Determinants of trade balance empirical evidence in vietnam from 2010 to 2019

Since the Doi Moi revolution in 1986, the role of external trade in Vietnam’s economy has grown dramatically in the last 30 years. Vietnam’s international trade has become more and more liberalized in recent years. One of the most important issues which need to be studied during this era is the behavior of the trade balance. This paper is aimed to examine the relationship between trade balance and macroeconomic variables: exchange rate, foreign direct investment, final consumption expenditure, labor force, and manufacturing in the case of Vietnam from 2010 to 2019. Using the OLS model and qualitative method with data collected from the General Statistics Office, World Bank, and other qualified sources, and handled by STATA software, whether a causal relationship exists between trade balance and the determinants or not is investigated. The results found that all aforementioned variables statistically affected the trade balance at

FACULTY OF ENGLISH FOR INTERNATIONAL BUSINESS

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RESEARCH PAPER

DETERMINANTS OF TRADE BALANCE:

EMPIRICAL EVIDENCE IN VIETNAM FROM 2010 TO 2019

Thoa Group: Group

Hanoi, May 2023

1School of Economics and International Business, Foreign Trade University

2Faculty of International Economics, Foreign Trade University

ESP231: English for Specific Purposes 3

M.A Phan Kim ThoaHanoi, May 2023

Since the Doi Moi revolution in 1986, the role of external trade in Vietnam’s economy hasgrown dramatically in the last 30 years Vietnam’s international trade has become more andmore liberalized in recent years One of the most important issues which need to be studiedduring this era is the behavior of the trade balance This paper is aimed to examine therelationship between trade balance and macroeconomic variables: exchange rate, foreigndirect investment, final consumption expenditure, labor force, and manufacturing in the case

of Vietnam from 2010 to 2019 Using the OLS model and qualitative method with datacollected from the General Statistics Office, World Bank, and other qualified sources, andhandled by STATA software, whether a causal relationship exists between trade balance andthe determinants or not is investigated The results found that all aforementioned variables

statistically affected the trade balance at 𝛼 = 5% In this case, only the exchange rate and

manufacturing have a positive effect on the trade balance, whereas the other variablesindicated a negative causal relationship with the trade balance Based on this result and thecurrent situation of the trade balance of Vietnam, further policy implications for Vietnam arealso suggested in this study

Keywords: Balance trade, Vietnam, OLS, trade liberalization

Before the year 1986, the inefficiencies of the economic system in Vietnam led todeteriorating living conditions Therefore, a need for comprehensively reforming the systemwas required During the 6TH party congress in December 1986, the communist party decided

to reform Vietnam’s economic system, called “Doi Moi” The economic developmentinduced by the reforms was remarkable: the living condition of the Vietnamese has improveddrastically since Doi Moi The role of external trade has grown dramatically in the currentyears The Vietnamese government promotes trade liberalization policies as a result of WTOentrance and integration trends When external trade relations are established, one of themacroeconomic indicators which reflects the efficiency of trade is the trade balance or BoT(Balance of trade) It is generally acknowledged that trade balance tells people more abouthow a nation’s economy operates and what it prioritizes than how well or poorly a nation’seconomy is doing The state of the balance of trade is declared to have an impact on theexchange rate, inflation rate, and other economic factors A trade deficit can result in thedevaluation of the domestic currency Thus, trade balance has become one of the most crucialissues needed to be studied

The main purpose of this paper is to examine determinants of trade balance in the case

of Vietnam during the period between 2010 and 2019 with five macroeconomic variablesusing the OLS model and secondary data collected from the General Statistics Office, WorldBank, and other qualified sources In order to achieve the aforementioned purpose, our threemain objectives are (1) to review the prior studies about BoT and its determinants, (2) toapply the OLS model with collected data via STATA software to examine determinants, and(3) to suggest policy implications for Vietnamese governments and researchers who areinterested in this topic based on these empirical results and the current view of balance trade

in Vietnam

Apart from the introduction and conclusion, the remainder of this paper is organized

as follows:

SECTION 1: THEORETICAL FRAMEWORK OF TRADE BALANCE

SECTION 2: LITERATURE REVIEW OF PRIOR STUDIES CONCERNING TRADEBALANCE AND ITS DETERMINANTS

SECTION 3: STATUS OF VIETNAM'S TRADE BALANCE IN THE PERIOD FROM

2010 TO 2019

SECTION 4: RESEARCH METHOD AND MODEL

SECTION 5: EMPIRICAL RESULTS AND FINDING

DISCUSSIONS SECTION 6: IMPLICATION

During the process of drafting and finalizing this paper, due to a limited amount oftime as well as some certain lack of experience in research, despite all the efforts, the reportmay undeniably avoid some mistakes We are willing to receive your comments in order toimprove the quality of this paper in the future.

