International Economic Question :

Part 1: Trade Theory

1. Why do nation trade ? What are some of the major arguments for and
against an free trade ? What are the consequences ( benefits and costs ) of free
trade ( present: at individual firms / nations ) ? Tại sao thương mại quốc gia?
Một số trong những lý lẽ chính cho và chống lại một thương mại tự do là gì?
Hậu quả (lợi ích và chi phí) của thương mại tự do (hiện tại: tại các công ty /
quốc gia riêng lẻ) là gì?
Why do nation trade ?
Nations trade because they gain by doing so. The principle of comparative
advantage states that each country should specialize in the goods it can produce
most readily and cheaply and trade them for those that other countries can produce
most readily and cheaply. The result is more goods at lower prices than if each
country produced by itself everything it needed. Free trade allows trade among
nations without government restrictions
Ex : Viet Nam exports rice to South Africa
What are some of the major arguments for and against an free trade ? (ghi
hết)
- Advanatges of specialization
- All – round prosperity
- Competitive spirit
- Accessibility of dosmetically produced goods and services
- Greater international cooperation
- Free from interference
- Advantageous not for LDCs
- Destruction of home industries / products
- Inefficiency becomes perpetual
- Danger of overdependence
- Penetration of harmful foreign goods
Ex: the agreement between the Unites States, Mexico, and Canada, known as
the North American Free Trade Agreement (NAFTA). NAFTA was
established January 1, 1994, between the United States, Mexico, and Canada.
What are the consequences ( benefits and costs ) of free trade ( present: at
individual firms / nations ) ?
Free trade is meant to eliminate unfair barriers to global commerce and raise the
economy in developed and developing nations alike. But free trade can – and has
– produced many negative effects, in particular deplorable working conditions, job
loss, economic damage to some countries, and environmental damage globally
Benefits :
- The theory of comparative advantage : This explains that by specialising in
goods where countries have a lower opportunity cost, there can be an
increase in economic welfare for all countries. Free trade enables countries
to specialise in those goods where they have a comparative advantage.
- Reducing tariff barriers leads to trade creation : Trade creation occurs when
consumption switches from high-cost producers to low-cost producers
- Increased exports : As well as benefits for consumers importing goods, firms
- Economics of scale : If countries can specialise in certain goods they can
benefit from economies of scale and lower average costs; this is especially
true in industries with high fixed costs or that require high levels of
investment. The benefits of economies of scale will ultimately lead to lower
prices for consumers and greater efficiency for exporting firms.
- Increased competition : With more trade, domestic firms will face more
competition from abroad.
- Trade is an engine of growth : World trade has increased by an average of
7% since 1945, causing this to be one of the significant contributors to
economic growth.
- Make use of surplus raw materials : Middle Eastern countries such as Qatar
are very rich in reserves of oil, but without trade, there would be not much
benefit in having so much oil. Japan, on the other hand, has very few raw
materials; without trade, it would have low GDP.
- Tariffs many encourage inefficiency: If an economy protects its domestic
industry by increasing tariffs industries may not have any incentives to cut costs.
Disadvantage:
- Increased Job Outsourcing:
- Theft of Intellectual Property
- Crowd out Domestic Industries
 - Poor Working Conditions
- Degradation of Natural Resources
- Destruction of Native Cultures
- Reduced Tax Revenue
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 ? ( chủ nghĩa trọng thương )
What were the Mercantilist’s views on trade ?

- Mercantilism is an economic theory that advocates government regulation

of international trade to generate wealth and strengthen national power.
Merchants and the government work together to reduce the trade deficit and
create a surplus. It funds corporate, military, and national growth.
Mercantilism is a form of economic nationalism. It advocates trade policies
that protect domestic industries.
- In mercantilism, the government strengthens the private owners of
the factors of production. The four factors are entrepreneurship, capital
goods, natural resources, and labor. It establishes monopolies, grants tax-free
status, and grants pensions to favored industries. It imposes tariffs on
imports. It also prohibits the emigration of skilled labor, capital, and tools. It
doesn't allow anything that could help foreign companies.
- In return, businesses funnel the riches from foreign expansion back to their
governments. Its taxes pay for increase national growth and political power

• Ex :
• England Navigation Act of 1651 prohibited foreign vessels engaging in
coastal trade.
• All colonial exports to Europe had to pass through England first and then be
re-exported to Europe.
• Under the British Empire, India was restricted in buying from domestic
industries and were forced to import salt from the UK. Protests against this
salt tax led to the ‘Salt tax revolt’ led by Gandhi.
• In seventeenth-century France, the state promoted a controlled economy
with strict regulations about the economy and labour markets
• Rise of protectionist policies following the great depression; countries
sought to reduce imports and also reduce the value of the currency by
leaving the gold standard.
 • Some have accused China of mercantilism due to industrial policies which
have led to an oversupply of industrial production – combined with a policy
of undervaluing the currency.

Mercantilism involves

• Restrictions on imports – tariff barriers, quotas or non-tariff barriers.

• Accumulation of foreign currency reserves, plus gold and silver reserves.
(also known as bullionism) In the sixteenth/seventeenth century, it was
believed that the accumulation of gold reserves (at the expense of other
countries) was the best way to increase the prosmperity of a country.
• Granting of state monopolies to particular firms especially those associated
with trade and shipping.
• Subsidies of export industries to give a competitive advantage in global
markets.
• Government investment in research and development to maximise the
efficiency and capacity of the domestic industry.
• Allowing copyright/intellectual theft from foreign companies.
• Limiting wages and consumption of the working classes to enable greater
profits to stay with the merchant class.
• Control of colonies, e.g. making colonies buy from Empire country and
taking control of colonies wealth.

What are the new contributions of Mercantilist’ views on Trade?

When free trade regulations forced countries to lower or break down tariff
barriers, the protection measures of classical commercialism, countries turned
to adopting so-called policies. "New mercantilism". Accordingly, in order to
restrict imports and increase exports, instead of applying tariff measures,
countries apply new measures such as import quotas, export subsidies, or
technical barriers. Therefore, it can be said that the protective policies of
mercantilism continue to exist and are an integral part of the economic policies
of many countries today.
In the modern world, mercantilism is sometimes associated with policies, such as:
• Undervaluation of currency. e.g. government buying foreign currency assets
to keep the exchange rate undervalued and make exports more competitive.
A criticism often levelled at China.
• Government subsidy of an industry for unfair advantage. Again China has
been accused of offering state-supported subsidies for industry, leading to
oversupply of industries such as steel – meaning other countries struggle to
compete.
• A surge of protectionist sentiment, e.g. US tariffs on Chinese imports, and
US policies to ‘Buy American.’
• Copyright theft

What is the weak point of Mercantilism ?

- Grave Consequences : Mercantilism is a one way traffic
- Misconception about the origin of wealth: Rich is to have more money, to
have more money, you have to export more than imported.
- The misconception of profit in trade: profit is the result of deceit and
exchange is not equal,
- Not yet mention the inner nature of economic phenomena: one country gets
rich thanks to another poor country, one country has a trade surplus, the
other country has a deficit. IT does not address issues such as how the
structure of international trade, how production specialization and exchange
can benefit.

