Chapter 1

International trade
concepts

Assoc. Prof. Dr. Vu Thanh Huong

Faculty of International Business and Economics
UEB-VNU

READING MATERIALS

Must-read
CHAPTER 1 - Krugman, P. R., Obstfeld, M., Meltiz, M. J.
(2012). International Economics: theory and policy (9th
ed.). Boston, MA: Addison-Wesley.

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 Lecture overview

1. What is international trade?

2. What are international trade activities?

3. Why do nations trade?

1 1.1. International trade concepts

What is international 1.2. International trade vs Domestic

trade? trade

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 Concept of international trade
• The exchange of goods and services across national
borders
– Trade in goods
– Trade in services

Concept of international trade (cont.)

• Trade of visible goods (Trade in goods, Merchandise trade)

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 Concept of international trade (cont.)

• Trade of invisible goods (Trade in services – Services

trade)

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 International trade vs. Domestic trade
v Similarity: the exchange of goods and services, under the control of authorities
v Main differences: International trade is riskier and more complicated.

Domestic trade International trade

Example Thuong Dinh Company signed a contract to Thuong Dinh Company signed a contract to sell
sell 1000 pairs of shoes to Hoang Anh Gia 1000 pairs of shoes to Manchester United
Lai Football Club Football Club
Subjects Same nations Different nations
-> Different regulated laws and policies
Objects Within domestic markets Across nations
-> Government controls and trade barriers

Payment Domestic currency Different currencies

-> BOP and exchange rate
Market Domestic market Diversified market
Transportation, More simple and less cost More complicated and more cost
customs,
insurance,...

• Given the differences between

domestic and international trade,
what are implications for
enterprises engaged in
international trade?

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 2.
What are international 2.1 Trade in goods

trade activities? 2.2 Trade in services

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TRADE IN GOODS

International trade activities

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 What are international trade activities?

International
Imports Exports processing

On-the-spot
Re-export Switch trade exports and
imports

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Exports
• Send goods to another country for sales
• Goods are produced in domestic country and purchased
by citizens of another country
• E.g: Vietnam exports rice to Indonesia, fisheries to the EU
• Why exports?
– Increase foreign exchange reserves
– Increases jobs
– Bings in higher wages, Raises the standard of living => happy
and support national leaders

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 Imports
• Bring goods into a country from abroad for sale
• E.g: Vietnam imports airplanes from the US
• Why imports?
• Imports and exports => trade balance
– trade deficit
– trade surplus
• Most country would prefer import less and export more. Why?
– Imports make a country dependent (e.g: Typhoon in Japan on
4/9/2018)
– Import more: Reduce foreign currency reserves (domestic currency
value, inflation and interest rate)
– Domestic company must compete with the imports => bankruptcy

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The Russia - Ukraine conflict

• Negatively impacts not only on Russia and Ukraine but
also on the EU’s and the world’s trade
• Increase in energy price
• EU: depends on energy supply from Russia
• Raise inflation
• Increase in logistics costs and accrodingly goods prices
• Diffculties to recover after the Covid-19 pandemic

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 Interanational processing
• Processing is a mode of producing goods in which an
outsourcer supplies raw materials and semi-finished
products to the processor. Processors shall produce and
deliver final products upon request to the outsourcers and
receive the processing fee
- Processor: Processing for foreign companies
- Outsourcer: Hiring foreign companies to process
- E.g: garments, textile and shoes processing in Vietnam

Outsourcer Processor

Raw materials, machines, semi-final

products, etc.
Final products
Processing fee

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Re-export
To export again what has been imported but is not processed
Re- domestically => diversified

export (?) IBM exports 100 computers to its branch in Vietnam to attend an
exhibition. Then all the computers are exported back to IBM.

(?) A branch of a Chinese shoe companies in Vietnam imports 100

pairs of shoes, and then export back to its headquarter 100 processed
pairs of shoes

(?) Thai Binh Duong Company of Vietnam export 1000 TV imported

from Japan to Lao.

(?) Damaged goods, export back to source country.

Objectives: profit or non-profit

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 Re-export:
Temporary import for re-export of goods

• Vietnam: Goods temporarily imported for re-export - Decree

187/2013/NĐ-CP (replace 12/2006/NĐ-CP)
– http://www.dncustoms.gov.vn/Phong_GSQL/hang_tntx.html
– Buy goods from one country to sell to another, conduct custom
procedures on importation into Vietnam and custom procedures on
exportation from Vietnam without processing goods domestically

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Re-export:
Temporary import for re-export of goods (cont.)

