Commentary 1

Title of the article: Vape shops cut down on supplies as customers stock up
after Hong Kong passes bill targeting e-cigarette business

Source of the article: South China Morning Post

https://www.scmp.com/news/hong-kong/health-
environment/article/3153219/vape-shops-cut-down-supplies-customers-stock
(Accessed 20 December 2021)

Date the article was published: 21 October 2021

Date when the commentary was written: 25 December 2021

Word count: 799

Unit of the syllabus to which the article relates: Microeconomics

Key concept being used: Intervention

 ARTICLE

Vape shops cut down on supplies as customers stock up after Hong

Kong passes bill targeting e-cigarette business
Xinlu Liang
Published: 11:38pm, 21 Oct, 2021

Shops catering to the vaping crowd were cutting back on supplies while customers stocked up on their
favourite products after lawmakers passed a bill on Thursday aimed at outlawing the business of e-
cigarettes in Hong Kong.

But the ban leaves untouched the right of consumers to use the gadgets that either heat up or combust
tobacco products. Some determined smokers said they would wait to see how the new law was
implemented six months from now before deciding the best way to secure their tobacco supplies.

Some stores have lost half their customers in the past month as smokers anticipated the ban. Photo:
Nora Tam

At the VapeBullHK in Wan Chai, employee Venus Yuen said the store sold more than HK$1.2
million (US$154,300) worth of heated tobacco products, e-cigarettes and other vaping devices in
September.

Although sales had not yet been affected, Yuen said her shop had since cut its inventory in half in
preparation for the new law.

“We used to replenish supplies five to six times a month, but last month we just made one purchase
because we don’t want to stock too much goods,” the 24-year-old said.

Yuen admitted the store had not come up with a comprehensive plan to deal with the ban and
management was waiting for specific details first.

“I think the government will at least give us enough time to sell out our goods,” she said.

The bill bans the import and sale of electronic cigarettes, heated tobacco products and herbal
cigarettes, as well as extends the restrictions on advertising smoking to cover the newer generation of
nicotine delivery systems.

Krystal Chen, 25, who works for the HeatHongKong store in the same building as VapeBullHK, said
workers were already anticipating the crackdown early last month when news about lawmakers
finishing scrutiny of the bill was reported. Some customers stopped coming to the shop or cancelled
their orders.

Management cut down on stock after losing more than half of the store’s clients recently.

Chen also said they would plan their next move after knowing the details on how the ban would be
implemented.

Twenty-year-old art teacher Aki Chiu, who bought a pack of e-cigarette at Chen’s shop on Thursday
afternoon, said she would later try to source the product from somewhere else.

“If there are still other ways to buy e-cigarettes in small stalls like HeatHongKong, I’ll manage to find
them anyway,” she said.

Chiu used to smoke traditional cigarettes years ago but turned to alternative ones out of curiosity. She
bought e-cigarettes once every two months, and one pack at a time.

“I’m not addicted. I smoke e-cigarettes just to satisfy my appetite,” Chiu said.

One buyer in his 30s, who wished to remain anonymous, purchased a bag of more than a dozen
flavours of alternative cigarettes at another shop in the same building. He said he was stocking up
before the bill was passed.

“I won’t change my smoking habit in the future,” he said.

In Hong Kong, the percentage of daily cigarette smokers aged 15 and above was 10.2 per cent in
2019, or about 638,000 people.

The city first proposed a total ban on e-cigarettes in 2015 but the idea was watered down in 2018
when the government planned to regulate the products in the same way as traditional cigarettes.

The move was heavily criticised by the medical and education sectors, prompting Chief
Executive Carrie Lam Cheng Yuet-ngor to propose a full ban on e-cigarettes, heated tobacco products
and herbal cigarettes in her policy address that year.

Lam warned that e-cigarettes, which had grown into an industry worth as much as HK$30 million
(US$3.86 million), were being promoted as less harmful than regular tobacco and targeted young
people.

The bill was submitted to Legco for scrutiny in 2019.

