Candidate Code: jxv088 Session Number: 003295-0020

Commentary 1

Title: New Zealand to ban cigarettes for future generations

Source: BBC News

https://www.bbc.com/news/world-asia-59589775

Date of Publication: 9 December 2021

Date Commentary was written: 06/04/22

Word Count: 800

Unit of the syllabus to which the article relates: Microeconomics

Key concept: Efficiency

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Article

New Zealand will ban the sale of tobacco to its next generation, in a bid
to eventually phase out smoking.

Anyone born after 2008 will not be able to buy cigarettes or tobacco products
in their lifetime, under a law expected to be enacted next year.

"We want to make sure young people never start smoking," Health Minister Dr
Ayesha Verall said.

The move is part of a sweeping crackdown on smoking announced by New

Zealand's health ministry on Thursday.

Doctors and other health experts in the country have welcomed the "world-
leading" reforms, which will reduce access to tobacco and restrict nicotine
levels in cigarettes.

"It will help people quit or switch to less harmful products, and make it much
less likely that young people get addicted to nicotine," said Prof Janet Hook
from the University of Otago.

The crackdown has been met with mixed reactions.

"I reckon it's a good move, really," one man told Reuters news agency.
"Because right now there's a lot of young kids walking around with smokes in
their mouth. Public are asking how they're getting these smokes.

"And it's also good for myself too because I can save more money."

However, others have warned that the move may create a black market for
tobacco - something the health ministry's official impact statement does
acknowledge, noting "customs will need more resource to enforce border
control".

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"This is all 100% theory and 0% substance," Sunny Kaushal, chairman of the
Dairy and Business Owners Group, a lobby group for local convenience
stores, told New Zealand's Stuff news site. "There's going to be a crime wave.
Gangs and criminals will fill the gap".

New Zealand is determined to achieve a national goal of reducing its national

smoking rate to 5% by 2025, with the aim of eventually eliminating it
altogether.

At the moment, 13% of New Zealand's adults smoke, with the rate much
higher among the indigenous Maori population, where it soars to almost a
third. Maori also suffer a higher rate of disease and death.

New Zealand's health ministry says smoking causes one in four cancers and
remains the leading cause of preventable death for its five million strong
population. The industry has been the target of legislators for more than a
decade now.

As part of the crackdown announced on Thursday, the government also

introduced major tobacco controls, including significantly restricting where
cigarettes can be sold to remove them from supermarkets and corner stores.

The number of shops authorised to sell cigarettes will be drastically reduced

to under 500 from about 8,000 now, officials say.

In recent years, vaping - smoking e-cigarettes which produce a vapour that

also delivers nicotine - has become far more popular among younger
generations than cigarettes.

New Zealand health authorities warn however, that vaping is not harmless.
Researchers have found hazardous, cancer-causing agents in e-cigarette
liquids as well.

But in 2017 the country adopted vaping as a pathway to help smokers quit
tobacco.

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Commentary

Governments throughout the world are taking measures to combat health risks resulting from
cigarette consumption. One of these measures is the imposition of age restrictions to lower the
share of the population that can buy cigarettes. The New Zealand government is considering
such a measure, in an attempt to achieve allocative efficiency which is being met with
opposition from convenience store lobby groups, which may affect its implementation.

Cigarettes are demerit goods which create negative externalities. When people smoke, it is not
only damaging to their health, but to that of those in their surroundings due to passive or
secondhand smoking. According to the article, the consumption of cigarettes is particularly
injurious to public health in New Zealand, where it remains the leading cause of preventable
death for its five million strong population. The diagram below illustrates the negative externality
arising from smoking:

In New Zealand, the marginal social benefit of cigarette consumption (MSB) is less than the
marginal private benefit (MPB). From society’s point of view, consumption should be at the
socially optimal level, Q*, where MSB is equal to MSC. However, since MPB is higher, suppliers
will produce at Q1 in order to make profit at the higher price P1. This leads to overprovision of

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cigarettes in the market. The vertical difference between MPB and MSB represents the negative
externality of cigarette consumption. Overall, New Zealand is consuming an amount (Q1) above
the socially optimal level at a price (P1) above the optimal level. Therefore, the free market has
failed to achieve allocative efficiency. Furthermore, between Q* and Q1, the units produced
impose a greater cost than benefit on society, creating a welfare loss represented by the blue
triangle. The aim of age restrictions is to reduce this market failure, as illustrated by the diagram
below:

Raising the smoking age prevents a large group of prospective smokers from smoking, resulting
in a fall in demand shown by the movement from MPB to MPB+regulation above. This results in
a new equilibrium Q2 at price P2. Due to the reduction in quantity demanded, the welfare loss is
reduced by the blue area, and the smaller welfare loss is represented by the yellow triangle.
Producer revenue also decreases from P1Q1 to P2Q2.

