1. Why do Nations Trade?

Adam Smith detailed the benefits of specialization and division of labor in his book The Wealth
of Nations. Each worker could become an expert in a small area, greatly increasing efficiency
- Differences in the technology used in each country (i.e., differences in each
- country’s ability to manufacture products): The quality of goods and services is likely to
increases as competition encourages innovation, design and the application of new
technologies. Trade will also encourage the transfer of technology between countries.
- Trade increases competition and lowers world prices, which provides benefits to
consumers by raising the purchasing power of their own income, and leads a rise in
consumer surplus.
- Trade also breaks down domestic monopolies, which face competition from more
efficient foreign firms
- The proximity of countries to each other (i.e., how close they are to one another)
- Specialize in the manufacture and export of products can be produced most efficiently in
that country : trade encourages a country to specialize in producing only those goods and
services which it can produce more effectively and efficiently, and at the lowest
opportunity cost.
- Import products can be produced more efficiently in other countries.
- Trade means that more will be employed in the export sector and, through the multiplier
process, more jobs will be created across the whole economy.
2. What are some of the major argument for and against a Free Trade?
- All countries can benefit if each country specializes in production those goods it can
produce best and satisfy their other wants and needs by trading for them. This will lead to
an optimum and efficient utilization of resources and, hence, economy in production.
- Free trade can raise aggregate economic efficiency and aggregate economic welfare.
- Free trade enables countries to obtain goods at a cheaper price. This leads to a rise in the
standard of living of people of the world. Thus, free trade leads to higher production,
higher consumption and higher all-round international prosperity.
- Free trade will benefit a country even if it is less efficient than all other countries in every
industry.
- Accessibility of Domestically Produced Goods and Services: Free trade enables each
country to get commodities which it cannot produce at all or can only produce
inefficiently. Commodities and raw materials unavailable domestically can be procured
through free movement even at a low price.
- Free trade would cause world resources to be utilized most efficiently, maximizing world
welfare.
- Import products can be produced more efficiently in other countries
- Competitive Spirit: Free Trade keeps the spirit of competition of the economy. As there
exists the possibility of intense foreign competition under free trade, domestic producers
do not want to lose their grounds. Competition enhances efficiency. Moreover, it tends to
prevent domestic monopolies and free the consumers from exploitation

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 - Greater International Cooperation: Free trade safeguards against discrimination. Under
free trade, there- is no scope for cornering raw materials or commodities by any country.
Free trade can thus promote international peace and stability through economic and
political cooperation.
- Free from Interference: Free trade is free from bureaucratic interferences. Bureaucracy
and corruption are very much associated with unrestricted trade.
3. What are some of the major argument for and against a Free Trade?
- Governments do restrict free international trade in order to protect domestic industries
from foreign competition. The restriction of international trade is called protectionism.
- Supporters of "protectionist" laws claim that keeping out foreign goods will
+ Save jobs
+ Give ailing domestic industries a chance to recover and prosper
+ Reduce the trade deficits
+ More growth opportunities: Protectionism provides local industries with growth
opportunities until they can compete against more experienced firms in the international
market
+ Lower imports: Protectionist policies help reduce import levels and allow the country
to increase its trade balance.
+ More jobs: Higher employment rates result when domestic firms boost their workforce
+ Higher GDP: Protectionist policies tend to boost the economy’s GDP due to a rise in
domestic production
+ Protectionism can also prevent dumping
+ Protectionism makes domestic firms less competitive in the export market
+ Protectionism could improve a nation’s economic well-being is when a country has
monopoly power over a goods.
+Protectionism permits the new and upcoming firms to work and develop at an
acceptable rate. Because they will not be pressured by foreign, more experienced firms
4. What are the Consequences (Benefits and Costs) of Free Trade (Present: at
Individual/Firms/Nation)?
Individuals
- Consumption of better quality products with lower price: International trade enables a
country to consume things which either cannot be produced within its borders or
production may cost very high. Therefore it cost cheaper to import from other
countries through foreign trade.
- Consumption of diverse products: Imports and exports of different countries provides
opportunities to the consumer to buy and consume those goods which cannot be
produced in their own country. They therefor get a diversity in choice
Firms
- Greater business opportunities
- Greater profit
Nation

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 - Fast economic growth
- Job creation
Costs of International Trade
Individuals
- Loss of jobs employed in the less competitive industries
Firms
- Face stronger competition and may lose competitive edge : Increased
competition With more trade, domestic firms will face more competition from
abroad. Therefore, there will be more incentives to cut costs and increase
efficiency. It may prevent domestic monopolies from charging too high prices.
Nation
- Greater income disparity
- Possibility of environmental degradation in developing countries :
International trade help a country to utilize its resources to the maximum limit
. If the country does not takes up import and exports then its resources remain
unexplored . Thus it helps to eliminate the wastage of resources
- Greater vulnerability to foreign shocks
OR

 Benefits of International Trade

- High prices for exports and lower prices for imports is a net gain for a
country. Efficient allocation of resources is a result of such exchanges. There’s
an increase in overall welfare because of the larger bundle of goods from such
affiance.
- Trade liberalization increases real GDP. Efficient allocation of resources has a
positive influence on GDP. International trade offers the exchange of ideas and
technical flow of expertise.
- Development of high quality and more effective institution’s policies
encourages domestic innovations. Domestic productivity benefits from foreign
development and researchers.
- Global competition motivates companies to become more efficient because
they face an open field. Multinationals also operate on a larger scale leading to
cost savings.
- Consumers access a variety of goods and services at lower prices. Hence,
living standards of people improve. The absence of restrictions and tariffs enable
production and shipment; hence, ensuring availability of goods and services.
- An increase in competition leads to a fall in monopoly power. Thus, the
market becomes more efficient.

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 - Trade encourages efficiency. Through specialization, countries have to
concentrate on producing more of the goods they could produce very well over
goods they cannot produce with efficiency.
 Costs of International Trade

- Loss of jobs and inequality in income caused by competition. As states

concentrate on free trade, the domestic industries adjust to this change. As a
result, they exist as the main exporters. However, the same exporters face import
competition.
- Less efficient firms exit the market. Reason being resources are re-allocated
according to whether the firm is growing or contracting. As firms close, some
countries can be at a loss at the expense of other countries.
- An increase in imports causes domestic industries to compete with imports.
Technology and capital might not be as developed in some countries. As such,
they cannot compete with developed countries in some industries.
5. What were the Mercantilists view on Trade ?
- Mercantilism is an economic theory that advocates government regulation of
international trade to generate wealth and strengthen national power.
Mercantilism is a form of economic nationalism. It advocates trade policies that
protect domestic industries
- Export surpluses brought inflow of gold and silver.
- Trade policy was to encourage exports and restrict imports.
- One nation gained only at the expense of another.
 Mercantilism suggests that it is in a country’s best interest to maintain a trade
surplus – to export more than it imports. To ensure that a country exported a
lot and imported only a little, the Mercantilists were in favor of high tariffs.
Mercantilism advocates government intervention to achieve a surplus in the
balance of trade
6. What are the new contribution of Mercantilist’s views on Trade ?
To recognize the importance of International Trade.
- Mercantilism suggests that countries | government should design policies that lead to
an increase in their holdings of gold and silver.
- This was usually done by increasing exports and limiting imports. This economic
philosophy was used by Europeans from about the 1500s to the late 1700s.

