International Trade Theories Comparative Analysis of Poland and Vietn

Question: Discuss about theInternational Trade Theoriesfor Comparative Analysis of Poland and Vietnam. Answer: Absolute Advantage of Poland and Vietnam Total volume of trade in Vietnam is higher in Poland compared to Vietnam. Volume of trade as a percentage of GDP is 91.9% for Poland and 160.07% for Vietnam. Among the total volume of trade, Vietnam export has 86.4.5% share in countrys GDP. Poland has 47.457% share of export in countrys GDP. Therefore, it can be assessed that growth of export of goods and services is more in Vietnam compared to Poland. Import share of Vietnam in 2014 was 83.13% whereas; the import of goods and services in Poland is 46.169%. During 2014, current account balance of Vietnam was US$9.353 billion and that of Poland is US$11.124 bn. Vietnam was in better position in terms of current account balance in trade. Major components of export of both the countries are agricultural product, fuels and mining products and manufacturers. Between the two countries, Vietnam export more agricultural products compared to Poland. Vietnam has 17.6% agricultural share in total export, whereas; Poland has that of 14.2%. Share of manufacturing products in export is 73.9% in Vietnam while Poland has 77.6% share of manufacturing product in export. Poland mainly specialises in manufacturing products. Germany is the major trading partner of Poland for export. During 2014, Poland imported mostly the crude petroleum, vehicle parts, cars and computers (Gandolfo, 2014). On the other hand Vietnam is mostly agrarian economy. Rice and rubbers are main agricultural products that are exported from Vietnam. As mentioned by Seretis Tsaliki (2015), a country enjoys absolute advantage in trade when cost of producing a good or service is low in that country compared to other countries. A country is said to have absolute advantage in producing a unit of good if it uses less number of inputs in producing that good. However, as the data on input use per unit of production is not available, absolute advantage can be evaluated from yield/hectare. Total production of a product in a country tells about the absolute advantage. It can be assumed that the country, which has lower cost of production, enjoys absolute advantage in production (Gandolfo, 2014). Poland has absolute advantage in production of potatoes, and millets as total production and yield per hectare are greater in this country compared to Vietnam. On the other hand, Vietnam has absolute advantage in production of roots and tubers, maize and total cereals. The yield value tells about the productive capacity of a country (Feenstra, 201 5). If it can be assumed that same number of inputs is used by the country, then absolute advantage will be there, where yield per hectare is higher. Comparative Advantage A country has comparative advantage in production if it can produce a particular product at lower marginal and opportunity cost compared to other country (Cuat Melitz, 2012). Opportunity cost in production prevails if a country is able to produce a unit of product at lower input cost compared to other country. As the input data is not available in the table, product price can be used in the analysis of opportunity cost. The product price reflects the input cost. Product price is lower if the input cost is lower. The product price in the table 2 reflects combining cost of capital and labour (Johnson, 2013). Poland has the capacity to supply sugar beet at UD$40.2, whereas, Vietnam do the same at $43.7. Then it can be said that Poland has comparative advantage in sugar beet production. For the other agricultural products such as chicory roots, carrots and turnip, potatoes and oats, price per unit is less in Poland. Cost of producing those goods are more in Vietnam compared to Poland. However, production pattern is different for the two countries. From the data table, it can be seen that Vietnam can produce sugarcane at lowest cost. Therefore, it can be assessed that Poland can enjoys lowest opportunity cost in sugar beet production and Vietnam has lowest opportunity cost in sugarcane production compared to other goods (Levchenko Zhang, 2016). Hence, while trading with other countries, Poland should produce and export more of sugar beet and Vietnam should produce more sugar cane. Factor Endowment, Trade and Income Distribution Heckscher-Ohline Model The Heckscher Ohline model says that a country exports that product, which it can produce by using abundant and cheaper factor. This country should import the goods which uses the scarce factor in production. The major factors of production are land, labour and capital. Land is primary input in agricultural production (Kawagishi Mino, 2016). It can be seen from table 4 that Poland has 144100 mn hectare agricultural lands which is 47.059% of the total land available in the country. Vietnam has 108737 mn hectare agricultural lands, which comprises 35.068% of the total land of the country. It can be said that opportunity of agriculture is more in Poland in terms of availability of land. However, labour in an important factor in agricultural production. Vietnam is labour abundant country compared to Poland as Vietnam has greater number of active labour force compared to Poland. As labour is abundant in Vietnam, it is cheaper to use in production. Table 4 shows that Poland is capital abundant country being a developed nation and Vietnam is capital scare country being a developing nation. Therefore, according to Heckscher- /Ohline model, Vietnam needs to specialise in agricultural production and Poland needs to specialise in manufacturing goods. The trade pattern of both countries shows that Poland and Vietnam follows the Heckscher- /Ohline model. Major export goods of Vietnam are rice, coffee whereas Poland specialises in manufacturing goods such as