The impact of food safety standard on coffee export the case in vietnam during 2005 2014

Significantly, the primary findings determine that the regulated number of pesticides has a negative impact while average maximum residue levels have a positive effect on the export of V

UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM

HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES

VIETNAM – THE NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE IMPACT OF FOOD SAFETY STANDARD

ON COFFEE EXPORT THE CASE IN VIETNAM DURING 2005-2014

BY TRUONG TAN TAI

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, OCTOBER -2016

ABSTRACT

The objective of this study is to scrutinize the impact of FSS on the quantity of Vietnam’s coffee export Meanwhile, the regulated number of pesticides or average maximum residue levels is usually applied as a measurement of Food Safety Standard of a country The data covers 56 countries from 2005 to 2014 due to the data availability from Agrobase-Logigram’s Homologa database providing coffee FSS The Fixed effect estimator is employed in the panel gravity model Furthermore, Driscoll – Kraay Standard Errors for Fixed effect estimator is used for robustness checks

Significantly, the primary findings determine that the regulated number of pesticides has a negative impact while average maximum residue levels have a positive effect on the export of Vietnamese coffee Furthermore, GDP per capita of importing countries, domestic consumption, and TWO member dummy variable demonstrate a contribution to Vietnamese coffee export Meanwhile, the real exchange rate depreciation and price*distance variable indicate a negative influence on the quantity of Vietnam’s coffee export Last but not least important, there are not any significant evidences proving the effect of trade openness and tariff on Vietnamese coffee export in the study

Keywords: Food safety standard, Vietnam’s coffee export, panel gravity model

ACKNOWDGEMENT

Firstly, I would highly appreciate my advisor Dr Nguyen Huu Dung for his valuable advice, consideration, and agreeable methodology during the time for conducting this thesis

If there are not such valuable things, I am unable to complete my thesis in time

Secondly, I am grateful to Dr Truong Dang Thuy providing me with precious instructions and encouragement Besides that, I also express my appreciation to dedicated professors and staffs in the Vietnam – Netherlands Programme who always support me during the time at VNP

Thirdly, I wish to express my thankfulness to my classmates and my friendly group in Class 20 The kind assistance, useful discussion, and wonderful memories together from them will be imprinted in my heart

Finally, I have no word to manifest my deep gratefulness to my loved family They have to sacrifice the best things for me to have this opportunity to study at VNP and complete this thesis

ABBREVIATIONS

CEPII The Centre d’Études Prospectives et d’Informations Internationales EEC

European Economic Community

EU The European Union

FSS Food safety standards

FTA Free Trade Agreement

MRLs Maximum Residue Levels of Pesticides

OLS Ordinary least squares

SPS Sanitary and Phytosanitary

TBT Technical Barriers to Trade

TRAINS The UNCTAD Trade Analysis Information System

UN Comtrade The United Nations Commodity Trade Statistics Database

WTO World Trade Organization

CONTENTS

ABSTRACT i

ACKNOWDGEMENT ii

ABBREVIATIONS iii

CONTENTS iv

LIST OF TABLES vii

LIST OF FIGURES viii

CHAPTER 1: INTRODUCTION 1

1.1 Problem statement 1

1.2 Research objectives 2

1.3 Research questions 3

1.4 Scope and limitations of the study 3

1.5 The structure of the study 3

CHAPTER 2: LITERATURE REVIEW 4

2.1 The definitions 4

2.1.1 Pesticides 4

2.1.2 A maximum residue level or limit (MRL) 4

2.2 Some contributions to gravity model theory 5

2.3 Empirical research 8

2.3.1 Gravity model estimation using MRLs 8

2.3.2 Gravity model estimation using the regulated numbers of pesticides 10

2.3.3 Gravity model estimation either using MRL or the regulated numbers of pesticides 11

2.3.4 Distance and GDP per capita in gravity model 12

2.3.5 Extended control variables in gravity model 13

2.4 Literature review summary 16

CHAPTER 3: SITUATION OF VIETNAMESE COFFEE DURING 2005 - 2014 18

3.1 Advantages 18

3.2 Disadvantages 19

3.3 The top contribution rankings for the importing Vietnamese coffee countries 20

CHAPTER 4: ECONOMETRIC MODEL AND DATA 23

4.1 Specification of the model 23

4.1.1 Gravity model 23

4.1.2 Extended variables in gravity model 24

4.2 Data 25

4.2.1 Data source 25

4.2.2 Data description 25

4.2.3 Descriptive statistical analysis 27

4.3 Econometric models 28

4.3.1 Pooled OLS 28

4.3.2 Fixed Effect Estimation 29

4.3.3 Random Effect estimation 30

4.3.4 Driscoll and Kraay estimation 30

4.4 Choosing between OLS, Fixed Effect, and Random Effect estimation 31

4.4.1 F Test for pooled OLS or Fixed Effect estimation 31

4.4.2 Breusch and Pagan Lagrangian Multiplier Test for Random Effect or OLS 31

4.4.3 The Hausman test 31

4.5 Post-estimation tests 32

4.5.1 Multicollinearity 32

4.5.2 Heteroskedasticity 32

4.5.3 Serial correlation 32

CHARTER 5: EMPIRICAL RESULTS 33

5.1 Correlation matrix of all variables in the model 33

5.2 Estimating the intuitive gravity model 34

5.3 Empirical results 35

5.3.1 The empirical results in the gravity model using the regulated number of

pesticides variable 35

5.3.2 The empirical results in the model using average maximum residue levels variable 39

CHAPTER 6: CONCLUSIONS AND POLICY IMPLICATIONS 42

6.1 Conclusions 42

6.2 Main findings 42

6.3 Policy implications 43

6.4 Limitations and future research 44

REFERENCES 45

APPENDICES 49

LIST OF TABLES

Table 3.1 Top 10 importing countries (selected data on share export quantity during

2005-2014) 20

Table 4.1: Descriptive statistical analysis 28

Table 5.1: The empirical results using the regulated number of pesticides variable 36

