ECON847 International Trade

ECON847 International Trade

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ECON847 International Trade

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ECON847 International Trade

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Course Code: ECON847
University: Macquarie University

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Country: Australia

Question:

We have learned a variety of trade models in the previous weeks. The primary proposition of all of the trade models is that trade bring net benefit to countries.
I While the majority of economists think that freer trade does more good than harm in general, governments around the world use a wide range of policies that restrict the trade volume.
I Why? A quick answer is that they want to protect domestic producers from foreign competition.
I In weeks 5 & 6, we will discuss different trade policies and their impact on nations
Restricting Imports

Tariff
Import Quota
Voluntary Exports Restraint (VER)
Product Standards
Domestic Content Requirements
Discriminatory Government Procurement
Excessive Bureaucratic Regulations
Countervailing measures against dumping or export subsidies

I Pushing Exports

Export Subsidies
(Dumping)

I How was the decline in the world tariff level possible? The short answer is international negotiations.
I It is easier to lower tariffs via mutual agreement than as a unilateral policy. Why?

It is easier to mobilise support for freer trade.

International negotiations bring in domestic exporters as a counterweight for resistance from import-competing producers against freer trade.
Consumer interests are indirectly represented, although unintended.

International negotiations help avoid a trade war.

I The WTO is the international institution that governs:

provision of a forum for multilateral trade negotiations through ‘Rounds’;

− reductions in policy barriers
− tarrification of non-tariff policy barriers

trade policy review mechanism; and
dispute settlement procedures.

I The WTO is base on the following principles:

non-discrimination between trade partners, i.e. the most-favoured nation (MFN) principle; and
national treatment of imported products

This implies that the ‘best’ tariff rate for the large importing country to impose can be derived so that the area (e-b-d) is maximised. This best tariff is called the nationally optimal tariff
I However, for the world as a whole, the nationally optimal tariff is unambiguously bad. What the nation gains (e-b-d) is still less that what foreigners lose from the tariff, (e).

The tariff redistributes the well-being (e) from foreign exporters to the importing country.

I Even for a large nation, imposing a tariff might be unwise because the foreign governments may retaliate by putting up their tariff barriers.

Answer:

New Balance is concerned about the removal of tariffs as it has many suppliers based in the U.S. that manufacture some of the parts it does not produce for instance the leather used in particular shoes. Such suppliers have employed close to 7000 workers in the U.S. (Brodeur & Van Assche, 2014). The factories located in small cities across the U.S. are essential to regional economies, such as, a small center such as Maine has 8500 individuals and is ranked as the largest employer in such an area. The presence of Maine boosts a variety of small businesses, for instance, the restaurants. The future of such towns depends solely on the manufacturing activities of New Balance in such towns.
 The consultation gatherings with Froman, the representatives from New Balance, were against tariffs reductions on imports from Vietnam. Based on the arguments from their spokesperson, Matt, it was more than 25% expensive producing in the United States of America in comparison to a country such as Vietnam (Brodeur & Van Assche, 2014). A reduction in tariff would not only make production activities in Vietnam viable but also chop off the tariff motivation that enables New Balance to produce in the U.S. This could make New Balance shut down its factories in the U.S. and relocate its production facilities overseas where productions costs were cheap. Thus, thousands of occupations would be lost, and contractors in the U.S affiliated to New Balance would be hurt. Also, the small communities where the company operated would be hurt economically.
Based on a report that was released in 2013, it was reported that Nike’s external contractors had recruit ted more than 1 million workers in the 774 firms spread across the 42 nations. Vietnam led the list of countries that had most workers working for Nike where 310000 of its workers were tasked with producing apparel and sporting equipment (Brodeur & Van Assche, 2014). China came second in the list with contractors employing 360000 and Indonesia came third with only 75000 (Brodeur & Van Assche, 2014). It is estimated that three-quarters of Nike’s international workforce originate from the above mentioned three countries. As opposed to New Balance, Nike was a robust advocate of the motion to have the import tariffs reduced. Nike’s defended its position by asserting that footwear manufacturers in the U.S. would be relieved of the burden enabling them to save on manufacturing costs. Such savings would allow Nike to re-invest in what is regarded as high-value-added occupations in the U.S. Nike also revealed that being able to import footwear production with no penalties imposed in terms of tariffs would be strategic in offsetting global labour and material costs which would have a ripple effect of making footwear affordable to the consumers in the U.S.
It was apparent that after Doha global round of trade negotiations, the Trans-Pacific Partnership would be the most fruitful trade liberalization intervention. The talks could eventually turn out to deliver substantial benefits for the American economy. This is partly because TPP was anticipated to deliver unprecedented access to markets for the American enterprises particularly for key stakeholders in the Asia-Pacific region. The Asia-Pacific region has been classified as the fasted growing territory globally. Thus, it would enable both the consumers and importers to tap on the benefits such as broad and cheap access to commodities from TPP nations.
However, Froman understands vividly that the TPP negotiations have to be carried out carefully, with extreme care. Nevertheless, reducing trade barriers by the U.S. would exert more pressure on the manufacturing industry in the U.S. that have been reported to frail. Although in between 1999 and 2012, the total number of occupations in the U.S. had increased by more than 2%, the manufacturing occupations, on the other hand, had reduced by more than 30%. The intensified import competition from offshoring to Asian manufacturing countries, for instance, China and Indonesia were viewed as the sole reason for the decline in the manufacturing sector in the U.S.
Froman has to strike a balance when entering the TPP deal, it is imperative for him to ensure that advancing American business interests overseas merges with protecting the same business interests in the U.S.  In the previous months, the industrial activists alongside politicians had expressed their worries on the risks that would emerge out of TPP negotiations specifically for the footwear industry in the U.S.
The footwear manufacturing industry had contracted over the past one decade mainly due to intensified import competition from countries such as China and Vietnam. The reduction of tariffs on Vietnamese imports would exacerbate such a decline. Vietnam has been reported to have a comparative cost advantage when it comes to footwear production compared to the U.S. It is estimated that producing a pair of shoes would cost more than 25% compared to the same pair generated in Vietnam (Brodeur & Van Assche, 2014). A Nike representative also showed that a pair of Nike running shoes would cost $20 in a firm located in Vietnam. The low wages in Vietnam have been attributed to be the primary driver of such a manufacturing cost advantage. The wages in Vietnam are 20 times lower compared to those in the U.S. In one of the studies that were conducted by a research service, and it revealed that wages in Vietnam particularly the footwear and apparel, labourer earned $0.51 per hour and this is even lower compared to what labourers in China make (Brodeur & Van Assche, 2014).
Following the end of World War II, most of the self-imposed formal barriers to global trade have been removed. This was possible through the collaborative efforts by the world’s trading countries that sought to work through negotiation models stipulated by the General Agreement on Tariffs and Trade and also the World Trade Organization. The removal of such trade barriers has, however, led to new obstacles in the context of increased global economic integration. For instance, some of the national laws implemented for stringent domestic motives unanimously inhibit global commerce in the face of an economic environment that is integrated. A law established that gives exclusive rights and monopoly power to one corporation in the telecommunication industry limits the entry of a foreign company in such a market.
The second obstacle is that of conflict over standards. This entails variations in product standards, health and safety levels and standards in both labour and environment.
Concerning financial incentives, most of the conflicts over standards originate from the wide disparities in global income levels (Gandolfo & Trionfetti, 2014). Trade between countries that are categorized high and low-income nations is based on comparative advantage that moves nations along their production possibility frontier leading to a higher degree of specialisation in production. Even though each country stands a chance to gain from such a trade, greater specialisation leads to winners and losers for such states and blows a whistle as to the issue of fairness.
The standards of living and economic conditions exhibited in low-income countries such as Vietnam are different from those in high-income countries such as the U.S. in spheres such as low wages, more extended working hours, less safe conditions in workstations, unhygienic industries and low esteem for environmental degradation (Wight, 2015). When trade between high-and low-income countries occurs, human rights activists begin to question the cheap commodities imported from low-income countries such as Vietnam. Questions such as whether children are exploited in the process of production, whether working conditions are safe and whether the means of production are environmentally friendly to begin to emerge (Gerber, 2014). The human rights and lobby groups in this context usually advocate for trade barriers such as tariffs to prohibit imports from such countries as this exerts pressure on the exporting nation to change its practices.
In the case of Vietnam, there are many instances of low wages, low labour and environmental standards that enable Vietnam to cut production costs (Boylan, 2014). Vietnam is also one of those countries that have ratified more than 18 conventions with the International Labour Organization. The Vietnam labour unions are not autonomous from the reigning party which happens to be a communist party. Workers in Vietnam are also not allowed to form or join unions. Well organized official strikes are difficult to organize in Vietnam due to requirements imposed by the government (Dlabay & Scott, 2011). Even though collective bargaining does exist, it a nascent concept that has a long way before it takes root in Vietnam. Also, issues such as child labour, forced labour and long working hours remain a quagmire in Vietnam. The state strives to enforce regulations that prohibit such poor working environments in Vietnam.
The Vietnamese footwear manufacturing firms continue being strong due to government support. Vietnam is a communist nation; the footwear industry is still being dominated by large companies that benefit from government subsidies and support. With the U.S. footwear industry being protected through import tariffs such tariffs affect costs associated with production as tariffs on athletic shoes add $3 to the cost of running shoes. Though the U.S. has been strategic in signing multiple free trade agreements, the government has been reluctant to eliminate tariffs imposed on footwear and instead imposes a yarn-forward rule to such FTAs.The law dictates that they yarn used must have come from FTA member countries to qualify for a reduction of levies as stipulated in the trade agreements.
How tariffs would affect both low and high skilled footwear workers in the US
Imposing high tariffs in the footwear industry that is characterized by labor-intensive and low manufacturing may not return occupations to the U.S. However, the footwear industry just like any other industry, engaging in any reshoring would mean that companies would finance automation to make manufacturing costs cheap while remaining competitive internationally (Buckley, 2009). Such a move would have devastating effects on high and low skilled workers as they would be replaced by the robots. This would mean talent loss among the highly skilled employees and joblessness among the low skilled workers.
References
Boylan, M., 2014. Business ethics. Chichester,U.K: Wiley Blackwell.
Brodeur, S. & Van Assche, A., 2014. Nike versus New Balance: Trade Policy in a World of Global Value Chains. International Journal of Case Studies in Management, 12(4), pp. 1-16.
Buckley, P., 2009. Business history and international business. Business History, 51(3), pp. 307-333.
Dlabay, L. & Scott, J., 2011. International business. Mason,OH: South-Western Cengage.
Gandolfo, G. & Trionfetti, F., 2014. International Trade theory and Policy. Heidelberg: Springer.
Gerber, J., 2014. Internation Trade and Labour and Environmental Standards. In: International Economics. San Diego: Pearson, pp. 182-193.
Wight, J. B., 2015. Chapter 1: Why Ethics Matters. In: Ethics in Economics as an Introduction to Moral Frameworks. s.l.:Stanford University Press, p. 5.

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