The main advantage of this regulation is that individuals born after 2008 are less likely to pick up
smoking in their lifetime which, according to the article, could reduce the national smoking rate
to 5% by 2025. The move will “make it much less likely that young people get addicted to
nicotine” or contract cigarette-related health problems, thereby allowing youngsters to focus on
their education and jobs, which will increase productivity in the economy. It also prevents any
further tax burden for citizens and allows them to “save more money.”

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In order to avoid becoming unpopular, many governments use taxation to reduce the
consumption of demerit goods rather than outright bans. However, higher taxes would be
unsuitable for the New Zealand economy: taxes are regressive and so affect low income
earners more. This would be injurious to the Maori population, which have a larger proportion of
low income earners and, according to the article, suffer a higher rate of cigarette-related disease
and death. Moreover, due to the price inelastic demand of cigarettes, it would have little impact
on the level of consumption, allowing allocative inefficiency to persist. As such, the New
Zealand government’s commitment to maximising allocative efficiency has led them to impose
this regulation instead.

While this allows for more efficient allocation of resources in the market, it does not completely
eliminate the negative externality. According to Sunny Kaushal, chairman of the Dairy and
Business Owners Group, a lobby group for local convenience stores, underage smoking will
persist as "criminals will fill the gap” with a black market. The regulation also has no impact on
anyone who is already of the legal smoking age, maintaining the level of external costs arising
from their consumption. While these social inefficiencies persist upon implementation, there are
also problems that arise from implementing this regulation. A drop in cigarette sales will mean a
loss of tax revenue for the government in the long run. Moreover, effectively implementing the
regulation will require tighter policing and fine collection, as well as monitoring supermarkets
and cornerstores to ensure only the 500 authorised to sell cigarettes do so. These require
government funds which could have gone to other beneficial projects, creating an opportunity
cost.

Despite these limitations, the benefits of the restriction will be far-reaching and outweigh the
costs. The government can adjust its budget to accommodate the increased funding needed
and increased productivity due to reduced health issues and addictions will be beneficial to the
entire society. As such, it can be concluded that the costs outweigh the benefits while promoting
efficiency in the market.

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Commentary 2

Title of the article: Chinese Premier Li Keqiang urges more tax cuts to boost China's slowing
economy

Source of the article: CNN

https://edition.cnn.com/2022/01/06/economy/china-economy-li-keqiang-tax-cuts-intl-
hnk/index.html

Date the article was published: January 6, 2022

Date the commentary was written: 11th April, 2022

Word count of the commentary: 799

Unit of the syllabus: Macroeconomics

Key concept: Change

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Article

A top Chinese official this week called for more tax cuts as the world's second
largest economy contends with fallout from renewed Covid outbreaks, a strict
zero-tolerance approach to containing the virus and a deepening real estate
crisis.

"Our country's economy is facing new downward pressures," Premier Li

Keqiang told financial and tax officials at a meeting Wednesday in Beijing,
according to the government news agency Xinhua. "It is necessary ... to
further cut taxes and [administrative] fees to ensure a stable economic start in
the first quarter and stabilize the macroeconomy."

Li's remarks are the latest to suggest that Beijing is reconsidering its approach
to policy in the face of increasing economic headaches. During a key meeting
last month, Chinese President Xi Jinping and other top leaders marked
"stability" as their top priority for 2022. That's a huge pivot from a year earlier,
when "curbing the disorderly expansion of capital" ruled the day.

As China's economy faces the prospect of a slowdown this year, the

government may be looking for ways to spur spending and keep the services
sector — an important generator of jobs — on an even keel. In his speech, Li
stressed the need to extend tax cuts for small and micro firms and individual
businesses, a policy that originally expired at the end of 2021.

