CHAPTER 2: TRADE THEORY

1. Why do nations trade? What are some major arguments for and against an free trade? what are the consequence of
free trade (benefits and costs) – individual, firms and nations?

Nations trade because they gain by doing so.

- The main goal of trade is the ability to buy goods and services at a lower price than domestic one. Consumers are
able to buy less expensive products and the producers are able to purchase less expensive raw materials and semi-
manufactured goods
- Greater choice: international trade enables consumers to have greater choice of products
- Differences in resources: there are some resources that a country may need but don’t have. They may need them in
order to produce other products and so have no option but to import commodities they lack. Solution: they will
need to export goods or services in order to earn foreign currency so they can buy the required resources
- Economies of scale: when producing for the international market, as well as for a domestic one, the size of the
market and thus demand will increase. This means that the level of production and the size of production units will
also increase
- Increase competition: international trade may lead to increase completion, as domestic firms compete with foreign
firms
- More efficient allocation of resources: when international trade takes place freely, without government interference
then the country that are best at producing certain goods and services will produce them, they will be able to
produce goods and services at the lowest cost and take advantage of their efficiency
- Source of foreign exchange: international trade enables countries to obtain foreign exchanges (currency)
Definition: Free trade is a largely theoretical policy under which governments impose absolutely no tariffs, taxes, or duties
on imports, or quotas on exports
* In your opinion, economic trend: integration or disintegration. As the fact that, there is a reduction in trend of integration,
such as the member nations in NAFTA tend to quit out of this organization, or England has quit Brexit. The main reason
stems from the disadvantages of free trade:
Arguments for Free Trade:
- It stimulates economic growth: Even when restrictions such as tariffs are imposed, all participating countries tend to
realize higher economic growth. For example, the Office of the US Trade Representative estimates that as a
signatory to the NAFTA (North American Free Trade Agreement) US economic growth is 5% per year.
- It helps consumers: trade restrictions such as tariffs and quotas are implemented to protect local businesses and
industries. When trade restrictions are eliminated, consumers tend to see lower prices because more products
imported from countries with lower labor costs become available at the local level.
- It increases foreign investment: When not faced with trade restrictions, foreign investment tends to pour money
into local businesses that help them expand and compete. In addition, many developed and isolated nations benefit
from a cash flow from US investors
- It reduces government spending: The government often subsidizes local industries, such as agriculture, for their loss
of income due to export quotas. Once the quota is lifted, the government's tax revenue can be used for another
purpose

Argument against Free Trade:

- Reduce protection of government: When the economy is privatized, FDI in the country will increase, dominating the
government capital. State-owned enterprise policies are also affected. For example, Vietnamese universities tend to
be privatized, have capacity for financial autonomy, and service improvements. The Ministry of Education only takes
responsibility in quality accreditation
- Unqualified goods: the market is filled with diversified domestic and imported goods. Non strict quality inspection of
goods leads to unqualified goods
- Causes job loss through outsourcing: Exempt import tax, imported products from abroad with lower wages cost less.
While this may seem good for consumers, it makes it difficult for domestic businesses to compete, forcing them to
reduce their workforce. In fact, one of the main objections to NAFTA is that it outsources American jobs to Mexico.
 - It encourages theft of intellectual property: Without the protection of patent law, companies often have their
innovations stolen and new technology stolen, forcing them to compete with counterfeit domestic products that
have fallen in price
- It allows for bad working conditions: Likewise, governments in developing countries rarely have laws to regulate and
ensure safe and fair working conditions. Because free trade is in part dependent on a lack of government
restrictions, women and children are often forced to work in factories doing heavy labor in slave-like working
conditions
- It can be harmful to the environment: the developing countries havent imposed strict environmental policies. Since
many of the free trade opportunities involve the export of natural resources such as wood or iron ore, obviously
cutting forests and un-reclaiming strip mining often decimate the local environment.
- It reduces revenue: Due to the high degree of competition that promotes unlimited free trade, participating
businesses ultimately experience a decrease in revenue. Small businesses in smaller countries are most vulnerable
to this effect

The consequence of free trade (benefits and costs) to:

- Individual: Have various selection of goods at a wide range of prices

- Firms: Free trade reduces imported-input costs, thus reducing businesses’ production costs. Create good conditions
and opportunities for entrepreneurship
- Nations: The Government increased budget revenue through taxes and many other taxes, contributing to boosting
GDP growth and a more complete trade policy

What are the benefits and arguments against protectionism?

Benefits:

- Protecting domestic employment: at any given time in an economy there will be some industries that are in decline
because they cant compete with foreign competition- sunset industry
- Protecting the economy from low cost labor: it is often argued that the main reason for declining domestic
industries is the low cost of labor in exporting countries and that the economy should be protected from imports
that are produced in countries where the cost of labor is very low
- Protecting an infant (sunrise) industry: many governments argue that an industry that is just developing may not
have the economies of scale advantages that larger industries in other countries may enjoy
- Avoid the risks of over specialization: the government may want to limit overspecialization, if it means that the
country could become over dependent on the export sales of one or two products. Any change in the world market
for these products might have serious consequences for the country’s economy
- Strategic reason: it is sometimes argued that certain industries need to be protected in case they are needed at
times of wars, for example agriculture, steel or electricity
- Prevent dumping: dumping is the selling by a country of large quantities of a commodity, at a lower price than its
production costs in another country. For example, the EU may have a surplus of butter and sell this at a very low cost
to a small developing country
- Protect product standards: a country may wish to impose safety, health or environmental standards on goods being
imported into its domestic market in order to ensure that the imports match the standards of domestic products.
For example, the EU banned the importing of US meat in the 1990s because it was treated with hormones
- Raise government revenue: in many developing countries, it is difficult to collect taxes and so government imposed
import taxes or tariffs on products in order to raise revenue
- Correct balance of payments deficit: governments sometimes impose protectionist measures to attempt to reduce
import expenditure and thus improve a current account deficit whereby the country is spending more on its imports
of goods and services then it is earning for its exports of goods and services

Arguments against

- Protectionism may raise prices to consumers and producers of the inboards that they bought
- Protectionism would lead to fewer choices for consumers
 - Protectionism would diminish competition if foreign firms are kept out of a country, and so domestic firms may
become inefficient without the incentive to minimize cost. Innovation may also be reduced for the same reason
- Protectionism distorts comparative advantage. Leading to the inefficient use of the world resources. Specialization is
reduced and this would reduce the potential level of the world output
- Protectionism may hinder economic growth

2. What were the mercantilist’s views on trade? What are the new contributions of mercantilist views on trade? What is
the weak point of mercantilism? Discuss

- Mercantilism was an economic system of trade that spanned from the 16th century to the 18th century. Mercantilism was
based on the idea that a nation's wealth and power were best served by increasing exports and so involved increasing trade.
Under mercantilism, nations frequently engaged their military might to ensure local markets and supply sources were
protected, to support the idea that a nation's economic health heavily relied on its supply of capital. Mercantilism suggests
that it is in a country’s best interest to maintain a trade surplus – to export more than it imports

It views trade as a zero-sum game - one in which a gain by one country results in a loss by another. Thus, any system of
policies that benefited one group would by definition harm the other, and there was no possibility of economics being used
to maximize the commonwealth, or common good. Mercantilists' writings were also generally created to rationalize
particular practices rather than as investigations into the best policies.

For example trang 34

The weak point of mercantilism

- It creates high levels of resentment. Trickle-down economics works on paper. It just doesn’t work well in real life thanks to
the inherent greed that so many people have. Why give others money when you can keep it for yourself? The rich tend to
get richer in a system of mercantilism and the working class gets to be stagnant at best. Eventually this creates resentment,
which leads to rebellion, and ultimately it leads to many colonies seeking out their own independence.
- It creates a preference for the mother nation to always be first. Many colonies are also treated as a foreign nation in a
system of mercantilism. This means the colonies are forced to sell their local raw materials for a bargain basement price
and then be forced to purchase manufactured goods at a higher price than necessary. This creates an even wider wealth
gap between the different income classes.
- There is always a risk of local raw materials and resources running out. Because mercantilism is based on the complete use
of natural resources, there will always be a day when those resources run out. Natural resources are finite in nature, so
even if there is an extensive reserve in place that can be accessed, that reserve will one day run out. If that happens sooner
rather than later, then the entire economy can collapse.
- The system is ultimately quite inefficient. Because materials and goods are shipped back and forth between colonies and
their mother nation, the price of goods is inflated more than it needs to be. Even with modern shipping methods, it costs
less to manufacture goods locally where raw resources are available than it does to ship those items back and forth.
Because of this, it also creates vulnerabilities in both economies should those shipments be intercepted by someone else.

The new contributions of mercantilist view on trade:

- Tariffs in response to domestic subsidies. Supporters argue that since China’s steel is effectively subsidised leading to
a glut in supply, it is necessary and fair to impose tariffs on imports of Chinese steel to protect domestic producers
from unfair competition. US tariffs on imports of steel from China 266%. In Europe, tariffs are 13%.
- Protection against dumping. If some countries have an excess supply of goods, they can sell at a very low price to get
rid of the surplus. But, this can make domestic firms unprofitable. Protectionism can be justified to protect against
this dumping. Examples include EEC dumping excess agricultural production on world agricultural markets and
China’s dumping of steel.
- Infant industry argument. For countries seeking to diversify their economy, tariffs may be justified to try and develop
new industries. When the industries have developed and benefited from economies of scale, then the tariffs and
protectionism can be dropped
 - recognize the importance of International Trade

3. How were Adams Smith (theory of absolute advantage) ‘s views on trade? How were gains from trade generated?
What policies did Adam Smith advocate in international trade? What did he think was the proper function of government
in the economic life of the nation?