Table 5.2: The empirical results using average maximum residue levels variable 39

LIST OF FIGURES

Figure 1.1: Vietnam’s coffee export value in the period of 2004-2014 1

Figure 2.1 : Analytical Framework for Vietnam’s Coffee Export and its influencing factors. 17

Figure 3.1: Distribution of Vietnam’s coffee to the major importing countries in the period of 2005-2014. 21

Figure 3.2 : The top ten rankings for the major importing Vietnamese coffee countries annually. 22

Figure 5.1: The correlation matrix of variables 33

Figure 5.2: The relationship between Pdistance and Vietnamese coffee export 34

Figure 5.3: The relationship between GDP per capita of importing countries and Vietnamese coffee export. 35

CHAPTER 1: INTRODUCTION 1.1 Problem statement

It is undeniable that Vietnam is an agricultural country although the government is still moving towards industrialization and modernization in the future Meanwhile, agricultural products in general and coffee commodity in particular play a crucial position in export turnover of Vietnam To describe this matter, it may consider the total exports of Vietnam in the period of 2004-2014 which has been increasing significantly recent years

Figure 1.1: Vietnam’s coffee export value in the period of 2004-2014

The Vietnamese economy has been entering a new development stage after joining WTO since 2007 wherein coffee export sector also adjusts to a great turning point The value

of coffee export reached more than USD 2.1 billion in 2008 Subsequently, it dropped in the two following years with the value export of nearly USD 1.76 and 1.90 billion respectively Nevertheless, there are also some years witnessing the decline in coffee export from Vietnam Specifically, demand from these countries and regions were also dropped slightly in 2010 and

2011 due to the change in food safety regulations However, it resumes good performance period from 2011 to 2014 Furthermore, Vietnamese coffee is noticeably exported to many countries around the world

At the same period times, the tariff barriers in the world incline to drop Specifically,

as a result of WTO, FTA joining or agreements on bilateral and multilateral treaties among countries, tariff is on the way to be lowered gradually Predictably, it will not be the important barrier in the coming time In practice, Henson and Loader (2001) identify that it appears to

play the less essential role in international trade due to its liberalization while the impact of other barriers have been rising in the recent year Therefore, non-tariff barriers become a indisputably primary problem that Vietnamese coffee exporters have to encounter

As a consequence, the paper of Otsuki et al (2001) highlight that there are only 2.3 deaths every year if the EU harmonized Aflatoxin B1 standard of 2 ppb is applied for commodities of edible nuts, dried and preserved fruits, and cereals which are replaced for Codex guideline of 9 ppb This death figure is extremely modest since there are 33,000 people deaths of liver cancer in EU per year while the amount loss in the case of an application for

EU harmonized Aflatoxin B1 standard is approximately USD 670 million Xiong and Beghin (2011) also prove that the importing countries have a tendency to enhance the technical barriers to exporting countries In illustrating this, importing countries treat food safety standard (FSS) as a reliable obstacle for protecting the health of the consumers in their own countries Furthermore, FSS is treated as a powerful tool to restrict imports of products from the exporting country In addition, Wei et al (2012) discover that honey export from China drops significantly since 2000 due to the strict regulation of food safety on this commodity Likewise, Ling (2013) finds out that the vegetable export of China is undesirably triggered by the increase in pesticide residue limits of the importing countries such as America, Europe, and Japan

On the other hand, tariff has an incontrovertible tendency to be the less vital role in terms of a market-entry barrier for developing countries to confront with Additionally, non-tariff barriers become remarkably crucial Apparently, even though the contribution values of coffee export from Vietnam as well as the issue of FSS which is connected with non-tariff barriers are incredibly critical, there are not any studies to analyze the effect of FSS on the coffee export from Vietnam That is the main reason which creates the great motivation for studying the issues in this thesis

1.2 Research objectives

This thesis mainly concentrates on the impact of FSS measured by the regulated number of pesticides or average maximum residue levels on Vietnam’s coffee exports in the years of 2005 - 2014 The thesis intends

i to study the effect of the regulated number of pesticides on the coffee export of Vietnam

ii to investigate the influence of average maximum residue levels on the coffee export of Vietnam

iii to draw some practical policy implications for enhancing the coffee export of Vietnam based on the findings of the thesis

1.3 Research questions

In order to reach these objectives, there will be two following questions in the thesis

Question 1: Do the regulated number of pesticides affect the quantity of Vietnamese

coffee export?

Question 2: Do average maximum residue levels affect the quantity of Vietnamese

coffee export?

1.4 Scope and limitations of the study

The scope of this study is confined to scrutinizing influences of FSS in terms of a number of pesticides or average maximum residue levels on the coffee from Vietnam exported to 56 primary importing countries in the period of 2005-2014 which is based on the data availability

Furthermore, the limitation of the study is the limited data for a number of pesticides

or average maximum residue levels imposed by importing coffee countries The data that can

be retrieved from Agrobase-Logigram’s Homologa database are applied for only these 56 countries These countries chiefly import Vietnam’s coffee in the period of 2005-2014

1.5 The structure of the study

The study is organized into 6 chapters as follows

Chapter 1 presents an overview of the study, the reason for choosing the issue of the impact the FSS on Vietnamese coffee export

Chapter 2 demonstrates an overview of previous research on the relationship between FSS and exports together with the extended important explanatory variables This chapter is seen as the literature review

Chapter 3 discusses the situation of coffee export from Vietnam in the period of 2005-2014 Chapter 4 expresses a detail of the research methodology, measurement method of the variables as well as data collection and process

Chapter 5: Reports and discusses the findings of the study from the econometric models Chapter 6: Concludes and draws the noteworthy policy implication and suggests some

of the limitations of the study

CHAPTER 2: LITERATURE REVIEW 2.1 The definitions

2.1.1 Pesticides

There are some definitions of pesticides However, it is well defined by The International code of conduct of WHO (2010) as: “Any substance or mixture of substances intended for preventing, destroying or controlling any pest, including vectors of human and animal disease, unwanted species of plants or animals causing harm during, or otherwise interfering with, the production, processing, storage, transport, or marketing of food, agricultural commodities, wood and wood products or animal foodstuffs, or which may

be administered to animals for the control of insects, arachnids or other pests in or on their bodies The term includes substances intended for use as a plant growth regulator, defoliant, desiccant, or agent for thinning fruit or preventing the premature fall of fruit, and substances applied to crops either before or after harvest to protect the commodity from deterioration during storage and transport.”