3. How were the 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?

How were the Adams Smith (Theory of absolute advantage )’s views on
trade ?
- Lake of mobility of factors of production : Adams Smith assumes that
factors of production cannot move between countries. This assumption also
implies that the production possibility frontier of each country will not
change after the trade
- Trade barriers : there are no barriers to trade for the exchange of good.
Government implement trade barriers to restrict or discourage the
importation or exportation of a particular good
 - Trade balance : Smith assumes that exports must be equal to imports. This
assumption means that we cannot have trade imbalances, trade deficits or
surpluses. A trade imbalance occurs when exports are higher than imports or
vice versa
- Constant returns to scale : Adam Smith assumes that we will get constant
returns as production scales, meaning there are no economies of scale. If
there were economies of scale, then it would become cheaper for countries
to keep producing the same good as it produced more of the same good
Ex :
Consider the two hypothetical countries, Atlantica and Krasnovia, with
equivalent populations and resource endowments, which each produce two
products, Guns and Bacon. Each year Atlantica can produce either 12 Guns or 6
slabs of Bacon, while Krasnovia can produce either 6 Guns or 12 slabs of
Bacon. Each country needs a minimum of 4 Guns and 4 slabs of Bacon to
survive. In a state of autarky, producing solely on their own for their own
needs, Atlantica can spend ⅓ of the year making Guns and ⅔ making Bacon
for a total of 4 Guns and 4 slabs of Bacon. Krasnovia can spend ⅓ of the year
making Bacon and ⅔ making Guns to produce the same, 4 Guns and 4 slabs of
Bacon. This leaves each country at the brink of survival, with barely enough
Guns and Bacon to go around. However, not that Atlantica has an absolute
advantage in producing Guns, and Krasnovia has an absolute advantage in
producing Bacon.
How were gains from trade generated ?
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.
- Differences in cost ratio: The gains from international trade depends upon
the cost ratios of differences in comparative cost ratios in the two trading
countries. The smaller the difference between exchange rate and cost of
production the smaller the gains from trade and vice versa.
- Demand and supply: If a country has elastic demand and supply gains the
gains from trade are higher than if demand and supply are inelastic.
- Factor availability: International trade is based on the specialization and a
country specializes depending upon the availability of factors of production.
It will increase the domestic cost ratios and thereby the gains from trade.
- Size of country: If a country is small in size it is relatively easy for them to
specialize in the production of one commodity and export the surplus
production to a large country and can get more gains from international
trade. Whereas if a country is large in size then they have to specialize in
more than one good because the excess production of only one commodity
can not be exported fully to a small sized country as the demand for good
will reduce very frequently. So the smaller the size of the country, the larger
the gain from trade.
- Terms of Trade: Gains from trade will depend upon the terms of trade. If the
cost ratio and terms of trade are closer to each other more will be the gains
from trade of the participating countries.
- Productive Efficiency: An increase in the productive efficiency of a country
also determines its gains from trade as it lowers the cost of production and
price of the goods. As a result, the country importing gains by importing
cheap goods.

What policies did Adam Smith advocate in International Trade?

• The central thesis of Smith's "The Wealth of Nations" is that our need to
fulfill self-interest results in prosperity. The core of Smith's thesis was that
humans' natural tendency toward self-interest (or in modern terms, looking
out for yourself) results in prosperity. Smith argued that by giving everyone
freedom to produce and exchange goods as they pleased (free trade) and
opening the markets up to domestic and foreign competition, people's
natural self-interest would promote greater prosperity than with stringent
government regulations. Smith believed humans ultimately promote public
interest through their everyday economic choices. “He (or she) generally,
indeed, neither intends to promote the public interest nor knows how much
he is promoting it. By preferring the support of domestic to that of foreign
industry, he intends only his own security and by directing that industry in
such a manner as its produce may be of the greatest value, he intends only
 his own gain and he is in this, as in many other cases, led by an invisible
hand to promote an end which was no part of his intention,” he said in "An
Inquiry into the Nature and Causes of the Wealth of Nations"
• Smith believed that people promote public interest through economic
choices—a free-market force that became known as the "invisible hand." :

The invisible hand is what comes from the collaboration of consumers and
producers in commerce. The automatic pricing and distribution mechanisms in the
economy—which Adam Smith called an "invisible hand"—interact directly and
indirectly with centralized, top-down planning authorities. However, there are
some meaningful conceptual fallacies in an argument that is framed as the invisible
hand versus the government.

The invisible hand is not actually a distinguishable entity. Instead, it is the sum of
many phenomena that occur when consumers and producers engage in
commerce. Smith's insight into the idea of the invisible hand was one of the most
important in the history of economics. It remains one of the chief justifications for
free-market ideologies.

The invisible hand theorem (at least in its modern interpretations) suggests that the
means of production and distribution should be privately owned and that if trade
occurs unfettered by regulation, in turn, society will flourish organically. These
arguments are naturally competitive with the concept and function of government.

The government is not serendipitous—it is prescriptive and intentional. Politicians,

regulators, and those who exercise legal force (such as the courts, police, and
military) pursue defined goals through coercion. However, in contrast,
macroeconomic forces—supply and demand, buying and selling, profit and loss
occur voluntarily until government policy inhibits or overrides them. In this sense,
it is more accurate to suggest that government affects the invisible hand, not the
other way around.

• Government interference in this process results in shortages and surpluses.

What did he think was the proper function of government in the economic life
of the Nation?
- Production and exchange : Using the example of a pin factory, Smith shows
how specialisation can boost human productivity enormously. By
specialising, people can use their talents, or acquire skill. And they can
 employ labour-saving machinery to boost production. Then they exchange
those specialist products, spreading the benefits of specialisation across the
whole population.
- Economic policy : Just as individuals gain from specialisation, says Smith,
so do nations. There is no point trying to grow grapes in Scotland, when they
grow so plentifully in France. Countries should do what they are best at, and
trade their products. Restrictions on international trade inevitably make both
sides poorer. Legislators think too much of themselves when they believe
that by intervening, they can direct production better than the market can.
- The role of government : Smith is critical of government and officialdom,
but is no champion of laissez-faire. He believes that the market economy he
has described can function and deliver its benefits only when its rules are
observed – when property is secure and contracts are honoured. The
maintenance of justice and the rule of law is therefore vital. Governments
should avoid taxing capital, which is essential to the nation’s productivity.
Since most of their spending is for current consumption, they should also
avoid building up large debts, with draw capital away from future
production.
- The wealth of nation today : Smith’s world was very different to ours, of
course, before the Industrial Revolution changed everything. At yet, by
showing how the freedom and security to work, trade, save and invest
promotes our prosperity, without the need for a directing authority, The
Wealth Of Nations still leaves us with a powerful set of solutions to the
worst economic problems that the world can throw at us. The free economy
is an adaptable and flexible system, which can withstand the shock of the
new, and cope with whatever the future brings.
4. In what way was Ricardo’s law of Comparative Advantage superior to
Smith’s Theory of absolute advantage ? (Compare: the theory of Absolute
Advantage and Comparative Advantage ?) Why this theory is more relevant
to the modern trade situation? How do gains from trade arise with
Comparative Advantage?
David Ricardo famously showed how England and Portugal both benefit by
specializing and trading according to their comparative advantages. In this case,
Portugal was able to make wine at a low cost, while England was able to cheaply
manufacture cloth. Ricardo predicted that each country would eventually recognize
these facts and stop attempting to make the product that was more costly to
generate.

Indeed, as time went on, England stopped producing wine, and Portugal stopped
manufacturing cloth. Both countries saw that it was to their advantage to stop their
efforts at producing these items at home and, instead, to trade with each other in
order to acquire them.

A contemporary example: China’s comparative advantage with the United States is

in the form of cheap labor. Chinese workers produce simple consumer goods at a
much lower opportunity cost. The United States’ comparative advantage is in
specialized, capital-intensive labor. American workers produce sophisticated goods
or investment opportunities at lower opportunity costs. Specializing and trading
along these lines benefit each.

The theory of comparative advantage helps to explain why protectionism is

typically unsuccessful. Adherents to this analytical approach believe that countries
engaged in international trade will have already worked toward finding partners
with comparative advantages.

If a country removes itself from an international trade agreement, if a government

imposes tariffs, and so on, it may produce a local benefit in the form of new jobs
and industry. However, this is not a long-term solution to a trade problem.
Eventually, that country will be at a disadvantage relative to its neighbors:
countries that were already better able to produce these items at a lower
opportunity cost.

The crucial distinction is that Smith’s theory does not take into account limitations
in productive factors, while Ricardian theory does. Main result of the latter being
that no matter where you start, you can find something profitable to produce.

E.g. in Smith’s theory technologically advanced countries would produce all the
goods in the world because they are better at doing that. Having absolute
advantage, they have lowest absolute costs, that is spend less factors in making one
unit of product. But there is only so many workers and so much capital in those
countries. They cannot be the manufacturing center for everything. If they tried,
the demand for workers and capital would result in higher wages and interest rates,
that would make goods produced too expensive for the rest of the world.

Instead Ricardo focused on relative costs of production. Which questions not how
much resources were spent per unit, but how much potential production of other
goods was sacrificed to make additional unit. Now the picture would make sence.
Tech-advanced countries still outperform everybody else in any particular good.
But they have to choose what to produce and what to sacrifice. Which opens up a
possibiity for other countries to also produce something profitably.