The services sector also needs specific tax relief measures, he added. The
industry has been hit hard by the pandemic as people spend more time in

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their homes and shell out less money on dining out, traveling and other leisure
activities.

Recent data showed that activity in China's services sector rose in December
from the prior month, according to a private Caixin/Markit survey released
Thursday. But pandemic-related uncertainty is weighing on business
confidence, with sentiment slipping to a 15-month low.

"The recovery in consumer spending tailed off in the face of recurrent Covid
outbreaks late in 2021 that led to local restrictions and a broader sense of
caution among households," wrote economists at Capital Economics in a
Wednesday research note. "That pattern will continue in 2022, particularly if
more transmissible variants are in circulation."

"The government must tighten its belt" to help companies, Li said,

underscoring the importance of "overall stability" for the corporate sector.

Slowing economy
The Chinese economy is struggling under the weight of repeated Covid-19
outbreaks, real estate woes and a regulatory storm that has hit the private
sector hard.

Authorities recently imposed a tight lockdown on Xi'an, a major industrial hub

in the northwest, following a spike in coronavirus cases. While the government
is now touting a reduction in cases there, strict Covid curbs have taken their
toll on industry: Two of the world's biggest chipmakers warned of operational
snags, raising fears about memory chip shortages and car production halts.

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Regulations on property firms that began in 2020, meanwhile, have

exacerbated the pain felt by major developers who were already carrying too
much debt. Real estate — which accounts for nearly a third of China's GDP —
is now in a deepening slump, with big players on the brink of collapse.

And a yearlong regulatory crackdown on tech, education, and entertainment

— which wiped out more than one trillion dollar worth of value from Chinese
companies on global markets — has triggered huge layoffs among many
companies, pressuring the job sector even as it tries to recover from the
pandemic.

All of that, coupled with the threat of the Omicron coronavirus variant that has
overtaken much of the globe, is pushing the Chinese government to consider
how best to support its economy in 2022.

The World Bank recently cut its 2022 forecast for China's growth from 5.4% to
5.1%, which would mark the second slowest pace of growth for China since
1990 — when the country's economy increased 3.9% following international
sanctions related to the 1989 Tiananmen Square massacre. China's economy
grew 2.2% in 2020.

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Commentary

The COVID-19 pandemic wreaked havoc globally. In China, recurrent outbreaks led to local
restrictions which impacted the economy, forcing many sectors into a deepening slump.
The government must now change its approach to policy to manage the unprecedented
changes the economy has undergone.

Increases in coronavirus cases forced the government to impose tight lockdowns, even in major
industrial hubs, taking a toll on industry. As people spend more time at home due to local
restrictions, consumer spending has taken a nosedive, particularly travel services and fine
dining. With companies on the brink of collapse due to imminent shortages and production halts,
many have resorted to pay cuts and mass layoffs. The combination of lockdown, pay cuts and
layoffs directly affect consumer spending in the Chinese economy, reducing the level of
aggregate demand.

However, aggregate demand in China’s economy is low due to another component of aggregate
demand affected by COVID-19 outbreaks: investment. According to a private Caixin/Markit
survey, pandemic-related uncertainty is “weighing on business confidence, with sentiment
slipping to a 15-month low.” Low business confidence will lead to a fall in investment spending
which will impact the aggregate demand and, in turn, the overall level of economic activity.
In light of all this, The World Bank cut its 2022 forecast for China's growth from 5.4% to 5.1%, a
record low pace which has not occurred since the country was faced with economic sanctions in
1990. This situation is known as a deflationary or recessionary gap, as the equilibrium real GDP
is less than the potential output due to insufficient aggregate demand, as shown below.

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The concept of change is rather relevant here, as the situation illustrates the ability of
unprecedented factors to cause such sharp changes to the conditions of demand in an
economy and in turn, the trajectory of a country’s economy. It is therefore important that the
Chinese government is open to changes in its policies to suit the new “downward pressures” the
economy is faced with. As such, Premier Li Keqiang urges for the introduction of tax cuts for
small, micro and individual firms as a means of stabilizing the macroeconomy. This is known as
expansionary fiscal policy, and its impact is illustrated in the diagram below.

