Question

This article illustrates the political economy of international trade and the concept of comparative advantage. Explain Who are the "Winners" and "Losers" and why as described in this article, and the effect of "arbitrary government intervention" that circumvents the workings of free trade initiated by Senator Trent Lott as described in the article? Use the economic concept of comparative advantage in your explanation. (10 points). Due Dec 5

As a side note - why do a number of popular Maryland Restaurants advertise they only serve Maryland Crabmeat in their crab cakes???????

Check out the web site for the McConnell et al - Microeconomics 20th edition at http://www.mcconnell21e.com and access the Origin of the Idea link to Ricardo's concept of comparative advantage to further your understanding of comparative advantage.

Viet Catfish Case

Sixteen years after the end of the

Vietnam war, the United States and

Vietnam signed a free trade agreement.

In December 2001, Vietnam

agreed to lower import tariffs and

restrictions on U.S. investments in

that nation. In return, the U.S.

agreed to dismantle discriminatory

trade barriers on Vietnamese

exports.

The trade pact was an instant

success. Vietnamese exports to

the U.S. more than doubled in the

first year after the trade pact was

signed, led by exports of textiles,

seafood, shoes, furniture, and

commodities. U.S. investments

in Vietnam also surged.

Catfish farmers in the

Mississippi Delta weren’t happy

about this surge in Viet-U.S. trade.

In fact, they were downright angr y.

For well over a decade, catfish

farmers in Mississippi, Arkansas,

and Louisiana had been struggling

to preserve their profits. As

reported in Chapter 23 of The

Economy Today (Chapter 8 in

The Micro Economy Today) low

entry barriers kept persistent

pressure on prices and profits.

The early entrepreneurs in the

industry had to contend with a

stream of cotton farmers who

sought higher returns in catfish

farming. Despite an impressive

rise in market demand, prices

and profits stayed low as the

industry expanded.

Surging Imports

The Viet-U.S. pact intensified competitive

pressures on Delta catfish

farmers. In 1998, only 575,000

pounds of Vietnamese catfish were

imported into the United States,

mostly in the form of frozen fillets.

Viet imports surged to 20 million

pounds in 2001 and jumped again

to 34 million pounds last year.

That was more competition than

domestic catfish farmers could

bear. The price of frozen fillets fell

by 15 percent in 2001, to a low of

62 cents a pound. Prices kept

falling in 2002, hitting a low of 53

cents a pound at years end. With

average production costs of 65

cents a pound, U.S. catfish farmers

were incurring substantial economic

losses. Suddenly, cotton farming

started looking better again.

Comparative Advantage

Shifting domestic resources from

catfish farming back to cotton

farming is consistent with the

principle of comparative advantage.

Most farm-raised U.S. catfish

are grown in clay-lined ponds filled

with purified waters from underground

wells. The fish are fed

pellets containing soybeans and

corn and are subject to regular

USDA health inspections.

Vietnamese catfish, by contrast,

are grown in giant holding pens

suspended under the free-flowing

Mekong river and other waterways.

The Vietnamese production process is

much less expensive, giving Vietnam’s

catfish farmers an absolute advantage

over U.S. farmers. Given the relatively

high costs of cotton farming in

Vietnam, the Vietnamese also have

a decided comparative advantage in

catfish farming. Because of this, both

the U.S. and Vietnam could enjoy

more output if the U.S. specialized

in cotton farming and Vietnam

specialized in catfish farming. That

is exactly the kind of resource

reallocation the surging Vietnamese

catfish exports was causing.

Trade Resistance

The 13,000 workers in the U.S.

catfish industry don’t want to hear

about comparative advantage.

They simply want to keep their jobs.

And their employers want to regain

economic profits. They aren’t willing

to sacrifice their own well-being for

the sake of cheaper fish and so-called

gains from trade.

Economic theory may not be on

the side of the domestic catfish

industry, but U.S. politicians

certainly are. At the urging of Trent

Lott, the Senate majority leader

from Mississippi, the U.S. Congress

decided that of the 2,000 or so

varieties of catfish, only the North

American channel variety of catfish

could be labeled as “catfish.”

Vietnamese catfish had to be labeled

as “basa” or “tra,” as in

the Vietnamese language.

To further discourage consumption

of imports, the Catfish Farmers of

America, an industry lobbying group,

ran advertisements warning American

consumers that “basa” and “tra” “float

a round in Third World rivers nibbling on

who knows what.” Arkansas

C o n g ressman Marion Berry warned that

Viet fish might even be contaminated by

Agent orange-- a defoliant sprayed over

the Vietnamese countryside by U.S.

f o rces during the Vietnam war. None of

these nontariff barriers halted the influx

of Viet catfish however.