2.1.2 A maximum residue level or limit (MRL)

It is defined by Ferro (2013) as “the maximum amount of residue legally permitted on food Once residues are demonstrated to be safe for consumers, MRLs are set by independent scientists, based on rigorous evaluation of each pesticide legally authorized They act as an indicator of the correct use of pesticides and ensure compliance with legal requirements for low residues on unprocessed food MRLs ensure that imported and exported food is safe to eat.” Similarly, MRL also is used from a definition of The International code of conduct as

“the maximum concentration of a residue that is legally permitted or recognized as acceptable

in or on a food or agricultural commodity or animal feedstuff.”

Meanwhile, there are Codex standards which are internationally negotiated in order to provide a benchmark for private and government to follow standards To facilitate agri-food trade, the Codex have to promote the international coordination of agri-food standards and target to protect consumers’ health In practice, although these levels are regulated by Codex Alimentarius, they are regulated by countries in international trade As a matter of this, these limits are widely varied by trading countries which produce International harmonization of MRL to not exist globally Specifically, trading countries will establish a different number of registered pesticides as well as MRLs To illustrate it, Italia regulates 539 limits of pesticides

for coffee while Japan imposes 649 limits of pesticides for the same coffee commodity in

2014

2.2 Some contributions to gravity model theory

Similar to the law of gravity of Newton, the basic gravity model suggests the flows of trade between two countries are derived from the product of the two countries GDP to geographic distance between them Meanwhile, the economic scale is measured by GDP is proxy for masses of countries and transportation cost is measured by geographic distance These two variables are considered as the primary ones in the gravity model proposed by the pioneers like Tinbergen (1962) and Pöyhönen (1963) to study trade flows in the international markets After the initiative works by these two authors, the gravity model has been widely employed in empirical studies of international commerce Nevertheless, the models have been subjected to criticism for their lack of clear theoretical foundation As a result, gradual improvements have been made over time not only to fill the theoretical gap but also to develop the theoretical explanation of the gravity model

Another development in overcoming the lack of theoretical underpinnings of gravity model involves its derivation from relevant theories of international trade Hence, Linnemann (1966) is one the leading scholar who tries to provide some theoretical foundations for the gravity model His main contribution relates to the derivation of gravity equation for export supply and import demand as a reduced form in the partial equilibrium model, where price factor discarded However, this early effort appeared to be inconsistent with the multiplicative form of the partial equilibrium model

Based on the hypothesis of indistinguishable homothetic preferences across regions for the properties of the expenditure system, Anderson (1979) is the pioneer economist to make an another contribution for deriving the gravity model Following the assumption of Armington, which said there will be imperfect substitutes in demand if two products of the identical type originated from different regions Thus, products are differentiated by the origin

of producing place in his model generate production place to be essential in relation to the implied trade costs Furthermore, under the concern of all other possible flows of trade, Anderson constructs bilateral trade flows to further flexibly be estimated As a reason, instead

of treating as an absolute formation of bilateral trading countries, the gravity model can be interactions in a bilateral trade with a comparative analysis of trade flows

As a replacement for nomothetic preferences from Anderson (1979), the conditions of monopolistic competition among firms and increasing return to scale are assumed by

Helpman and Krugman (1985) Likewise, they augment the utilization of gravity model in light of these assumptions In view of the economies of scale at the firm level, a monopolistic rivalry is expected to clarify the reason that the manufacture of differentiated products are specialized by firms These authors attempt to make an explanation for the trade of products relevant to the identical product class which is referred as intra-industry trade With small characteristics, products in this class can be distinguished from other products in different class

Meanwhile, with the assumption from Bergstrand (1989) the same price is charged in the market by firms within the identical industry in a nation; therefore, labor and capital in terms of input determinants are utilized with the same technology among firms Because the firms focus on manufacturing a differentiated product and a fixed supply of labor and capital

in a country which interacts in monopolistic competition, the products will be exported to trading partners to maximize the profit in the case of a constant elasticity of transformation function He also provides the clarification that in the first stage firms can manufacture with rising returns to scale However, when firms export to trading partners, they face the decreasing returns to scale due to transportation costs in the second stage in the light of gravity model In addition, authors handle data of 9 different industries in 16 industrial countries in the year of 1965, 1966, 1975 and 1976 In the finding, income per capita from exporters shows a sign of the positive relationship while distance variable indicates a negative sign

Conversely, the (H-O) model from Heckscher-Ohlin states that the different factor endowments among countries lead to the trading of the countries due to a dissimilar productivity in producing products For instance, Vietnam will either export intensive-labor products such as garment, shoes or agricultural product with comparative advantage On the contrary, Vietnam will import capital-intensive or technology product from trading partners With the assumptions of homogeneous products, homothetic preferences in addition to differences in factor endowments in the perfect competition, Deardorff (1998) derives the gravity model by applying Heckscher-Ohlin (H-O) model in two extreme scenarios of frictionless and impediments in trade

For the frictionless trade, it is based on that there are not any transportation cost and barriers to trade in homogeneous goods Constructed on the theory, expected trade flows that correspond to simple gravity equation is attained by authors with these assumptions In the second scenario of trade impediments, he presumes that countries manufacture differentiated

products, Cobb-Douglas preferences applied in the gravity model and Constant Elasticity of Substitution (CES) preferences are derived Basing the estimation of gravity model on important hypotheses, the analysis is crucially supported Furthermore, the author also expresses that the transportation cost and elasticity of substitution could be the determinants impacting the gravity model Further specifically, if countries are adjacent to each other, there will be more trade among them and vice versa Similarly, the reduced transportation cost because of advanced technology can be familiar with export values expected by the standard gravity model