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Income tax cuts allow for increased spending due to higher disposable income. In the diagram
above, expansionary fiscal policy through income tax cuts increases aggregate demand from
AD1 to AD2, thus boosting real GDP from Y0 to Y1. While this aligns with statements by Chinese
President Xi Jinping and other top leaders, who cited "stability" as their top priority for 2022, it is
a huge pivot from a year earlier when the government concerned itself primarily with "curbing
the disorderly expansion of capital." This also illustrates the role of change in ensuring economic
wellbeing in a country, as governments must adapt to or stimulate changes in the conditions of
demand and/or supply.

Initially, there is no pressure on the general price level, which remains at PL1 due to spare
capacity in the economy. However, since research shows that "the deflationary pattern will
continue in 2022, particularly if more transmissible variants are in circulation,” this policy could
have some side effects. If this expansionary policy is sustained, while increasing real GDP from
Y1 to Y2 along with economic growth and employment, it will add inflationary pressure as the
general price level rises from PL1 to PL2. Similarly, if aggregate demand is allowed to continue
to expand from AD3 to AD4, the change in real GDP from Y2 to Yf would be less than the
proportional change in the general price level from PL2 to PL3 due to the increasing scarcity or
factors of production, which leads to general levels of inflation. The Chinese government seems
to be wary of this fact though, as this policy comes only as an extension of those proposed in
2020 as their 2021 expiry draws closer. If the government maintains this flexible outlook, a
potentially negative inflationary effect resulting from expansionary fiscal policy can be cushioned
by policy adjustments, reinforcing that change is essential in economics.

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Furthermore, it is imperative that the Chinese government maintains a flexible outlook in

managing the economy while the pandemic looms because it not only hampers the regular
functioning of economic agents, it sometimes affects the outcome of economic concepts. For
instance, the implementation of expansionary fiscal policy may not produce the expected result
given the current conditions of demand and supply in the economy: the tax cuts could end up
encouraging higher savings rather than spending as consumer confidence is at an all-time low
in China.

Despite all this, the Chinese government has already demonstrated commitment to stability of
the macroeconomy above all else, and openness to change in its policies to achieve that goal.

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Commentary 3

Title of the article: U.S. companies are bearing the brunt of Trump’s China tariffs, says Moody’s

Source of the article: CNBC

U.S. companies bearing the brunt of Trump's China tariffs, says Moody’s (cnbc.com)

Date the article was published: May 18, 2021

Date the commentary was written: 13th March, 2022

Word count of the commentary: 751

Unit of the syllabus: The Global Economy

Key concept: Economic Well-being

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Article

American businesses are bearing most of the cost burden from the elevated
tariffs imposed at the height of the U.S.-China trade war, said Moody’s
Investors Service.

The ratings agency said in a Monday report that U.S. importers absorbed
more than 90% of additional costs resulting from the 20% U.S. tariff on
Chinese goods.

That means U.S. importers pay around 18.5% more in price for a Chinese
product subject to that 20% tariff rate, while Chinese exporters receive 1.5%
less for the same product, according to the report.

“A majority of the cost of tariffs have been passed on to US importers,”

Moody’s said in the report.

“If the tariffs remain in place, pressure on US retailers will likely rise, leading to
a greater pass-through to consumer prices,” the agency added.

Higher trade tariffs came into force during former U.S. President Donald
Trump’s term. Most of those tariffs have remained in place and affect over half
of all trade flows between the U.S. and China, said Moody’s.

U.S. tariffs on Chinese goods stood at an average of 19.3% on a trade-

weighted basis in early 2021, while Chinese tariffs on American products were
about 20.7%, according to data compiled by think tank Peterson Institute for
International Economics.

Before the U.S.-China trade war in early 2018, U.S. tariffs on Chinese goods
were on average 3.1% while China’s tariffs on American goods were at 8%,
the data showed.

U.S. importers are not the only one bearing the brunt of the elevated tariffs.

Moody’s said in the report that U.S. exporters also absorbed most of the costs
from tariffs imposed by China. That’s partly because the U.S. exports targeted

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by those retaliatory tariffs are products that may be sourced from other places,
such as agricultural goods.