The Adams Smith (theory of absolute advantage) ‘s views on trade:

The concept of absolute advantage was developed by Adam Smith in his book Wealth of Nations to show how countries can
gain from trade by specializing in producing and exporting the goods that they can produce more efficiently than other
countries. Countries with an absolute advantage can decide to specialize in producing and selling a specific good or service
and use the funds that good or service generates to purchase goods and services from other countries. By Smith’s argument,
specializing in the products that they each have an absolute advantage in and then trading products, can make all countries
better off, as long as they each have at least one product for which they hold an absolute advantage over other nations

For example, in a single day, Owen can embroider 101010 pillows and Penny can embroider 151515 pillows, so Penny has
absolute advantage in embroidering pillows

Gains from trade generated:

Meaning and Measurement of Gains from Trade: Just as two traders in the same country enter into exchange for the
consideration of making some gain, in the same way two countries get engaged into transactions for deriving some gain. The
economists have viewed the gains from trade from different angles. The classical theorists believed that gains from trade
resulted from increased production and specialisation.

- Increase in national income

- Differences in comparative costs
- Terms of trade

The modern theorists considered the gains from trade as the gains resulting from exchange and specialisation. In the opinion
of Adam Smith, the gains from international trade are in the form of the increased value of product and improvement in the
productive capacity of each trading country. The international trade leads to export of the commodity which is less in
demand in the home market, and import of the commodity which is strong in demand. It enables each trading country to
derive the maximum welfare and obtain maximum possible export earnings.

When each country specialises in the production of the commodity in which it has cost advantage, there is optimum
allocation of productive resources. Coupled with increased division of labour, specialisation reduces the cost structure and
enlarges the size of market for each trading country. As a consequence, the world production and welfare gets maximized
through international trade

EX: The United States, for example, has a skilled workforce, abundant natural resources, and advanced technology. Because
of these three things, the US can produce many goods more efficiently than potential trading partners, giving it an absolute
advantage in the production of goods from corn to computers, to maple syrup and cars

Adam Smith’s policies avocate in International Trade

- Adam Smith and other classical economists advocated policy of laissez-faire, or minimal government interference with
economic activity. Free trade would cause world resources to be utilized most efficiently, maximizing world welfare.

- Smith was in favor of free trade.

· He derived his support for free trade among nations by basing it on the obvious desirability of trade among
individuals: "It is the maxim of every prudent master of a family, never to attempt to make at home what it will
cost him more to make than to buy".
· According to Smith, free trade expands the extent of the market and, thereby, allows greater division of labor
· Free trade also increases productivity by allowing countries to specialize in what they do well.
- The Invisible Hand

· Consumer sovereignty and business competition are the key components of Smith’s argument that the pursuit of
individual self interest leads to an excellent social outcome

· Consumer sovereignty ensures that consumer needs determine what gets produced

· Business competition ensures that prices are driven down to unit cost

Thus, without any government control, the most beneficial goods get produced, and at the lowest possible price

The proper function of government in the economic life of a nation:

- Protection of private property and maintaining law and order / national defence : If a country has a problem with
crime, then it will discourage investment and the quality of life. The role of the government is to ensure basic law
and order, through ensuring the rule of law. This involves protecting the rights to private property. A similar function
of the government is to provide for national defence – paying for an army
- Raising taxes. To provide public goods and public services, the government needs to raise tax
- Providing public services. Public goods tend to be not provided in a free market because of the free rider problem.
Therefore, these goods and services need to be provided by the government. Examples of public goods include
street lighting, roads and law and order. Most governments provide some form of state provided education and
health care
- Regulation of markets: The government may need to regulate monopoly power, e.g. prohibiting mergers or setting
price limits in natural monopolies (industries like tap water and railways)
- Macroeconomic management: Capitalist economies can be subject to economic cycles – economic booms and
recession. Recessions can lead to lost output and higher unemployment. In this case, the government may use fiscal
policy to influence aggregate demand , or monetary policies and avoid inflation
- Reducing inequality/poverty: The government may feel the need to ensure everyone has an equal opportunity, for
example providing education so even those from poor families have the opportunity to get qualifications

4. In what way was Ricardo’s law of comparative advantage superior to smith theory of absolute advantage? (compare:
the theory of absolute advantage and comparative advantage?)

( Absolute Advantage and Comparative Advantage : Absolute advantage can be contrasted to comparative advantage, which
is when a producer has a lower opportunity cost to produce a good or service than another producer. Absolute advantage
leads to unambiguous gains from specialization and trade only in cases where each producer has an absolute advantage in
producing some good. If a producer lacks any absolute advantage then Adam Smith’s argument would not necessarily apply.
However, the producer and its trading partners might still be able to realize gains from trade if they can specialize based on
their respective comparative advantages instead

- Absolute advantage and comparative advantage are two concepts in economics and international trade
- Absolute advantage refers to the uncontested superiority of a country or business to produce a particular good
better
- Comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options
for production diversification ) _ mục tham khảo
Comparison Absolute advantage Comparative advantage
Meaning Implies the unbeatable dominance of Refer to the ability of a country or
a country or a business organization in business organization to produce a
 producing a particular commodity specific products or services at lower
marginal cost and opportunity cost
than other country

Represent difference in Productivity of nations opportunity cost

Determines Resources allocation,trade pattern and Direction of trade and international
trade volume production

Trade Not mutual or reciprocal mutual or reciprocal

Factor involve cost opportunity cost

David Recardo’s law of comparative advantage is superior to Smith’s theory in more comprehensive terms of associating
specialization with opportunity cost. Unlike Smith’s theory which is completely based on absolute advantage, Ricardo’s law
of comparative advantage generates hope for nations that are technically on the back foot by entailing that they can involve
in international trade even if their labor output in all commodities is less than that of a developed country.

In today’s scenario, an example could be of Pakistan exporting cotton products to the United States and importing military
guns, tanks and missiles. The United States can produce cotton products too but relatively less efficiently than Pakistan. On
the contrary, the United States has a relative advantage in making military products. According to Ricardo’s law of
comparative advantage, the United States is benefitting from Pakistan’s efficiency in making cotton products whereas
Pakistan is benefitting from theUnited States’s efficiency in making military products.

The above example justifies the win-win situation as was proposed by Ricardo.

If the United States was to choose to grow cotton on its land and make its own cotton products, it could possibly have done
that, less efficiently though. This signifies that if Smith’s theory was implemented, Pakistan would have nothing left to trade
with the United States.

Why is this theory more relevant to the modern trade situation?

Ricardo demonstrated that even when a nation is more efficient than another at producing all goods, it should focus on the
one for which it is internally most efficient, and trade for the others.The key implication of the law of comparative advantage
is that if free trade is allowed, then all nations can and will be integrated through the international division of labor. No
nation is so poor or inefficient that it cannot gain from free trade. And he brilliantly showed this with his famous example of
English and Portuguese cloth and wine production. Through free trade Portugal and England can both reduce their labor
hours and redirect those resources to their best relative use

As predicted by Ricardo—the world has moved closer to a highly specialized universe of comparative advantage. The level of
trade globalization and integration has increased at a rapid pace in the last three decades. The entry of China into the World
Trade Organization (WTO) and the economic paradigm shifts of India and many other developing countries toward free-
market economies have increased global trade volumes and supply chain dynamics

As Ricardo's theory suggests, the impact of a negative event in one source country can have wide-ranging impacts on trade
flows across the world. This is especially true today since all advanced economies, as well as most developing ones, are
highly integrated with each other via trade and financial markets. This connection can be seen through the highly correlated
Purchasing Managers' Indexes (PMI) for manufacturing in the United States, the euro zone, the United Kingdom, China, and
Brazil. In Ricardo's example, a storm that would wipe out the clothing industry in England would leave both countries
without new clothing, while a drop in the price of wine due to changing tastes or prohibition in England would devastate the
Portuguese economy. Furthermore, while emerging markets have recently led the global expansion, they have not been able
to decouple from the more advanced economies. This illustrates the fact that economic or political events in one country or
region can have significant consequences around the world
Since they cannot evade these global economic forces, supply chain managers should focus on what they can do: building
key redundancies and backup plans, and avoiding an over-reliance on a specialized product that leads to the short in goods
and lack of autonomy in supply

Gains from trade arise with comparative advantage:

- Trade allows each country to take advantage of lower opportunity costs in the other country. If Mexico wants to
produce more refrigerators without trade, it must face its domestic opportunity costs and reduce shoe production.
- It shows that the gains from international trade result from pursuing comparative advantage and producing at a
lower opportunity cost. The following feature shows how to calculate absolute and comparative advantage and the
way to apply them to a country’s production
- When nations increase production in their area of comparative advantage and trade with each other, both countries
can benefit. The production possibilities frontier is a useful tool to visualize this benefit. Recall from earlier readings
that the production possibilities frontier shows the maximum amount that each country can produce given its
limited resources, in this case workers
- Opportunity Cost Sets the Boundaries of Trade: both parties can benefit from specializing in their comparative
advantages and trading. By using the opportunity costs in this example, it is possible to identify the range of possible
trades that would benefit each country
- Trade and Incomes: Incomes depend on labor productivity. If a country specializes in the product in which it has a
comparative advantage, it raises its average labor productivity and raises its average income. Thus, comparative
advantage is important in understanding which country should trade which product in order to maximize the standard
of living in both countries