 COMMENTARY 1

A new bill to ban e-cigarette sales has been passed by the Hong Kong government. E-
cigarettes, which are demerit goods, are undesirable for consumption as they are harmful to
consume, but are overprovided in the market; here, overprovision is due to lack of consumer
knowledge on the negative effects of e-cigarettes as they were being “promoted as less
harmful.” Since this consumer ignorance can also spill onto society, e-cigarette consumption
causes negative externalities of consumption, which is a market failure. Thus, intervention
from the Hong Kong government is necessary to eliminate the external cost caused by the
free market.

Figure 1: Graph showing Negative Externalities of Consumption of e-cigarettes:

In the Hong Kong e-cigarette market, the consumption of e-cigarettes presents an external
cost to the Hong Kong society in form of “harmful” effects such as health issues due to
passive smoking that cause society’s marginal social benefits (MSB) to be less than the e-
cigarette consumers’ marginal private benefits (MPB). The difference between both is the
external cost caused by the consumption of cigarettes. Consumers dictate an equilibrium
price and quantity at P1 and Q1, but the Hong Kong society dictates that the price and
quantity are socially optimum at the smaller Popt and Qopt, following the intersection of the
MPB and MSB curve with the (S=MPC=MSC) curve. This indicates an inefficient over
allocation of resources to cigarette production by the market as Q1> Qopt, thus a market
failure. The external cost therefore causes a welfare loss to society equal to the blue area.

The Hong Kong government thus intervenes with a regulation to reduce this external cost
caused by the free market. In this case, it imposes the most extreme form of regulation, a ban,
to completely remove the external cost by banning the “import and sale of electronic
cigarettes”.

The advantage of this regulation is that it is easier and less time-consuming to implement
than a typical market-based policy such as an excise tax on e-cigarettes. The ban also
effectively solves the issue of e-cigarettes “being promoted as less harmful than regular
tobacco” as there is now a clear message that e-cigarettes are harmful and illegal.

However, since the government “leaves untouched the right of consumers to use gadgets
that…combust tobacco products”, the MPB is unaffected as consumption of e-cigarettes is
still permitted. To counter this, the Hong Kong government imposed another regulatory
policy of “[extending] the restrictions on advertising smoking”, so that there are fewer
smoking advertisements:

Figure 2: Graph showing Reduced Negative Externality of Consumption of e-cigarettes by

restrictions on advertising:
Reduced advertising implies lesser willingness of consumers to buy e-cigarettes as lesser
people know about e-cigarettes, so consumption should see a fall as seen by the leftward shift
in the MPB curve from MPB to MPB+Regulation. Consequently, quantity demanded of e-
cigarettes falls from Q1 to Q2, as the external cost also falls following the fall in price from
P1 to P2.

Reduced advertising has similar advantages to the ban regarding the simplicity of both,
however, the regulations cannot remove the external cost completely, since existing
consumers may still use gadgets to consume e-cigarettes. Additionally, there is clear evidence
that the complete lack of e-cigarettes, and their addictive nature, shall force many current e-
cigarette consumers to find “other ways to buy e-cigarettes”, i.e., from black markets, from
where harmful e-cigarettes may still be illegally purchased at a higher price. But the
regulations can still reduce the external cost to a big extent as the welfare loss reduces from
the blue area to the smaller orange area.

E-cigarette producers also face a major loss in producer revenue and may be put out of
business, thus laying off workers and leading to major structural unemployment. Since this is
an industry worth “US$3.86 million”, a market-based policy such as imposing a tax may
allow the intervention to be more effective as producer revenue shall reduce slightly instead
of completely, and the high price inelasticity of demand of e-cigarettes because of their
addictive nature shall allow the government to generate a lot of revenue, which may be re-
injected into the economy by negatively advertising e-cigarettes.

