Reference no: EM132155532

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. (5 points). 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. With your knowledge of comparative advantage and international trade – explain who were the winners and losers and why in this Catfish Case? Use economic terms and concepts to explain and support your answer.