African Swine Fever, China and demand for New Zealand beef

In my ECONS102 class this week, we've been discussing international trade. Having spent a lot of time going through the various ways that governments can intervene in markets with international trade, and the deleterious effects of those interventions, doesn't leave a lot of time for interesting questions about market dynamics in markets with international trade. So, I thought I would take a moment here to do so, motivated by this New Zealand Herald article from last month:

African Swine Fever has played a part in China overtaking the United States as the biggest market for New Zealand beef, the Meat Industry Association (MIA) said...

Demand for New Zealand red meat in China had been growing before the disease arrived in Asia a year ago, but Ritchie said its onset had altered the world supply/demand dynamic.

"We have been lucky in the sense that there has been that buying demand for protein in recent years," he said.

"Right now, with the impact of African Swine Fever in China, they are talking about potentially a 25 to 30 per cent cut in production, so that has to be extraordinarily significant given pork's position as the biggest meat and with China representing about 50 per cent of the world's pork market," he told the Herald.

"Clearly, the alternative proteins have been caught up in that, and demand there has such a huge impact on the world's meat markets," he said.

China has seen a large decrease in the supply of pork, due to African Swine Fever. This raises the price of pork. Beef is a substitute for pork, and when the price of pork increases, some consumers will switch to buying beef. This increases the demand for beef. Now, China is an importer of beef, and how that increase in demand affects the market for beef is shown in the diagram below. If China was not able to trade for beef, the market would operate in equilibrium, where the price of beef is P0 and the quantity of beef traded is Q0. The increase in demand (from D0 to D1) would raise the price of beef from P0 to P1, and increase the quantity of beef traded from Q0 to Q1.

However, China is able to trade for beef on the world market. In other words, they can buy beef from the market by paying the world price for beef, which in the diagram is PW. The world price PW is lower than the Chinese domestic price P0, because China has a comparative disadvantage in beef production - they can produce and sell beef, but only at a higher cost than other countries (those other countries have a comparative advantage in beef production). In other words, the rest of the world is willing to supply China with beef at the price PW. We represent this with the kinked (red) supply curve S+imports (the supply of beef to the China market, once we account for imports). Now, Chinese consumers only have to pay the lower price PW instead of P0, so they will buy more (QD). However, Chinese beef suppliers have to compete with the lower world price PW, so they will sell less (QS). The difference between QD and QS is the quantity of beef imports.

When demand increases from D0 to D1, that doesn't affect the Chinese beef suppliers any more. They are already supplying as much as they wanted to at the low price PW. The Chinese consumers will increase the quantity that they purchase though, to QD1. The difference between QD1 and QS is a larger quantity of beef imports.

Now consider how that will affect New Zealand, as a beef exporting country. This is shown in the diagram below. New Zealand has a comparative advantage in beef production, so the world price PW is above the New Zealand domestic price that would obtain if there was no trade (P2). In other words, New Zealand can produce and sell beef at a lower cost than other countries. The rest of the world is willing to demand New Zealand beef at the price PW. We represent this with the kinked (red) demand curve D+exports (the demand of beef from New Zealand, once we account for exports). At the higher world price of PW, New Zealand beef suppliers are willing to supply more beef (QS3), and New Zealand beef consumers are willing to purchase less beef (QD3), than they would at equilibrium. The difference between QS3 and QD3 is the quantity of New Zealand beef exports.

When Chinese demand for beef from the world market increases, this pushes up the world price of beef (the Chinese economy and population are large enough that an increase in demand from China is enough to shift world market prices - this would not be the same for New Zealand in most markets!). We won't go back to our earlier diagram on the Chinese market and make this change, but in the New Zealand market, the world price increases from PW to PW1. The D+exports curve moves up to D+exports1. Now, New Zealand consumers have to compete with a higher world price, so they reduce their beef purchases to QD4. New Zealand beef suppliers increase their production to QS4, to take advantage of the greater profit opportunities from the higher world price. New Zealand exports of beef increase to the difference between QS4 and QD4.

So, we can see how Chinese demand for beef translates into impacts on the New Zealand economy. New Zealand beef exporters will be better off, and beef exports increase, but New Zealand beef consumers can expect to see higher prices. I wonder - are we already seeing higher beef prices at New Zealand stores?