INTERNATIONAL TRADE

Individual Assignment 3

Course code ECON1269

Course International Trade

Student name Bui Hai Phuc - s3748872

Lecturer’s name Nguyen Mai Ngan

Number of words 2435 words

Date 06/01/2020

Question 1
Thailand proposes a large opportunities for enterprises to invest and develop in its country in
order to promote the economy due to the fact that Thailand is one of the WTO’s founders.
However, this country though does not sign the WTO Agreement on Government
Procurement, in which businesses might face high tariffs in definite sectors, licensing
requirements, localization barriers, price controls or excise taxes which obstruct negatively to
the international trade. As a result, both domestic and international trading market are
immensely interesting, in which Thailand’s rice industry will be analysed in order to see the
trading policies of this country and how it affect the producers, consumers and government.
Moreover, this paper also gives a closer observation on the costs and benefits of the rice
sector before and after carried out the policies.

Thailand is considered to be one of the top rice production and exporters in the world when it
ranked 2nd with 24% of world market share. Back to 1992 when the ASEAN Free Trade
Area (AFTA) Agreement was signed, there are many impacts that affect the consumers,
domestic producers and consumers. Regarding this agreement, any country that is located in
the Southeast-Asian region and cooperate in ASEAN will have lower product prices due to
the reduction of tariffs on raw materials throughout ASEAN which allows consumers to
experience different types of rice with cheap prices. Domestic producers not only get to gain
access to different markets that incorporate a variety of substantial advantages but they also
be able to import raw materials with cheaper prices due to the tariff elimination and cutting
their production costs. The producers will get more motivation to improve their performance
on the rice sectors when there are still many large foreign competitors that advances both in
producing and exporting rice and Vietnam is considered to be a big competitor in the ASEAN
when it lost the top rank to India and Vietnam in 2012.
 Figure 1. Producing and Exporting rate of the world

The government will benefit from producing and exporting rice, in which it will gain more
profit and future potential for the long-term and better trading relationship with countries in
the ASEAN and other regions.
On the other hand, Thailand rice sector still face some negative effects when Vietnam is
considered to be less developed than Thailand, in which it will have to decrease its tariffs 0-
5% under the AFTA commitments. Moreover, the trade war between China and USA also
creates a big impact on the ASEAN trade market. As a result, Vietnam will have lower raw
materials and production costs which Vietnam become a hard competitor with Thailand.
Indeed, this South-East Asian country predicts that it’s rice trade market will suffer the loss
of 0.5% share ($13 million) to Vietnam (Thailand Business News 2019). A closer
observation for the rice industry, although there are many trading agreements that support the
Thailand to trade rice with minimum tariffs such as the AFTA, the domestic producers has
reduced from 9.5 - 9.0 millions tons in annual rice exports due to a strong baht and ample
global stockpiles (Reuter 2019). In addition ASEAN believe that AFTA can motivate higher
market competition which allow countries in this region to create new competitive products
with higher quality, however higher market competition will be an obstacle for individual
countries such as Thailand, Vietnam or Malaysia. In fact, Thailand (for example) has to
adjust the prices of all types of rice in order to compete with others, aim for more market
shares but in the long-term, this issue will make negative impact for the domestic producers
(farmers, agricultural enterprises, rice industries), in which not only they have to suffer profit
loss from unstable price adjustment from the international competitors but these businesses
will also endure inventory or storing problems. For the government, they will lose income
from tax collection which affect badly in the long-term.
Besides the AFTA agreement, food safety regulations is also a priority for Thailand. With the
regulations, people will be able to consume the products with safe, high quality and
encourages consumers to buy more. Thailand’s government will also benefit from the
regulations when it’ll have better reputation and good relationship in the international trading
market. Domestic producers get more opportunity to develop their businesses and earn more
profits.
Liberalisation is also applied for Thailand rice market when there are many private rice
exporters that liberally trade with foreign countries. Government also involved in exporting
sector through government-to-government trading policy which is held by the Department of
Foreign Trade under the MoC. This could also bring advantages for both the governments
and the producers when their participation in rice trade is primarily aimed at securing and
promoting the Thai rice export market rather than monopolizing the export of rice.
Thailand also follows the policies on governing agricultural products standards which is
called GAP in order to provide safe goods and benefits for producers and consumers. Overall,
in order to handle rice trading market, the government has released a variety of regulations
such as the Export License (Rice Trade Act), Quota System, Export Tax, Rice Premium, and
Rice Reserve Enactment to manipulate the rice exports and the domestic price rice.