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 7. What is the weak point of Mercantilist’s? Disscuss?
- As an economic philosophy, Mercantilism is flawed. Mercantilism weakens country in
long run; enriches only a few
- It creates high levels of resentment.
The rich tend to get richer in a system of mercantilism and the working class gets to be
stagnant at best. Eventually this creates resentment, which leads to rebellion, and
ultimately it led to many colonies seeking out their own independence.
- It creates a preference for the mother nation to always be first.
This means the colonies are forced to sell their local raw materials for a bargain basement
price and then be forced to purchase manufactured goods at a higher price than necessary.
This creates an even wider wealth gap between the different income classes.
- There is always a risk of local raw materials and resources running out.
Because mercantilism is based on the complete use of natural resources, there will always
be a day when those resources run out. Natural resources are finite in nature, so even if
there is an extensive reserve in place that can be accessed, that reserve will one day run
out. If that happens sooner rather than later, then the entire economy can collapse.
- The system is ultimately quite inefficient.
Because materials and goods are shipped back and forth between colonies and their
mother nation, the price of goods is inflated more than it needs to be. Even with modern
shipping methods, it costs less to manufacture goods locally where raw resources are
available than it does to ship those items back and forth. Because of this, it also creates
vulnerabilities in both economies should those shipments be intercepted by someone else.
8. How were the Adams Smith (Theory of absolute advantage’s ) views on trade ?
- "It is the maxim of every prudent master of a family, never to attempt to make at home
what it will cost him more to make than to buy.” (Adam Smith)
- Specialization and trade among regions and countries are based upon the same principle
as among individuals.
- 1776 Adam Smith, The Wealth of Nation
 Word’s wealth is not a fixed quantity
 International trade
 Increase the general level of productivity within a country
 Increase world output (wealth)

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 - Adam Smith argued that a country has an absolute advantage in the production of a
product when it is more efficient than any other country in producing it
- According to Smith, countries should specialize in the production of goods for which
they have an absolute advantage and then trade these goods for the goods produced by
other countries
9. How were gains from trade generated ?
- In 1770s, Adam Smith argued that import restrictions would reduce the gains from
specialization and make a nation poorer. He used absolute advantage to explain the
benefits of trade. Adam Smith argued that a country has an absolute advantage in the
production of a product when it is more efficient than any other country in producing it.
- When one nation has absolute advantage in production of a commodity, but an absolute
disadvantage with respect to the other nation in a second commodity, both nations can
gain by specializing in their absolute advantage good and exchanging part of the output
for the commodity of its absolute disadvantage.
10. What policies did Adam Smith advocate in International Trade ?
- According to Smith, countries should specialize in the production of goods for which
they have an absolute advantage and then trade these goods for the goods produced by
other countries
- Specialization and trade advantage both countries.
- Adam Smith and other classical economists advocated policy of laissez-faire, or minimal
government interference with economic activity.
- Free trade would cause world resources to be utilized most efficiently, maximizing world
welfare.
11. What did he think was the proper function of government in the economic life of the
Nation?
- As one might expect from Smith’s conviction that markets were extremely efficient, he
was in favor of a government that did not hamper the working of the market
- However, Smith emphasized the fact that the government should
+ Maintain law and order
+ Ensure the defense of the nation from foreign enemies,
+ Erect and maintain public works that private citizens would not build
+ Subsidize education for those who could not afford it, and
+ Regulate international trade when free trade endangers ‘infant industries’ or
compromises national security
12. Ricardo’s law of Comparative Advantage superior to Smith’s Theory of absolute
advantage:

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 Comparative Advantage Absolute Advantage
Even if someone is absolutely
more productive at 2 activities, if
he is comparatively more
productive at 1 activity than
another relative to a 2nd person,
he will be better off specializing
and trading than producing in
isolation.
The causes of economic progress David Ricardo, by contrast,
and the creation of wealth was focused on how wealth is
Adam Smith’s main topic of shared among different groups
interest in society
According to Smith, the wealth
of a nation derives from the level
of the technology in use.
The level of technology and its
rate of improvement depend on
the division of labor.

Comparative Advantage Absolute Advantage

Definition Ability of country to produce Ability of a country to
good better than other produce more goods with
country with same amount of same amount of resources
resources. than other country.
Benefit Trade is mutually Trade is not mutually
beneficial beneficial
Benefits both the Benefits the Country with
countries absolute advantage
Cost Opportunity cost of Absolute cost of
producing good impact producing goods impacts
the Country’s if the country has absolute
comparative advantage advantage
Economic Nature It is mutual and reciprocal It is not mutual and
reciprocal

4.1 This theory is more relevant to the modern trade situation:

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 - 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.
13. Gains from Trade with Comparative Advantage:
- Gain from trade depends on the comparative cost conditions. Comparative cost doctrine
suggests that trade can provide benefit to all countries if they specialize in the production
of those goods and, hence, export them in which they have comparative advantage
- Ricardo said that trade contributes “to increase the mass of commodities, and therefore,
the sum of enjoyments…” he adds that the gain from trade consists in the saving of cost
resulting from obtaining the imported goods through trade instead of domestic
production.
- Ricardo’s comparative cost thesis may be applied to establish the existence of gains from
trade. In other words, gain from trade depends on the comparative cost conditions.
Comparative cost doctrine suggests that trade can provide benefit to all countries if they
specialize in the production of those goods and, hence, export them in which they have
comparative advantage.
- A country, thus, specializes in production and export in accordance with its comparative
advantage. Ricardo’s trading nations acquire complete specialisation in production. As a
result, global output becomes larger than under autarky. Trade also enables each country
to consume more than under isolation. Thus, there is a production gain and a
consumption gain arising out of international trade. Such gains cannot be reaped in the
absence of trade.

- Principle of comparative advantage:

Even if a nation has an absolute cost disadvantage in the production of both goods
+ The less efficient nation
 Specialize in and export the good in which it is relatively less inefficient
o Where its absolute disadvantage is least

+ The more efficient nation

 Specialize in and export the good in which it is relatively more inefficient

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 o Where its absolute disadvantage is greatest
There are gains from trade for both countries. This is the second lesson of the Ricardian
model.
Countries have comparative advantage in producing different goods and hence they can
get mutual benefits from trade. This is because countries differ from each other. The
more different they are, the larger the (potential) benefits from trade
14. What are the sources of Comparative Advantage ?
- Comparative advantage is a dynamic concept meaning that it can and does change over
time. For a country, the following factors are important in determining the relative unit
costs of production:
- The quantity and quality of factors of production available for example some countries
have an abundant supply of good quality farmland, oil and gas, fossil fuels. Climate and
geography have key roles in creating differences in comparative advantage.
- Different proportions of factors of production – some countries have abundant low-cost
labor suitable for volume production of manufacturing products.
- Increasing returns to scale and the division of labor – increasing returns occur when
output grows more than proportionate to inputs. Rising demand in the markets where
trade takes place helps to encourage specialization, higher productivity and internal and
external economies of scale. These long-run scale economies give regions and countries a
significant advantage.
- Investment in research & development which can drive innovation and invention
- Fluctuations in the exchange rate, which then 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.
- The 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 here is the division of knowledge
in the medical industry, some countries specialize in heart surgery, others in
pharmaceuticals.
- Institutions – these are important for comparative advantage and important 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.
15. What is meant by labor-intensive commodity ?
The demand for labor relative to capital is assumed to be higher in shoes than in
computers, LS/KS > LC/KC. These two curves slope down just like regular demand
curves, but in this case, they are relative demand curves for labor (i.e., demand for labor
divided by demand for capital