Alternatively, production technology and various costs are also referred as comparative advantage Developed from Ricardian trade theory with the assumption of comparative advantage creates trade to be beneficial, Eaton and Kortum (2002) augment the gravity model by establishing on different production technologies They make the assumption that the factor of labor is known as an only element of production that is not moving internationally The trading partners possess heterogeneity in their production technology which differs from products are differentiated by factor endowments of the Heckscher-Ohlin and by diversity preference of Helpman-Krugman models

Anderson and Van Wincoop (2003) propose the fundamental theory for the gravity model stating that fixed effect variables of exporting and importing countries can encounter the resistance to trade from trading countries In addition, these authors also discuss both of the inward and outward multilateral resistance The former can be explained as the barriers to trade imposed by importing country on its potential trading exporters Consequently, if the trade barriers are increased will cause the product relative price of exporters reduces Meanwhile, the latter is said that the trade barriers of exporters are higher triggering their products hard to be exported to the other countries which finally lead to the reduction in product prices In addition, their findings indicate that if trade barriers are enlarged, the multilateral resistance of a large country is less affected than that of a small one It is clearly known that the small countries strongly rely on international market while big countries do not since they have larger home markets

Theoretically, the traditional variable in the gravity model such as distance, GDP per capita replaced for GDP, population Nevertheless, recently, other explanatory variables have been further employed in the gravity models by other scholars at a various time Thus, the gravity model is still extended to analyze the added variables that researchers are interested in For this reason, the model is continually extended and developed to be able to gain an

adequate explanation for the variations in the flow of trade thanks to the combination of various essential variables

Therefore, they make a great effort to justify the fluctuations in trade flows by employing several explanatory variables In practice, researchers are gradually introducing extended variables in gravity model such as trade restrictions, domestic consumption, exchange rate, trade policy regime, trade agreement, tariff rate and other determinants into the gravity model Additionally, dummy variable has been incorporated to apprehend the element

of trading countries’ cooperation that may produce trade in the international market These determinants are presented in the below empirical studies in details

2.3 Empirical research

There are many kinds of gravity models in which they basically account for the unilateral or bilateral trade between distances as well as an economic scale of trading countries Many approaches are used for modeling the influence of FSS on the exporting volumes However, there are three main models including the major explanatory variable of FSS such as gravity model estimation using MRL, gravity model estimation using regulated numbers of pesticides, and gravity model estimation either using MRL or regulated numbers

of pesticides as following 2.3.1 to 2.3.3 respectively

2.3.1 Gravity model estimation using MRLs

MRLs are used in many studies to quantify the effect of MRLs in a framework of the gravity model Fundamentally, the changes in MRLs of certain pesticides are estimated to obtain significant coefficient for evaluating changes in flows of international trade Nonetheless, it also relies on their institutional ability for implementing residue level limit (Kim & Reinert, 2009) when calculating the standards

Otsuki et al (2001) apply gravity model to study EU Aflatoxin standard as MRL of cereal and cereal preparations and fruit, nuts, and vegetables from 9 exporting African countries and 15 importing EU countries The data is covered between the year of 1989 and

1998 Authors mainly implement the new Aflatoxin standard established by these EU countries They take a logarithm of both sides for dependent and independent variables together The findings designate the elasticity of 1.10 and 0.43 for cereal and cereal preparations and fruit, nuts, and vegetables correspondingly Evidently, export volume is positively correlated with MRL in their research The results highlight that when the new MRL is lower, which is more stringent, the export volumes from African exporting countries

reduce To emphasize it, if Codex standard is applied as a replacement for EU standard which

is referred as stricter standard, the trade value of these products exchanged by these countries can raise around USD 670 million

In the same published year, similarly, Wilson and Otsuki (2001) gather data of 15 importing countries including 4 developing countries and 31 exporting countries including 21 developing countries in order to evaluate the crucial factor of the Aflatoxin level requested by these importing countries on the commodities of cereal, dried fruit, and nuts The used method

in this paper is the gravity model with the fixed effect for each commodity This result can gain elasticity of these commodities corresponding with the standard of Aflatoxin B1 which is estimated with the coefficient of 1.12, 0.34 and 0.09 for cereals, dried fruits, and nuts separately The findings show this substance positively affects export values of 31 countries which imply the loose MRL leads to the higher export This positive sign is also consistent with the previously mentioned research of Otsuki et al (2001) Furthermore, their model forecasts that there will be an increase with a figure of USD 38.8 billion in total world export

if an international standard regulated by Codex is applied as an alternative of different standards by importing countries

Instead of using Alatoxin, Wilson et al (2003) employ Tetracycline standards as MRL

to analyze the impact of this substance on beef export value In their research, authors exploit data covering 16 exporting countries including the developing and developed countries over the period of 1995 - 2000 This applied approach is gravity model employing a fixed effect regression which is able to allow the constant term to change across trading countries Moreover, these authors apply the dummy variable as a proxy for the Tetracycline standard when the importers’ current standard is more stringent than that of exporters Their outcome points out that export value will be decreased by 5.9% when MRL of this substance lower by 10% It is obviously found that Tetracycline standards imposed by importing countries lower beef trade Furthermore, in spite of the standards of exporters, the Tetracycline standards required by the trading partners have the identical deterring impact on beef trade Besides, they realize that the global export of beef can be risen by above USD 3.2 billion in the case international standard of Codex is adopted by trading countries

Furthermore, Moenius (2006, May) estimates a gravity model in which bilateral trade value is regressed on a number of specific criteria shared standards There are 15 countries together with 80 different agricultural industries for the period of 1998 – 1995 in their data set The author divides data into two groups of outsider and insider which belong to non-EU

countries and EU members correspondingly He discovers that bilaterally shared standards of the same member group like EU members have useful protection for their imports from non-

EU countries in addition to promoting their trade Meanwhile, this shared standard within EU members also lowers international cost trade as well as lower variety

