Assignment 1 ECON 1269 group 3 team 4-1 PDF

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Subject code ECONSubject name International TradeCampus Saigon South Campus (SGS)Assessment name Group Assignment 1Lecturer Dr. Daniel BorerStudent name & ID Tran Minh – sBui Dac Loc – s Vu Hien Long – s Vuong Bao - sWork Contribution: Question 1: Tran Minh + Bui Dac LocQuestion 2: Tran Minh + B...

Description

Subject code

ECON1269

Subject name

International Trade

Campus

Saigon South Campus (SGS) Group Assignment 1

Assessment name

Dr. Daniel Borer

Lecturer Student name & ID

Tran Minh – s3749819 Bui Dac Loc – s3754449 Vu Hien Long – s3845572 Vuong Bao - s3878354

Work Contribution:

Question 1: Tran Minh + Bui Dac Loc Question 2: Tran Minh + Bui Dac Loc Vu Hien Long + Vuong Bao Format:

Word count

Tran Minh + Bui Dac Loc

1097 (excluding graphs/tables/figures)

1|Page

Question 1: A. Before 2014, Vietnam wine market experienced a monopoly situation where Vietwine was the only supplier in the market. In price maker position, Vietwine can higher their price to the point where MC=MR to maximize their profit (Hubbard et.al. 2017) (figure 1.1). This creates allocative inefficiency (Hubbard et.al. 2017) since consumer are forced to buy at high cost, limiting their consumption.

Figure 1.1: Vietnam wine market (before tariff reduction).

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The participation of VinosDeChile into the market after the tariff reduction broke the monopoly position of Vietwine. With more choices, the market is hence more elastics as high price could drive the consumer to their competitors’ product (McLaren 2012). This is demonstrated by a flatter demand curve in figure 1.2. As a result, Vietwine would price their product lower, closer to the MC, attracting more sales.

Figure 1.2: Wine competition in the short run (after tariff reduction)

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Eventually, more competitors will enter the market, turning the wine market into a monopolistic competition. With more competition, Vietwine demand will shift inward until they are tangent to AC curve (figure 1.3). Now, wine market price of wine is lower with more product variety and more consumption compared to before trade.

Figure 1.3: Wine competition in the long run (after tariff reduction)

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B. Prior to 2014, with a huge market power, Vietwine could achieve positive producer surplus (profit) of a monopoly. Concurrently, this reduced the consumer welfare partially to the supplier and partially due to economic inefficiency (deadweight loss) (Hubbard et.al. 2017) (figure 1.4).

Figure 1.4: Market welfare of producer and consumer in wine competition market (before tariff reduction) With more competitors joining the market after tariff reduction, wine market slowly transformed from monopoly to monopolistic making prices of the product to drop while expanding the consumption (figure 1.5; 1.6). This decreases the supplier surplus to zero (figure 1.6) in the long run due to free entry characteristic (McLaren 2012). Yet it greatly benefits the economy especially consumer as now they can buy at a lower cost with a higher variety as well (McLaren 2012). Although there is still deadweight loss as the product price is still higher than MC, such economy inefficiency has been improved by trade.

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Figure 1.5: Market welfare of producer and consumer in wine competition market (after tariff reduction in the short run

Figure 1.6: Market welfare of producer and consumer in wine competition market (after tariff reduction in the long run)

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C. In reality, Vietnam wine market during 2012 to 2016 has shown dissimilarity to the assumption and trade theory. Firstly, before 2014, there were 15 local suppliers together with foreign suppliers other than Chile such as France, Italy, US, and Australia. (Vu et.al 2014). Hence, the market before the Chile tariff reduction had already been a monopolistic competition where multiple producers had small market power. Secondly, the tariff reduction for Chile Wine was applied in 2012 during the FTA policy (European Union 2020). On the one hand, the policy did help to contribute to the increase in wine consumption of the Vietnamese market. From 31.5 million liters from 2011, the wine consumption has increase gradually, reaching 40 million liters in 2015 (figure 1.7) with a YOY growth of approximately 6% (figure 1.8). On the other hand, instead of dropping the price as theoretically expected, the price in after trade policy increase. For foreign supplier, the rise in transportation cost and devaluation of VND against USD forces suppliers to raise their cost. For local supplier, the producers faced higher manufacturing cost due to electricity and water prices increase (Euromonitor 2013).

Figure 1.7: Sales of Wine in Vietnam from 2005 to 2019. Reproduced from Euromonitor 2020.

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Figure 1.8: Viet wine sales growth from 2005 to 2019. Reproduced from Euromonitor 2020.

Question 2: A. The world economy has witnessed two essential waves of globalization, manipulating transportation costs and tariffs to drop down significantly, hence, creating opportunity for stimulating foreign trading (World

Bank

n.d.).

Travelling

to

Vietnam,

after

‘Đổi Mới’

Policy imposed

in

1986,

the economic situation has been developing rapidly, when the government are open to sign numerous free trade agreements (Vanham 2018). Over 20 years, Vietnam is catching up with the world’s trade patterns, when becoming member of free trade organizations, especially ASEAN and WTO, etc. (Mah 2018). The agreements of lowering tariffs have benefited Vietnam, as export is considered the main economic activities of the country. In terms of statistics, according to World Bank data, the number of exports and imports of Vietnam over 20 years has been increasing up to $280 billion and $271 billion in 2019, respectively, which is align with the exponential growth of Vietnam GDP.

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2015 Vietnam export value to Malaysia (billion $) Vietnam import value from Malaysia (billion $) Term of trade (%)

2016

2017

2018

2019

3.9

3.64

4.63

4.33

4.04

4.55

5.73

6.7

8.39

8.26

85.714

63.525

69.104

51.609

48.910

Table 2.1: Vietnam and Malaysia trade value and term of trade from 2015 to 2019. (Data adapted from: OEC) Malaysia: Vietnam exports to Malaysia remained the same in 2015-2019, meanwhile imports surged as Malaysia government is aiming to boost their trade in Vietnam (David 2019). 2015 Vietnam export value to Thailand (billion $) Vietnam import value from Thailand (billion $) Term of trade (%)

2016

2017

2018

2019

3.51

3.95

4.92

5.44

5.07

8.87

9.4

12

12.9

11.8

39.572

42.021

41.000

42.171

42.966

Table 2.2: Vietnam and Thailand trade value and term of trade from 2015 to 2019 (Data adapted from OEC) Thailand: Vietnam export-import values with Thailand both steadily increased over the period. However, due to the economy slowdown of Thailand in 2019 (World Bank, 2020), export decreased slightly to $5.07 billion.

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Analyse: Based on the table 2.1, terms of trade between Vietnam and Malaysia dropped by 50% during 2015-2019, meaning Vietnam can only trade 1 export good for 48.91% of 1 import good. Therefore, the real income for purchasing the imports will be reduced (Triple A Learning, n.d.), resulting in the reduction in living standard of Vietnam, compared to that of Malaysia. Opposite to the trend related to Malaysia, the term of trade between Vietnam and Thailand increased at a steady pace by about 4% over 5 years (Table 2.2). I can be inferred that the living standard of Vietnam improved faster than that of Thailand (Triple A Learning, n.d.), as Vietnam is able to increase their volume imports with the corresponding exports.

B. Using comparative advantage theory of Ricardio: Vietnam Steel production Air Conditioner (AC) production Opportunity cost of producing AC

Thailand

Unit

23,000,000

2,200,000

tonnes/year

460,000

15,000,000

tonnes/year

50

0.15

tonnes/ton

Table 2.3: Steel and Air conditioner production value in 2019. (Data adapted from General Statistics Office, International Trade Administration & Nikkei Asia) From table 2.3, the opportunity cost of producing 1 ton of AC for Vietnam is 50 tonnes of steel/year while this for Thailand is significantly cheaper with only 0,15 tonnes of steel/year. Hence Vietnam has comparative disadvantage in AC and comparative advantage in steel.

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Vietnam

Malaysia

Unit

Oil

85,359

287,000

barrels/day

Oil

31,156,035

10,4755,000

barrels/year

Rice

42,529,000

1,880,000

tonnes/year

0.73

55.72

barrels/ton

Opportunity cost of producing Rice

Table 2.4: Oil and Rice production value in 2019 (Data adapted from General Statistics Office, CEIC & Statista) From table 2.4, the opportunity cost of producing 1 tonnes of rice for Vietnam is 0.73 barrel/year while this for Malaysia is greatly expensive with 55.7 barrels/year. Hence Vietnam has comparative advantage in rice and comparative disadvantage in Crude Oil. Based on theory of free trade in Ricardian model (McLaren 2012), Vietnam should specialize in producing steel and rice, while Thailand and Malaysia should focus on AC and oil production, respectively. Evidently, steel and rice industry are believed to surge as Vietnam recently signed EFVTA, opening opportunities for Vietnam steels and rice to be exported to European countries (Nguyen 2021; Agribank 2020). For steel, the growth rate of the industry is rising rapidly, backed up by enormous increase in the production capacity of steel, from 12.5 million to 23 million tonnes during 2015-2019 (GSO 2019). Similarly, Vietnam rice is reported to massively expand their production by 7%, reaching 42.5 million tonnes in 2019 (GSO 2019). Vietnam can negotiate for importing ACs and oil barrels, to fulfill demand without reducing its specialization. Over the past 5 years, the total production of ACs declined by 13.8% (only 460 thousand pieces in 2019) and that of crude oil also fell by 30% (13 million tonnes in 2019). The statistics proves that ACs and oil production is shrinking (GSO 2019).

