(TIỂU LUẬN) in the oligopoly market, a small number of firms significantly influence each other the influence of each firm relates to the concept of prisoner dilemma that if one out of two firms

Figure 1.4: Consumer surplus in Autarky vs Trade with transportation costFigure 1.5: Profit of TS in Autarky and Trade with transportation cost Figure 1.6: Net welfare in trade If there

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QUESTION 1:

1. Prisoner Dilemma

In the oligopoly market, a small number of firms significantly influence each other Theinfluence of each firm relates to the concept of Prisoner Dilemma that if one out of two firms inoligopolies takes the optimal action for itself, the outcome would be worse for both firms.Moreover, if both firms take the optimal action simultaneously, the outcome would be the samefor both (McLaren 2012, p 57)

Assumption 30

Profit from the export pluscompetition

Figure 1.1: Assumption and Profit following Prisoner Dilemma

(2) presents the case TS does not export but XD does, XD profit then will be 360 (300 Autarkyplus 60 export) In contrast, TS’s domestic profit reduces to 180 due to the market having newcompetition The case happens vice versa for (3) However, whether TS does export or not, theoptimal option of XD is to export since 360 is higher than 300 Autarky If TS also chooses the

same strategy, XD and TS will meet at (4) That is when both firms trade simultaneously, bothearn 220 each instead of 360 because they earn from export but not as much as domestic lossesfrom the competition Moreover, obviously making 220 is better than 180 (profit from doingnothing and foreign firm are going to conquer the local market) In short, under free trade withinthe situation of Prisoner Dilemma, regardless of the action of the competitor in the oligopoly,both firms will take the dominant option that is to trade than do nothing, otherwise, the outcomewill be lower for both.

2 Cournot model and the welfare analysis

Assuming that marginal cost is 5000 USD, transportation costs for each unit is 1500 USD Also,assuming that the price of the car is the same in both countries since they share the same demandcurve and react based on the cournot model on that demand curve

Case 1: No transportation costs

If there are no transportation costs, the surplus of the consumers will be increased since they canconsume with a lower price ($7500 > $6700) compared to autarky Accordingly, the profits of thefirms will be decreased because even though they sell more cars (5/4m to 5/3m), the price of thecars has decreased in larger degree ($7500 to $6700) The grey area in figure 1.2, total revenue,had decreased from $3125 (Autarky) to

$2833 (Trade) after the trade withouttransportation costs

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Figure 1.2: TS profit in Autarky and Trading with no transportation cost

Case 2: Transportation costs exist

Figure 1.3: Reaction function

Figure 1.4: Consumer surplus in Autarky vs Trade with transportation cost

Figure 1.5: Profit of TS in Autarky and Trade with transportation cost

Figure 1.6: Net welfare in trade

If there are transportation costs, consumer surplus increases and the firms’ profits decrease Inthis case, the reaction function of XD, figure 1.3, shows larger selling compared to that ofautarky(5/4mil to 17/12mil) Moreover, the price for the cars would be lowered from $7500 to

$7180 As seen on the figure 1.5 comparison, A will be the loss from the firms’ profits since theylower the price from the autarky Moreover, due to the transportation costs, they lose D.However, compared to autarky, they export goods to each other, and they gain profits fromexport revenue minus transportation costs, which is C

Therefore, the consumer surplus will rise as depicted in figure 1.4 In autarky, deadweight loss ishigher than that of trade because firms are changed from monopolists who charge higher price totheir product, to participants of competition who make price based on equilibrium of market

supply and demand Therefore, the price after trade will be lowered, hence deadweight lossreduces and eventually beneficial for society welfare (figure 1.6).

