Group assignment 2 effects of trade theory explanation

In a perfectlycompetitive market, the SFM supposes that an economy manufactures two commoditiesexport product tobacco and import product cloth actually utilizing three factors ofproducti

Group Assignment 2

Group-work Report

Allocation Contribution Signature

Nguyen Toan Duong Question 1.a 100%

Pham Quoc Khai Question 2.b

Question 2.e 100%

Tran Bao Ngoc Question 2.c 100%

Vuong Do Thanh Uyen Question 1.b 100%

Nguyen Quoc Bao Question 2.a

Question 2.d 100%

SFM: The mixed specific factors model MVPL : The marginal value product of labour MPL: The marginal product of labour DCA: Domestic currency appreciation ASEAN: Association of Southeast Asian Nations

CBU: Completely built-up ToT: The terms of trade OEC: The Observatory of Economic Complexity

QUESTION 1:

A T HEORY EXPLANATION : 5

B T ERMS OF TRADE :9

QUESTION 2:

A I NCREASING RETURNS OF SCALE : 11

B H ECKSCHER OHLIN MODEL - : 13

C L ABOR EXCHANGE : 15

D R ECOMMENDATIONS FROM IRS : 17

E R ECOMMENDATIONS FROM HECKSCHER OHLIN MODEL - : 17

REFERENCES:

Table of Contents

The mixed specific factors model (SFM) illustrates the trade's influences on an economywhere one production factor is specific to an industry (Tohamy & Mixon 2003) In a perfectlycompetitive market, the SFM supposes that an economy manufactures two commodities(export product tobacco and import product cloth) actually utilizing three factors ofproduction (labor, capital, and land) because each industry wields differentiated specificcapital Thus, Tobacco industry's land and Cloth industry's capital industry are specificfactors, whereas labor is liberally and costlessly mobile across industries Afterward, thefirms in each production select an appropriate labour input to maximize profit until the wage(W) equals the marginal value product of labour (MVPL): WC=P MPL (L /K ),C C C C

WT=P MPL (L /AT T T T) with L=LC+LT (McLaren 2012) Point A signifies the equilibrium labourallocation to two sectors and the equilibrium wage (w) The horizontal and vertical linerespectively shows the number of employed workers and their wage for each industry, hence,the shaded area represents the capitalists' income and land owners' earnings after subtractingthe salary payment According to the law of diminishing return, the downward sloping MVPLcurve manifests if labor usage increases, the MPL will decline since the output price is fixed(Akay 2009)

Figure 2 Effect of domestic currency appreciation (DCA) on the mixed specifics model

Tobacco ProductionFarmers’ Income

Cloth

Production

Capitalists’ Income

BA

The domestic currency appreciation (DCA), which is the increment in one country's currencyvalue relative to another country's currency, could hamper exports and diminish import goods'price (Hsing 2018) Hence, the terms of trade, which represents the ratio of a country's exportand import prices, will grow significantly and have a positive effect on domestic cost-pushinflation (Yetiz 2017).

Although the foreigners receive the more exorbitant export price, the domestic export priceactually remains constant leading the MPL curve to be unchanged Otherwise, the importT

price's decrease makes the cloth labor demand reduced, so the MPL curve shifts leftward toC

point E' where cloth workers suffer a lower wage (W') So, cloth employees will move towork in tobacco industry for a higher price (Krueger 2020), meaning cloth industry witnesses

a loss of labor (a blue double arrow) Applying the law of diminishing return, tobaccoemployers will curtail the wage to reduce the workforce overcrowding (L' ).T

Consequently, both cloth capital owners and cloth workers experience a decrease in theirincome, but the cloth price decline will improve their welfare due to reduced laborcompetition In contrast, an increased number of employees in the tobacco sector shrinkstheir wage down, whereas the land owners' income enlarges

Exports of Thailand with Vietnam (international $)

Refined petrolium Air conditioners

Figure 3 2 main exports products of Thailand with Vietnam (2014-2018) graph

Source: OEC ( https://oec.world/en )

Imports of Thailand with Vietnam (internation $)

Crude Petrolium Broadcasting Equipment

Figure 4 2 main imports products of Thailand with Vietnam (2014-2018) graph

Source: OEC ( https://oec.world/en )

During the last five reported years, refined petroleum and air-conditioner had the earning exports However, Thailand has replaced China as Vietnam's biggest fruit andvegetable exporter due to the increased domestic demand in 2017 (Tung 2018) By 2018,Vietnam's import tariffs on automobiles from ASEAN have been drastically reduced to 0%for CBU, which lead to increases in CBU imports from manufacturing hubs of Thailand(Shira & Associates 2018) Oil ranks 2nd to broadcasting equipment on the list of Thailand’sprimary imports from Vietnam Since Thailand's domestic crude oil reserves are decreasing,the country has acquired a huge volume of Vietnamese crude oil, resulting in a dramaticincrease in Thai imports from Vietnam (Eia 2017).

highest- Calculation of the ToT:

Thailand remained Vietnam's biggest trading partner in ASEAN, whilst Vietnam is thesecond-largest trading partner in Thailand (Duc 2021) Regarding investment, Thailandcurrently ranks 9th top investors in Vietnam which Thai firms are progressively dominatingdistributing systems and replacing items created in Thailand with those manufactured inVietnam (VNA 2018) In the past, Vietnam’s trade deficit with Thailand has constantlyincreased because Vietnam's primary imported high-value products while only exportinglower-value products (Nhan Dan 2018) However, Vietnam achieves a trade surplus for thefirst time with Thailand thanks to the tremendous growth of fruit and vegetable exports to thecountry in 2021 The important solution for Vietnam to gradually maintain trade balance withThailand is improving the competitiveness in quality, affordability and safety of Vietnameseagricultural goods