This makes the concept of intervention extremely relevant. The free market for e-cigarettes
in Hong Kong, having failed in effectively allocating its resources, relies on the government
to intervene and fix the market failure. The government could have decided to impose a tax
with which it could generate revenue, but instead imposed regulations, as the purpose of the
intervention was to reduce the external cost caused by smoking, instead of generate revenue,
in which case the regulation is more effective as the regulation (ban) shall remove the
external cost to a very high degree, whereas the tax shall do so very slightly due to the
inelastic nature of e-cigarettes. Despite this, Hong Kong e-cigarette consumers shall continue
to source out and consume e-cigarettes despite their ban by the government and because e-
cigarette gadgets are still allowed, thus intervention is not always perfect.
 Commentary 2

Title of the article: Egypt raises interest rates, sets fixed bread prices against
global inflationary pressures

Source of the article: CGTN

https://newsaf.cgtn.com/news/2022-03-22/Egypt-raises-interest-rates-sets-
fixed-bread-prices-18AQGlYPvJm/index.html (Accessed 24 March 2022)

Date the article was published: 22 March 2022

Date when the commentary was written: 26 March 2022

Word count: 800

Unit of the syllabus to which the article relates: Macroeconomics

Key concept being used: Change

 The Article

Africa 02:00, 22-Mar-2022

Egypt raises interest rates, sets fixed bread prices against

global inflationary pressures
CGTN
Share

An Egyptian baker prepares "Kahk", a traditional Egyptian food filled with honey and nuts,
for the celebration of Eid al-Fitr in Mansoura, Egypt on July 3, 2016. (Xinhua File photo)

The Egyptian government on Monday introduced new economic measures to absorb

shocks from the global inflationary pressures caused by the Russia-Ukraine conflict
and lingering COVID-19 pandemic.

At a surprise meeting, the Monetary Policy Committee of the Central Bank of Egypt
(CBE) decided to raise key interest rates by one percent. This is the first time Egypt
has raised rates since 2017.

The overnight deposit and lending rates were both raised by 100 basis points to 9.25
percent and 10.25 percent respectively, according to a central bank statement.

Soaring commodity and energy prices have added strain on the economy of Egypt
that targets a inflation rate of 7 percent (±2 percentage points) for the fourth quarter
of 2022, the statement noted.

According to official statistics, the annual headline inflation in Egypt rose to 10

percent in February from 8 percent in January because of the rise in food prices.

"Achieving low and stable inflation rates in the medium term is a prerequisite for
supporting the purchasing power of the Egyptian citizens and achieving high and
sustainable growth rates," the statement said.
On Monday morning, the trading price of one U.S. dollar against one Egyptian pound
jumped to 17.5 pounds for buying and 17.4 pounds for selling, after having stabilized
at around 15.6 pounds for two years, according to the National Bank of Egypt.

"The CBE is committed to safeguarding the achieved macroeconomic stability, and

highlights the exchange rate flexibility as a shock absorber to preserve Egypt's
competitiveness," said the CBE statement.

Meanwhile, the Egyptian cabinet said it has set a fixed price for unsubsidized bread
for three months in an effort to ensure food security for those who mainly depend on
bread in their meals.

Under the new pricing system, the price of a 45-gram flat loaf is sold at 0.5 pounds, a
65-gram loaf at 0.75 pounds, and a 90-gram loaf at one pound, while packaged
bread sold in supermarkets and grocery stores is priced at 11.5 pounds per kg,
according to a cabinet statement.

Retailers who do not comply with the new pricing system or hoard commodities will
face a fine of 100,000 pounds (5,714 dollars) to 5 million pounds (285,714 dollars).

The price of subsidized bread has remained unchanged in Egypt for decades. About
60 percent of the 102 million people in Egypt live on the bread allocated under the
subsidized food card system, which costs only 0.05 pounds a loaf.

The bread consumption per capita in Egypt is 150 to 180 kg a year, nearly three
times of the global average, according to official statistics.

Source(s): Xinhua News Agency

 COMMENTARY

Due to supply shocks caused by the “Ukraine-Russia war” and the “Covid-19 pandemic”,
Egypt has witnessed quite a few “firsts” in its economy. Where policies have remained
unchanged for a while, the Egyptian government has had to change a few and even introduce
“new economic measures” to support its economy.