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 16. Capital-Intensive commodity?
- The term "capital intensive" refers to business processes or industries that require
large amounts of investment to produce a good or service and thus have a high
percentage of fixed assets, such as property, plant, and equipment (PP&E).
Companies in capital-intensive industries are often marked by high levels of
depreciation.
- Capital intensive refers to the production that requires higher capital investment such
as financial resources, sophisticated machinery, more automated machines, the latest
equipment, etc. Capital intensive industries pose higher barriers to entry as they
require more investment in equipment and machinery to produce goods and services.
An industry, firm, or business is considered to be capital intensive taking into
consideration the amount of capital that is required in comparison to the amount of
labor required. Good examples of capital intensive industries include the oil refining
industry, telecommunications industry, airline industry, and public transport
authorities that maintain the roads, railways, trains, trams, etc.
17. 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.
18. Suppose that there: Airplane is Capital-Intensive commodity and Rice is labor-
intensive commodity, and we have 2 nations : France is rich and Capital-Abundant
nation ; Somali is a labor abundant country
-A country has comparative advantage in those commodities that use its abundant factors
intensively
-Factor Endowments:
+ Notation: K=capital, L=labour, r = price of capital, w = price of labour
+ Physical definition: (K/L)1 > (K/L)2  France is capital abundant (labor-scarce),
Somali is labor-abundant (capital-scarce)
+ Price definition: (r/w)1 < (r/w)2  France is capital-abundant, Somali is labor-
abundant
- In this case, the apparent contradiction of the Heckscher-Ohlin model could be
explained by factor-intensity reversal. In the France , Aviation industry belongs to
TOP most developed industry in France, production utilizes considerable capital and,
thus, many commodities such as airplane are relatively capital-intensive. In Somali ,
however, agricultural production uses relatively much more labor than capital and, in
all likelihood, is a labor-intensive product. Since there is considerable substitutability
between capital and labor in the production of, for example, rice, it would not be
surprising to find that rice is a labor-intensive product in a labor-abundant country
such as Somali and capital-intensive in a capital-abundant country such as the
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 France . Consequently they both end up exporting the product because it is intensive
in their respective abundant factors.
19. What can we say from the Trade pattern between two countries ?
- Trade is the exchange of goods and services between countries. Goods bought into a
country are called imports, and those sold to another country are called exports.
Developed countries have a greater share of global trade than developing 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.
- To better understand how modern global trade has evolved, it’s important to understand
how countries traded with one another historically. Over time, economists have
developed theories to explain the mechanisms of global trade. The main historical
theories are called classical and are from the perspective of a country, or country-based.
By the mid-twentieth century, the theories began to shift to explain trade from a firm,
rather than a country, perspective. These theories are referred to as modern and are firm-
based or company-based. Both of these categories, classical and modern, consist of
several international theories.

20. What does Heckscher and Ohlin theory postulate ?

 The Heckscher-Ohlin theory argues that trade occurs due to differences in labor, labor
skills, physical capital, capital, or other factors of production across countries.
- Countries have different relative abundance of factors of production.
-Production processes use factors of production with different relative intensity.
 They wanted to explain this increase in trade during the “golden age” of international
trade.
-Definition: A nation will export the commodity whose production requires the intensive use of
the nation’s relatively abundant and cheap factor and import the commodity whose production
requires the intensive use of the nation’s relatively scare and expensive factor.
-Or: the relatively labor-rich nation exports the relatively labor-intensive commodity and imports
the relatively capital -intensive commodity.
 Heckscher-Ohlin theorem: An economy has a comparative advantage in producing,
and thus will export, goods that are relatively intensive in using its relatively
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 abundant factors of production, and will import goods that are relatively intensive in
using its relatively scarce factors of production.
 In summary, the capital-abundant country exports the capital-intensive commodity,
and the labor-abundant country exports the labor-intensive commodity.

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PART 2 :
21. What is primary function of tariffs in industrial nations ?
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 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 and then higher rates to
any imports that exceed that level.
- Punitive tariffs may be used to remedy trade distortions resulting from measures
adopted by other countries.
22. What are the advantages and disadvantages of Ad valorem and Specific Tariff ?
AD VALOREM SPECIFIC TARIFF
Advantages - Automatic adjustment for - Predictable. The government
inflation. Since the tax is tied to the revenue is therefore protected
product price, the tax automatically against industry price wars or
adjusts with inflation. price manipulations. For
- Higher profit margin is taxed. Ad example the government can
valorem tax reduces the industry predict tobacco tax revenue
profit margin since a part of any based on tobacco demand.
price/profit increase goes to the - Raises all product prices.
government as tax revenue. Since the tax is applied to all
products at the same rate, a
higher tax usually results in
similar prices increase across
the board, regardless of
product. Specific taxes reduce
the gap in prices between
cheap and more expensive
products.
- Easy to determine the
amount of tax.

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Disadvantages - Less predictable revenue stream. -
As ad valorem taxes are based on
value, it is difficult to predict tax
revenue over time
- Difficult to determine the amount
of tax.
- Leads to large price differences
between products. Ad valorem
taxation widens the gap in prices
between cheap products and more
expensive products.
- Difficult to administer.
- Easier to administer.
Inflation erodes its value.
Because the tax rate is not tied
to the product price, it does not
automatically adjust with
inflation. Instead, the
government must periodically
implement additional rate
increases, or add into the tax
law that the specific excise tax
rate will automatically adjust
with inflation.
- Can be reduced by changing
products characteristics.

23. What is meant by the Consumption, Production, Trade, Revenue, and

Redistribution effects of a tariff ?
 Consumption Effect: Imposition of tariff raises the price, and as a result, the
demand for the commodity falls. Total outlay on consumption of the commodity
is larger or smaller depending upon whether demand is inelastic or elastic.
 Production Effect: When a tariff or other price-increasing policy is put in place,
the effect is to increase prices and limit the volume of imports.
 Revenue Effect: Tariff brings revenue to the government. The revenue to the
government is equal to the amount of the import duty multiplied by the quantity
of imports.
 Redistribution Effect refers to the transfer of real income from the consumers to
the producers as a result of tariff.
 Trade Effect:
- When a country imposes a tariff duty, its willingness to receive imports is
reduced. For a given quantity of exports, the country now demands a larger
quantity of imports because a part of these imports are to be surrendered to the
customs authorities in the form of tariff payment. Or, putting the same thing
differently, the country is now willing to offer less of exports in exchange for
a given quantity of imports.
- Thus, the tariff reduces the country’s offer of exports for imports. This
increases the country’s terms of trade or the rate at which exports are
exchanged for imports.

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 24. What is an Import Quota ?

An import quota is a type of trade restriction that sets a physical limit on the quantity of
a good that can be imported into a country in a given period of time. Quotas, like other
trade restrictions, are typically used to benefit the producers of a good in that economy.
25. How are they similar to and different from the effects of an equivalent Import
Tariff?

