INTRODUCTION
Problem Statement
Vietnam is now an official member of eight active free trade agreements, as certified by the World Trade Organization, enhancing its position in global trade The country is also actively negotiating additional agreements, including the Trans-Pacific Partnership (TPP) and the ASEAN-EU Free Trade Agreement (FTA), to strengthen its economic integration These initiatives aim to boost Vietnam’s exports, attract foreign investment, and promote sustainable economic growth.
Vietnam and other members of ASEAN Free Trade Agreement (AFTA), recorded at -
US $3.443 billion, and Vietnam – China trade balance, members of ACFTA, is – US
$16.397 billion (Customs Handbook on International Merchandise Trade Statistics of
Vietnam, 2012) In stark contrast, the net export of Vietnam to the Australia and New
Zealand, members of ASEAN-ANZ FTA, is US $ 1.2258 billion in 2012(computed base on Customs Handbook on International Merchandise Trade Statistics of Vietnam,
2012 It can be observed that trade patterns of Vietnam among FTA partner are different
Between 1990 and 2012, FTA countries accounted for approximately 50% of Vietnam's total trade, highlighting their significant role as key trading partners However, starting from the year 2000, the share of trade with non-FTA countries gradually increased, primarily driven by rising trade volumes between Vietnam and European countries as well as the United States, as shown in Figure 1-2.
Share of FTA countries Non-FTA share
Figure 1-1: Trade share of FTA countries and non-FTA countries
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Furthermore, among Vietnam FTAs, AFTA share was decreasing from around
30 percent in 1996 to 15 percent in 2012 The decreasing trend can be attributed from the increase in share of AFTA plus For instance, the trade between Vietnam and
China, member of ASEAN- China FTA, increased nearly three times from 2000 to
2012 Another positive change after signing FTA is with Korea to establish ASEAN-
Korea FTA Yet, the change in trade share of other AFTA plus are not significantly
Therefore, a question posed is that whether the impact of FTA on Vietnam trade flow is significant or not
Share of FTA countries US share EU share Other
Figure 1-2: Trade Share of FTA countries, EU, and USA
Non-FTA share China Share ASEAN share Japan share AANZ share India Share Korea Share
Figure 1-3: Trade share among Vietnam FTAs
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From an academic perspective, free trade is advocated for its ability to enhance trade efficiency and the economic welfare of participating countries This concept is rooted in foundational economic theories such as Adam Smith's theory of absolute advantage and David Ricardo's principle of comparative advantage, which demonstrate how countries can benefit from specializing and trading based on their unique efficiencies Additionally, the Heckscher-Ohlin model further explains how countries' factor endowments influence trade patterns, supporting the idea that free trade promotes optimal resource allocation and overall economic growth.
The Ohlin model, developed by Eli Heckscher and Bertil Ohlin, emphasizes the roles of factor endowments in determining comparative advantage, while Paul Krugman's contributions focus on economies of scale and product differentiation shaping international trade patterns Viner (1950) not only acknowledged the benefits of free trade but also highlighted the potential drawbacks of trading blocs, introducing the concept of “trade diversion,” which occurs when trade shifts from more efficient producers outside the bloc to less efficient ones within Consequently, it is important to examine how Vietnam's trade flows are influenced by its free trade agreements, considering both the gains from increased market access and the risks of trade diversion.
Numerous studies have explored the relationship between free trade agreements and bilateral trade For instance, Hur, Alba, and Park (2009) used panel data analysis of 96 countries from 1960 to 2000 to examine the Hub-and-Spoke problem in free trade agreements, finding that despite overlapping agreements, exports increased overall Similarly, Baier and Berstrand (2009) provided a comprehensive empirical model demonstrating a positive impact of free trade agreements on international trade flows Conversely, Aitken (1972) analyzed trade creation and diversion following the establishment of the EEC and EFTA, concluding that EEC membership significantly boosted trade among member countries through both trade creation and external trade diversion.
EFTA is not considerably because of trade diverting Besides, Bhavish, Jugurnath,
Stewart & Brooks (2007), evaluate ASEAN FTA, APEC, CER, MERCOSUR and
NFTA, assert that ASEAN FTA, CER increase significantly its members’ trade, while
MERCOSUR, NFTA and APEC created the trade diversion As a result, the demand for study for international trade effect on specific context needs a critical exploration
However, papers analyses the linkage between free trade agreement and trade flow in
Vietnam's international trade has historically been limited; for example, Thai (2006) utilized a gravity model to analyze trade flows between Vietnam and twenty-three European countries, identifying key determinants such as economic characteristics, exchange rate volatility, and destination demand However, the study did not consider the impact of Free Trade Agreements, as Vietnam had not yet signed such accords with these countries at the time.
Other paper investigates the impact of ASEAN Free Trade Agreement (AFTA) on
Fukase & Martin (2001) concluded that the impact of AFTA on Vietnam's economy is not significant Their study found that the agricultural sector benefits from free trade by gaining export opportunities to the ASEAN market, while other industries face challenges and may require protection due to increased ASEAN competition The research used simulation methods but did not examine the dynamic effects of AFTA over time This thesis aims to analyze the role of the free trade agreement on Vietnam's bilateral trade in goods by applying a gravity model approach and panel data, building on previous research.
Research Objectives
The main objective of thesis is:
To investigate the impact of free trade agreement on trade flow of goods in Vietnam.
Research questions
To attain the research objective of this thesis, there are two primary research questions are as follow
1 Do free trade agreements impact on trade flow of goods in Vietnam?
2 How much free trade agreements impact on trade flow of goods in Vietnam? tot nghiep do wn load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
LITERATURE REVIEW
Theoretical literature
The first theoretical theory on international trade come from the idea of Adam Smith in his book named “An Inquiry into the Nature and Causes of the Wealth of
Nations”, published in 1776 Adam Smith disagreed with the ideas of mercantilists who believed that trade only benefit to the home country at the cost of trading partner
Adam Smith recognized that countries benefit from trade through the efficient reallocation of resources based on absolute advantage Countries produce certain commodities more effectively and at a lower cost than others, leading to specialization By reallocating resources to focus on goods with an absolute advantage and trading for those with an absolute disadvantage, both nations can increase their overall consumption Ultimately, this specialization and exchange enable countries to enjoy a greater variety and quantity of commodities than before engaging in trade.
Besides the increase in volume of consumption, Schumacher (2012) asserted that
Adam Smith theory also attributed the gain from trade to the increasing in international competitiveness This is not equivalently discussed in many textbooks
Absolute advantage explains why a country with no absolute advantage in certain goods can still engage in international trade This concept is addressed by the theory of comparative advantage, or the Ricardian model, which demonstrates how countries benefit from specializing in and trading goods where they have a relative efficiency advantage.
The Ricardian model, named after economist David Ricardo, is a foundational theory based on the concept of comparative advantage It explains that differences in relative labor productivity between countries drive international trade, assuming that labor is the sole factor of production and can move freely between sectors within a country Despite its simplified assumptions, the Ricardian model significantly contributes to understanding the trade patterns among nations.