Theoretical Framework Overview of Trade Balance

Definition of Trade Balance

The trade balance is the difference between the value of the goods that a nation (or

another geographic or economic area) exports and the value of the goods that it imports

If exports exceed imports then the nation has a trade surplus and the trade balance issaid to be positive If imports exceed exports, the nation or area has a trade deficit and itstrade balance is said to be negative However, the words ‘positive’ and ‘negative’ have only anumerical meaning and do not necessarily reflect whether the economy of a nation or area isperforming well or not A trade deficit may for instance reflect an increase in domesticdemand for goods destined for consumption and/or production The total trade balance,including all goods exported and imported, is one of the major components of the balance ofpayments A big surplus or deficit for a single product or product category can show aparticular national competitive advantage or disadvantage in the world market for goods(Eurostat, 2013)

The measure of Trade Balance

To calculate the balance of trade, people subtract the value of a nation's imports fromthe value of its exports

Balance of Trade = Value of Exports - Value of Imports

Where:

Value of exports: the value of all goods provided to the rest of the world Theyexclude compensation of employees and investment income (formerly called factor services)and transfer payments

Value of imports: the value of all goods received from the rest of the world Theyexclude compensation of employees and investment income (formerly called factor services)and transfer payments

The Balance of Payments and Trade Balance

The balance of payments framework provides a theoretical basis for understanding thedeterminants of the trade balance According to this framework, the current account, whichincludes trade in goods and services, plays a pivotal role in influencing the trade balance Apositive trade balance occurs when a nation's exports exceed its imports, resulting in a surplus

in the current account Conversely, a negative trade balance, or trade deficit, arises whenimports surpass exports, leading to a deficit in the current account

The balance of payments and the balance of trade’s relationship is viewed fromdifferent theoretical perspectives The traditional balance of payments theory states that an

increase in nominal currency value improves trade balance The essence of this view is thesubstitution effects in consumption and production induced by the relative price (domesticversus foreign) changes caused by a devaluation Meanwhile, the absorption approach whichemerged at the beginning of the 1950s focuses on total domestic expenditures and income,stating that an improvement in the trade balance requires increased income exceedingdomestic expenditures Appearing at the end of the 1950s, the monetary view sees thebalance of payments as a monetary phenomenon, where excess demand or supply of moneyaffects the trade balance.

Literature Review Literature review of prior studies concerning Trade

Balance

There are many factors that affect the balance of trade in a nation A nation’s balance

of trade is defined by its net exports (exports minus imports) and is thus derived from all thefactors that affect international trade These include factor endowments and productivity,trade policy, exchange rates, foreign currency reserves, inflation, demand, and so on.Through reading and understanding previous studies, our research has synthesized severalspecific factors that affect the nation's trade balance

The theory of value-labor of A Smith shows that all types of productive labor createvalue, labor is the ultimate measure of value, distinguishing the difference between use valueand exchange value and assert use value determines exchange value When analyzing thevalue of goods, value is expressed in the exchange value of goods, in quantitative relationswith other goods, and in the production of developed goods, it is expressed in money Thequantity of a commodity's value is determined by the average required labor cost, and twodefinitions of price are given, the natural price and the market price In essence, market

prices are the monetary expression of value According to him, natural prices areobjective, while market prices depend on many other factors such as; natural prices, andsupply and demand relations The Marshall–Lerner condition (named after Alfred Marshalland Abba P Lerner) is satisfied if the absolute sum of a nation's export and importdemand elasticities (demand responsiveness to price) is greater than one If it is satisfied,then if a nation begins with a zero trade deficit when the nation's currency depreciates (e.g., ittakes fewer yen to buy a dollar), its balance of trade will improve (e.g., the U.S willdevelop a trade surplus with Japan) The nation's imports become more expensive andexports become cheaper due to the change in relative prices, and the Marshall-Lernercondition implies that the indirect effect on the quantity of trade will exceed the direct effect

of the nation having to pay a higher price for its importsand receive a lower price for its exports

