1. Discuss whether Michael Froman should remove tariffs against Vietnamese footwear. Your discussion should include, but not be limited to, the following points:
- A brief discussion of Michael Froman’s goal in making his decision and the dilemma that he is facing
- How the use of global value chains adds a new dynamic to the traditional tariff analysis (i.e. the one from the week 5lecture)
- How the removal of footwear tariffs would affect the followingplayers:
- Consumers in theUS
- High-skilled footwear workers in theUS
- Low-skilled footwear workers in theUS
- New Balance
2. Some business interest groups in the US and human rights activists may argue that the removal of footwear tariffs should be made conditional on Vietnamese firms’ compliance with internationally recognised labour standards. Discuss whether Michael Froman should accept this argument provided that he decides to eliminate tariffs against Vietnamese footwear. Your discussion should include, but not be limited to, the following points:
- Why business interest groups in the US and human rights activists would support the same argument
- Which ethical approaches business interest groups in the US and human rights activists would be taking in theirarguments
3. Answer the following questions in 400-500 words using the trade theories and concepts from the topics covered in weeks 1-4.
- What are the basis for and gains from trade between economically differentcountries?
- What are the basis for and gains from trade between economically similarcountries?
- Which trade theory explains well the footwear trade between the US and China/Vietnam?
4. Suppose that in the scenario given in Brodeur and Van Assche (20114) the US has another policy option: forcing Vietnam to agree to a voluntary export restraint. Using a diagram, discuss the potential effect of using a VER on the US’ national wellbeing.
Challenges faced by Michael Froman
1. Michael Froman is recently appointed United States Trade Representative who works as a trade consultant to the president of the USA. One of his main goals is to complete a comprehensive and benefitting trade partnership with transpacific countries. He is trying to use all the tools which are available to him for the national interest of the USA. The footwear manufacturing sector of the US is facing a contraction over the years due to the completion from low cost manufacturing nations such as Vietnam. Despite the overall impressive economic performance of the US, the production in the manufacturing sector of the US is reducing (Viner, 2016). Thus, his goal is to improve the manufacturing sector using the strategies of international trade as a tool. However, he is facing a serious dilemma mainly due to the differing views of the two key players in the footwear manufacturing industry of the USA. While a reduced tariff for footwear import in the TPP negotiation may help the US to have access to the fastest growing economic area of the world, it will also provide a great threat to the home footwear manufacturers of the USA. The indigenous footwear manufacturers of the USA are already struggling with a high import tariff of 10% (Tholen, 2017). Therefore, it is a challenge for Mr. Froman to protect both the international and national interest of the USA dealing accurately with the dilemma that he is facing.
The global value chain is a process where the multinational organisations carry out their production steps in different countries of the world. This not only makes the tariff analysis complex but it also makes it harder for the policymaker to formulate a suitable policy for the protection of the national interest of the respective countries. In the traditional tariff analysis, the gross amount of trade between the two partners was easy to calculate and study. However, the global value chain has made it harder for the observer and the expert. Senouci, Al- Abbasi, and Eldin (2018) states that, under the Global value chain process, the understanding of division of production process in different economies is important. However, Reinecke and Donaghey (2015) contrasted that, global value chain provides a pattern pertaining to the gross trade value similar to the traditional tariff analysis. The smile curve is a common pattern that showcases the trade value between two trade patterns. According to the logic of smile curve, the trade volume is low at the initial stages as research and development take place in this phase. After that, return from the investment on research significantly increases the trade volume between the two countries before reaching a peak. That means if Mr. Froman reduces the tariff on the footwear of Vietnam the trade volume between the two countries can be traced using the smile curve similar to the traditional tariff analysis.
Global value chain and tariff analysis
The reduced footwear tariff would impact different stakeholders in different ways. The consumers in the USA would enjoy a lower price for the end footwear product. As discussed in the case study, a huge amount of footwear is imported from Vietnam by most of the companies of the USA. Therefore, the production cost of the companies would reduce and hence the consumers would be able to buy shoes at lower rates than before (Perry, Wood, and Fernie, 2015). On the other hand, high skilled footwear workers of the USA that are considered as highly paid workers would lose their jobs. Companies such as Nike would benefit from a low-cost alternative to reduce the price of their shoes and hence the labour demand for highly skilled workers would reduce leading to unemployment. However, in the case of low skilled workers in the US, the demand would increase (Oka, 2016). Low cost of production due to the reduction of the tariff would further attract new small players in the market and improved competition would drive up the employment of the low skilled workers. Nike Inc would be able to reduce the cost of production and could reinvest the savings on the expansion and the job creation for the workers of the USA if the tariff were lowered. According to the company, high tariff on the Vietnamese footwear export drives up the prices which eventually harm the consumers of the US. New Balance on the other hand advocates that, lowered tariff rate on the footwear of Vietnam would further shrink the size of footwear manufacturing industry of the US. The low cost produced materials from the US would endanger the US made products and a huge number of workers would lose their jobs. Mr. Froman should reduce the tariff for the footwear of Vietnam on the ground that it would provide a huge margin to the companies which could be further reinvested in the US industry for boosting the employment (Neary, 2016). Therefore, Mr. Froman should lower the tariff on a conditional basis that the margin would be fully reinvested in the US footwear industry so that both high and low skilled workers retain their jobs.
2. Labour is one of the important inputs to any kind of production in the global economy. Despite the invention and implementation of machinery, the requirement of labour in any kind of production process is inevitable. Low (2016) highlighted that labour generates value for the firms using the machinery available to them. Apart from that, the absolute number of labours directly involved with the economy has also increased over the years despite the introduction of technologically enriched machinery. According to the figure of the US, the employed labour force of the country grows at the rate of 3.5% per year (Lang, 2016). Therefore, the working conditions and the security of the labours should be an important concern for the management of the organisation. Internally recognised labour standards have few of the benchmark compliance of which makes sure the labour rights are properly met by the employers.
Impact of reduced footwear tariff
The business interest group would support the argument of reducing the tariff on the condition that Vietnamese firm would adhere to the labour standards, for two main reasons. First and the most explicit reason is the fact that business interest group would want to have an environment safe for the working class of society. This also comes under the ethical visions of the business community as well. Apart from that, a safe and healthy pool of workers would also become a great source of sustainable operation of the business community in the future (Jones and Kierzkowski, 2018). The second reason, the business interest group would support the argument is more implicit. Poor working conditions imply a low manufacturing cost for the footwear companies along with a violation of human rights. This low manufacturing cost, in turn, helps the company to have a better competitive edge over the rivals which in this case is being enjoyed by the Vietnamese firms. Adherence to the international labour standards would increase the cost of manufacturing and hence a more competitive business scenario would establish in the footwear industry of the US.
From the perspective of the human rights activists, the reason for supporting the argument is quite obvious as they would point any violation of human rights in any part of the world. Human right activities have a simple aim to make sure all humans of the world are provided with their deserved and fundamental rights. In this case, conditional reduction of tariff on the Vietnamese product would work in line with the objectives of the human right activist and hence they would support the argument. In supporting the argument of conditional reduction of tariff the human right activist would mainly use the utilitarianism approach of ethics. Gilpin (2018) highlighted that utilitarianism first chalks out different strategies available and then screens them based on who will be affected or influenced by the strategy. The human right activist would also bring the points of minimum harm in their justification as well while supporting the argument as well. The conditional reduction of tariff on Vietnamese product would mainly harm the firms of Vietnam which earns a reasonable high margin despite the odd working conditions of the workers and the low price for per unit product (Gerber, 2014). Thus, the conditional reduction would increase the operational cost which will not violate any human rights of the owners of the organisation. Consequently, the human right activists would also bring the approach of fairness and justice in establishing the fact that, poor working condition and a benefit to owners of footwear companies of Vietnam would not be a fair distribution of justice (Human Rights Watch, 2003).
Arguments for and against conditional removal of tariffs based on compliance with labour standards
The basis of trade with an economically different country is the differentiated comparative advantages of the respective countries. According to Gansemans et al. (2017), a country no matter how much advanced in manufacturing can never have a comparative advantage in two different products at the same time. Comparative advantage measures the opportunity cost of producing a product. A country with a comparative advantage in a product will have the lowest opportunity cost of producing that product. For example, US may have an absolute advantage in producing footwear in the US itself; however, its opportunity cost of producing footwear is more than Vietnam (Asche et al. 2015). This low opportunity cost would allow the countries to enjoy a product at a lower cost which eventually contributes to the gains of both the countries.
Trade with economically similar countries
The concept of comparative advantage also holds true for the case where the participating economies are similar in nature. Trade with the economically similar country would allow a country to devote all the resources to the production of that product in which this country has a comparative advantage or low opportunity cost. In this case, both the participating nation's gains positively from the trade as well (Follet, 2013). However, the gains from trade between to similar country are not much compared to the pre-trade autarky situation.
Trade theory that explains US and Vietnam trade
The trade theory that best explains the trade between the USA and Vietnam is the Ricardian theory which is based mainly on the concept of comparative advantage. This theory states that two countries will have a comparative advantage in two different products and allow the respective country to produce that particular product at a cheaper rate due to the differentiating relative price of the products in two nations (Feenstra, 2015). This theory matches with the case of the trade between the US and Vietnam as it talks about specialisation in production. The specialisation can also be seen in this case where Vietnam has the comparative advantage of producing footwear over the US due to the lower cost of labours. Furthermore, this theory is one of the simplistic theories of international trade that only consider one-factor production. This case study of trade between the US and Vietnam also mainly focuses on the labour-intensive production process and hence it is best explained by the Ricardian Theory of international trade.
4. Voluntary export restraint comes under the nontariff barriers which are used by the importing countries to have a control over the volume of import. One of the biggest advantages of using VER is that it does not seriously affect the political relationship between the two nations like the direct import quotas and tariff. This voluntary restraint on export was first used in the year 1980 when the US requested the Japanese automakers to reduce the export in the market of US (Chase, 2017). In the case of forcing Vietnam to implement a Voluntary Export Restraint, the firms would stop exporting low-cost products in the market of the US.
Trade theories and concepts – comparative advantage
Figure 1: The changes due to Voluntary export restraint
The above figure shows the demand and the supply curve for footwear in both the importing and the exporting country. The blue line shows the import of footwear from Vietnam. Now as Vietnam reduces the export to the level shown as the red line the resulting price level for footwear will increase till the import demand is equal to the amount of footwear being exported by Vietnam in the market of the US (Chaney, 2018). Simultaneously, prices for footwear in Vietnam will also decrease until it reaches the quantity of export being done by the country.
Now, the increase in the price level would increase the producers' surplus of the firm in the US. Brack (2017) highlighted in this context that, producers surplus is the area above the supply curve and below the price level which in this case is increasing due to the VER. On the other hand, due to the increase in the price, the area below the demand curve and the price level would decrease leading to a decrease in the consumer surplus.
Welfare effects of Voluntary Export Restraints
Table 1: The welfare effects of VER on two nations
(Source: Developed by the learner)
The above table lists the consumer’s surplus, producer’s surplus and the overall national surplus of the two countries. The overall national welfare reduces in the case of USA due to the imposition of VER which is shown in red. Therefore, the potential effects of forcing Vietnam to impose VER are a loss of national welfare which is not desirable.
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