Telephones (% of total export market value)

Figure 5 Telephones export of Vietnam (unit: % of total export market value)

Source: OEC ( https://oec.world/en )

Increasing economies of scale is when a firm enhances its level of output by taking the costadvantage since there was a reverse relationship between the per-unit fixed cost and thequantity of production, it refers to the input sourcing division or innovating the manufactureprocess (CFI n.d) Figure 5 illustrated a significant growth by 5.13% within 5 years of thetelephone export segment of Vietnam, since most of foreign companies are looking to adaptthe internal economies of scale by deploying high-tech machine to replace the human labor,

as a result, foreign enterprises in the telecommunication industry can achieve lower fixedcost, higher output production

Intra-industry is determined as the trade among countries within the same industry and level

of development, it also includes foreign direct investment to locate its affiliates in differentcountries to trade goods and services (OECD 2010) Therefore, the intra-industry has takenpart in the telecommunication industry in Vietnam since most of the telephone’s brand inVietnam are from FDI companies such as Samsung is the one that prioritize the quality andcompetitiveness over incentives (Tung 2020), or Apple which has invested $101 million formore FDI project to enter Vietnamese market (Vietnaminsider 2021), which explains whymost of Vietnamese telephone brand has withdrawn as they are unable to compete with thesegiant FDI firms Although the industry has gained lots of successes and profits, it is recentlystruggling with COVID-19 crisis The export of phones and material in 2020 have shrunk

Footwear export (% of total export marrket value)

Figure 6 Footwear export of Vietnam 2014-2018 (unit: % of total export market value)

Source: OEC ( https://oec.world/en )

Figure 7 Size of skilled labor in Vietnam

Source: Vu 2020

The Heckscher-Ohlin model is a comparative advantage model in international trade Itdemonstrates that countries which have abundant capital are more likely to export capital-intensive goods, meanwhile, countries in which labor is approximately abundant will tend toexport labor-intensive goods (Morrow 2010) Overall, countries export what they can mostproductively and amply produce.

One of Vietnam's main export industries is the footwear industry In 2018, the footwearindustry ranked second in exporting products to other countries, accounting for 7.62%, andonly behind electrical machinery, equipment with 36.6% of total exports (OEC n.d) Vietnam

is known for its exceptionally evolved footwear producing industry, and it's currently theworld's second biggest footwear exporter after China Vietnam's footwear export economy isvalued at $22B/year (Kennemer 2020) Vietnam has accomplished fast economicdevelopment since the improvement in the 1990s and has taken advantage of expanding FDI

In spite of the fast turn of events, the number of skilled workers is narrow compared to theneed of the industrialization, modernization and global integration process The number ofskilled labors in Vietnam took only 10.2% of total employment in 2014 (Figure 7) Althoughthis number is increasing constantly, Vietnam still has had a shortage of skilled workers In

2018, the number of skilled workers was 20.3% of total labor employment (Vu 2020) Hence,

c Labor exchange:

Foreign labor with advanced education has played an important role in international trade(Nishiyama 2013) Specifically, Japan and Korea are industrialized countries, have a highdemand for skilled personnel Meanwhile, the Vietnamese footwear industry has a shortage ofmanagerial skills (Lan 2016) Following the SFM, if Vietnam enables skilled workers fromJapan and Korea to work in the footwear industry, it will accelerate trade, and maintaineconomic growth with industrialized countries (Alessandro 2002) Besides, labor endowment

is the key for the comparative advantage of developing countries The SFM assumed that thelabor intensity of export industries in developing countries is higher than that of import-competing sectors (Alessandro 2002) Therefore, trade liberalization raises overall labordemand (Fishlow 1984) Particularly, trade liberalization will increase the relationshipbetween employment indicators and sectoral wage, sectoral trade variables include tradeprices, trade flows, trade policy variables (Fishlow 1984) However, based on the Rybczynskitheorem, if we keep the constant price of a product and increase the number of skilledworkers, the intensive supply of that product will increase, and the supply of others willdecrease (Opp 2009)

Table 2 Vietnamese labor assumption (unit: million)

Figure 8 Vietnamese labor illustration

d Recommendations from IRS:

There are 99% of electronics manufacturing firms of all size are owned by foreigner in 2018,which means these foreign companies are the most likely to be affected by COVID-19, suchenterprises have to face with a contraction of 10% to 20% in their order for 2020 (PwC2020) It also delays the logistics process which requires more safety protocol for suppliers oftech firms and distributors (Sen 2021) Although Vietnam has been free from infection fornearly 1 year, it is difficult for the telecommunication industry to emerge strongly out of thepandemic But it can slowly regenerate and regain its position if the government can proposepolicies in terms of taxation or making an incentive by supporting tech firms with lowinterest rates As a result, the telephone industry can strongly emerge through crisis torebound to the market

e Recommendations from Heckscher-Ohlin model:

After Covid-19, in the first half of 2021, footwear export increased by 28.4% compared to thesame period last year The reason is Vietnam has been less affected by Covid-19 Moreover,low working costs and stable politics are elements that prompt investors to place orders withlocal companies (Anh 2021) Because Vietnam is abundant in unskilled workers, thegovernment should complete research and investigation of work market patterns and newskills and the industry demand in the market to react to industry changes and matchorganizations and local human resource development centers (CARE 2020)

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<scale/>

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<

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