THE EFFECT OF THE EVFTA ON VIETNAM’S EXPORTS OF ELECTRONIC PRODUCTS

THE EFFECT OF THE EVFTA ON VIETNAM’S EXPORTS OFELECTRONIC PRODUCTS Vu Thi Thai An Foreign Trade University, Hanoi, Vietnam Tran Ngoc Anh Foreign Trade University, Hanoi, Vietnam Vu Viet

THE EFFECT OF THE EVFTA ON VIETNAM’S EXPORTS OF

ELECTRONIC PRODUCTS

Vu Thi Thai An

Foreign Trade University, Hanoi, Vietnam

Tran Ngoc Anh

Foreign Trade University, Hanoi, Vietnam

Vu Viet Hung

Foreign Trade University, Hanoi, Vietnam

Nguyen Thi Ngoc Minh

Foreign Trade University, Hanoi, Vietnam

Le Hong Nhung

Foreign Trade University, Hanoi, Vietnam

Tran Mai Phuong

Foreign Trade University, Hanoi, Vietnam

Truong Ngoc Quynh

Foreign Trade University, Hanoi, Vietnam

Nguyen Duc Truong

Foreign Trade University, Hanoi, Vietnam

Abstract

This study aims to identify and analyse the impacts of the European Union - Vietnam FreeTrade Agreement (EVFTA) on Vietnam’s exports of electronics products An analysis isundertaken using the Gravity model to analyze the transformation of electronics productsexports from Vietnam to the EU under the influence of EVFTA As a result, the exports ofelectronics products from Vietnam to the EU witnessed a slight increase in terms of value.This is due to the great majority of increases in EU imports from Vietnam attributable to dutyremoval, rather than an effective distribution of resources Therefore, policy makers shouldimplement some remedies to make good use of the opportunities of the EU market, in order

to bring bilateral advantages for both Vietnam and Europe

Keywords: EVFTA, Gravity model, Electronics exports, Vietnam, EU

1 Introduction

Regarding Vietnam’s trading markets, the EU is the largest one with 508 million people and

a gross domestic product (GDP) of about 18,000 billion USD However, because of the hightariff and technical barriers, Vietnam’s exports to the EU still remain unstable In 2019,exports to the EU reached 41.5 billion USD, which decreased from a higher level in 2018(Trade Map, 2019) The EVFTA, along with its tariff reduction and non-tariff barrieralleviation, will aid to promote the EU and Vietnam cross-border trading (Doan and Nguyen,2021)

Among Vietnamese goods exported to the EU market, electronics products belong toone of the most important and potential groups Vietnam’s electronics industry is one of thefastest-growing and the most crucial industries in Vietnam, which continues to grow despitethe negative impact of the COVID-19 pandemic, according to the Ministry of Industry andTrade (2021) Dominated by multinational businesses, the Electronics industry hassignificantly boosted Vietnam’s trade volume and contributed to its GDP in the past decade.Vietnam has climbed the ranks as a key electronics exporter, from a modest 47th place

in 2001 to 12th place in 2019 (Dezan Shira & Associates, 2020) Phones and componentswere the top export products of Vietnam, followed by electronic products, computers, andother components From a country with agricultural products and labour-intensive productsbeing the main exports, Vietnam was gradually transitioning to producing more high-techexport products with higher added value such as electronics and electronic components(Trinh, 2020)

The EVFTA is an ambitious agreement It is set to eliminate over 99% of customsduties The EU duties on Vietnamese products will be eliminated over seven years The tariffeliminations, along with the alleviation of non-tariff measures, are expected to stimulatetrading and increase export values

In view of EU-Vietnam free trade agreement (EVFTA) full engagement, this paperattempts to examine potential impacts of EVFTA on Vietnam’s electronics exporting to the

EU using Gravity models All trade data used in this study was sourced primarily from Trademap, World bank database, Vietnam Electronics Industry Association, and so on Since theintroduction of the paper has been given, the next section gives a literature review about theElectronics industry of Vietnam under traditional and new-generation FTAs,

impacts of EVFTA, Gravity model and needed data Section 4 offers the result Lastly,section 5 summarizes our discussion and conclusion of the paper.

