Impacts of AFTA on Government revenue, external trade, and FDI of Lao PDR

ABBREVIATIONS AND ACRONYMS ASEAN Free Trade Area Association of Southeast Asian Nations Cambodia, Lao PDR, Myanmar, and Vietnam Brunei, Indonesia, Malaysia, Philippines, Thailand, and Si

Doctor of Philosophy in Economics

Supervisor: Prof Dr TRAN THO DAT

VIENTIANE – 2014

ACKNOWLEDGEMENT

My sincere appreciation and heartfelt thanks are expressed to my supervisor, Professor Tran ThoDat, for his regular provision of invaluable pieces of advice, guidance, correction, and encouragement to me throughout this research This dissertation could not have been successfully accomplished without his contributions and supports

Also, I would like to dedicate this success to my beloved parents and especially to my everlasting dearest wife, my lovely children, who all the time stay beside me with their love and caring I would not be able to achieve this success without their continuous supports and great deal of encouragements

TABLE OF CONTENTS

ACKNOWLEDGEMENT ii

TABLE OF CONTENTS iii

LIST OF TABLES v

LIST OF FIGURES vi

ABBREVIATIONS AND ACRONYMS vi

CHAPTER 1: INTRODUCTION 1

1.1 Background 1

1.2 Problem Statement 6

1.3 Objective 8

1.4 Expected Outcomes 8

1.5 Significance of Study 8

1.6 Scope of Study 9

1.7 Organization of the Dissertation 9

CHAPTER 2: LITERATURE REVIEW 11

2.1 Theoretical Literature Review 11

2.1.1 Definition and Levels of Economic Integration 11

2.1.2 Advantages and Disadvantages of Regional Economic Integration 13

2.1.3 ASEAN and AFTA 17

2.1.4 Challenges and Opportunity for Lao PDR after Joining ASEAN 28

2.2 Empirical Literature Review 30

CHAPTER 3: ANALYTICAL METHODOLOGY AND DATA COLLECTION 43

3.1 Analytical Methodology 43

3.1.1 Descriptive Approach 43

3.1.2 Econometric Approach 44

3.2 Data Collection 51

CHAPTER 4: IMPACTS OF AFTA ON ECONOMIC PERFORMANCE, GOVERNMENT REVENUE, EXTERNAL TRADE AND FDI 53

4.1 Lao PDR Economic Performance During 1990-2012 53

4.1.1 Growth Rate 53

4.1.2 Output Structure 58

4.1.3 GDP per Capita 61

4.2 Impacts on Government Revenue 63

4.2.1 Total Revenue 63

4.2.2 Tax and Non-Tax Revenue 66

4.3 Impacts on External Trade 71

4.3.1 Exports, Imports and Trade Balance, 1990-2012 71

4.3.2 Direction of Exports and Imports 77

4.3.3 Degree of Trade Openness 80

4.4 Impacts on Foreign Direct Investment 85

4.5 Empirical Evidence of Impacts of AFTA on Government Revenue, External Trade, and Foreign Direct Investment 91

CHAPTER 5: CONCLUSION AND RECOMMENDATION 103

5.1 Conclusion 103

5.2 Recommendation 106

REFERENCES 108

APPENDIX 115

LIST OF TABLES

Table 2.1: Schedule for Tariff Reduction under CEPT Agreements 21

Table 2.2: Timetable for Accelerating AFTA for the Regional Six ASEAN Countries 26

Table 3.1: Framework on Analyzing the Impacts of AFTA on Economic Performance, Government Revenue, Trade, FDI 43

Table 3.2: Summary of Expected Signs of Independent Variables 50

Table 3.3: Data Sources Used in Analysis 51

Table 4.1: Directions of Exports, 1900-2012 77

Table 4.2: Merchandise Exports of Lao PDR (% of Total Merchandise Exports) 78

Table 4.3: Directions of Imports, 1990-2012 79

Table 4.4: Merchandise Imports 80

Table 4.5: The World‘s most Opened and most Closed Economies in 1996 82

Table 4.6: Degree of Openness of ASEAN Member Countries, 1995-2012 83

Table 4.7: Intra-ASEAN Trade 2009 & 2010 85

Table 4.8: FDI Net Flows to ASEAN 87

Table 4.9: Percent Share of FDI in ASEAN 87

Table 4.10: FDI as Percent of GDP 88

Table 4.11: FDI by Countries, 2001-2010 89

Table 4.12: Results of Regressions by Using Lao Data 91

Table 4.13: Results of Regressions by Using the Weighted-Average Data (WAD) 95

Table 4.14: Comparing the regression results by using the Lao data and WAD 99

Table 4.15: Regression Results by Excluding INFR in the EXP, IMP, and FDI Equations and EXR in the GOVR Equation 101

Table 4.16: Regression Results by Excluding INF and EXR in All Equations 101

LIST OF FIGURES

Fig 2.1: Levels of Economic Integration 12

Fig 2.2: Tendency of ASEAN Members‘ Tariff Rates, 1993-2009 27

Fig 2.3: Tariff Rates of ASEAN-6 and ASEAN-4, 1993-2009 28

Fig 4.1: Economic Performance of Lao PDR, 1990-2012 55

Fig 4.2: Resource Sector Contribution to GDP Growth, 2004-2012 57

Fig 4.3: Structure of Output as Percent of GDP, 1990-2012 59

Fig 4.4: Growth Rates of Economic Sectors, 1990-2012 60

Fig 4.5: GDP per Capita of Lao PDR, 1990-2012 61

Fig 4.6: GDP per Capita of ASEAN Members In 2012 62

Fig 4.7: Total Revenue of GOL, 1990-2012 63

Fig 4.8: Annual Percent Change of Total Revenue and Grant, 1990-2012 65

Fig 4.9: Tax and Non-Tax Revenue, 1990-2012 66

Fig 4.10: Tax and Non-Tax Revenue and Grants as Percent Share of Total Revenue, 1996-2010 67

Fig 4.11: Components of Tax Revenue, 1995/60-2009/10 68

Fig 4.12: Growth Rate of Import and Export Duties, 1996/97-2009/10 69

Fig 4.13: Total Revenue, Tax Revenue, Total Expenditure, and Budget Balance as Percent of GDP, 1990-2012 70

Fig 4.14: Tax Revenue and Tariff Rate, 1998-2012 71

Fig 4.15: Exports, Imports, and Trade Balance, 1990-2012 73

Fig 4.16: Annual Change of Exports, Imports, and Trade Balance, 1990-2012 74

Fig 4.17: Exports and Imports as Percent Of GDP, 1990-2012 75

Fig 4.18: Lao Exports and ASEAN Averaged-Tariff rate, 1996-2013 76

Fig 4.19: Lao Imports and Averaged-Tariff rate, 1998-2013 76

Fig 4.20: Exports Shared by Countries, 1990-2012 78

Fig 4.21: Imports Shared by Counties, 1990-2012 80

Fig 4.22: Degree of Trade Openness, 1990-2011 81

Fig 4.23: Trends of Openness Degree of ASEAN Members, 1995-2012 84

Fig 4.24: Foreign Direct Investment in Lao PDR, 1990-2012 86

Fig 4.25: FDI Project Numbers by Sectors, 2002-2010 90

Fig 4.26: Values of FDI by Sectors, 2002-2010 90

ABBREVIATIONS AND ACRONYMS

ASEAN Free Trade Area Association of Southeast Asian Nations Cambodia, Lao PDR, Myanmar, and Vietnam Brunei, Indonesia, Malaysia, Philippines, Thailand, and Singapore

Bank of Lao PDR Common Effective Preferential Tariff Exports

Exchange Rate Foreign Direct Investment Free Trade Agreement Fiscal Year

Gross Domestic Product Foreign Income

Government of Lao PDR Government Revenue Generalized Systems of Preferential International Monetary Fund

Ministry of Planning and Investment National Socio-Economic Development Plan Normal Trade Relations

Official Development Assistance Regional Trade Agreements Tariff Rate of ASEAN Member Countries Value Added Taxes

Tariff Rate of Lao PDR Weighted-Averaged Data World Bank

CHAPTER 1 INTRODUCTION

1.1 Background

Regional integration has become the main form of trade liberalization since the early 1990s After the conclusion of the Uruguay Round in 1994, no significant progress has been made at multilateral liberalization By contrast, a new regional trade agreement (RTAs) is announced almost every month According to the World Trade Organization, more than 300 regional trade agreements (RTAs) are currently in force and all but one (Mongolia) of its 153 members participate in at least one of those arrangements Given the rising prominence of bilateral and regional trade liberalization, it is important to understand the implications for world trade

This is even more important because, unlike multilateral liberalization, which most economists believe to be largely beneficial for both liberalizing countries and

by standers, preferential liberalization is controversial The reason comes from its inherent discriminatory nature: when forming an RTA, members agree to lower trade barriers to each other but their tariffs on imports from outsiders remain unconstrained This can induce members to substitute inefficiently produced imports from bloc members for imports previously sourced efficiently from nonmember countries Such trade diversion harms the nonmembers through lost markets, as well as the members through reduced tariff revenue However, like broader trade liberalization, the RTA is also likely to enhance trade of the goods that are efficiently sourced within the bloc This trade creation will enhance welfare These two forces suggest that preferential liberalization can in principle be either welfare-enhancing or welfare-reducing Ultimately, the result must be empirical, and may be different for different trading blocs Trade creation forces may prevail over trade diverting ones in some cases, but the reverse could be true in other cases

Progress of the integration has been very impressive in recent decades for a number of developing countries in Asia and, to a lesser extent, in Latin America These countries have become successful because they chose to participate in regional and global trade, helping them to attract the bulk of foreign direct investment in developing countries This is true of China and India since they embraced trade liberalization and other market-oriented reforms, and also of higher-income countries in Asia—like Korea and Singapore—that were themselves poor

up to the 1970s (IMF, 2001)

It has been realized since Viner (1950) that the formation of a free trade agreement (FTA) can lead to trade creation and/or trade diversion The former arises when the FTA promotes trade among the members without disrupting trade with nonmembers, and tends to be efficiency-enhancing By contrast, trade diversion arises when the FTA promotes trade among members at the expense of trade with bloc outsiders, and tends to be efficiency-reducing

There have been attempts to pin down theoretically the characteristics that make FTAs more trade creating or more trade diverting Frankel (1997) develops the ―natural trading partners‖ hypothesis, which states broadly that agreements between countries that already trade significantly (in particular geographically close countries and those that share cultural characteristics that reduce transaction costs, such as language) are the ones most likely to be trade creating Although theoretically this does not need to always hold, as Bhagwati and Panagariya (1999) point out, Frankel (1997) finds evidence consistent with the natural trade partners hypothesis in a number of regression analyses based on the gravity equation with country-level trade flows

Lee and Shin (2006) extend the approach of Frankel (1997) and estimate a gravity model with year dummies and with both random and fixed effects to assess trade creation and trade diversion in 175 countries using data from 1948 to 1999 The key trade creation variable is a dummy that is one if both countries are

members of a common RTA; the key trade diversion variable is a dummy that is one if one country belongs to an RTA and the other does not belong to that RTA Lee and Shin interact these variables with geographical and common language variables to identify whether trade creation and trade diversion are different for

―natural‖ trade patterns

In most specifications, Lee and Shin (2006) confirm that RTAs increase bilateral trade between members The magnitudes are around 50 percent, but if the countries share a common border this effect increases to up to 200 percent Similarly, the closer the countries are from each other, the larger is trade creation

On the other hand, RTAs are never found to reduce trade between members and nonmembers significantly In fact, in most specifications RTAs are estimated to increase trade between members and nonmembers, from 6 to 15 percent Trade with nonmembers grows more for RTAs with a smaller average distance between their members and when more members of the RTA have common borders or share a common language Having the trade creation and trade diversion estimates

in hand, Lee and Shin then predict the average trade impact of several proposed RTAs in Asia They find in particular that the trade effects of AFTA are significantly positive

There is a sizeable theoretical literature that explores the optimal external tariff response of countries following the formation of FTAs In a standard model, with a welfare-maximizing government, optimal external tariffs are likely to fall in

a free trade area precisely to limit the welfare costs of trade diversion [Bagwell and Staiger (1999), Freund (2000), Bond et al (2004)] The intuition is that the welfare cost of trade diversion induces governments to lower external tariffs to recapture tariff revenue and improve economic efficiency