5. What are the sources of comparative advantage?

For a country, some of the factors below are important in determining the relative unit costs of production:

- The quantity and quality of natural resources available for example some countries have an abundant supply of
good quality farmland, oil and gas, or easily accessible fossil fuels. Climate and geography have key roles in creating
differences in comparative advantage. Severe worries about water scarcity in the future in large parts of the
developing world might have hugely significant effects on their ability to export products
- Demographics - An ageing population, net outward or inward migration, educational improvements and women's
participation in the labour force will all affect the quantity and quality of the labour force available for industries
engaged in international trade
- Rates of capital investment including infrastructure: Greater public infrastructure investment can reduce trade costs
and hence increasing supply capacity. Investment in roads, ports and other transport infrastructure strengthens
regional trade ties
- Increasing returns to scale and the division of labour – increasing returns occur when output grows more than
proportionate to inputs. Rising demand in markets where trade takes place helps to encourage specialisation, higher
productivity and internal and external economies of scale
- Investment in research & development which can drive innovation and invention
- Fluctuations in the exchange rate, which affect the relative prices of exports and imports and cause changes in
demand from domestic and overseas customers
 - Import controls such as tariffs, export subsidies and quotas – these can be used to create an artificial comparative
advantage for a country's domestic producers
- Non-price competitiveness of producers - covering factors such as the standard of product design and innovation,
product reliability, quality of after-sales support. An example is the division of knowledge in the medical industry,
some countries specialize in heart surgery, others in pharmaceuticals – health tourism is becoming more important
- Institutions – these are important for comparative advantage and for growth too. Banking systems are needed to
provide capital for investment and export credits, legal systems help to enforce contracts, political institutions and
the stability of democracy is a key factor behind decisions about where international capital flows

6. What is meant by labor intensive commodity? Capital intensive commodity? What is meant by a capital abundant
nation? Suppose that there: airplane is capital intensive commodity and rice is labor intensive commodity, and we have 2
nations: korea is rich and capital abundant nation, china is a labor abundant country

Labor intensive: Labor intensive is the relative proportion of labor (compared to capital) used in any given process. Its
inverse is capital intensity.In Economics, labour is the all human effort in the production. Labour does not only mean the
labourers in an industrial site..EX labor intensive industries include agriculture, mining, hospitality and food service

Advantages of labour-intensive production

- Staff(labour), unlike machinery can be used flexibly to meet changing levels of consumer demand, e.g. temporary
workers
- Can provide a ‘personal touch’ and be more in-tune with customer needs and wants
- Can provide tailor made products / services for different customer needs and wants. Machinery is not flexible
enough to provide custom made products / services for individual customers
- Labour can provide feedback, that provides ideas for continuous improvement. Workers can adapt to introduce new
ideas
- Labour is always required to take over in any event of breakdown of machinery

Disadvantages of labour intensive production

- Relatively expensive in the long-term when compared to machinery – higher per unit costs due to lower levels of
productivity
- Relatively inefficient and inconsistent levels of effort
- Labour relation problems, e.g. may go on strike
- There could be a shortage of skilled labour, unlike machinery
- Problems in personal life could easily affect the performance at work..

Capital intensive: Capital intensity is the amount of fixed or real capital present in relation to other factors of production,
especially labor. At the level of either a production process or the aggregate economy, it may be estimated by the capital to
labor ratio, such as from the points along a capital/labor isoquant. The term came about in the mid- to late-nineteenth
century as factories such as steel or iron sprung up around the newly industrialized world

Examples of capital-intensive industries include automobile manufacturing, oil production, and refining, steel production,
telecommunications, and transportation sectors (e.g., railways and airlines)

Advantages of capital intensive production

- Reduces human error – more accurate production

- Greater speed (efficiency) and uniform effort / output
- Technical economies of scale – increased efficiency which could reduce average cost
- No problems with labour shortages / planning labour

Disadvantages of capital intensive production

- Initial high costs of investment and possible training costs

 - Lack of flexibility in responding to a change in demand. In contrast, labour can be used flexibly, e.g. using temporary
workers
- Machinery lacks initiative, e.g: it is unlikely to be innovative, provide ideas on how to improve production or take on
extra responsibilities

Effects of labor intensity:

- A labor-intensive industry requires large amounts of manual labor to produce its goods or services. In such
industries, labor costs are more of a concern than capital costs. Labor intensity is measured by its proportion to the
amount of capital to produce goods or services. The higher the labor cost, the more labor intensive is the business. -
- Labor cost can vary because businesses can add or subtract workers based on business needs. When it comes to
controlling expenses, labor intensive businesses have an advantage over those that are capital intensive and require
a large investment in capital equipment, such as the automobile industry. In case of high levels of inflation in the
economy, the labor-intensive industry can suffer to some extent. In times of high inflation, laborers are more likely
to reveal their unwillingness to work at the same level of wage, because inflation lowers the value of their earnings.
- Before the industrial revolution, the major part of the workforce was employed in agriculture. Producing food was
very labor-intensive. Advances in technology and worker productivity have moved some industries away from labor-
intensive status, but many remain, such as mining and agriculture.

Effects of capital intensity:

- Capital-intensive industries tend to have high levels of operating leverage, which is the ratio of fixed costs to variable
costs. As a result, capital-intensive industries need a high volume of production to provide an adequate return on
investment. This also means that small changes in sales can lead to big changes in profits and return on invested
capital.
- Their high operating leverage makes capital-intensive industries much more vulnerable to economic slowdowns
compared with labor-intensive businesses because they still have to pay fixed costs, such as overhead on the plants
that house the equipment and depreciation on the equipment. These costs must be paid even when the industry is
in recession.
- Capital-intensive firms generally use a lot of financial leverage, as they can use plants and equipment as collateral.
However, having both high operating leverage and financial leverage is very risky should sales fall unexpectedly.
Because capital-intensive industries have high depreciation costs, analysts that cover capital-intensive industries
often add depreciation back to net income using a metric called earnings before interest, taxes, depreciation, and
amortization (EBITDA). By using EBITDA, rather than net income, it is easier to compare the performance of
companies in the same industry
- EX: Take a position and seize opportunities on 70 key US companies like Netflix and Tesla. Go long or short and
trade during extended US trading hours. CFDs are complex, high risk and losses can be substantial

The Heckscher-Ohlin (H-O) theorem states that "A capital-abundant country will export the capital-intensive good, while the
labor-abundant country will export the labor-intensive good." The critical assumption of the Heckscher–Ohlin model is that
the two countries are identical, except for the difference in resource endowments. This also implies that the aggregate
preferences are the same. The relative abundance in capital will cause the capital-abundant country to produce the capital-
intensive goods cheaper than the labor-abundant country and vice versa

- The structure of trade, in general, can be traced back to differences in factor endowments, technology and tastes
- Since Heckscher- Ohlin theory assumes that technology and tastes are similar between countries, it attributes the
comparative advantages to differences in factor endowments
- In summary, the capital abundant country exports the capital intensive commodity and the labor abundant country
exports the labor intensive commodity
-

What can we say from the trade pattern between two countries? what does the heckscher and ohlin theory postulate
We shall examine the Heckscher-Ohlin theory in its simplest version, that is a model in which there are two countries, two
final goods and two primary factors of production. Initially, when the countries are not trading:

- The price of the capital-intensive good in the capital-abundant country will be bid down relative to the price of the
good in the other country
- The price of the labor-intensive goods in the labor-abundant country will be bid down relative to the price of the
goods in the other country
- Once trade is allowed, profit-seeking firms will move their products to the markets that have (temporary) higher
prices

As a result:

- The capital-abundant country will export the capital-intensive good

- The labor-abundant country will export the labor-intensive goods

EX: The Leontief paradox, presented by Wassily Leontief in 1951, found that the U.S. (the most capital-abundant country in
the world by any criterion) exported labor-intensive commodities and imported capital-intensive commodities, in apparent
contradiction with the Heckscher–Ohlin theorem. However, if labor is separated into two distinct factors, skilled labor and
unskilled labor, the Heckscher–Ohlin theorem is more accurate. The U.S. tends to export skilled-labor-intensive goods, and
tends to import unskilled-labor-intensive goods

CHAPTER 3: TRADE POLICIES/ BARRIERS

8. What is the primary function of tariffs in industrial nations? What are the advantages and disadvantages of Ad Valorem
and specific tariff ? what is meant by the consumption , production, trade, revenue and redistribution effects of a tariff ?