machinery and equipment, textile and footwear and metal products. However, as seen in modern trade globally, countries produces little amount of that product in which it has no specialisation in order to meet domestic demand (Iwasa Nishimura, 2014). Therefore, both the country produces products in which they have incomplete specialisation. Poland has exception in trade pattern as it imports those goods which use the abundant factor such as capital in this country. The reason may be that importing those products may give the country comparative advantage. Stolper- Samuelson Model Stolper Samuelson theory of trade says that under constant economies of scale and perfect competition between two countries, an increase in the relative price of a good will increase the return to the factor, which is intensively used in production and vice-versa (Luttmer, 2013). Therefore, from the trade pattern of Poland and Vietnam, it can be said that if relative price of agricultural product rises in the international market in comparison to the manufacturing product, wage rate in this country will rise. Rise in agricultural price will increase GDP of the country and demand for labour will rise (Backhouse, 2015). Terms of trade of Vietnam will increase in favour of Vietnam. Therefore, the price of labour such as wage will increase in Vietnam. On the other hand, if price of manufacturing product rises in the international market, the price of capital such as interest rate will increase as requirement for capital/ labour is more in case of manufacturing products. Therefore, return to capital in Poland is likely to rise. New Trade Theory Economies of Scale According to modern trade theory, economies of scale exist in international trade, if a country is able to produce a product at a large scale with the lowest cost compared to any other country (Feenstra, 2015). From table 2, it can be assessed that using the available agricultural land, Vietnam is able to produce 50178717 tonnes of cereals with a yield of 55774 kg per hectare while Poland can produce 31945433 units of cereals. Vietnam has economies of scale in agricultural production and especially the cereals. Production of cereals requires labour more intensively in production. Vietnam can use the abundant factor labour in cereal production. Hence, it can be said that Vietnam has economies of scale in cereal production whereas; Poland has economies of scale in manufacturing goods production along with potato and millet production (Johnson, 2013). However, in the ASEAN market, Vietnam enjoys some extent of market power in rice production and export as it has economies of scale in ri ce production. Table 5 Country 1:Poland Country 2:Vietnam Product Domestic consumption (tone) Exports(tone) Product Domestic consumption (tone) Exports (tone) Potatoes 7792248 103068 Mesline flour 1800000 113544 Roots and tubers,total 7689203 23 Corn 7140000 400000 Maize 475258 284055 Rice 1500000 6500000 Cereal Total 31970162 24729 Wheat 1900000 0 Millet 51860 2173 Coffee 2025 per 1000 bags 14.5 million bags Source: export.gov.il, 2014 Imperfect Competition and Market Power In the international trade, imperfect competition and market power exists, if a country supplies goods at a large scale in the international market. If no other country can produce that good at the same or more scale, then that said country enjoys a significant amount market power (Gandolfo, 2014). When country enjoys market power in the international market, it regulates the global price for that product due to having monopoly power. An example of market power is OPEC country, which regulates the crude oil price. The country having market power in the presence of imperfect competition regulates the price by increasing or decreasing the supply of products. In the present analysis, there is no imperfect competition between Poland and Vietnam. Competition exists between the two countries as both uses the same factors in the production although having differences in factor endowment. Although Poland enjoys comparative advantage in manufacturing goods production and Vietnam enjoys that in selected agricultural goods production, no one specialises in any single product. Both the countries have diversified trade pattern. Therefore, export and import combination of two countries comprises both the agricultural and manufacturing products. Hence, no one faces imperfect competition in the market or enjoys any market power in bilateral trade (Cuat Melitz, 2012). Among the top five countries producing agricultural goods, United states enjoy significant market power in Almond production. Total volume of trade is highest for United States with 37.7% market share. Though US have no monopoly power, it has power to influence market price of Almond in the international market. As it is supplies largest amount of almond in the market, reduction is almond production in US can reduce the price of this production in the global market. In comparison, Iran and Morocco has little power to influence the price as they have only 5.2% and 5.1% market share. References Backhouse, R. E. (2015). Revisiting Samuelson's Foundations of Economic Analysis.Journal of Economic Literature,53(2), 326-350. Cuat, A., Melitz, M. J. 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Time Preference and Income Convergence in a Dynamic HeckscherOhlin Model.Review of International Economics. Levchenko, A. A., Zhang, J. (2016). The evolution of comparative advantage: Measurement and welfare implications.Journal of Monetary Economics,78, 96-111. Luttmer, E. G. (2013). The Stolper-Samuelson effects of a decline in aggregate consumption.Federal Reserve Bank of Minneapolis Working Paper, (703). Seretis, S. A., Tsaliki, P. V. (2015). Absolute Advantage and International Trade Evidence from Four Euro-zone Economies.Review of Radical Political Economics, 0486613415603160.