Tran (2012) used regression with a logarithmic form to determine the impact of sixfactors on the trade balance in Vietnam and a statistical program was used to analyze thedata The main objectives of the study are to examine the factors that impact the trade balance

in Vietnam including foreign direct investment (FDI), exchange rate, labor force,manufacturing growth rate, and agricultural growth rate by using the monthly data during theperiod 2002 – 2011

Zewudie and Alemu (2016) attempted to identify the short and long-run determinants

of trade balance in the case of Ethiopia‘s economy for the period 1978 to 2009 In order toachieve the stated objectives a synthesis model of absorption, elasticity, and monetaryapproaches to trade balance is estimated using Engle-Granger two-step procedures Thefindings of the study suggest that the most important long-run determinants of trade balanceare final consumption expenditure, exchange rate, manufacturing, and terms of trade, whilegovernment consumption expenditure, final consumption expenditure, real effectiveexchange rate, and terms of trade are the short-run determinants of trade balance

Saeedi and Rana (2021) measure the impact of leading trade of balance, export, andimport such as foreign direct investment, net inflows, final consumption expenditure, GDP,effective exchange rate, and tax revenue The study identifies the trade balance and how itcan influence import and export in Selected Emerging Countries, namely India, Indonesia,Ireland, Malaysia, Mexico, and Pakistan The confirmed period is from 1990 to 2015

Based on the previous studies and theories mentioned above, we can conclude thatfive general factors have an impact on the balance of trade: FDI, exchange rate, finalconsumption expenditure, manufacturing, and labor force Therefore, our study uses thesefactors as the independent variables in our model, in order to find out the impact of them ontrade balance in Vietnam from 2010 to 2019

Literature Review on factors affecting Trade Balance

● FDI

According to the International Monetary Fund (IMF) (1993), FDI is an investmentactivity made to obtain lasting benefits in an enterprise operating in the territory of aneconomy other than the host economy According to the Organization for Economic Co-operation and Development (OECD) (2008), Foreign direct investment is made in order toestablish relationships long-term economic relationships with an enterprise, especiallyinvestments that have the ability to influence the management of the said enterprise

Yousaf et al (2008) highlight the impact of FDI on the exports and imports ofPakistan during the period 1973 to 2004 The results suggest that FDI has a positive impact

on real exports and real imports in the long run In the short run, FDI has a positive impact onimports and a negative impact on exports Therefore, according to the study, FDI has anegative effect on the trade balance

Hailu (2010) determines the relationship between FDI and the trade balance of sixteenAfrican nations for the period from 1980 to 2007 Using the Least Square Dummy Variable(LSDV) regression method, he reports that FDI stock has positive effects on both exports andimports The overall net effect of FDI on the trade balance was inferred to be positive

● Exchange rate

According to the World Bank, the exchange rate between two nations is the price atwhich the currency of one nation can be expressed in terms of the currency of another nation.The exchange rate is the relative purchasing power between the domestic currency and theforeign currency The exchange rate, on the one hand, reflects the purchasing power of thedomestic currency, and on the other hand, the supply and demand for foreign exchange

By examining the trade balances between ASEAN-5 nations and Japan for the sampleperiod from 1986 to 1999, Liew (2003) found that the role of exchange rate changes ininitiating changes in the trade balances has been exaggerated It is widely expected that thedepreciation of ASEAN-5 exchange rates concerning the Japanese yen would improve theseeconomies’ trade balances with Japan during the sample period of study It is explained that

as the exchange rate of a nation's currency rises, the price of imported goods becomescheaper while the price of exported goods becomes more expensive for foreigners Therefore,the appreciation of the domestic currency exchange rate will be detrimental to exports andfavorable to imports, resulting in net exports

According to Marshall–Lerner condition, goods are often price inelastic in the shortrun, because people's consumption habits cannot be changed easily Therefore, the Marshall-Lerner condition is not met, leading to a currency devaluation that only worsens the balance

of payments in the short run

● Final consumption expenditure

According to the Central Statistics Office, final consumption expenditure (formerlytotal consumption) is the sum of household final consumption expenditure (privateconsumption) and general government final consumption expenditure (general governmentconsumption) Data are in current U.S dollars

Zewudie and Alemu (2016) identify the short and long-run determinants of tradebalance in the case of Ethiopia‘s economy for the period 1978 to 2009 By using Engle-Granger's two-step procedures of cointegration and general to specific error correction model,they prove that final consumption expenditure negatively affects trade balance.