Tariffs have three primary functions: to serve as a source of revenue, to protect domestic industries, and to remedy trade
distortions (punitive function):

- The revenue function comes from the fact that the income from tariffs provides governments with a source of
funding. In the past, the revenue function was indeed one of the major reasons for applying tariffs, but economic
development and the creation of systematic domestic tax codes have reduced its importance in the developed
countries. For example, Japan generates about 90 billion yen in tariff revenue, but this is only 1.7 percent of total tax
revenues (fiscal 1996)
- Tariffs is also a policy tool to protect domestic industries by changing the conditions under which goods compete in
such a way that competitive imports are placed at a disadvantage. In some cases, “tariff quotas” are used to strike a
balance between market access and the protection of domestic industry. Tariff quotas work by assigning low or no
duties to imports up to a certain volume (primary duties) and then higher rates (secondary duties) to any imports
that exceed that level.
- The WTO bans in principle the use of quantitative restrictions as a means of protecting domestic industries, but does
allow tariffs to be used for this purpose. The cost of protecting domestic industry comes in the form of a general
reduction in the protecting country's economic welfare and in the welfare of the world economy at large, but tariffs
are still considered to be more desirable than quantitative restrictions.
- Punitive tariffs may be used to remedy trade distortions resulting from measures adopted by other countries. For
example, the Antidumping Agreement allows countries to use "antidumping-duties" to remedy proven cases of
injurious dumping; similarly, the Subsidies Agreement allows countries to impose countervailing duties when an
exporting country provides its manufacturers with subsidies that, while not specifically banned, nonetheless damage
the domestic industry of an importing country.

The advantages and disadvantages

A specific tariff is expressed in terms of a fixed amount of money per physical unit of the imported product.An advantage of
a specific tariff is that is easy to apply to apply on imports, regardless of their price.It protects domestic producers during a
recession because consumer seek to purchase cheaper goods and the specific tariff raises the price of cheap imports ,
discouraging consumption of foreign goods. A disadvantage of this tariff is that it does not discourage consumption of
imported goods that are relatively more expensive due to the set amount of tax would be more negligent as the price
offoreign products increase

An ad valorem (of value) tariff is much like a sales tax and is expressed as a fixed percentage of the value of the imported
product.An advantage to this tariff is the change in tax charges with varying import prices and it tends to maintain a constant
degree of protection for domestic producers.A disadvantage is this tariff taxes based on the valueof the import which can be
difficult to determine at times

A compound tariff is a combination of specific and ad valorem tariffs in which a set of money is charged in addition to a fixed
percentage of the value of the imported good.An Advantage to this tariff is that the specific portion of the tax is levied on
the imported raw materials embodied in manufactured goods while the ad valorem tariff is taxed on the manufactured good
itself.There is no disadvantage to the compound tariff

Effect of tariffs:

- Protective or Production Effect: The imposition of tariff may be intended to protect the home industry from the
foreign competition. As tariffs restrict the flow of foreign products, the home producers find an opportunity to
increase the domestic production of import substitutes
- Consumption Effect: The imposition of import duty on a particular commodity has the effect of reducing
consumption and also the net satisfaction of the consumers
- Revenue Effect: The imposition of import duty provides revenues to the government. The revenue receipts due to
tariff signify a revenue effect
- Redistribution Effect: The imposition of tariff, on the one hand, causes a reduction in consumer’s satisfaction and, on
the other hand, provides a larger producer’s surplus or economic rent to domestic producers and revenues to the
government. Thus tariff leads to redistributive effect in the tariff-imposing country. The redistributive effect can be
shown with the help
- Terms of Trade Effect: The traditional theorists believed that tariff led to an improvement in the terms of trade of
the tariff-imposing countries. The modern theorists, however, do not hold such a simplistic view. In their opinion,
the terms of trade, consequent upon the imposition of tariff, depend upon the elasticities of demand and supply of
products of the two trading countries
- Competitive Effect: The imposition of tariffs can facilitate the growth of an infant industry which otherwise is not in a
position to face the foreign competition. As tariff makes the foreign product relatively more costly, the domestic
infant industry finds opportunity to grow behind the protective shield. Thus tariff increases the competitive power of
the industries of tariff-imposing countries. After the infant industry becomes mature enough to face the foreign
competition, tariffs may be removed
- Income Effect: The imposition of tariff reduces the demand for foreign products. The amount of money not spent on
imported goods may either be spent on the home-produced goods or saved. If there is the existence of surplus
productive capacity in the home country, switching of expenditure from foreign to home-produced goods will lead
to a rise in production, employment and income
- Balance of Payments Effect: When tariff is imposed by a country upon foreign products, the home-produced goods
become relatively cheaper than the imported goods. The price effect caused by tariff, on the one hand, reduces
imports from other countries and on the other hand, causes increased production and purchase of home- produced
goods. That leads to a reduction in the balance of payments deficit of the home country

Some doubts are raised that tariff may fail to improve the balance of payments deficit:

- Firstly, if the demand for imports in the tariff- imposing country is inelastic, tariff may not reduce the volume of
imports despite the rise in the prices of imported goods consequent upon the imposition of tariff
- Secondly, if the balance of payments disequilibrium is caused by the export surplus, the imposition of tariff will
further aggravate rather than adjust the balance of payments disequilibrium
- Thirdly, tariff can, at the maximum, bring about some adjustment in temporary disequilibrium of international
payments. There is no possibility of adjusting the fundamental disequilibrium in the balance of payments through
tariff restrictions
9. What is an import quota ? How are they similar to and different from the effect of an equivalent import tariff ? How
does the revenue effect of an import quota differ from that of a tariff ?

Definition: quota is a government-imposed trade restriction that limits the number or monetary value of goods that a
country can import or export during a particular period. Countries use quotas in international trade to help regulate the
volume of trade between them and other countries. Countries sometimes impose them on specific products to reduce
imports and increase domestic production. In theory, quotas boost domestic production by restricting foreign competition

There are certain similarities between import quota and import tariff:

- Firstly, both tariffs and quotas have the same objectives such as reduction in the volume of imports, protection of
home industries, expansion of employment and economic activities and correction of balance of payments deficit
- Secondly, a certain rate of tariff causes reduction in the quantity by a specified extent and, therefore, it has a quota
equivalent
- Thirdly, tariff and quota both have similar price, protection, consumption, redistribution, welfare, balance of
payments and income effects

Differences: Import quota limits imports to specified levels with certainty, while the trade effect of an import tariff may be
uncertain. On theoretical and practical grounds, tariffs seem to have an edge over the import quotas

- With an import quota, an increase in demand will result in a higher domestic price and greater domestic production
than with an equivalent import tariff. On the other hand, with an import tariff, an increase in demand will leave the
domestic price and domestic production unchanged but will result in higher consumption and imports than with an
equivalent import quota
- A second important difference between an import quota and an import tariff is that the quota involves the
distribution of import licenses.The government must decide the basis for distributing licenses among potential
importers of the commodity. - Import licenses result in monopoly profits, potential importers are likely to devote a
great deal of effort to lobbying and even bribing government officials to obtain them. Import quotas not only
replace the marker mechanism but also result in waste from the point of view of the economy as a whole and
contain the seeds of corruption
- An import quota limits import to the specified level with certainty, while the trade effect of an import tariff may be
uncertain.

The revenue effect

- Both tariffs and import quotas reduce quantity of imports, raise domestic price of good, decrease welfare of
domestic consumers, increase welfare of domestic producers and cause deadweight loss
- The revenue effect of a tariff is captured by the government, while a quota's revenue tends to be captured by
domestic or foreign firms.
- For a firm that gets a licence to import, profit per unit equals domestic price minus world price. Total profit equals
profit per unit times quantity sold
- Government may charge fees for import licences. If the government sets the import licence fee equal to the
difference between domestic price and world price, the import quota works exactly like a tariff. The entire profit of
 the firm with an import licence is paid to the government. Thus government revenue is the same under such an
import quota and a tariff. Also, consumer surplus and producer surplus are the same under such an import quota
and a tariff
In practice, when a country uses import quotas it rarely sells import licences. The US has pressured Japan to voluntarily limit
the sale of Japanese cars in the US. Then Japanese government allocated the import licences among Japanese firms. Surplus
(profit) from the licences went to those firms

10. What is meant by dumping ? What are the different types of dumping ? Why is dumping undertaken ? What
conditions are required to make dumping possible ? Does dumping usually lead to trade restrictions ? Analyze one case
study many governments have used. China with a steel industry , solar panel ?

Dumping is a term used in the context of international trade.The sale of goods of one nation in the markets of a second
nation at less than the price charged within the first nation. Dumping can eliminate competitors by undercutting their prices.

Dumping is when a country's businesses lower the sales price of their exports to unfairly gain market share. They drop the
product's price below what it would sell for at home. They may even push the price below the actual cost to produce. They
raise the price once they've destroyed the other nation's competition.

Conditions are required to make dumping possible

Dumping can only occur if two conditions are fulfilled:

- First, the industry must be imperfectly competitive, so that firms have market power. That is firms must be able to set
prices in the domestic or foreign market rather than take prices as given in both markets.

- Second, markets must be segmented, so that domestic customers cannot easily purchase products sold at a lower price in
foreign markets

The elasticity of demand must be different in the two markets. The demand should be less elastic in the domestic market
and perfectly elastic in the foreign market. As a result, the monopolist sells his commodity at a low price in the foreign
market and at a high price in the domestic market. The foreign market should be perfectly competitive and the domestic
market is monopolistic. The buyers in the domestic market cannot buy the cheap commodity from the foreign market and
bring it in the domestic market.

