Does the Hong Kong Milk Powder Regulation really does it job A cost benefit analysis of the amend of the Import and Export (G

Applied Welfare Economics Project

Topic:

Does the Hong Kong Milk Powder Regulation really does it job? A cost benefit analysis of the amend of the Import and Export (General) Regulations (Cap. 60, subsidiary legislation A)

Layout:

1.Introduction

2.Background of the Issue

3.Economic analysis and Result

4.Conclusions plus discussion,including an indication of what might have been done if more time and resources had been avaliable

Introduction:

At the opening remarks by the secretary for food and health, Dr Ko Wing man,at a joint press conference take place at the 1st of February 2013 on the issue of combat cross-boundary parallel trading and to help ensure a stable supply of infant formula,The Hong Kong Government has decided to introduce two different measure,one long term and one short term one.For the short term measure the government have decide to set up 24 hours hotline to help local “mother” to purchase the 7 major brands (Abbott,Cow & Gate,Friso,Mead johnson,Nestle Nan,Snow Brand,Wyeth gold) to ensure that parents of local infants and young children are able to secure the purchase of baby formula.

But for this project we will be focusing on the long term measure that the Government bring in in this conference which took place at the 1st of March 2013,As the government consider that the supply chain failure of the baby formula is largely affected by the parallel trading activities.The huge demand of the “couriers” or the parallel traders have hugely affected the retail outlets,and created a shortage of certain brands of baby formula mainly at Sheng Shui retail outlets. To be able to combat the moves of the “couriers” or the parallel traders,The Government have amend Import and Export (General) Regulations (Cap. 60, subsidiary legislation A) to help prohibit the export of baby formula from Hong Kong except with a permit issued by the relevant authority.Under the new regulations, now only a net weight of 1.8 kilograms of baby formula (two cans) can be carried by each person for self-consumption purpose departing from Hong Kong,and in this project I will use a cost-benefit analysis to evaluate how the policy have affected the price of Milk formula in China Market and Hong Kong Market.

Background of the Issue:

The infant milk formula in Hong Kong had always been running out of stock since 2010,and became intensify in early 2013.The major reason behind this is because of the mainland chinese had lose faith with their own mainland infant milk formula,and lead to the intensify to snap up the formulas in Hong Kong.In 2008,Mainland Sanlu Group (Local infant milk formula in Mainland China) had been reported that their manufactured infant milk formula contain melamine and killed 6 baby,by that time,Premier Wen Jia Bao were confident within a year or two the government can solve the food safety problems.But in 2010,a lot of mainland babies have been discovered abnormal sexual premature after consuming another local Infant milk formula Syutra,and so a large number of individual visitors from the chinese mainland and the parallel trader came to buy milk powder in hong kong,had led to social discontent,and even the mainland china government said that 99% of Mainland infants formula are safe afterward,how many parents will actually believe the statement again?and mainland netizen questioned the 99% still mean there will be 1% of baby have the risk of drinking fault infant formula.

Because of the snap up activties,In January 2013,the Government has been closely monitoring the price and supply of infant formula in the local market,also the 7 major baby formula suppliers have also stringent measures to combat the malpractices of some retailers in Sheng Shui.The Suppliers issued 77 warnings to these retailers and restricted the supplu of 27 retailers,and suspended 11 retailers,but despite the measure taken to improve and combat malpractices of some retailers,many local parents still complain that individual brands of baby formula are out of stock at the retail level, and that there is no one answering the hotlines.The ratio betw een import formula equal to 1/4 of the consumption,far less then demand of imported milk powder

The mother website article in Hong Kong said, Because there are parallel goods trader paying people lining up to buy formulas and send back to Mainland for speculation,This rumors had make the Hong Kong local parents worried and joined up to buy the formula,and make the Hong Kong milk powder market completely out of stock.These had mades batch of people organizations took to the streets, and containment and accused Chinese which are suspected to be the parallel goods trader.

The second reason is due to the arbitrage,as the price between Hong Kong infant formulas and mainlands have a significant price different due to the import and sales taxes in China,also the RMB-HKD ratio increase throughout the pass 3 years is bigger then the price increase of Hong Kong infant formula which the parallel good trader can make a huge profit from importing.