Saeedi and Rana (2021) identify the trade balance and how it can influence thenation's imports and export in Indonesia The confirmed period is from 1990 to 2015 Theresult, in contrast, shows that final consumption expenditure affects the trade balance in apositive direction

 Labor force

According to the World Bank, the labor force comprises people ages 15 and olderwho supply labor for the production of goods and services during a specified period Itincludes people who are currently employed and people who are unemployed but seekingwork as well as first-time job-seekers Not everyone who works is included, however Unpaidworkers, family workers, and students are often omitted, and some nations do not count asmembers of the armed forces Labor force size tends to vary during the year as seasonalworkers enter and leave

Zewudie and Alemu (2016) find determinants of the trade balance in Ethiopia for theperiod 1978 to 2009 Meanwhile, Saeedi and Rana (2021) do research on the trade balance inIndonesia between 1990 and 2015 Both research find out that the labor force has a negativeimpact on the trade balance

● Manufacturing (value added)

Manufacturing refers to industries belonging to ISIC divisions 15-37 Value added isthe net output of a sector after adding up all outputs and subtracting intermediate inputs It iscalculated without making deductions for depreciation of fabricated assets or depletion anddegradation of natural resources The origin of value added is determined by the InternationalStandard Industrial Classification (ISIC), revision 3 Data are in current U.S dollars

Orr (1991) examines the extent to which the growth in overall foreign ownership ofU.S manufacturing firms is likely to improve the U.S trade balance over the long term Theevidence from this two-step analysis suggests that the growth in manufacturing will increasethe trade balance in the longer term It is explained that if a nation experiences an erodingmanufacturing base, its productivity growth declines, and it then suffers trade deficits in spite

of repeated currency devaluations

Status of Vietnam's trade balance in the period from 2010 to 2019

Regarding Vietnam's trade balance, thanks to the reasonable policies of thegovernment, the trade balance was relatively stable in the past However, in each period, thetrade balance will tend to develop, and change based on many factors such as historical,social, and economic circumstances

 Trade balance in Viet Nam in eight years from 2010 to 2018: Positive changes in the balance of trade

Over the eight years (2010 - 2018), Vietnam's trade balance had a spectacular reversalfrom a deficit of tens of billions of dollars to a trade surplus of more than $7.2 billion

According to the General Department of Customs, the nation's export value of goods

in the past ten months of 2018 reached US$202.03 billion, and imports reached US$194.82billion Therefore, the nation's trade surplus in goods has reached more than 7.2 billion USD,much higher than the surplus of 2.11 billion USD in 2017 Statistics show that, from 2018onwards, Vietnam's balance of trade in goods has made positive changes The trade deficithas gradually decreased over the years and turned into a surplus in recent years

However, along with the high growth of exports, especially that of the foreign directinvestment (FDI) sector, the balance of trade in goods has changed a lot

In the last years of the last decade, the trade deficit decreased gradually but remainedhigh Specifically, according to the data of the General Statistics Office, in 2010 the tradedeficit still reached nearly 13 billion USD In 2012, the trade balance turned into a slightsurplus In 5 years (2013 - 2017), the trade balance was only in deficit in 2015, the rest was insurplus Especially in the first 10 months of this year, the trade surplus was very impressivewith 7.2 billion USD, far exceeding the record trade surplus in 2018 as mentioned above

As mentioned above, Vietnam's trade surplus has a large contribution from the FDIenterprise sector With a high export growth rate, since 2012, exports of this bloc have alwaysbeen in a state of large surplus while the sector of enterprises with wholly domestic capitalhas continuously had a trade deficit In the past 10 months of 2018, the trade surplus of FDIenterprises reached 25.8 billion USD (exported 142.80 billion USD, importing 116.99 billionUSD)

