ECON847 International Trade: Nike vs New Balance & Tariff Dilemma

This assignment delves into the complexities of international trade law, using the case of Nike versus New Balance to explore the dilemma faced by the United States Trade Representative regarding tariff removal on Vietnamese footwear. It examines how global value chains add a new dimension to traditional tariff analysis, impacting various stakeholders such as consumers, high-skilled and low-skilled workers, and companies like Nike and New Balance. The analysis extends to the role of labor standards and the perspectives of business interest groups and human rights activists. The assignment further discusses the basis of trade with economically different and similar countries, highlighting the Ricardian theory as the best explanation for US-Vietnam trade. Finally, it addresses the implications of voluntary export restraints as a non-tariff barrier, providing a comprehensive overview of international trade dynamics and policy considerations. Desklib offers a platform for students to access this and similar solved assignments for their studies.

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ASSIGNMENT
INTERNATIONAL TRADE LAW

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Table of contents
Question 1..................................................................................................................................3
Question 2..................................................................................................................................4
Question 3..................................................................................................................................6
Question 4..................................................................................................................................7
Reference....................................................................................................................................9

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Question 1
Michael Froman is recently appointed United States Trade Representative who works as a
trade consultant to the president of the USA. One of his main goals is to complete a
comprehensive and benefitting trade partnership with transpacific countries. He is trying to
use all the tools which are available to him for the national interest of the USA. The footwear
manufacturing sector of the US is facing a contraction over the years due to the completion
from low cost manufacturing nations such as Vietnam. Despite the overall impressive
economic performance of the US, the production in the manufacturing sector of the US is
reducing (Viner, 2016). Thus, his goal is to improve the manufacturing sector using the
strategies of international trade as a tool. However, he is facing a serious dilemma mainly due
to the differing views of the two key players in the footwear manufacturing industry of the
USA. While a reduced tariff for footwear import in the TPP negotiation may help the US to
have access to the fastest growing economic area of the world, it will also provide a great
threat to the home footwear manufacturers of the USA. The indigenous footwear
manufacturers of the USA are already struggling with a high import tariff of 10% (Tholen,
2017). Therefore, it is a challenge for Mr. Froman to protect both the international and
national interest of the USA dealing accurately with the dilemma that he is facing.
The global value chain is a process where the multinational organisations carry out their
production steps in different countries of the world. This not only makes the tariff analysis
complex but it also makes it harder for the policymaker to formulate a suitable policy for the
protection of the national interest of the respective countries. In the traditional tariff analysis,
the gross amount of trade between the two partners was easy to calculate and study.
However, the global value chain has made it harder for the observer and the expert. Senouci,
Al- Abbasi, and Eldin (2018) states that, under the Global value chain process, the
understanding of division of production process in different economies is important.
However, Reinecke and Donaghey (2015) contrasted that, global value chain provides a
pattern pertaining to the gross trade value similar to the traditional tariff analysis. The smile
curve is a common pattern that showcases the trade value between two trade patterns.
According to the logic of smile curve, the trade volume is low at the initial stages as research
and development take place in this phase. After that, return from the investment on research
significantly increases the trade volume between the two countries before reaching a peak.
That means if Mr. Froman reduces the tariff on the footwear of Vietnam the trade volume

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between the two countries can be traced using the smile curve similar to the traditional tariff
analysis.
The reduced footwear tariff would impact different stakeholders in different ways. The
consumers in the USA would enjoy a lower price for the end footwear product. As discussed
in the case study, a huge amount of footwear is imported from Vietnam by most of the
companies of the USA. Therefore, the production cost of the companies would reduce and
hence the consumers would be able to buy shoes at lower rates than before (Perry, Wood, and
Fernie, 2015). On the other hand, high skilled footwear workers of the USA that are
considered as highly paid workers would lose their jobs. Companies such as Nike would
benefit from a low-cost alternative to reduce the price of their shoes and hence the labour
demand for highly skilled workers would reduce leading to unemployment. However, in the
case of low skilled workers in the US, the demand would increase (Oka, 2016). Low cost of
production due to the reduction of the tariff would further attract new small players in the
market and improved competition would drive up the employment of the low skilled workers.
Nike Inc would be able to reduce the cost of production and could reinvest the savings on the
expansion and the job creation for the workers of the USA if the tariff were lowered.
According to the company, high tariff on the Vietnamese footwear export drives up the prices
which eventually harm the consumers of the US. New Balance on the other hand advocates
that, lowered tariff rate on the footwear of Vietnam would further shrink the size of footwear
manufacturing industry of the US. The low cost produced materials from the US would
endanger the US made products and a huge number of workers would lose their jobs. Mr.
Froman should reduce the tariff for the footwear of Vietnam on the ground that it would
provide a huge margin to the companies which could be further reinvested in the US industry
for boosting the employment (Neary, 2016). Therefore, Mr. Froman should lower the tariff
on a conditional basis that the margin would be fully reinvested in the US footwear industry
so that both high and low skilled workers retain their jobs.
Question 2
Labour is one of the important inputs to any kind of production in the global economy.
Despite the invention and implementation of machinery, the requirement of labour in any
kind of production process is inevitable. Low (2016) highlighted that labour generates value
for the firms using the machinery available to them. Apart from that, the absolute number of
labours directly involved with the economy has also increased over the years despite the

