FINAL ASSIGNMENT INTERNATIONAL ECONOMICS COURSE CODE 202 INE2020 e5

VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMIC & BUSINESS FINAL ASSIGNMENT INTERNATIONAL ECONOMICS COURSE CODE 202 INE2020 E***5 Lecturer Le Tuan Anh Student Tran Thi Thu Trang ID student 19051242[.]

VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMIC & BUSINESS

FINAL ASSIGNMENT INTERNATIONAL ECONOMICS COURSE CODE: 202 INE2020 E***5

Student: Tran Thi Thu Trang

Hanoi, July 2021

Part I:

Question: Analyze the benefits of free trade between countries? Supporting your answers with relevant arguments and data.

Answer:

The global economy is facing a challenge which is the impact of the COVID-19  pandemic The COVID-19 pandemic has been plunging the global economy into one of the deepest recessions ever, and it’s unclear when it is addressed According to the World Health Organization (WHO), Coronavirus Disease (COVID-19) is an infectious disease caused by a newly discovered coronavirus The virus that causes the outbreak of COVID-19 is

SARS-CoV-2 (formerly known as Corona virus) The virus causes severe acute respiratory syndrome, officially named by WHO and implemented on 11/02/2020 The first confirmed Covid-19 case was recorded in Wuhan city, Hubei province, China on December 3, 2019 Since the beginning

of February 2020, the virus has spread inside China and spread to several other countries, including Vietnam On March 11, 2020, WHO classified the COVID-19 as a global pandemic

Up to now, the world has experienced two outbreaks of COVID-19 and may enter a third wave The online statistics site worldometers.info continues to update the latest data as of  the morning of June 11th In 2021, the total number of COVID-19 infections in the world is currently 175.576.659 cases, of which 3.787.298 deaths and 159.435.134 cases have been cured The US is still the world's leading country in the number of infections Yesterday, the

US recorded 11.524 new infections, bringing the total number of infections in this country to 34.272.447 cases, of which 613.855 cases have died Meanwhile, the number of new infections

in India - the second hardest hit country by the pandemic declined, with 91,266 cases The total number of infections in this country is 29.273.338 cases, of which 363.097 have died After a  peak day with more than 6000 deaths recorded, yesterday, India recorded an additional 3.402 deaths from the COVID-19 pandemic Brazil became the third country in the world in terms of  cases with 17.210.969 cases and the number of deaths was 482.019 Only yesterday, the country recorded an additional 85.612 new infections, 2.228 deaths Asia became the region with the most infections in the world (53,092,428 cases) With 47.069.730 cases, Europe is the second affected region Followed by North America with 40.079.962 cases and South America with 30.235.787 cases Africa (5.028.091 cases) and Oceania (69.940 cases) are the two least affected regions The situation in Asia is still complicated with the number of new infections and deaths continuing to increase, of which Indonesia recorded the highest number of  infections on June 10, 2021 at the highest level since February 26, 2021 with 8.892 cases; Mongolia has a record high number of daily infections with 1,460 cases; Malaysia added 5.671

new infections and 73 deaths; Cambodia with 11 deaths and 426 new infections In Asia, follow India, Iran is the second affected country by the COVID-19 pandemic with 5.313.098 cases, of which 48.524 have died June 10, 2021, the country recorded 12.398 new infections The IMF reported that COVID-19 lead to the most serious socio-economic crisis since the second world war The severity has surpassed the 2008 financial crisis, even surpassing the Great Depression in the US in the 1930s The year 2020 has witnessed a downward trend of  most global economies and economic area World economic growth continues to be heavily effected by the COVID-19 pandemic Most of the major economies continue to face many difficulties, especially the US and European countries Measures of lockdown, social distancing, border closure in many countries have caused economic stagnation

 Figure 1: Global gross domestic product (GDP) at current prices from 1985 to 2026(in billion

U.S dollars)

Sources: Aaron O’Neil 

Statistics showed that global gross domestic product (GDP) from 1985 to 2020, forecast

to 2026 In 2020, global GDP will reach about 84.54 trillion US dollars, nearly three trillion lower, compared to 2019 Before the historic shock named Covid -19, 2020 recorded for the first-time dozens of economies around the world simultaneously fell into recession such as the

US, UK, Spain, Portugal, France, Germany, Italy, Australia, Brazil, Canada, Japan, Korea, Indonesia, Singapore, Philippines, Thailand, Indonesia In which, the US and Europe are the main countries of the center of the epidemic and also the worst places of economic and trade

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growth in 2020 For 2020 as a whole, GDP fell by 3.3% in the G20 area, with only China and Turkey recording growth (of 2.3% and 1.8%, respectively), while the United Kingdom

experienced the largest fall (minus 9.9%)

