Group assignment 2 effects of trade theory explanation

Group Assignment Effects of Trade Team members: Nguyen Toan Duong S3836195 Lecturer: Mr Daniel Borer Pham Quoc Khai S3836559 Due Date: 17th August 2021 Tran Bao Ngoc S3836222 Vuong Do Thanh Uyen S3818539 Nguyen Quoc Bao S3836287 Unit Code: ECON1269 Word Count: 1648 Group-work Report Name Nguyen Toan Duong Pham Quoc Khai Allocation Question 1.a Question 2.b Question 2.e Contribution 100% 100% Tran Bao Ngoc Question 2.c 100% Vuong Do Thanh Uyen Question 1.b 100% Nguyen Quoc Bao Task Question 2.a Question 2.d 100% Signature Abbreviations SFM: The mixed specific factors model MVPL : The marginal value product of labour MPL: The marginal product of labour DCA: Domestic currency appreciation ASEAN: Association of Southeast Asian Nations CBU: Completely built-up ToT: The terms of trade OEC: The Observatory of Economic Complexity FDI: Foreign direct investment H-O: The Heckscher-Ohlin model Table of Contents QUESTION 1: A THEORY EXPLANATION: B TERMS OF TRADE:9 QUESTION 2: A INCREASING RETURNS OF SCALE: 11 B HECKSCHER-OHLIN MODEL: 13 C LABOR EXCHANGE: D RECOMMENDATIONS FROM IRS: E RECOMMENDATIONS FROM HECKSCHER-OHLIN MODEL: 17 15 17 REFERENCES: Question 1: a Theory explanation: pCMPLC(LC/KC) pTMPLT(LT/AT) Cloth Production Capitalists’ Income Tobacco Production Farmers’ Income E W LC LT Figure Equilibrium of the mixed specifics model The mixed specific factors model (SFM) illustrates the trade's influences on an economy where one production factor is specific to an industry (Tohamy & Mixon 2003) In a perfectly competitive market, the SFM supposes that an economy manufactures two commodities (export product tobacco and import product cloth) actually utilizing three factors of production (labor, capital, and land) because each industry wields differentiated specific capital Thus, Tobacco industry's land and Cloth industry's capital industry are specific factors, whereas labor is liberally and costlessly mobile across industries Afterward, the firms in each production select an appropriate labour input to maximize profit until the wage (W) equals the marginal value product of labour (MVPL): WC=PCMPLC(LC/KC), WT=PTMPLT(LT/AT) with L=LC+LT (McLaren 2012) Point A signifies the equilibrium labour allocation to two sectors and the equilibrium wage (w) The horizontal and vertical line respectively shows the number of employed workers and their wage for each industry, hence, the shaded area represents the capitalists' income and land owners' earnings after subtracting the salary payment According to the law of diminishing return, the downward sloping MVPL curve manifests if labor usage increases, the MPL will decline since the output price is fixed (Akay 2009) pTMPLT(LT/AT) pCMPLC(LC/KC) p’CMPLC(LC/KC) W W’ Cloth Production Capitalists’ Income E A E’ L’C Tobacco Production Farmers’ Income B L’T Figure Effect of domestic currency appreciation (DCA) on the mixed specifics model The domestic currency appreciation (DCA), which is the increment in one country's currency value relative to another country's currency, could hamper exports and diminish import goods' price (Hsing 2018) Hence, the terms of trade, which represents the ratio of a country's export and import prices, will grow significantly and have a positive effect on domestic cost-push inflation (Yetiz 2017) Although the foreigners receive the more exorbitant export price, the domestic export price actually remains constant leading the MPLT curve to be unchanged Otherwise, the import price's decrease makes the cloth labor demand reduced, so the MPLC curve shifts leftward to point E' where cloth workers suffer a lower wage (W') So, cloth employees will move to work in tobacco industry for a higher price (Krueger 2020), meaning cloth industry witnesses a loss of labor (a blue double arrow) Applying the law of diminishing return, tobacco employers will curtail the wage to reduce the workforce overcrowding (L'T) Consequently, both cloth capital owners and