2 Literature review

2.1 Literature review on impact of traditional FTAs on Vietnam exportation

Up to now, Vietnam has experienced an over-35-year integration process into theInternational Economy from the start of economic renovation toward “socialist-orientedmarket economy”, transfering into a market economy to now with several new generationfree trade agreements containing large scope and high level of liberalization Until May 2021,Vietnam has joined a total of 17 FTAs, of which 14 FTAs are in effect (WTO and IntegrationCenter, 2021) These FTAs analysed through many researches adopting several kinds ofmodels showed different levels of impacts on Vietnam exportation

During the first period of integration, all of the FTAs in which Vietnam joined wererelated to ASEAN namely in chronological order AFTA, ACFTA, AKFTA, AJCEP andAIFTA There are lots of researchers, both the Vietnamese and the foreign, assessing theimpact of these FTAs on Vietnam exportation in general It can be seen that studies using thegravity model were very common For example, Nguyen and Doan (2017) used stochasticfrontier gravity model and trade efficiency to evaluate efficiency performance of Vietnam’strade through AFTA with its main trading partners from 1995 to 2015 It was shown that theaverage export efficiency with ASEAN countries grew from 37.54% in the years between

1995 and 1999 to 48.73% in the period 2010–2015 Another paper of Nguyen (2012) aboutassessing the impacts of Vietnam’s integration under AFTA on Vietnam trade flows based on

a gravity model indicated that a major portion of Vietnamese exports depends on the imports

of the intermediate inputs As a result, there was an increase in the production costs alongwith higher price of exported products, which dampened the competitive ability of Vietnam’sexports and made Vietnam not able to enjoy the benefits from domestic currency’sdevaluation as its trading partners do (Nguyen and Doan, 2017) A study of Alleyne et al.(2013) used a structured gravity approach to estimate potential export patterns at aggregateand industry level and what ACFTA offers ASEAN exports to China including Vietnam.Gravity model of trade was used in the study assessing the impact of ACFTA on the export ofVietnam from 2001 to 2018

2.2 Literature review on impact of new-generation FTAs on Vietnam exportation

With the great influence of new-generation FTAs on Vietnam’s economy and trade,especially in exportation, assessment studies of this agreement are becoming greater innumber and diversified in study methods and contents with both on the whole economy andrecently focusing more on a specific sector Kieu (2019) evaluated the impact of new-generation trade agreements on Vietnam bilateral exports by using the Gravity model.Another study of Vu et al (2020) on the CPTPP effect on Vietnam’s fisheries exports to theCPTPP region with the use of Global Simulation Analysis of Industry-Level Trade Policymodel (the GSIM model), while Vu (2015) used trade indicators such as RevealedComparative Advantage, Export Specialization and Trade Intensity to anticipate the potentialbenefits and losses of the EVFTA Baker et al (2014) estimated the impacts of EVFTA onVietnamese economy and forecasted that textile and apparel trade would be one of the mostbeneficial sectors when EVFTA comes into force Vo et al (2018) analysed the impacts inVietnam’s apparel exports Nguyen and Pham (2020) using SMART studied the potentialimpacts of EVFTA on Vietnam’s exports of seafood to the EU market Ha (2016) employsboth SMART and regression models to assess how the EVFTA would influence Vietnam’stimber industry Pham (2019) analyzes trade creation and trade diversion effects from theSMART’s outputs for Vietnamese seafood Nguyen and Trinh (2020) applied the SMARTmodel to estimate the impact of EVFTA on exportation of Vietnamese agricultural products

to the EU market It can be seen from those previous researches that new-generation FTAshave had a great impact on not only Vietnam’s economy in general but many economicsegments as well Simultaneously with each kind of FTA, Vietnam has different key industrysegments due to the country partners

Through research on the impact of both traditional and new-generation FTAs that havebeen in force on international trade lines on Vietnam exportation, the researchers realizedthat although, overtime, the methods and contents of studies have been multiform, there areonly a few studies on the impact assessment in the electronics segment of FTAs in generaland EVFTA in particular

3 Overview

3.1 The electronics industry of Vietnam

The Electrical and Electronics Retail market is comprised of the sales of communicationsequipment, computer hardware and software, consumer electronics, household appliances,

and photographic equipment The electronics industry is one of the fastest-growing and mostcrucial industries in Vietnam It is a core element of the Vietnamese manufacturing sector’ssuccess and contributes significantly to GDP growth, export earnings, investment, andemployment According to the evaluation of the Vietnam Electronic IndustriesAssociation (2014), Vietnam appeared to be one of the largest manufacturing hubs of mobilephones, photocopy machines, printers, etc in the world The export of electronics andcomponents in 2013 has grown to over 34% of Vietnam’s export basket However, taskstaken over in Vietnam are mainly low value-adding, low tech, and labor-intensiveproductions The local content is relatively small and intermediate products are mainlyimported.

