Current International Trade In Media Industry Between the U.S. and China —An Economic Explanation Advised By Dr. Kevin Heffernan Written By Daping Kuai.

Current International Trade In Media Industry Between the U.S. and

China

—An Economic Explanation

Advised By Dr. Kevin HeffernanWritten By Daping Kuai

for CTV 6335

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Fact sheet-1:

Late 2001, AOL Time Warner Inc announced its CETV (Chinese Entertainment TV) would be distributed to cable television subscribers in the Southern region of the People's Republic of China. According to Minister Xu Guang Chun, Director of China's State Administration of Radio, Film and Television (SARFT), "this is the first time for a foreign TV institution to be granted cable TV carriage rights in Mainland China."

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Fact sheet-2:

Almost at the same time, China granted News Corporation the right to air Star Satellite TV to households in Guangdong in exchange for News Corp beaming CCTV-9 to the United States market via its network. In early March 2003, Murdoch's ambition to conquer the mainland's television market moved a step further, when a letter from the state broadcasting regulator approving STAR Group's plans to beam its Chinese-language channel Star TV to select areas nationwide.

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Fact Sheet-3

In early 2003, Star TV expands landing rights in Mainland China, enabling it to be available nationally in three-star and above hotels, and in foreign and overseas Chinese compounds.

Phoenix InfoNews Channel receives landing rights in Mainland China.

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Why did this happen?

Counter Points:1.P.R.C. is a communist country, the gov. controls the media as a propaganda and foreign investment is still prohibited from getting in this area.

2.Although China has entered WTO, the agreement didn't push it to open its media market in the near future (5-10 years) .

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Two Theories in International Trade

1, Absolute Advantage As a Basis for Trade: Adam Smith’s Model

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Adam Smith developed the classical theory of international trade in his famous book The Wealth of Nations.

Absolute advantage means the ability of a country to produce a good using fewer productive inputs than is possible anywhere in the world.

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Here is an example. Suppose Country A and B are both producing goods S (Soybeans) and T (Textiles) and they both have fixed input/output ratios. In particular, the numbers in the table reflect the hours it takes to make 1 unit of output of a certain good in a certain country.

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Table 1^ Absolute Advantage as a Basis for Trade

Country A

Country B

Soybeans 3 12Textiles 6 4

^Numbers in the table denote labor require to produce one unit

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From Table 1, we can see that country A can produce S in less time than country B, so A is said to have an absolute advantage. By analogous reasoning, in this example B has an absolute advantage in the production of T.

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Consider what happens if they follow this track. Please refer to Table 2, one unit of T reduced in A would free up 6 hours of labor. Let them move to industry S, with 6 hours of labor, the output of S would increase 2 units. Similarly, let’s move one unit of S in country B to T industry, which would lead to 3 units of T. For the world, the output of S is increased by 1 unit and T by 2 units.

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Table 2 Per Unit Gain from Specialization When Country A Moves to Specialize in Soybean (S), and Country B in Textile (T)

Per Unit Gain

In Production

of S

In Production

of T

In A 3(+2) 6(-1) In B 12(-1) 4(+3)

In World +1 +2

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Thus, we see the benefits of an international division of labor. Without using anything new, we are better off! This simply means that each country should concentrate on the most efficient goods.

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Comparative Advantage as a Basis for Trade: David Ricardo’s

Model: A question may still be bothering you: what if one country has absolute advantage in both goods? As Ricardo later pointed out, countries should specialize where they have their greatest absolute advantage. Consider the example in Table 3; here we can see country A has an absolute advantage in both goods!

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Table 3 Comparative Advantages as a Basis for Trade

Country A Country B

Soybeans 3 12Textiles 6 8

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However, these absolute advantages are not identical. In particular, A is 4 times more efficient in the production of S while only 4/3 more efficient in the production of T. Because A’s greatest absolute advantage is in the production of S, it is said to have a comparative advantage in S. Likewise, because B’s least absolute advantage is in the production T, B is said to have a comparative advantage in T.

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Thus, each country will move to the area of its comparative advantage. Like what we have seen before, 1 unit loss of T in country A which is 6 hours’ labor will lead to 2 unit of gain in S; while in country B there will be extra 1.5 units of T in the expense of 1 unit loss of S.

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Table 4 Per Unit Gain from Specialization According to Comparative Advantage as A Produces More S, and B Produces More T

Per Unit Gain

In Production

of S

In Production

of T

In A 3(+2) 6(-1) In B 12(-1 ) 8(+1.5 )

In World +1 +0.5

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2, The Heckscher-Ohlin Theory in International Trade

Compared to the classical theory, the HO theory seems to be more empirical and easier to understand though it was also perfectly proved in economics.

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Heckscher and Ohlin argues that a country will be able to produce at lower cost (and therefore have comparative advantage in) those products whose production requires relatively large amount of the factors of production (also known as factor endowment. e.g. labor, land, capital, natural resources) with which the country is relatively well endowed.

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For instance, countries with relatively large amount of land relative to other factors (e.g. Australia) will have a comparative advantage in producing goods that require relatively large amount of land for efficient production (e.g. wheat).

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Questions after the theories:

Why would American media get into China?And why now? 10years pander the party leaders

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Deduction to our case

1, US has the comparative advantage in media production Why? More-skilled workers… Assembly-line Production… Implementation of high tech… Scale of economy in this field…

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2, US is a capital-abundant country while media production and distribution is a capital-intensive industry so US should export media goods to other countries. 1990 US GDP is $5793.5 billion, while China is $387.7 billion.

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On the other hand, China has been exporting labor-intensive goods to the U.S. and the rest of the world for more than 20 years because it is a relatively labor-abundant country.

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Implications

Unlike other goods, media also have the characteristics of aesthetics and social impact besides commodity.

So because of different tastes and social structure, the trade in media must be different from other homogeneous products such as coke and computers.

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Therefore, the key to survive for foreign investors should be western programming innovation (eg. Reality Show), quick & reliable source (eg. From FOX News & Sports), and localization (such as Asian entertainment elements).

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What can we predict for the future?

Media inflow will get more dynamic because of the inevitability of economics and China’s ongoing reformHarsher competition with the local media outletsUps and downs depending on the volatile gov. policy and other unpredictable factors such as investment environment