Export dynamics of vietnam trade in value added (TiVA) approach

VIETNAM NATIONAL UNIVERSITY, HANOIUNIVERSITY OF ECONOMICS AND BUSINESS SHASHI KANT PRASAD CHAUDHARY EXPORT DYNAMICS OF VIETNAM: TRADE IN VALUE ADDED TIVA APPROACH DISSERTATION IN INTERNA

VIETNAM NATIONAL UNIVERSITY, HANOI

UNIVERSITY OF ECONOMICS AND BUSINESS

SHASHI KANT PRASAD CHAUDHARY

EXPORT DYNAMICS OF VIETNAM:

TRADE IN VALUE ADDED (TIVA) APPROACH

DISSERTATION IN INTERNATIONAL ECONOMICS

Hanoi – 2020

VIETNAM NATIONAL UNIVERSITY, HANOI

UNIVERSITY OF ECONOMICS AND BUSINESS

SHASHI KANT PRASAD CHAUDHARY

EXPORT DYNAMICS OF VIETNAM:

TRADE IN VALUE ADDED (TIVA) APPROACH (ĐỘNG LỰC CHO XUẤT KHẨU CỦA VIỆT NAM: TIẾP CẬN

TỪ PHƯƠNG PHÁP GIÁ TRỊ GIA TĂNG THƯƠNG MẠI)

Major: International Economics (Chuyên ngành: Kinh tế Quốc tế)

Code: 9310106.01

Mã số: 9310106.01

DISSERTATION IN INTERNATIONAL ECONOMICS

(LUẬN ÁN TIẾN SĨ KINH TẾ QUỐC TẾ) SUPERVISOR: Associate Professor Dr Nguyen Viet Khoi

Hanoi - 2020

I would like to express my sincere gratitude to my supervisor AssociateProfessor Dr Nguyen Viet Khoi who has been a constant source of inspiration andencouragement Without his invaluable suggestions and encouragement, myresearch work would not have taken this form

I would also like to express my sincere thanks and appreciation to Dr NguyenCam Nhung (UEB, VNU), Dr Nguyen Thi Kim Anh (UEB, VNU), Dr Nguyen TienMinh (UEB, VNU), Dr Nagendra Lal Srivastava (TU, Nepal), Dr Dilli Ram Pokhrel(Nepal Rastra Bank) and Dr Jun Alejo Bathan (British University Vietnam) for theirinvaluable comments and suggestions to improve the quality of dissertation I wouldalso like to thank anonymous referees for their valuable comments in terms ofenhancing the quality of this dissertation

I also acknowledge the motivation and support that I received from mylecturers while undertaking the PhD modules, in specific to Dr Le Quoc Hoi, DrNguyen Thi Kim Anh, Dr Nguyen Xuan Thien, Dr Nguyen Thi Kim Chi, and Dr

Ha Van Hoi Apart from them, I also say a big thank to Mr Tuan, Mr Quang, MrDat and all other support staffs at the office of Academic and Training Department,UEB

A special thank goes to Chris Jeffery, the Dean of British University Vietnamwho constantly supported me in providing flexible working schedule and constantencouragement

Last but not the least, my family deserves a special credit for bringing me sofar in this utmost academic journey Words cannot compensate the sacrifices theyhave made on my behalf

Thank you very much all

I declare that this dissertation, which I have submitted to the University ofEconomics and Business (UEB), Vietnam National University, Hanoi forassessment in consideration for the award of the degree of Doctor of Philosophy(PhD) has been composed solely by myself Except where states otherwise byreference or acknowledgment, the work presented is entirely my own I have notsubmitted before, in whole or in part of this work to UEB or any other institution forany professional qualification I have taken due care to ensure that the work isoriginal and does not breach any copyright law