Met with new “global inflationary pressures”, the Central Bank of Egypt (CBE) is
implementing a contractionary monetary policy (CMP) that increases the interest rate and
decreases aggregate demand (AD) and average price levels in the country, where AD is the
total amount of real GDP that all buyers in the Egyptian economy are willing and able to buy
at different price levels, ceteris paribus.

Figure 1: Cost push inflation in the Egyptian economy

Initially, there was inflation of 8% in the Egyptian economy, caused by an increase in non-
labor resource prices as seen by “soaring energy and commodity prices” that caused a
leftward shift in the short-run aggregate supply (SRAS) curve from SRAS to SRAS1, leading
to cost-push inflation following the rise of price levels from PL to PLinfl(8%). This led to
stagflation as unemployment rose, since firms found it expensive to keep workers due to
higher wages and thus laid them off, and real output decreased, as real GDP fell from Y to
Yinfl (8%).

Now, because of the pandemic and the war in February 2022, the SRAS saw a proportionally
smaller decrease seen by a smaller leftward shift from SRAS1 to SRAS2, because of the
supply shock caused by lesser availability of resources due to the war. Inflation increased
from 8% to 10% as the price level saw another increase from PLinfl (8%) to PLinfl(10%) and real
GDP fell from Yinfl(8%) to Yinfl(10%) following further stagflation, which is undesirable for
Egypt’s economy.
To combat the issue of inflation, the CBE decided to implement the contractionary monetary
policy (CMP) by reducing interest rates.

Figure 2: Effects of the Contractionary Monetary Policy (CMP) and changes in the US-Egypt
exchange rate on the Egyptian economy:

The CBE has decided to raise the interest rate “by one percent”. This causes Egyptian
consumer spending (C) and investment spending by firms (I) to decrease since borrowing is
made more expensive for both firms and consumers and AD falls following a leftward shift
from AD to AD1. The price level decreases from PLinfl (10%) to a lower inflation price level
PL1, reducing the inflation below 10% as desired by the CBE. However, as firms are
discouraged by the lower price level since their profitability decreases, they decide to reduce
their aggregate supply, and there is a movement down the SRAS2 curve, causing the real
GDP to reach the lowest it has been thus far, at Y1.

To combat the low real GDP, the CBE allows the Egyptian pound to depreciate from “15.6”
to “17.4”/ “17.5” pounds per US$ under a freely-floating exchange rate. Imports (M)
therefore become expensive and exports (X) cheaper, thereby encouraging exports and
discouraging imports, causing net exports (X-M), hence AD, to increase as seen by the
rightward shift in the AD curve (AD1→AD2). Real GDP now sees an increase instead of a
decrease, as Y1 increases to Y2, effectively allowing the “exchange rate flexibility” to act “as
a shock absorber to preserve Egypt’s competitiveness”

Ultimately, the monetary policy shall be quite effective in the “medium term” as intended by
the CBE, as “low and stable inflation rates” can be achieved to ultimately support the
“purchasing power of Egyptian citizens” since the lower price levels imply that buyers in the
Egyptian economy are able to buy more than before. In the long run, however, the CBE is
unable to achieve “macroeconomic stability” and “high and sustainable growth rates”
following the huge trade-offs in form of a loss of aggregate output and higher unemployment
caused by the CMP. This is because the CMP is a demand-side policy, and is unable to
directly address the immediate supply-side problem which is the decrease in the SRAS due to
supply shocks, thus causing the observed undesirable fall in real GDP.

A supply-side policy, on the other hand, can also lower the inflation without decreasing real
output like the CMP, by shifting the SRAS curve to the right. But this can take a lot of time to
implement and cease to be appropriate as the effects of the war and pandemic wear out over
time.