By the end of October 2018, Vietnam had a trade surplus with the US of 28.77 billionUSD (exported 39.42 billion USD, imported 10.65 billion USD) Previously, in 2017, thetrade surplus to this market also reached 32.24 billion USD In terms of market, Vietnammainly has a trade surplus with the US and Europe but has a large deficit in trade in goodswith Asian nations

 Trade balance in Viet Nam in 2019: The trade balance developed spectacularly with the impression of the trade surplus, exceeding the planned target

Vietnam enjoyed a record trade surplus of nearly US$10 billion in 2019, beating the

$9.94 billion forecast, making positive contributions to the balance of payments, andstabilizing other macroeconomic indices, according to the Ministry of Industry and Trade.The most notable thing is that Vietnam's exports continued to grow quite well in the context

of the world economic situation with many unpredictable fluctuations, trade conflictsbetween major nations, especially the trade war between the United States and Chinaaffecting global production chains and world trade; decrease in consumer demand; pressurefrom requirements to implement international commitments under FTAs; trade remediesapplied by importing nations to goods exported from Vietnam, and so on

Vietnam recorded a trade surplus of $11.12 billion last year, widening from a surplus

of $6.8 billion in 2018, customs data released showed, with smartphones, garments, andelectronic home appliances among the largest export earners The nation posted total importand export revenue of US$516.96 billion in 2019, up 7.6% compared to 2018 Of which, theexport revenue was estimated at US$263.45 billion, a year-on-year increase of 8.1%, whichwas notably higher than the target set by the National Assembly and the Government of 7-

8%.Vietnam’s total trade turnover reached USD 100 billion between the start of the yearand March 19, according to the General Department of Vietnam Customs Released statisticsshowed the nation had a trade turnover of USD 21.3 billion during the first half of March, up18.6 percent against the second half of February This result helped to bring the nation’s totaltrade turnover to USD 93.6 billion by March 15, edging up to USD 100 billion by March 19 -

a surge of 6.3 percent on the year

The total value of exported goods was 10.95 billion during the first half of March, anincrease of 13.6 percent compared to the second half of February Several export productsrecorded strong rises in value during the March 1 - 15 period compared to the second half ofFebruary, including telephones and components (up 15.7 percent), garments and textiles(27.2 percent), computers, electronic items, and components (17.3 percent), wood andwooden products (39.2 percent) and means of transport and spare parts (27.4 percent) Thesefigures lifted the nation’s total turnover of exports to 47.05 billion USD by March 15, up 5.4percent compared to the same period in 2018 The manufacturing and processing sector madethe largest contribution to the export revenue of Vietnam with export revenue of US$222.172billion, accounting for 84.3% of the nation’s total export revenue in 2019 Meanwhile,Vietnam’s import revenue was estimated to reach US$253.5 billion in 2019, a year-on-year

increase of 7%, resulting in a trade surplus of US$9.94 billion, the trade surplus in the fourthconsecutive year Exports in 2019 rose 8.4% to $264.189 billion, while imports rose 6.8% to

$253.071 billion, the Customs Department said in a statement Vietnam's exports ofsmartphones and spare parts are mostly produced by Samsung Electronics 005930.KS, rose4.4% last year to $51.38 billion, the data showed

Table 1

Estimated export turnover in 2019 of important processed industrial products in Vietnam

in 2019 (billion USD)

2 Computers, electronic products, and components 35,591

4 Other machinery, equipment, tools, and spare parts 18,304

Sources: The Import-Export Department

In the first half of March, Vietnam imported USD 10.34 billion worth of goods, up24.5 percent against the second half of February By March 15, the total import value for theyear reached USD 46.55 billion, a year-on-year increase of 7.3 percent Export value offoreign direct investment (FDI) enterprises from March 1 to 15 reached USD 7.82 billion, up12.7 percent against the second half of February By March 15, the total export value of FDIenterprises reached USD 32.76 billion, an increase of 2.7 percent over the same period in

2018, accounting for 69.6 percent of the nation’s total export value

The import value of FDI enterprises in the first period of March 2019 reached USD6.02 billion, an increase of 22.1 percent compared to the last 15 days of February As ofMarch 15, 2019, the total value of imports of FDI enterprises reached USD 27.22 billion, up4.7 percent, accounting for 58.5 percent of the nation’s total import value Vietnamrecorded a

trade surplus of USD 610 million in the March 1 to 15 period and USD 500 million betweenJanuary and March 15.