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introduction of technologically enriched machinery. According to the figure of the US, the
employed labour force of the country grows at the rate of 3.5% per year (Lang, 2016).
Therefore, the working conditions and the security of the labours should be an important
concern for the management of the organisation. Internally recognised labour standards have
few of the benchmark compliance of which makes sure the labour rights are properly met by
the employers.
The business interest group would support the argument of reducing the tariff on the
condition that Vietnamese firm would adhere to the labour standards, for two main reasons.
First and the most explicit reason is the fact that business interest group would want to have
an environment safe for the working class of society. This also comes under the ethical
visions of the business community as well. Apart from that, a safe and healthy pool of
workers would also become a great source of sustainable operation of the business
community in the future (Jones and Kierzkowski, 2018). The second reason, the business
interest group would support the argument is more implicit. Poor working conditions imply a
low manufacturing cost for the footwear companies along with a violation of human rights.
This low manufacturing cost, in turn, helps the company to have a better competitive edge
over the rivals which in this case is being enjoyed by the Vietnamese firms. Adherence to the
international labour standards would increase the cost of manufacturing and hence a more
competitive business scenario would establish in the footwear industry of the US.
From the perspective of the human rights activists, the reason for supporting the argument is
quite obvious as they would point any violation of human rights in any part of the world.
Human right activities have a simple aim to make sure all humans of the world are provided
with their deserved and fundamental rights. In this case, conditional reduction of tariff on the
Vietnamese product would work in line with the objectives of the human right activist and
hence they would support the argument. In supporting the argument of conditional reduction
of tariff the human right activist would mainly use the utilitarianism approach of ethics.
Gilpin (2018) highlighted that utilitarianism first chalks out different strategies available and
then screens them based on who will be affected or influenced by the strategy. The human
right activist would also bring the points of minimum harm in their justification as well while
supporting the argument as well. The conditional reduction of tariff on Vietnamese product
would mainly harm the firms of Vietnam which earns a reasonable high margin despite the
odd working conditions of the workers and the low price for per unit product (Gerber, 2014).
Thus, the conditional reduction would increase the operational cost which will not violate any

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human rights of the owners of the organisation. Consequently, the human right activists
would also bring the approach of fairness and justice in establishing the fact that, poor
working condition and a benefit to owners of footwear companies of Vietnam would not be a
fair distribution of justice (Human Rights Watch, 2003).
Question 3
Trade with economically different countries
The basis of trade with an economically different country is the differentiated comparative
advantages of the respective countries. According to Gansemans et al. (2017), a country no
matter how much advanced in manufacturing can never have a comparative advantage in two
different products at the same time. Comparative advantage measures the opportunity cost of
producing a product. A country with a comparative advantage in a product will have the
lowest opportunity cost of producing that product. For example, US may have an absolute
advantage in producing footwear in the US itself; however, its opportunity cost of producing
footwear is more than Vietnam (Asche et al. 2015). This low opportunity cost would allow
the countries to enjoy a product at a lower cost which eventually contributes to the gains of
both the countries.
Trade with economically similar countries
The concept of comparative advantage also holds true for the case where the participating
economies are similar in nature. Trade with the economically similar country would allow a
country to devote all the resources to the production of that product in which this country has
a comparative advantage or low opportunity cost. In this case, both the participating nation's
gains positively from the trade as well (Follet, 2013). However, the gains from trade between
to similar country are not much compared to the pre-trade autarky situation.
Trade theory that explains US and Vietnam trade
The trade theory that best explains the trade between the USA and Vietnam is the Ricardian
theory which is based mainly on the concept of comparative advantage. This theory states
that two countries will have a comparative advantage in two different products and allow the
respective country to produce that particular product at a cheaper rate due to the
differentiating relative price of the products in two nations (Feenstra, 2015). This theory
matches with the case of the trade between the US and Vietnam as it talks about

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specialisation in production. The specialisation can also be seen in this case where Vietnam
has the comparative advantage of producing footwear over the US due to the lower cost of
labours. Furthermore, this theory is one of the simplistic theories of international trade that
only consider one-factor production. This case study of trade between the US and Vietnam
also mainly focuses on the labour-intensive production process and hence it is best explained
by the Ricardian Theory of international trade.
Question 4
Voluntary export restraint comes under the nontariff barriers which are used by the importing
countries to have a control over the volume of import. One of the biggest advantages of using
VER is that it does not seriously affect the political relationship between the two nations like
the direct import quotas and tariff. This voluntary restraint on export was first used in the
year 1980 when the US requested the Japanese automakers to reduce the export in the market
of US (Chase, 2017). In the case of forcing Vietnam to implement a Voluntary Export
Restraint, the firms would stop exporting low-cost products in the market of the US.
Figure 1: The changes due to Voluntary export restraint
(Source: )
The above figure shows the demand and the supply curve for footwear in both the importing
and the exporting country. The blue line shows the import of footwear from Vietnam. Now as
Vietnam reduces the export to the level shown as the red line the resulting price level for
footwear will increase till the import demand is equal to the amount of footwear being

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exported by Vietnam in the market of the US (Chaney, 2018). Simultaneously, prices for
footwear in Vietnam will also decrease until it reaches the quantity of export being done by
the country.
Now, the increase in the price level would increase the producers' surplus of the firm in the
US. Brack (2017) highlighted in this context that, producers surplus is the area above the
supply curve and below the price level which in this case is increasing due to the VER. On
the other hand, due to the increase in the price, the area below the demand curve and the price
level would decrease leading to a decrease in the consumer surplus.
Welfare effects of Voluntary Export Restraints
Importing nation
US
Exporting nation
Vietnam
Consumer Surplus - (A+B+C+D) +e
Producers Surplus +A -(e+f+g+h)
Quota Rents 0 +(c+g)
National Welfare -(B+C+D) c-(f+h)
World Welfare -(B+D)-(f+h)
Table 1: The welfare effects of VER on two nations
(Source: Developed by the learner)
The above table lists the consumer’s surplus, producer’s surplus and the overall national
surplus of the two countries. The overall national welfare reduces in the case of USA due to
the imposition of VER which is shown in red. Therefore, the potential effects of forcing
Vietnam to impose VER are a loss of national welfare which is not desirable.

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