 Figure 2: Quarterly GDP in volume terms for the G20 economies in 2019 and 2020

Sources: OECD

According to a report by the International Labor Organization (ILO), it is estimated that the economic consequences of the Covid-19 pandemic are the loss of about 81 million jobs in

2020 The decrease in working hours includes both reduced hours worked for those still employed and those who lost their jobs The level of job loss is "unprecedented", with 114 million people Notably, 71% of these job losses (equivalent to 81 million people) were

workers who were no longer engaged in economic activity, rather than unemployed This means that workers are leaving the labor market because they are unable to work, or due to  pandemic control measures or simply stopping finding a job Therefore, just inspecting the unemployment index, we cannot fully assess the considerable impact that COVID-19 has on the labor market These enormous decline brought about contracting by 8.3% in global labor income (before support measures were taken), equivalent to US $3.7 trillion or 4.4% of global gross domestic product (GDP)

The COVID-19 pandemic affects all economic activities of the world, in which tourism

is the most affected industry The World Tourism Organization (UNWTO) has seen 2020 as the worst year in the history of the world tourism industry According to the latest statistics of

UNWTO, the global tourism industry in 2020 recorded a loss with a 73% drop in international tourist arrivals In 2020, the outbreak of the Covid-19 pandemic prompted governments and authorities around the world to impose unprecedented travel restrictions to prevent the spread

of the deadly pandemic that has made tourist attraction loss of 1 billion international visitors compared to 2019 Global export revenue in tourism has contracted by $ 1.3 trillion in 2020  because of the Covid-19 pandemic This loss is 11 times larger than the loss recorded during the global financial crisis in 2009 This loss of revenue in the tourism industry because of this Covid-19 cost global GDP up to 2 trillion USD Asia and the Pacific, the first region impacted

 by the Covid-19 pandemic and the region with the highest levels of travel restrictions, saw an 84% drop in visitor arrivals in 2020 The Middle East and Africa has contracted tourist arrivals

 by 74% International visitors in Europe fell to 69%, the Americas plunged by 68%

In the US the world's largest economy by GDP at market exchange rates, accounting for  about a quarter of global GDP, in the second quarter of 2020 shrank 31.4%, the smallest number since 1947, mainly due to Americans losing their jobs, which led to a sharp drop in consumer (factor that contributes to 2/3 of GDP ) (down 34%) Previously, the country's economy shrank by 5% in the first quarter of 2020 and fell into recession due to pandemic, ending the 11-year growth streak - the longest period of growth in history In parallel,  businesses have stalled production due to the Covid-19 epidemic and global supply chain disruptions The investment situation also became gloomy with a decrease of up to 27% compared to the same period in 2019 According to a report by the US Department of  Commerce, the country's trade deficit in 2020 increased by 17.7% to $678.7 billion, the highest

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level since 2008 Specifically, exports of goods and services fell 15.7% to the lowest level since 2010 Imports of goods and services also fell 9.5% to a 4-year low The drop in export activity has caused the US gross domestic product (GDP) to fall by 3.5% in 2020, the steepest decline since 1946 US imports in the first five months of 2020 declined more than 13%, or 

$176 billion, compared with the same period last year In Germany, exports to the US fell by 36% compared to the same period last year (according to IMF data) According to the US Bureau of Labor Statistics, the country lost 20.4 million jobs in the second quarter of 2020 as  businesses were forced to close due to COVID-19 In December 2020, the country lost 140.000  jobs 847,000 people filed for unemployment benefits just in one week A poll by the University of Chicago and the University of Notre Dame found that the poverty rate in the US rose to 11.8% in the second half of 2020 to 8.1 million people

According to data from the European Statistics Authority (Eurostat), the economies of  the 27 members of the European Union (EU) shrank by 6.4% in 2020 In the Eurozone, the economy fell 6.8% in 2020 Germany, Europe's largest economy, recorded a smaller  contraction than other major EU countries in the second quarter However, the country also recorded a 10.1% decline in GDP - the steepest decline since the country started quarterly GDP statistics since 1970 and the financial crisis in 2009 France, Italy and Spain is the countries hardest hit by the pandemic compared to other countries in the region when recording a decrease in the second quarter of 13.8%, respectively; 12.4% and 18.5% Besides, Portugal recorded a decrease of 14.1%, Belgium 12.2% and Austria 10.7% With a decline of 18.5%, Spain was the country with the largest decline among EU member states in the second quarter