Similar
- Firstly, both tariffs and quotas have the same objectives such as reduction in the
volume of imports, protection of home industries, expansion of employment and
economic activities and correction of balance of payments deficit.
- Secondly, a certain rate of tariff causes reduction in the quantity by a specified extent
and, therefore, it has a quota equivalent. The import quota, on the other hand, while
restricting the quantity, causes a rise in import price. It has, therefore, an import tariff
equivalent.
- Thirdly, tariff and quota both have similar price, protection, consumption,
redistribution, welfare, balance of payments and income effects.
Different
- A tariff is a tax on imports. It is normally imposed by the government on the imports
of a particular commodity. On the other hand, quota is a quantity limit. It restricts
imports of commodities physically. It specifies the maximum amount that can be
imported during a given time period.
- The main difference is that quotas restrict quantity while tariff works through prices.
Thus, quota is a quantitative limit through imports.
- A tariff raises revenue for the government, whereas an import quota creates surplus
for those who obtain the licenses to import.The profit for the holder of an import
licenses is the diferrent between the domestic price ( at which they sell the emported
good) and the world price ( at which they buy it)
- All the benefits of quotas go to the producers and to the lucky importers who manage
to get the scarce and valuable import permits. In such a situation, quotas differ from
tariff
- As a tax , triffs bring in revenue for the government. A quota, on the other hand,
benefits the sellers because they can now sell the imported product for more money
- In assessing the costs and benefits of an import quota , it is crucial to determine who
gets the rents
When the rights to sell in the domestic market are assigned to governments of
exporting countries , the transfer of rents abroad makes the costs of a quota
substantially higher than the equivalent tariff

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 26. How does the revenue effect of an import quota differ 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.
- If 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 temporary monopoly in importing the product. It cause
deadweight losses.
- The Lessons for Trade Policy : Both tariffs and import Quota
o Raise domestic prices.
o Reduce the welfare of domestic consumers.
o Increase the welfare of domestic producers.
o Cause deadweight losses.
27. 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.
28. What are the different types of dumping?
- Sporadic dumping:
This occurs when there is a temporary surplus of a specific product. Businesses will
dump surplus goods in foreign markets without having to reduce prices in their domestic
market. The domestic market refers to the market within a country’s borders.
- Predatory dumping:

Used by manufacturers as a means of eliminating competition in a foreign market. High

domestic prices are used to supplement the reduced revenue of exporting cheaper goods.
By exporting goods at cheap prices exporters are able to drive off any competition in the
area. Once competition has been eliminated, the firm can then raise the price of the
product and generate more revenue.
The importing country usually complains, because its market might end up being
controlled by a foreign monopoly.
-
Example
Hitachi was accused of following predatory dumping for its EPROM (electrically
programmable read only memory) chips.Zenith in USA accused Japanese
Television manufacturers of using predatory dumping. A charge was leveled

16
 against Japanese manufacturers for false billing and secret rebates to set low
predatory prices on T.V. sets in U.S markets. It was argued that they tried to drive
U.S firms out of business in order to gain a monopoly.

- Persistent dumping (Long period dumping):

 This is international price discrimination that goes on indefinitely.

 Exporting firms benefit from this when demand in a foreign market is more
elastic than the demand in the company’s home market.
29. Objective of Dumping
- To find a Place in the Foreign Market: Due to perfect competition in the foreign market
lowers the prices of commodity in comparision to the other competitors so that the
demand for commonly may increase.
- To sell surplus commodity: When there is excessive production of a monopolist’s
commodity and he is not able to sell in the domestic market, they wants to sell the surplus
at a very low price in the foreign market. But it happens occasionally.
- Expansion of Industry: The cost of production of commodity is reduced and bt selling
more quantity of the commodity at a lower price in the foreign and domestic market, they
earns larger profit.
- New trade relations: They sells their commodity at a low price in the foreign market,
thereby establishing new market relations with those countries.
30. What are the conditions required to make dumping possible?
- The product must have a degree of Monopoly at least in the home market.
- There must be clearly defined separate market. In international trade, markets are clearly
differentiated between home and foreign markets. In fact, in international trade markets
are separated by space, differences in customs, nationality, language, currency etc.
- It should not be possible for buyers to re-sell goods from a cheaper market to a dearer
one. In foreign trade, of course, the distance transport cost element and customs duties
prevent this tendency.
- Price discrimination is profitable only when two different markets have different
elasticities of demand. It is meaningless to resort to price discrimination if two separate
markets have identical demand curves because under such conditions, the total sale
receipts will not be affected by shifting to a uniform price policy.
31. Why does dumping usually lead to trade restrictions?
- Dumping often condemned as “unfair trade practice” which accords exporters a
competitive advantage over producers of similar goods in the market of importation.
- The problem with dumping is that it's expensive to maintain. It can take years of
exporting cheap goods to put the competitors out of business. Meanwhile, the cost of
subsidies can add to the export country's sovereign debt.
- The second disadvantage is retaliation by the trade partner. Countries may impose trade
restrictions and tariffs to counteract dumping. That could lead to a trade war.

17
 - The third is censure by international trade organizations. These include the WTO and the
European Union.
32. Why do nations subsidize exports?
- Export subsidies are foreign trade policies undertaken by domestic governments that are
intended to "protect" domestic production by restricting foreign competition. In general, a
quota is simply a quantity restriction placed on a good, service, or activity. For example,
employers often face hiring quotas for different demographic groups and sales
representatives often have quotas for sales activities.
- 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.
33. To what problems do these subsidies give rise
- If demand is elastic, then a subsidy causes a bigger percentage rise in demand. There is
only a small fall in price. In this case, producers benefit from the subsidy because their
producer surplus increases more than consumer surplus
- If demand is price inelastic, then a subsidy causes a substantial fall in price, however
there is only a small increase in demand.
- Quantity restrictions imposed by the government of one nation on imports from other
nations. The primary goal of export subsidies is to reduce imports and increase domestic
production. Because the quantity of imports is restricted, the price of imports increases,
which thus encourages domestic consumers to buy more domestic production. Export
subsidies are one of three common foreign trade policies designed to discourage imports
and/or encourage exports.
34. Analyze few industries that China use the exports subsidize.
- In 2009, the Ministry of Finance of China implemented an increase in tax reimbursement
for 553 mechanical and electronic products from 14% to 17% for robotic equipment for
industrial use, from 11% and 13% to 14% for sewing machines and motorcycles. In
addition, the Ministry of Finance, the General Department of Customs and the China Tax

18
 Administration have approved the pilot project of "tax refund at the Export Port", which
was officially implemented in Shanghai City
- To encourage businesses to export, the Ministry of Finance of China has applied
incentive tax policies for more than 600 items export. Export taxes are discounted on
products including shoes, toys and souvenirs in the 5-17% range.The Chinese
government has also implemented a policy of promoting the export of consumer goods
by quota. Accordingly, the items subject to export tax to 0%, applied from July 2009,
include:
o Light industrial products for consumption: Audiovisual electronics, household
electrical goods, children's toys, garments, shoes, plastic products, wooden products.
o Goods and materials: Chemical fertilizers, pesticides and preservatives for fruits and
vegetables, food, roofing sheets (corrugated iron, plastic), raw wood products (wood)
Laminated pine, veneer, MDF).
o Agricultural products: Fruits, vegetables.

- In terms of loans, Chinese commercial banks have provided short-term loans to exporters that
enjoy the rates
Preferential interest rates, with interest rates currently only at 4-5% / year. With low
interest rates, the volume of Chinese goods exported is increasing. Foreign businesses
only need to buy Chinese goods and materials to enjoy 0% interest rate support for 30%
of the order value.
- In addition, Chinese commercial banks also provide loans with interest rates of only 1-2% to
encourage exporters to invest in building factories and workshops. These conditions have
enabled Chinese enterprises to produce products in large quantities at the lowest cost.
35. The major forms of subsidies that governments grant to domestic producers
- The main form of subsidy is a member of party government or any public body to certain
companies for their financial contributions and the right price or income support, directly
or indirectly increase the output of a product from its territory or reduce the importation
of certain products within its territory, or Members of other damage to the interests of the
formation of a government measure.
- The export subsidy is a government intervention, therefore it has, as all trade policies, the
purpose to modify something in a country's terms of trade, in order to pursue some
specific political objectives. One of the main purposes that can be found for export
subsidies is to encourage national producers. As an example, in developed countries, an
export subsidy is given in order to protect their producers in the international market from
the competition of other countries, poorer countries, where the cost of factors of
production, such as labor or land, is much cheaper and as a consequence, also the final
price of the good will be lower. Other important purposes could be to support income to