In addition, the recent study of Drogué and DeMaria (2012) investigate the regulation

of MRLs on specific commodities of apples and pears For this reason, two authors have an inquiry to the different regulations on MRL whether they affect trade or not They collect the panel data covering 38 exporting countries and 40 importing countries in the annual period of

2000 - 2009 These countries in a sample are based on criteria that the data is available for MRL of pesticides possessing the consumption level related to these two kinds of fruits As a substitute for the simple estimation method of OLS regression, these authors also applied the advanced estimation methods which are Poisson Pseudo Maximum Likelihood (PPML) and the Negative Binomial Regression (NBR) to solve biased estimations on account of heteroskedasticity from OLS regression Their research specifies that similar regulations on MRLs among countries will lead to increased value of international trade On the contrary, a rise in the strict regulations forces fruit trade from developing countries to be less competitive than developed countries

Another research of Atici (2013) applies pesticide regulations within the framework of

a gravity model Using panel date of unilateral export flow between the year of 1995 and

2011, the author adopts this variable of food safety regulation for Aflatoxins compelled by EU

to observe its consequence for fig and hazelnut of Turkey exported to EU According to the author, the balance of payment problem in international trade can be avoidable thanks to the aspect of the unilateral export flow In addition, he applies the fixed effect in his gravity model to prevent the bias of omitted factors by reason of unobservable multilateral resistances This finding of his paper reflects that the food safety regulation variable has the deterring relationship with fig and hazelnut export for developing countries in the context of Turkey

2.3.2 Gravity model estimation using the regulated numbers of pesticides

Chen et al (2006) challenge the influence of technical requirement at the enterprise level The authors handle data covering 17 developing countries internationally trading with 5 importing countries which are US, Canada, EU, Australia and Japan Their empirical analysis based on Technical Barrier to Trade Survey of World Bank providing the enterprise-level data

on standard and compliance costs They exercise econometrical estimation of ordered logit

model to monitor effect of standards on trade from the perspective of specific exporters and to concentrate on the technical regulations imposed by importing countries The research indicates that exporting firms from these 17 developing countries are seriously adversely affected by various types of technical regulations such as the testing procedure, information access, and testing process regulations

Different countries will implement and enforce a different number of standards when they are in foreign trade Another research from Jayasinghe et al (2010) studies the number of SPS regulations imposed by trading importers These authors are interested in the impact of the number of SPS regulations on the corn seeds export from United of States The data set covers selected 48 importing countries over the period of 1989 – 2004 The explanatory variables for the corn seeds export from United of States are applied in the gravity model are tariffs, distance, and SPS regulations By applying the OLS regression and Maximum likelihood estimator, their findings infer that the number of SPS regulations have an adverse consequence for United of States’ corn seeds exported to these selected countries

One recent study embracing this variable method is Ling (2013) who evaluates the effect of the number of vegetable pesticide limits regulated by collected countries on vegetable export volume of China over the period 1995 - 2010 There are some such explanatory variables as GNP per capita of exporting countries and importing countries, the absolute distance between the capital of China and that of importing Chinese vegetable countries, the primarily interested variable of the number of pesticide imposed in the importers, and the number of pesticides imposed in the exporters for vegetable commodity Thus, there appear quite a few explanatory variables which can be regarded as the limitation

of this research Besides, the author estimates a gravity model with estimation of OLS, fixed effect, and random effect regression He utilizes the results from fixed effect regression which

is the best winning method This result indicates that the strictness of residue limits in terms

of regulated numbers rises by 10% will reduce China’s vegetable export by 4.16% significantly Consequently, the vegetable export volume of China is adversely caused by an increase in a number of MRLs regulations which are the same outcome as mentioned study of Chen (2006)

2.3.3 Gravity model estimation either using MRL or the regulated numbers of pesticides

There are many papers researching either MRL or number of MRL regulations as the interesting variables to estimate its influence on international trade of agricultural products

For that reason, Ferro et al (2013) have an inquiry to the impact of agricultural product standards on export from developing countries Instead of employing MRL of specific pesticides or number of SPS notifications from WTO Committee to monitor the product standard as previous studies, they apply data set for MRLs from approximately 61 importing countries which are collected from Agrobase-Logigram’s Homologa database in this paper It

is indisputable that the data set from this organization is considered as the pioneer in utilizing the time-series database of MRLs import restrictiveness

In their study, they deeply investigate the impact of either average MRLs or the number of MRLs of a specific product regulated by these importing partners based on the valuable database which are provided by this organization The important results for the average MRLs and regulated the number of pesticides specify the negative and positive correlation with exports respectively For instance, the exports will be reduced when average MRLs is lower; whereas, the regulated number of pesticides increase will lead to a decline in exports into given destination markets

Similarly, Dong and Zhu (2015) question the effect of Fenvalerate and Endosulfan pesticides which are proxy for MRL as well as a number of SPS on Chinese tea export established by developed countries The annual time for this data set is covered in the period

of 1992 – 2013 They apply the OLS, FE, RE and PPML models to estimate the effect of these two substances and SPS numbers in addition to control variables of GNI, distance, tariff

so forth Their research advances that the tea export from China is significantly affected by the different numbers of SPS To specify it, the regulated MRLs raise by unit, the tea export from China will go down by 0.6% Moreover, if there is a rise in 1ppm, Chinese tea export will be reduced by 1.6% and 0.7% for MRLs of Fenvalerate and Endosulfan respectively

2.3.4 Distance and GDP per capita in gravity model

The distance is regarded as one of the primary explanatory variables in the gravity model Brun et al (2005) have an inquiry to the influence of distance in the context of globalization and the flat world which means the distance is not as vital as previous time For that reason, “the death of distance” is the term that is also discussed in their paper Data during the period of 1962-1996 from a large sample of 130 countries are collected Besides the main interested variable of distance, there are predictors such as population and the trading partners’ incomes These authors employ estimation by using a fixed-effects estimator

in panel gravity model Their finding specifies the significant effect of distance variable on two-sided trade over the period of 35 years which is raised by 11 percent as an alternative of

the expected fall Besides, Drogué and DeMaria (2012) realize that distance is a significantly influencing factor on trade To illustrate it, the trade volumes among these countries will be negatively affected by physical distance with the coefficient figure of -0.54