Figure 1 Vietnamese electronics imports and exports

Source: Trademap (2020)

Although the electronics industry is dominated by foreign giants like Samsung andPanasonic, the nation still reaps a lot of benefits since these multinational corporations haveset up industries in Vietnam that employ local people Given the rapid growth of electronicsproduction, trade, and investment seen in recent years, the time has never been better to makeuse of Vietnam as a cost center for larger Asian operations or as a full-fledged productionhub (Nguyen, 2020) The electronics industry will continue to grow strongly due to risingconsumer demand amid the pandemic, according to a forecast from the Ministry of Industryand Trade (MoIT) The industry’s growth will also contribute significantly to Vietnam’srecovery process and 2021 growth targets This industry is proven to be highly integratedwith global value chains

3.2 Electronics exports from Vietnam to the EU

3.2.1 Vietnam’s electronics export

The electronic industry is the biggest export-earner for Vietnam The largest single-investor,Samsung, now produces more than half of its smartphones globally in Vietnam; Intel,Foxconn, and others are following suit, according to the study of Herr et al (2016) TheMonetary Authority of Singapore (MAS) found that with investments from China, SouthKorea, and the US, Vietnam has seen phenomenal growth in its exports of mobile phones andprinters/photocopiers in the past decade Its share in world production of mobile phones atless than 10% is far below China’s 50% and the EU’s 20%; however, is already almost onpar with the US Vietnam has also carved out a similar global share in exports ofprinters/photocopiers, overtaking Japan and the US (MAS, 2020)

Figure 2 Vietnam exports of electrical, electronic equipment period 2010-2020

Source: Trademap (2020)

The Vietnamese electrical appliance industry has experienced steady growth as theglobal economy continues to recover and demand improves At present, Vietnam hasexported computer products and electronic components to over 100 markets globally,including China, the United States, ASEAN, Japan, the Republic of Korea, as well as theNetherlands, Germany, the Czech Republic, Poland, Finland, and others in the EuropeanUnion

3.2.2 Vietnam-EU trade of electronics products

The EU is Vietnam's fourth-largest export market Export turnover of Vietnamese HJN $18.5billion last year Vietnam's main exports to the EU are electronic products, footwear, textilesand clothing, coffee, rice, seafood, and furniture

Table 1 Key export products from Vietnam to EU in 2020

Product Value (Mio euros) % TotalElectrical machinery and appliances 18,412 53.5Footwear, hats, and other headgear 3,613 10.5Textiles and textile articles 3,501 10.2Vegetable products 1,881 5.5Miscellaneous manufactured articles 1,295 3.8

Source: European Commission (2021)

Currently, the EU is Vietnam’s main trading partner, with the import valuesrepresenting 20 percent of Vietnam’s global exports in goods and services from Vietnam in

2020 Most of Vietnam’s exports in goods and services to the EU are demanded by Germany(22 percent of total exports to the EU), the Netherlands (13 percent), and France (11 percent)

Over the years, Vietnamese exports to EU member states have managed impressivegrowth and the electronic industry is one of the best-performing sectors, with the exportvalues remaining at a steady growth, amounting to 15.3% of the total electronics export to theworld

Figure 3 Vietnam exports of electronic products to EU and the world

Source: Trademap (2020)

Therefore, besides the US market, Europe is a promising market for Vietnameseelectronics with export turnover reaching 95.8US$ billion in 2020, equal to one-third of thetotal export turnover of Vietnam.

3.3 EVFTA and the impacts of tariff elimination impact on electronics export

3.3.1 EVFTA

The Europe Vietnam Free Trade Agreement (EVFTA) is a new-generation FTA signedbetween Vietnam and the 27 EU’s Member States Recent research (Dezan Shira &Associates, 2020) showed that it is considered a new generation bilateral agreement – itcontains important provisions for intellectual property rights, investment liberalization, andsustainable development

The EVFTA will eliminate over 99 percent of all tariffs relating to trade in goods andpartly remove the remainder by means of Tariff Rate Quotas (TRQs) Almost half of theduties on Vietnamese imports from the EU will be eliminated at the time of the entry intoforce of the agreement, with the remainder gradually removed over a 10-year period Incomparison, 81 percent of duties on European imports from Vietnam will be eliminated atentry into force, with the remainder progressively eliminated over a 7-year period Customsduties will be removed over a transitional period (of a maximum period of seven years forVietnamese goods and 10 years for EU goods) so that domestic producers can graduallyadapt, according to the European Commission (2019) Consumers from both sides willbenefit from lower prices and exporters from strengthened competitiveness

3.3.2 Impacts of the EVFTA on electronics export

Vietnam is likely to be the major beneficiary of the agreement as the liberalization of tariffbarriers will benefit key export industries, including the manufacturing of smartphones andelectronic products These industries are also very labor-intensive Increasing Vietnam’sexport volume to the EU, the FTA will facilitate the expansion of these industries, both interms of capital and increasing employment

The EVFTA should be a fantastic opportunity for both nations as a reduction of up to99% on tariffs is an opportunity to increase sales and produce more lucrative electronicsproducts in Vietnam Although Vietnam is yet to have an extensive developed electronicsmanufacturing industry at present, the FTA provides Vietnam with an unprecedented chance

to take a lead in electronics products, and hence expansion of this budding industry could be

a smart move for local businesses

The EU-Vietnam trade and investment agreements will create the momentum to furtherstrengthen the already robust trade and investment ties between the EU and Vietnam Theimplementation of key trade agreements, strong demographic tailwinds, and supportivegovernment policies are likely to continue this trend and present a variety of opportunities forinvestors (Nguyen, 2020) The new-generation FTA would be one of the important factorsdriving Vietnam’s exports in the forthcoming time.