Question 2
2.1.Malaysia should/should not use protectionist policies.
Malaysia automobile industry is considered to be the biggest car market in the South-East
Asian region and the Proton car company is the largest automobile company in Malaysia.
With more than 26% of the total sales, Proton has become a monopoly in the mid-size, mid-
price cars sector. Although Proton is protected by government’s industrial policy (Infant
Industry Protection), Malaysia still get a loss when it can not compete with foreign car
industries in the international market, in which Malaysia government should not provide
protection policies for the Automobile industry due to the following reasons

Proton’s sales and production has reduced up to 45% due to the low quality products. As a
result, Malaysia will have low exporting and producing rate and create high unit costs, in
which Malaysia will find it hard to compete internationally without government support. In
case that Proton does not receive the support from the government, it can not earn a position
in the market by its effort and get a cumulative loss which can lead to bankruptcy. In
addition, when the government reduced IIP or stops involving so much in the Proton,
international car enterprises might involve and get lower tariff barriers which will create a
stimulation for Proton to compete against them. The truth is that this Malaysian company can
get disadvantages in comparing with those foreigners, though Proton still have some support
from the authorities and can be able to handle this issue.

Another reason that Malaysia should not adapt protection policy is that Proton will
accommodate harder in the new generation of automobile industry when it will not apply new
technologies from the foreign car companies. Consumers are now requiring cars with high
quality, well-used technologies but in the mid-price sectors and Proton can not provide what
the consumers need in the long-term. As a result, this Malaysian car company now has to
share 50% stake for a private company called DRB-Hicom in order to take back their
position. Proton believes that be privatized can be a significant move when it can improve the
efficiency of this domestic car manufacturer and be able to access the newest technologies
create the products that the consumers need.

2.2. Country that applied IIP in the past and its costs and benefits
Back to Oct 2018 in Paris, Vingroup organized a Vietnam Motor show and introduced the
authentic Vietnamese cars to the international market. The Vietnamese automobile industry
have made their spotlight and assert their position in the world and this was considered to be
evidence for the assertment of the government which is “industrialization and modernization
of the country”. However Vingroup has paid a lot of efforts going along with government’s
support in order to to earn today success. Back to 2007, to develop the domestic automobile
industry, the government has released the Infant Industry Protection policy which can
encourage the domestic consumers ratio and the spirit of Vietnamese people to use
Vietnamese products. During the period that Vietnam market being applied the IIP policy,
there are also costs and benefits that I want to mention.

Figure 2.. The localization ratio of Vietnam automobile industry

Consumer
Vietnam automobile industry is considered to be a monopoly market due to the release of
banned policy for importing foreign used vehicles. As a result, the Vietnam Automobile
Manufacturers Association was born with the combination of different domestic car
company.
 Figure 3. Local content requirements of Vietnamese car companies in the VAMA

As mentioned in the table, the localization rate of Toyota and Honda have reached over 20%
while other enterprises are ranging from 1.5% to 14%. Vietnam Motor Industry, Xuan Kien
Private Enterprise and 4 other companies have their local content rate ranging from 35% to
60% due to the fact that the products that they provide mostly are big vehicles without
adapting high-skills technologies such as trucks, tank trucks or buses.

Regarding the consumers, prices is considered to be the most important thing that they care
when all of the domestic firms have the rights to adjust their sales prices, in which this can be
a negative impact for the consumers.
 Figure 4. Domestic and International cars prices comparison in 2008

Comparing Vietnam to the US or some Asian automobile market, the consumers from those
countries only have to pay the price less than 2 or 3 times for the vehicles which leads to the
fact that although the consumers want to use Vietanmes products but they do not want to buy
due to high selling prices.

Producer
On the other hand, IIP in general has brought advantages for the domestic manufacturers in
the automobile industry, in which those car enterprise can increase their profits from the
protection policies and advances in the distribution channels (Feenstra 2004). Moreover, the
average prices for each vehicles can also be increased due to the lack of quality choices from
the companies that support the automobile companies.

Figure 5. Forecast of vehicles volume in circulation to the year 2010 and 2020

Figure 6. Domestically produced and assembled auto turnover 2000-2007

Maxcy and Silberston (1959) has stated that to be more efficient in the assembling industries,
at least 60,000 units to 100,000 units per year for all models produced which leads to the
reality that none of any domestic car companies can be able to reach that rate.

Despite those facts that I mentioned above, many FDI enterprises continue to work in the
Vietnamese automobile industry due to the profits that they made from IIP barriers, in which
the profits of those companies were from the fact that they set the selling prices higher than
the market share and sales. As a result, they break the localization ration commitment with
the domestic authority for not reducing their profits. Moreover, these FDI companies do not
transfer their technologies as the expectation of the government mainly because they will get
a reduction in profits in the short-term.