Shashi Kant Prasad Chaudhary

TABLE OF CONTENTS

LIST OF ACRONYMS USED i

LIST OF TABLES iii

LIST OF FIGURES vi

EXECUTIVE SUMMARY vii

CHAPTER 1: INTRODUCTION 1

1.1 Background 1

1.2 Statement of the problem 3

1.3 Objectives of the study 5

1.4 Significances of the study 6

1.5 Delimitations of the study 6

1.6 Organisation of the dissertation 7

CHAPTER 2: LITERATURE REVIEW 10

2.1 Overview 10

2.2 Importance of „Trade in Value Added (TiVA)‟ approach 13

2.2.1 A better understanding of bilateral trade imbalances 14

2.2.2 An effective measure of the efficacy of trade barriers and trade measures 16

2.2.3 A better way to analyse job contribution of trade 16

2.2.4 A better measure of trade competitiveness 17

2.2.5 Measuring backward and forward linkages of an economy 18

2.2.6 Fair assessment of the environmental impact of trade 19

2.3 Earlier Studies in context of Vietnam 20

CHAPTER 3: RESEARCH METHODOLOGY 23

3.1 Research design 23

3.2 Sources of data and study period 23

3.3 Estimation of „Trade in Value Added‟ 25

3.3.1 Construction of an inter-country input output (ICIO) table: one country, N industries case 26

3.3.2 Computation of „Trade in Value Added‟ 27

3.4 Validating export-led growth of Vietnam 28

3.5 Assessing export competitiveness of Vietnam 28

3.6 Measuring Vietnam‟s participation in global value chain 31

CHAPTER 4: SOURCES AND DESTINATIONS OF VALUE ADDED EMBODIED IN GROSS EXPORTS OF VIETNAM 32

4.1 Introduction 32

4.2 Sources of domestic value added embodied in gross exports 33

4.3 Destinations of domestic value added embodied in gross exports 38

4.4 Domestic value added embodied in exports by „Types of Goods‟ 42

4.5 „Foreign Value Added‟ embodied in gross exports 44

4.5.1 Sources of foreign value added by partners 44

4.5.2 Sources of foreign value added by industries 45

4.6 Concluding remarks 46

CHAPTER 5: AN EMPIRICAL ANALYSIS OF EXPORT-LED GROWTH OF VIETNAM 49

5.1 Introduction 49

5.2 Early initiatives and the achievements 51

5.3 Methodology 55

5.4 Variables and data 57

5.5 Empirical results 58

5.5.1 Testing presence of unit root and structural break 58

5.5.2 Estimating ARDL models and checking their robustness 61

5.5.3 Bounds test of cointegration and error correction model 62

5.6 Concluding remarks and policy discussion 64

CHAPTER 6: EXPORT COMPETITIVENESS OF VIETNAM 70

6.1 Introduction 70

6.2 Methodological framework 71

Discussing Balassa‟s Index 72

6.3 Empirical Findings 75

6.3.1 Export competitiveness of Vietnam in the World 75

6.3.2 Export competitiveness of Vietnam in East Asian market 83

6.3.3 Export competitiveness of Vietnam in NAFTA market 87

6.3.4 Export competitiveness of Vietnam in European Union (EU) 93

6.3.5 Export competitiveness of Vietnam in ASEAN market 99

6.3.6 Export competitiveness of Vietnam in in BRIS (BRICS-China) 105

6.4 Concluding remarks and policy discussion 113

CHAPTER 7: WHERE IS VIETNAM IN GLOBAL VALUE CHAIN? 116

7.1 Introduction 116

7.2 Understanding Global Value Chain 121

7.3 Sources of Data and Study Period 128

7.4 Empirical findings 129

7.4.1 GVC Participation of Vietnam 129

7.4.2 GVC Position of Vietnam 132

7.4.3 GVC Participation, position and domestic value added contribution 139

7.5 Concluding remarks and policy discussions 140

CHAPTER 8: SUMMARY, FINDINGS AND SUGGESTIONS 143

8.1 Summary and findings 143

8.2 Discussing the issues 145

8.2.1 Group I industries 150

8.2.2 Group II industries 151

8.2.3 Group III industries 152

8.3 Suggestions 153

8.3.1 Ways to improve domestic value added exports 153

8.3.2 Ways to improve export competitiveness 154

8.3.3 Ways to improve global integration 155

8.4 Ways ahead 156

REFERENCES 161

APPENDICES 172

LIST OF ACRONYMS USED

No Acronyms Original

4 ASEAN Association of South East Asian Nations

6 BRIS Brazil Russia India and South Africa (BRICS minus China)

9 CPTPP Comprehensive and Progressive Agreement for Trans-Pacific

Partnership

13 DVA_EXGR Domestic Value Added embodied in Gross Exports