cloth workers experience a decrease in their income, but the cloth price decline will improve their welfare due to reduced labor competition In contrast, an increased number of employees in the tobacco sector shrinks their wage down, whereas the land owners' income enlarges b Terms of trade: Exports of Thailand with Vietnam (international $) 1400 1200 1200 1050 1030 International $ 1000 800 789 680 600 535 543 494 388 400 299 200 2014 2015 2016 Refined petrolium Air conditioners 2017 2018 Figure main exports products of Thailand with Vietnam (2014-2018) graph Source: OEC (https://oec.world/en) Imports of Thailand with Vietnam (internation $) 1400 1150 1200 1140 International $ 1000 834 792 800 720 600 400 430 403 423 272 205 200 2014 2015 Crude Petrolium 2016 2017 2018 Broadcasting Equipment Figure main imports products of Thailand with Vietnam (2014-2018) graph Source: OEC (https://oec.world/en) 10 During the last five reported years, refined petroleum and air-conditioner had the highestearning exports However, Thailand has replaced China as Vietnam's biggest fruit and vegetable exporter due to the increased domestic demand in 2017 (Tung 2018) By 2018, Vietnam's import tariffs on automobiles from ASEAN have been drastically reduced to 0% for CBU, which lead to increases in CBU imports from manufacturing hubs of Thailand (Shira & Associates 2018) Oil ranks 2nd to broadcasting equipment on the list of Thailand’s primary imports from Vietnam Since Thailand's domestic crude oil reserves are decreasing, the country has acquired a huge volume of Vietnamese crude oil, resulting in a dramatic increase in Thai imports from Vietnam (Eia 2017)  Calculation of the ToT: 2014 2015 2016 2017 2018 Total export price 1088 1588 1215 1524 1593 Total import price 1237 925 1064 1580 1563 Terms of Trade (ToT)(%) 87.955 171.676 114.192 96.456 101.919 Table Terms of trade calculation (unit: %) Thailand has a positive ToT because the export prices are higher than the import prices, which indicates that every amount of exports sold, it can buy more imported goods  11 Conclusion: Thailand remained Vietnam's biggest trading partner in ASEAN, whilst Vietnam is the second-largest trading partner in Thailand (Duc 2021) Regarding investment, Thailand currently ranks 9th top investors in Vietnam which Thai firms are progressively dominating distributing systems and replacing items created in Thailand with those manufactured in Vietnam (VNA 2018) In the past, Vietnam’s trade deficit with Thailand has constantly increased because Vietnam's primary imported high-value products while only exporting lower-value products (Nhan Dan 2018) However, Vietnam achieves a trade surplus for the first time with Thailand thanks to the tremendous growth of fruit and vegetable exports to the country in 2021 The important solution for Vietnam to gradually maintain trade balance with Thailand is improving the competitiveness in quality, affordability and safety of Vietnamese agricultural goods Question 2: a Increasing returns of scale: Telephones (% of total export market value) 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2014 2015 2016 2017 2018 Figure Telephones export of Vietnam (unit: % of total export market value) Source: OEC (https://oec.world/en) 12 Increasing economies of scale is when a firm enhances its level of output by taking the cost advantage since there was a reverse relationship between the per-unit fixed cost and the quantity of production, it refers to the input sourcing division or innovating the manufacture process (CFI n.d) Figure illustrated a significant growth by 5.13% within years of the telephone export segment of Vietnam, since most of foreign companies are looking to adapt the internal economies of scale by deploying high-tech machine to replace the human labor, as a result, foreign enterprises in the telecommunication industry can achieve lower fixed cost, higher output production Intra-industry is determined as the trade among countries within the same