The impact of international trade on vietnam’s economic growth

THE IMPACT OF INTERNATIONAL TRADE ON VIETNAM’S ECONOMIC GROWTH FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS MIDTERM ASSIGNMENT Module: Development Economics GROUP 5

THE IMPACT OF INTERNATIONAL TRADE ON VIETNAM’S ECONOMIC GROWTH

FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS

MIDTERM ASSIGNMENT

Module: Development Economics

GROUP 5

Instructor: Assoc Prof Vu Hoang Nam Class: KTEE406(2425-1)GD2.2 Group member:

Nguyễn An Bình 2212450015 |Trần Nguyên Khánh 2119090013

Đỗ Anh Đức 2212450025

Ha Noi, November 2024

INDIVIDUAL ASSESSMENT

Name Student ID Rate of Bonus point Sign

contribution (%) Nguyễn Trung 2212450014 20%

Anh

Nguyễn An Bình | 2212450015 20%

Đỗ Anh Đức 2212450025 20%

Vũ Quý Đức 2212450028 20%

Trần Nguyên 2119090013 20%

si 80 ii 4 Chapter 1: IntrodUctiOn << HH HH KH To KH Ho kh 4 1.1 The importance of the SỈUy - SH HH ke 4 1.2 Objects and SGOD SH HT HH KH TH go kh 6 1.3 Research qUe€S†ÏOI - - SH HT HH» KH KH To kh 6 1.4 Structure of the †@SÌS HH HH n* HH Ho HH kp 7 Chapter 2: LiteratUr© r@VỈOW -L LH LH HT HH no Họ ky 7 2.1 Foreign reS©arCH cà» Ho kh HH tk kế 7 2.2 _ Domestic reS©arCH - ng Họ TH Hi Hy 9 Chapter 3: Research Methodology - - SH HH nh ket 10 3.1 Datta i00 n5 10 3.2 ECOmometric MOE ốc 6e ee 11 Chapter 4: Results and Discussion -. - HH 12 4.1 Descriptive s†atiStỈCS - LH HH HH kh 12 4.2 Correlation matrix descriptÏOn chen 12 4.3 Empirical results and DiscussSion - SH nh», 13

CÀ =0: 13 4.3.2 _ Hypothesis †€s†indQ - SH HH HH HH ky 14 4.3.3 Pa on ỐĐe 15 Chapter 5: Conclusions and Recommendations . -c << << 15 REPEPENCES nh 35 16

Abstract

Vietnam's economic landscape has undergone significant transformation, driven largely by its integration into the global economy Since joining the World Trade Organization (WTO) in 2007 and entering various free trade agreements (FTAs), Vietnam has seen substantial growth in international trade However, the rapid growth in trade also presents challenges, including trade imbalances and dependency on foreign markets This study aims to analyze the impact that international trade has on Vietnam’s economic growth and some recommendations to strengthen the growth of the nation Data collected from a quantitative approach and the Ordinary Least Squares (OLS) estimation method, the research employs an econometric model to analyze factors influencing economic growth Also by using the data set called panel data, several tests were conducted to select a model appropriately estimating the impact of international trade on economic growth The results indicate that tariff rates have the lowest mean and variability, less fluctuation compared to GDP, exports, and imports and tariffs were harmful towards the development of an economy and should be slashed Therefore, it is suggested that the Vietnamese government should reduce tariffs as much as possible to strengthen the growth of the nation

Keywords: International trade, economic growth, Vietnam

Chapter 1: Introduction

1.1 The importance of the study

Economic growth is defined as a process measuring the development of a country, as

it can be influenced by many factors shaping its complexity Among these, external factors such as foreign capital flows play a fundamental role in increasing economic growth, especially in developing countries Foreign capital flow is known as a source of funds coming from abroad, which is the inflow of funds into the economy from another nation These capital flows might come in the form of foreign direct investment (FDI), foreign trade, debt, or remittances

The importance of international trade in the world has been widely studied and also examines the role of international trade in the various issues Trade is essentially an international transformation of commodities, inputs and technology which promotes welfare

in two ways It extends the market of a country’s output beyond national frontiers and may ensure better prices through exports Through imports, it makes available commodities, inputs and technology which are either not available or are available only at higher prices, thus taking consumers to a higher level of satisfaction The foremost principle of foreign trade, viz., ,,the law of comparative costs", signifies that what a country exports and imports

is determined not by its character in isolation but only in relation to those of its trading partners According to Samuelson “Foreign Trade offers a Consumption possibility frontier that can give us more of all goods than can own domestic production possibility frontier The extension of foreign trade, according to Ricardo “will very powerfully contribute to increasing the mass of commodities, and therefore, the sum of enjoyments” This will be true for each trading nation In modern terminology, “trade is a positive sum game” Underdeveloped countries are concerned with their international trade position, because for all of them, international trade position, because for all of them, international trade-how, skills, capital, machinery and implements which are essential for their economic development

There is always a need for because the countries have different capabilities and they specialize in producing different things To compensate for what they don’t produce, they have to involve trade with other countries For example: not all the countries have oil resources, the rest of the countries import oil from the oil producers Most of the oil producers on the other hand import finished goods because they don't produce enough So

in the modern world no country is completely self-sufficient Therefore, International Trade

is very important for all the countries in the world The importance of International Trade: Economics deals with the proper allocation and efficient use of scarce resources International Trade is also concerned with allocation of economic resources among countries Such allocation is done in the world markets by means of international trade under the concept of free trade, the best products are produced and sold in a competitive market, and benefits of efficient production like better quality and lower price are available to all people of the world One fundamental principle of international trade is that one should buy and services from a country which has the lowest price and sell his goods and services to a country which has the highest price This is good for buyers and sellers and also the developed countries have the opportunities to accelerate the pace of their economic development They can import machines and adapt foreign technology They can send their scholars and technocrats to more progressive countries to gain more knowledge and skills

5

which are relevant to the particular needs of their developing economies In the final analysis,

no country in the world can be economically independent without a decline in its economic growth Even the richest countries buy raw material for their industries from the poorest countries If every country produces only for its own needs, the production and consumption

of goods would be limited Clearly, such a situation hampers economic progress Furthermore, the standard of living of the people all over the world would have no chance

to improve Because of internal trade, people with money can acquire goods and services which are not available in their own countries Hence satisfaction of consumers can be maximized International Trade is that kind of trade that gives rise to the economy of the world In this the demand and supply and the prices are affected by the global events

1.2 Objects and scope

Over the past two decades, Vietnam has witnessed a significant surge in both exports and imports of goods and service, with exports increasing from $16.81 billion in 2000 to

$384.93 billion in 2023, and imports rising from $17.92 billion to $369.2 billion during the same period (World Bank, 2024) Alongside this, the country has achieved remarkable economic growth, as its gross domestic product (GDP) expanded from $31.17 billion in 2000

to $429.72 billion in 2023 (World Bank, 2024) This rapid development has attracted the attention of economists, highlighting the role of international trade in driving growth, particularly in developing countries like Vietnam As a developing nation facing unique challenges in its economic progress, this study aims to empirically assess whether international trade has a positive impact on Vietnam's economic growth and the extent to which it influences the country's development

1.3 Research question

- How has foreign trade influenced the economic growth of Vietnam over the past decade?

- How do trade policies and agreements between Vietnam and other countries affect the competitiveness of Vietnamese exports?

1.4 Structure of the thesis

This section will provide an overview of the essay structure to help readers follow along easily The structure will have 5 chapters The first chapter will introduce to the readers about the importance of the study, objects and scope, research question and the structure of the thesis The second chapter will review the study through foreign research and domestic research The third chapter will describe the research methodology by using data variables and econometric models The fourth chapter will present the result and discussions through descriptive statistics, correlation matrix description The last chapter will summarize the main points of the essay, emphasizing the significance of the research results and the contribution of the essay In conclusion, the structure of the thesis will emphasize the importance of understanding the structure of the essay to be able to follow and better understand the research content

Chapter 2: Literature review

2.1 Foreign research

Numerous studies and policy reports have highlighted the inevitable trend of removing

or decreasing tariffs in FTAs once countries have committed their partners to promote global and regional trade liberalization (Ahmed and O’Donoghue, 2010; Cirera et al.,

2014) Fukase and Martin (2016) pointed out that an FTA brings additional welfare benefits

to both countries and creates a positive impact on both economies when they studied the case

of the India-US FTA Phan and Jeong (2016) found that the Vietnam—Korea FTA increased aggregate welfare and decreased the level of unemployment for both countries in the long run as a result of improving allocation resources Dung (2009) and Minh et al (2018) concluded that joining a FTA causes a positive impact on Vietnam’s economic growth through promoting gross domestic product (GDP) growth, increasing import-export value, and promoting the diversification and restructuring of the import-export market Nevertheless, it is still a controversial issue whether a country should sign an FTA, especially after the failure of the Doha negotiation rounds, due to taking into consideration what benefits and losses that country virtually achieves (Cho, 2010) Minh et al (2018) predicted that joining an FTA will not only cause Vietnam exports to face many non-tariff barriers (e.g technical barriers, rules of origin) which will become more complex and sophisticated, but will also cause a large competitive pressure for domestic production Meanwhile, Nguyen and Cao (2016) demonstrated that not all FTAs contribute to increasing

7

the amount of foreign direct investment (FDI) inflow in Vietnam To explore the influences

of tariff reduction on the economy, various studies have recently employed the CGE model, which is very effective in studying the impact of climate change, tax policy or tax reform on the economy There are papers that utilized the static CGE model (Dasgupta and Mukhopadhyay, 2017; Ganguly and Das, 2017; Jean et al., 2014; Khorana and Narayanan, 2017; Shaikh, 2009; Todsadee et al., 2012); meanwhile, others employed a dynamic CGE model to measure the impacts of the FTAs (Itakura and Lee, 2012; Thu and Lee, 2015) Ahmed and O’Donoghue (2010) utilized Pakistan’s social accounting matrix (SAM) data for the year 2002 and developed a CGE model to evaluate the effect of slashing tariff rates on the macroeconomic and welfare indicators of Pakistan They concluded that tariff reduction not only increases the welfare level but also raises the export value, household consumption and gross fixed capital formation Similarly, Khorana and Narayanan (2017), Shaikh (2009) and Winchester (2009) employed a CGE model to evaluate the impact of reducing tariffs on the economies of India, Pakistan and New Zealand in sequence They revealed that tariff reduction will benefit social welfare and strengthen GDP growth, the labor force and factors of production (e.g capital and labor)

A great deal of research has also been undertaken to assess the importance of export and import on the growth of a nation According to Rati Ram (1985), export performance was amongst the important factors for economic growth after carrying out a research with a fairly large example of 73 LDCs Ram also came to conclusion that the importance of exports seemed to have increased during the 1970s, and although the impact of export performance

on growth appeared to be small in the low-income LDCs over the period 1960-70, the impact differential almost disappeared in 1970-77, at which point the positive impact of exports on growth seemed quite large and of almost equal magnitude for the two groups Alfredo M Pereira and Zhenhui Xu (2000) used a multivariate VAR model to investigate the effects of export growth on the growth of domestic output, employment, and investment for 39 developing economies, and found evidence suggesting positive cumulative effects of export growth on GDP growth for 30 out of the 39 selected economies The research also discovered six economies that showed negative cumulative effects of export growth on GDP growth, and these economies were clearly inward looking either as classified by the World Bank or

as suggested by a sharply declining export to GDP ratio over the sample period Nevertheless, in a study conducted by Muhammad S Anwer and R.K Sampath (1997) that utilized the Granger causality approach, contrary to the belief that exports promote growth,

8

they were able to discover that for the majority of cases, there were no relationships between these two variables, with only 8 out of the 96 chosen countries displaying a positive relationship

In 2011, Mori Kogid et al (2011) conducted a research to see whether import had any effects on economic growth in Malaysia Using the annual time series data from 1970 to

2007 collected from the IFS, they concluded that although there was no cointegration relationship between import and economic growth in the long run, there was a bidirectional causal relationship between import and economic growth especially in the short run, meaning that import did positively affect economic growth in the case of Malaysia In another research by Sewasew Pawlos (2004), who looked into the relationship between import and GDP growth in Ethiopia, import was found to depend positively on real GDP growth and foreign receipts, and negatively on relative price Pawlos (2004) also found that imports did not depend on real income in the long run, but on international reserves

2.2 Domestic research

Previous studies suggest that developing countries have the opportunity for economic growth and to develop industries with advantages, encourage exports, and industries that are protected are disadvantaged when import tariffs are reduced Recent studies by ltakura & Lee focus on forecasting the impact of the TPP agreements and the Regional Comprehensive Economic Partnership (RCEP) on the economic structure and productivity of Japan International organizations such as the World Bank and UNDP have supported economic centers and international economic institutes using CGE models to conduct research and forecast the impact of tariff reductions on developing countries In Vietnam, there are many studies analyzing the impact of import tariff reductions, notably the studies by Nguyén Manh Toan and Truong Ba Thanh, which use the CGE model with the main data being the

2000 IO table The results show that labor-intensive industries will have many advantages, while capital-intensive and highly protected industries will face difficulties The research by Cassing & colleagues Nguyén Dire Thanh & Nguyén Thi Thu Hang using the GTAP general equilibrium model concluded that the textile and garment industries and services would experience significant changes The Development Strategy Institute applied the MIRAGE model to assess the impact of tariff reductions when Vietnam joined the WTO, and found that the garment, leather, and electronics industries would have opportunities to

9

expand production In contrast, agricultural products, tea, pepper, and coffee industries would be forced to reduce their scale

According to the World Bank, Vietnam's economic success over the past two decades

is largely attributed to its strategic export-driven growth Therefore, numerous researches have been carried out to understand the impact that export has on the country’s economic growth Thanh Hai Nguyen (2016), who carried out research to understand the impact of export on the economic growth in Vietnam, arrived at the conclusion that export of a current year had a significant and positive impact on GDP growth of the current year and the following two years Nguyen Thi Van Anh et al (2020) also came to conclusion that export played an important role in the growth of the Vietnamese economy and there should be solutions to promoting export activities to support economic growth in Vietnam

Chapter 3: Research Methodology

3.1 Data and variables

This study examines the effects of international trade on Vietnam's economic growth over a 24-year period (2000-2023) Using a quantitative approach and the Ordinary Least Squares (OLS) estimation method, the research employs an econometric model to analyze factors influencing economic growth The analysis incorporates four variables, with secondary data sourced from reliable open platforms such as the World Bank and the IMF, presented as panel data The primary objective is to evaluate the impact of international trade

on economic growth, represented by GDP, with a focus on three key macroeconomic variables: exports, imports of goods and services, and tariff rates Further details are provided in the table below

Unit of

measurement

Dependent

variables