The Ricardian model explains that a country exports a good to another nation because its opportunity cost of producing that good is lower than that of its trading partner This model emphasizes comparative advantage, where countries specialize in the production of goods they can produce most efficiently, maximizing overall international gains By focusing on their strengths, nations can benefit from cooperation, leading to increased exports and economic growth through mutually advantageous trade.
Page | 6 is lower than that in partner country; this concept is called comparative advantage
Comparative advantage explains how a country lacking absolute advantage can still benefit from international trade by focusing on its relative productivity differences The central concept is that trade benefits countries when they specialize in producing goods where they have a comparative advantage, meaning they are relatively more efficient compared to other nations In this model, import activities are viewed as an extension of domestic production, allowing countries to obtain goods more efficiently through trade rather than solely relying on direct production Overall, comparative advantage highlights that relative productivity, rather than absolute efficiency, drives the gains from international trade.
According to Krugman, Obstfeld, and Melitz (2012), indirect production allows a country to specialize in producing a specific good and then export it in exchange for importing other goods at a lower relative cost than domestic production Moreover, the concept of comparative advantage is fundamental in understanding how countries develop their cost advantages, enabling them to focus on the goods they produce most efficiently and gain benefits through international trade.
Obstfeld and Melitz (2012) explain that lower productivity countries tend to have lower wages, resulting in reduced production costs relative to high productivity countries This phenomenon accounts for why high-wage nations can export goods to low-wage countries, as higher wages are offset by increased productivity and compensation Consequently, this dynamic supports the existence of international trade flows driven by differences in productivity and wage levels.
Ricardian model implies that all countries can benefit from trade based on its disputing assumptions
According to the Ricardian model, countries benefit from participating in international trade, but its one-factor assumption is often considered unrealistic The specific-factors model extends this framework by introducing sector-specific factors of production, such as capital and land, which cannot move between sectors within a country, along with mobile labor This model demonstrates that trade can create winners and losers: the specific factors in exporting sectors typically benefit, while those in importing sectors may lose Additionally, mobile labor's gains or losses depend on consumption patterns across different sectors, highlighting the nuanced effects of trade on various economic agents (Krugman, Obstfeld, &).
According to Krugman, Obstfeld, & Melitz (2012), international trade generally benefits countries as a whole by expanding consumer choices and offsetting potential sector-specific losses Melitz (2012) emphasizes that increased market openness can enhance overall economic welfare, despite certain industries experiencing adverse effects In conclusion, international trade fosters economic growth and consumer benefits by encouraging market diversification and efficiency.
The distribution effect is essential in understanding the benefits and costs of international trade, as it explains how trade impacts different groups within a country This concept also highlights why many nations maintain trade barriers, such as tariffs and quotas, to protect their domestic industries from foreign competition By analyzing the distribution effect, policymakers can better assess the economic gains from trade while addressing potential disadvantages faced by certain sectors Ultimately, this helps justify the continued use of trade restrictions to safeguard local jobs and industries.
Jones & Neary (1982) explained that the specific-factor model accounts for short-run international trade, but it can transition to the Heckscher-Ohlin model as factors become mobile in the long run The Heckscher-Ohlin model assumes that all factors of production can move freely between sectors, with trade driven by differences in resource endowments and technological capabilities of nations These differences in resource ratios and production technologies determine the patterns of international trade between countries.
H-O model explain that country will gain from trade if it exports product in whose factor is well endowed and relatively intensive Well endowed means that the relative ratio of factor productions in country is higher than that of its partner countries while relative intensive explicates that relative ratio of that factor to other factor used to produce that good is higher than that of producing other good H-O model provides that international trade will impact on income distribution as a result of change relative price of goods, and the relative factor price (Krugman, Obstfeld, & Melitz,
Different market structures such as monopoly, oligopoly, and monopolistic competition extend beyond the traditional competitive market model Krugman (1979) introduced a trade theory highlighting the role of economies of scale in monopolistic competition, where firms benefit from increasing their output to reduce costs International trade fosters specialization and results in concentrated production locations, enabling countries to gain cost advantages through mass production rather than solely relying on comparative advantage The key question is how countries determine which industries to produce on a large scale to compete globally Krugman noted that market structures, particularly oligopoly with few dominant suppliers, create favorable conditions for economies of scale, enhancing international competitiveness.
International trade patterns are influenced not only by differences in national resources and technology but also by economies of scale The Ricardian model, H-O model, and economies of scale are interconnected in explaining how countries specialize and trade Understanding these models helps clarify the reasons behind varied international trade flows, highlighting the complex factors that shape global markets.
The standard theory of international trade assumes that there are no costs involved in delivering goods from the exporting to the importing country Samuelson (1962) analyzed the benefits of free trade and concluded that free trade can be advantageous for trading nations, especially when winners can compensate losers However, trade costs do exist in international commerce and significantly influence the pattern of bilateral trade flows.
EMPIRICAL LITERATURE
This section explores empirical indicators used in previous research, drawing from established theoretical mechanisms in the literature Aitken (1973) was the first to apply the gravity model to estimate the effects of trade, providing a foundational approach for understanding bilateral economic relationships.
European Economic Community (EEC) and European Free Trade Association
The article examines the impact of Free Trade Agreements (FTAs) on the import and export activities of EFTA member countries It presents a theoretical model where export value is the dependent variable, and key independent variables include the presence of FTAs, the income levels of exporting and importing countries, and the distance between trading partners These indicators have been widely utilized in subsequent research to analyze how FTAs influence international trade flows.
This section focuses on two key components: the trade flow indicator, which serves as the dependent variable in this study, and various independent variables including Free Trade Agreements (FTA), exporter’s income, importer’s income, and the geographical distance between trading countries Understanding these indicators is essential for analyzing the factors influencing international trade flows, with the trade flow indicator acting as the primary measure of trade activity The inclusion of FTAs, income levels, and distance helps to identify their impact on trade volume and patterns, providing valuable insights for trade policy and economic analysis.
In empirical papers, there are three indicators for trade flow between countries
McCallum (1995) analyzed trade flows between the United States and Canada by using shipment value as a key indicator His study focused on the impact of the trade border effect, highlighting how borders influence economic exchanges between neighboring countries This research demonstrated that trade between the U.S and Canada is significantly affected by the presence of national borders, impacting shipment values and overall trade volume.
Research indicates that within-province trade in Canada exceeds trade with U.S states and foreign markets This insight is analyzed using the gravity model, represented as \(x_{ij} = \alpha + a_i + b_j + c \times \text{distance}_{ij} + \text{DUMMY} + u_{ij}\), which helps quantify the factors influencing trade flows The model highlights the significance of geographic proximity and regional factors in shaping domestic trade patterns within Canada, emphasizing the dominance of intra-provincial commerce over external trade.