Another research from Sarker and Jayasinghe (2007) examine the trade flow of six agricultural products trading from European Union (EU) Even though the extended gravity model is applied with more extended regressors in their model, the estimation methods are merely generalized least squares and pooled data Additionally, they divide the data into the interval of three years during 1985-2000 for each of the six agricultural commodities to analyze the effects of regressors on the trade flow This finding from the three-year interval for each of estimation model indicates that the distance effect is identical impediments to the flow of trade for each of agri-food products Similarly, Chen et al (2008) apply fixed effect regression to monitor the effect of non-tariff barriers on agricultural export of China The findings also discover that the distance element has a significantly negative effects on five agricultural commodities exported from China

On the other side, it can be expected that the high national income in term of GDP per capita will demand further products in international trade Bergstrand (1989) points out that importers’ incomes deliver knowledge about spending abilities, as well as of purchaser inclinations in the import markets Consequently, Lee and Park (2007) also take GDP per capita to observe its effect on trade of East Asian They replicate the data from Rose (2005) which include 175 countries over the time year of 1994 – 1999 They uncover that there is a significantly positive impact of this variable in the gravity model by using both random effect and fixed effect regression

Meanwhile, Khan and Kalirajan (2011) collect cross section data in the year of 1999 and 2004 from Pakistan’s trade data to study the export growth of Pakistan The GDP per capita is included in the gravity model to explore the effect of this variable The coefficient of this variable is displayed as a positive sign of 0.57 and 0.53 for the year of 1999 and 2004 respectively in his research However, the limitation of this model is just applied for cross section data as a substitute for panel data due to the lack of data

2.3.5 Extended control variables in gravity model

In the light of gravity model in order to consider trading volumes, domestic consumption is one of control variables As the matter of that, Mangelsdorf et al (2012) apply the variable of domestic consumption as a proxy for potential demand to be measured for agricultural and food products from China They manipulate seven Chinese products exported

to 132 countries in the period of 1992-2008 in a panel dataset Furthermore, their result is able

to confirm the positive effect of this variable represented as domestic consumption of importing countries on the export of these seven Chinese products Particularly, the coefficient of this variable is significantly sign of 0.127 which implies domestic consumption has a positive effect on Chinese seven products in this study

In the meantime, it is undeniable that real exchange rate is one of the determinant variables in explaining the outcome of trade in gravity model Commonly, export performance of certain country can be enhanced when the exchange rate is really depreciated due to an increase of their competitive products in the international markets Nevertheless, there are disagreement among the findings from the previous research that the real exchange appreciation will create either a growth or fall in export Therefore, Fang and Miller (2007) collect monthly data in the year time of 1979-2002 The bivariate GARCH-M model is applied to conduct investigation into the significance of depreciation of exchange rate and risk

of exchange rate on export for Singapore Their outcome indicates the real exchange rate is an insignificantly positive sign due to the weak correlation between Singaporean export and depreciation of exchange rate Meanwhile, exchange rate risk can create an impediment to Singaporean export

On the other hand, Nowak-Lehmann et al (2007) gather the data during 1988-2002 to scrutinize the sectorial trade flow between Turkey and EU They apply some important predictors such as GDP per capita, GDP, real exchange rate, and transportation costs in their gravity model They claim that real Turkish exports in most sectors are enhanced by an appreciation of Turkish real exchange rate For instance, this variable in the full sample reports positive sign with the coefficient of 1.14 at the significant level of 1%

Nonetheless, Aristotelous (2008) finds out the diverse result for real exchange rate that Greek export performance to Eurozone countries is negatively affected by the appreciated exchange rate with statistically significant at the level of 5% after this nation has applied the European Monetary Union since the year of 1999 Consistently, Thorbecke and Zhang (2009) also indicate a same evident that export of Chinese labor-intensive products is remarkably decreased by appreciated Chinese RMB by using panel data set for Chinese labor-intensive products exported to 30 countries

Besides, the trade agreement in terms of joining World Trade Organization (WTO) is also interested by researchers They pose a question that becoming WTO member will enhance trade of countries or not Rose (2005) utilizes the gravity model with the large data

during 1950-1999 to treat a variable of becoming WTO member as dummy one Nonetheless, the outcome from research determines that there is not an influence of this WTO member variable

In the meantime, Subramanian and Wei (2007) apply the gravity model including country fixed effects for their regression to search this question and find out that there is a strong impact of this variable on developing countries’ export Additionally, Liu (2009) gathers data including 210 countries or region in the period of 1948-2003 to research the effect of variable dummy of WTO member His results confirm that WTO member improves trade of the existing trading partners together with building connections of trading which are referred as intensive margin and extensive margin separately

In view of trade policy regime, trade openness is considered as how much that one country is open to trade with other partners Moreover, this variable is also important in gravity model to research its effect on international trade Therefore, the effect of trade openness of importing countries on the agricultural export of Egypt is hypothesized by Hatab

et al (2010) They apply the gravity model with data of 50 countries which import the agricultural export of Egypt in the period of 1994-2008 However, this variable is shown as statistically insignificant result which indicates this variable does not account for Egypt’s agricultural export Meanwhile, Jongwanich (2009) finds out the distinctive outcome for trade openness with a statistically significant coefficient of 1.93

The tariff rate has not been more important as NTMs recently Nevertheless, the variable is still not omitted in investigating foreign trade in gravity model According to Wilson and Otsuki (2004), they also consider this variable in their model to monitor its consequence on the agricultural product of banana They examine the applied ad valorem as tariff variable and uncover that there is the negative link between the tariff and value of trade flow

Meanwhile, the stronger influence of food safety trade than tariff barriers are also found in the research of (Drogué & DeMaria, 2012) In addition, Dong and Zhu (2015) manipulate the simple average tariff as a control variable to measure its contribution to China’s tea export The findings also statistically confirm that there is a negative relationship between this variable and tea export from China Furthermore, this result is consistent with the finding of this variable researched by Wei et al (2012)