In terms of unemployment rate, in the first eight months of 2020, the Eurozone had about 13.2 million unemployed people and the number of unemployed people increased by 251,000  people Specifically, the unemployment rate in 19 countries in the Eurozone increased to 8.1%

in August 2020, from the corresponding level of 7.9% in July After the second outbreak in August / 2020 2020, in the first month of the fourth quarter of 2020, the EU's import and export turnover of goods to non-EU markets recorded 178.9 billion euros (equivalent to 218.17  billion USD), down 10.3% compared to with the same period in 2019; imports from the

non-EU market stood at 150.8 billion Euro (equivalent to 183.9 billion USD), down 14.3% over the same period last year Meanwhile, intra-regional trade between EU member states fell 4.5% to 266.6 billion euros ($325.12 billion)

China is one of the few countries with positive GDP growth in 2020 According to the  National Bureau of Statistics of China, China's GDP in 2020 will reach 101.569 trillion yuan

In comparison, GDP in 2020 grew by 2.3% Specifically, from the second quarter to the fourth quarter of 2020, China's GDP increased by 3.2%, 4.9% and 6.5% respectively in the same  period, after suffering from a decline of 6.8% in the first quarter of the same period as a result

of Covid-19 According to the General Administration of Customs of China, in 2020, Export-import turnover reached 32.160 billion yuan (more than 4.646 billion USD), an increase of  1.9% over the same period last year, of which exports increased by 4% In 2020, ASEAN is China's largest trading partner with a total two-way trade turnover of US $684.6 billion, up 7%, followed by the European Union (EU) and the US Notably, trade with the US increased the most among the top 5 partners, reaching 8.8% China's trade surplus in 2020 also reached about

535 billion USD, a sharp increase of 27.4% This is the deepest on record since 2015 In which, the trade surplus with the US alone reached about 317 billion USD, accounting for nearly 60%

In trade relations with Australia, the two-way turnover between the two countries decreased by 0.1%, of which Australia's exports to China decreased by 4.6%, while China's exports to Australia still increased sharply 11.2% The unemployment rate in China increased quite high

in the first quarter of 2020 Official data from the National Bureau of Statistics of China show that the unemployment rate in this country has fallen from a record of 6.2% in February to just 5.9% in March Chinese cities lost 26 million jobs in the first quarter of 2020, as opposed to 8.3 million jobs created in 2019 During the first quarter of 2020, on average, about 18.3% of the workforce is laid off, reduced in wages or on unpaid leave

From the aforementioned data, it can be seen that the global economy has plunged into a severe contraction due to the COVID-19 pandemic After nearly 2 years of the outbreak, vaccines are only the most effective tool To date, 93 vaccines are being tested in human clinical trials by researchers, of which 30 have reached the final stage of testing and at least 77  preclinical vaccines are being tested on animals More than 1.34 billion doses of the COVID-19 vaccine have been administered worldwide as of May 11, 2021 According to the statistics of  the New York Times, Seychelles - East Africa - has the highest vaccination rate in the world with 70% of the population having received at least 1st dose and 62% of fully occulated, with a total number of doses is 128.919 Next is Israel with 60% of the population having had the 1st shot and 56% of the 2nd shot The US is also leading in vaccine rollout with a vaccination dose rate per 100 people of 79, with a total of 263.132.561 doses of vaccine administered However, this number is still low and there are significant differences between continents in vaccination rates About 83% of vaccine doses administered worldwide are in high-and middle-income countries Ưhile low income countries have received just 0.2% Therefore, it is very likely that the world will have to experience the 3rd wave of COVID-19 Currently, the challenges that the world economy is facing are the impacts during the COVID-19 period After the pandemic  passes, its consequences will be more serious and bring more challenges Therefore, each country in the world needs to have measures to contain as well as speed up vaccination to recover the national economy and the world economy

Part II:

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Question: What are the methods that an MNC applies to carry out transfer pricing in its intra-firm  trade? Give examples to illustrate 

Answer:

According to Stone G (2012), "Transfer pricing is an intentional collusion between companies in the same group to negotiate prices that are not based on market prices, in order to transfer profits from one company to another other companies in different countries in order to avoid paying taxes in full, thereby improving the business efficiency of the whole group which they deem appropriate"

Tranfer pricing methods of MNCs in intra-firm trade:

 Transfer pricing through technology transfer:

Foreign companies transfer production and business technology to affiliated parties in the receiving country and collect royalties at high prices As a result, input costs are pushed up, leading to loss accounting, while royalties are transferred to foreign parties to enjoy

Starbucks is one of the most famous brands in the world Starbucks sales in 2012 increased by 4% from the previous year, and reached £413 million However, Starbucks reported a loss of £30 million so it did not have to pay tax on the profits Starbucks' explanation

is that although its branches in the UK are doing well, they have to pay a lot of "royalty fees" to the parent company, so they make a loss