24 I2E Importing inputs for exporting (Import to export)

i

No Acronyms Original

27 ISIC International Standard Industrial Classification of All

Economic Activities

41 UNCTAD United Nations Conference on Trade and Development

ii

LIST OF TABLES

1 Table 2.1: The equivalence of reported and value added trade 15

balances at the level of trade with the entire world

2 Table 3.1: List of industries used in the text with their ISIC codes 24

industries, 2011

4 Table 4.2: Major originators of DVA exports by service industries, 38

2011

5 Table 4.3: Sources of FVA by industries (major contributors) 46

6 Table 4.4: Major contributors to the value added exports by 48

industries, 2011

7 Table 5.1: Empirical works using exports and GDP series of 57

Vietnam

9 Table 5.3: Results of Breusch-Godfrey Serial Correlation LM Test 61

13 Table 5.7: Results of Breusch-Godfrey Serial Correlation LM Test 68

17 Table 6.1: RCA indices of selected industries in the World market, 76

2011

iii

No Table Content Page

19 Table 6.3: Results of Galtonian cross-section regression (1995- 80

2011): World

21 Table 6.5: RCA indices of selected industries in East Asia, 2011 84

22 Table 6.6: Pattern of specialisation by industries in East Asia 85

(1995-2011)

23 Table 6.7: Results of Galtonian cross-section regression (1995- 87

2011): East Asia

25 Table 6.9: RCA indices of selected industries in NAFTA, 2011 90

26 Table 6.10: Pattern of specialisation by industries in NAFTA (1995- 91

2011)

27 Table 6.11: Results of Galtonian cross-section regression (1995- 93

2011): NAFTA

29 Table 6.13: RCA indices of selected industries in the EU, 2011 96

30 Table 6.14: Pattern of specialisation by industries in the EU (1995- 97

2011)

31 Table 6.15: Results of Galtonian cross-section regression (1995- 99

2011): EU

33 Table 6.17: RCA indices of selected industries in the ASEAN, 2011 102

34 Table 6.18: Pattern of specialisation by industries in ASEAN 103

(1995-2011)

35 Table 6.19: Results of Galtonian cross-section regression (1995- 104

36 Table 6.20: RCA indices of Vietnam in ASEAN market 106

iv

No Table Content Page

37 Table 6.21: RCA indices of selected industries in BRIS, 2011 108

38 Table 6.22: Pattern of specialisation by industries in BRIS (1995- 109

2011)

39 Table 6.23: Results of Galtonian cross-section regression (1995- 110

2011): BRIS

43 Table 8.1: Selection of industries in which Vietnam has expertise, 147

year 2011

v

LIST OF FIGURES

1 Figure 4.1: Shares of DVA & FVA, and growth rates of DVA 35

7 Figure 4.7: DVA by final and intermediate goods and services 43

8 Figure 4.8: Origin of foreign value added by regions and countries 45

13 Figure 7.2: GVC Participation of Vietnam by years (1995-2011) 130

14 Figure 7.3: Vietnam's participation in GVCs by industries (1995 131

and 2011)

16 Figure 7.5: DFD indices and value added contributions by industry 134

17 Figure 7.6: GVC position index and value added contributions by 135

vi

EXECUTIVE SUMMARY

Vietnam is an open case to the world in terms of achieving remarkable economicgrowth in a very short period of time utilizing its strong exports bases, and stillstands stronger in terms of economic growth and exports outlook This study hasexamined the „export dynamics of Vietnam‟ from the perspective of (i) industries‟contribution in value added exports, (ii) export‟s cointegration with economicgrowth, (iii) industries‟ trade competitiveness, and (iv) industries‟ participation inglobal value chain, applying „trade in value added‟ (TiVA) approach, which hasalso helped to identify presence of exaggerations in conventional export values,contributions, and competitiveness of exporting industries of Vietnam For instance,

a clear exaggeration of 29 percentage points as ratio of GDP in export values ofVietnam in 2014 can be observed when its gross exports value (US$147) iscompared with the domestic value added exports value (US$94) of the same year In