(2.2) Where x ij is the total export from region i to region j
Anderson and Wincoop (2003) examined the results obtaining from McCallum
In 1995, researchers highlighted that previous trade flow estimates were potentially overestimated due to the omission of trade resistance variables, known as multilateral resistance terms (MRTs) Anderson and Wincoop (2003) addressed this issue by proposing a revised gravity model that explicitly incorporates MRTs, leading to more accurate and reliable trade flow estimations.
The model employed exports from country i to country j as the dependent variable to analyze trade flows Unlike McCallum (1995), this approach incorporates multilateral resistance terms (MRTs), which represent the average relative price of an export country compared to the rest of the world MRTs serve as essential variables capturing the overall price competitiveness of countries in international trade, providing a more nuanced understanding of trade flow determinants The definitions of MRTs are outlined as follows:
Baier and Bergstrand (2007) examined the impact of Free Trade Agreements (FTAs) on international trade flows using data from 96 countries spanning 1960 to 2000 Their research utilized an estimation model that measures trade flow as the export value from country i to country j, adjusted by the GDP deflator to reflect real trade flow This comprehensive study highlights the significant influence of FTAs on boosting bilateral trade among participating nations.
(2010) applied the gravity model proposed by Baier and Bergstrand (2007) to find out the hub-spoke effect of FTA using data on 96 countries around the world throughout
40 years from 1960 In the model, dependent variable is real exporting value, the nominal exporting value divided by GDP deflator However, Yang and Martinez-
Zarzoso (2014) evaluated whether the ASEAN-China Free Trade Agreement (ACFTA) leads to trade creation or trade diversion The study uses current export levels measured in US dollars to analyze trade flows in the context of international trade The findings provide insights into the impact of the agreement on regional trade dynamics and international market integration.
Jugurnath, Stewart, and Brook (2007) did not use export value as an indicator for trade flow; instead, they employed current import value as the dependent variable in their model This choice was based on the fact that countries often report import values more accurately for tax purposes, making import value a more reliable measure than export value.
The primary impact of Free Trade Agreements (FTAs) on trade flows is through the removal of trade tariffs, leading researchers to analyze trade costs as a key measure of FTA effectiveness Anderson and Wincoop (2003) developed a model where the border effect, represented by the variable \(b_{ij}\), is used to assess trade costs, taking the value of 1 for domestic trade and increasing with trading taxes between regions Although their study did not explicitly focus on FTAs, their framework has been widely adopted in subsequent research to evaluate the influence of trade barriers and tariff eliminations.
Baier and Bergstrand (2007) analyzed the impact of Free Trade Agreements (FTAs) on international trade flows by modeling FTA as a dummy variable, where a value of 1 indicates that both exporter and importer are in the same free trade area, and 0 otherwise Utilizing panel data and fixed effect estimation, their results demonstrated a positive relationship between FTAs and trade flow Building on their findings, Jugurnath, Stewart, and Brooks (2007) also explored the effects of FTAs on trade, emphasizing the significance of free trade agreements in boosting international commerce.
In their paper, the authors utilized FTA as a dummy variable to analyze its effects However, their primary goal extended beyond estimating the overall impact of FTAs on trade flows; they also aimed to distinguish between trade diversion and trade creation effects To achieve this, multiple dummy variables were introduced to separately identify these distinct impacts The model is designed to differentiate between trade diversion and trade creation, providing a comprehensive understanding of FTAs' influence on international trade patterns.
1 1 1 log ij ik kj ki kj k k k
IMPORT aX RTA RTA RTA RTA
In the model, country i represents the importing nation, while country j denotes the exporter The variable k indicates the specific Regional Trade Agreement (RTA) under consideration Unlike Baier and Bergstrand (2007), this analysis considers separate RTAs for each country pair to effectively evaluate the impacts of trade creation and trade diversion within different regional agreements.
Regional Trade Agreements (RTAs) Play a crucial role in shaping international trade dynamics ASEAN's Common Effective Preferential Tariff (CEPT) provides evidence of trade creation, promoting increased trade among member countries In contrast, agreements like APEC, MERCOSUR, and NAFTA show a tendency toward trade diversion, which may hinder trade with non-member nations According to Yang and Martinez, understanding whether RTAs lead to trade creation or trade diversion is essential for assessing their overall impact on global and regional economies.
OVERVIEW OF VIETNAM’S FREE TRADE AGREEMENT
ASEAN Free Trade Agreement (AFTA)
ASEAN Free Trade Agreement (AFTA) was established in 1992 by six countries (Brunei Darassalam, Republic of Indonesia, Malaysia, republic of the
Philippines, Republic of Singapore, and Kingdom of Thailand) Until now, AFTA is signed officially by ten member states, six original countries plus Vietnam (1995),
AFTA was established with the primary goal of creating a more competitive regional market by promoting complete trade liberalization among member countries such as Lao, Myanmar, and Cambodia To achieve this, member nations have committed to reducing their trade tariffs in accordance with the Common Effective Preferential Tariff (CEPT) Agreement signed in 1992, aiming to lower tariffs to a range of 0% to 5% by the end of the tariff reduction scheme Additionally, all exported and imported products must comply with the rules of origin outlined in the agreement's annex to ensure proper tariff application and regional trade facilitation.
3- Product Specific Rules of CEPT Agreement
Vietnam joined the ASEAN Free Trade Area (AFTA) on July 28, 1995, committing to the implementation of CEPT (Common Effective Preferential Tariffs) agreements As a member, Vietnam was obligated to reduce tariffs on products listed in the Inclusion List to a range of 0-5% by 2006 and to do the same for products in the Sensitive List by 2013 Additionally, the country was required to eliminate quantitative restrictions and other non-tariff barriers by 2013 The implementation of these commitments is further supported by protocols aimed at amending and strengthening the AFTA agreement, ensuring a more integrated and competitive regional market. -Streamline your SEO-rich content rewrites with precision—boost clarity and coherence effortlessly [Learn more](https://pollinations.ai/redirect/draftalpha)
Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA) for the
The "Elimination of Import Duties" agreement, signed in 2003, extended Vietnam's deadline to eliminate import tariffs to January 2015 Additionally, it included an expansion of sensitive product categories, delaying their tariff elimination until January 2018 This policy significantly impacted the trading relationship between Vietnam and its partners, promoting increased trade liberalization and market integration.
ASEAN countries is as following
Figure 3-1: Trade Pattern between Vietnam and ASEAN Members, 1990-2012
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As can be seen from the graph, the export to and import from ASEAN of Vietnam faced gradually increasing trend from 2003 afterwards In details, the export value in 2003 is
Vietnam's trade value increased significantly from US$2,952,700,000 to US$17,312,112,370 in 2012, highlighting substantial growth in its international trade activities Despite this growth, Vietnam has consistently maintained a trade deficit during this period, with the trade deficit amount rising markedly over time This indicates that ASEAN countries are exporting more commodities to Vietnam than Vietnam is consuming or exporting back, emphasizing Vietnam's role as a major importer within the region.