QUESTION 2:

McLaren (2012) pointed out that a specific model is when the determinant of manufacturingcannot be altered across industries Also, there are few or all factors of manufacturing in themodel that are distinguished, and it can be known as a specific factors model (McLaren 2012).Labor is a mobile factor that can motivate freely through 2 industries

Assuming that land-A and capital-K are specific since each kind of capital and land are made for

a particular manufacturing process, textile requires (labor) L and (capital) K and sugar requiresland-A and labor-L Profit-maximizing conditions require both sectors to choose the output levelsince labor usage level as wage should be equal to the MVPL of both industries (w =

p MPL (LS S S MPL (L /K))

/A) = pT T T

Nevertheless, if an administration does not dictate the tariff on imported products, the demand ofconsumers will be higher, which means that they will ask the government for their demandsatisfaction Moreover, due to the domestic supply being low, there is an existence of excessingdemand Based on Toppr (n.d.), when consumers seek for lower-price products and competitionbetween customers occurs, it leads to a rise in prices Thus, other suppliers will take advantage ofhoping to gain more profit from it

Figure 2.1: Equilibrium with the mixed specific-factors model

Figure 2.2: Effect of Tariff

Because Sugar industry in Vietnam has a comparative disadvantage, we should import sugar andVietnam will export their comparative advantage product is textile (McLaren 2012) Thus, whenthe government imposes a tariff on imports that affect consumer price p , p is unchanged.S T

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Suppose that the government reduces the import tariff by 50%, makes p decrease by 50% andthat shifts the MVPL to the left proportionally by 50% and meets at point Y However, the newSequilibrium (Z) went up and to the left compared to Y Thus, the wage declined but less than50% Due to the decline of tariff, the wage decreased to W’ but the real wage in respect of sugar

increases to W '

0.5 p S so the sugar intercept after reducing tariff is greater than its current tariff.

Since pT is unchanged, the real wage regarding textile

W '

p T decrease so the textile interceptafter reducing the tariff is smaller than its current tariff

Figure 2.3: The effect of reducing tariff on the free-worker’s budget lines.

Thus, the free workers have both higher and lower utility after reducing tariffs Noticeably,looking at figure 3, the more essential in the consumption bundle of textile the more likely thatthey are worse-off and the more essential in the consumption bundle of sugar the more likely thatthey are better-off

Considering the welfare of workers and firms, the boundary of the area of Vietnam farmer’ssugar income in figure2 shifts down by 50% and the lower boundary also shifts down but lessthan 50% so the whole area would decrease less than 50% Thus if the Vietnam farmer’s sugar

w/Psw’/Ps

income denote by I soS I

p S decreased and the p is remained so T I

p T decreased The budgetline of Vietnam farmer’s was shifted in

Figure 2.4: Vietnam farmer’s budget line

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Figure 2.5: Vietnam capitalist’s budget line

According to The Worldbank (2020), Vietnam’s GDP is around $200billion compared to theworld’s GDP is nearly $85trillion so Vietnam is considered as a small country compared to theworld’s economy Following figure12, tariffs make Vietnam's sugar industry overproduction andunderconsumption which are social welfare costs to Vietnam and gain from terms-of-tradebenefit However, as a small-eco, its gain is not large enough and likely to-be insignificant or notbetter-off to the whole eco-development However, the reason that the Vietnam governmentshould maintain tariffs or accept the appeal of the Association of Sugar Products of Vietnamselling protection to the interest group The government is a part of sugar producers- the biggestgain by tariffs They maximize not social welfare but put more weight on social welfare of theinterest group relative to the products which were imposed by tariffs Nevertheless, in the long-term when our sugar industry becomes larger, reducing the tariff or even no tariff to gain term-of-trade benefit Hence, in 2007 Vietnam join FTAs with Euro and become the largest exportersgoods of among 10ASEAN countries to EU since 2015 that support Vietnam effort to enhancethe economy for benefit of their people (Delegation of the European Union to Vietnam 2019).

