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Microeconomics

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Each year, the United States considers renewal of Most Favored nation (MFN) trading status with China. Historically, legislators have made threats of not renewing MFN status because of human rights abuses in China. The game below reflects the potential economic gains associated with a two-outcomes in which (a) China may impose trade sanctions against US firms and (b) the United States may not renew MFN status with China. The following table contains the dollar value of all trade-flow benefits to the United States and China under two trade-relationship scenarios.

,----------------------China
,-------------|Imposes------|Doesn't
,-------------|Trade--------|Impose
,-------------|Sanctions----|Trade
,-------------|Against US---|Sanctions
,---------------------------|---------
,------US-------------------|---------
Doesn't Renew-|US trade----|US trade---MFN with China|$65 billion-|$140billion
,-------------|China Trade-|China Trade
,-------------|$75 billion-|$5 billion
,--------------------------|----------|
Renews MFN----|US trade----|US trade--|
With China----|$35 billion-|$130billion
,-------------|Chian Trade-|China trade
,-------------|$285 billion|$275billion

If trade negotiators are able to communicate effectively about the consequences of various trade policies (i.e., enter into an agreement about the policy they should adopt), then we would expect the game outcome to be:

A. US 35 billion and China $285 billion
B. US $65 billion and China $75 billion
C. US 140 billion and China $5 billion
D. US $130 billion and China $275 billion

I picked D?

  • Microeconomics -

    I agree.

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