Adam Smith helped to originate the concepts of absolute and comparative

advantage in his book, An Inquiry into the Nature and Causes of the Wealth of
Nations. Smith argued that countries should specialize in the goods they
can produce most efficiently and trade for those goods they can't produce as well.1

Smith described specialization and international trade as they relate to absolute

advantages. He suggested that England can produce more textiles per labor hour
and Spain can produce more wine per labor hour so England should export textiles
and import wine and Spain should do the opposite. Following Adam Smith's
research, British economist David Ricardo built on his concepts by more broadly
introducing comparative advantage in the early 19th century.2

Ricardo has become well-known throughout history for his musings on

comparative advantage. Building on research from Adam Smith along with Robert
Torrens, Ricardo explains how nations can benefit from trading even if one of
them has an absolute advantage in producing everything. In other words, countries
must choose to diversify the goods and services they produce which requires them
to consider opportunity costs

5. What are the sources of comparative advantage ?

- 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. More recently the shale gas
revolution in the United States and elsewhere is leading to shifts in the future
pattern of world energy production and trade as North America becomes
more energy sufficient. 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. ICT infrastructure is particularly important
for countries wanting to build a competitive advantage in information-
intensive sectors such as mobile telecommunications, gaming and financial
services

- 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. These long-run
scale economies can give regions and countries a significant unit cost
advantage.

- 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. Many countries are now building comparative advantage
in high-knowledge industries and specializing in specific knowledge sectors
– 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 capital-abundant nation? Suppose that there:
Airplane is Capital-intensive commodity and Rice is labor-intensive
commodity, and we have two nations: France is rich and capital-abundant
nation; Somali is a labor abundant country.
What is meant by labor-intensive commodity ?

- Labor-intensive industries or processes require large quantities of physical

effort to complete necessary tasks. In labor-intensive industries, the costs
associated with securing the necessary personnel outweigh the capital costs
in regards to importance and volume. While many labor-intensive jobs
require low levels of skill or education, this is not true of all labor-intensive
positions.
- Advances in technology and worker productivity have moved some
industries away from labor-intensive status, but many remain. Labor-
intensive industries include restaurants, hotels, agriculture, and mining.
- Less developed economies, as a whole, tend to be more labor-intensive. This
situation is rather common because low income means that the economy or
business cannot afford to invest in expensive capital. But with low income
and low wages, a business can remain competitive by employing many
workers. In this way, firms become less labor-intensive and more capital-
intensive.
- Before the industrial revolution, 90% of the workforce was employed in
agriculture. Producing food was very labor-intensive. Technological
development and economic growth have increased labor productivity,
reduced labor intensity, and enabled workers to move into manufacturing
and (more recently) services.

Capital-intensive commodity ?

Capital intensive refers to the production that requires higher capital investment
such as financial resources, sophisticated machinery, more automated machines,
the latest equipment

What is meant by capital-abundant nation?

A country is capital abundant if its endowment of capital relative to other factors is
large compared to other countries. Relative capital abundance can be defined by
either the quantity definition or the price definition.

7. What can we say from the trade pattern between two countries?
What does the Heckscher and Ohlin theory postulate ?
What can we say from the trade pattern between two countries?
Countries trade with each other when, on their own, they do not have the
resources, or capacity to satisfy their own needs and wants. By developing and
exploiting their domestic scarce resources, countries can produce a surplus,
and trade this for the resources they need.

• trade pattern is the exchange of goods and services between countries.

• Trading globally gives consumers and countries the opportunity to be
exposed to goods and services not available in their own countries, or which
would be more expensive domestically.
• The importance of international trade was recognized early on by political
economists like Adam Smith and David Ricardo.
• Still, some argue that international trade actually can be bad for smaller
nations, putting them at a greater disadvantage on the world stage
Ex :
EU-Pakistan bilateral trade relations are governed by the Cooperation Agreement
from 2004. Enhancing bilateral trade and investment is also part of the EU-
Pakistan 5-year Engagement Plan from 2012. Pakistan is a major beneficiary of
the trading opportunities offered by the EU Generalised Scheme of Preferences
(GSP).
What does the Heckscher and Ohlin theory postulate ?
The proposition of the Heckscher-Ohlin Model that countries will have
comparative advantage in, and therefore export, the goods that use relatively
intensively their relatively abundant factors.
- The Heckscher-Ohlin model is an economic theory that proposes that
countries export what they can most efficiently and plentifully produce. Also
referred to as the H-O model or 2x2x2 model, it's used to evaluate trade and,
more specifically, the equilibrium of trade between two countries that have
varying specialties and natural resources.
 - The model emphasizes the export of goods requiring factors of
production that a country has in abundance. It also emphasizes the import of
goods that a nation cannot produce as efficiently. It takes the position that
countries should ideally export materials and resources of which they have
an excess, while proportionately importing those resources they need.
- The Heckscher-Ohlin model explains mathematically how a country should
operate and trade when resources are imbalanced throughout the world. It
pinpoints a preferred balance between two countries, each with its resources.
- The model isn't limited to tradable commodities. It also incorporates other
production factors such as labor. The costs of labor vary from one nation to
another, so countries with cheap labor forces should focus primarily on
producing labor-intensive goods, according to the model.
Ex :
the Netherlands exported almost $506 million in U.S. dollars in 2017, compared to
imports that year of approximately $450 million. Its top import-export partner was
Germany. Importing on a close to equal basis allowed it to more efficiently and
economically manufacture and provide its exports.
II/ Trade Policy – Trade Instrument
8. What is 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 ?
What is primary function of tariffs in industrial nations ?
- Tariffs are the most common kind of barrier to trade; indeed, one of the
purposes of the WTO is to enable Member countries to negotiate mutual
tariff reductions. Before we consider the legal framework that provides the
discipline regarding tariffs, we must understand the definition of tariffs, their
functions, and their component elements (rates, classifications, and
valuations)
- A tariff is a tax imposed on the import or export of goods. In general
parlance, however, a tariff refers to “import duties” charged at the time
goods are imported
- 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). In some developing countries, however,
revenue may still be an important tariff function.
- 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 point of fact, a cursory examination
of the tariff rates employed by different countries does seem to indicate that
they reflect, to a considerable extent, the competitiveness of domestic
industries. 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.3 The cost of protecting 40 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
What are the advantages and disadvantages of Ad valorem and Specific
Tariff ?
There are many advantages to tariffs including:

▪ They help the government earn extra funds

▪ It reduces dependence on foreign markets
▪ They protect local businesses
▪ They can help environmental efforts
▪ They can be used to encourage consumers to make healthy choices by
making unhealthy products prohibitively expensive.

There are also many disadvantages associated with the use of tariffs:

▪ It can indirectly cause the price of local goods to increase; for example, if
the cost of fuel is high then this will impact many industries and they will
need to pass on the increased cost of production onto customers.
▪ It discourages free trade which many economists would claim that this is
always a bad idea
What is meant by the consumption, production, trade, revenue, and
redistribution effects of a tariff ?
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.
Protective or Production Effect: The imposition of tariff may be intended to
protect the home industry from foreign competition. As tariffs restrict the flow
of foreign products, the home producers find an opportunity to increase the
domestic production of import substitutes. That is why Ellsworth termed the
protective or production effect of tariff as the import-substitution effect.
Terms of Trade Effect: If the foreign supply of a good is perfectly elastic or if
the foreign suppliers are ready to supply the product at a constant price, the
imposition of tariff is not likely to improve the terms of trade for the tariff-
imposing country. In case the foreign supply of a good is not perfectly elastic,
the imposition of tariff can have varying effects upon the terms of trade of the
tariff-imposing country depending upon the elasticities of demand and supply in
the two trading countries.
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 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.

9. What is an import Quota ? How are they similar to and different from
the effects of an equivalent import tariff ? How does the revenue effect of
an import quota differ from that of a tariff ?

What is an import Quota ?

- The import quota means physical limitation of the quantities of different
products to be imported from foreign countries within a specified period of
time, usually one year. The import quota may be fixed either in terms of
quantity or the value of the product.
- A 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.

Ex : the Organization of Petroleum Exporting Countries sets a

production quota for crude oil in order to "maintain" the price of crude oil in
world markets.

