MIDTERM INTERNATIONAL ECONOMICS 2023

Part 1:
Question1: How can Vietnam become the success story of Economic Integration? 
The withdrawal of Vietnamese troops from Cambodia in 1989 marked its re-
integration into the international community. Since then, Viet Nam has
successfully maintained a stable external environment for its economic growth. Its
foreign policy orientation of ‘multilateralisation and diversification of relations’
with an expression of ‘making friends with all countries’ has proved to be an
enabling foreign policy direction for Viet Nam. Externally, this foreign policy
helped Viet Nam to improve and establish relations with its old foes such as
France, the US and Japan without antagonising its allies such as Russia and China.
Internally, it could balance the difference in ideology among the older and younger
generations of leaders within the communist party, as well as in society generally.
Viet Nam now has significant economic and improved political relations with
France, the US, Japan and China11. This conducive external environment has
created a stable environment in which to attract foreign investment to Viet Nam.
The integration of Viet Nam into the regional and global market has increased its
foreign trade sharply. The import and export of goods and services increased from
15.03 and 6.68 per cent share of GDP respectively in 1986 to 67.89 and 60.36 per
cent respectively in 2003. The labour intensive and agricultural products such as
textile and apparel, shoes, furniture, rice and seafood processing comprised a large
share of Viet Nam’s exports. The import of raw materials for export products
(textiles) and machines and equipment has increased rapidly to meet the required
production inputs of the economy. Clearly, the expansion of international trade in
labour intensive manufacturing has created more jobs for a young population and
it also helps to employ the migrants from rural areas to industrial centres that
mitigate the pressures on agricultural sector.
What are the key sectors that Vietnam can have benefits in these new FTAs: such as
RCEP and Vietnam -EU - FTA? Explain?
- The RCEP was signed at the ASEAN Summit hosted by Vietnam. Fitch Solutions
notes that for Vietnam, major export categories that are expected to benefit include
IT, footwear, agriculture, automobiles, and telecommunications. The FTA would
help Vietnam access large consumer markets double the size of those included in
the CPTPP.

- As Vietnam moves to become a high-tech manufacturer, the RCEP can help local
firms increase exports and attract high-quality goods for its consumers. In
addition, with demand for Vietnam’s exports like agriculture and fisheries
products, Vietnam is set to benefit.
 - In addition, the simplification of procedures such as customs and rules of origin
will help reduce bureaucracy allowing more SMEs to participate. SMEs account
for 98 percent of all enterprises in Vietnam, contributing to 40 percent of GDP,
and thus the RCEP presents significant opportunities for Vietnamese SMEs to
move up the value chain.

- For investors operating across ASEAN, China, and other regions – RCEP offers
good news. Streamlined customs procedures, unified rule of origin, and improved
market access will make investing in multiple location – a much more viable and
attractive investment strategy and likely bring “China + 1” business models to the
fore. The common rule of origin will lower costs for companies with supply chains
that span across Asia and may encourage multinationals to RCEP countries to
establish supply chains across the bloc, thus growing the global value chain
activity in the region.

What are your proposals for future trade policy of Vietnam to gain full benefits of new
generation of FTAs such as RCEP, EU-Vietnam FTA, CP-TPP.

- The benefits of the free trade agreements will enable Vietnam’s economic
development to continue to shift away from exporting low-tech manufacturing
products and primary goods to more complex high-tech goods like electronics,
machinery, vehicles, and medical devices.

- This can be done in two ways – first, through more diversified sourcing partners
through larger trade networks and cheaper imports of intermediate goods from
partner countries, which should boost the competitiveness of Vietnam’s exports.

- Second – through partnership with foreign firms that can transfer the knowledge
and technology needed to make the jump into higher value-added production. An
example of this is the recently launched VSmart phone manufactured by
Vietnamese conglomerate Vingroup.

- Vietnam is touted as a low-cost manufacturer with several companies such as

Samsung and Nokia setting up shop to manufacture and then export electronics,
but the latest example shows how Vietnam can develop its own products from the
transfer of know-how technology.

- Such sophisticated business practices and technology will help boost Vietnamese
labor productivity and expand the country’s export capacity.
 - With recent trade agreements such as the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (CPTPP), EU-Vietnam FTA (EVFTA),
UK-Vietnam FTA (UKVFTA) in effect, and the upcoming Regional
Comprehensive Economic Partnership (RCEP) – Vietnam seems to prioritize
international trade integration trade partners outside ASEAN.

- Such trade agreements will allow Vietnam to take advantage of the reduced tariffs,
both within the ASEAN Economic Community (AEC) and with the EU and US to
attract exporting companies to produce in Vietnam and export to partners outside
ASEAN.

- The EVFTA Report 2018 by the European Chamber of Commerce (EuroCham) in

Vietnam revealed that 72 percent of EuroCham members believed that the EVFTA
will make Vietnam more competitive and turn it into a hub for European
businesses.

- Vietnam’s entry into these trade deals will also ensure alignment with national
standards ranging from employee rights to environmental protection. Both the
CPTPP and EVFTA require Vietnam to conform to the International Labor
Organization (ILO) standards. Chan Lee from the ILO noted that this is an
opportunity for Vietnam to modernize its labor laws and industrial relations
systems.

Question 2: What are Economies of Scale? How can they be the basis for international
trade? What is meant by the new international economics of scale? How Can
International trade be based on Product differentiation? Give some examples international
trade. (Chapter 6 in textbook). Explain how can small nations can lose from trade?

What are Economies of Scale?

When more units of a good or a service can be produced on a larger scale, yet with (on
average) less input costs, economies of scale (ES) are said to be achieved. Alternatively,
this means that as a company grows and production units increase, a company will have a
better chance to decrease its costs. According to theory, economic growth may be
achieved when economies of scale are realized.

How can they be the basis for international trade?

The main reason the presence of economies of scale can generate trade gains is because
the reallocation of resources can raise world productive efficiency.

The benefits of international trade for a business are a larger potential customer base,
meaning more profits and revenues, possibly less competition in a foreign market that
hasn't been accessed as yet, diversification, and possible benefits through foreign
exchange rates.

How Can International trade be based on Product differentiation?

When nations are engaged in international trade, they make changes in goods and
services to become competitive and different from other firms operating in the same
industry. In order to bring uniqueness in the product in terms of quality, the firms of
different nations adopt vertical product differentiation strategy.

Give some examples international trade. (Chapter 6 in textbook). Explain how can small
nations can lose from trade?

We proceed much as David Ricardo did in presenting the argument of the gains from
specialization in one’s comparative advantage good. First, we will construct an autarky
equilibrium in this model assuming that the two countries are identical in every respect.
Then we will show how an improvement in world productive efficiency can arise if one
of the two countries produces all the steel that is demanded in the world.

Suppose the exogenous variables in the two countries take the values in Table 6.4
Table 6.4 Initial Exogenous Variable Values

United States aLC = 1 L = 100

France A*LC =1 L∗ = 100

Let the unit labor requirement for steel vary as shown in Figure 6.3 “Economies of Scale:
Numerical Example”. The graph shows that when fifty tons of steel are produced by the
economy, the unit labor requirement is one hour of labor per ton of steel. However, when
120 tons of steel are produced, the unit labor requirement falls to half an hour of labor per
ton of steel.
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Figure 6.3 Economies of Scale: Numerical Example