Dumping usually lead to trade restrictions:

- The problem with dumping is that it's expensive to maintain. It can take years of exporting cheap goods to put the
competitors out of business. Meanwhile, the cost of subsidies can add to the export country's sovereign debt.
- The second disadvantage is retaliation by the trading partner. Countries may impose trade restrictions and tariffs to
counteract dumping. That could lead to a trade war.
- The third is censured by international trade organizations. These include the World Trade Organization and the
European Union.

Analyze one case study many governments have used: China with a steel industry , solar panel

President Trump announced his plans to impose a 25% tariff on steel and a 10% tariff on aluminum. Initially, no distinction
was made among trading partners, but later it was revealed that Mexico and Canada were to be exempt, and that other
countries can apply to also be exempt. Australia has been identified as perhaps a third country that could qualify for
exemption and other allies may also qualify.

The tariffs are designed to protect U.S. steel and aluminum producers from dumping by China, although the tariff is very
broad based, covering many more countries than just China. In fact, the version of the tariff in effect as of this writing
(although the policy is still in flux) covers something like $41 billion worth of imports, of which only 7% is from China.
Trump’s decision to broadly impose tariffs has been criticized by many as wrong headed in that the problem is China and the
tariffs do not target China. China is responsible for 50% of the world's steel exports and it has achieved this market share
through government subsidies, that is, by dumping.

EX2: PAGE 265 in 1985 us…..

11. Why do nations subsidize exports? To what problems do these subsidize give rise ? Analyze a few industries that China
uses to subsidize exports . What are the major forms of subsidization that governments grant to domestic producers ?

Subsidize definition: Quantity restrictions imposed by the government of one nation on imports from other nations. The
primary goal of export subsidies is to reduce imports and increase domestic production. Because the quantity of imports is
restricted, the price of imports increases, which thus encourages domestic consumers to buy more domestic production.
Export subsidies are one of three common foreign trade policies designed to discourage imports and/or encourage exports.
The other two are tariffs and export subsidies.

Export subsidies are foreign trade policies undertaken by domestic governments that are intended to "protect" domestic
production by restricting foreign competition. In general, a quota is simply a quantity restriction placed on a good, service, or
activity. For example, employers often face hiring quotas for different demographic groups and sales representatives often
have quotas for sales activities.

Export subsidies are then merely legal restrictions on the quantities of imports from the foreign sector that are imposed by
the domestic government.The goal of export subsidies is to increase the limit the availability of imports in the domestic
economy and thus encourage domestic consumers to purchase domestic production.

The imposition of export subsidies on foreign imports, as well as other foreign trade policies, are commonly justified for
at least five reasons:

- Domestic Employment: Because foreign imports are produced in other countries by foreign workers, subsidizing
exports and increasing domestic production also increases domestic employment.
- Low Foreign Wages: Subsidizing the exports of domestic production "levels the competitive playing field" compared
to imports produced by foreign workers who receive lower wages.
- Infant Industry: If foreign imports compete with a relatively young domestic industry that is not mature enough nor
large enough to benefit from economies of scale, then export subsidies protect the "infant industry" while it
matures and develops.
- Unfair Trade: Foreign imports might be sold at lower prices in the domestic economy because foreign producers
engage in unfair trade practices, such as "dumping" imports at prices below production cost. Export subsidies once
again seek to "level the competitive playing field."
- National Security: Export subsidies can also encourage domestic production of goods that are deemed critical to the
security of the national economy.

While export subsidies and other foreign trade policies can be beneficial to the aggregate domestic economy they tend to be
most beneficial, and thus most commonly promoted by, domestic firms facing competition from foreign imports. Domestic
firms benefit with higher sales, greater profits, and more income to resource owners. In addition, domestic consumers also
benefit with more production and lower prices. However, export subsidies are paid for by domestic taxpayers.

Problems do these subsidize give rise:

- The detrimental effects of perverse subsidies are diverse in nature and reach. Case-studies from differing sectors are
highlighted below but can be summarised as follows.
- Directly, they are expensive to governments by directing resources away from other legitimate should priorities
(such as environmental conservation, education, health, or infrastructure) ultimately reducing the fiscal health of
the government
- Indirectly, they cause environmental degradation (exploitation of resources, pollution, loss of landscape, misuse and
overuse of supplies)
 - Acts as a further brake on economies; tend to benefit the few at the expense of the many, and the rich at the
expense of the poor; lead to further polarization of development between the Northern and Southern hemispheres;
lower global market prices; and undermine investment decisions reducing the pressure on businesses to become
more efficient
- Consumer attitudes do not change and become out-of-date, off-target and inefficient furthermore, over time people
feel a sense of historical right to them

China used to subsidize exports: Page 267 in 2010,....

A subsidy may provide import competing producers the same degree of protection as tariff or quota but a lower cost in
terms of national welfare . It could have long term benefits for the economy. Explain.

- Lowering prices and controlling inflation: They are especially applicable in the area of fuel prices, particularly when
global crude oil prices are rising. Many countries subsidize fuel costs in order to keep prices from ballooning
- Preventing the long-term decline of industries: There are many industries that should be kept alive and functional,
such as fishing and farming. Many new and fast-growing industries may also benefit from being subsidized
- A greater supply of goods: Governments want to increase the access of their population to Goods & Services such as
Water, Food, and Education. They, therefore, provide an incentive that could be in the form of a tax credit or even
straight up cash. Markets that have positive externalities are usually the ones that receive such benefits

12. Do you agree or don’t agree with protectionism ? What are the benefits and arguments against protectionism ?

Give some examples and trade tools that developed nations : US, EU, Japan used to protect their industry, agricultural

● What are the main argument of Trump against free trade ( use tariff on imported goods from china )
● What are the current trends from the protectionism wave ? Could you give some examples of these trends ?

a. Do you agree or disagree with protectionism

Trade protectionism is a policy that protects domestic industries from unfair competition from foreign ones , by some tools
such as : tariffs, subsidies, quotas, and currency manipulation. There are many arguments in favor of protectionism.
However, in my point of view, i don't agree with it because it has a negative impact on economic development

Economic markets are inherently competitive. Since there’s no ( or less ) competition from abroad, innovation begins to lag.
Products produced at their home are more expensive and not always state-of-art. Growth faces stagnancy and companies
almost produce exclusively for the domestic market. Neighboring countries can respond by instituting protectionist
measures of their own and impose import tariffs

Then Protectionism threatens globalization and international integration .As Prime Minister Narendra Modi stated that
Trade protectionism is against globalization, Countries following this trend not only want to avoid globalization, but also
want to go against this inevitable process . Meanwhile, there are developing countries depending on the global and regional
markets ( including Vietnam ).It really affects use of resources and distribution of resources. In addition, protectionism limits
foreign investment, which decreases growth opportunities. For example , in 2018, the United States has imposed quite high
tariffs on Vietnam's steel, aluminum and catfish.Trade and investment relationship between the two countries could be
negatively affected

History has shown that a wave of protectionism is always followed by financial crisis. The American revolution also derived
from British tariffs and customs duties, as well as the protectionist policies before World War I and World War II. Hence , I
totally don’t expect any of its turnback

b. What are the benefits and arguments against protectionism?

Benefits:

- Protecting domestic employment: at any given time in an economy there will be some industries that are in decline
because they cant compete with foreign competition- sunset industry
 - Protecting the economy from low cost labor: it is often argued that the main reason foTrade protectionism is a
policy that protects domestic industries from unfair competition from foreign ones , by some tools such as : tariffs,
subsidies, quotas, and currency manipulation. There are many arguments in favor of protectionism. However, in my
point of view , it has a negative impact on economic development
- Economic markets are inherently competitive. Since there’s no ( or less ) competition from abroad, innovation
begins to lag. Products produced at their home are more expensive and not always state-of-art. Growth faces
stagnancy and companies almost produce exclusively for the domestic market. Neighboring countries can respond
by instituting protectionist measures of their own and impose import tariffs.
- Then Protectionism threatens globalization and international integration .As Prime Minister Narendra Modi stated
that Trade protectionism is against globalization, Countries following this trend not only want to avoid globalization,
but also want to go against this inevitable process . Meanwhile, there are developing countries depending on the
global and regional markets ( including Vietnam ).It really affects use of resources and distribution of resources. In
addition, protectionism limits foreign investment, which decreases growth opportunities. For example , in 2018, the
United States has imposed quite high tariffs on Vietnam's steel, aluminum and catfish.Trade and investment
relationship between the two countries could be negatively affected
- History has shown that a wave of protectionism is always followed by financial crisis. The American revolution also
derived from British tariffs and customs duties, as well as the protectionist policies before World War I and World
War II. Hence , I totally don’t expect any of its turnbackr declining domestic industries is the low cost of labor in
exporting countries and that the economy should be protected from imports that are produced in countries where
the cost of labor is very low
- Protecting an infant (sunrise) industry: many governments argue that an industry that is just developing may not
have the economies of scale advantages that larger industries in other countries may enjoy
- Avoid the risks of over specialization: the government may want to limit overspecialization, if it means that the
country could become over dependent on the export sales of one or two products. Any change in the world market
for these products might have serious consequences for the country’s economy
- Strategic reason: it is sometimes argued that certain industries need to be protected in case they are needed at
times of wars, for example agriculture, steel or electricity
- Prevent dumping: dumping is the selling by a country of large quantities of a commodity, at a lower price than its
production costs in another country. For example, the EU may have a surplus of butter and sell this at a very low cost
to a small developing country
- Protect product standards: a country may wish to impose safety, health or environmental standards on goods being
imported into its domestic market in order to ensure that the imports match the standards of domestic products.
For example, the EU banned the importing of US meat in the 1990s because it was treated with hormones
- Raise government revenue: in many developing countries, it is difficult to collect taxes and so government imposed
import taxes or tariffs on products in order to raise revenue
- Correct balance of payments deficit: governments sometimes impose protectionist measures to attempt to reduce
import expenditure and thus improve a current account deficit whereby the country is spending more on its imports
of goods and services then it is earning for its exports of goods and services