How are they similar to and different from the effects of an equivalent
import tariff ?
Similar: Both of these interventions in the market is detrimental to the
consumer as it will result in an increase in price. The first will be a direct
increase since the cost of the product will have increased, the second will result
in the market price to increase because of the artificial shortage that has been
created by the quota.

Both of these methods also increase the probability for smuggling

and corruption to come into being and though useful as short term instruments
to solve a particular problem have long term negative impacts on the economy
such as protecting inefficient producers locally at the expense of the consumer.

Different: . The difference between an import tariff and an import quota is

relatively simple - a tariff is an amount that the importer needs to pay based on
a percentage of the value of the goods.
 - Tariffs and quotas are both imposed on import and export products by the
government of a country. Tariffs and quotas both serve the
purpose of protecting the domestic industry of a country in restricting the
quantity of products imported or exported and also earn revenue for the
government

How does the revenue effect of an import quota different from that of a
tariff ?
- A tariff is a tax on import able whereas an import quota is a direct quantitative
restriction on trade which places an absolute limit upon the volume of imports
that can be imported within a fixed time span.

Effects of Tariff:

Effects of Quota:
- Because the quota raises the domestic price above the world price,
+ domestic buyers of the good are worse off, and
+ domestic sellers of the good are better off.
- Import license holders are better off
+ They make a profit from buying at the world price and selling at the higher domestic
price.
Definition of import Quota:
A limit on the quantity of imports
Can be mandatory or voluntary, and can be legislated or negotiated with foreign
governments
Tariff Rate Quota (TRQ)—allows a certain quantity of a good into a country at a low or zero
tariff rate, but applies higher tariff to quantities exceeding the quota.
Tariffs vs. Quotas:
If the government sells import licenses for full value,
+ the revenue would equal that from an equivalent tariff and
+ tariffs and quotas would have identical results.
+ Otherwise, quotas are worse than tariffs. Quotas will benefit for the Quota License
holder They become a temporary monopoly in importing the product. It cause deadwe
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? Why does dumping usually lead to trade restrictions? Analyze one
case study many government have used: China with steel industry, solar
panel.
What is meant by dumping?
Dumping is a term used in the context of international trade. It's when a country or
company exports a product at a price that is lower in the foreign importing market
than the price in the exporter's domestic market. Because dumping
typically involves substantial export volumes of a product, it often endangers the
financial viability of the product's manufacturers or producers in the importing
nation.
Ex :
Low-cost Canadian lumber has kept U.S. new home prices low. A 20% tariff
would raise prices and possibly hurt new home buyers.
What are the different types of dumping?
- Sporadic dumping: Manufactures practice sporadic dumping to get rid of
excess merchandise. A manufacturer with unsold inventories avoids starting
 a price war in the home market to preserve his competitive position. Excess
supplies are destroyed. Example, Asian farmers dumped small chickens into
the sea. Another method is to have the excess supply dumped in a foreign
market where the product is normally not sold. Thus, sporadic dumping
is aimed at liquidating excess stocks that may arise occasionally.
Predatory dumping (Intermittent dumping): : is the temporary sale of a
commodity at below cost or at a lower price aboard in order to drive foreign
producers out of business, after which prices are raised to take advantage of the
newly acquired monopoly power aboard
- Ex : Hitachi was accused of following predatory dumping for its EPROM
(electrically programmable read only memory) chips.
Persistent dumping (Long period dumping): is the Continuous tendency of a
domestic monopolist to maximize total profits by selling the commodity at higher prices in
the domestic market (which is insulated by transportation cost and trade barriers) than
internationally (where it must meet the competition of foreign producers).
- Ex : sold consumer electronics at high prices in its own country. This is
because it has no foreign competition. But it lowered prices in the U.S
market in order to maintain market share.
Reverse dumping: Reverse dumping is followed in the overseas
markets where the demand is less elastic. Such markets tolerate a higher price.
Thus, dumping is done in the manufacturer’s home market by selling locally at
a lower price.
Why is dumping undertaken?
- Dumping to eliminate competitors in the market from which to monopolize;
- Sell at low prices in importing countries to gain market share;
- Sell low prices to earn strong foreign currencies ...
- Sometimes dumping is undesirable because manufacturers and exporters are
unable to sell products, supply exceeds demand, production is delayed, and
storage products can be damaged for a long time ... sell off goods to recover part
of capital.
What conditions are required to make dumping possible?
- The fragmented market, the buyers in the domestic market cannot easily buy the dumped
commodity from the foreign market and bring it into the domestic market.
- 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.
- The imperfect competitive market, the imperfectly competitive market is where the
supplier gives decisions on their product’s price instead of the price decided by the supply
and demand on the market.

Why does dumping usually lead to trade restrictions?

Effects on Importing Country:
- If a producer dumps his commodity abroad for a short period, then the
industry of the importing country is affected for a short while. Due to the
low price of the dumped commodity, the industry of that country has to
incur a loss for some time because less quantity of its commodity is sold
- Dumping is harmful for the importing country if it continues for a long
period. This is because it takes time for changing production in the
importing country and its domestic industry is not able to bear competition.
But when cheap imports stop or dumping does not exist, it becomes difficult
to change the production again.
- If the dumped commodity is a consumer good, the demand of the people in
the importing country will change for the cheap goods. When dumping
stops, this demand will reverse, thereby changing the tastes of the people
which will be harmful for the economy.

- If the dumped commodities are cheap capital goods, they will lead to the
setting up of a now industry. But when the imports of such commodities
stop, this industry will also be shut down. Thus ultimately, the importing
country will incur a loss.
- If the monopolist dumps the commodity for removing his competitors from
the foreign market, the importing country gets the benefit of cheap
commodity in the beginning. But after competition ends and he sells the
same commodity at a high monopoly price, the importing country incurs a
loss because now it has to pay a high price.
 - If a tariff duty is imposed to force the dumper to equalise prices of the
domestic and imported commodity, it will not benefit the importing country.
- But a lower fixed tariff duty benefits the importing country if the dumper
delivers the commodity at a lower price.
Effects on Exporting Country:
- When domestic consumers have to buy the monopolistic commodity at a
high price through dumping, there is loss in their consumers’ surplus. But if
a monopolist produces more commodities in order to dump it in another
country, consumers benefit. This is because with more production of the
commodity, the marginal cost falls. As a result, the price of the commodity
will be less than the monopoly price without dumping.
- The exporting country also benefits from dumping when the monopolist
produces more commodity. Consequently, the demand for the required
inputs such as raw materials, etc. for the production of that commodity
increases, thereby expanding the means of employment in the country.
- The exporting country earns foreign currency by selling its commodity in
large quantity in the foreign market through dumping. As a result, its
balance of trade improves.
Ex : The US dumped Vietnamese shrimp. Shrimp imported from Vietnam will
be subject to the tax rate of 1.42% instead of 1.16% as before.

Analyze one case study many government have used: China with steel
industry, solar panel. (Phân tích một trường hợp nghiên cứu nhiều chính phủ
đã sử dụng: Trung Quốc với ngành thép, pin mặt trời.)
US anti-dumping tax on Chinese solar panels
The US Department of Commerce has imposed new tariff duties of up to 165.04%
on crystalline silicon photovoltaic (PV) solar imports from China , after it found
panels were being sold too cheaply to the US market. China’s Trina Solar faces the
lowest duty of 26.33% for its products, while Rensola/Jinko received a duty of
58.87%. A list of 42 other Chinese exporters, including Canadian Solar
International and Hainan Yingli New Energy Resources, were given a rate of
42.33%. The highest rates, of 165.04%, were reserved for the companies that did
not co-operate with the investigation.
Under the preliminary ruling, Taiwanese producers will face anti-dumping duties
of up to 44.18%.
China’s Commerce Ministry criticised the decision on Monday, warning that it will
ultimately hurt the downstream solar industries.
“Frequent trade remedy measures taken by the US [solar] industry cannot solve
their own development problems. [we] hope the US cautiously handles the
investigation and ends the investigation procedures as soon as possible to create a
good environment to promote competition in the global [solar] industry,” a
spokesman for the Chinese Department of Commerce said.
The Coalition for Affordable Solar Energy (CASE) also criticised the US decision,
and said the duties would hinder the deployment of renewable energy by raising
the prices of solar products.
In 2013, the US imported crystalline silicon photovoltaic solar products worth $1.5
billion from China and $656.8 million from Taiwan, according to US data.
The US Department of Commerce will make its final decision on the duties by
December this year, and the US International Trade Commission will make a final
ruling on the move by next January.
11. Why do nations subsidize exports? To what problems do these subsidies
give rise ? Analyze few industries that China use the exports subsidize.
What are the major forms of subsidies that governments grant to domestic
producers?
A subsidy may provide import-competing producers the same degree of
protection as tariff or quota but at a lower cost in terms of national welfare. It
could have long-term benefits for the economy. Explain.
Why do nations subsidize exports?