19
 the nation, stabilize prices and equalize balance of payments (the record of a country's
transactions with the rest of the world).
 Explain
- A government subsidy granted to import-competing producers leads to increased
domestic production and reduced imports. The subsidy revenue accruing to the producer
is absorbed by producer surplus and high-cost production (protective effect). A subsidy
granted to exporters allows them to sell their products abroad at prices below their costs.
However, it entails a deadweight welfare loss to the home country in the form of the
protective effect and the consumption effect. Omit the consumer taste
36. Do You agree or don’t agree with Protectionism ?
We agree with Protectionism. Because:
- Trade protectionism is a policy that protects domestic industries from unfair
competition from foreign ones.
- Protectionism is a politically motivated defensive measure. It makes the country and
its industries less competitive in international trade.
- Trade protectionism brings temporary benefits to domestic producers, ensuring the
social goal of securing jobs for certain groups of workers.
- Protection of trade helps redistribute income. The redistribution of social income is
the intervention of the State through the provisions of law, policies to mobilize and
persuade high-income people to contribute to the State to help the community and
low-income people
37. What are the benefits and arguments against Protectionism ?
It can be seen that trade protection offers the following benefits:
-An advantage of protectionism is that it keeps the domestic economy rolling. Since there is a
decrease in imports, domestic firms have less competition, and so are able to continue. The
domestic economy will also be strengthened because unemployment will be down due to the
domestic firms and they will be able to produce and sell more goods with a lot less difficulty,
giving firms less reason to decrease its costs by decreasing its workforce. Those with jobs will
continue to consume while allowing the economy to flow.
-Protectionism permits the new and upcoming firms to work and develop at an acceptable rate,
because they will not be pressured by foreign, more experienced firms
-Protectionism can also prevent dumping, this is where foreign and bigger economies enter an
economy and sell their goods at a price lower than the costs of production.
-Reduce the competitiveness of imported goods
-Protection of domestic producers; help them to strengthen their strengths in the domestic market
-Help manufacturers increase their competitiveness to penetrate foreign markets
-Help to regulate the international payment balance of the country, reasonable use of foreign
currency payment of each country.
Arguments Against Protectionism.

20
-Various arguments are used against protectionism. These include: Inefficiency of resource
allocation in the long run - the imposition of tariffs, or other protectionist measures, in the
long run results in losses of allocative efficiency.
-Protectionism invites a retaliatory response and countries can get locked into trade war: Risk of
Retakiation (?), Market Distortion, Higher prices for consumers, Regress effect on income
inequality, By-passing import controls , Higher cost for exporters. The WTO has found it
impossible to negotiate a wide ranging global trade agreement
Example: In G-7, Japan and Germany particularly responded strongly to the trend
of trade protectionism. Ahead of the meeting, Japanese Finance Minister Shoichi
Nakagawa announced that Tokyo would resist any manifestation of trade
protectionism. He emphasized that the lesson from the Great Depression in the
early 20th century made it clear that the closure would lead to disaster and at the
G-7 Conference, Japan will discuss measures to prevent this from happening
again.
1. ?? Give some examples that countries used in Trading Practice?
38. What are the technical, administrative, and other non-tariff barriers to trade?
- Non-tariff barriers to trade (NTBs) or sometimes called "Non-Tariff Measures
(NTMs)" are trade barriers that restrict imports or exports of goods or services
through mechanisms other than the simple imposition of tariffs. The SADC says, "a
Non-Tariff Barrier is any obstacle to international trade that is not an import or export
duty. They may take the form of import quotas, subsidies, customs delays, technical
barriers, or other systems preventing or impeding trade." According to the World
Trade Organisation, non-tariff barriers to trade include import licensing, rules for
valuation of goods at customs, pre-shipment inspections, rules of origin ('made in'),
and trade prepared investment measures.
- There are several different variants of division of non-tariff barriers. Some scholars
divide between internal taxes, administrative barriers, health and sanitary regulations
and government procurement policies. Others divide non-tariff barriers into more
categories such as specific limitations on trade, customs and administrative entry
procedures, standards, government participation in trade, charges on import, and other
categories.
- Standards take a special place among non-tariff barriers. Countries usually impose
standards on classification, labeling and testing of products in order to be able to sell
domestic products, but also to block sales of products of foreign manufacture. These
standards are sometimes entered under the pretext of protecting the safety and health
of local populations.
Technical Barriers
- Technical barriers to trade (TBT) refer to technical regulations and voluntary
standards that set out specific characteristics of a product, such as its size, shape,
design, functions and performance, or the way a product is labelled or packaged
before it enters the marketplace. Included in this set of measures are also the technical
procedures that confirm that products fulfill the requirements laid down in regulations

21
 and standards. Product specifications are often written in such detail that a fair chance
of winning a contract might mandate extensive product modification. The product
testing process might take several months to several years. Such tactics become
market entry barriers especially when they are not required of domestic firms.
39. Administrative and bureaucratic delays at the entrance
- Among the methods of non-tariff regulation should be mentioned administrative and
bureaucraticdelays at the entrance, which increase uncertainty and the cost of
maintaining inventory. For example, even though Turkey is in the European Customs
Union, transport of Turkish goods to the European Union is subject to extensive
administrative overheads that Turkey estimates cost it three billion euros a year.
40. What is the importance of these non-tariff barriers relative to tariff barriers
As against the tariff barriers, non-tariff barriers are government policies and
administrative practices that regulate or restrict the foreign trade. Non-tariff barriers are
quantitative restrictions which influence the volume of trade unlike tariff barriers, non-
tariff barriers impose absolute limitations upon foreign trade and inhibit market
responses. The non-tariff barriers are numerous. Following are some common excuses
offered by a country to impose non-tariff barriers:
 Human rights.
 Damage to environment.
 Health considerations.
 Injury to domestic industries.

Examples:
o European Union (EU)—The EU has adopted a series of directives that establish
essential requirements for a whole variety of equipment including
telecommunications equipment. Equipment must be labeled with the CE mark
to indicate that it has complied with all relevant directives. Other countries
including U.S. and Japan have their own standards for telecommunications and
equipment. The purpose of such regulations include electrical safety,
electromagnetic compatibility, user safety and quality of communications.
o Japan—Access to Japan’s value chain network creates market barriers since
there are tight corporate and cultural ties among original Equipment
manufacturers (OEM), wholesaler and retailers. Keiretsu are large groups of
Japanese companies linked together often through one main affiliated bank.

PART 3 : Economic Integration : FTA – Common Market

22
 41. What are the main drivers of Globalization?
The media and almost every book on globalization and international business speak about
different drivers of globalization and they can basically be separated into five different
groups:
1) Technological drivers
Technology shaped and set the foundation for modern globalization. Innovations
in the transportation technology revolutionized the industry
2) Political drivers
Liberalized trading rules and deregulated markets lead to lowered tariffs and
allowed foreign direct investments in almost all over the world.
3) 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
4) Cost drivers
Sourcing efficiency and costs vary from country to country and global firms can
take advantage of this fact. Other cost drivers to globalization are the opportunity
to build global scale economies and the high product development costs
nowadays
5) Competitive drivers
With the global market, global inter-firm competition increases and organizations
are forced to “play” international.
42. What are the benefits and challenges of Globalization ?
-Improved Living Standards
One of the main benefits of globalization is the massive rise in living standards in
developing nations. These same countries also have access to huge technological
improvements without going through the difficulties that developed nations have
experienced.
- 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

23
 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
-Easy Access to Foreign Culture
Globalization has also made it easier to access foreign culture, including food,
movies, music, and art
43. Challenges of Globalization
-Job Mobility
One of the most common critiques of the global trade system is how it ships jobs,
especially manufacturing jobs, from less developed countries to developing countries.
Lower-skilled workers who lose manufacturing jobs in developed countries often
have a difficult time finding new, comparably compensated work.
-Western Dominance
Despite huge growth in emerging markets, the Western developed world still holds
the reigns on international order and on how capital flows from country to country
- Loss of Cultural Identity
While globalization has made foreign cultures easier to access, it has also begun to
meld cultures together. The success of certain cultures throughout the world have
caused other countries to emulate these lifestyles and culture
44. 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 societies around the world.