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Reference List Agribank 2020,’ Vietnamese rice set a new record’, Agribank, 28 November, viewed 1 April 2021, < https://www.agribank.com.vn/en/ve-agribank/tin-tuc/dtl? current=true&urile=wcm:path:/agbanken/ve-agribank/news/agricultural-markets/vietnamese-rice-set-anew-record>. Barkley, A 2016, The Economics of Food and Agricultural Markets, Minneapolis Open Textbook Library, viewed 2 April 2021, Ebook RMIT Library. David A 2019,’ Malaysia-Vietnam trade boost’, New Straits Time, 3 November, viewed 1 April 2021, < https://www.nst.com.my/business/2019/11/535447/malaysia-vietnam-trade-boost9>. Euromonitor International 2013, Wine in Vietnam, Scribd, viewed 31 March 2021, . Euromonitor Intertional 2020, ‘Sales performance of wine’, chart, Euromonitor International, viewed 3 April 2020, . Euromonitor Intertional 2020, ‘Sales of wine’, chart, Euromonitor International, viewed 3 April 2020, . European Union 2020, The Food and Beverage Market Entry Handbook: Vietnam: a Practical Guide to the Market in Vietnam for European Agri-food Products, viewed 2 April 2021, . General Statistics Office 2019 ,’Statistical Year Book of Vietnam in 2019’, General Statistics Office , viewed 1 April 2021, < https://www.gso.gov.vn/wp-content/uploads/2020/09/Nien-giam-thong-ke-daydu-2019.pdf>. Hirschmann R 2021,’Production of rice in Malaysia from 2013 to 2019’, Statista, Jan 6, viewed 1 April https://www.statista.com/statistics/794700/rice-production-volume-malaysia/#:~:text=In

2021,<

%202019%2C%20the%20production%20volume,a%20staple%20food%20in%20Malaysia.>. Hubbard, RG, Garnett, AM, Lewis, P & O’Brien 2017, Microeconomics, 4th edn, Melbourne, VIC Pearson Australia, viewed 1 April 2021, Ebook RMIT Library database. Kawakami Azusa 2020,’ Thai air conditioning market hot for investment’, Nikkei Asia, 5 February, viewed

1

April

2021,

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International Trade Administration 2019,’Steel Imports Report: Thailand’, International Trade Administration, viewed 1 April 2021, Mah K 2018,’ An introduction to Vietnam’s Import and Export Industries’, Vietnam Briefing, 19 November, viewed 1 April 202, . McLaren, J 2012, International Trade, 1stEdition, Wiley, viewed 1 April 2021, Ebook RMIT Library database. Nguyen T 2021,’Vietnam steel industry outlook 2021’, Mirae Assets Securities, 22 January, viewed 1 April

2021,

. OEC n.d.,’Vietnam (VNM) Exports, Imports, and Trade Partners’, OEC, viewed 1 April 2021,

ORGANIZATION OF THE PETROLEUM EXPORTING COUNTRIES, 2019, Malaysia Crude Oil: Exports https://www.ceicdata.com/en/indicator/malaysia/crude-oil-exports ORGANIZATION OF THE PETROLEUM EXPORTING COUNTRIES, 2019, Vietnam Crude Oil: Exports https://www.ceicdata.com/en/indicator/vietnam/crude-oil-exports Vanham P 2018,’ The story behind Viet Nam’s economic miracle’, World Economic Forum, 11 September, viewed 1 April 2021, . Vu ,TVA, Chieu, TQ & Nguyen TTT 2014, ‘Vietnam Wine TrendChallenges for imported wine companies in Vietnam market’, Universite De Strasbourg, viewed 1 April 2021, . World Bank n.d.,’ Exports of goods and services (current US$) - Vietnam’, World Bank, viewed 1 April 2021, < https://data.worldbank.org/indicator/NE.EXP.GNFS.CD?locations=VN>. World Bank n.d.,’ The New Wave of Globalization and Its Economic Effects’, World Bank, viewed 1 April 2021, . World Bank n.d.,’ Imports of goods and services (current US$) - Vietnam’, World Bank, viewed 1 April 2021, < https://data.worldbank.org/indicator/NE.IMP.GNFS.CD?locations=VN >.

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World

Bank 2020,’Thailand

Overview’, World

Bank,

viewed

1

April

2021, < https://www.worldbank.org/en/country/thailand/overview>.

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