Balance of Hong Kong in recent years.

The Merchandise Trade Balance of Hong Kong is always less than zero. It means

that there has been a trade deficit in Hong Kongs merchandise trade for the years. It

reflects that the revenues from domestic exports and re-exports have been

less than the expenditures on buying imported goods .

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3. Based on question 2 and your knowledge of Kong Kongs economy, explain for the situation of
Hong Kongs Merchandise Trade Balance in the past two decades.

Import: As Hong Kong is short of natural and productive resources, it has to import a lot of

goods from overseas for people to consume. Therefore, the total imports have been rising.

Export: Service industry has become the pillar of Hong Kongs economy due to the ongoing

economic restructuring. Therefore, domestic exports have been decreasing.

: What are the trends of Hong Kongs external

merchandise trade in recent years?

Source 2 : Top merchandise suppliers of Hong Source 3 : Value of External

Kong in terms of value for 2003 and 2010 Merchandise Trade by End-use
Categroy - Imports (2010)

Source: The Census and Statistics Department of the Hong Kong Government

25
1. Compare the figures of 2003 and 2010. What is/are the change(s) in Hong Kongs total imports
of goods?

Source 2 shows that there was an increase in Hong Kongs imports of goods.

The value of goods imported from the mainland increased most during this period. However, in

terms of percentage increase in the value of imported goods, Singapore out performed other

countries.

2. With reference to the above chart, which country/territory is the biggest supplier for Hong
Kong?

The mainland of China

3. Hong Kong is a place with limited land and natural resources but accommodating a population
of over 7 million. Source 3 reveals that foodstuffs only account for 4% of the total imports of
2010 when both capital goods and raw materials and semi-manufactures account for over 30%.
Why?

Hong Kong has limited land and natural resources. Its true that we have to import a large

amount of foodstuffs to meet the needs of the large population. On the other hand, Hong Kong

has to import large amounts of raw materials, semi-manufactures and machineries for producing

exportable goods and services in order to earn foreign exchange. Moreover, with close

economic ties between Hong Kong and the mainland, certain imported raw materials and

semi-manufactures and machineries are to be exported to factories in the mainland for

production. With massive imports for domestic use and re-exports, the value of imports of

foodstuffs is relatively small.

26
 Source 4 : Total Exports of Goods to Main Destinations of
Hong Kong in terms of value for 2003 and 2010

According to the information published by the Census and Statistics

Department, Hong Kongs exports of principal commodity divisions
include plastics, electrical machinery, apparatus and appliances, and
electrical parts thereof, medicinal and pharmaceutical products,
telecommunications and sound recording and reproducing apparatus
and equipment and articles of apparel and clothing accessories, which
account for 47% of Hong Kongs total exports of goods.

Source: The Census and Statistics Department of the Hong Kong Government (2011)

4. Which countries / region are the two main destinations of Hong Kongs exports of goods?

The mainland of China, the USA

5. Compare the figures of 2003 and 2010. Which country/region has a marked decline in imports
of goods from Hong Kong? Explain the reason(s).

The USA. The US has switched to other lower-cost locations for importing the goods needed.

Some lower-cost locations are the mainland of China and Southeast Asian countries.

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 : What are the trends and present situation of
Hong Kongs trade in services?

Source 5 : Total Exports and Total Imports of Services between 1980 and 2010

Source 6: Major destinations for Hong Source 7: Percentages of value of exports

Kongs exports of services in 2010 of services by Service Group in 2010

Source: The Census and Statistics Department of the Hong Kong Government

Note: The information in Sources 5, 6 and 7 have not considered the change made by the
Census and Statistics Department on the implementation of the new international standards in
September 2012. As the incorporation of the new revised estimation methods is still in
progress, the information above has not taken into account the change accordingly.

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 : Calculation of Balance of Invisible Trade

The balance of invisible trade is the difference between total value of exports of services and total
value of imports of services of a country (territory) in a period.

Balance of invisible trade = Total value of exports of services Total value of imports of services
(Revenue) (Expenditure)

Invisible trade deficit means that the total value of imports of services is greater than the total value
of exports of services in the territory. On the contrary, an invisible trade surplus means that the total
value of exports of services is greater than the total value of imports of services in the territory.

1. Calculate the invisible trade balance for the following years and indicate whether they are deficit
or surplus.

Invisible trade balance

Year Surplus/Deficit
(HK$ million)
1990 41,727 Surplus
1995 73,020 Surplus
2000 122,585 Surplus
2005 231,157 Surplus
2010 428,482 Surplus

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2. With reference to the above table and Source 5, describe the trends of invisible trade of Hong
Kong between 1990 and 2010.