45. Benefits of current wave of Globalization for Vietnam’s economy

- 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.
- Rapid increase in foreign direct investment (FDI)
As a WTO member, 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.
During the three years of WTO membership, total registered FDI into Vietnam reached
more than $114 billion, 4.5 times higher than the target set for the 2006-2010 period. Of
this, $29.5 billion was disbursed in the five years
- Increase in enterprises’ awareness, adaptation and performance

24
 Joining WTO means that Vietnam has entered a large “play ground” where Vietnamese
enterprises have to compete with many giant players-big foreign corporations with strong
financial power and experience. This is also a chance for state-owned enterprises pending
on the Government protection and subsidies restructure their operation. Otherwise they
will be defeated even in the domestic market. So under the competition pressure, the
Vietnam’s enterprises will become more effective and competitive.
- More favorable legal system for trading activities
Global economic integration and accession to the WTO have given Vietnam a chance to
refine its policy and legal system to be more transparent, sustainable and predictable to be
in line with WTO regulations and to attract more foreign investors.
Moreover, as a WTO member, Vietnam is treated as a full WTO membership.
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.
46. Challenges of current wave of Globalization for Vietnam’s economy
- Low competitiveness of nation, enterprises and products
Vietnamese enterprises are mainly medium and small-sized. None of Vietnam’s state-
owned enterprises was on the list of 1000 world biggest corporations, neither its
commercial trademarks in the list of 1000 most prestigious global trademarks. If we want
to gain strong competitiveness in international market, we must have many strong
enterprises like Sony, Toyota of Japan, or Hyundai, Samsung of South Korea
- Issues relating to macro policies and administrative procedure
A widening trade deficit, an overheating economy, and a global rise in commodity prices
caused inflation to shoot up to 23 percent in 2008.This in turn triggered a crisis of
confidence, big swings in interest rates, and a sharp fall of the dong, the local currency”.
Although this issue was over and the government has performed better when dealing with
the global financial crisis, it is an important lesson that because the Vietnamese economy
has integrated deeply into the global economy, the exchange rates, inflation, balance of
payment and budget deficit will develop unpredictably.
- Difficulties in agricultural sector
Agriculture [1] is the main sector in the economy, accounting for 20 percent of GDP and
66 percent of the national population. However, it is confronting with vigorous
competition in the global market. Farmers lack knowledge and professional skills.
Production technology is small and backward, which increases the production costs
compared to those of other countries and makes the quality of the products low.
Agricultural enterprises are often of small size and disperse. As a result, they have weak
financial capacity to improve production technology and labor productivity.
47. What are the benefits and challenges of ASEAN Economic Community ?
 Trade

25
 - Concerning the free flow of goods: as of 2010, duties were eliminated on 99.2% of tariff
lines for the ASEAN-6 Member States (Brunei Darussalam, Indonesia, Malaysia,
Philippines, Singapore and Thailand).
- In the other member states (Cambodia, Lao PDR, Myanmar and Viet Nam), 97.52% of
tariff lines have been reduced to 0-5%. Measures to reduce technical barriers to trade are
also being implemented.
Investment
- ASEAN is committed to building an investment environment to attract businesses: it
created the ASEAN Comprehensive Investment Agreement (ACIA), which includes
commitments towards the liberalization and protection of cross-border investments
operations, together with best practices for the treatment of foreign investors and
investments
- For the free flow of capital, stock exchanges from Indonesia, Malaysia, Philippines,
Singapore, Thailand and Viet Nam are working together to form the ASEAN Exchanges,
aiming to promote ASEAN capital markets and to offer more opportunities to investors in
the region.
 Challenges of ASEAN Economic Community:
- The Trump administration's 'America first' policy injected ambiguity in economic
activities.
- The risk intensified as the trade war between the US and several countries -
China, India, Russia, Mexico, Canada, the European Union - became effective.
These have long-term implications in terms of reconfiguration of manufacturing
supply-chains and confidence in the multilateral trading framework of the WTO.
- Simultaneously, the world economy is witnessing the process of Brexit, an
outcome of a referendum when Britain decided to leave the European Union.
- While it marked the rise of populist policies, it also criticized globalization,
particularly trade and immigration, for income inequality and economic
insecurity.
- The ASEAN countries are not aloof from these adverse global developments.
There are concerns over how AEC 2015 has benefitted individual ASEAN
members and its businesses and people
- Low awareness of AEC often lead to debates of uneven benefit of economic
integration and conflicts of interest between the 'winners' and 'losers'.
- These are limiting the governments from committing to bold measures and
compelling them to undertake populist policies to raise their future political
prospects.
- As a result, the pace of ASEAN economic integration may be slowed. Implementation
could be uneven and attention might be paid to more inclusive and people-centric trade
and investment measures.

26
 - However, trade will remain at the core of AEC. Although tariffs have been almost
eliminated for flow of goods in the region, facilitation initiatives, such as the ASEAN
Single Window and Self-Certification Scheme, will gain importance.
48. Describe the opportunities and economic benefits of Vietnam in the AEC ?
- Opportunity to get a wider market
This is a good opportunity for Vietnamese businesses to expand their markets.
The AEC creates a unified market and manufacturing area, which leads to the
economy of many countries to become more prosperous, resulting in
increased income and formation of a new amount of middle-income
consumers with high incomes – also the very potential customers of
businesses.
- Extended Export Opportunities
When participating in AEC, the export market for goods in Vietnam will be
increasingly expanding. When AEC is formed, Vietnamese enterprises can
sell goods to ASEAN countries almost domestic sales. This is one of the
advantages for the flow of goods of businesses. The import and export
procedures will be more cumbersome and the reform of the procedure of
origin, towards allowing enterprises to certification of origin will also
facilitate the business customs clearance of goods to the market ASEAN.
- Opportunity to enhance competitiveness for Vietnam's exports
When AEC is established, Vietnamese enterprises will have a wider market.
In addition, when the tax rate in ASEAN is reduced to 0%, Vietnamese
enterprises will have conditions to reduce costs, lower prices for exports,
contribute to increasing competitiveness.
- Opportunity to attract investment sources
AEC will also help Vietnam to better improve the business environment from
customs clearance, administrative procedures to create more balanced
investment incentives.

49. Describe the opportunities and economic benefits of Vietnam in the AEC ?
- Reduce the risks in export-imports from minimizing dependency to the Chinese
market, increasing the replacement of the ASEAN market for the Chinese market.
- Creating opportunities for Viet Nam to be deeper into the value chain and the regional
supply chain is firstly the supply chain value agricultural products and intermediate
products.
- To promote the process of implementing strategic breakthroughs to Vietnam to
basically become industrialization in the modern direction in 2020
- Strengthening the comprehensive understanding between Vietnam and other AEC
member countries, expanding socio-cultural exchanges across countries, facilitating
the development of Vietnamese values and identity in AEC,

27
 50. Why Vietnam actively participates in many FTAs ?
- Having better trade relations with some other partners in other regions contributed to
helping Vietnam balance its trade deficit
- Tranfers the knowledge and technology
- Take advantage of reduced tariff
- Enable vietnam is economic develpment to continue to shift away from exporting low
tech manufacturing products to high tech goods
- FTAs has contributed to raising Vietnamese exports
- FTAs also help Vietnam improve its infrastructure, attract more investment capital;
accelerate administrative reform; abolish barriers for the market access.