Government
In overall, IIP is considered to be a failure for the domestic autômbile industry when the
society have to suffer high tariffs, low social welfare and can not reach the vision of
“Industrialization and Modernization of the country”. And that could be the explanation why
Vietnam become a member of WTO (2007) in order to develop the domestic automobile
industry.
Question 3: Self-reflection
Through the guest lecturer that I just had this International Trade course in the semester, I can
deeply understand more about the Free Trade Agreement and how it applied in reality trading
market. The guest lecturer was Mr. Bob Fletcher has defined the FTA and explained the
different types of FTA how they are adapted in different countries, regions in the world.
There are 2 main types of FTA which are Traditional and New-generation of FTAs, in which
he clearly explained from CustomsProcedures, Sanitary and Phyto-sanitary Measures to
Technical Regulations, Standards, and Conformity Assessment Procedures. He also
mentioned about how FTA affect the relationship between Vietnam and ASEAN or European
regions in order to the costs and benefits of Vietnamese trading market, how FTAs affect the
GDP, Exporting rate compared to the world’s market.

More importantly, I have a clearer understanding on how to connect what the lecturer
mentioned during the guest sessions to what I have learned in-class. Through the case studies
that he expressed, I can relate them to the Ricardian model theory which I’ve studied. In fact,
when he explained about the Business Flow of sale of electronics and machinery in the Asia
Pacific regions, I can see the Comparative and Absolute Advantage of each product lines
from different regions. Aside from the Ricardian model, I can also connect the Heckscher
Ohlin model in my course to the FTAs that he mentioned. In the cases he given, countries
like Vietnam has the advantage in producing electronic equipment that mainly use cheap
labor factors and it will specialize in producing those goods and export them to order regions
in exchange for other goods (electronics equipment but with high-techniques), which it is
unprofitable to compare.

I’m an International Business students and International Trade course is considered to be a

replaceable course, in which I find it very interesting and helpful for my future plans. For me,
to work in the Business area, I’d have to understand both domestic trading market and
international market as well in order to set efficient strategies to develop my businesses or the
companies that I work for in the future. Before the lecturer session, I only have in-class
theories in my head, which means that I find it hard to adapt to those in the real world. But
after the sessions, with the specific analysis of the Mr Bob Fletcher, I can now imagine how a
real trading market works and what issues that enterprises will face.
Moreover, through the sessions, I can see that many RMIT students can understand more
about the International Trading market in specific and the economies of Vietnam in general,
in which it helps them to choose their careers, follow the jobs they feel suitable most in the
economic area. A friend of mine told me that after listening to Mr Bob, he’s now more
interested and understand the trading market deeper which will help him to have a better
performance in his works a market analyst in the future.

References:
Kimberly A 2019, ‘The WTO: Members, Categories and Benefits, Three Reasons Why WTO
Membership Is So Important’, 22th Oct 2019, viewed 6th Jan 2020
https://www.thebalance.com/wto-membership-benefits-and-importance-3306364

Export Government 2019, ‘Thailand Trade Barriers’, 8th Sep 2019, viewed 6th Jan 2020
https://www.export.gov/article?id=Thailand-trade-barriers

National News Bureau of Thailand 2019, ‘ Thailand’s export growth expected to drop to 0.5-
1%’, 16th May 2019, viewed 6th Jan 2020
https://www.thailand-business-news.com/trade/72523-thailands-export-growth-expected-to-
drop-to-0-5-1.html

Business in Asia, ‘BENEFITS FROM ASEAN FREE TRADE AREA (AFTA) TARIFF CUTS’,
viewed 6th Jan 2020
http://www.business-in-asia.com/asia_freetrade.html
Reuter 2019, ‘UPDATE 2-Thai rice exporters cut 2019 target for annual exports’, 24th July
2019, viewed 6th Jan 2020
https://www.reuters.com/article/thailand-rice/update-2-thai-rice-exporters-cut-2019-target-
for-annual-exports-idUSL4N24P10C

ADB 2012, ‘The Rice Situation in Thailand’, Technical Assistance Consultant’s Report,
viewed 6th Jan 2020
https://www.adb.org/sites/default/files/project-document/73082/43430-012-reg-tacr-03.pdf

FFTC Agricultural Policy Platform 2018, ‘ Thailand’s Rice Industry and Current Policies
towards High Value Rice Products’, viewed 6th Jan 2020
http://ap.fftc.agnet.org/ap_db.php?id=878

Jon F 2010, ‘Benefits of AFTA for Thailand: Not yet fully captured’, 19th Oct 2010, viewed
6th Jan 2020
https://www.bangkokpost.com/learning/advanced/202159/benefits-of-afta-for-thailand-not-
yet-fully-captured

Vikram Nehru 2012, ‘Modern Industrial Policy: Lessons from Malaysia’s Auto Industry’,
22nd March 2012, viewed 6th Jan 2020
https://carnegieendowment.org/2012/03/22/modern-industrial-policy-lessons-from-malaysia-
s-auto-industry-pub-47625

Tuan P and Thi N 2008, ‘Impacts of the Protection Policy for Vietnam’s Automobile
Industry’, 10th June 2018, viewed 6th Oct 2020
https://mpra.ub.uni-muenchen.de/54067/1/MPRA_paper_54067.pdf