2.4 Literature review summary

Although gravity model can be applied to other fields of studies such as human migration and investment flows across countries, the gravity model is one of the most crucial empirical models in the measurement of trade in international markets In view of that, there are surplus numbers of literature reviews which have been published using this model This extended gravity model applies the panel data to exploit the values or volumes of export of unilateral and bilateral trades

Basically, it bases on some major explanatory variables such as GDP per capita, distances, FSS, domestic consumption, real exchange rate, openness and tariff of trading countries Possibly, some trading policy variables can be omitted due to lack of data in the model Therefore, countries specific fixed effects can be applied to correct the omitted trading policy variables together with all other countries specific influence in this case These differences are also solved in the extended gravity model by using the countries specific fixed effect based on the previous papers

Furthermore, many scholars employ the regulated numbers of MRLs or average MRLs

as variable represented for FSS to measure the stringency of standards in gravity model The findings in these studies determine there is the positive relationship between the regulated numbers of MRLs and trade which implies this variable is further imposed by countries on importing commodities will reduce the export quantities of exporting countries Meanwhile, average MRLs manifest the negative bond with export volumes which imply that the low average MRLs will reduce the export volumes However, it is obviously seen the tendency that most of the researchers make efforts to concentrate on one specific MRL on one product because of the data availability shortage This issue can be viewed as the limitations of the mentioned research in literature reviews

Finally, to obtain the appropriate explanatory variables in the gravity model for this thesis, analytical framework for Vietnam’s coffee export and its influencing factors can be also retrieved and summarized from the previously discussed studies as the below figure

Figure 2.1 : Analytical framework for Vietnam’s coffee export and its influencing factors

Vietnam’s Coffee Export Quantity

Average Maximum Residual Levels

Food Safety Standard

Regulated Number of

Pesticides

Controlling Variables

Trade Openness

Exporters’ Tariff on Vietnam Coffee

World Trade Organization

Consumption for Domestic Market

Real Exchange Rate

Income Distance

Gravity Model

Price

CHAPTER 3: SITUATION OF VIETNAMESE COFFEE

DURING 2005 - 2014

The coffee trees have been initially introduced and planted in Vietnam since 1857 by French Additionally, Vietnam has favorable conditions for agricultural development for this commodity particularly since Vietnam is located in the suitable climate For that reason, the export of coffee is considered one of the industries that generate the largest source of foreign currency for the domestic economy and total export as well Incontrovertibly, coffee commodity is a key economic sector of Vietnam supporting economic development, reducing the burden on society by solving the unemployment problem In recent years, Vietnam's coffee industry has seen a boom in production to become the world's top producer of coffee causing coffee export to be accounted for the second position in the world in terms of exporting quantity This is due to the favorable conditions for the production and export of coffee from Vietnam as follows:

3.1 Advantages

Condition on climate, the geographic and surplus land is appropriate for Vietnamese coffee development which could produce coffee with a unique taste Moreover, Vietnam possesses solid type which is appropriate for the coffee tree This also creates Vietnam to obtain the advantage that other countries do not have Vietnam has planned and developed many coffee plantations for export with good quality and high yield in the areas such as the Central Highlands, Southeast and Central provinces which trigger a great advantage to have a source for coffee export to meet the domestic and global demand

Abundant labor resources in Vietnam can ensure the annual coffee production which leads to low production costs Furthermore, Vietnam farmers have been learning science and technology in order to apply for the cultivation and processing of coffee export Besides, Vietnamese farmers also have long experience in the cultivation of coffee As a result, the price can be dropped by these favorable conditions simulating competitiveness for this commodity on the world market to be fostered This is also the advantage of creating a source for coffee export of Vietnam

One of the subjective advantages is due to economic renewal policy of the Party and the State of Vietnam which has created a favorable environment for the development of coffee production For example, they determine the planning and development orientation of the country's coffee plant Coffee production could be well planned so as to meet the

government’s plans which include planting volume of 400 thousand hectares and export quantity of at least 600 tons per year to remedy the unstable situation for coffee planting In addition, the government support policies on prices when prices of the world market are low

Coffee has been a popular beverage which causes the increasing world demand for coffee consumption whereby encouraging countries to export coffee further Last but not least important, becoming TWO member, Vietnam has intensified economic cooperation, trade, science and technology, and human resource development for coffee export These can reinforce Vietnam in coffee exporter rankings in the region and the world

Meanwhile, due to a restraint on the level of science and technology, lack of capital and flexibility thinking leads to a low technology processing coffee in Vietnam Processing industry develops at a lower level because financial conditions of investors in Vietnam are still restrained However, the value of instant coffee which is through the processing in order

to gain value-added for coffee products can be enhanced remarkably if compared with the raw coffee bean This also causes a negative influence on export quality coffee in Vietnam

The selling prices of export coffee are governed by international market prices Nevertheless, the prices on the world market fluctuate constantly due to the impact of other elements It creates the psychological effect on the production of coffee growers and businesses purchasing coffee export making coffee production to decline as well

Finally, purchasing coffee products for export has been difficult recently This is due

to the difficult financial situation and high-interest rates, the export volume purchasing of local businesses decreased from 2009 to 2011 As a result, the disadvantage of inadequate capital, high-interest loans, short term loan cycles for the purchase of coffee export, and market information shortage trigger Vietnamese coffee firms to cope with business risks and bankruptcy

3.3 The top contribution rankings for the importing Vietnamese coffee countries Table 3.1 Top 10 importing countries (selected data on share export quantity during

2005-2014)

Rankings Coffee Importer

from Vietnam

Average annual export (tons)

Share of total export in top 10 importers

Cumulative percentage

Meanwhile, USA is the second export destination country accounting for 138 thousand tons annually Coffee export quantity destined to Italy, Spain and Belgium are approximately 83.1, 82.5 and 67.1 thousand tons respectively