 Transfer pricing through the transfer of raw materials and goods:

Through the overseas parent company, the MNCs have dominated the high input prices

of materials transferred between the subsidiary company in the receiving country and its affiliates and transferred profits from this country to the affiliated company in country with a lower corporate tax rate

Coca-Cola is an MNC that entered the Vietnamese market in 1994 At the end of 2019, Coca-Cola Vietnam Company had to receive a decision on administrative sanctions on tax through tax compliance inspectors with a total amount of up to more than 821.4 billion VND Since entering Vietnam until now, Coca-Cola has reported losses for more than 20 consecutive years According to the tax authority, the cost of raw materials, in which flavorings were imported directly from the parent company of Coca-Cola Vietnam, was very high On average, the cost of raw materials accounted for over 70% of the cost of goods, especially in 2006-2007, the cost of raw materials and accessories was up to 80-85% of the cost price

 Transfer pricing through the following service providers:

Because it is difficult to determine the price of service provision between the parent company and its subsidiaries and between companies within the group, some MNCs invest capital and provide management services and management support for the whole group Groups such as accounting, financial, consulting, asset management services, etc charge a very high price for this service to transfer profits from the subsidiary to the parent company for the  purpose of tax avoidance

Keangnam Vina Company is a 100% Korean owned real estate company Entering Vietnam since 2007, Keangnam Vina signed a turnkey contract with Keangnam Enterprise Company for this company to survey, design, provide equipment and machinery, execute  project construction, and provide consulting services Financial advisor, loan arrangement for  Keangnam Vina In 2008, the financial consulting fee that Keangnam Vina paid to Keangnam Enterprise was up to 30 million USD, the service fee for arranging loan was up to 20 million USD, the cost of advertising consultancy, consulting on land use right and Investment license is also up to several million USD The performance of Keangnam Vina after 5 years shows that the company always declares losses According to tax authorities, up to 2011 when the Keangnam Hanoi Landmark building started operating, the company's revenue reached over  VND 5,200 billion, but the company reported a loss of up to VND 140 billion

 Transfer pricing through interest payments on business loans:

Through the form of borrowing capital from an affiliate and paying high interest rates The purpose is to transfer profits from the foreign-invested enterprise in the receiving country

to the associate in the country with a lower tax rate in order to avoid tax liability in that country

Entering Vietnam since 2006, O Long Jun Chow Tea Processing Company of Taiwan has an investment capital of VND 6,344 billion But 4 years later, the total loss declared by the company amounted to VND 23,903 billion, the loss was 3.7 times higher than the investment capital Because this company has exported products to the parent company at a price lower  than the production price of the product, the company reported a loss In order to compensate for the loss, this enterprise has been supported by the overseas parent company with a very high interest rate loan, thus avoiding income taxes

 Transfer pricing through market domination:

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In order to penetrate the market and gain market share, MNCs increase advertising and  promotion activities, causing these companies to declare these costs at high prices, causing these companies to lose money Many businesses take advantage of preferential policies to reduce costs for advertising and promotion activities, so they have found ways to declare the cost of branding of the parent company

Adidas was present in Vietnam in 1993 but it was not until 2009 that Adidas officially established Adidas Vietnam Company In early 2012, Adidas earned 22,000 billion dong, but this business reported a loss Unreasonable expenses include international marketing costs, administration costs, purchasing costs, and royalties In which, the most prominent is the cost

of international marketing The parent company has hired a celebrity to take pictures for the  product When these advertising pictures were hung at the Adidas Vietnam store, they had to  pay the parent company 4% of the net sales of the product

Part III:

Question: Should the current account deficit be a cause for an alarm for policy-makers?  Describe and present the current situation of balance of payments in Vietnam since 2010?  Propose solution(s) to improve the deficit in current account in Vietnam.

Answer:

The international balance of payments is a term that has appeared for a long time with the formation of the economic and financial category However, when it comes to international trade activities, it is increasingly developed thanks to the open-door policy of a few countries, economists are also quite interested in the balance of import and export turnover

The balance of international payments is also known as the balance of payments, the English name is Balance Of Payment - BOP This is a record of payment transactions of a country with other countries in the world at a certain time It can be month, quarter or year (but usually year)

These transactions will be conducted by individuals or businesses currently residing in the country or the government of that country In which, the transaction object will include goods, services, assets or some transfers Or to put it simply, the balance of payments is the system of accounts that records all payment transactions and the reconciliation between the total amount of receivables and expenses of a country with other countries in a certain time (month, quarter, year, ) Therefore, the balance of international payments is also known as the  balance of payments or balance of payments Currently, the balance of payments is divided into two main categories: