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Free International Trade Effect

Hoi Tu Phuoc

Columbia Southern University

MBAV 6053: Economic For Manager

Dr. Seifu Zerihun

November 29, 2021

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Free International Trade Effect

Free international trade allows trade activities to take place without any barriers such as

tariffs, quotas, or exchange controls that are put in place to impede the free movement of goods

and services between countries. It also allows consumers to buy more, better quality products at

a lower cost. Also, it promotes economic growth, improves efficiency, increases innovation.

Producers might gain benefits through the export and import activities of goods and services.

Furthermore, free international trade will affect the monopoly market and oligopoly market by

advantages in competition. The effect of free international trade on to export and import market

will be demonstrated in two examples of importing catfish from Viet Nam to the US market and

exporting steel from Viet Nam to the global market.

The Effect of Free International Trade on Importing Country

Catfish is a popular food item among American consumers. Since the US and Vietnam do

trade with each other, Vietnam has imported a large amount of catfish to the US market. This

affects the price of catfish products in the US market to decrease as well as to the US catfish

farming industry. To understand more clearly the effect of importing catfish on the US market,

we need to analyze the effect on supply/demand for goods, the effectiveness of catfish’s market

and the change of competitiveness affect equilibrium price and quantity of catfish.

Effect on The Supply of /Demand for Catfish

The catfish product, imported from Viet Nam, have increased and taken a large share in

the US market (20 in 2005 versus 76 percent in 2011) (Daniels et al., 2015). With the advantages

of the natural condition and labor cost is low, the catfish products from Viet Nam have been

lower cost compared to the catfish goods of the US. Furthermore, costs of catfish manufacturing

have been increased because of the increase of the corn price and soybean feed. Hence, the price
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of catfish in the US catfish industry has increased. This leads to catfish products imported from

Vietnam to have a competitive advantage and expand market share in the US market (Daniels et

al., 2015).

Effects on The Competitiveness of Catfish’s Market

Due to the increase in catfish exports from Vietnam, China, and Thailand to the US

market, the market shares (in terms of value) of the catfish farming channel in the United States

decreased significantly. The benefit of increasing world-level demand for gross fisheries

products for the US catfish industry has been affected by a decline in the competitiveness of

farm-raised catfish in the domestic market. In addition, the increased cost of production makes

the US catfish farmers unable to overcome the increase in cost to the consumers (Singh & Dey,

2011). As a result, the US catfish industry is in decline.

Competitiveness Affects Equilibrium Price and Quantity of Catfish

The research of Quagrainie & Engle (2002) revealed that there is a long-run equilibrium

relationship between pairs of the price of catfish and the price of imported catfish. A negative

price transmission exists between producer price and import price. Furthermore, the price of

domestic catfish frozen fillets was higher than the price of importing catfish frozen fillets.

Figure 1

Comparison of annual quantity of the US catfish sales and quantity of catfish imported
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(Quagrainie & Engle, 2002)

Effect of Free International Trade on an Exporting Country

Viet Nam is one example that gaining benefits from free international trade. Since joining

the World Trade Organization in 2002, Viet Nam has been engaging in international business

and exporting goods and materials to the world market. Particularly, Viet Nam has been

exporting steel and iron with significant development. In 2019, the exported value of iron and

steel increased ten times compared to 2001. Figure 2 illustrates the development of steel and iron

export of Viet Nam from 2001 to 2019.

Figure 2

The Development of Steel and Iron Export of Viet Nam from 2001 to 2019.

Iron and steel

5,000,000

4,500,000

4,000,000

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

-
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(Trade Map, 2021)

Effect On Supply Of /Demand For Steel and Iron

The growth rate of Vietnam's steel exports is high, especially exports to the Chinese

market. This leads to an increase in domestic steel prices because closed exporters tend to export

more in order to maximize profits. Despite the Covid pandemic and the reduction in domestic

construction, the price of steel in the domestic market is still rising. In addition, the increase in

steel prices leads to the development of steel production. Therefore, Vietnam's steel production

and exports to the world market have been growing strongly since 2004, and expect increasing

continuously in the period from 2020 to 2024.

Figure 2

Steel Sector to Benefit from Higher Production and Prices in 2021

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Figure 3

Viet Nam Steel Price Index From 2016 to 2020

According to the law of supply and demand, when an increase in domestic steel prices

leads to a decrease in domestic demand, exporters export inventories and excess domestically to

foreign countries. This helps steelmakers and exporters gain higher profits from exports. This is

the reason of development steel manufactures in Viet Nam.

Effects on The Competitiveness of Steel and Iron Market

In the past, when Vietnam did not join the WTO, steel manufactures had to compete with

each other and with government enterprises to survive. This has prevented the domestic steel

price from rising sharply and stimulated domestic demand. However, since Vietnam increased

steel exports, large steel manufacturing companies have grown (Formosa, Hoa Phat, Hoa Sen

group) and supplied large quantities of products for export to international markets. Due to profit

from the international market, steelmakers pay more attention to competing with international

competitors as well as Chinese manufacturers, thus, domestic capital may decrease compared to

before joining international trade.

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Description of Opening Up To Trade Specifically Affects A Domestic Monopoly.

According to Froeb et al. (2018), monopoly firms have attributes that protect them from

the forces of competition. Monopoly firms have no competitors, have no alternative close

substitutes products or services, and prevent other firms from engaging their industry. Free

international trade will encourage to development of alternative products to compete with

monopoly firms. With the feature of competitiveness in the free international trade, products

need to compete for not only price but also quality. Hence, the consumers will have plenty of

good choices. It will affect to reduce price and therefore, the monopoly profit will be eroded and

declined. make the monopolist’s demand more elastic.

Using Game Theory to Explain The Case of a Single Additional Competitor Can Lead to a

Market Outcome Similar to Perfect Competition.

According to Froeb et al. (2018), game theory is utilized in decision-making where one

party’s actions impact another party’s result. Game theory can not utilize in the monopoly

market because the monopoly market only has one producer. Meanwhile, Webster (2003) stated

that the characteristics of a perfectly competitive industry are a large number of sellers and

buyers, a standardized product, complete information about market prices, and complete freedom

of entry into and exit from the industry.

When an additional competitor (or new entrant) engages in the industry/market, the new

entrant has two options consisting of entering the market (In) and staying out of the market

(Out). Meanwhile, the incumbent competitor also has two strategies including accommodating

the new entrant and fighting to reject the new entrant. When the market occurs a new entrant and

the incumbent choose the strategy to accept the new entrant, the incumbent faces the competition

of new entrant. The increase in product supply by the new entrant will lead to a decrease in the
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product price. Furthermore, the market share of the incumbent also is reduced. Hence, the profit

of the incumbent is declined. Meanwhile, the new entrant will get profit in the new market. If the

incumbent chooses the strategy of fighting the new entrant, the incumbent needs to strongly

compete by reducing the product price as well as allow to pay more expensive for fighting. It

will affect the new entrant business situation and the new entrant also can not get positive profit.

In this case, both new entrants and incumbents do not get profit. According to the game theory,

both companies will tend to enhance their benefit. Hence, the incumbent will choose the strategy

of accommodating the new entrant. Thus, new entrants will engage the market easily and it is a

characteristic of perfect competition.

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References

Daniels, J. D., Radebaugh, L. H., & Sullivan, D. P. (2015). International business environments

and operations (5th ed.). Pearson.

Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial economics (5th ed.).

Cengage Learning.

Quagrainie, K. K., & Engle, C. R. (2002). Analysis of catfish pricing and market dynamics: The

role of imported catfish. Journal of the World Aquaculture Society, 33(4), 389–397.

https://doi.org/10.1111/j.1749-7345.2002.tb00018.x

Singh, K., & Dey, M. M. (2011). International competitiveness of catfish in the U.S. market: A

constant market share analysis. Aquaculture Economics and Management, 15(3), 214–229.

https://doi.org/10.1080/13657305.2011.598214

Trade Map. (2021). List of products exported by Viet Nam.

https://www.trademap.org/Product_SelCountry_TS.aspx?nvpm=1%7C704%7C%7C%7C

%7CTOTAL%7C%7C%7C2%7C1%7C1%7C1%7C2%7C1%7C1%7C1%7C%7C1

Webster, T. J. (2003). Managerial economics: Theory and practice. Emerald Publishing Limited.