4 Research methodology and data

4.1 Gravity model

Our study adopts the Gravity model, which has been used frequently by a variety of globaleconomists with a view to understanding the pattern of trade in a globalised world To bespecific, this model is used to indicate the bilateral trade between two countries

This model was first applied in 1962 by Jan Tinbergen, a Dutch economist, whoproposed that the size of bilateral trade flows between any two countries can be approximated

by employing the ‘gravity equation’, which is derived from Newton’s theory of gravitation.While planets are attracted to each other in proportion to their sizes and proximity, so too arecountries Relative size is determined by current GDP, and economic proximity is determined

by trade costs – the more economically ‘distant’ the greater the trade costs

It has been demonstrated how Gravity models can emerge from a variety of tradetheories, based on several extensive studies For instance, Bergstrand (1985) used PaulKrugman's (1980) microeconomic basis to show that the gravity model is a directconsequence of a trade model The country's trade supply is generated from the profitmaximization of firms, while the country's trade demand is derived by maximizing theconstant elasticity of substitution utility function subject to an income constraint Usingmarket equilibrium clearance, the gravity equation is then calculated In addition, whileDeardorff (1998) demonstrated that the gravity model may be derived from two extremeexamples of the Hecksher-Ohlin model with and without trade barriers, Martinez-Zarzoso et

al (2004) categorize export sectors based on their sensitivity to geographic and economicdistance, and use a gravity model framework to determine which commodities have strongexport potential From a theoretical model of international commerce in differentiated goodswith business heterogeneity, Chaney obtained a gravity-type equation in 2008

In general, we have a common model as below:

Xij = G*Si*Mj*φijijWhere:

Xij: The trade value of exports from i to j

Mj: All importer-specific factors that make up the total importer’s demand

Si: Exporter-specific factors that represent the total amount exporters are

willing to supply

G: A variable that does not depend on i or j such as the level of world liberalizationΦij: The ease of exporter i to access of market jij: The ease of exporter i to access of market j

After reviewing the previous research and papers conducted using the gravity model,

we believe that this model is the most suitable tool for us to fulfill our study’s objectives Inthis study, we apply the gravity model to analyze the transformation of electronic productsexports as well as the bilateral trade between Vietnam and EU in terms of this industry underthe influence of EVFTA To be specific, we assume that Si and Mj represent the GDP ofnations i and j, respectively, and φijij represents the inverse of trade costs between twocountries, including shipment/distance costs plus tariffs In fact, Austria, Netherlands,Germany, Italy and Poland are all in the same zone, so the costs of shipping from Vietnam tothese countries are likewise the same As a result, we have decided to make the distancevariable's value equal to a unit (million dollars) As a result, the Gravity model is as follows:Xij = (G*Si*Mj)/(Qij*1+Vij*tij) or Xij = (G*Si*Mj)/(Qij+Vij*tij)

Where Xij, Si, Mj, and G have the same meaning as before, Qij is the quantity ofelectronics exported from Vietnam, Vij is the value of the exported electronic products, andtij is the tariffs applied by the EU to items

In order to achieve our study’s objectives, we must acquire data from credible sources

to support the work of computation based on the Gravity equation The figures acquired fromthe Gravity equation results are expected to be reliable and may help to explain therelationship between the EU and Vietnam, as well as the effects that the EVFTA has onVietnamese exports The collected data is presented in the following section

4.2 Data

Table 3 Top 5 Vietnamese electronics products exported the most to the EU

HS code Exported value (US$ thousand)

Source: Trade map (2021)

In recent 5 years (2016-2020), HS code 851712, 852990, 851762, 852859, 851770 were

the top five regarding the exported value Telephones for cellular networks "mobile

telephones" or for other wireless networks (HS code 851712) were exported the most to the

EU market, while parts suitable for use solely or principally with transmission and reception

apparatus for radio-broadcasting or television, television cameras, digital cameras, video

camera recorders, radar apparatus, radio navigational aid apparatus or radio remote control

apparatus, monitors and projectors, n.e.s (excluding for aerials and aerial reflectors of all

kinds) (HS code 852990) ranked the second and other types (HS code 851762, 852859,

851770) were exported in a smaller amount

From data collected about top Vietnamese electronics products exported the most to the

EU, we use these five electronics product categories as representative products for our

analysis

Table 4 Tariffs applied on products by EU (Tij)

Products Applied tariff (Tij)