Figure 3-2 illustrates the changes in trade flows between Vietnam and ASEAN countries, excluding Brunei Darussalam due to missing data in certain periods The vertical axis shows the trade change index, calculated by dividing the total trade in a given period by the total trade in the previous period, with values expressed in 2005 US dollars This index reflects the relative growth or decline in trade between Vietnam and each ASEAN partner year-over-year An index greater than one indicates increased trade compared to the previous year, while an index less than one signifies a decrease in trade volume.
Figure 3-2 illustrates the evolving trade flows between Vietnam and ASEAN countries, excluding Brunei, highlighting significant shifts in regional trade patterns The data underscores Vietnam's growing role as a key trade partner within ASEAN, driven by increased exports and imports These changes reflect broader economic integration and strengthening of supply chains across the region Understanding these trade flow dynamics is crucial for analyzing Vietnam's position in regional and global markets, as well as identifying future opportunities for growth and collaboration.
Page | 28 period is lower than that of previous period The index is equal to zero meaning that there is no trade between Vietnam and that country in current period
Between 1990 and 1994, Vietnam's trade was developing prior to its accession to AFTA After joining AFTA, Vietnam experienced a significant increase in trade volume with the six original AFTA member countries, whereas trade with non-member countries like Cambodia and Laos grew at a slower pace Notably, two periods—1997-1998 to 1999-2001 and 2002-2008 to 2009—saw substantial declines in trade growth, primarily due to the impacts of the Asian financial crisis and regional economic uncertainties Overall, AFTA membership played a crucial role in boosting Vietnam's intra-ASEAN trade, although external economic factors temporarily hindered trade expansion during these periods.
Financial Crisis in 1997-1998 and Global Financial Crisis in 2008 After joining
The ASEAN Free Trade Agreement (AFTA) in 1997 aimed to enhance trade among member countries, including Laos and Vietnam However, the growth in trade between Laos and Vietnam during this period was modest, primarily due to the economic downturn caused by the 1998 financial crisis As a result, the immediate impact of the FTA on boosting trade between Laos and Vietnam was not clearly visible.
Vietnam experienced a positive impact on its trade with Cambodia, a member of AFTA since 1999, with trade flows steadily increasing from 1999 to 2001 and continuing to grow from 2002 to 2008 The graph shows a consistent upward trend, indicating that the free trade agreement (FTA) has significantly boosted cross-border trade between Vietnam and other AFTA member countries In conclusion, descriptive statistics confirm that the FTA has positively influenced the trade flow of goods between Vietnam and its trading partners in the ASEAN region.
ASEAN-People’s Republic of China Comprehensive Economic
The ASEAN-China Free Trade Agreement, signed in 2002 by all ten ASEAN member countries and China, aims to promote economic integration and trade liberalization Vietnam committed to implementing a tariff elimination scheme, gradually reducing all applicable tariffs to 0-5% according to the Inclusion List Specifically, Vietnam was required to complete the tariff reduction process, reaching the target range, by January 2015 This agreement has significantly enhanced trade relations between ASEAN countries and China, fostering economic growth and market expansion for Vietnam.
Trade in Goods of the Framework Agreement on Comprehensive Economic Co- operation between the Association of Southeast Asian Nations and the People’s
On November 29, 2004, in Vientiane, the Republic of China and Vietnam reached an agreement on a tariff reduction timeline This agreement outlines specific commitments for Vietnam to progressively lower its tariffs, facilitating increased trade and economic cooperation between the two countries The implementation of this tariff reduction plan aims to promote greater market integration and strengthen bilateral relations in the region.
Table 3-1:ACFTA's Tariff Elimination schedule for Vietnam
ACFTA Preferential Tariff Rate ( No later than 1 January)-%
Source: http://www.asean.org/news/item/asean-china-free-trade-area-2, retrieved in Oct 04
In 2012, Vietnam's total export value to ACFTA member markets reached approximately US$29.7 billion, accounting for 38.11% of the nation's total exports This highlights the significant role of ACFTA countries in Vietnam's international trade, reflecting strong economic ties within the ASEAN-China Free Trade Area.
The total import value amounts to 63,393,211,783, representing 52.91% of the overall import value The detailed trade pattern is illustrated in the accompanying graph, providing insights into the distribution and trends of imports This data highlights the significant share of imports and offers a clear overview of current trade dynamics.
Section 3.1 details the change in the trade index, so it will not be reiterated here As shown in Figure 3-4, China's trade volume with Vietnam grew substantially before entering the Free Trade Agreement, increasing by approximately 2.98 times between 1990-1994 and 1995-1996 (Author’s calculation) Following this rapid growth, trade expansion slowed during the Asian Financial Crisis of 1997-1998.
Between 1998 and 2001, trade between Vietnam and China experienced a significant recovery, while trade with ASEAN nations showed only modest growth Following the signing of the ASEAN Free Trade Agreement, Vietnam-China bilateral trade continued to expand from 2002 onward, strengthening economic ties between the two countries.
Between 1999 and 2001, Vietnam's trade value was significantly lower compared to 2008, which saw a 3.06-fold increase, suggesting a positive impact of free trade agreements (FTAs) on trade flow The subsequent periods show a gradual uptick in trade between Vietnam and China, following a similar trend observed with ASEAN countries This slow growth pattern may be attributed to the global financial crisis of 2008, which affected international trade dynamics.
Total Export Total Import Trade Balance
The trade pattern between Vietnam and ACFTA member countries from 1990 to 2012 illustrates significant growth in bilateral and regional trade relations Over this period, Vietnam's exports and imports with ACFTA nations increased steadily, reflecting deeper economic integration within the ASEAN-China Free Trade Area This evolving trade relationship highlights Vietnam's strategic position as a key player in regional commerce, driven by favorable trade policies and economic cooperation agreements The data underscores the importance of ACFTA in facilitating Vietnam's export growth and enhancing its role in the ASEAN economic landscape.
Figure 3-4: Change in Trade Flow between Vietnam and ACFTA Members
ASEAN- Australia and New Zealand Free Trade Agreement (AANZFTA)
The ASEAN-Australia-New Zealand Free Trade Area (AANZFTA), signed in 2009, aims to create a comprehensive free trade zone among ASEAN member countries, Australia, and New Zealand This agreement facilitates increased trade in goods and services, promotes investment, and supports human movement across member nations Vietnam has been a participant since January 2010, benefiting from enhanced market access and economic integration within the AANZFTA framework.
According the “Agreement Establishing the ASEAN-Australia-New Zealand Free
Vietnam is committed to eliminating its tariff rates starting from 2010, with all tariffs reduced to zero by 2020 This trade liberalization effort aims to facilitate easier market access and strengthen economic ties within the region The phased removal of tariffs demonstrates Vietnam's dedication to promoting free trade and attracting foreign investment.