Arguments against

- Protectionism may raise prices to consumers and producers of the inboards that they bought
- Protectionism would lead to fewer choices for consumers
- Protectionism would diminish competition if foreign firms are kept out of a country, and so domestic firms may
become inefficient without the incentive to minimize cost. Innovation may also be reduced for the same reason
- Protectionism distorts comparative advantage. Leading to the inefficient use of the world resources. Specialization is
reduced and this would reduce the potential level of the world output
- Protectionism may hinder economic growth

Example:

- EU : Common Agricultural Policy (CAP). Despite reforms and some reduction in tariff rates, the EU still impose
substantial tariff rates on many agricultural markets. The aim is to increase prices for domestic European farmers in
order to increase their income.
 - US : Tariffs on imports of Chinese tires into the US. The US imposed tariffs of 35% on imports of tyres from China.
Trump tariffs. In March 2018 President Trump imposed tariffs on steel (25%) and aluminum (10%) from most
countries President Trump raised tariffs on imports of many Chinese goods such as fridges, washing machines and
clothes.America’s sugar quota.Clothing: textiles (fabrication of cloth) and apparel (assembly of cloth into clothing). –
Until 2005, quotas licenses granted to textile and apparel exporters were specified in the Multi-Fiber Agreement
between the U.S. and many other nations
- Japan : Japan’s 1000% tariff on imported rice

c. Donald Trump argument against free trade:

Rebalance American Trade Relationships by Promoting National Security: According to the Trump administration, trade
policy should focus more on the national interests of the United States and for this reason must be harmonious with the
country’s national security strategy. Accordingly, the Trump Administration has not only initiated several 232 investigations
but implemented 232 tariffs on steel and aluminum

Re-Negotiation of “Outdated and Imbalanced” Trade Agreements: At the top of the agenda stood NAFTA and the free trade
agreement with South Korea (KORUS). Trump castigated NAFTA as “the worst deal ever”. After several years of negotiation,
the United States, Canada, and Mexico ratified U.S.-Mexico-Canada Agreement (USMCA) in late 2019/early 2020. The
agreement is largely similar to NAFTA but differs from it in some key areas; for example, it contains much stricter rules of
origin and will thus have major implications for regional value chains. The United States ratified the agreement late 2019; it
is scheduled to come into force in summer of 2020

Aggressive Enforcement of U.S. Trade Law: The Trump administration is no longer willing to tolerate unfair trade practices
and is prioritizing the rigorous application of national trade laws, with a clear focus on China. In July 2018, the United States
imposed a first round of 301 import duties of 25 percent on imports of Chinese goods worth 34 billion U.S. dollars. After
more than a year of tit-for-tat tariff retaliation, the two countries agreed on the so-called Phase-One Deal in early 2020 – an
agreement far from a traditional free trade agreement, featuring many aspects of managed trade

Defending American Interests at the WTO: The Trump administration is highly critical of the WTO, denouncing that the WTO
was no longer “able to keep up with modern economic challenges” and as such, should be reformed. Among other things,
the Trump Administration criticizes the dispute settlement system for overstepping its mandate. As a response, the Trump
administration threatens the functioning of the entire organization by blocking the appointment of members to the
Appellate Body and by refusing to engage in serious reform discussions

d. Current trends from protectionism wave:

The global economic recession, which was prompted by the global financial crisis and is still being dragged by the Euro
zone’s fiscal turmoil, is projected to continue for a longer period than expected. As the world economy is languishing, many
countries are resorting to protectionist measures. The growing concern is that the more recent wave of trade restrictions is
no longer a temporary response to the crisis, but rather becoming a long-term strategy for countries to develop their
industries into major growth engines by shielding them from external competition

- The election of President Trump represents the cusp of the current wave of protectionism and populism that
emerged in the aftermath of the Global Financial Crisis of 2008
 - As the Brexit vote and the emergence of populist leaders such as Vladimir Putin in Russia showed, the disaffection
and dissatisfaction among the masses against globalization and free trade as well as outsourcing have boiled over
leading to the current wave of protectionism and populism in the United States and Europe
- Indeed, even the developing economies have been affected by nationalism and a revolt against the liberal order as
can be seen in India and other Asian countries

Part 3 : Economic Integration : FTA- common market+ CHAPTER 1: INTRODUCTIONS + GLOBALIZATION

13. What are the main drivers of globalization ? what are the benefits and challenges of globalization

There are 5 main drivers of globalization:

1. Technological drivers :Technology shaped and set the foundation for modern globalization.. Inventions in the area of
microprocessors and telecommunications enabled highly effective computing and communication at a low-cost
level. The rapid growth of the Internet is the latest technological driver that created global e-business and e-
commerce.
2. Political drivers: Liberalized trading rules and deregulated markets lead to lowered tariffs and allow foreign direct
investments in almost all over the world. The institution of GATT (General Agreement on Tariffs and Trade) 1947 and
the WTO (World Trade Organization) 1995 as well as the ongoing opening and privatization in Eastern Europe are
only some examples of latest developments. Government , with policies also leads to reductions in trade barriers
and a shift towards an open market economy.
3. Market drivers: Common customer needs and the opportunity to use global marketing channels and transfer
marketing to some extent are also incentives to choose internationalization.
4. Cost drivers: Sourcing efficiency and costs vary from country to country and global firms can take advantage of this
fact. Other cost drivers to globalization are the opportunity to build global scale economies and the high product
development costs nowadays
5. Competitive drivers: With the global market, global inter-firm competition increases and organizations are forced to
“play” international. Strong interdependencies among countries and high two-way trades and FDI actions also
support this driver

Benefit of Globalization:

- Better product with lower price : Globalization allows companies to find lower-cost ways to produce their products. It
also increases global competition, which drives prices down and creates a larger variety of choices for consumers.
Lowered costs help people in both developing and already-developed countries live better on less money
- Increased Flow of Capital: The economic benefits of globalization to much of the world are hard to ignore. Increased
trade to larger and more diverse markets results in greater revenues and increased gross domestic product (GDP)
- Spread of Knowledge and quick technology advances : Technology has spread quickly worldwide. Google, Dell, and
Microsoft, for example, all have offices on many continents. Developing countries often appeal to investors because
of the huge potential for growth. The resulting advancements lead to results like the spread of motorized farm
machinery in Southeast Asia, for instance, where there had previously only been manual labor
- Higher Standards of Living Across the Globe : Developing nations experience an improved standard of living—
thanks to globalization. According to the World Bank, extreme poverty decreased by 35% since 1990. Further, the
target of the first Millennium Development Goal was to cut the 1990 poverty rate in half by 2015. This was achieved
five years ahead of schedule, in 2010. Across the globe, nearly 1.1 billion people have moved out of extreme poverty
since that time. This development also has the effect of increasing real wages by lowering the cost of living.
Additionally, competition on the global market means the prices of many items have declined, so purchases that were
once unaffordable luxuries, such as laptops, cars, and washing machines, are now affordable for many people
 - Gains from improved labor mobility: globalization allows companies to find new, specialized talent that is not
available in their current market. For example, globalization gives companies the opportunity to explore tech talent in
booming markets such as Berlin or Stockholm, rather than Silicon Valley. Again, International PEO allows companies
to compliantly employ workers overseas, without having to establish a legal entity, making global hiring easier than
ever
- Cross-Cultural Exchange: Individuals who travel around the world for business or leisure and try different foods,
listen to different music, read different books, gain exposure to different media outlets, and learn to express
themselves, even poorly, in another language gain a broader perspective on the world. Their new knowledge helps
develop stronger empathy and appreciation for people of other cultures

Challenges of Globalisation:

- Exploitation: Exploiting cheap markets and lax regulations in developing nations has caused pollution and suffering
in those countries, even as profits soar abroad
- High Investment Costs: Globalization presents challenges for multinational corporations in terms of capital
investment and leadership. Setting up a business in a new country, especially a developing country, requires
substantial upfront capital. The needed infrastructure may not be in place
- Confusing Local Systems: Multinational corporations also face the challenge of contending with different laws in
different countries. Sometimes they must contend with different types of legal and banking systems entirely.
Difficulty navigating these systems may lead to impediments in expanding to new countries and severe
repercussions for missteps made
- Weak Regulation: Fewer regulatory bodies exist for international business enterprises. Navigating the international
markets can thus sometimes feel like the Wild West. Interconnected markets also mean that with a lack of
regulation, if something goes wrong, the repercussions will resound globally. The global financial crisis, for example,
hit many nations hard
- Immigration Challenges: Increasing populations of immigrants and refugees present a challenge for industrialized
nations. Though countries may wish to help, too large an influx puts a strain on resources and social structures.
Countries find themselves limited in the aid they can provide without detriment to their own citizens
- Localized Job Loss: Globalization can contribute to a decline in job opportunities as companies move their
production facilities overseas