Dumping Charges

U.S. catfish farmers decided to mount

a more direct attack on Viet catfish. The

Catfish Farmers of America filed a complaint

with the U.S. Department of

C o m m e rce, charging Vietnam of “dumping”

catfish on U.S. markets. Dumping

occurs when foreign producers sell their

p roducts abroad for less than the costs

of producing them or less than prices

in their own market.

On its face, the complaint seemed to

have no merit. Export prices were no

lower than domestic prices in Vi e t n a m .

Plus, Vietnamese farmers were evidently

e a rning economic profits. Hence, neither

form of dumping seemed plausible.

The Department of Commerce found a

loophole to resolve this contradiction.

C o m m e rce officials decided that

Vietnam was still not a “market econom

y.” As a “nonmarket economy” its

prices could not be regarded as re l i a b l e

indices of underlying costs. Instead, the

U.S. Department of Commerce would

have to independently assess the “true ”

costs of Vietnamese catfish production.

To determine the “true” costs of

Vietnamese catfish farming, U.S.

investigators went to Bangladesh!

Bangladesh is widely regarded as a

market economy, with a level of

development similar to Vi e t n a m ’s.

So Bangladesh prices were assigned

to Vietnamese farmers. With no fully

integrated firms and fewer natural

resource advantages, Bangladesh

ended up with hypothetical costs in

excess of Vietnamese prices. With this

“evidence” in hand, the Commerce

Department concluded in January 2003

that Vietnamese catfish were indeed

being dumped on U.S. markets.

Anti-Dumping Duties

To “level the playing field,” the

U.S. Commerce Department leveled

temporary import duties (tariffs) of

37-64 percent. Importers of Viet

catfish had to deposit these duties

into an escrow account until the

U.S. International Trade Commission

(ITC) reviewed the case. The ITC

must not only affirm the practice of

dumping, but must also determine

that U.S. catfish farmers have been

materially damaged by such unfair

foreign competition. If the ITC so

rules, then the duties become

permanent and payable. If the ITC

rejects the dumping or damage

charges, the duties are rescinded

and the escrowed payments are

refunded. The odds are never

good for foreign producers: The

Commerce department ruled in

favor of domestic producers 91

percent of the time and the ITC

concurred 80 percent of the time.

The catfish case was similarly

decided: on July 23 of this year

the ITC unanimously ruled that

Viet catfish had injured U.S.

catfish farmers. The temporary

duties of 37-64 percent were

made permanent and retroactive

to January.

This article illustrates the political economy of international trade and the concept of comparative advantage. Explain Who are the "Winners" and "Losers" and why as described in this article incorporating the concept of comparative advantage in your response, and the effect of "arbitrary government intervention" that circumvents the workings of free trade initiated by Senator Trent Lott as described in the article? Use the economic concept of comparative advantage in your explanation. (10 points)

Answer 1

The difference in the costs of production necessitates trade among the regions. Even the theories of international trade considered cost as one of the basic factors of international trade. One of such theory is David Ricardo’s theory of comparative cost advantage. In his theory, he basically argued that the international trade is generally governed by the comparative cost advantage. In simple words, this theory says that a country will specialise in that line of production in which it has relatively a greater advantage in the costs than other countries and will depend on other countries for all such commodities in which it has relative cost disadvantage.

In this article it is stated that after the free trade agreement between United States and Vietnam, the trade of both of these countries had expanded. But due to strong protests and resistance of US Catfish farmers and also due to decisions of U.S Department of Commerce on anti-dumping duties; the trade between these two countries could not sustain on the basis of comparative cost advantage. As a result none of these countries could be regarded as the winner. This is because, US had comparative advantage in the production of Cotton and had relative cost disadvantage in the production of Catfish. Similarly, Vietnam had comparative cost advantage in the production of Catfish and relative cost disadvantage in the production of Cotton. If the trade took place between these two countries on the basis of comparative cost advantage then both of these would get gains from trade. In the presence of international trade, they would get enlarged market for their respective products and eventually they would get economic profits by producing and exporting the goods on which they had comparative cost advantage. But in the absence of international trade, both of the countries lost their parts of economic gains.

However, the effect of arbitrary government intervention in the form of anti-dumping duties against the imports of Vietnam favoured some of the domestic Catfish farmers in US and helped to retain economic profits with their domestic production of Catfish. But the total production would be much higher if the trade took place on the basis of comparative cost advantage. This is because, in the presence of free international trade, domestic resource allocation to the production of the specific commodity on which a country has comparative cost advantage would make the production process less expensive and enable the country to export that commodity at lower cost. As a result, the consumers of that commodity in the importing country would get the good at a lower cost which would result in more demand and ultimately more production. So, it would lead more production of both of the commodities. But the arbitrary government intervention prevented the workings of free trade and as a result, both of the countries did not get their benefits from trade.