Globalisation

Question 1-

Michael Froman who got appointed as United State trade representative (USTR) and it is his duty now to maintain United States economy in respect to trade and save its interest in relation to United States footwear industry.

He got two options now,

1. To remove the existing tariff on Vietnamese footwear industry
2. To keep the existing tariff the way it is.

He has to make a decision now and so he had a brief meeting with the US footwear industry advisors of which the major players in the market were NIKE and NEW BALANCE.

Nike suggested that they want the existing tariff in the market to be nullified totally, through which they can cut their cost of production. And they can invest the saved money into another industry where they can rise employment rate and provide high value jobs.

New balance view is exactly opposite. They suggested to keep the existing tariff the way it is because, when there is tariff in the market, Vietnamese footwear industry will be having a lesser favor to export their footwear products into the US market and thus the demand for product wouldn’t be fulfilled totally, which will help small US footwear industries to fulfil the demand by producing the footwear domestically.

With this there will be a rise in the employment of footwear industry in the US market and hence domestic producers will be able to survive in the market.

1. So, both of these industries had their own opinions which were reflecting exactly opposite views for which Michael Froman has to respond.

Michael Froman’s goal was to keep the economy of US high, keep economic interest of US good, and keep producers and consumers surplus rate in a positive way.

However, he was in dilemma as in with which industry’s decision he must go and also wanted to know which out of these companies are after economic interest and  which is after personal interest.

[pic 1]

In the given figure, assume:-

• Vertical line as price of the shoes
• Horizontal line as quantity of the shoes
• $300 as the world price (without tariff)
• $303 as the domestic price of US (after tariff)
• $297 as the world price of US (after tariff)

• The combined area of (A+B+C+D) will face a drastic reduction in consumer’s surplus.
• Area “A” faces an increment in the producer’s surplus.
• Area “C+E” faces increment in the governmental revenues.

So, the resultant of calculation of (surplus & revenues) and (loss & expenses) if,

• If it’s positive, tariff would be removed.
• If it’s negative, tariff would be there.

1. The removal of footwear tariff would affect ,

1.  Consumers in the US-

Reduction of tariffs in the footwear industry makes the costs of footwear really low and then the affordability of footwear by the consumer increases and thus they can buy more of it. Also, the imports of footwear would go high so does the availability of them in the market.

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