Japan is Asian countries which are known as the primary importer of Vietnamese coffee with the annually average figure of nearly 55.2 thousand tons Finally, these remaining

4 countries are also the major coffee importing market of Vietnam with the annually export of around 119.2 thousand tons

The two below consecutive figures display the contribution of the major export markets from collected countries and areas

Figure 3.1: Distribution of Vietnam’s coffee to the major importing countries and areas

in the period of 2005-2014

Based on the national and regional distributions from figure 3.1, the share accounting for approximately 54% of Vietnamese coffee exports dominated by EU (26 countries) in the period of 2005-2014 Followed by it, the US contributes to its import at 14.1% Subsequently, Japan and Korea are viewed as the largest importing coffee countries from Vietnam in Asia at the figure of nearly 9%

Ultimately, distributions from ASIAN members, BRICS and OTHERS countries are estimated at 8.37%, 7.94%, and 7.30% separately which are referred as a remarkably large portions of coffee imports during 2005-2014

Figure 3.2 : The top ten rankings for the major importing Vietnamese coffee countries

and areas annually

Overall, as it can be clearly seen from figure 3.2 that the coffee exports from Vietnam are analyzed from 2005 to 2014 The importing coffee of Vietnam from selected countries and regions were increasing in during 2005 to 2014

In contrast, its trend returns to normal with the increase in 2012 and achieve at the peak was in 2014 due to the strong demand from EU In this period, the quantity of export from EU surged from 557 thousand tons to 750 thousand tons which are equivalent to growth

at 35% Accordingly, these importing tons assist EU to become the leading market in 2014

The second ranking in 2014 is the US market with contributing figure of 165 thousand tons, followed by export destination continent of Asian members that achieve 116 thousand tons Besides, Vietnamese coffee quantity exported to Japanese and Korean markets are notable with the figure of 109 thousand tons in the year of 2014

CHAPTER 4: ECONOMETRIC MODEL AND DATA 4.1 Specification of the model

4.1.1 Gravity model

The gravity model is related to the law of gravitational force in physics discovered by Isaac Newton to explain the flow of international trade Also, in explanation of export flow from one country to the other ones, it is also one of the experimental methods applied popularly In the contemporary papers, the gravity model has been widely adopted in the investigation of foreign trade as well as measurement method of FSS as TBT objectively and effectively

As discussed in the chapter of literature review, the model is the first application by Tinbergen (1962) It indicates bilateral trade flow is relative to GDP of their countries and is conversely relative to the geographical distances between these countries It can be reflected

in the type of mathematical formula as below equation:

is transformed into the form of a logarithmic type As a matter of this, ordinary least squares (OLS) regression is usually estimated in the gravity model By taking the natural logarithm of the above equation and add an error term, a linear relationship can be reached to explain such elasticity coefficients

After taking logarithmic form, the coefficients can be accounted for normally as OLS

regression For instance, in the case the exporter's GDP

i rises 1 percent, the export volume

will raise β

1 percent holding other variables constant Similarly, if the geographical distance

between countries i and j increased by 1 percent, the export volume will decline as β

3 percent keeping other variables unchanged

4.1.2 Extended variables in gravity model

Subsequently, theoretical and empirical research on the gravity model has been embraced to explore the international trade The gravity model has continued to develop further by adding many other important variables When variables are added the gravity model, it is seen as extended variables in gravity model As discussed in the empirical studies, the explanatory variables such as income per capital which represents GDP and population variables, the geographical distances between these countries, domestic consumption, real exchange rate, trade openness, import tariff of importing countries, and WTO member variables are applied to investigate the export flow of trade These variables can be changed depending on the purpose and interest of researchers’ exploration

In addition, based on applications of the extended gravity model, this paper primarily concerns the issues on food safety standard represented by average the maximum residual levels or the regulated number of pesticides impacting on coffee exports of Vietnam over the period of 2005 - 2014 Therefore, based on the analytical framework in the literature review, the coffee export of Vietnam can be quantitatively measured and estimated by these explanatory variables in the two separate gravity models as below

Based on these extended gravity model with panel data extraction, i and j are referred

to exporting country which is known as Vietnam and the importing coffee countries at time t correspondingly Meanwhile, Y is the coffee tons exported from Vietnam to its primary trading partners

Finally, v are unobserved time-invariant characteristics from the importing countries; whereas, ε is error term

4.2 Data

4.2.1 Data source

In order to utilize availability and updated data, the dataset for this study is used in panel data from the year of 2005 to 2014 These variables in the model are retrieved from the below sources

NETWEIGHT: This variable is denoted as quantity of Vietnamese coffee export collected from UN Comtrade Database

PDISTANCE: It is calculated by using data for PRICE and DISTANCE from UN Comtrade Database and CEPII Database respectively

GDPPERC: It is expressed as GDP per capita attained from World Bank

REGNUM: Its denotation is the regulated numbers of pesticides retrieved from Agrobase-Logigram’s Homologa database

AVERMRL: This variable is computed from Agrobase-Logigram’s Homologa database denoted as average maximum residue levels

DCONSUM: It is designated as domestic consumption of importing countries This variable is calculated by applying data from Faostat of FAO organization

REXRATE: This is real exchange rate calculated by using data from World Bank TRADEOPN: Its designation is trade openness The variable is collected from World Bank

SIMPTAX: It is denoted as the simple tax that is retrieved from the UNCTAD Trade Analysis Information System (TRAINS)

WTOMEMB: This is meant as dummy variable for WTO member collected from

WTO organization

4.2.2 Data description

Y is the coffee volumes exported from Vietnam to the importing countries This variable is the dependent variable in this thesis wherein the unit is measured by tons The classification of Harmonized System Codes at four digits for coffee is 0901

PDISTANCE is a variable which is proxy for the function of transportation costs In practice, the geographical distance is between Vietnam and the importing Vietnamese coffee countries Basically, this variable is measured by the unit of kilometer known as the distance between the capitals of Vietnam and its trading partners However, due to the constant