Before signing AANZFTA, from 1990 to 2009, the average value of Vietnam export to Australia and New Zealand were US$ 1,280,890,700 and US$ 26,141,800 respectively The average value from 2010 to 2012 is US$ 2,821,416,435 for
Australia, and US$ 152,737,869 for New Zealand The average value of import also rose from US$ 383,718,850 to US$ 1,779,697,639 for import from Australia, while
China, P.R.: Mainland ASEAN tot nghiep do wn load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Page | 32 that of New Zealand are from US$ 81,500,150 to US$ 373,925,166 The detail trade between Vietnam and Australia-New Zealand is as follow
Figure 3-5: Trade between Vietnam and Australia-New Zealand, 1990-2012
Vietnam and Australia- New Zealand Free Trade Agreement is in force from
2010, the change in trade between Vietnam and Australia-New Zealand trade from
Figure 3-6 is not high in period after FTA in force, 2010-2012, 1.22 times with
Trade between Vietnam and Australia-New Zealand has increased by approximately 1.45 times compared to 2009, which can be attributed to the time lag effects of the FTA (Baier & Berstrand, 2007) The longer time required by Vietnam, Australia, and New Zealand to fully eliminate their tariff lines—aiming to do so by 2020—means the full impact of the FTA on trade flows may not yet be reflected in the reported periods Consequently, descriptive statistics alone may not capture the complete effect of the FTA on Vietnam's trade with Australia and New Zealand.
Australia and New Zealand is shown in the following Figure
Export to Autralia Import from Autralia Export to New Zealand Import from New Zealand
The trade balance with New Zealand remains a significant aspect of our international economic relations Recent data highlights key trends and patterns in bilateral trade, emphasizing the importance of strengthening trade agreements and market access Monitoring these developments is crucial for optimizing future trade strategies and enhancing economic cooperation between the two nations.
ASEAN-India Free Trade Agreement (AIFTA)
The AIFTA is signed on August 2009 which comprised ten ASEAN countries and India; the agreement is in force from 2010 for Vietnam According to Circular
In 2010, the Ministry of Finance issued Circular 58/2010/TT-BTC, which mandated a significant reduction in tariffs for Vietnam's commodity list By 2018, 71% of items on the Normal Track List had their tariff rates reduced to 0%, with an additional 9% of remaining products lowering tariffs further by 2021 Sensitive trading commodities were required to decrease their tariff rates to 5% in 2021, while highly sensitive products saw their tariffs lowered to 4% by 2024, supporting Vietnam's commitment to trade liberalization and market integration.
The export to India stood at US$ 1,782,216,881 in 2012, and import at US$
2,161,010,979 Vietnam is suffering trade deficit with India from 1990 to 2012 The
Export to India Import from India Trade Balance
Figure 3-6: Change In Trade Flow Between Vietnam And AANZFTA Members
Between 1990 and 2012, trade relations between Vietnam and India experienced significant growth, reflecting increasing economic cooperation and bilateral trade activities This period saw a steady increase in exports and imports, strengthening the economic ties and contributing to mutual growth The expanded trade exchange highlights the strategic partnership and the importance of ASEAN and South Asian regional integration in fostering regional economic development Overall, the Vietnam-India trade relationship from 1990 to 2012 underscores a trajectory of expanding economic collaboration and mutual benefit.
Page | 34 greatest trade deficit value is US$ -1,705,300,000 in 2008, and in decreasing trend, at
Figure 3-8 illustrates the changes in trade activity among Vietnam, ASEAN, and India over different periods The most notable growth occurred between Vietnam and India from 2002 to 2008, when trade increased by 3.35 times compared to 1999-2001 However, trade growth slowed during 2009 and from 2010 to 2012 Although the Vietnam-India Free Trade Agreement (FTA) was launched in 2010, its impact on bilateral trade is difficult to discern due to the short timeframe and potential time lag effects Notably, there appears to be no significant difference in the trade increase between Vietnam and India before and after the FTA was signed, indicating limited observable immediate effects of the agreement on trade flow.
ASEAN-Republic of Korea Comprehensive Economic Cooperation
In 2009, Vietnam signed ASEAN-Republic of Korea Free Trade Agreement
After signing, Vietnam and Korea are obligated to adhere to agreed conditions for tariff reduction and elimination, following the established track Generally, Vietnamese products classified under the Normal Track must reduce their tariffs to a maximum of 20% by 2017, and to between 0-5% by 2021 For products in the Sensitive Track, tariff reductions are implemented over a longer period, with specific schedules outlined, including progressive reductions for Normal Track products.
Between 1990 and 2012, trade between Vietnam and India experienced significant growth, reflecting strengthened economic ties and increased bilateral cooperation The data highlights a steady upward trend in trade volume, contributing to mutual economic development and expanding market opportunities for both countries This period of increased trade underscores the importance of Vietnam-India relations in regional economic integration and highlights the potential for further growth in their bilateral trade partnerships.
Table 3-2: Preferential Tariff Rate commitment by Vietnam for AKFTA
Source: Website of Ministry of Finance, Vietnam, Retrieved from:http://www.mof.gov.vn/portal/page/portal/mof_vn/1371620/1371623/20317893?pers_id
!77089&item_id272607&p_details=1, on Oct 04, 2014
From 1990 to 2012, the trade relationship between Vietnam and Korea experienced significant growth, reflecting a strong economic partnership The graph illustrates a steady increase in bilateral trade volume over the years, highlighting the expanding economic cooperation between the two countries This positive trend demonstrates the importance of Vietnam-Korea trade relations in the Southeast Asian region Increasing trade flows have contributed to both nations' economic development, making Vietnam and Korea key partners in regional and global markets.
Figure 3-9: Trade between Vietnam-Korea, 1990-2012
Before Vietnam became a member of the FTA with Korea, trade between Korea and Vietnam followed a similar growth trend to that of China and ASEAN countries Trade volumes increased significantly from 1990 to 1996, reflecting rapid economic expansion in the region However, trade declined during 1997-1998, likely due to the impact of the Asian Financial Crisis The period from 1999 to 2008 marked a phase of recovery and renewed growth in Korea-Vietnam trade relations.
Crisis, yet 2008 Global Crisis forced the increase in trade to go down again, the increase in trade in 2009 is 1.37 times average trade in 2002-2008 From 2010 to
Since 2012, trade between Korea and Vietnam has experienced significant growth, reflecting a similar upward trend in ASEAN’s overall trade with Vietnam Although Korea and Vietnam entered into a Free Trade Agreement in January 2010, it remains challenging to precisely assess its impact on bilateral trade flows based solely on the descriptive statistics presented in Figure 3-10.
Figure 3-10: Change In Trade Flow Between Vietnam And AKFTA Members
Trade at current value, US$ Export to Korea
Import from Korea Trade Balance
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Japan-Vietnam Economic Partnership Agreement (VJEPA)
Vietnam and Japan signed an Economic Partnership Agreement in 2008, which came into force in December 2009, marking a significant step towards strengthening trade relations Under this agreement, Vietnam committed to reducing 87.60% of its tariff lines within 10 years and 92.95% within 16 years, facilitating greater market access for both countries The tariff reduction schedule targeted normal products, with 72.5% of these items expected to see tariff cuts by 2019, including 27.5% by 2009, 40.3% in 2019, and incremental reductions in subsequent years For sensitive products, the tariff reductions are extended until 2024, allowing for a phased liberalization process while protecting certain industries This agreement aims to promote economic growth, enhance bilateral trade, and foster closer economic integration between Vietnam and Japan.