• 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 .

To what problems do these subsidies give rise ?

• It would be expensive; the government would have to raise a significant
amount of tax revenue.
 • There is an argument that when government subsidises firms, it reduces
incentives for firms to cut costs. For this reason, it is argued that a
government should avoid subsidising firms unless there is a clear social
benefit to subsidising firms. For example, a firm that develops
environmentally friendly technology may be able to give society a net
positive externality – and this could justify a government subsidy.

Analyze few industries that China use the exports subsidize.

China hidden shipbuilding subsidize and their impact on its industrial dominance :
Chinese firms have rapidly come to dominate a number of capital-intensive
industries, such as steel, auto parts, solar panels, and shipbuilding. In 2006, for
example, China identified shipbuilding as a ‘strategic industry’ and introduced a
plan for its development. In a short time, China’s market share had doubled from
25% to 50%, leaving Japan, South Korea and Europe trailing behind.The share of
labor intensive products in Chinese exports fell from 37% to 14% between 2000
and 2010 . On a monthly basis, in 2011 the US imported advanced-technology
products from China 560% more than it exported to China. By contrast, the
monthly US-China trade surplus in scrap (used as raw material) grew by 1187%
between 2000 and 2010 . (U.S.-China Economic and Security Review Commission
(2011)
China’s steel industry :
Since it joined the WTO in 2001, China has frequently drawn
complaints that its exports are being “dumped,” or sold at unfairly
cheap prices on foreign markets.Chinese Embassy spokesman Zhu
Haiquan said Beijing is committed to WTO regulations.“China has
been firmly committed to the WTO rules, continuously expanded its
opening-up, deepened the reform of its foreign trade system,
improved its foreign trade legal system, reduced trade barriers and
administrative intervention,” Zhu said in an email. U.S. Steel Corp
President and Chief Executive Mario Long said he was cautious about
the latest Chinese move.“People can say whatever they want, and I
think China has been saying a lot of things for the past couple of
decades,” Longhi told reporters in Washington. “You need to ask
yourself what, from a practical perspective, is really happening. We
need to see the proof in actions, not just in verbiage.”The U.S. steel
industry is under huge pressure this yearfrom cheap imports, a strong
 dollar, and falling oil prices, which have decimated demand for steel
tubes used by the oil and gas industry.China still has other forms of
support for industry in place, including relatively cheap and easy
credit from state banks, state-regulated power prices that have often
favored industry, and low prices for other inputs such as water.

China has approximately 10 times the steelmaking capacity of the United States. It has
been accused of dumping cheap steel on the global market to beat out competitors by the
subsidize that China government used. The Chinese government’s industrial policies to
develop downstream industries in the specialty steel sector and the support measures
used to carry out those policies have had a devastating impact on domestic industries in
the United States and their workers.
China cheats by subsidizing manufacturing with cheap loans and cheap energy. Because of
its cheating, it already dominates industries ranging from ship production and refrigerators
to color TV sets, air conditioners, and computers.

What are the major forms of subsidies that governments grant to domestic
producers?
Domestic and export subsidies, tax concessions, low interest rate loans, loan
guarantees, and insurance arrangements.
Each year, the U.S. federal government subsidizes a wide range of economic
activities that it wants to promote. What exactly are subsidies? The definition may
be broader than you think. Find out about the most well-known subsidies, the
history of these subsidies, and some of their costs.

Farm Subsidies

- Many experts argue that U.S. farms don't even need subsidies. After all, they
are located in one of the world's most favorable geographic regions. It
has rich soil, abundant rainfall, and access to rivers for irrigation when
rainfall fails. Today's farms have all the advantages of modern business.
They have highly trained labor, computerized equipment, and cutting-edge
chemical research in fertilizers and seeds.

Oil Subsidies
 - In March 2012, President Obama called for an end to the $4 billion in oil
industry subsidies. Some estimates indicated that the real level of oil
industry subsidies is higher, between $10 and $40 billion. At the same
time, oil company profits benefited when oil prices reached a record of $145
a barrel in 2008.
- Volumetric Ethanol Excise Tax Credit - $31 billion.
- Intangible Drilling Costs - $8.9 billion.
- Oil and Gas Royalty Relief - $6.9 billion.
- Percentage Depletion Allowance - $4.327 billion.
- Refinery Equipment Deductions - $2.3 billion.
- Geological and Geophysical Costs Tax Credit - $698 million.
- Natural Gas Distribution Lines - $500 million.
- Ultradeepwater and Unconventional Natural Gas and other Petroleum Resou
rces R&D - $230 million.
- Passive Loss Exemption - $105 million.
- Unconventional Fossil Technology Program - $100 million.
- Other subsidies - $161 millio

Ethanol Subsidies

- Between 1979 and 2010, the corn industry received $20 billion in federal
subsidies. Congress wanted to divert production into ethanol, a component
of gasoline. The subsidies were meant to help producers meet a 2005 federal
law that required 7.5 billion gallons of renewable fuel to be produced by
2012. In 2007, a revision increased the goal to 36 billion gallons by 2022.
Only 6.25 billion gallons were produced in 2011.

Export Subsidies

- The WTO bans export subsidies. But it allows two U.S. federal
government export subsidy programs. They help U.S. farmers compete with
other countries' subsidized exports. The U.S. Department of Agriculture
promotes:

Housing Subsidies

- Housing subsidies promote homeownership and support the construction

industry. They total about $15 billion a year
A subsidy may provide import-competing producers the same degree of
protection as tariff or quota but at a lower cost in terms of national welfare. It
could have long-term benefits for the economy. Explain.

Why do nations subsidize exports?

• 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 .

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

Protection of trade is a term in international economics that refers to the

raising of a number of standards in areas such as quality, hygiene, safety,
labor, environment, origin, etc. imposing high import and export duties on
certain imports to protect the industry that produces similar items (or
services) in a given country. Trade protection brings temporary benefits to
domestic producers, ensuring the social goal of securing jobs for certain
groups of workers. The downside is that it gives domestic producers the
opportunity to speculate on selling prices (or service provision) in the most
beneficial way for them or to take measures to improve quality and lower
costs. product. This brings damage to consumers in terms of long-term
goals. => Agree
Ex : American president Donald Trump signed : “ Buy Amercan, hired
American “ to support to solve employment problems. In the US, to protect
their rights, they applying 80% of the 31,000 “Trade protection” measures in
the world today. In particular, new trade protection measures have been
 developed, such as enforcing cheap US dollar policies , increasing monetary
easing, expanding QE packages, super low interest rates, improving quality
standards.

What are the benefits and arguments against Protectionism ?