51. What are the benefits and costs of Vietnam when we sign FTAs
o Benefits
- 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
- Sophisticated business practices and technology will help boost Vietnamese labor
productivity and expand the country’s export capacity.
- Trade agreements will allow Vietnam to take advantage of the reduced tariffs, both
within the ASEAN Economic Community (AEC) and with the EU and US to attract
exporting companies to produce in Vietnam and export to partners outside ASEAN.
- Vietnam's participation in trade agreements will also ensure compliance with
national standards, from employee rights to environmental protection.
o Cost
- Such agreements are likely to trigger aggressive competition from foreign rivals
on local businesses – particularly in the agriculture sector including meat and
dairy products from the EU, Australia and Canada
- If local firms do not adapt, make use of new market opportunities and potential
partnerships with foreign firms – they could find competing in the market
challenging.
- The Vietnamese government would also need to continue on its path of reforms –
strengthening the banking sector, removing corruption, refining legal and tax
structures, and improving trade facilitation.

52. Benefits and costs of Vietnam when we joint WTO

o Benefits
- Vietnam has access to markets for goods and services in all member countries with
reduced import tariffs and non-discriminatory service sectors.
- When participating in WTO, Vietnam's business environment is increasingly
improved.

28
 -Vietnam has the same status as other members in global trade policy making, has an
opportunity to fight to establish a fairer, more reasonable, conditional economic
order. to protect the interests of the country, the business.
- Integration into the world economy also promotes the domestic reform process,
ensuring that Vietnam's reform process is more synchronized and more effective.
- WTO accession will enhance our position in the international arena, creating
conditions for Vietnam to effectively implement foreign policies.
o Costs
- Competition will be fiercer, with more "competitors", on a wider and deeper scale
- In the world, the "distribution" of benefits of globalization is uneven. Countries
with low developed economies benefit less
- International economic integration in a globalized world, interdependence among
countries will increase. In the context of limited potential of the country, incomplete
legal system, limited experience in operating a market economy, this is not small
difficulty.
- International economic integration raises new issues in protecting the environment,
protecting the national security, preserving the fine cultural identity and traditions
of the nation, against pragmatic lifestyles and pursuing coin.

53. The challenges for Vietnam in this period: Trade tension between US- China
o Impacts on economy, trade and impacts on Vietnamese enterprises
- Creating opportunities for Vietnamese enterprises to export high-tech goods to the
US. However, the increase in exports to the United States also means increasing the
US trade deficit with Vietnam. That will cause Vietnamese goods to fall under the
scope of US inspection, affecting export businesses.
- US-China trade tensions also increase the risk of trade deficit with China in a short
time. The surplus of Chinese goods will flow to Vietnam market, causing price
competition for Vietnamese businesses (the yuan has depreciated sharply, making
Chinese goods cheaper).
- Export goods from Vietnam to China will be more difficult because China
strengthens enforcement measures to protect the domestic market.
o Impact on investment flows of FDI enterprises
- Vietnam is considered as one of the important destinations of FDI flows away from
China thanks to its strategic location, low labor costs, abundant human resources,
macro environment and stable politics. Increasing production costs in China are
also causing investors to shift to more cost-effective investment locations, and
Vietnam is seen as an alternative option.
- However, the rapid increase of FDI inflows from China is also a matter of concern,
because many FDI projects from China to Vietnam were formerly backward
technology projects, causing pollution. environment.

29
 o Impact on financial markets, currencies, banks
- Besides the implications for the Vietnamese economy, US-China trade tensions also
have a strong impact on Vietnam's financial and monetary markets. Trade war,
though not directly affecting interest rates in Vietnam, can be indirectly affected by
exchange rate fluctuations and inflationary pressures
54. Present the different level of Economic Integration ?
Economic integration can be classified in five additive levels
- 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.
- 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.
- 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.
- Political union. Represents the potentially most advanced form of integration with a
common government and were the sovereignty of member country is significantly
reduced.
55. Advantage of Free Trade Agreements (FTA) :
Free trade agreements are designed to increase trade between two or more countries
- Increased Economic Growth
- More Dynamic Business Climate: Often, businesses were protected before the
agreement. These local industries risked becoming stagnant and non-competitive on
the global market. With the protection removed, they have the motivation to
become true global competitors.
- Lower Government Spending: Many governments subsidize local industry
segments. After the trade agreement removes subsidies, those funds can be put to
better use.
- Foreign Direct Investment: Investors will flock to the country. This adds capital to
expand local industries and boost domestic businesses.
- Expertise: Global companies have more expertise than domestic companies to
develop local resources. When the multinationals partner with local firms to

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 develop the resources, they train them on the best practices. That gives local firms
access to these new methods.
- Technology Transfer: Local companies also receive access to the latest technologies
from their multinational partners.
56. Benefits of Free Trade Agreements (FTA )
- Contribute to greater economic activity and job creation in the country , and deliver
opportunities for big and small businesses to benefit from greater trade and
investment.
- Reduce and eliminate tariffs, improve rules that affect issues like intellectual
property.
- Free trade agreements give businesses and consumers improved access to a wider
range of competitively priced goods and services, new technologies, and innovative
practices.
- Free trade agreements help obtain more benefits from foreign investment.
- Promote regional economic integration and build shared approaches to trade and
investment between one country and trading partners.
- Support stronger people-to-people and business-to-business links that enhance
Australia’s overall bilateral relationships with FTA partners.
- Free trade agreements can continue to provide additional benefits and trading
partners over time, including via in-built agendas that encourage ongoing domestic
reform and trade liberalization.

57. Advantages of Custom Union

- Increase in trade flows and economic integration
The main effect of a free-trade agreement is that it increases trade between
member countries. It helps improve the allocation of scarce resources that satisfy
the wants and needs of consumers and boosts foreign direct investment (FDI).
Customs unions lead to better economic integration and political cooperation
between nations and the creation of a common market, monetary union, and fiscal
union.
- Trade creation and trade diversion
The effectiveness of a customs union is measured in terms of trade creation and
trade diversion. Trade creation occurs when the more efficient members of the
union sell to less efficient members, leading to a better allocation of resources.
Trade diversion occurs when efficient non-member countries sell fewer goods to
member countries because of external tariffs. It gives less efficient countries in
the union the opportunity to capitalize on their position and sell more goods
within the union.
- Reduces trade deflection:

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 One of the main reasons a customs union is favored over a free trade agreement is
because the former solves the problem of trade deflection. This occurs when a
non-member country sells its goods to a low-tariff FTA (free trade agreement)
country, which then resells to a high-tariff FTA country, leading to trade
distortions. The presence of a common external tariff in customs unions helps
avoid problems that arise from tariff differentials.
58. Benefits of Custom Union
a) To Producers :
- Producers get a larger and wider market and can thus produce more goods.
- The Custom Union lowers cost of production
- It offers equal protection to all manufacturers against third country imports and
minimizes the possibility of transshipment or trade deflection.
- It levels the economic environment and promotes fair competition by reducing
disparities in production costs for manufacturers in the various countries with
regard to taxes on imported raw materials and intermediate goods from third
countries.
b) To Traders within the CU:
- Traders get wider source of goods therefore, bargaining power in dealing with
suppliers resulting in cost savings for their customers.
c) To the Importers:
- Because the CU removes border controls and trade barriers, importing goods
becomes faster since traders do not have to go through so many customs procedures
in different countries. This reduces transaction costs and results in timely deliveries.
d) To Consumers:
- Consumers get a wider choice of goods and they also benefit from the advantages
of increased productivity which leads to lower prices.
e) To the CU Members:
- In a CU with a Free Trade Area, intra-regional trade is enhanced as there are no
tariffs or quotas on goods originating from within the region,
- It seeks to maintain a price advantage for regionally produced goods over goods
produced outside the Customs Union.
f) To Land locked Countries:
- Land locked countries that are neighbours to CU members who have access to the
sea, will in actual terms no longer be landlocked, given that their goods will be
cleared at first port of entry and will have free circulation rights when moving to
such, countries as all customs formalities would have been discharged at the port of
entry.
g) To the Region as a Whole (CU Members):
- A customs union promotes cross-border investment and serves to attract investment,
both Foreign Direct Investment (FDI) and domestic investment, as the enlarged

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 market is more attractive to investors than the previously small individual national
markets.
59. The principles of WTO
- Trade without discrimination
Under the WTO agreements, countries cannot normally discriminate between
their trading partners. Grant someone a special favour (such as a lower customs
duty rate for one of their products) and you have to do the same for all other WTO
members.
Imported and locally-produced goods should be treated equally — at least after
the foreign goods have entered the market. The same should apply to foreign and
domestic services, and to foreign and local trademarks, copyrights and patents
- Freer trade: gradually, through negotiation
Lowering trade barriers is one of the most obvious means of encouraging trade.
The barriers concerned include customs duties (or tariffs) and measures such as
import bans or quotas that restrict quantities selectively
- Predictability: through binding and transparency
Sometimes, promising not to raise a trade barrier can be as important as lowering
one, because the promise gives businesses a clearer view of their future
opportunities. With stability and predictability, investment is encouraged, jobs are
created and consumers can fully enjoy the benefits of competition — choice and
lower prices. The multilateral trading system is an attempt by governments to
make the business environment stable and predictable.
In the WTO, when countries agree to open their markets for goods or services,
they “bind” their commitments. For goods, these bindings amount to ceilings on
customs tariff rates. Sometimes countries tax imports at rates that are lower than
the bound rates. Frequently this is the case in developing countries. In developed
countries the rates actually charged and the bound rates tend to be the same.
- Promoting fair competition
The rules on non-discrimination — MFN and national treatment — are designed
to secure fair conditions of trade. So too are those on dumping (exporting at
below cost to gain market share) and subsidies. The issues are complex, and the
rules try to establish what is fair or unfair, and how governments can respond, in
particular by charging additional import duties calculated to compensate for
damage caused by unfair trade.
- Encouraging development and economic reform
The WTO system contributes to development. On the other hand, developing
countries need flexibility in the time they take to implement the system’s
agreements. And the agreements themselves inherit the earlier provisions of
GATT that allow for special assistance and trade concessions for developing
countries.

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 60. Differ from a FTA
The WTO includes many agreements in different areas of trade (goods, services,
intellectual property, investment, etc.). These agreements are aimed at unifying rules for
global trade and reducing trade barriers. However, the WTO has only succeeded in
reducing but not reaching the level of removing barriers to the majority of trade as in
FTAs. Therefore, there is no FTA agreement in the WTO.
61. Present the evolution of International Monetary System : From
A. Gold standard (1870-1914) + earlier
B. Gold exchange standard (1918-1939)
C. Bretton Woods (1944-1973)
D. Floating (1973-present)
The institutional arrangements that countries adopt to govern exchange rates are known as the
international monetary system
A/ Gold standard (1870-1914) + earlier
❖ The gold standard dates back to ancient times when gold coins were a medium of
exchange, unit of account, and store of value
❖ Payment for imports was made in gold or silver
❖ Later, as trade grew, payment was made in paper currency which was linked to gold at a fixed
rate
Rules of Gold Standard:
❖ Pegging currencies to gold and guaranteeing convertibility is known as the gold
standard
❖ In the 1880s, most of the world’s trading nations followed the gold standard
❖ Under the gold standard one U.S. dollar was defined as equivalent to 23.22 grains of
"fine (pure) gold
❖ The amount of a currency needed to purchase one ounce of gold was called the gold
par value
The great strength of the gold standard was that it contained a powerful mechanism for achieving
balance-of-trade equilibrium (when the income a country’s residents earn from its exports is
equal to the money its residents pay for imports) by all countries
B/ Gold exchange standard (1918-1939)
❖ The gold standard worked fairly well from the 1870s until the start of World War I in

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1914
❖ During the war, many governments financed their war expenditures by printing money, and in
doing so, created inflation
❖ People lost confidence in the system and started to demand gold for their currency putting
pressure on countries' gold reserves, and forcing them to suspend gold convertibility
❖ By 1939, the gold standard was dead
C/ Bretton Woods (1944-1973)
In 1944, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a
new international monetary system that would facilitate postwar economic growth .
Under the new agreement:
❖ a fixed exchange rate system was established
❖ all currencies were fixed to gold, but only the U.S. dollar was directly convertible to
gold
❖ devaluations could not to be used for competitive purposes
❖ a country could not devalue its currency by more than 10% without IMF approval
The Bretton Woods agreement also established two multinational institutions:
❖ the International Monetary Fund (IMF) to maintain order in the international
monetary system
❖ the World Bank to promote general economic development
D/Bretton Woods worked well until the late 1960s
❖ It collapsed when huge increases in welfare programs and the Vietnam War were
financed by increasing the money supply and causing significant inflation
❖ Other countries increased the value of their currencies relative to the dollar in response to
speculation the dollar would be devalued
❖ However, because the system relied on an economically well managed U.S., when the U.S.
began to print money, run high trade deficits, and experience high inflation, the system was
strained to the breaking point
• The US dollar was the only currency that could be converted into gold
• The US dollar served as the reference point for all other currencies
• Any pressure to devalue the dollar would cause problems through out the world
Washington Consensus (1973 – Present)

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After the collapse of the Smithsonian Agreement, the major currencies of North America,
Europe and Japan floated. During the 1970s, the dollar depreciated as inflation bit and then
commenced its dramatic ascent following the 1979-80 Volcker Shock when US interest rates
were hiked to unprecedented levels. By 1985, the dollar’s strength was harming US
competitiveness, prompting the US, Japan, Germany, France to sign the Plaza Accord, under
which they jointly intervened to lower the dollar. Their intervention was so effective that they
had to sign another agreement in 1987 - the Louvre Accord - to stop the further fall of the dollar.
Prior to these meetings, free floating exchange rates were considered the best but thereafter, the
major countries began to cooperate more.
62. How can International Monetary System be classified
 The international monetary system can be divided according to the regime of exchange
rates or the way of determining international reserve assets. According to the exchange
rate regime, there is an international monetary system according to the fixed exchange
rate regime and the floating exchange rate regime.
 Classification according to the method of determining the international reserve assets, we
have a monetary system according to the gold standard system (gold is the only
international reserve asset), the monetary system follows the indigenous regime of a
currency. country (for example, the US dollar).

63. What was agreed on at the Jamaica Accords?

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. In practice the dollar had been floating in this
way, in contravention of the articles of an agreement of the IMF, since the Nixon shock in 1971.
The accords also made provisions for financial assistance to developing countries representing
the Group of 77 member countries to compensate for lost earnings from the export of primary
commodities. An amendment was made in 1978 to allow for the creation of Special Drawing
Rights, described as "a rather cheap line of credit" for developing countries ./.

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