industry and level of development, it also includes foreign direct investment to locate its affiliates in different countries to trade goods and services (OECD 2010) Therefore, the intra-industry has taken part in the telecommunication industry in Vietnam since most of the telephone’s brand in Vietnam are from FDI companies such as Samsung is the one that prioritize the quality and competitiveness over incentives (Tung 2020), or Apple which has invested $101 million for more FDI project to enter Vietnamese market (Vietnaminsider 2021), which explains why most of Vietnamese telephone brand has withdrawn as they are unable to compete with these giant FDI firms Although the industry has gained lots of successes and profits, it is recently struggling with COVID-19 crisis The export of phones and material in 2020 have shrunk 0.4% compared with 2019, and the growth rate grew 4.4% which was only half of 2018 (8.4%) (Le 2021) 13 b Heckscher-Ohlin model: Footwear export (% of total export marrket value) 8.60% 8.40% 8.20% 8.00% 7.80% 7.60% 7.40% 7.20% 7.00% 2014 2015 2016 2017 2018 Figure Footwear export of Vietnam 2014-2018 (unit: % of total export market value) Source: OEC (https://oec.world/en) Figure Size of skilled labor in Vietnam Source: Vu 2020 14 The Heckscher-Ohlin model is a comparative advantage model in international trade It demonstrates that countries which have abundant capital are more likely to export capitalintensive goods, meanwhile, countries in which labor is approximately abundant will tend to export labor-intensive goods (Morrow 2010) Overall, countries export what they can most productively and amply produce One of Vietnam's main export industries is the footwear industry In 2018, the footwear industry ranked second in exporting products to other countries, accounting for 7.62%, and only behind electrical machinery, equipment with 36.6% of total exports (OEC n.d) Vietnam is known for its exceptionally evolved footwear producing industry, and it's currently the world's second biggest footwear exporter after China Vietnam's footwear export economy is valued at $22B/year (Kennemer 2020) Vietnam has accomplished fast economic development since the improvement in the 1990s and has taken advantage of expanding FDI In spite of the fast turn of events, the number of skilled workers is narrow compared to the need of the industrialization, modernization and global integration process The number of skilled labors in Vietnam took only 10.2% of total employment in 2014 (Figure 7) Although this number is increasing constantly, Vietnam still has had a shortage of skilled workers In 2018, the number of skilled workers was 20.3% of total labor employment (Vu 2020) Hence, connecting to the H-O model, there are unskilled workers in Vietnam As other industries, the footwear industry has faced many difficulties because of Covid-19 In the first half of 2020, footwear exports decreased by 8.6% year on year Most workers had to reduce their working time to 4-7 hours per day and 3-4 days per week It leads to a reduction in their income (CARE 2020) 15 c Labor exchange: Foreign labor with advanced education has played an important role in international trade (Nishiyama 2013) Specifically, Japan and Korea are industrialized countries, have a high demand for skilled personnel Meanwhile, the Vietnamese footwear industry has a shortage of managerial skills (Lan 2016) Following the SFM, if Vietnam enables skilled workers from Japan and Korea to work in the footwear industry, it will accelerate trade, and maintain economic growth with industrialized countries (Alessandro 2002) Besides, labor endowment is the key for the comparative advantage of developing countries The SFM assumed that the labor intensity of export industries in developing countries is higher than that of importcompeting sectors (Alessandro 2002) Therefore, trade liberalization raises overall labor demand (Fishlow 1984) Particularly, trade liberalization will increase the relationship between