Benefit:
If a country is trying to grow strong in a new industry, tariffs will protect it from foreign
competitors. That gives the new industry’s companies time to develop their competitive
advantages. give ailing domestic industries a chance to recover and prosper
Protectionism also temporarily creates jobs for domestic workers. The protection of tariffs,
quotas, or subsidies allows domestic companies to hire locally. This benefit ends once
other countries retaliate by erecting protectionism.
Reduce the trade deficits.
Arguments, disadvantage:
• Stagnation of technological advancements: As domestic producers don’t need to worry
about foreign competition, they have no incentive to innovate or spend resources on
research and development (R&D) of new products.
• Market Distortion and loss of Economic Efficiency: Protectionism can be an ineffective
and costly means of sustaining jobs and supporting domestic economic growth
• Reduction in Market Access for Producers: Export subsidies depress world prices and
damage output, profits, investment, and jobs in many lower and middle-income
developing countries that rely heavily on exporting primary and manufactured goods for
their growth.
• Extra Costs for Exporters: For goods that are produced globally, high tariffs and other
barriers on imports act as a tax on exports, damaging economies, and jobs, rather than
protecting them. For example, a tariff on imported steel can lead to higher costs and lower
profits for car manufacturers and the construction industry.
• Adverse Effects on Poverty: Higher prices from tariffs tend to hit those on lower incomes
hardest because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on products that
lower-income families spend a higher share of their income. Tariffs can therefore lead to
a rise in relative poverty.
• Retaliation & Trade Wars: There is the danger that one country imposing import controls
will lead to retaliatory action by another.
• Limited choices for consumers: Consumers have access to fewer goods in the market as
a result of limitations on foreign goods.
• Increase in prices (due to lack of competition): Consumers will need to pay more without
seeing any significant improvement in the product.
• Economic isolation: It often leads to political and cultural isolation, which, in turn, leads
to even more economic isolation
Types of Protectionism (giải thích định nghĩa thêm)
1. Tariffs – This is a tax on imports.
2. Quotas – This is a physical limit on the quantity of imports
3. Embargoes – This is a total ban on a good, this may be done to stop dangerous
substances
4. Subsidies – If a government subsidizes domestic production this gives them an unfair
advantage over competitors.
5. Administrative barriers – Making it more difficult to trade, e.g. imposing minimum
environmental standards.
6. Competitive devaluation – manipulating currency to make exports cheaper.

• What are the main argument of Trump against Free Trade

(use tariff on imported goods from China)
- Trump is applying pressure to try to force China to narrow the trade
deficit – the gap between imports and exports – between the two
countries. He complains that China buys fewer US goods than the US
buys from China, a gap worth $419.5bn last year. He has also accused
Chinese firms of stealing US companies’ intellectual property and called
for Beijing to alter its rules.
- Trump is threatening tariffs of 10% on $300bn of Chinese imports. The
White House already levies tariffs of 25% on $250bn of Chinese goods.
 Adding both together would mean roughly all Chinese imports to the US
face higher taxes. China sold $539.7bn of goods to the US last year.
- Beijing has retaliated with tariffs of up to 25% on US goods worth
$113bn. China is constrained by how much further it can go, given that
total imports from the US were worth $120.1bn last year. However, the
trade war has extended beyond tariffs before, with rules to make life
difficult for US or Chinese companies, such as the US blacklisting the
Chinese technology company Huawei.
- The International Monetary Fund has said the US-China trade war is
dragging on global growth. Last month it said the conflict would cut
growth by 0.1 percentage points in 2019 and 2020 from its April
forecasts, at 3.2% and 3.5% respectively. International trade growth has
stalled and business investment has been paused because of the
uncertainty over trade. Factory output has stalled in several countries
including the UK, Germany and Italy, with a knock-on impact on growth.
Central banks including the US Federal Reserve and European Central
Bank are under pressure to cut interest rates as a consequence.

What are the current trends from the protectionism wave ? You could give
some examples these trends ?

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

Ex : The European Union imposes significant tariff rates on a range of agricultural

markets, seeking to protect the European farmers from imported agricultural
goods. The EU CAP policy influences food prices by initially affecting the
producer prices. Producers have to impose a higher price, thereby increasing
consumer prices and discouraging consumption. The EU subsidizes the European
farmers so that they produce more output and become competitive with their
foreign peers. The subsidies increase consumption because producers can charge
more competitive prices. At this stage, the size of the market is an important factor
Part 3: Economic Integration : FTA – Common market
13. What are the main drivers of Globalization? What are the
benefits and challenges of Globalization.?
What are the main drivers of Globalization?
- Technological drivers : Technology shaped and set the foundation for
modern globalization. Innovations in the transportation technology
revolutionized the industry. The most important developments among
these are the commercial jet aircraft and the concept of containerisation
in the late 1970s and 1980s. Inventions in the area of microprocessors
and telecommunications enabled highly effective computing and
communication at a low-cost level. Finally the rapid growth of the
Internet is the latest technological driver that created global e-business
and e-commerce.
- Political drivers : Liberalized trading rules and deregulated markets lead
to lowered tariffs and allowed 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.
- Market drivers : As domestic markets become more and more saturated,
the opportunities for growth are limited and global expanding is a way
most organizations choose to overcome this situation. Common customer
needs and the opportunity to use global marketing channels and transfer
marketing to some extent are also incentives to choose
internationalization. (Ferrier, 2004)
- 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.
- Competitive drivers : With the global market, global inter-firm
competition increases and organizations are forced to “play”
international. Strong interdependences among countries and high two-
way trades and FDI actions also support this driver.
What are the benefits and challenges of Globalization.?
Benefits :
- Improved Living Standards : One of the main benefits of globalization is
the massive rise in living standards in developing nations. According to
the World Bank, extreme poverty has been reduced by 35% since 1990.
Further, the first Millennium Development Goal target to cut the 1990
poverty rate in half by 2015 was achieved five years ahead of schedule,
in 2010. Nearly 1.1 billion people have moved out of extreme poverty
since then. These same countries also have access to huge technological
improvements without going through the difficulties that developed
nations have experienced. For example, developing countries in
Africa did not have an extensive land-line phone network before mobile
phones permeated the market. Many African markets skipped landlines,
avoiding the huge setup costs. In developed nations, phone companies
still maintain aging, outdated systems.
- Increased Creativity and Innovation : Global competition can
encourage creativity and innovation, helping companies to stay one step
ahead of competitors. This drive toward quality and price can improve
products and keeps costs low. The free movement of labor and capital
means that ideas from developing nations can drive innovation around
the world. Before globalization, getting funding for an idea in an
underdeveloped country was extremely difficult. Since communications
have evolved, individuals without access to funding can still make a
difference in both their home market and around the world.
- Lowered Costs for Goods and Services : Lowered costs help people in
both developing and developed countries live better on less money. Huge
cost reductions from inexpensive manufacturing and logistics have
lowered the cost of living for everyone around the world. The world trade
system has also created an unprecedented variety of food at lower costs.
- Easy Access to Foreign Culture : Globalization has also made it easier to
access foreign culture, including food, movies, music, and art. The free
flow of people, goods, and information has made it possible to have Thai
 food delivered to your apartment as you listen to your favorite
Norwegian death metal band and stream the latest Brazilian movie.

Challenges :
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 the globalization? Describe the benefits and challenges of current
wave of Globalization for Vietnam’s economy.
What is the globalization?
- Globalization is a process of interaction and integration among the
people, companies, and governments of different nations, a process
driven by international trade and investment and aided by information
technology. This process has effects on the environment, on culture, on
 political systems, on economic development and prosperity, and
on human physical well-being in societies around the world.
- The term is most frequently used in reference to creating an integrated
global economy marked by free trade, the free flow of capital and
corporate use of foreign labor markets to maximize returns. However,
some use the term globalization more broadly, applying it to the
movement of people, knowledge and technology across international
borders; some also apply it to the free flow of cultural, environmental and
political discourse.
Describe the benefits and challenges of current wave of Globalization
for Vietnam’s economy.
- Vietnam, since the country began the “Doi Moi” process in 1986, the
economy has gradually integrated into global market. With the guideline
“Vietnam is prepared to be a friend and reliable partner of all countries in
the world community, striving for peace, independence and
development.” Vietnam has gradually joined international organizations
and economic institutions as well as cooperated with other countries for
mutual development. “Vietnam re-joined the World Bank (WB),
International Monetary Fund (IMF) and Asian Development Bank (ADB)
in 1992 and 1993. The year 1995 saw many significant external
economic events. Vietnam joined the ASEAN and committed to
implement the ASEAN Free Trade Area (AFTA), signed a Cooperative
Agreement with the European Union (EU) and normalized relations with
the US and applied for WTO membership. In 1998 Vietnam officially
became a member of the Asia Pacific Economic Cooperation (APEC)”
Benefits :

- Increasing export revenues : As a result of integrating into the regional

and global market, export revenues have increased continually since
1990, speeded up sine 1995 when Vietnam joined ASEAN and grew
sharply since Vietnam joined WTO in 2007. The growth in export
revenues is illustrated in the following table. Vietnam has become one of
the ten largest exporters of textiles and garments in the world after
earning US$7.7 billion from exporting these commodities in 2007. The
US market made up 56 percent of this total turnover, followed by the EU
(US$1.45 – 1.65 billion) and Japan (US$700 million.)
- 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.
Although FDI commitments dropped last year to $21.4 billion as a result
of the global financial crisis, the figure was still at the same level as pre-
crisis 2007.
- Increase in enterprises’ awareness, adaptation and performance :
Thousands of Vietnamese enterprises in different fields such as textile,
transport, service, telecommunication, food production have met
international standards: ISO 9000, ISO 14000. Furthermore, besides
traditional markets such as the US, Japan, they have reached new markets
such as Europe, the Middle East, and Africa
- More favorable legal system for trading activities : Vietnamese
enterprises have a healthy environment for development in foreign
markets. If there are trade disputes, they can be treated under WTO’s
Dispute Settlement Mechanism. “Vietnamese enterprises will be judged
by the WTO international court, which means we have more advantages
to protect our rights.”