14. What is globalization? describe the benefits and challenges of current wave of globalization for Vietnam’s economy

Definition : Globalization is a term used to describe how countries, people and businesses around the world are becoming
more interconnected, as forces like technology, transportation, media, and global finance make it easier for goods, services,
ideas and people to cross traditional borders and boundaries

To Vietnam, since the country began the “Doi Moi” process in 1986, the economy has gradually integrated into the global
market. In order to enhance trade among Vietnam and other countries, many bilateral and multilateral trade agreements
have been signed.Most significantly, after eleven years of negotiation, in 2007 Vietnam became the official member of the
world trade organization (WTO)-the world’s biggest trade organization, and EVFTA . Joining the current wave of globalization
has brought many tangible benefits and opportunities to the Vietnamese economy

a Benefits:
 - Increasing export revenues: Vietnamese commodities have been exported widely to 150 countries and territories, with
many sectors benefiting from WTO membership including labor-intensive industries like clothing, footwear and
electronics.
- Rapid increase in foreign direct investment (FDI): Vietnam has become an attractive destination for foreign investors.
Registered FDI surged to US$71 billion in 2008, compared with only $12 billion in 2006. Up to 20/12/2019,
Registered FDI in Vietnam reached 38 billion USD.
- Increase in enterprises’ awareness, adaptation and performance: Being aware of challenges such as competitiveness
and big foreign corporations etc , Vietnamese enterprises were forced to restructure and self-improve by standardizing
their operation and products, reaching new markets and focusing on the labor forces. So under the competition
pressure, Vietnam's enterprises will become more effective
- More favorable legal system for trading activities: Global economic integration has given Vietnam a chance to refine
its policy and legal system to be more transparent, sustainable to attract more foreign investors. There is also the
reduction of the administrative burden.
b. Challenges:

- Low competitiveness of nations, enterprises and products : According to World Economic Forum’s report and
practical situation, we can come up with some drawbacks in our economy which lead to poor competitiveness .
Firstly, the most problematic factor of doing business is the inadequate supply of infrastructure .Secondly, difficulty
in accessing financing ranks second in problematic factors of doing business in Vietnam
- Issues relating to macro policies and administrative procedure : In fact, the current administrative system is a
serious obstacle to development. Vietnamese public administration has been laden with the following problems:
red-tape, ineffectiveness, inefficiency, cumbersomeness, and an unskilled and under-qualified public service

- Difficulties in the agricultural sector: Vietnam's agriculture has a low level of development, small production scale,
low labor productivity, and many processing enterprises are always in a shortage or lack of raw materials, leading to
high prices and low quality. . Enterprises in the sugar, vegetables and livestock sectors will face great pressure from
opening up their domestic markets

15. What are the benefits and challenges of ASEAN economic community(AEC)? Describe the opportunities and
economic benefits of Vietnam in the AEC

Purpose:

- Creating a single market and production base

- Increasing competitiveness
- Promoting equitable economic development
- Further integrating ASean with the global economy

Benefits: Last November 2017, ASEAN celebrated its 50th anniversary and the event was attended by leaders from around
the world. Apart from the event’s success, it’s important to understand that ASEAN isn’t a mere organization for leaders to
get together and make merry. It’s about the betterment of the people and the economy.The aims to create a single market
and production base for the free flow of goods, services, investment, capital, and skilled labor within ASEAN. Here are other
reasons why the ASEAN is helping boost our economy more than you think:

- Easier and cheaper travel options for everyone: Of course, it only makes sense that ASEAN wants to provide easier
travel services for their service providers. However, even citizens can enjoy the benefit of improved air, sea, or land
travel. Thanks to ASEAN, there are now VISA-free entry countries like Cambodia, Indonesia, and Malaysia.
- Cheaper goods and services: Other than better travel options, ASEAN also gives nations within the region to do more
trade for goods and services. Tax on imported goods is lowered or even eliminated.
- More and better jobs: With the progressive dynamic between the ASEAN region, with easier and cheaper travel
options, goods, and services, it only makes sense that it comes with the extended bonus of better employment
opportunities. Take note, the continent makes up one-third of global GDP. You can only expect that Asia will keep
 doing what it can to maintain and exceed this performance. It’s also highly beneficial to the country’s IT industry,
seeing as how ASEAN has 700 million digital consumers. In fact, by 2025, the sector is expected to grow 500% to
$200 billion. One of ASEAN’s goals, after all, is to decrease “unemployment and underemployment” across the
region
- More study options: The Vietnamese would have more access to better jobs if they are better equipped for these
emerging roles. Thankfully, even the country’s education would be enhanced because of ASEAN integration.
- It provides consumers with more options and the benefit of lower prices: Proponents argue that, with imported
products from other countries with lesser or without tariff, consumers can choose from a plethora of products,
unlike when there is monopoly in the market. Also, the high level of freedom in this trade will result in reduced
prices
- It benefits trading countries through competitive advantage: It is stated that countries that have enough resources
to produce certain products will enjoy competitive advantage to specialize in such goods and be their only suppliers
to other countries. In return, the purchasing countries can also benefit from the low prices of these imported
products. Therefore, it is a win-win situation for both trading nations
- It is a key to economic growth: Countries that are engaging in free trade are seen to have richer economies. By
specializing in certain products with plenty of materials to make of, they maintain a high level of productivity. Also,
there exists productive competition, where products are traded at lower prices. All these aspects are good for
economic growth

Opportunities

- The AEC would create greater opportunities for Vietnam to export goods and services to the ASEAN market. Thanks
to the establishment of AEC 2015, ASEAN will become a single market as well as a joint production space to promote
free flows of goods, services, investment and employment in the bloc. The tariffs and non-tariff removal will
facilitate businesses to help cut the cost of imports, lower production costs, increase competitiveness and boost
exports... ASEAN is a large-scale potential market for Vietnamese enterprises with a population of 600 million and a
regional GDP of around 2,200 billion USD. Vietnam has also completed the elimination of import taxes for about 80%
of tariff lines and will completely remove all kinds of tariff lines by 2018
- FDI inflows in ASEAN, including Vietnam, will be facilitated due to the region’s propitious investment environment.
Together with the advent of the AEC, this may position the 10 ASEAN countries as attractive alternative locations for
foreign direct investment. According to the Japan External Trade Organization, Japanese direct investment in ASEAN
from January 2014 to June 2014 increased by 55.4% to USD10.29 billion
- AEC 2015 will help Vietnamese workers have more job opportunities, especially skilled workers. Now, a
comprehensive investment agreement ASEAN has been fully implemented, ASEAN agreements on human migration
(ASEAN Agreement on Movement of Natural Persons-MNP) has been signed. Businesses will invest more to create a
better working environment, as well as improved salary conditions, rested, on the welfare of workers. Joining AEC
will help the workers in Vietnam are protected by the legitimate rights of their legal, Vietnam legal system is
gradually adapted towards ensuring the rights of workers, increasing the worker's voice in the management place
and running the country with the spirit of "the people know, people discuss, people do and people check" and
building the rule of law, the state of the people, by the people and for the people. Hence, above all, the interests of
workers are protected, the voice of workers are protected, the voice of workers is concerned though that the
required level is still lower than the requirements and demands of the Trans - Pacific Partnership – TPP

What are the benefits and costs of Vietnam when we sign FTAs and join WTO ? What are the challenges in Vietnam in this
period of trade tension between US-China?

Benefits FTAs
As of July, 2019, Viet Nam had 12 effective FTAs. One FTA was recently signed but has yet come into effect. The three others have been
negotiated. So far, Viet Nam has entered the group of economies with a lot of signed FTA in the region and the world

- Vietnam’s economic development will be the continued shift away from exporting low-tech manufacturing products
and primary goods to more complex high-tech goods like electronics, machinery, vehicles, and medical devices. This
will be made possible first through more diversified input sources from larger trade networks and cheaper imports
 of intermediate goods from partner countries, which should boost the competitiveness of Vietnam’s exports. An
example of this is the recently launched VSmart phone manufactured by Vietnamese conglomerate Vingroup
- Through partnership with foreign businesses that can transfer the know-how and technology needed to make the
leap into higher valued-added production, more sophisticated business practices and technology will help boost
Vietnam’s labour productivity and expand the country’s export capacity.
- As most of Vietnam’s current FDI largely originates from Asian countries, the presence of investors from Europe and
advanced countries like Australia and Canada has room to grow – and these trade pacts will provide fresh impetus
- Moreover, while recent FDI has been primarily channeled into manufacturing or real estate, other emerging sectors
represent untapped opportunities for foreign companies to reap profitable returns on investment. Indeed, one
sector that has already begun to allure funding is clean energy, particularly natural gas and wind development
- European investors’ entry into Vietnamese service markets, including banking and insurance, maritime transport,
and environmental services, should help modernise these markets and improve service quality. A recent survey by
the European Chamber of Commerce revealed that the majority of participants believe the EVFTA will make Vietnam
more competitive and turn it into a hub for European business in the region
- Mergers and acquisitions will likely become more prevalent and will be pivotal in boosting total factor productivity.
Further global integration resulting from the trade deals, combined with the prolonged trade dispute between the
US and China could see an influx of multinationals establishing bases in Vietnam to divert their supply chains away
from ChinA
- Apart from the direct benefits of trade and FDI, the deals should be catalysts of other important changes. One such
advantage will be greater alignment with international standards from workers’ rights to environmental protection.
Both FTAs require compliance with the International Labour Organization’s (ILO) standards, including the freedom of
association and the elimination of forced labour