Economists and businesses had argued that Trump’s tariffs on China harm
the U.S. economy, while failing to force China to reverse its unfair trade
practices.

President Joe Biden previously said he disagreed with Trump’s approach to

China, but is not in a hurry to reverse his predecessor’s policies. His
administration had suggested that it’s open to using tariffs to fight China’s
unfair trade practices.

Some observers said the tariffs could give the U.S. leverage over China.

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Commentary

Countries trade internationally since scarce resources are unevenly distributed between
countries. The US economy relies on other markets, such as the Chinese market, to achieve
various economic goals. In a bid to even out the terms of interaction between the two markets,
the Trump Administration imposed elevated tariffs on Chinese goods, averaging at about 20%.
This was an anti-dumping measure intended to force China to reverse its “unfair trade practices”
and improve the economic wellbeing of domestic producers. However, according to a recent
report from Moody’s Investors Service, the policy has not gone completely as intended, and has
ended up threatening the economic wellbeing of domestic producers and consumers alike.

Prior to the imposition of the tariff in 2018, tariffs on Chinese goods were quite low, averaging at
about 3%, which allowed Chinese importers flood the domestic market with products that were
deliberately priced lower than the price charged by local firms, who were therefore not able to
compete. To guard against this and make domestically produced goods more competitive, the
US government set tariffs at 20%. The impact of the tariffs is illustrated in the diagram below:

Since it is an indirect tax on goods imported from China, the tariff increases producer costs
leading to a decrease in supply, shown by the upward shift of the foreign supply curve from
SChina to SChina+tariff above. This leads to an increase in the price of imports from P1 to Ptariff. Due

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to the higher price of goods, there will be a decrease in domestic quantity of imports demanded
from Q2 to Q4, an increase in domestic quantity supplied from Q1 to Q3, and a decrease in
imported goods from Q2-Q1 to Q4-Q3.

This has many benefits for stakeholders. Firstly, it improves the economic wellbeing of
domestic suppliers by making domestically produced goods more competitive. This will allow
infant industries to gain from economies of scale as they increase their output and reduce
dumping.
It also improves economic wellbeing by reducing unemployment: new jobs may be created as
a result of the increased competitiveness of local firms. Moreover, the tariff generates revenue
for the US government while reducing import expenditure, improving the country’s current
account position and equipping the government to fund projects that improve the wellbeing of its
citizens.

While the imposition of the tariff allows domestically produced goods to compete in the
American market, which is beneficial to the economy, it is not without its drawbacks.

A tariff distorts the market, negatively impacting the economic wellbeing of various
stakeholders.

Domestic consumers are negatively impacted by the reduction of choice and, possibly,
satisfaction that results from the reduced quantity of imports from China. Consumers are also
impacted negatively by the increased prices. Thus, the tariff leaves them worse off and creates
a welfare loss to consumers, shown by the red triangle on the left of Figure 1. However,
according to the article, US importers absorb over 90% of the cost of the tariff and pay around
18.5% more in price for a Chinese product subject to the 20% tariff. Due to the necessity and
hence, relatively price inelastic demand of goods imported from China, importers may be able to
pass the incidence of the tax on to consumers. According to Moody’s Investors Service, there
will be a greater pass-through to consumer prices, contributing to the welfare loss to consumers
and further impairing their economic well-being.

Moreover, due to the relatively price inelastic demand for Chinese goods, the quantity of imports
does not fall by a great level. This means that the benefits accrued such as increased domestic
production and, in turn, employment will be rather limited. Additionally, due to the retaliatory
tariffs imposed by the Chinese government, which average at 20.7%, the welfare loss to
consumers and producers are exacerbated. In the wake of increasing prices, domestic suppliers
will also be negatively impacted. Over time, increased production costs may erode their profits,
and lead to the layoff of workers. This will also adversely affect the economic wellbeing of
consumers and producers alike.

Finally, there is a welfare loss to US society as a whole, or world efficiency as shown by the red
triangle on the right in Fig 1, as there is increased production by relatively inefficient domestic
producers, leading to a global misallocation of resources. From these considerations, it is clear

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why economists and businesses argue that “Trump’s tariffs on China harm the U.S. economy,
while failing to force China to reverse its unfair trade practices.”

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