This may explain why the CBE is not implementing this policy. The supply-side policy
cannot address the drastic short-term changes that the Egyptian economy is currently
witnessing. When facing economic issues like a global crisis, changes in economic policies
are almost always guaranteed, but such policies may or may not address the economic issues
in time, which exposes the effectiveness of economic policies in such situations. The CBE
therefore increased the interest rate and allowed the exchange rate to fluctuate as these are the
policies that are most able to cope with the changes caused by the supply shocks in the
shortest time.
 Commentary 3

Title of the article: Vietnam cuts tariffs on corn, wheat and pork

Source of the article: Agri Pulse

https://www.agri-pulse.com/articles/16815-vietnam-cuts-tariffs-on-corn-
wheat-and-pork (Accessed 15 December 2021)

Date the article was published: 16 November 2021

Date when the commentary was written: 2 January 2022

Word count: 800

Unit of the syllabus: Global Economy

Key concept: Economic Well-being

 ARTICLE

Vietnam cuts tariffs on corn, wheat and pork

11/16/21 1:38 PM By Bill Tomson

Vietnam is following through on promises to slash its most-favored nation tariffs on

corn, wheat and pork, offering new opportunities for U.S. ag exporters, according to
USDA’s Foreign Agricultural Service.

The MFN tariff reductions will help U.S. exporters compete with other suppliers from
countries that have preferential free trade agreements with Vietnam. The country is a
member of the Comprehensive and Progressive Trans-Pacific Partnership, an
agreement from which the United States withdrew.

Vietnam issued a decree Monday that eliminates its tariffs on all classes of wheat,
lowers its corn tariff from 5% to 2% and cuts the duty on frozen pork from 15% to
10%. The elimination of the wheat tariffs and the reduction of the corn tariff will go
into effect Dec. 30, but the tariff on pork will not be lowered until July 1.

The country promised the tariff reduction in conjunction with Vice President Kamala
Harris visit to Hanoi this summer, but no details were given at the time.

“This is great news for U.S. products as it levels the playing field with our competitors
from the Black Sea and (Southeast Asian nations),” said U.S. Grains Council
President and CEO Ryan LeGrand.

He said his group's work with FAS “helped make this happen. We thank the
Vietnamese government for taking these important steps to make trade freer and
fairer there.”

The tariff cuts will be helpful to U.S. wheat exporters, who shipped more than
500,000 metric tons of hard red spring, soft white, hard red winter, and soft red
winter wheat to Vietnam in the 2020-21 marketing year, according to the National
Association of Wheat Growers. That volume is worth about $129 million.

U.S. wheat exports to Vietnam have plenty of room to grow. The country imports
about 4 million tons annually.

“With about half of the wheat we produce available for export each year, we depend
on increasing access to markets like Vietnam,” said NAWG President Dave Milligan.
U.S. Meat Export Federation President and CEO Dan Halstrom also welcomed the
tariff cut.
“U.S. pork faces a significant tariff disadvantage compared to most major suppliers in
Vietnam, so the MFN tariff reduction is a welcome development in this very
competitive and price-sensitive market,” he said in a statement to Agri-Pulse.

Senate Ag Committee member Roger Marshall, R-Kan., says the tariff reductions are
good news and he hopes to see more soon.

“Reducing tariffs in Vietnam has been a priority for the agricultural industry for a long
time,” Marshall said. “This is great news for Kansas farmers saddled with increasing
input costs on fertilizer and crop protection products. We hope to hear more positive
news about tariff reductions on distiller’s grains and ethanol for our biofuels industry
soon.”
Story updated at 5:30 p.m. EST to include comments from Sen. Marshall.