Challenges: The FTAs may also come with some added downsides

- Such agreements are likely to trigger aggressive competition from foreign rivals on local businesses – particularly in
the agriculture sector including meat and dairy products from the EU, Australia and Canada
- If local firms do not adapt, make use of new market opportunities and potential partnerships with foreign firms –
they could find competing in the market challenging
- The Vietnamese government would also need to continue on its path of reforms – strengthening the banking sector,
removing corruption, refining legal and tax structures, and improving trade facilitation

Benefits WTO

For Vietnam, admission to WTO manifests the country’s integration into the world economy and the international market.
However, along with opportunities, there are challenges for Vietnam in its joining the global trade organisation. Vietnam
joins the WTO to avoid being solitary in the business world. It is in conformity with the current trend of international trade
and Vietnam’s interests of national construction and economic development

- Thanks to the removal of tariff barriers and quotas, Vietnam can have access to latest technological advances for
national modernisation and industrialisation
- For Vietnam now, promoting exports is the decisive factor for the success of industrialisation and modernisation.
Exports bring home capital to import advanced equipment and technologies and other products of an intellectual-
based economy. Being admitted to the WTO, the tariff barriers will be removed or reduced, so as the quotas. These
are very important for Vietnam. Currently, Vietnam’s exports turnover stands at around US $30 billion, accounting
for half of the country’s GDP
- Those products that Vietnam has advantages such as textiles and garments, footwear, coffee, rubber, processed
seafood, furniture, electronics appliances will have more opportunities on the world market

Challenges WTO

However, once Vietnam has become a WTO member, the country will also have to face difficulties and challenges
 - Firstly, integration but not dissolvent, Vietnam integrates but has to maintain national identity as well as the
regime’s identity, always following the policy of independence and self-reliance in economic development
- Secondly, once tariff barriers are reduced for removal and quotas abolished, competition is more severe. Products of
low competitiveness can not be exported. On the other hand they will be defeated by foreign products. Thus,
domestic businesses might face bankruptcy. Unemployment rate might rise
- This requires Vietnamese enterprises to do their utmost to make reforms so as to produce products of high quality,
high competitiveness and reasonable prices

The challenges in Vietnam in this period of trade tension between US-China

Over the years, the United States has been the largest market for Vietnam’s exports (with China the third-largest), while
China has been the largest source market for Vietnam’s imports. Vietnam’s exports to China comprise mainly of electronics,
semiconductors, garments, footwear, sporting goods, and furniture. Vietnam often plays the role of China's OEM in these
industries, and only exports raw materials or intermediate inputs for production in China. Another positive impact of the US-
China trade war is that companies in certain sectors are either relocating out of China or diversifying from the Chinese
market to Vietnam:

- One of the positive impacts of the trade war is that countries like Vietnam have been presented with the
opportunity to increase their export of certain goods to the United States and China, particularly to the former.
Vietnamese exports to the United States are mainly consumer goods such as apparel, leather shoes, phones,
furniture, and seafood
- To some extent, Vietnam has some attractive features that will enable it to benefit from the relocation of FDI
enterprises. First and foremost, Vietnam has a relatively stable government and cheap wages, which are advantages
that other countries do not have. Furthermore, Vietnam's proximity to China, along with its geographical location in
the ASEAN region, allows manufacturers to sell and move equipment faster across the border.

There are, however, also negative impacts from the US-China trade war. With Vietnam’s high trade liberalisation and the
fact that both China and the United States are its key trading partners, Vietnam will face a complex and multidimensional
problem as a result of the US- China trade war:

- Firstly, when China boosts its exports to Vietnam, this will result in an increase in Vietnam’s trade deficit with China,
and Vietnam’s domestic enterprises will face more competition from Chinese goods. In view of China's comparative
advantages over Vietnam in raw material supply, its position in the global supply chain, coupled with its geographical
proximity to Vietnam, should China expand its export share to ASEAN countries – including Vietnam – in the future,
Vietnam's domestic market will be impacted, especially its steel, furniture, and wood processing industries
- Secondly, when additional taxed Chinese goods shift to other markets (apart from Vietnam), Vietnam's exports may
face increased competition in these markets
- Thirdly, if China is unable to find an export market to replace the United States, it is possible that some of its exports
will have to be consumed within China. This will make it more difficult for Vietnam’s commodities to be exported to
China. In fact, Vietnam’s export turn over to China in the first eight months of 2019 was US$23.89 billion, a decrease
of 2 percent compared to the same period in 2018

16. Present the different level of Economic integration ? What are the advantages and benefits of FTA and custom union
for one country ? what are the principle of WTO and how it differ from a FTA

The different level of Economic integration:

- Free trade area: In this stage of economic integration, the member countries’s governments agree to remove or
significantly reduce trade barriers with each other. The agreement only addresses the trading policies of these
countries with each other. For example, NAFTA is an agreement between the US, Canada and Mexico. They must
adhere to the policies of the agreement when trading with each other, but they don't share common policies
towards non-NAFTA members like Brazil, UK, China
- Customs Union: In this stage of economic integration, countries not only establish a free trade area but they also set
a common external tariff. EX: The southern African Customs Union (SACU) which includes five countries of Southern
 Africa: Botswana, Lesotho, Namibia, South Africa and Swaziland. The collected revenue from the common external
tariff is share out between member countries
- Common market. Services and capital are free to move within member countries, expanding scale economies and
comparative advantages. However, each national market has its own regulations such as product standards.
- Economic union (single market). All tariffs are removed for trade between member countries, creating a uniform
(single) market: There are also free movements of labor, enabling workers in a member country to move and work
in another member country. Monetary and fiscal policies between member countries are harmonized, which implies
a level of political integration. A further step concerns a monetary union where a common currency is used. EX: The
European Union: the eurozone offer benefits including the elimination of exchange rates, reducing transaction
cost, ...and making it easier for members to conduct cross border trade which promotes more growth and stability
to the member states
- Political union: Represents the potentially most advanced form of integration with a common government and
where the sovereignty of a member country is significantly reduced. Only found within nation-states, such as
federations where there are a central government and regions (provinces, states, etc.) having a level of autonomy.

The advantages of FTA

Free trade agreements are designed to increase trade between two or more countries. Increased international trade has the
following six main advantages:

- Increased Economic Growth: The U.S. International Trade Commission estimated that NAFTA could increase U.S.
economic growth by 0.1%-0.5% a year
- More Dynamic Business Climate: Without free trade agreements, countries often protected their domestic
industries and businesses. This protection often made them stagnant and non-competitive on the global market.
With the protection removed, they became motivated to become true global competitors.
- Lower Government Spending: Many governments subsidize local industries. After the trade agreement removes
subsidies, those funds can be put to better use
- Foreign Direct Investment: Investors will flock to the country. This adds capital to expand local industries and boost
domestic businesses. It also brings in U.S. dollars to many formerly isolated countries
- Expertise: Global companies have more expertise than domestic companies to develop local resources. That's
especially true in mining, oil drilling, and manufacturing. Free trade agreements allow global firms access to these
business opportunities. When the multinationals partner with local firms to develop the resources, they train them
on the best practices. That gives local firms access to these new methods.
- Technology Transfer: Local companies also receive access to the latest technologies from their multinational
partners. As local economies grow, so do job opportunities. Multinational companies provide job training to local
employees

Disadvantages:

The biggest criticism of free trade agreements is that they are responsible for job outsourcing. There are seven total
disadvantages:

- Increased Job Outsourcing: Why does that happen? Reducing tariffs on imports allows companies to expand to other
countries. Without tariffs, imports from countries with a low cost of living cost less. It makes it difficult for U.S.
companies in those same industries to compete, so they may reduce their workforce. Many U.S. manufacturing
industries did, in fact, lay off workers as a result of NAFTA. One of the biggest criticisms of NAFTA is that it sent jobs
to Mexico
- Theft of Intellectual Property: Many developing countries don't have laws to protect patents, inventions, and new
processes. The laws they do have aren't always strictly enforced. As a result, corporations often have their ideas
stolen. They must then compete with lower-priced domestic knock-offs
- Crowd out Domestic Industries: Many emerging markets are traditional economies that rely on farming for most
employment. These small family farms can't compete with subsidized agri-businesses in the developed countries. As
 a result, they lose their farms and must look for work in the cities. This aggravates unemployment, crime, and
poverty
- Poor Working Conditions: Multi-national companies may outsource jobs to emerging market countries without
adequate labor protections. As a result, women and children are often subjected to grueling factory jobs in sub-
standard conditions
- Degradation of Natural Resources: Emerging market countries often don’t have many environmental protections.
Free trade leads to depletion of timber, minerals, and other natural resources. Deforestation and strip-mining
reduce their jungles and fields to wastelands
- Destruction of Native Cultures: As development moves into isolated areas, indigenous cultures can be destroyed.
Local peoples are uprooted. Many suffer disease and death when their resources are polluted
- Reduced Tax Revenue: Many smaller countries struggle to replace revenue lost from import tariffs and fees