QUESTION 3:

1 Vietnam’s trading partner

Based on the total value of import and export of Vietnam, Japan is one of the top 10 leadingcountries which trade with Vietnam in 2018 (OEC n.d.), which accounts for 7.9% out of the sum

of value trade (Best Care Shipping 2015)

2 Skilled or unskilled labor abundant

According to McLaren (2012), the skilled labour is the worker with a college degree Thepercentage of workers who have college degrees in Japan in 2010 is 83% of the total population

of Japan (OECD n.d.) However, that of Vietnam in 2013 is 26% of the total population ofVietnam (OECD n.d.) Moreover, based on OEC (n.d.) the most specialized products of Vietnamare mainly ingredients for food, fabric and goods that need low-level of processing However,those of Japan tend to be more focused on goods that need more sophisticated levels ofprocessing like chemicals and watch movements Therefore, with these two pieces of evidence,Japan is more focusing on skilled labour than Vietnam

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Figure 3.1: Most-specialized-products of Vietnam and Japan (Source: OEC, n.d.)

3. Heckscher-Ohlin model

McLaren (2012) pointed out that the Heckscher-Ohlin model (HOM) is the easiest way todetermine the labor market’s problems affected by globalization HOM can be understood as acomparative advantage model between countries (McLaren 2012) Also, it is acknowledged thatwhether countries are abundant in which factors, they may manufacture and export theirincentives products

Based on VnEconomy (2018), Vietnam exports textile; kinds of transport and replaced parts;equipment and tools; seafood; wood products - which are primarily exported products to Japan.Trinh (2020) indicated that the textile industry is one of the key sectors in Vietnam representing16% of GDP Furthermore, Koushan (2018) stated that lack of skilled-employment is one of thekey factors that Vietnam’s labor market is faced The shortage of technology, vocational andtechnical skills lowers Vietnam competitiveness and decreases economic growth (Koushan2018) Hence, according to the Heckscher-Ohlin model HOM) theory, Vietnam’s textile industry (

is known as an unskilled labor abundant which exports unskilled-incentives goods

Moreover, machinery and equipment, computers and electronics devices (industrial field);plastics items; iron and steel are products exported to Vietnam by Japan (VnEconomy 2018).According to Nordea (2020), an industrial sector - one of the main fields in Japan, which rangesfrom paper to biotechnology or artificial intelligence, accounting for 29.1% of GDP Nordea(2020) also declared that Japan is a home of manufacturing electronic items Also, this industryplays an essential role for the country's modernization and industrialization (International LabourOrganization 2014) In short, based on the concept of HOM, Japan’s industrial sector isacknowledged as a skilled labor abundant which imports skilled-incentives products.

4. Samuelson-Stolper Theorem

Figure 3.2: Gini index of Vietnam in the last 20 years

Figure 3.3: Gini index of Japan in the last 20 years

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Figure 3.4: Japan export of Machinery and Equipment

Samuelson-Stolper Theorem is the case when a country trades, income of abundant factorincreases while income of scarce factor decreases resulting in increased inequality (McLaren2012) Vietnam and Japan had an opposite level of Gini index that Vietnam reached the highest

of 39.3 in 2010 while Japan slump to the lowest of 32.1 in 2011 (figure 3.2, 3.3) RegardingVietnam with unskilled-labor abundant, textiles - incentive goods of Vietnam was export themost (up 23% from 2009 to $9.2 billion) (Vietnam Trade Promotion Agency 2011) which meansthe aggregate demand of textile increase lead to relative price increase, hence benefit theunskilled labor to raising their income and hurts income of skilled workers As a result, making agreater gap in income distribution among abundant and scarce labor Regarding Japan, due tochange in educational policy and an aging population, the supply and demand have increasedsimultaneously which make the relative price for skilled workers stay the same (Kawaguchi andMori, 2018) while income minimum wage also increases (Mitsumaru K et al 2016) which ismore beneficial for lower-wage workers Thus, income inequality falls eventually Until 2010,skilled-intensive goods exports decreased (figure 3.4) due to Japan's economy being hard hit byTsunami (Associated Press 2011), which hurt the relative skilled wages to decrease, hence theGini index fell to the lowest In short, change in income distribution is the effect of tradingamong two countries in which the increase of abundant labor’s wage affects the scarce labor’swage

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