Japan accounted of 11.40% of Vietnam export and 10.20% of Vietnam import in 2012 The share of exporting from Japan decreased throughout periods from
26.64% in 1990 to 11.40% in 2012 The details of trade pattern between Vietnam and
Japan is as following graph
Figure 3-11: Trade Between Vietnam and Japan, 1990-2012
Using descriptive statistics to evaluate trade changes before and after the VJFTA enforcement may not clearly reveal its impact on Vietnam-Japan trade flow Since VJFTA has been active since 2009, trade volumes show an increasing trend; however, this rise cannot be solely attributed to the FTA The post-2009 growth may primarily reflect a recovery in trade following the 2008 Global Financial Crisis, which severely affected Japan.
Secondly, the trend in trading between Vietnam and Japan is similar to that between
Vietnam and ASEAN countries, so this trend may be a general trend of Vietnam
Optimizing international trade with Japan involves focusing on both export and import activities Exporting goods to Japan can boost your business by accessing one of the world's largest markets, while importing products from Japan ensures a steady supply of high-quality goods Maintaining a balanced trade relationship with Japan is essential for a healthy trade balance, which impacts overall economic stability Stay updated with the latest trade data and trends to enhance your international trading strategies and maximize benefits from Japan's dynamic market.
The impact of the FTA on trading is not immediate, as the tariff elimination schedule for Vietnam extends until 2024 Therefore, it may be premature to observe the full effects of the FTA in the short term.
The article discusses the evolving trade relationship between Vietnam and Japan, highlighting significant changes in trade flows over recent years It emphasizes the importance of understanding these shifts for businesses and policymakers aiming to enhance economic cooperation and boost bilateral trade The analysis provides insights into the patterns and trends shaping Vietnam-Japan trade dynamics, underscoring the potential for increased collaboration and economic growth between the two nations.
RESEARCH METHODOLOGY
Model Specification and Estimation Method
This study employs the gravity model to estimate the relationship between trade flows and free trade agreements (FTAs), leveraging its effectiveness in analyzing international trade policies The gravity model is recognized as a powerful tool for understanding how trade is influenced by economic size and geographic distance (Anderson & van Wincoop, 2003; Baier et al.) By applying the gravity model, the research aims to quantify the impact of FTAs on trade volumes between countries, providing valuable insights into the policy's effectiveness in promoting international trade.
& Bergstrand, 2007; Silva & Tenreyro, 2006; Baier & Bergstrand, 2009; Zarzoso,
The gravity model, as discussed by Head & Mayer (2013), is represented in a log-linear form where trade flow is on the right-hand side, and the left-hand side includes the variable of interest along with control variables, as outlined in equation (2.2) in Chapter 2 (Mc Callum, 1995).
The estimation of model (2.2) reflects the core concept of the gravity function, incorporating key variables such as gross domestic product of importer and exporter, distance, borders, and remoteness However, there are concerns regarding the reliability of the estimated coefficients, as highlighted by Anderson and vanWincoop (2003) One critique is that the remoteness variable lacks a solid theoretical foundation, making its inclusion potentially irrelevant The second and more crucial critique addresses the issue of omitted variables, since model (2.2) only accounts for country-pair barriers, which may lead to biased or incomplete results.
Distance variables are crucial in understanding trade patterns, yet they do not serve as absolute barriers between a testing country and the rest of the world Anderson and van Wincoop refer to these factors as multilateral resistance terms, highlighting their role in shaping trade flows amidst other influences The proposed model incorporates these multilateral resistance factors to effectively analyze international trade dynamics, providing a comprehensive framework for understanding how distance impacts global trade relationships.
This equation models the relationship between various factors influencing trade flows, incorporating parameters such as import and export prices, market size, and demand elasticities Specifically, it highlights how bilateral trade volume depends on the relative prices of goods, with declines in price differences leading to increased trade Additionally, the model accounts for other influential factors like transportation costs, tariffs, and market features that can affect trade competitiveness Understanding these relationships is crucial for analyzing international trade patterns and making informed policy decisions.
The trade flow between two countries is measured by dividing the actual trade volume (y) by the product of their incomes, providing a normalized indicator of trade intensity The variable dij represents the geographical distance between the two countries, which influences trade costs and patterns A dummy variable δij equals 1 if both countries are the same, indicating internal trade, and 0 otherwise, capturing border effects Multilateral resistance terms, lnPi^{1−σ} and lnPj^{1−σ}, account for the relative trade barriers and market accessibility, ensuring consistent estimation of trade flows Recalling from Chapter 2, model (4.1) is a log-linear version of the original model (2.3), with the inclusion of these MRTs enhancing the robustness and accuracy of the results, as supported by Baier and Bergstrand (2007) and Anderson.
The effect of free trade agreements (FTAs) on Vietnam's trade flows will be evaluated using panel data analysis Although the parameter (4.1) is estimated via nonlinear least squares, this study will not employ that advanced technique due to its complexity Instead, the focus will be on panel data methods to effectively assess the impact of FTAs on Vietnam's international trade, aligning with existing research by Baier and Bergstrand.
In 2007, it was proposed that Model (4.1) can be estimated using panel data techniques To account for differences in Marginal Revenue Transfers (MRTs), a fixed effect for each country will be incorporated into the model This approach allows for a more accurate estimation by controlling for unobserved heterogeneity across countries The specified model aims to provide reliable insights into the relationships under study while addressing potential country-specific effects.
0 1 2 3 4 5 6 log( T vjt ) log( GDP vjt ) log( DIST vt ) FTA vjt log( REER vjt ) ERV jt REV vt ln P i ln P j ijt
LnTvjt is natural logarithm of trade flow between Vietnam and country j in year t;
Log (GDP vjt ) is natural logarithm of product of Vietnam and partner GDP share to world GDP in year t
Log (DISTvt) is the natural logarithm of distance between Vietnam and country j;
FTAvjt is the dummy variable take value of 1 if Vietnam and country j is in the same FTA in year t,
REERvjt is the real effective exchange rate in year t of Vietnam and country j,
The real effective exchange rate volatility (ERVvt and ERVjt) of Vietnam and country j in year t reflects the fluctuations in their respective currencies' values over time Monitoring these volatility measures is essential for understanding currency stability and informing economic policies Accurate measurement of ERV helps investors and policymakers assess exchange rate risks, supporting more informed decision-making in international trade and investment.
This study incorporates dummy variables to analyze their impact on trade between country pairs Specifically, the models include dummies for the 1997-1998 Financial Crisis and the 2008 Global Financial Crisis to control for external economic shocks affecting trade flow Additionally, following Liu (2009), a dummy variable representing WTO membership is added, revealing a positive relationship between WTO membership and increased trade creation among member countries.