Challeges :

- Low competitiveness of nation, enterprises and products

- Issues relating to macro policies and administrative procedure
- Difficulties in agricultural sector

15 . What are the benefits and challenges of ASEAN Economic

Community ? Describe the opportunities and economic benefits of
Vietnam in the AEC.
What are the benefits and challenges of ASEAN Economic
Community ?

Challenges :

- Geopolitical stability and regional relationships : ASEAN was formed

in 1967, with an agreement by the five original founding nations –
Indonesia, Malaysia, the Philippines, Singapore and Thailand – to
organize for the sake of peace, stability and cooperation. ASEAN states
are located at a strategically important junction, bordering two of the
world’s most populous economic powers, China and India, which makes
ASEAN a focal point for both regional and global powers. ASEAN
 member states are also enmeshed in territorial disputes with interested
powers. China’s claim to territories in the South China Sea, for example,
overlaps with competing claims by Brunei Darussalam, Malaysia, the
Philippines and Viet Nam. While there are challenges, closer
coordination and common goals among ASEAN governments can help
promote stability and lessen the prospect of conflicts.
- Governance challenges for businesses : ASEAN is home to a wide
variety of businesses, including a number of huge family-owned
conglomerates and state-linked enterprises, like the Central Group in
Thailand, Salim Group in Indonesia, state-linked Singtel in Singapore,
and Vinamilk in Viet Nam. Yet small- and medium-sized enterprises
(SMEs) together with micro-entrepreneurs make up at least 89% of
business activity in the region.
- New business models : he ASEAN region offers a growing market of
more than 600 million consumers. The region’s GDP per capita measures
about $6,500 (excluding Singapore, the region’s most advanced
economy), which is less than China but more than India. Consumers in
the region are price-sensitive and demanding, resulting in local
businesses with low margins and low labour costs – formidable
competitors to foreign rivals.
- Changing demographics : ASEAN is home to young, literate and
increasingly urbanized and aspirational populations. Consumers in the
region are demanding higher-quality products and services and presents
an opportunity for businesses hoping to tap growing consumer markets.
- Inclusive growth and sustainable development : ASEAN member
states span a wide spectrum of income levels, ranging from Singapore’s
GDP per capita of $57,714 to Cambodia’s $1,384 and Myanmar’s $1,298
in 2017. In recent years, lower-income states have made important gains.
However, regional economic gains have fallen short of erasing significant
differences among ASEAN member states. The World Bank’s most
recent 2017 edition of the Global Findex showed that while 98% of
adults in Singapore and 85% in Malaysia had a bank account, just 22% of
Cambodian adults and 26% Burmese adults did. These disparities
illustrate the need for broad, robust investment in infrastructure, financial
institutions and strategic planning.
- Regional digital economy : South-East Asia is home to the world’s
fastest growing population of internet users, with more than 125,000 new
users forecast to come online every day through the year 2020. Most of
that growth will come via mobile use, and it has the potential to stimulate
 new industries, leapfrog legacy business models and fundamentally
change the lives of millions of people. However, technology adoption
differs greatly among ASEAN countries, and there is a need to build
regional internet infrastructure.
- Economic integration : With the launch of the ASEAN Economic
Community (AEC) in 2015, ASEAN member states have formed a
tighter, more integrated group. The AEC aims to foster a single market
and industrial production capacity, increase competitiveness, support
inclusive growth and further integrate the region into the global
economy. In addition, a revised Trans-Pacific Partnership (TPP) was
signed by ASEAN countries, Australia, Canada and others in 2018,
following the US’s withdrawal from the agreement.

Benefits :
- Achieving the objectives of AEC translates to a better investment climate
in ASEAN. The AEC facilitates the implementation of trade, services,
investment, and other reforms necessary in each ASEAN Member States,
thereby improving each country’s location offers. At the regional level,
the AEC is critical in developing the ASEAN as a region and making it
one of the most competitive economic blocs in the world.
- Facilitate the movement of goods, services, investments, capital, and
skills.
- Increase trade (goods and services) and investment among Member
States.
- Promote and expand regional production sharing and network.
- Promote higher level of transparency and predictability.
Why Vietnam actively participates in many FTAs? What are the benefits
and costs of Vietnam when we sign FTAs and join WTO ?
What are the challenges for Vietnam in this period: trade tension between
US- China ?

Why Vietnam actively participates in many FTAs? What are the benefits
and costs of Vietnam when we sign FTAs and join WTO ?
Connecting through these Agreements will enable Vietnamese
enterprises to promote economic efficiency on a scale to increase
productivity and reduce production costs, leading to more competitive
commodity prices. Chain linkages between Vietnamese businesses and
 those of ASEAN, EU, CPTPP countries ... will also be formed through
labor division, intermediate goods and services exchange, thereby
creating many More business opportunities for Vietnamese businesses.
This process will support Vietnamese businesses to develop together to
meet the demand of consuming goods and services in the region as well
as towards more developed markets such as the EU, Japan, Korea, and
Canada ... ” ,

- Joining FTAs has contributed to raising Vietnamese exports. It is evident

that the exports reached only US$ 5.4 billion in 1995, US$ 14 billion in
2000, US$48 billion in 2007 and US$ 213 billion in 2017.
- Typically, for the Textile and Garment sector, when exporting to the US
market, and if Vietnam was not a WTO member, the tariff on finished
garments would be 150% higher than those of WTO members, If being a
WTO member, the tariff shall be 25% average. If there is an FTA with
the United States, the tariff shall reduce to 0-5% compared to 25%.
- FTAs offer many other benefits, notably ensuring equal accessibility. In
FTAs, especially new-generation FTAs, are very interested in equality.
This requires that the State has to create equality in the domestic market,
between state-owned enterprises and private-owned enterprise, thereby
assisting private enterprises to access resources more equally. FTAs also
help Vietnam improve its infrastructure, attract more investment capital;
accelerate administrative reform; abolish barriers for the market access.
- The benefits of the free trade agreements will enable Vietnam’s
economic development to continue to shift away from exporting low-tech
manufacturing products and primary goods to more complex high-tech
goods like electronics, machinery, vehicles and medical devices.
- Partnership with foreign firms that can transfer the knowledge and
technology needed to make the jump into higher valued-added
production. An example of this is the recently launched VSmart phone
manufactured by Vietnamese conglomerate Vingroup.
What are the challenges for Vietnam in this period: trade tension
between US- China ?
Challeges :
Vietnam’s Economy Gets Boost from US-China Trade War
 - Vietnam is expecting solid growth this year as it receives an economic
lift from the U.S.-China trade war.
- Vietnamese officials have predicted the country’s $300 billion economy
will grow between 6.6 to 6.8 percent this year. SSI Research, based in
Hanoi, reported the estimate.
- The research company said strength in manufacturing and exports were
mainly responsible for the 2019 prediction. Both areas have experienced
growth over the past year as companies moved production to Vietnam
from China.
- Vietnam’s past economy, measured by gross domestic product, or GDP,
proved to be larger than had been thought. “They found that they
understated their GDP itself,” Singapore-based economist Song Seng
Wun told VOA.
- Earnings results from some companies were not included in earlier GDP
estimates. So in August, the government raised its reported GDP by 25.4
percent for money discovered between 2010 and 2017, Vietnamese
media reported.
- Vietnam has depended heavily on export manufacturing since the late
1980s. That policy has helped Vietnam become one of Asia’s fastest-
growing economies.
- Some companies facing U.S. tariffs on goods shipped from China are
moving business to Vietnam. Some of those companies can produce and
ship the same goods from Vietnam without paying U.S. tariffs on a total
of $550 billion in goods now made in China.