employment indicators and sectoral wage, sectoral trade variables include trade prices, trade flows, trade policy variables (Fishlow 1984) However, based on the Rybczynski theorem, if we keep the constant price of a product and increase the number of skilled workers, the intensive supply of that product will increase, and the supply of others will decrease (Opp 2009) Table Vietnamese labor assumption (unit: million) 16 Figure Vietnamese labor illustration Figure Vietnamese labor after the labor of Japan and Korea entering 17 d Recommendations from IRS: There are 99% of electronics manufacturing firms of all size are owned by foreigner in 2018, which means these foreign companies are the most likely to be affected by COVID-19, such enterprises have to face with a contraction of 10% to 20% in their order for 2020 (PwC 2020) It also delays the logistics process which requires more safety protocol for suppliers of tech firms and distributors (Sen 2021) Although Vietnam has been free from infection for nearly year, it is difficult for the telecommunication industry to emerge strongly out of the pandemic But it can slowly regenerate and regain its position if the government can propose policies in terms of taxation or making an incentive by supporting tech firms with low interest rates As a result, the telephone industry can strongly emerge through crisis to rebound to the market e Recommendations from Heckscher-Ohlin model: After Covid-19, in the first half of 2021, footwear export increased by 28.4% compared to the same period last year The reason is Vietnam has been less affected by Covid-19 Moreover, low working costs and stable politics are elements that prompt investors to place orders with local companies (Anh 2021) Because Vietnam is abundant in unskilled workers, the government should complete research and investigation of work market patterns and new skills and the industry demand in the market to react to industry changes and match organizations and local human resource development centers (CARE 2020) 18 References: Akay, G-H 2009, 'Trade, wages, and the specific factors model: empirical evidence from manufacturing industries in Ghana', Journal of productivity analysis, vol 31 (1), pp 47-55 Alessandro, T 2002, INTERNATIONAL TRADE AND LABOUR MARKET PERFORMANCE: MAJOR FINDINGS AND OPEN QUESTIONS, United Nations Conference on Trade and Development, New York, Geneva Anh, D 2021, 'Footwear export shows strong rebound in first half', Vietnam Investment Review, 14 July, viewed 14 August 2021, CARE 2020, COVID-19 impact on Vietnamese apparel and footwear workers Workers’ Perspective - KEY FINDINGS AND POLICY IMPLICATIONS FOR ENTERPRISES, TRADE UNIONS AND GOVERNMENT, December, viewed 14 August 2021, CFI n.d ‘Economics of scale: Cost benefits from higher output levels’, OEC, viewed 13 August 2021, Duc, A 2021, ‘MM Mega Market maintains position as two-way trade bridge between Vietnam and Thailand’, Vietnam Investment Review, viewed 14 August, Eia 2017, Thailand, Eia, February, viewed 15 August 2021, Fishlow, A 1984, 'Anne O Krueger, Editor, Trade and Employment in Developing Countries 3: Synthesis, The University of Chicago Press for the National Bureau of Economic Research, Chicago and London (1983)', Journal of international economics, vol 16, no.3, pp 379-382 Hsing, Y 2018, 'Is Currency Appreciation or Depreciation Expansionary in Thailand?', The Journal of Asian finance, vol (1), pp 5-9 19 10 Kennemer, J 2020, 'HOW TO FIND SHOE MANUFACTURERS IN VIETNAM // TOP 10 FOOTWEAR SUPPLIERS AND FACTORIES IN VIETNAM LIST', COSMO SOURCING, August, viewed 14 August 2021, 11 Krueger, A 2020, International trade : what everyone needs to know®, New York, ProQuest Ebook Central database 12 Lan, H & Hong, P 2016, 'An Analysis of Vietnamese Footwear Manufacturers’ Participation in the Global Value Chain Where They Are and Where They Should Proceed?', VNU Journal of Science: Education Research, vol 32, no (5), pp 55-65 13 Le, H 2021, ‘Vietnam’s phone exports