This article discusses the estimation based on model (4.2) to address key issues such as endogeneity (Baier & Berstrand, 2007, 2009), the zero-trade values observed between Vietnam and certain countries, and heteroscedasticity problems (Silva & Tenreyro, 2006; Martinez-Zarzoso) The model effectively accounts for endogeneity concerns in trade analysis, ensuring more accurate and reliable results Zero-trade occurrences are carefully considered, reflecting the complexities of international trade flows involving Vietnam Additionally, heteroscedasticity is addressed to improve the robustness of the estimations, adhering to best practices in econometric modeling.
Existing research highlights that estimation coefficients can be biased or underestimated, as noted by Baier and Berstrand (2007), which poses challenges for accurate analysis (Martin & Pham, 2008) To address these issues, our study adopts solutions proposed in earlier studies, ensuring robust and reliable results Details of these methods will be discussed in the subsequent section.
4.1.1 Model for avoiding endogenous problem
The FTA dummy variable in model (4.2) can correlate to the unobserved factors in ijt
Baier and Berstrand (2004) identified key economic factors influencing the establishment of free trade agreements, including the relative economic sizes of member and non-member countries, differences in factor endowments, and levels of specialization These determinants significantly impact the trade volume between countries, suggesting that broader unobserved factors may also influence both the formation of FTAs and bilateral trade values.
The relationship between free trade agreements (FTA) and trade flow is complex due to endogeneity issues, particularly simultaneity bias, which reflects the bidirectional influence between FTAs and trade volume A key question is whether trade flow drives the formation of FTAs or vice versa To address this challenge, researchers often employ instrumental variables; however, selecting appropriate instruments is difficult because economic factors influencing FTAs are typically also related to trade between countries This methodological hurdle highlights the need for careful econometric strategies to accurately assess the impact of FTAs on international trade.
Baier and Berstrand (2007) developed a model that applies fixed effects to control for unobserved heterogeneity over time, enhancing the accuracy of longitudinal data analysis This approach helps isolate the true effects of variables by accounting for time-invariant characteristics Using fixed effects models is essential in research where unobserved factors may influence the results, ensuring more reliable and valid conclusions Incorporating fixed effects can significantly improve the robustness of econometric and social science studies, providing clearer insights into causal relationships over time.
Page | 42 invariant unobserved factors in error term which may relate to FTA As a result, the time-invariant variable such as distance in model will be ignored
Turning to the multilateral resistance terms (MRTs), Anderson & vanWincoop
(2003) used non-linear method to estimate MRTs However, other papers (Yang &
Martinez, 2013; Baier & Bergstrand, 2007, 2009) used panel data to control MRTs
Variable Definition
4.2.1 Dependent Variable in Model Specification
This thesis examines total bilateral trade as the primary dependent variable, representing the total value of goods exchanged between Vietnam and its trading partners Total bilateral trade includes both imports and exports, capturing all inward and outward movement of goods across Vietnam's borders (International Trade Statistics, 2012) Measured in US dollars based on 2005 values, this comprehensive metric provides a clear indication of Vietnam's international trade performance.
Vietnamese export from the country to international markets involves the transfer of ownership of movable goods, including nonmonetary gold and net exports of merchandise, from Vietnamese owners to foreign buyers This process reflects Vietnam's active participation in global trade, contributing to its economic growth According to the World Bank Indicator, exports are a key indicator of economic performance and international trade relations for Vietnam Export activities encompass various goods and commodities, emphasizing Vietnam's role as a vital player in the global supply chain Understanding the definition of exports is essential for analyzing Vietnam’s trade policies and economic development.
Export values are measured in US dollars at constant prices based on 2005 Since the International Direction of Trade Statistics (DOTS) provides export figures calculated at current US dollars, this study adjusts for inflation by dividing the DOTS export values by the GDP deflator with a 2005 base year This approach ensures an accurate measurement of real exports, facilitating meaningful comparisons over time and supporting robust economic analysis.
Import to Vietnam from other countries reflects the total value of goods received from international trading partners, measured consistently in US dollars at constant 2005 prices This measurement approach aligns with the method used for calculating exports, ensuring accurate and comparable trade data.
4.2.2 Independent variables in the Model Specification a Free trade agreement (FTA)
A Free Trade Agreement (FTA) is defined as a pact between two or more customs territories that aims to eliminate or reduce tariffs and other trade restrictions FTAs foster increased economic integration by creating a free-trade area where member countries can engage in commerce with minimal barriers These agreements promote efficient trade flows, enhance market access, and support economic growth among participating nations By removing duties and restrictive regulations, FTAs encourage cross-border investment and strengthen regional economic cooperation.
Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories” (World
The article references the World Trade Organization’s official webpage on regional trade agreements, accessed on October 13th, 2014 Key insights highlight the importance of regional trade agreements in promoting international economic cooperation and reducing trade barriers For more detailed information, please visit the WTO’s official site.
Free trade agreement variable is dummies variable equal to 1 if Vietnam and countries j is in same free trade agreement in the year t, otherwise is zero The Free
Trade Agreement will impact positively on trade flow of goods because it reduce the tariff barriers (Baier & Bergstrand, 2007) b World Share of Gross Domestic Production (GDPvjt)
Gross Domestic Production (GDP) is a control variable in the model specification The role of GDP in trade of two countries is proved theoretically in
Berstrand (1995), Anderson (1979), and Anderson and van Winccop (2003) The GDP is proved to have positive impact on the trade flow of goods between two countries
In the thesis, the variable GDP plays a role as a controlling factor is defined as the model (2.3) of Anderson and van Winccop (2003) GDP is the product of GDP of
Vietnam and trading partner divided by the world GDP The greater this number the greater expected trade flow between two countries The formula is as follow
Vietnam's economic influence can be analyzed through its share of global GDP, represented by the metric where GDP_vjt denotes the world's GDP share of the product of Vietnam's and its partner country's GDP in year t This measure highlights Vietnam's contribution to the international economy relative to its trading partners Additionally, understanding Vietnam's own GDP (GDP_vt) and that of its partner countries (GDP_jt) in the same year provides valuable context for assessing economic relationships and growth patterns This approach offers insights into Vietnam's economic position and its evolving partnerships within the global marketplace.
GDPworld,t is the world GDP which is calculated by the sum of GDP of all Countries available in the data set
GDP is calculated at constant US prices in 2005, based on data from the World Bank Indicator (2014) While Anderson & Van Wincoop (2003) used current GDP to estimate the effect of borders on trade between the US and Canada, some studies prefer using real GDP as an independent variable in empirical analysis For instance, Hur, Alba, and Park (2010) employed real GDP at constant 2005 prices to assess the impact of hub-and-spoke problems in free trade agreements In this thesis, real GDP at constant 2005 US dollars will be used for model specification because, unlike developed countries, Vietnam experiences significant fluctuations in the price index over time, which can affect the accuracy of the analysis.
