Theories of international trade to master in Vietnam

by Thu Huong

Today, LSX Lawfirm will give you an article about: “Theories of international trade to master in Vietnam”, as follows:

The mercantilist point of view in international trade

Before the 15th century, economic agents also operated according to economic principles, but these agents acted but did not express it into specific theories. Because they do not understand the theory of movement, they do not know what is good and what is not good and so the life of the people thousands of years ago developed spontaneously.

By the fifteenth century, some economists had formed an economic theory. Mercantilism is considered the first economic theory. Mercantilism has the following view:

(i) The relationship between economic agents is Win-Loss: If one person gains an additional amount of gold, another person loses a certain amount of gold. Wealth can only be obtained through unfair distribution, that is, exploitation of others. The ruling class exploits labor and plunders wealth from the ruled class.

(ii) The relationship between the two countries is trade protectionism: Through stimulating exports and restricting imports, gold will flow into their countries.

(iii) View of wealth of a country: The more gold, silver, land, population a country has, the richer it is. This view stimulates one country to go to war with another to obtain more gold and silver, seize land, and assimilate the population.

Theory of absolute advantage in international trade

Adam Smith argued that each commodity has a different cost of production. At this time he considered labor as the only cost of production in his economic theoretical model.

Work Hours/ProductsJapanVietnam
Steel 26

In the above example, the cost of steel production in Vietnam is more expensive than in Japan, but in Japan the cost of fabric production is more expensive than in Vietnam. Thus, Vietnam should focus on fabric production, while Japan should focus on steel production.

In his book, Adam Smith’s views on the theory of international trade promotion are as follows:

(i) The relationship in economic agents is Mutual: By optimizing personal interests, economic agents have increased social welfare, albeit indirectly.

(ii) The relationship between the two countries is for mutual development: Each country has its own advantages, so it produces goods at different costs. By exchanging goods between countries, each country will reap the greatest benefit at the lowest cost.

(iii) The view of the wealth of a country: is the life of the people happy, life is full, not the amount of gold and silver.

Adam Smith advocates removing trade barriers such as taxes, quotas, etc. This is a big step from a protectionist economy to a free trade.

The theory of comparative advantage in international trade

David Ricardo extended Adam Smith’s theory by hypothesized that a country has an absolute advantage in the production of all goods. And then he put forward the theory of comparative advantage, meaning that countries need to determine which goods have a comparative advantage in order to focus on production.

Work Hours/ProductsJapanVietnam
Steel 2twelfth

In the above example, although fabric production in Japan is cheaper than in Vietnam, but because:

(i) In Japan, 1 hour can make 2 units of steel and 5 units of fabric, so 1 unit of steel = 2/5 of fabric

(ii) In Vietnam, 1 hour can make 12 units of steel and 6 units of fabric, so 1 unit of steel = 2 units of fabric

Thus, 1 unit of steel, if converted into fabric, will be larger in Vietnam than in Japan. Japan should produce steel and bring it to Vietnam in exchange for 2 units of fabric rather than producing cloth. On the contrary, Vietnam should bring 2 units of fabric to Japan in exchange for 1 unit of steel rather than producing steel itself.

The case for international trade occurs only when both countries feel it is beneficial. If 1 unit of steel is equal to or greater than 2 units of fabric, Japan will benefit but Vietnam will not benefit; and if 1 steel unit < 2/5 fabric unit, Vietnam benefits but Japan does not.

Therefore, the two countries will have trade as long as 2/5 units of fabric < 1 unit of steel < 2 units of fabric.

By extension, suppose that there are 3 countries involved in the production process, then a country should choose the one with the highest cost of producing that good for export.

Heckscher-Ohlin model

This model, also known as Ho model, was co-formed by two economists, Eli Heckscher and Bertil Ohlin of Sweden, so the model name is a connection between the two names of these two economists.

This model introduces two factors that affect international trade as follows:

(i) Abundant and cheap levels of factors of production.

(ii) Each type of good requires a different ratio of inputs.

A country should export goods and have an abundance of inputs for that good and import goods of the opposite nature.

In the above specific example, Vietnam should produce cloth and shoes because of its abundance of labor, and Japan should produce steel because of its large capital and less labor and import fabric.

However, the reality is that all countries follow neo-mercantilism, which means encouraging exports and protecting domestic trade through tariff and technical barriers. So we will see that the export tax is very low or can be zero, but the import tax is very high, up to 100% or more.

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What do the theories of Adam Smith and David Ricardo require?

(i) Labor is not allowed to move freely between countries (because if it moves, there will be no more advantages),
(ii) The shipping cost between two countries is zero,
(iii) In the model there are only two countries and two commodities
(iv) Perfect competition exists in markets (meaning there are infinitely many sellers and infinitely many buyers)
(v) The two countries have the same and constant production technology (because Adam only considers labor as the only input cost of production, ignoring other variables such as technology)

What does the view of mercantilism result?

The view of mercantilism resulted in the fact that the country did not focus on stimulating production but only on stimulating appropriation. 
However, when the population is increasing but the production does not grow accordingly, it will lead to imbalance, people’s living standards will become worse and worse. 
At that time, having a lot of gold did not solve the problem because there was no commodity.

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