Below are the graph of the RMB-HKD exchange rate ratio for the past 3 years

In USD ($1 = 7.7555 Hong Kong dollars) ($1 = 6.2188 Chinese yuan)

And for the brand make the most of their captive market in Mainland and mark up prices up to 4 times their level in the US / Europe makes 1 tin of foreign baby formula ranges from around RMB 2500 to RMB 450. Some high533400546100 end products of the like such as Wyeth’s Illuma, and Mead Johnson’s Enfagrow cost even more. Mainland China then levies a 10% tax on imported baby formula in an effort to promote domestic alternatives in the year of 2011. But demand driven by safety concerns is inelastic, meaning Mainland Chinese consumers absorb the extra costs while foreign brands continute to grow their market share.

Due to the 10% tax plus another 10% on quality check before importing into China also different cost (see graph),which is lower then the exchange rate of RMB-HKD increased from 1.13 in 2011 April to the current 1.248,we can see that there are a large price difference which create a arbitrage and therefore the difference is too significant and the trader can make a huge profit from trading from Hong Kong and sell them in Mainland.The policy is aim to stop parallel trader snap up the Milk formula in Hong Kong,so that the local parents can be able to purchase the milk formula by limits travelers from taking more then 1.8 kg of infant milk formula out of Hong Kong,and arrest or fine people who in violation of the new law,to increase the cost above the arbitrage (the difference),so that the parallel trader will stop snap up the formula,as the risk is increase above the price difference between the exchange rate of RMB – HKD with the Tax,so they will have to purchase in Mainland China instead.

Product (900g) Hong Kong(HKD) Guang Chou(RMB) Price Different(RMB)

Wyeth S-26 Gold 258 248 33.86

Wyeth Promil Gold 225.5 223 35.84

Wyeth Progress Gold 199 198 32.83

Wyeth Promise Gold

162.9 175 39.79

Friso Gold 1 231 258 66.27

Friso Gold 2 197 229 65.49

Friso Gold 3 174 209 64.59

Friso Gold 4 140 179 62.8

Nestle NAN. H. A. 1 243 310 110.74

Nestle NAN. H. A. 2 212.5 279.5 103.12

Nestle NAN. H. A. 3 187.5 260 104.38

Mead Johnson Nutrition Enfagrow A+ 196.9 216 52.57

(Note:Hong Kong Infant Milk Price record at June 2012,and Guang Chou infant Milk Price record at July 2012)

(note:2012 data only up to August)

(source:China Dairy food import/export society)

Economic Analysis and Results

I will run a cost benefit analysis to define whether the policy will benefit the entire so8128001092200ciety more or alternative not running the policy.

Stage 1

Proposal – Amend of the Import and Export (General) Regulations (Cap. 60, subsidiary legislation A)

Alternative – Stay the same/no change

Stage 2

For Proposal reference

Costs = V IL Benefits = VIG

C1 GDP in Hong Kong B1 Hong Kong Parents to be able to get milk formula

C2 Cost of enforce and implementive the policy B2 Stop Smugglers activities

C3 The Hong Kong born baby who lives in Mainland China may have problem to get infant formula

B3 Government gain money from fine

C4 To increase immigration Views Will mark

Increase congestion at the pass between Mainland China and Hong kong, and the relevant departments resulting in greater pressure B4 Reduced congestion at Sheng Shui Station due to smugglers

C5 Mainland China force to buy expensive formula B5 Retail Point to have sufficient Milk Infant Formlua

C6 B6

Conclusions plus discussion,including an indication of what might have been done if more time and resources had been avaliable

The policy violates the principle of free trade

Target Smugglers We can understand protection, restriction and fine many fine are outraged.particular the 2 year imprisonment penalty that cant be calculate into the cost

modern version of Les Miserables

Mainland market Hong Kong imported infant powder change frequently after the policy

although many trader in mainland stopped the service of buying milk powder from hk

Mainland imported infant powder increased significantly increase 21.4% in 7 days,imported infant milk increase 70%-80%

Guangzhou imported milk powder the parallel price inflation higher than mainstream price

Didnt pass PIT so in short term since March the policy doesnt benefit the whole society

Can improve when more time is given,to observe how the infant milk powder price change in long term,as the policy havent been running for long ,and clearly the mainland chinese parents were still having a hard time to find another way for their baby to get the formula,but Hong Kong parents are able to have more stock,and clearly government gain more money from fine.

but for cost benefit analysis, since its difficult to determine the full cost, not only the different in exchange rate

but also the externalities factor plus admin cost etc and additional the political reason, e.g. free trade between hk and china,so setting up quota seems not rely possible

and more reasonable way should be tax the products or increase the penalty to punish then

so this will increase the cost for the traders

for the benefit side, i think u can say that after imposing this policy, there is positive externalities to Hong Kong citizen but again, this effect is not easy to quantify