This article illustrates the political economy of internationaltrade and the concept of comparative advantage. Explain Who are the"Winners" and "Losers" and why as described in this article and theeffect of "arbitrary government intervention" that circumvents theworkings of free trade initiated by Senator Trent Lott as describedin the article? Use the economic concept of comparative advantagein your explanation. (5 points). Viet Catfish Case Sixteen yearsafter the end of the Vietnam war, the United States and Vietnamsigned a free trade agreement. In December 2001, Vietnam agreed tolower import tariffs and restrictions on U.S. investments in thatnation. In return, the U.S. agreed to dismantle discriminatorytrade barriers on Vietnamese exports. The trade pact was an instantsuccess. Vietnamese exports to the U.S. more than doubled in thefirst year after the trade pact was signed, led by exports oftextiles, seafood, shoes, furniture, and commodities. U.S.investments in Vietnam also surged. Catfish farmers in theMississippi 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 beenstruggling to preserve their profits. As reported in Chapter 23 ofThe Economy Today (Chapter 8 in The Micro Economy Today) low entrybarriers kept persistent pressure on prices and profits. The earlyentrepreneurs in the industry had to contend with a stream ofcotton farmers who sought higher returns in catfish farming.Despite an impressive rise in market demand, prices and profitsstayed low as the industry expanded. Surging Imports The Viet-U.S.pact intensified competitive pressures on Delta catfish farmers. In1998, only 575,000 pounds of Vietnamese catfish were imported intothe United States, mostly in the form of frozen fillets. Vietimports surged to 20 million pounds in 2001 and jumped again to 34million pounds last year. That was more competition than domesticcatfish farmers could bear. The price of frozen fillets fell by 15percent in 2001, to a low of 62 cents a pound. Prices kept fallingin 2002, hitting a low of 53 cents a pound at years end. Withaverage production costs of 65 cents a pound, U.S. catfish farmerswere incurring substantial economic losses. Suddenly, cottonfarming started looking better again. Comparative AdvantageShifting domestic resources from catfish farming back to cottonfarming is consistent with the principle of comparative advantage.Most farm-raised U.S. catfish are grown in clay-lined ponds filledwith purified waters from underground wells. The fish are fedpellets containing soybeans and corn and are subject to regularUSDA health inspections. Vietnamese catfish, by contrast, are grownin giant holding pens suspended under the free-flowing Mekong riverand other waterways. The Vietnamese production process is much lessexpensive, giving Vietnam’s catfish farmers an absolute advantageover U.S. farmers. Given the relatively high costs of cottonfarming in Vietnam, the Vietnamese also have a decided comparativeadvantage in catfish farming. Because of this, both the U.S. andVietnam could enjoy more output if the U.S. specialized in cottonfarming and Vietnam specialized in catfish farming. That is exactlythe kind of resource reallocation the surging Vietnamese catfishexports was causing. Trade Resistance The 13,000 workers in theU.S. catfish industry don’t want to hear about comparativeadvantage. They simply want to keep their jobs. And their employerswant to regain economic profits. They aren’t willing to sacrificetheir own well-being for the sake of cheaper fish and so-calledgains from trade. Economic theory may not be on the side of thedomestic catfish industry, but U.S. politicians certainly are. Atthe urging of Trent Lott, the Senate majority leader fromMississippi, the U.S. Congress decided that of the 2,000 or sovarieties of catfish, only the North American channel variety ofcatfish could be labeled as “catfish.” Vietnamese catfish had to belabeled as “basa” or “tra,” as in the Vietnamese language. Tofurther discourage consumption of imports, the Catfish Farmers ofAmerica, an industry lobbying group, ran advertisements warningAmerican consumers that “basa” and “tra” “float a round in ThirdWorld rivers nibbling on who knows what.” Arkansas C o n g ressmanMarion Berry warned that Viet fish might even be contaminated byAgent orange-- a defoliant sprayed over the Vietnamese countrysideby U.S. f o rces during the Vietnam war. None of these nontariffbarriers halted the influx of Viet catfish however. Dumping ChargesU.S. catfish farmers decided to mount a more direct attack on Vietcatfish. The Catfish Farmers of America filed a complaint with theU.S. Department of C o m m e rce, charging Vietnam of “dumping”catfish on U.S. markets. Dumping occurs when foreign producers selltheir p roducts abroad for less than the costs of producing them orless than prices in their own market. On its face, the complaintseemed to have no merit. Export prices were no lower than domesticprices in Vi e t n a m . Plus, Vietnamese farmers were evidently ea rning economic profits. Hence, neither form of dumping seemedplausible. The Department of Commerce found a loophole to resolvethis contradiction. C o m m e rce officials decided that Vietnamwas still not a “market econom y.” As a “nonmarket economy” itsprices could not be regarded as re l i a b l e indices ofunderlying costs. Instead, the U.S. Department of Commerce wouldhave to independently assess the “true ” costs of Vietnamesecatfish production. To determine the “true” costs of Vietnamesecatfish farming, U.S. investigators went to Bangladesh! Bangladeshis widely regarded as a market economy, with a level of developmentsimilar to Vi e t n a m ’s. So Bangladesh prices were assigned toVietnamese farmers. With no fully integrated firms and fewernatural resource advantages, Bangladesh ended up with hypotheticalcosts in excess of Vietnamese prices. With this “evidence” in hand,the Commerce Department concluded in January 2003 that Vietnamesecatfish were indeed being dumped on U.S. markets. Anti-DumpingDuties To “level the playing field,” the U.S. Commerce Departmentleveled temporary import duties (tariffs) of 37-64 percent.Importers of Viet catfish had to deposit these duties into anescrow account until the U.S. International Trade Commission (ITC)reviewed the case. The ITC must not only affirm the practice ofdumping, but must also determine that U.S. catfish farmers havebeen materially damaged by such unfair foreign competition. If theITC so rules, then the duties become permanent and payable. If theITC rejects the dumping or damage charges, the duties are rescindedand the escrowed payments are refunded. The odds are never good forforeign producers: The Commerce department ruled in favor ofdomestic producers 91 percent of the time and the ITC concurred 80percent of the time. The catfish case was similarly decided: onJuly 23 of this year the ITC unanimously ruled that Viet catfishhad injured U.S. catfish farmers. The temporary duties of 37-64percent were made permanent and retroactive to January. With yourknowledge of comparative advantage and international trade –explain who were the winners and losers and why in this CatfishCase? Use economic terms and concepts to explain and support youranswer. (5points)