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International Trade and Its Impacts

Tran Tri Duc

Columbia Southern University

MBAV 6053 Economics for Managers Unit IV Essay

Instructor Seifu Zerihun, PhD.

Date: February 27th, 2021

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Introduction

We are living in a flat world where people interact with one another through many means

of connectivity. As a result, all aspects of our lives are gradually and constantly globalized.

Nowadays, it is difficult to imagine that a country can thrive steadily without cooperating or

doing business with the others. From that perspective, we realize how important international

trade is to this globe. Not only can it helps countries to approach the goods and services that are

not available domestically but also helps broaden the markets. Moreover, countries can benefit

from international trade as they can concentrate on developing their strengths. Consumers as well

do have more options and therefore can bring home the most suitable goods.

There are sides that international trade affects the most, they are export and import. In the

following part we will find out its impact on the supply and demand of goods, on the

competitiveness of the goods’ market and then lead to the change in equilibrium price and

quantity. We will also find out how it affects the domestic monopoly and the ways a domestic

market responses to international trade.

1. Impacts of international trade on exporting and importing countries

1.1. Impacts on exporting countries

Vietnam lies within the world biggest exporters of pepper in recent years.

Although the volume has a bit decreased in comparison with 2019 – 5.9% according to

data from the Department of Agro-Processing and Market Development, it is undeniable

that pepper are still having a steady place when talking about Vietnam export. This is

because Vietnam has the needed conditions to develop agricultural products and the soil

is suitable for growing pepper. Nevertheless, the consumption of pepper in domestic

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market is not that much, so we must find overseas markets to sell the redundant amount

in order to bring more revenue. Export helps solve the issue quite easily as exporters are

only willing to sell their products if the price is higher than what they are establishing in

domestic market. Foreign trade now helps boost the price in the domestic market because

there is additional demand for pepper in other countries. That is not everything. The price

leveled up means producers earn more profits. As a result, they will find ways to raise the

quantity to maximize profits. This means the domestic quantity supplied of pepper

increases. Following the law of demand, the domestic demanded for pepper drops

because of the higher price.

International trade is a solution for domestic pepper producers as they do not have

to scramble for the domestic market shares, which is just a small “pie”. Opening up to

foreign trade opens more doors for producers to broaden their market and lessen the

effort to fight against other domestic producers. With more new markets, producers will

raise the pepper price and the quantity in the market certainly goes up as it must serve

both domestic and overseas markets.

1.2. Impacts on importing countries

According to data from Export Genius, in 2018, Vietnam major imports are

electrical machinery and equipment. For a developing country like Vietnam, it is

recognizable that heavy industries are not the biggest strength. Our well-trained workers

and technology are still limited, that is why we have to purchase electrical machinery

from advanced countries to serve the needs of production.

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Source: Export Genius

In fact, Vietnam can still produce or assemble these goods but as mentioned

above, limited resources make it difficult to sell these products at a low price. Therefore,

importers seek for suppliers from abroad who sell electrical machinery at a lower price.

Due to having new competitors, Vietnamese producers have to reduce the price of their

goods, which later leads to a reduction in the entire domestic price of electrical

machinery. Because of the decline in price, domestic producers receive less profits which

discourage them from manufacture more products. Consequently, the domestic quantity

supplied of electrical machinery in the market drops. In contrast, the quantity demanded

for electrical machinery rises as consumers can benefit from the lower price.
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With the challenge from foreign producers, home producers have to seriously

battle to survive by all means such as enhancing their quality, lower the price in order to

better their competitiveness. Thanks to that, the quantity of electrical machinery in the

market develops as it is now the sum of both foreign goods and domestic goods.

2. Impacts of international trade on domestic monopoly

A monopoly is an enterprise that is the only seller of a good or service. In the

absence of government intervention, a monopoly is free to set any price it chooses and

will usually set the price that yields the largest possible profit (Stigler, n.d.). With this

power in their hands, they can simply manipulate the market following their will. No

matter how good or bad their products/services are, they still gain profits because

consumers do not have other choices. When open up to trade, these enterprises have to

cope with challenges from other contestants. They will have to adjust their price, improve

their quality to compete with the challengers. To sum up, international trade is the factor

that diminish or even eliminate domestic monopoly power.

3. Perfect competition in economics

According to Khan Academy, “Perfect competition occurs when there are many

sellers, there is easy entry and exiting of firms, products are identical from one seller to

another, and sellers are price takers”. To clarify this concept, we can apply game theory

to understand the strategies of the two manufacturers who are about to make their moves

in the market.
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For instance, in the textile industry, we have Company C which has been in

operation for 20 years and Company D which is a newbie. Let us have a quick look at the

below matrix to know more and predict their profit in each situation.

- Strategy of C: accept (accommodate) or eliminate the contestant (fight)

- Strategy of D: Step in or Stay out

Unit used: USD million (m)

Company D

Step in (In) Stay out (Out)

C’s profit: 10 m C’s profit: 12 m

Accomodate
D’s profit: 2 m D’s profit: 0 m
Company C
C’s profit: -3 m
Fight
D’s profit: -2 m

Apparently, when Company D chooses to step in and Company C is willing to

accommodate, the situation is the nearest to the perfect competition when they share the

profit. In short, to achieve the perfect competition, Company C must accept any other

challengers and do not fight against them.

Conclusion

International trade is inevitable and it does bring a lot of interests for the improvements

of suppliers, consumers and the society as a whole. It reduce the dependence on the domestic

market, increase the productivity as well as efficiency. It brings innovation, confidence and

progress. Without it, we can never obtain global growth and economic development.
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References

Ministry of Agriculture and Rural Development. (2020). Vietnam’s pepper exports forecast to
recover.

https://www.mard.gov.vn/en/Pages/vietnam%E2%80%99s-pepper-exports-forecast-to-
recover.aspx?item=19

Export Genius. (n.d.). What Does Vietnam Import?

https://www.exportgenius.in/export-import-trade-data/vietnam-import.php?gclid=Cj0KCQiA-
OeBBhDiARIsADyBcE5wQfV0qD0k1VGElE77NOZd0e6dqGSavJXhEa-
Ey2Je2py2zIszaVsaApcwEALw_wcB

Stigler, G. T. (n.d.). Monopoly.

https://www.econlib.org/library/Enc/Monopoly.html

Khan Academy, Perfect competition and why it matters.

https://www.khanacademy.org/economics-finance-domain/microeconomics/perfect-competition-
topic/perfect-competition/a/perfect-competition-and-why-it-matters-cnx