An expected sign of effect suggests that an increase in GDP share positively influences the demand for goods produced domestically and abroad Higher GDP share can lead to increased demand for exports and imports, reflecting heightened economic activity and trade Additionally, the distance between countries (DISTij) plays a significant role in trade dynamics, with greater distance potentially reducing trade volume due to higher transportation costs and logistical challenges Together, these factors highlight the impact of economic size and geographical proximity on international trade demand.
Distance serves as a proxy for trade barriers between Vietnam and its trading partners, influencing bilateral trade flows (Anderson, 2010) This measure is calculated as the straight-line distance between the capitals of the two countries, using the great circle formula as employed by Mayer and Zingago (2011) The distance is expressed in kilometers (km), providing a standardized metric to analyze the impact of geographic remoteness on trade interactions.
Disdier & Head (2008) use meta-analysis to investigate the impact of distance of trade The paper concludes that on average, distance affect negatively on value of trade flow d Exchange rate
This study analyzes the relationship between exchange rates and trade using two key concepts: the Real Effective Exchange Rate (REER) and Exchange Rate Volatility (ERV) The REER measures a country's currency value relative to a basket of other major currencies, adjusting for inflation differences, making it a crucial indicator for assessing competitiveness and trade performance Meanwhile, ERV captures fluctuations and unpredictability in the exchange rate, which can significantly impact international trade stability and investment decisions By examining both REER and ERV, the research provides a comprehensive understanding of how currency appreciation, depreciation, and volatility influence trade dynamics These exchange rate measures are essential for evaluating trade outcomes and formulating effective economic policies.
Real Effective Exchange Rate index (REERvjt, REERjt)
This study employs the Real Effective Exchange Rate (REER) index as a key proxy to assess the impact of exchange rate fluctuations on trade flows between Vietnam and its trading partners The REER is derived by deflating the Nominal Effective Exchange Rate (NEER) with the relative price levels between Vietnam and its trading countries, capturing the real appreciation or depreciation of the domestic currency As a comprehensive measure, REER reflects changes in the value of Vietnam’s currency in response to a weighted basket of trading partners, providing insights into how exchange rate movements influence bilateral trade dynamics.
Based on Darva (2012), REER calculated as following formula d d d t t t f t
The Real Effective Exchange Rate (REER) of a country in year t is a crucial indicator reflecting the country's currency value relative to its trading partners, adjusted for inflation differences Monitoring REER helps assess external competitiveness and informs economic policy decisions, especially in the context of globalization and international trade A stable or appreciating REER may indicate strong competitiveness, while a depreciating REER can signal potential issues or opportunities for export growth Understanding REER trends allows policymakers and businesses to make informed decisions to enhance economic stability and growth.
NEER t is the nominal real effective exchange rate of domestic country in year t, calculated as ( )
, S(i) t is the nominal bilateral exchange rate between domestic country and its trading partner i with the weighted w i , n is the total trading partners d
CPI t is the consumer price index of domestic country in year t f
CPI t is the consumer price index of trading partners weighted geometrically, calculated as ( )
, CPI(i) t is the consumer price index of partner i in year t
Exchange rate volatility (ERV), alongside the REER index, significantly influences a country's trade performance (Bahmani-Oskooee & Hegerty, 2009; McKenzie, 2002) Uncertainty in exchange rates disrupts the decision-making of risk-averse exporters, causing them to avoid markets with unstable exchange rates due to potential risks in future payments This volatility can therefore hinder export activities and impact overall trade growth.
This study utilizes the Exchange Rate Variability (ERV) as a key proxy to assess the impact of currency-related risk on export and import values According to McKenzie (2002) and Tenreyro (2007), the ERV is calculated by measuring the standard deviation of the percentage change in the monthly real effective exchange rate This approach provides a robust indicator of exchange rate volatility, enabling a thorough analysis of its effects on international trade flows.
ERV Var REER REER (4.9) where ERV it is the exchange rate volatility of country i in year t
REER i tm is the real effective exchange rate of month m in year t of country i
Data Collection
The thesis collects secondary data available on the international organizations:
World Bank (WB) provides data on the Current GDP, Real GDP at constant price 2005, Vietnam’s Population, and Partner’s Population The data available at http://data.worldbank.org/products/wdi
World Trade Organization (WTO) is an official source for Free Trade Agreements of Vietnam notified and sign Data available at http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx
International Monetary Fund (IMF) is collected data on import and export between Vietnam and other countries Data is available at http://elibrary- data.imf.org/
Centre D’ Études Prospectives ET D’Informations Internationales (CEPII) provides information on the distance between Vietnam and other countries
Data available at http://www.cepii.fr/CEPII/en/bdd_modele/bdd.asp
The Annual and Monthly Real Effective Exchange Rate data is sourced from the Belgian Non-Profit International Association (AISBL) This data provides essential insights into currency competitiveness and economic stability across 178 countries Access to these datasets is available at Bruegel’s official website: http://www.bruegel.org/datasets/real-effective-exchange-rates-for-178-countries-a-new-database/ Using this information enhances analysis of exchange rate trends and their impact on international trade.
Data on the WTO membership will be collected from WTO official website
Data available at http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm
This dataset encompasses aggregated data from 185 countries, including Vietnam, covering the period from 1990 to 2012 It represents the most comprehensive data available for research purposes, providing valuable insights for analysis Accessing this dataset enables researchers to examine global trends and patterns across multiple nations over two decades, facilitating informed decision-making and policy development.
When selecting countries for analysis, only those with at least one year of data on the explanatory variables are included; for example, countries like Country A lacking GDP data from 1990 to 2012 are excluded from the dataset Additionally, countries are chosen based on their official listing in both the World Bank Indicator 2014 (WDI) database and other relevant sources to ensure data reliability and consistency.
The International Trade Direction Statistics (DOTS) 2014 provides comprehensive data on Vietnam's trade relationships, covering 184 trading partners from 1990 to 2012, with a total of 4,232 observations Notably, some countries listed in the World Development Indicators (WDI) 2014 are absent from DOTS 2014, indicating gaps in trade data coverage This dataset offers valuable insights into Vietnam's evolving export and import patterns over more than two decades, highlighting key trends and trade dynamics relevant for economic analysis and policy development.
Monthly Real Effective Exchange Rate, the data is available for 138 countries from
Between 1995 and 2012, comprehensive data and variable descriptions were summarized in the table on the following page This information provides valuable insights into the trends and patterns observed over this period, supporting detailed analysis and research.
Note: + indicates the expected positive effect; - indicates the expected negative effect
Source: Constructed by the Author
1 Total Bilateral Trade Export value plus import value US$ Author’s Calculation
Export Total export value in 2005 US$ US$ DOTS
Import Total export value in 2005 US$ US$ DOTS
Dummy variable, equal 1 if Vietnam and trading country is in FTA in year t
Ratio of Product of RGDP of Vietnam and trading partner to world GDP in year t, based year
Population of Vietnam, trading partner
Distance between two capital of Vietnam and trading partner
Real Effective Exchange Rate of Vietnam, Trading Partner
Real Effective Exchange Rate Volatility of Vietnam, Trading Partner
Dummy variables for WTO member ship +/-
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