Question 3:

a. [10 marks] Use your knowledge about trade policy to evaluate each of the following statement:

"In a perfectly competitive setting in which trade is driven by comparative advantage, tariffs have a more negative effect on welfare in large economies than in small economies"

Make sure you cover the following points in your answer: briefly review the terms-of-trade motive of large importing economies in imposing tariffs on small exporters and then apply the microeconomics model with partial equilibrium approach to analyze the effects of the tariffs on welfare of people in large economies and the effects of tariffs on welfare of people in small economies.

(Answer qualitatively, although a diagram and a demonstration by functions may help you explain your reasoning).

b. [6 marks] Read following news articles for your reference about the case of Vietnam as the next target of Donald Trump's tariffs:

• The Saigon Times (2020),Vietnamese goods likely to face higher U.S. tariffs,[online] available at:https://english.thesaigontimes.vn/69723/vietnamese-goods-likely-to-face-higher-us-tariffs.html(Links to an external site.)
• Financial Times (2019),Trump's targeting of Vietnam is misguided,[online] available at:https://www.ft.com/content/c31ece1a-a95a-11e9-984c-fac8325aaa04(Links to an external site.)
• (alternative link via Rmit library:https://primo-direct-apac.hosted.exlibrisgroup.com/permalink/f/aqirjb/TN_proquest2306379036(Links to an external site.)
• )
• World Politics Review (2019),Why vietnam looks like the next target of Trump's tariffs,[online] available at:https://www.worldpoliticsreview.com/articles/27997/why-vietnam-looks-like-the-next-target-of-trump-s-tariffs(Links to an external site.)
• The Diplomat (2019),The next battleground in Trump's trade war: Vietnam,[online] available at:https://thediplomat.com/2019/08/the-next-battleground-in-trumps-trade-war-vietnam/(Links to an external site.)
• Liberty Street Economics (2019),Are US tariffs turning Vietnam into an export power house?,[online] available at:https://libertystreeteconomics.newyorkfed.org/2019/08/are-us-tariffs-turning-vietnam-into-an-export-powerhouse.html(Links to an external site.)
• Asia Times (2019),Vietnam struggles to stay a trade war winner,[online] available at:https://asiatimes.com/2019/12/vietnam-struggles-to-stay-a-trade-war-winner/(Links to an external site.)
• Forbes (2019),Vietnam is becoming the big winner in the China trade wars,[online] available at:https://www.forbes.com/sites/warrenshoulberg/2019/10/16/us-finally-succeeds-in-vietnam-as-more-companies-move-sourcing-there/#331b5f4d4a4e(Links to an external site.)
• The Business Times (2019),Vietnam's US$5b plan to neutralise Trump's tariff threats, [online] available at: Https://www.businesstimes.com.sg/government-economy/vietnams-us5b-plan-to-neutralise-trumps-tariff-threats(Links to an external site.)

Discuss whether this case closely approximates the economic model as reviewed in part (a), the trade restriction policy in a perfectly competitive setting in which trade is driven by comparative advantage. Identify any violations of the assumptions of the economic model in the case of Vietnam - US trade and briefly anticipate the effects of the US tariffs on net welfare of Vietnam.