Ex :

Chinese-based wireless earphone maker GoerTek. The company plans to

move production of Apple AirPods to Vietnam for an investment of $260
million, SSI Research said in July. In another case, Google plans to move
Pixel smartphone production from China to Vietnam, the Nikkei Asian
Review reported in August. Google has not commented on the report.

16. Present the different level of Economic Integration? What is the advantage
and benefits of FTA, and Custom Union for one country? What are the
principles of WTO and how it differ from a FTA?
Present the different level of Economic Integration?
- Free trade. Tariffs (a tax imposed on imported goods) between member
countries are significantly reduced, some abolished altogether. Each
 member country keeps its own tariffs in regard to third countries. The
general goal of free trade agreements is to develop economies of scale
and comparative advantages, which promotes economic efficiency.
- Custom union. Sets common external tariffs among member countries,
implying that the same tariffs are applied to third countries; a common
trade regime is achieved. Custom unions are particularly useful to level
the competitive playing field and address the problem of re-exports
(using preferential tariffs in one country to enter another country).
- 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 an uniform (single) market. There is
also free movements of labor, enabling workers in a member country is
able 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, such as with the European Union
(Euro).
- Political union. Represents the potentially most advanced form of
integration with a common government and were the sovereignty of
member country is significantly reduced. Only found within nation states,
such as federations where there is a central government and regions
having a level of autonomy.
What is the advantage and benefits of FTA, and Custom Union for
one country?
Free trade agreements are designed to increase trade between two or more countries.
Increased international trade has the following six main advantages:
1.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.2
2.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.
3.Lower Government Spending: Many governments subsidize local industries. After the
trade agreement removes subsidies, those funds can be put to better use.3
4.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.4
5.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.5
6.Technology Transfer: Local companies also receive access to the latest technologies from
their multinational partners. As local economies grow, so do job opportunities. Multi-
national companies provide job training to local employees
The advantages of a customs union
- Increased trade flows
Like an FTA, the main positive effect of a customs union is that trade between members is
likely to increase.
However, while the removal of trade barriers between members will encourage trade
between them it is likely to reduce trade between members and non-members. How
beneficial this is depending upon whether membership of a customs union increases or
decreases the efficient allocation of scarce resources and the satisfaction of the wants and
needs of consumers and producers.
- Trade creation vs trade diversion
The effect of a customs union is commonly explained in terms of trade creation and trade
diversion. With trade creation, more efficient members can now sell more to less efficient
(domestic) members. However, with trade diversion, more efficient non-members may
now sell fewer goods to members, creating an opportunity for less efficient members to
capitalize by selling more within the union.
Following the work of Jacob Viner, economists often start their analysis of customs unions
by assessing whether the gains from trade creation outweigh the losses from trade
diversion. If they do, then membership of a customs union will increase the welfare of
member countries.
- Solving the problem of trade deflection
One of the strongest arguments for a customs union (over a simple free-trade agreement)
is that it solves the problem of trade deflection. Trade deflection occurs when non -
members ship their goods to a low tariff FTA member (or set up a subsidiary in the low
tariff country) and then re-ship to a high tariff FTA member. Hence, without a unified
external tariff, trade flows would become distorted.
For example, assuming Europe operated a simple FTA, rather than a customs union, and if
Germany imposes a high 40% tariff on Japanese cars, while France imposes just a 10%
tariff, Japan would export its cars to French car dealers, and then re-sell them to Germany
on a free-trade basis. This trade deflection is avoided if Germany and France (and others)
form a customs union.
- Closer integration and cooperation
Finally, the establishment of a customs union may pave the way for closer economic
integration and political collaboration, including the formation of a single internal market,
(common market) monetary union, and fiscal union. This is, of course, something that may
generate as many new problems as it solves existing ones.

What are the principles of WTO and how it differ from a FTA?
- Trade without discrimination
+Most-favoured-nation (MFN): treating other people equally :
+ National treatment: Treating foreigners and locals equally

- Freer trade: gradually, through negotiation.

- Predictability: through binding and transparency

- Promoting fair competition

- Encouraging development and economic reform

- How is WHO different from FTA?
 - - The WTO agreements are lengthy and complex because they are legal texts
covering a wide range of activities. They deal with: agriculture, textiles and
clothing, banking, telecommunications, government purchases, industrial
standards and product safety, food sanitation regulations, intellectual property,
and much more.
- - A free trade agreement is a pact between two or more nations to reduce
barriers to imports and exports among them. Under a free trade policy, goods
and services can be bought and sold across international borders with little or
no government tariffs, quotas, subsidies, or prohibitions to inhibit their
exchange.

17. Present the evolution of International Monetary System: From

The international monetary system has gone through four stages in its evolution:
(1) the gold standard (1880–1914); (2) the gold-exchange standard (1925–1933);
(3) the Bretton Woods system (1944–1971); and (4) the Jamaica system, also
known as the floating exchange rate system (1976–present)…
 Gold standard (1870-1914) + earlier : Until the 1870s, most
monetary systems were based on a bimetallic standard. Only Britain
was on the gold standard, after Sir Isaac Newton in his capacity as
Master of the Mint, set the wrong gold-silver price ratio in 1717 and
drove silver out of circulation. But by 1870 Britain had become the
world’s preeminent commercial power, creating an incentive for her
trading partners to adopt her mono-metallic standard. After Germany
went onto gold in 1871 . and the US in 1873, the preponderance of
the world’s industrial countries followed suit, such that by 1900 only
China and a few Central American countries remained on silver. The
gold standard ensured stable exchange rates by fixing them in terms
of gold. Central banks were willing to convert paper currency for a
specified amount gold. The corollary of this was that countries could
not run persistent trade imbalances. When a country ran a trade
deficit, it experienced a gold outflow, initiating a self-correcting
chain of events known as the price-specie flow mechanism. With less
gold-backed money circulating internally, prices fell in the deficit
country, making imports more expensive and exports cheaper and
thus eliminating the deficit. But in practice, external adjustments
 typically took place in the absence of substantial movements of gold.
When a country ran a deficit, its central bank could intervene to
accelerate the adjustment of the money supply by adjusting its
discount rate. If the bank raised the rate to make discounting more
expensive, fewer intermediaries would be inclined to present bills for
discount to obtain cash from the central bank. This would decrease
the volume of domestic credit and restore the balance of payments
equilibrium without requiring gold flows.
 Gold exchange standard (1918-1939) : governments suspended the
gold standard during World War I, to increase the money supply and
pay for the war. Therefore, as in the case of all post-war eras, many
countries faced much higher inflation rates at the end of World War I.
 Bretton Woods (1944-1973) : 44 countries met to design a new
system in 1944  Established: International Monetary Fund (IMF) and
World Bank – IMF: maintain order in monetary system – World
Bank: promote general economic development – Fixed exchange rates
pegged to the US Dollar – US Dollar pegged to gold at $35 per ounce
– Countries maintained their currencies ± 1% of the fixed rate;
buy/sell own currency to maintain level
 Floating (1973-present) : A floating exchange rate is one that is
determined by supply and demand on the open market. A floating
exchange rate doesn't mean countries don't try to intervene and
manipulate their currency's price, since governments and central
banks regularly attempt to keep their currency price favorable for
international trade.
How can International Monetary System be classified ?
- Gold standard
- Gold exchange standard
- Fiduciary standard
- Floating exchange rate system
- Fixd exchange rate system
What was agreed on at the Jamaica Accords?
- The agreement was concluded after meetings 7–8 January 1976 at
Kingston, Jamaica by a committee of the board of governors of the IMF.
 The accords allowed the price of gold to float with respect to the U.S.
dollar and other currencies, albeit within a set of agreed constraints.
- Floating rates declared acceptable
- God abandoned as reserve asset
- IMF returned gold reserve to members of currents prices
- Proceeds placed in trust fund to help poor nations
- IMF quotas – member country contributions – increased, membership
now 182 countries
- Less- develop, non oil exporting countries give more access to IMF
- IMF continued its role of helping countries cop with macroeconomic and
exchange rate problems
New trade and the others
Trade creation effect ( welfare gain and replaced by another member’s lower-
cost import)
Trade diversion effect ( welfare loss and are replace by purchase from a higher -
cost suplier withing the union)