fall 0.4% in 2020’, The Saigon Times, viewed 15 August 2021, 14 McLaren, J 2012, International trade: Economic analysis of globalization and policy, John Wiley & Sons, Inc., Hoboken, New Jersey 15 Morrow 2010, 'Ricardian–Heckscher–Ohlin comparative advantage: Theory and evidence', Journal of international economics, vol 82 (2), pp 137-15 16 Nhan Dan 2018, ‘Opportunities to balance trade with Thailand’, Nhan Dan Online, viewed 14 August, 17 Nishiyama, H & Gintani, Y 2013, 'The Effects of Globalization on the Elasticity of Labor Demand and Employment', International economic journal, vol 27, no.1, pp 11-23 18 Nong Nghiep Vietnam 2021, ‘Vietnam gains trade surplus with Thailand for the first time’, Nong Nghiep Vietnam, viewed 14 August, 19 OEC n.d, Vietnam, OEC, viewed 14 August 2021, 20 20 OEC n.d ‘Yearly exports and imports of Vietnam in 2014’, The Observatory of Economic Complexity, OEC, viewed 13 August 2021, 21 OEC n.d ‘Yearly exports and imports of Vietnam in 2015’, The Observatory of Economic Complexity, OEC, viewed 13 August 2021, 22 OEC n.d ‘Yearly exports and imports of Vietnam in 2016’, The Observatory of Economic Complexity, OEC, viewed 13 August 2021, 23 OEC n.d ‘Yearly exports and imports of Vietnam in 2017’, The Observatory of Economic Complexity, OEC, viewed 13 August 2021, 24 OEC n.d ‘Yearly exports and imports of Vietnam in 2018’, The Observatory of Economic Complexity, OEC, viewed 13 August 2021, 25 OECD 2010, ‘Intra-industry trade’, Measuring Globalisation: OECD Economic Globalisation Indicators 2010, OECD Publishing, viewed 14 August 2021, 21 26 Opp, M-M, Sonnenschein, H-F & Tombazos, C-G 2009, 'Rybczynski's Theorem in the Heckscher–Ohlin World — Anything Goes', Journal of international economics, vol 79, no.1, pp 137-142 27 PwC 2020, ‘Analysis of Potential Impacts of COVID-19 on Vietnamese economy’, viewed 15 August 2021, 28 Sen, N 2021 ‘Coronavirus: Vietnam races to cut disruptions for suppliers of tech firms such as Apple, Samsung’, South China Morning Post, viewed 15 August 2021, 29 Shira, D & Associates, ‘Vietnam to Reduce Import Tariffs on Automobiles from ASEAN from 2018’, Vietnam Briefing, 22 December, viewed 14 August, 30 Tohamy, S-M & Mixon, J-W 2003, 'Lessons from the specific factors model of international trade', The Journal of economic education, vol 34 (2), pp.139-150 31 Tung, N 2018, ‘Fruits and vegetable imported from Thailand approaching US$1 billion’, Hanoi Times, 26 March, viewed 14 August 2021, 32 Tung, N 2020, ‘Why Samsung keeps investment into Vietnam?’, Vietnam Insider, viewed 14 August 2021, 33 Vernon, R 2000, ‘United Nations Conference on Trade and Development, "Trade and Development Report, 1997" (Book Review)’, Economic Development and Cultural Change, vol 48, no 2, pp 421 34 Vietnaminsider 2021, ‘Apple’s partner increases $101 million to the investment in Vietnam More and more FDI projects continue to enter the country’, viewed 14 August 2021, 22 35 VNA 2018, ‘Vietnam’s trade deficit with Thailand to balloon’, Vietnamplus, viewed 14 August, 36 Vu, T-P-D 2020, 'Current Skilled Labour Shortage in Vietnam', VIETNAM ACADEMY OF SOCIAL SCIENCES, 28 April, viewed 14 August 2021, 37 Yetiz, F 2017, 'The Relationship among Gross Barter Terms of Trade, Exchange Rates, and Economic Growth: A Case in Turkey', International journal of economics and financial issues, vol (3), pp 738-745 23 ... 1400 1150 120 0 1140 International $ 1000 834 7 92 800 720 600 400 430 403 423 27 2 20 5 20 0 20 14 20 15 Crude Petrolium 20 16 20 17 20 18 Broadcasting Equipment Figure main imports products of Thailand... only half of 20 18 (8.4%) (Le 20 21) 13 b Heckscher-Ohlin model: Footwear export (% of total export marrket value) 8.60% 8.40% 8 .20 % 8.00% 7.80% 7.60% 7.40% 7 .20 % 7.00% 20 14 20 15 20 16 20 17 20 18 Figure... 400 29 9 20 0 20 14 20 15 20 16 Refined petrolium Air conditioners 20 17 20 18 Figure main exports products of Thailand with Vietnam (20 14 -20 18) graph Source: OEC (https://oec.world/en) Imports of Thailand