COMMENTARY

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a

preferential free trade agreement (FTA) with various member countries such as Vietnam, but
not US. Members of this agreement lower trade barriers between each other on particular
products to improve international trade and provide access to more markets. Tariffs, taxes on
imported goods, are one such restriction that this agreement may remove, which Vietnam is
deciding to reduce for US “agricultural goods”. This shall affect the economic well-being of
different stakeholders in both countries, where the article makes it clear that US producers
shall enjoy the most benefits from this decision. The effect on each stakeholder group in both
countries can be explained by analyzing the effects of the tariff reduction:

Figure 1: Graph showing impact of Vietnam tariff on US corn for Vietnam

market:

Prior to the reduction in tariffs, Vietnam held a 5% import tariff on corn imported from the
US under international trade, as seen by the constant Sw+5% tariff curve showing the extra price
of the imported goods due to the 5% tariff. Now, the reduction of the tariff from 5% to 3%
shall cause the supply-world curve to shift from Sw+5% to Sw+3% tariff, leading to a 2%
decrease in the price of goods from Pw+5% to Pw+3% tariff.

The primary effect this reduction has, as most emphasized by the article, is that US suppliers
are now able to supply a greater quantity of corn to Vietnamese consumers. Domestic
consumers, are now more willing and able to buy corn due to the lower price, increase their
quantity demanded for corn from Q4 to Q6. The quantity of corn that is imported thus
increases from (Q4-Q3) to (Q6-Q5). This is a big deal for US wheat producers as “half of
[produced wheat] available for export each year]” is safeguarded, with now “plenty of room”
for wheat exports “to grow” in Vietnam. Consequently, foreign US producer revenue
increases. For US wheat producers, this gain in revenue is worth “$129 million”.
Additionally, this “levels the playing field with [US] competitors from the Black Sea” as US
exporters now have access to more (Vietnamese) markets, both huge pluses for the economic
well-being of US producers.

This has clear implications for the well-being of US stakeholders as greater exports mean that
GDP can rise and the US government can generate tax revenue from the increased producer
revenue to invest in infrastructure and important sectors of the economy, bettering the
economic well-being of both US citizens and the government.

The perspective of Vietnam is not too different. Domestic Vietnamese consumers benefit
from this tariff reduction as they’re now able to buy a greater quantity (Q4→Q6) at a lower
price (Pw+5%tariff→Pw+3%tariff) than before, where there is now greater consumer choice in
regards to corn, with greater quality corn as domestic producers have to produce higher
quality goods to beat foreign competition. The increase in Vietnam consumers’ economic
well-being is evident through the increase in consumer surplus from (a+b) to (a+b+c+d+e+f).

However, domestic Vietnamese producers are at loss, as, disincentivized by this decrease in
the price of corn, they limit their corn production from 0Q3 to 0Q5, causing a loss in
domestic producer revenue worth the amount (d), followed by a loss in producer surplus from
(c+g+m) to (g+m).

The Vietnamese government also loses revenue from (enjoy) to (i+j+k) to a great degree
since “agricultural goods” like corn have a price inelastic demand as they are a necessity.
This represents the opportunity cost of lost profits hence economic well-being of Vietnamese
infant (even agricultural) producers who could have been subsidized by the government.

The overall effect of the tariff reduction can be seen by the Vietnamese social surplus before
[(a+b)+(c+g+m)+(e+j)] and after [(a+b+c+d+e+f)+(g+m)+(i+j+k)] where there’s a welfare
gain of (d+f+i+k) due to increased consumer surplus because of increased consumption by
consumers (f+k) and decreased production by inefficient domestic Vietnamese producers
(d+i).

The concept of economic-wellbeing is central here, as many stakeholders are seen to gain
from this economic decision, but some don’t, such as Vietnamese producers and the
government. The tariff reduction holds greatest merit in the fact that it enables friendly
relations between Vietnam (and member countries of the CPTPP) and US, which lead to
lesser chances for retaliations from the US in form of tariff wars (which may spread), where
the loss in Vietnamese agricultural producer surplus and government revenue would be
largely outweighed by the benefits of strengthened international friendships and overall
welfare gained by US agricultural producers. While Vietnamese producers may lose out on
economic-wellbeing initially in the short run, they would still have access to many markets of
the CPTPP in various countries due to free trade of the multilateral FTA in the long run. This
decision, thus, best manages to address the collective economic well-being of stakeholders in
both US and Vietnam.