There had been a rising trend in the values of invisible exports and invisible imports between

1990 and 2010. Moreover, the balance of invisible trade surplus had been increasing over this

period.

3. According to Source 6, which country is the main destination for Hong Kongs exports of
services? Suggest one possible reason for that.

According to Source 6, the mainland of China is the main destination for Hong Kongs exports

of services. It is because Hong Kong is close to the mainland and they have frequent exchange.

Moreover, many Hong Kong firms have established their production lines in the mainland

which need support services from Hong Kongs service industries.

4. According to Source 7, which two service groups are the most important pillars of present
invisible trade of Hong Kong? What are the industries included in these service groups? Give
one example for each group.

Merchanting and other trade-related services and transportation services groups are the two

most important pillars of present invisible trade of Hong Kong.

An example for merchanting services group: Business Advisory Services.

An example for transportation service group: Logistics Management.

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 : Why is external trade important to Hong Kong?

Based on the above analysis, we can see that Hong Kong has frequent trade with all parts of the
world. Comment the overall situation of Hong Kongs external trade and what kind of production do
we enjoy competitive advantage. Why is external trade important to Hong Kong?

A deficit in merchandise trade balance and a surplus in the balance of invisible trade have always

been recorded. It suggests that Hong Kong has competitive advantages in providing services rather

than in the production of goods. External trade is important to Hong Kong because it exports goods

and services which it has competitive advantages to earn foreign exchanges and imports goods

(including foodstuff, consumer goods, raw materials and semi-manufactures) at a lower cost (i.e.

costs of producing the goods domestically is higher than the prices of the imported goods) to meet

the needs of Hong Kong population.

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 Worksheet (4): Challenges facing Hong Kongs
External Trade and the Ways to Deal with them

Economic structure of Hong Kong has shifted towards increasingly service orientated, Hong Kong is
currently an important hub for trading of services. However, there are many challenges facing Hong
Kongs external trade. Read the information below carefully. Analyse the problems facing Hong
Kong and give some suggestions for improvement.

: Worlds Top Four Ports by Throughput

Rank 2000 2005 2010

1 Hong Kong Singapore Shanghai
2 Singapore Hong Kong Singapore
3 Pusan Shanghai Hong Kong
4 Kaohsiung Shenzhen Shenzhen

Source: Forbes (The world busiest ports 2011)

The competition in port facing Hong Kong is mainly due to the rapid development of ports in the
mainland. In recent years, ports in Shanghai and Shenzhen reached a rapid growth of nearly 30% per
year in their container throughput. Together with the Yantian Port in Shenzhen, which is close to
Hong Kong, have posed great challenges to Hong Kong. With a rapid development of the maritime
sector in the mainland, Hong Kongs re-exports and exports will be adversely affected.

Source: Hong Kong Trade Development Council

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 : Global Economic Environment

Hong Kongs economy is likely to be affected by the external environment. Hong Kongs exports
are adversely affected by the recession of the global economy. European debt crisis, economic
problems in the USA and the slowdown of the mainlands economic growth reduce Hong Kongs
exports. The economic prospect is even worse than that during the financial turmoil in 2008.

According to a survey conducted by the Hong Kong Trade Development Council in 2012 for Hong
Kong manufacturers and traders, most respondents thought that Hong Kongs performance in export
orders is disappointing. Reasons that had been suggested by most of the respondents are as follows:

Weak purchasing power among target markets(e.g. Western Europe, the USA) 89%*
The products are not competitive 87%
Fierce competition from industry players 83%
Change in demand or market structure, or other reasons 60%

*Respondents may choose more than one reason.

Source: News roundup (2012), HKTDC (Hong Kong exporters seeking solutions in tough times.
14 June, 2012)

: Ranking of Commercial Shopping Avenues for Hong Kong

According to data published by the Travel Industry Council of Hong Kong, the Hong Kong Tourism
Board and the Consumer Council during 2011, 3,344 complaints were received from tourists visiting
Hong Kong. These complaints were mainly related to shopping, accounted for 2,325 cases (70% of
the total number of complaints). These scandals will scare off potential tourists.

Source: the Commerce and Economic Development Bureau

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In view of the present difficult business environment of Hong Kong, an economist of the Hong Kong
Trade Development Council (HKTDC) responded that as the production cost has been rising, Hong
Kong manufacturers can relocate their production bases to lower-cost locations. Moreover,
manufacturers may also launch new products and enhance the quality of the products to stand out in
the competitive environment.