When political-economy motives are incorporated, the results are ambiguous For example, Richardson (1993) and Ornelas (2005) find that, upon the formation of a free trade area, lobbying will decline and external tariffs fall, as the

import-competing sector contracts and becomes weaker politically This force will

be more important, the greater the share imports stemming from the bloc partners However, in a different model, Panagariya and Findlay (1996) find that countries in

a free trade area will raise protection against outsiders because lobbying in favor of tariffs against the partner will be diverted to lobbying for a greater external tariff Furthermore, it is not just existing trade blocs that matter As Bagwell and Staiger (2004) show, the mere potential for a future trade agreement may affect the extent

of current tariff reduction that can be negotiated multilaterally The threat of

―bilateral opportunism‖ reduces the extent of multilateral tariff reduction because current global trade agreements can be later diluted by bilateral preferences

By contrast, the empirical literature on the effect of RTA formation on external tariffs is still in its infancy Bohara, Gawande and Sanguinetti (2004) examine tariff adjustments in Argentina following the formation of Mercosur, finding some support for the hypothesis that the decline of industries driven by the formation of a trading bloc leads to lower external tariffs Similarly, Estevadeordal

et al (2008) examine the direct impact of changes in preferential tariffs on changes

in MFN tariffs in ten Latin American countries and one hundred industries over 12 years Using a number of empirical techniques to extract causality, they find that preferences in free trade areas lead to a decline in external tariffs, whereas the effects are negligible in customs unions In contrast, Limão (2006) finds that the United States was more reluctant to lower tariffs in the Uruguay Round for products where preferences were granted His results imply that trade preferences lead to less multilateral tariff reduction Limão and Karacaovali (2008) find similar results for the European Union

Recently, Lendle (2007) has developed the first analysis of the trade policy reactions to regionalism in Asia Specifically, Lendle evaluates whether products receiving preferential treatment in Indonesia, Malaysia, Philippines and Thailand under the ASEAN Free Trade Agreement underwent greater reduction in MFN tariffs during the late 1990s and early 2000s than goods that did not receive

preferential treatment The approach resembles that of Limão (2006), in that he estimates the change in the MFN tariff from the mid-1990s to the early 2000s (the precise years vary with the country in analysis due to data availability) on a dummy that represents whether the country offered preferential treatment under AFTA Lendle finds evidence of tariff complementarity for Indonesia, the Philippines and Thailand, where the MFN tariffs of preferential products were reduced by more (between one and five percentage points) than for non-preferential products In contrast, the results for Malaysia, which has the lowest average MFN among the four countries studied, are somewhat mixed, varying according to the specification While Lendle‘s study is very instructive about the developments in internal and external liberalization in ASEAN, it does not take into account the variations in the extent and the speed of intra-bloc liberalization, which are significant

The impacts of free trade can be reviewed from different countries‘ case studies One of the most directly related to the consequences of implementing ASEAN free trade area can be found in the study conducted by Menon (1999) In this paper, it examined the impact that membership of AFTA is likely to have on Lao's trade, government revenue and foreign investment flows The findings show that (i) trade diversion is likely to be low, and that AFTA will provide the vehicle to negotiate market access issues with Thailand; (ii) the reduction in government revenue from trade taxes is likely to be low, particularly in light of the high share of informal trade and only low levels of trade diversion; and (iii) foreign direct investment (FDI) flows are likely to grow sharply in the future, as the legal, administrative and institutional framework in Lao develops to meet the ASEAN standard Araya (2002) also analyzed the ways how new ASEAN member countries (CLMV) cope with revenue loss due to AFTA tariff reduction

Another recent studies of the impact of trade blocs have found that trade diversion has been less apparent than was previously assumed to be the case A

1995 study by the OECD concluded that there was no evidence that these agreements had created trade diversion While conceding that it was in some cases

difficult to assess diversion, the anecdotal evidence suggested that these agreements had probably served to stimulate trade liberalisation elsewhere, including through multilateral liberalisation

A study by the Department of Foreign Affairs and Trade of the impact of NAFTA concluded that there was no evidence that the trade agreement has had diversionary effects According to Krueger (1999), the NAFTA experience lends weight to the conclusion that Free Trade Agreements between countries with low trade barriers

There are also a number of arguments on free trade It can bring about several advantages and disadvantages The benefits can be indicated in trade creation, increased exports, economies of scale, increased competition, make use of surplus raw materials, increased production, production efficiencies, benefits to consumers, foreign exchange gain, employment opportunities, and economic growth

Although free trade has benefits, there are a number of disadvantages such as changes in structural unemployment in the short term, increased domestic economic instability from international trade cycles, as economies become dependent on global markets, developing or new industries may find it difficult to become established in a competitive environment with no short-term protection policies by governments, free trade can lead to pollution and other environmental problems, free trade may raise government revenue by import taxes, but this will only be a small amount of money

1.2 Problem Statement

The Lao People‘s Democratic Republic (Lao PDR) - a landlocked country with a population of 6.7 million (MPI, 2012) - is classified to be one of the Least Developed Countries (LDCs) by the United Nations (UN) in the region with an estimated GDP per capita at current price of US$ 1,067 in 2011 (IMF, 2011) Lao PDR has, similarly to other LDCs, confronted with many chaotic circumstances in

developing its national development programs aimed at maintaining macroeconomic stabilities, achieving Millennium Development Goals in 2015 and graduating from LDC status by 2020 (MPI, 2010)

The socio-economic impediments of Laos can be illustrated in two main factors One of the most difficult constraints is geographic conditions of landlocked country with mountains covered two-thirds of total land areas which restrict both the quantity and quality of agricultural land and pose difficulty to the trade development, social infrastructure, and transportation and communication links Second, though GDP per capita is low, consumption level is very high in both public and private sectors The national saving rate is thus low, which is insufficient for infrastructure investment This is also considered to be a severe limitation in the Lao socio-economic development process Apart from this, the general present characteristics of Laos can be categorized by Human Development Index: low literacy rate of both adult and children enrollments – only 76 per cent of population age 15+ in 2010, low life expectancy, high fertility, crude birth and death rates – due to a lack of contraception and health care accession, and massive poverty

To solve the above-specified development difficulties and attain the term development goals, a sound national socio-economic development plan (NSEDP) needs to be identified and implemented The government of Lao PDR has continued to set a five-year NSEDP in response to the development process requirement During implementing the 6th NSEDP (2006-2010), the average annual GDP growth was 7.9 per cent, budget deficit accounted for 4.7 per cent of GDP, FDI accumulation amounted to US$ 8 billion, exports accounted for 20.72 per cent, imports covered 26.1 per cent and trade deficit represented 5.3 per cent of GDP, respectively

long-With respect to the economic integration with the regional and international counterparts, after having become a member of Association of Southeast Asian Nations (ASEAN) in 1997, Lao PDR has attempted through the implementation of a

policy of open foreign economic cooperation, on the basis of independence and mutual benefit As a result, there has been expansion in cooperation in the fields of economy and commerce International trade negotiations at the bilateral, regional, sub-regional and global levels have increased and strengthened International integration includes multi-party trade cooperation, ASEAN and Regional Economic Cooperation, Trade Negotiation within ASEAN and related countries, and Asia-Pacific Trade Agreement (MPI, 2011)

1.3 Objective

The main objectives of this dissertation are twofold as follows:

 To review the economic performance of Lao PDR before and after participating AFTA;

 To estimate the impacts in implementing the Common Effective Preferential Tariff (CEPT) scheme under AFTA on the Lao PDR‘s government revenue, external trade (exports and imports), and Foreign Direct Investment (FDI) flows

1.5 Significance of Study

The findings of this paper are considered significant for the author since it deepens more understandings on economic development policies, strategies and

growth in Lao PDR in the past and shades light on the future development directions

Moreover, the results will provide better knowledge on the repercussions of regional economic integration, particularly with ASEAN on the Lao government revenue, external trade directions, influx of FDI, and smuggling activities

In addition, this paper will be a useful reference for the scholars, researchers, and general interested groups who desire to analyze the similar issues in the different case studies, approaches, and time periods

1.6 Scope of Study

The scope of this study is to focus on the impacts of regional economic integration, namely AFTA on the Lao government revenue, external trade, and FDI These indicators are selected as dependent variables to indicate the impacts during 1990-2012 These time periods cover several internal, regional, and international economic shocks, namely the implementation of NSEDP, membership of ASEAN and AFTA implementation of Lao PDR, Asian Financial Crisis in 1997, and global economic crisis in 2008

1.7 Organization of the Dissertation

For a scientific approach and systemic and chronological flows, this thesis is divided into five chapters, which will be further subdivided into sections, and they are organized in the following manner

The introductory part briefly presented problem statement, objective, anticipated outcome and significance, scope of study, and thesis organization, respectively as shown in Chapter 1

Chapter 2 will review both theoretical and empirical literature on regional economic integration In the theoretical section, it firstly defines the levels of economic integration, followed by the pros and cons of such integration Next, it will briefly review the background and objective of establishing ASEAN and

AFTA After that, it will also describe the implementation of CEPT, especially the CEPT production list and products covered under the CEPT agreement Finally, it will discuss the positive and negative impacts of AFTA that ASEAN member countries have experienced In the empirical section, some of the previous researches on AFTA impacts in different countries‘ case studies will be summarized Additionally, it will discuss the differences between the previous and this study in terms of the analytical methodology, models, and scope of study

Chapter 3 is concerned with the analytical methodology and data sources In the section of analytical methodology, it will describe the method and model specifications used in analyzing the AFTA impact on Lao PDR‘s government revenue, external trade, and FDI In the section of data sources, it will describe how data were collected from different sources and data modification in terms of weighted-average data

Chapter 4 will present the analytical results of AFTA impacts on the issues

It will firstly present the overall economic performance, followed by analytical results of AFTA impacts on government revenue, external trade, and FDI by using descriptive approach Secondly, the results derived from utilizing econometric technique will be revealed

Chapter 5 will come up with the main conclusion of analyses and policy implications

CHAPTER 2 LITERATURE REVIEW

2.1 Theoretical Literature Review

2.1.1 Definition and Levels of Economic Integration

Economic integration is a process whereby countries cooperate with one another

to reduce or eliminate barriers to the international flow of products, people or capital The aim of economic integration is to reduce costs for both consumers and producers,

as well as to increase trade between the countries taking part in the agreement The more integrated the economies become, the fewer trade barriers exist and the more economic and political coordination there is between the member countries

There are six additive levels of economic integration: preferential trade agreement, free trade area, custom union, common market, economic union, and political union

integration which offers member countries tariff reductions in certain product categories Discrimination or preferential treatment for some countries is not allowed as it is against the principle of Most Favored Nation (MFN) under the World Trade Organization (WTO)

 Free Trade Area (FTA) is the second level of economic integration which

tariffs (a tax imposed on imported goods) between member countries are abolished or significantly reduced Each member country keeps its own tariffs in regard to the third countries The general goal is to develop economies of scale and comparative advantages, which promotes economic efficiency

implying that the same tariffs are applied to third countries Custom unions are particularly useful to level the competitiveness playing field and address the problem of re-exports (using preferential tariffs in one country to enter another country)

 Common Market (CM) is an advanced level of economic integration that

factors of production, such a labor and capital, are free to move within member countries, expanding economies of scale and comparative advantages Thus, a worker in a member country is able to move and work in another member country

 Economic Union (EC) In this level, monetary and fiscal policies between

member countries are harmonized, which implies a level of political integration A further step concerns a monetary union where a common currency is used, such as with the European Union (Euro)

integration with a common government and were the sovereignty of member country is significantly reduced Only found within nation states, such as federations where there is a central government and regions having a level of autonomy

Fig 2.1: Levels of Economic Integration

2.1.2 Advantages and Disadvantages of Regional Economic Integration

1 Advantages of free trade

Free trade occurs when there are no artificial barriers put in place by governments to restrict the flow of goods and services between trading nations

When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows

 Production efficiencies

Free trade improves the efficiency of resource allocation The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services

Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods

would cost 35 per cent more if the 1998 tariff levels still applied Clothing and footwear would also cost around 24 per cent more

 Foreign exchange gains

When Australia sells exports overseas it receives hard currency from the countries that buy the goods This money is then used to pay for imports such as electrical equipment and cars that are produced more cheaply overseas

 Employment

Trade liberalization creates losers and winners as resources move to more productive areas of the economy Employment will increase in exporting industries and workers will be displaced as import competing industries fold (close down) in the competitive environment With free trade many jobs have been created in Australia, especially in manufacturing and service industries, which can absorb the unemployment created through restructuring as firms close down or downsize their workforce When tariffs were increased substantially in the period 1974–1984 for textiles and footwear - employment in the sector actually fell by 50 000, adding to overall unemployment

 Economic growth

The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth This is created by more competitive industries, increased productivity, efficiency and production levels

2 Disadvantages of free trade

Although free trade has benefits, there are a number of arguments put forward by lobby groups and protestors who oppose free trade and trade liberalization These include:

 With the removal of trade barriers, structural unemployment may occur in the short term This can impact upon large numbers of workers, their families and local economies Often it can be difficult for these workers to

find employment in growth industries and government assistance is necessary

 Increased domestic economic instability from international trade cycles, as economies become dependent on global markets This means that businesses, employees and consumers are more vulnerable to downturns in the economies of our trading partners, e.g Recession in the USA leads to decreased demand for Australian exports, leading to falling export incomes, lower GDP, lower incomes, lower domestic demand and rising unemployment

 International markets are not a level playing field as countries with surplus products may dump them on world markets at below cost Some efficient industries may find it difficult to compete for long periods under such conditions Further, countries whose economies are largely agricultural face unfavorable terms of trade (ratio of export prices to import prices) whereby their export income is much smaller than the import payments they make for high value added imports, leading to large current account deficits and subsequently large foreign debt levels

 Developing or new industries may find it difficult to become established in a competitive environment with no short-term protection policies by governments, according to the infant industries argument It is difficult to develop economies of scale in the face of competition from large foreign Transitional Corporations This can be applied to infant industries or infant economies (developing economies)

 Free trade can lead to pollution and other environmental problems as companies fail to include these costs in the price of goods in trying to compete with companies operating under weaker environmental legislation

in some countries

 Pressure to increase protection during the GFC During the global financial crisis and recession of 2008-2009, the impact of falling employment meant that protection pressures started to rise in many countries In New South Wales, for example, the state government was criticised for purchasing imported uniforms for police and firefighters at cheaper prices rather than purchasing Australian made uniforms from Australian companies Similar pressures were faced by governments in the United States, Britain and other European countries

For the advantages of ASEAN Free Trade Area can be summarized as follows:

 Rural Development and Poverty Eradication

Certain ASEAN member states, such as Laos, Cambodia and Myanmar are defined by the United Nations as "least developed nations," while others, such as Singapore and Brunei, are considered fully developed by international standards One of the stated goals of the ASEAN Free Trade Agreement is to reduce poverty while bringing member states into a state of full development For example, ASEAN encourages the proliferation of information and Communication Technology (ICT) in rural, underdeveloped communities

 Preserving Peace and Stability

An annual forum consisting of all the ASEAN members, plus other observers from Asia and the Pacific region, aims for "promoting peace and security through dialogue and cooperation" Intended to provide a venue for multilateral and bilateral discussion, this forum works to reduce tension amongst member states while preserving the Free Trade Agreement

 Protecting the Mekong

ASEAN formed the Mekong Basin Development Cooperation as a cooperative effort to sustainably develop the Mekong Basin The Mekong River,

which flows through five of the 10 ASEAN member states, is a fragile ecosystem that could be easily damaged by the actions of a single member state (runoff from pesticides in Thailand, for instance, can have ramifications for Cambodia's fish stocks) By developing the Mekong Basin Development Cooperation, ASEAN aims

to reconcile conservation efforts with economic development while living up to the promises of the Free Trade Agreement

 Women's Rights

Originally established in 1976 and re-established in 2002, the ASEAN Committee on Women focuses on incorporating the roles of women into free trade-oriented social and economic development ASEAN's work on women's rights is guided by two main documents: The Work Plan for Women's Advancement and Gender Equality (2005-2010) and The Work Plan to Operationalise the Declaration

on the Elimination of Violence against Women (2006-2010)

2.1.3 ASEAN and AFTA

1 Establishment and Objective

ASEAN was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers

of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand

Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July

1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999, making up what is today the ten Member States of ASEAN

As set out in the ASEAN Declaration, the aims and purposes of ASEAN are:

1 To accelerate the economic growth, social progress and cultural development

in the region through joint endeavours in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian Nations;

2 To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries of the region and adherence to the principles of the United Nations Charter;

3 To promote active collaboration and mutual assistance on matters of common interest in the economic, social, cultural, technical, scientific and administrative fields;

4 To provide assistance to each other in the form of training and research facilities in the educational, professional, technical and administrative spheres;

5 To collaborate more effectively for the greater utilisation of their agriculture and industries, the expansion of their trade, including the study of the problems of international commodity trade, the improvement of their transportation and communications facilities and the raising of the living standards of their peoples;

6 To promote Southeast Asian studies; and

7 To maintain close and beneficial cooperation with existing international and regional organizations with similar aims and purposes, and explore all avenues for even closer cooperation among themselves

In their relations with one another, the ASEAN Member States have adopted the following fundamental principles, as contained in the Treaty of Amity and Cooperation in Southeast Asia of 1976 (ASEAN.org):

1 Mutual respect for the independence, sovereignty, equality, territorial integrity, and national identity of all nations;

2 The right of every State to lead its national existence free from external interference, subversion or coercion;

3 Non-interference in the internal affairs of one another;

4 Settlement of differences or disputes by peaceful manner;

5 Renunciation of the threat or use of force; and

6 Effective cooperation among themselves

AFTA is a trade bloc agreement by the Association of Southeast Asian Nations supporting local manufacturing in all ASEAN countries

The AFTA agreement was signed on 28 January 1992 in Singapore When the AFTA agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand Vietnam joined

in 1995, Laos and Myanmar in 1997 and Cambodia in 1999 AFTA now comprises ten countries of ASEAN All the four latecomers were required to sign the AFTA agreement in order to join ASEAN, but were given longer time frames in which to meet AFTA's tariff reduction obligations

The primary goals of AFTA seek to:

 Increase ASEAN's competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and non-tariff barriers; and

 Attract more foreign direct investment to ASEAN

The primary mechanism for achieving the goals given above is the Common Effective Preferential Tariff (CEPT) scheme, which established a schedule for phased initiated in 1992 with the self-described goal to increase the "region‘s competitive advantage as a production base geared for the world market (www.aseansec.org)‖

A proposal to set up a Free Trade Area in ASEAN was first mooted by the Thai Prime Minister AnandPanyarachun, which was agreed upon with amendments during the ASEAN Seniors Economic Official Meeting (AEM) in Kuala Lumpur In January 1992, the ASEAN members signed the Singapore Declaration at the heart

of which was the creation of AFTA in 15 years This is a comprehensive program of

tariff reduction in the region, which is to be carried out in phases through the year

2008 This deadline was subsequently moved forward and AFTA became fully operational on 1 January 2003

Over the course of several years, the initial program of tariff reductions was broadened and accelerated and other "AFTA Plus" activities were initiated This includes efforts to eliminate non-tariff barriers, harmonization of customs nomenclature, valuation, and procedures and development of common product certification standards

2 AFTA CEPT Implementation

The CEPT scheme is a cooperative arrangement among ASEAN member countries that reduces intraregional tariffs and nontariff barriers (NTBs) Signatory countries agree to remove nontariff barriers within five years after joining CEPT According to the scheme, members agree to gradually reduce intraregional tariffs on imported goods1 to 0-5 percent over a 10-year period ASEAN-6 countries started to implement the CEPT on 1 January 1993 Cambodia, Lao PDR, Myanmar, and Viet Nam will implement the CEPT Scheme on a different schedule Viet Nam will reduce tariffs on all manufactured goods to 0-5 percent by 2006, Lao PDR and Myanmar by 2008, and Cambodia by 2010 The CEPT scheme is expected to make ASEAN‘s manufacturing sector more efficient and competitive in the global market AFTA has become a larger market for manufacturing producers within the region Investors can enjoy economies of scale in production Through this arrangement, ASEAN hopes to enhance competitiveness, improve the investment climate, and attract foreign direct investment

3 CEPT Product List

Under the CEPT scheme, each ASEAN member country must independently allocate goods that are subject to tariffs to one of four lists The four lists determine

agricultural and products At least 40 percent of the contents must originate from any member of ASEAN order to be considered as ASEAN products

the schedules according to which each country will reduce tariff rates on listed goods The names of the lists are: Inclusion List (IL), Temporary Exclusion List (TEL), Sensitive List (SL), and General Exception List (GEL)

The schedules for tariff rate reductions are also determined by the nature of the goods; manufactured and processed agricultural products are subject to earlier rate reductions, not the non-processed agricultural products

Table 2.1: Schedule for Tariff Reduction under CEPT Agreements

1996-2003 1996-2003 1997-2003 2001-2010

Vietnam (NT) 1996-2006

(FT) 1996-2003 1996-2006 1996-2006 2000-2006 2004-2013 Lao PDR

and

Myanmar

(NT) 1998-2008 (FT) 1998-2005 2001-2008 2001-2008 2002-2008 2006-2015

Cambodia (NT) 2000-2010

(FT) 2000-2007 2003-2010 2003-2010 2004-2010 2008-2017

Sources: http://www.moc.go.th/thai/dbe/ecoco/rt/asean/afta.htm

4 Eligibility for CEPT Tariff Rate Reductions

In order for an exporter to enjoy reduced tariff rates under the CEPT scheme, the exported goods must appear in the ILs of both the exporting and importing

years;

3

FT means Fast Track Products classified under FT are subject to tariff rate reduction of 0-5% in 5-8 years

countries, must have been approved by the AFTA Council as part of a tariff reduction program, and no less than 40 percent of its content must have originated from ASEAN member countries Within the AFTA, each ASEAN member country has the right to set tariff rates on imports in accordance with the CEPT scheme Therefore, one product may be subject to different tariff rates depending on which country in the free trade area imports the goods Under other regional trade agreements such the European Union, all member countries must apply the same tariff rates to the same imported goods.4

5 Strategic Compliance with the CEPT Scheme

The AFTA is one of the least restrictive regional trading arrangements Although members must remove barriers to intra-ASEAN trade, they are individually free to impose trade barriers on nonmembers This stands in contrast

to the European Union (EU) and Mercosur (Argentina, Brazil, Paraguay, and Uruguay), in which members must impose uniform tariff rates on nonmember countries The CEPT scheme also gives members freedom to set tariffs on intra-ASEAN trade at any rate between 0 and 5 percent Furthermore, due to the Asian financial crisis of 1997, certain long-standing member countries have not fully complied with requirements of the CEPT scheme in spite of written deadlines, a fact that has not resulted in their exclusion from AFTA Although this is not to suggest that the new member countries should join the free trade area with the intention of not complying with CEPT requirements, they must take into consideration the actual behavior of other members as well as any emergency circumstances that may arise

According to the CEPT schedule, by 2017 all of the current ASEAN member countries muster duce intra-ASEAN tariff rates on all but General Exception goods

to a maximum of 5 percent Consequently, the new ASEAN members have considerable freedom to determine how they will comply with the CEPT scheme In

one respect, the new members are free to set tariff rates on various goods in their IL anywhere in the range of 0-5 percent, which calls for careful consideration The new ASEAN members must be careful to avoid overambitiously reducing tariff rates to

0 percent, as Lao PDR has done with certain goods In another respect, the new members are also free to determine which goods they will place on which list according to the strategic importance of those goods

It is important for the new ASEAN members to identify which goods they can or might be able to produce with a relative competitive edge so that they can add those products to their ILs and benefit from reduced tariffs when exporting those goods to other ASEAN countries At the same time, they must also identify which of their own domestic industries need more time to adjust to trade liberalization so that they can place those goods on their TELs or SLs Unfortunately, it is not easy to identify which industries might enjoy a comparative advantage Doing so requires that countries make accurate projections based on comprehensive information from both the formal and informal sectors

Unlike the EU, AFTA does not apply a common external tariff on imported goods Each ASEAN member may impose tariffs on goods entering from outside ASEAN based on its national schedules However, for goods originating within ASEAN, ASEAN members are to apply a tariff rate of 0 to 5 percent (the more recent members of Cambodia, Laos, Myanmar and Vietnam, also known as CMLV countries, were given additional time to implement the reduced tariff rates) This is known as the Common Effective Preferential Tariff (CEPT) scheme5