In this period, Vietnam was at risk of being labeled a currency manipulator by theU.S because of its trade surplus with the U.S., a highly positive current account balance, andbecause its central bank has been quite active in terms of net foreign exchange purchases.Vietnam has been seeking to import more U.S goods to help narrow the trade gap followingthreats by President Donald Trump to impose tariffs on its products amid the Sino-U.S tradewar

According to the Ministry of Industry and Trade, the export achievement wasattributed to the ministry’s negotiations on the market expansion With 16 signed free tradeagreements (FTA), including 12 effective FTA, several new markets have been opened toVietnam, facilitating the nation’s export activity Thanks to excellent results exceedingVietnam's target in 2019, the ministry aims at an export revenue growth of 7-8% in 2020

 Trade Balance of Vietnam compared to other ASEAN nations from 2010 to 2019

Vietnam became a full member of ASEAN on 28 July 1995 With Vietnam’sMembership, ASEAN now represents a market of about 420 million people and a regionalGross Domestic Product (GDP) of over US $ 500 billion ASEAN is also now a step closer tohaving all ten Southeast Asian Countries in ASEAN Since Vietnam became a member of theAssociation of Southeast Asian Nations (ASEAN), two-way trade turnover between Vietnamand ASEAN has continuously increased However, the growth rate has tended to decrease inrecent years and trade relations have revealed shortcomings such as weak competitiveness,quality, and export efficiency The added value of exported goods is still low, the capacity toparticipate in regional/global value chains is low, and Vietnam has not yet taken advantage ofthe incentives from the trade agreement with ASEAN

Vietnam’s economy is in transition from a pure centrally planned economy based onagriculture to a socialist market economy In 1986, Vietnam embarked upon an economicreform process popularly known as ‘Doi Moi’ which paved the way for Vietnam of today.After more than 20 years of joining ASEAN, the two-way trade turnover between Vietnamand ASEAN has continuously increased, except in 2009 due to the influence of the globaleconomic-financial crisis As of 2017, two-way trade turnover between Vietnam and ASEANnations reached nearly 50 billion USD

However, in terms of growth rate, trade relations are on a downward trend In 2017,the growth rate of bilateral trade between Vietnam and ASEAN reached 20.9%, openingmany

expectations for Vietnam's trade in the coming years Regarding exports, before 2015,ASEAN was always the third largest export market of Vietnam, however, in the period 2015

- 2017, China has risen to become the third largest export market of Vietnam besides the twolargest export markets Traditional major markets are the US and EU, and ASEAN dropped

to fourth place This shows that the competitiveness of Vietnamese exports in the ASEANcommon market is still not high, but the export opportunities to the Chinese market tend to bemore open

Within ASEAN, Vietnam's exports are mainly concentrated in six markets: Singapore,Cambodia, Thailand, Malaysia, Indonesia, and the Philippines By 2017, this structure hadnot changed significantly, still accounting for nearly 94% of Vietnam's total export turnover

to ASEAN However, the export structure of the market has also changed Before, theSingapore market was the largest export market of Vietnam in ASEAN and accounted fornearly 30% of export turnover, but now, the export structure has been more uniform.Thailand and Malaysia are currently two major export markets of Vietnam, while exports toSingapore only account for about 13% of the total export turnover

Table 2

Comparison of the Trade balance between Viet Nam and the average of the Trade Balance

of ASEAN nations

Sources: World Bank

Regarding imports, the impact of free trade agreements (FTAs) and internationalinvestment transitions have also changed the structure of Vietnam's import market Since

2010, when China and ASEAN – six nations have reduced tariffs to 0% according to theACFTA Agreement and the AKFTA Agreement between ASEAN and Korea, the structure oftrade in goods between Vietnam and its partners has changed main has changedsignificantly ASEAN

-1E+10

VN ASEAN