In addition to enhancing products quality, Hong Kong exporters may also strengthen their marketing
in exploring new markets, particularly the mainland of China and emerging markets. Many Hong
Kong companies have developed good relationships and trust with importers from all parts of the
world.

Furthermore, as more and more businesses have been negotiating with the clients and manufacturers
directly, Hong Kongs role for intermediaries diminished. Though Hong Kong merchants are facing a
tough time, they have been actively seeking better material suppliers and providing more
value-added services on the other hand. For example, Hong Kong merchants help overseas clients in
inspecting goods produced by manufacturers and supervising the manufacturing schedules.

Source: HKTDC (Hong Kong exporters seeking solutions in tough times, 14 June 2012,);
(Overview of Import and Export Trade Industry in Hong Kong, 9 May, 2011)

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Summarise the information in Source 1 to Source 3. What are the problems facing Hong Kongs
external trade? With reference to Source 4 and to your own knowledge, give some suggestions for
improvement.

Source Problems facing Hong Kong Suggestions

Enhance the ports efficiency, e.g. provide

1 Competitions from mainland ports electronic services, development of e-commerce
(suggested answers)

Explore emerging markets, provide products and

services to meet their demand, expand sales of
2 Worse global business environment
locally produced goods and services (suggested
answers)

Strengthen promotion and education, enhance the

The quality of tourism players
3 service performance of local tourism (suggested
varied
answers)

Enhance business efficiency, provide more

4 Production cost has been rising
value-added services (suggested answers)

: Overview of Trade in Hong Kong

The Importance of Trade to Hong Kong

Trade has been one of the most important economic activities in Hong Kong. For a hundred years of
development, Hong Kong had been turned into a key trading centre in the world. Trade is very
important to the economic development of Hong Kong. Strengthening trade connections, shipping
and logistics facilities can foster the economic development of Hong Kong. Trade can also be the
driving force of the development of industries associated with trade, e.g. finance, insurance and

35
shipping industry. This can enhance Hong Kongs status as an important trading centre in the world.
Trade and its related industries can attract professionals from all parts of the world. By attracting
talents, Hong Kong may enjoy stronger economic growth and develop into a diverse and
international city.

Challenges facing Hong Kong and the ways to deal with them
1. Enhance its efficiency.
Hong Kong cannot compete with other cities in terms of price as its production and operating costs
have been very high. Therefore, Hong Kong has to enhance quality of services, efficiency and
productivity or strengthen the promotion of creativity to compete with other territories. Offer goods
or services that are not available in other territories and strengthen training of local talents may also
help to keep the competitiveness of its trading industries in the world market.

2. Restructure of Trading Services

The mainland of China, the USA and Japan have been the main trading partners of Hong Kong.
However, the rapid development of cities and ports in the mainland has resulted in the diminishing
roles of Hong Kong as an entrepot. Therefore, Hong Kong has to seek other trade partners in
responding to its economic restructuring. Accordingly, there is a change in Hong Kongs external
trade from visible, physical imports/exports or re-exports to offshore trade in order to provide trading
services for merchants from the mainland and other countries.

3. Explore the Emerging Markets

In addition to its traditional trading partners (e.g. the mainland of China, USA and Japan), Hong
Kong has to explore new markets for business opportunities. It expands the territory for its trading
services and enhances its competitiveness.

4. Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA)

The mainland and Hong Kong signed the CEPA in 2003. It opens up huge markets for Hong Kong
goods and services, greatly enhancing the close economic cooperation and integration between the
mainland and Hong Kong. Under CEPA, some goods of Hong Kong origin importing into the
mainland enjoy tariff free treatment while Hong Kong service suppliers enjoy preferential treatment
in various areas. CEPA provides a window of opportunity for Hong Kong businesses to gain greater
access to the mainland market.

36
 Concept Map of World Trade

Conditions for trade

to take place Comparative
advantage

Factors that promote trade Trade barriers

Common trade
WTO
protection policies
EliminateReduce trade
Reach trade Import tariff
barriers
agreements Import quota
Export subsidy

Embargo

Hong Kongs External Trade

The effects on
Challenges
competition from ports
and cities in the mainland
and other territories
Ways to improve the situation

Polices: Eliminate trade barriers Economic development: Explore

comparative advantage

Mainland and Hong Kong Closer Restructure of trading services,

Economic Partnership explore emerging markets,
Arrangement (CEPA) enhance efficiency

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38
Heart-shaped punch Scissors & Glue

Garment and Heart-shaped (orange) paper

mould Beads in different colours

Sample of garment Sample of bead string

39
40
(should be orange in colour)

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