ASEAN members have the option of excluding products from the CEPT in three cases: (i) Temporary exclusions; (ii) Sensitive agricultural products; and (iii) General exceptions Temporary exclusions refer to products for which tariffs will ultimately be lowered to 0-5 per cent, but which are being protected temporarily by

a delay in tariff reductions

Sensitive agricultural products include commodities such as rice ASEAN members have until 2010 to reduce the tariff levels to 0-5 per cent6

General exceptions refer to products which an ASEAN member deems necessary for the protection of national security, public morals, the protection of human, animal or plant life and health, and protection of articles of artistic, historic,

or archaeological value ASEAN members have agreed to enact zero tariff rates on virtually all imports by 2010 for the original signatories, and 2015 for the CMLV countries

The Common Effective Preferential Tariff (CEPT) Agreement for AFTA requires that tariff rates levied on a wide range of products traded within the region are reduced to 0-5 per cent Quantitative restrictions and other non-tariff barriers are

to be eliminated Although originally scheduled to be realised by 2008, the target of

a free trade area in ASEAN was continuously moved forward AFTA will now be fully completed by the year 2002

6 Products Covered Under the CEPT Agreement

In principle, the free trade area covers all manufactured and agricultural products, although the timetables for reducing tariffs and removing quantitative restrictions and other non-tariff barriers differ

Inclusion List Products in the Inclusion List are those that have to undergo

immediate liberalisation through reduction in intra-regional (CEPT) tariff rates, removal of quantitative restrictions and other non-tariff barriers Tariffs on these products should be down to a maximum of 20 per cent by the year 1998 and to 0-5 per cent by the year 2002 The new Members of ASEAN have up to 2006 (Viet Nam), 2008 (Laos and Myanmar) and 2010 (Cambodia) to meet this deadline By the year 2000, there would be 53,294 tariff lines in the Inclusion List representing 82.78 per cent of all tariff lines in ASEAN

Temporary Exclusion List (TEL).Products in the Temporary Exclusion List

can be shielded from trade liberalisation only for a temporary period of time However, all these products would have to be transferred into the Inclusion List and begin a process of tariff reduction so that tariffs would come down to 0-5 per cent Starting on 1 January 1996, annual installments of products from the TEL have been transferred into the Inclusion List By the year 2000, there would remain 9,674 tariff lines in the TEL representing about 15.04 per cent of all tariff lines in ASEAN

Sensitive List This contains unprocessed agricultural products, which are

given a longer time frame before being integrated with the free trade area The commitment to reduce tariffs to 0-5 per cent, remove quantitative restrictions and other non-tariff barriers is extended up to the year 2010 The new members of ASEAN have up to 2013 (Viet Nam), 2015 (Laos and Myanmar) and 2017 (Cambodia) to meet this deadline By the year 2000, there would be 370 tariff lines

in the Sensitive List making up 0.58 per cent of all tariff lines in ASEAN

General Exception (GE) List.These products are permanently excluded from

the free trade area for reasons of protection of national security, public morals, human, animal or plant life and health and articles of artistic, historic and archaeological value There are 1,036 tariff lines in the GE List representing about 1.61 per cent of all tariff lines in ASEAN7

Table 2.2: Timetable for Accelerating AFTA for the Regional Six ASEAN

Countries

2000 A minimum of 90 per cent of the six countries‘ total tariff lines must

have tariffs of 0-5 per cent Individually, each country would commit to achieve a minimum of 85 per cent of the Inclusion List with tariffs of 0-5 per cent

2001 Each country would achieve a minimum of 90 per cent of the

Inclusion list in the 0-5 per cent tariff range

2002 100 per cent of items in the Inclusion List would have tariffs of 0-5

per cent, but with some flexibility

Sources: ASEAN Secretariat

ASEAN has agreed on a firm timetable leading up to the full realisation of AFTA by the year 2002 By the year 2000, each country will have 85 per cent of the items in its Inclusion List with tariffs of 0-5 per cent This will be increased to 90 per cent of the Inclusion List by the year 2001 and then for the whole Inclusion List

by the year 2002 The Inclusion List refers to those products, which are scheduled for tariff reduction, removal of quantitative restrictions and non-tariff barriers

By 1 January 2000, the total number of tariff lines in the CEPT Inclusion List will reach 53,254 tariff lines, which represents about 82.78 per cent of all tariff lines in the ten ASEAN countries By then, the average tariff rate among ASEAN economies will be down to 3.87 per cent The average tariff was 12.76 per cent when AFTA was launched in 1993.8

8

www.aseansec.org/10342.htm

Fig 2.2 demonstrates the general direction of tariff rates of individual ASEAN member countries during 1993-2009 It is clearly observed that the tariff rates of Singapore is the lowest in the region, which was only 0.01 per cent in 1993 and it has been abolished since 1997 The tariff rates of Brunei and Malaysia have also seen lower than those of other members In contrast, Lao PDR, Myanmar, and Vietnam have remained the tariff rates relatively high

Fig 2.2: Tendency of ASEAN Members’ Tariff Rates, 1993-2009

Sources: ASEAN Secretariat (2013)

Fig 2.3 further illustrates the overall picture of the tariff rates of ASEAN-6 and ASEAN-4 From the figure, it is obviously seen the discrepancy of the tariff rates between older and younger members There has been a big gap since the tariff rates of ASEAN-4 are higher than the averaged-tariff rate of ASEAN-10, whereas the tariff rates of ASEAN-6 are lower

Fig 2.3: Tariff Rates of ASEAN-6 and ASEAN-4, 1993-2009

Sources: ASEAN Secretariat (2013)

2.1.4 Challenges and Opportunity for Lao PDR after Joining ASEAN

For Lao PDR, joining ASEAN is due to the following reasons:

1 Political and Social reasons

— Due to geographical aspect, Lao PDR borders with several countries in the region Therefore, it is very important to become an ASEAN member for the sake

of maintaining national stability and peace as well as strengthening solidarity and exchanging cultural relations with neighboring countries

2 Economic reasons

— To attract more Foreign Direct Investment;

— To accelerate socio-economic development; and

— To mobilize financial resources and develop human resources;

Accessing to ASEAN membership would bring about advantages and disadvantages for Lao PDR The benefits could be indicated in the following areas:

 Economic reform can be accelerated, creating a favorable condition to attract more foreign direct investment (FDI) to Lao PDR;

 Market for the exports can be expanded, i.e., the exports from Lao PDR to ASEAN member countries and other main trading partners would increase, bringing about accumulated government revenue;

 Natural resources would be better allocated thanks to technical assistance from other ASEAN member nations;

 Small- and medium-sized enterprises would be developed and more lessons learnt to protect infant industries;

 Infrastructures would be developed, particularly the road networks, to turn geographical aspect from a land-locked to land-linked country; and

 More jobs would be created, increasing more employment opportunities available for people

With regard to the costs of joining ASEAN for Lao PDR, some of indicators could be described as follows:

 More goods and services from ASEAN member countries and other major trading partners would increase owing to better quality and cheaper prices This would deteriorate trade deficits and current account;

 Tax revenue of the government would reduce due to an implementation of agreement on the Common Effective Preferential Tariff (tax exemption) in ASEAN Free Trade Area (AFTA);

 Some of Lao business activities would go bankrupt due to higher competition from external firms;

 Economic development and growth as well as income distribution would not spread nationwide, causing wider development gap between the rich and the poor; and

 More influx of immigration from the rural to urban areas, provoking public disorder and other social illness

In addition to the above-described costs and benefits, Lao PDR would also confront with some challenges as follows:

 Capacity to absorb assistance from ASEAN is highly competitive This is due to discrepancy of development levels between older ASEAN (Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand) and younger ASEAN members (Cambodia, Lao PDR, Myanmar, and Vietnam) In this situation, Lao PDR is supposed to be adequately competitive and try with its great effort to grab benefits from ASEAN;

 With low competitiveness, Lao PDR would become a commodity-distributed market imported from ASEAN members and other main trading partners and

a place for exploiting the raw materials and natural resources of foreign investors

2.2 Empirical Literature Review

There have hitherto been a number of previous researches with regard to the impacts of AFTA accession on the ASEAN member countries‘ economies In case

of Lao PDR, several previous studies have been conducted by both internal and international researchers, scholars, and international organizations which could have been reviewed and summarized the main objectives, analytical methodologies, and findings as follows:

AusAid and UNDP (1996) study the economic and financial impacts on the Lao PDR of participation in the AFTA The findings reveal that AFTA will have a bigger influence on trade of the Lao PDR than any other existing members Most of the trade of the Lao PDR is with other members of ASEAN In terms of revenue impact, AFTA participation is unlikely to lead to an overall drop in government revenue There is scope for revenue from other sources as the share of revenue from trade taxes increases in imports than cuts in tariff AFTA will encourage increased flows of FDI to the Lao PDR Most of this effect is likely to be indirect

Menon (1998) examines the impact of AFTA membership on Lao PDR‘s trade, government revenue and foreign investment flows The findings reveal that: (i) trade diversion is likely to be low; (ii) the reduction in government revenue from trade taxes is likely to be low, particularly in the light of the high share of informal trade and low levels of trade diversion; and (iii) FDI flows are likely to grow sharply, as the legal, administrative and institutional framework in Lao PDR develops to meet the ASEAN standard.Menon (2000) continues to analyze the effect that the CEPT scheme would have on revenue in Lao PDR and concludes that the size of shortfall in revenue derived from tariffs would be moderate He discusses several factors that suggest this conclusion, namely: (i) economic growth will lead

to an increase in the volume of imports, (ii) a significant share of tariff revenue in the Southeast Asian Transitional Economies is collected on goods that are in the General Exception List such as alcoholic beverages and cigarettes, and (iii) the share of formal trade on which tariffs can be levied will increase, since there is less incentive for smuggling when tariff rates are low Menon also concludes that the overall impact of revenue from trade taxes in the absence of significant trade diversion would depend on (i) the size of the tariff reduction; (ii) the growth in recorded imports as a result of tariff cuts; and (iii) indirectly, through the increase in economic activity associated with trade liberalization

Phongsavanh (2003) studies the Lao PDR‘s integration in ASEAN The main objective is to initially assess the potential impacts of joining ASEAN of the Lao PDR

By employing descriptive approach, the results reveal that through accessing to ASEAN and following the commitments of AFTA, the trade regime of the Lao PDR is negatively affected However, the risk of trade diversion is considered to be minimal, it may occur in some imported products, namely automobiles Simultaneously, the welfare of people will be improved through AFTA‘s scheme as they can buy commodities at lower prices with more choices in a larger ASEAN market

Phouphet (2004) attempts to build the macroeconomic model to analyze the impacts of AFTA on Lao PDR‘s economy Participating in AFTA by reducing tariff

has had the effect of decreasing general prices, and increasing exports to Thailand and other countries Also, imports from Thailand and other countries are increased The effect of AFTA on imports is bigger than exports Furthermore, the findings indicate that Lao PDR is facing a larger trade deficit On the other hand, AFTA is lowering the general price thereby increasing real consumption, investment, and macroeconomic variables, and therefore the GDP also is increasing, but its effect is small It concludes that Lao PDR will gain few benefits by joining AFTA

Additionally, there has been another report relevant to the impact of AFTA

on Lao PDR‘s Economy and small-scale producers This paper gives an overall overview on economic development The key discussion indicates that the income derived from the import tax is decreased However, there are general benefits such as: the political situation is stronger, the membership countries have a strong support, the attraction of investment and the economy sectors that make more income for the country and people have alternative to select the qualified of goods with low price for better living and to make initiative of people in production to exchange the products in the country and for the export

In case of Vietnam, some previous studies related to the consequences of AFTA on its economy have also been conducted which can be reviewed as follows:

Fukase and Martin (1999) use a CGE model to evaluate how different trade liberalizaticn policies of Vietnam and its main trading partners affect Vietnam's welfare, taking into account the simultaneous impacts on trade, output, and industrial structure The results reveal that the static economic benefits of Vietnam‘s access to AFTA are likely to be relatively small The gains from increased access to ASEAN markets would be offset by the costs of trade diversion on the import side

If Vietnam extends its AFTA commitments on a non-discriminatory basis, Vietnam's welfare would increase substantially These gains are larger in part because the broader liberalization reduces the costly trade diversion and partly the resources are more efficiently allocate among Vietnam's industries Although some