• Vietnam: Temporary import for re-export of goods

– The followings are not considered as temporary import for
re-export and regulated by particular policies
• Goods temporarily imported for attending trade fair, exhibition, or
machinery fix according to a contract and then goods are re-exported.
(http://www.customs.gov.vn/Lists/ThuTucHaiQuan/XuatKhau-Khac-
ChiTiet.aspx?ID=7)
• Goods temporarily imported for domestic use but because of some
reason cannot be used and then exported after a period of time

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 Re-export:
Temporary import for re-export of goods (cont.)
• Vietnam: Goods temporarily imported for re-export
– Goods temporarily imported for re-export shall be subject to
customs procedures on importation into Vietnam and shall be
subject to customs supervision for the entire period until their re-
exportation from Vietnam”
• Decree 187/2013/NĐ-CP
• Goods which are temporarily imported into Vietnam for re-export
shall only be permitted to be circulated in Vietnam for 60 days
=> can be extended => the duration of any one extension shall
not exceed 30 days and there shall be no more than two
extensions permitted.
• If exceeds => goods will be destroyed

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Border-gate transfers of goods

(Switch trade)
• Goods are transported from one country to another via a
third country.
• E.g: Lumber is transported from Canada to Mexico by
road
Border The Border
Canada U.S. Mexico

Transportation,
warehouse, bonded
warehouse

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 Border-gate transfers of goods –
Switch Trade in Vietnam (cont.)
Border-gate transfers of goods (Decree 187, Decree 69/2018/NĐ-CP, Circular 38/2015/TT-
BTC)
• To buy goods from a country (export country) to sell to another country (import country)
without doing the import procedures into Vietnam and export procedures out of Vietnam.
• Compare with re-export?

Border-gate transfers of goods can ben undertaken in 3 forms

• Goods are transported directly from export country to import country without passing the
border gates of Vietnam.
• Goods are transported from export country to import country via the border gates of
Vietnam
• Goods are transported to Vietnam where first temporarily stored in “bonded warehouse"
and then transported to import country

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On-the-spot exports (imports)

Goods exported or imported on the spot are goods

Produced in Vietnam by the Vietnamese companies (including foreign-

invested company and export processing companies)

Sold to foreigner traders

however, the goods are not exported out of Vietnam territory but
delivered to other domestic enterprises as assigned by foreign traders.

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 On-the-spot exports (imports)
• E.g:
1. Signed a contract to
Rang Dong in VN sell 1000 light bulbs Honda in Japan

2. Delivered
1000 light bulbs International
processing
Another Vietnamese
company in VN

• Advantages of on - spot export is to save costs: transportation, packing,

insurance, preferential tax, etc.

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TRADE IN SERVICES

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 4 modes of services supply

• Mode 1: Cross-border supply

• Mode 2: Consumption abroad
• Mode 3: Commercial presence
• Mode 4: Natural persons presence

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What are international trade activities?

4 modes of supply
Mode 1:
Cross-border Mode 2:
supply Consumption abroad

Mode 3:
Commercial presence Mode 4:
Natural persons presence

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 What are international trade activities?

Mode 1: Cross-border supply

Services are supplied from the territory of one
country into the territory of another country
E.g:
● Distance learning
● Banking or architectural services are
transmitted via telecommunications/Internet
● Telehealth
● Passing of information by mail

Service supplier Service consumer

Supply service from the territory Receive service in the territory

of one country of another country
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The University
of Tokyo

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 What are international trade activities?

Mode 2: Consumption abroad

Where a service consumer moves
into another country’s territory to
obtain a service.
E.g:
● Chinese tourists travel to Britain
● Vietnamese people go to
Singapore for health care services

Service supplier
Service consumer
Service consumer

Service consumer receives services in

territory of the supplier 31

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What are international trade activities?

Mode 3: Commercial Presence

A service supplier of one country establishes a territorial
presence, including through ownership or lease of premises, in
another country's territory to provide a service
E.g:
● Insurance companies, hotels, hospitals of Vietnam set up
branches, subsidiaries or joint-venture in Laos
● Establishment of a private hospitals by a European company
in Ecuador

Service consumers
Service supplier Establishes a commercial
presence in the territory of
other country

Service consumer 32

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What are international trade activities?

Mode 4: Natural Person Presence (Movement

of Natural Person)
Persons of one country temporarily entering the territory of
another country to supply a service
E.g: EU’s Accountants, doctors or teachers move to Vietnam
temporarily to provide their services

Service supplied by
presence of natural
persons on 1 country in
the territory of another
country

Service consumer
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 3.
Why do nations trade? 3.1.

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Why Do Nations trade?

Differences in
Benefits (Profit: Distance: Gravity
resource
price differences) model
endowment

Diversified
Reach economies
consumption
of scales
tastes

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 Preparation

Read: CHAPTER 1 & 2 (Textbook)

End of
chapter 1
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