2014, the gross exports forms 79.3 percent of GDP while that of the domestic valueadded exports forms 50.5 percent

This study follows a longitudinal design that has used timeseries secondary data ofvarious TiVA indicators covering the period of 1995 to 2011 The procedure appliedhere to assess the export dynamics of Vietnam using TiVA approach bases onexplanation and analysis of those secondary data Analysis of sources anddestinations of the value added exports of Vietnam has been conducted indescriptive manner On the other hand, cointegration of exports with economicgrowth of Vietnam has been examined using ARDL bounds test Likewise,Balassa‟s index has been used to assess industries revealed comparative advantage

in six major export markets for Vietnam viz the World, East Asia, the EuropeanUnion, NAFTA, ASEAN and BRIS markets The GVC participation index ofindustries as well as Vietnam itself has been estimated using Koopman et al.‟s(2010) GVC participation index and Fally‟s (2012) distance to final demand index

The key findings of this study are as follows:

i A long-run relationship exists between exports and GDP of Vietnam andshows a substantial long-run contribution of exports in the real GDP, as much as 0.73percent for one percent changes in the domestic value added exports

ii There are 10 industries viz agriculture, mining, foods and beverages, textileand footwear, computer and electronics, electrical machinery, manufacturing notelsewhere classified, wholesale and retail trade, hotels and restaurants, and transport andstorage that have contributed significantly in the domestic value added export ofVietnam

iii Among those 10 industries, except agriculture, mining, and hotels andrestaurant, other seven do also have significant contributions in foreign value addedexports of Vietnam Most active industries in importing for exporting (I2E) activities arecomputer and electronics, textile and footwear, foods and beverages, and electricalmachinery

iv China, Japan and South Korea are key suppliers of inputs as well as buyers ofVietnamese intermediate products

v Three manufacturing industries viz agriculture, foods and beverage, andtextile and footwear are „globally competitive‟ showing comparative advantagesacross all six markets (the World, East Asia, ASEAN, EU, NAFTA, and BRIS)consistently through 1995-2011

vi Four manufacturing industries and two service industries are „regionallycompetitive‟ Mining is competitive in East Asia, European Union and NAFTA; woodproducts in the World, East Asia, EU and NAFTA; non-metallic minerals in NAFTAonly; computers and electronics in BRIS only; wholesale and retail trade in other thanASEAN market; and hotels and restaurants in the World, East Asia, EU, and BRIS Apartfrom these, furniture that falls into manufacturing n.e.c also has shown greater potential

in recent period in terms of domestic value added exports

vii Despite the natural resource-intensive industries (mining, wood products,petroleum products etc.) add high domestic value in exports, their comparative

viii

advantages have been underestimated by gross exports data In contrary, theassembly activities in the human capital and technology intensive industries havecontributed in ballooning up both the gross exports and their comparativeadvantages However gross exports are aligned with the domestic value addedexports for low skilled labour intensive (e.g foods and beverage, textile andfootwear), and services industries (e.g trade, hotels and restaurants).

viii Vietnam‟s participation in GVC has increased significantly via backwardparticipation in computer and electronics, textile and footwear, foods and beverages,electrical machinery, basic metals, wholesale and retail trade, and transport and storageindustries Importantly, the GVC participation rate has shown positive correlation withthe RCA index and shares of domestic value added exports, while negative relationshipwith the distance to final demand (exceptions are textile and footwear, trade and hotels,and financial intermediation)

ix Among four models of export-led growth strategies viz German andJapanese model, Asian Tigers‟ model, Mexico model, and Chinese model, Vietnamclosely resembles Mexico model, whereby it has turned itself into export productionplatforms for foreign multinational companies by suppressing the wages, rather thandeveloping own indigenous industrial capacity

x Vietnam requires collaborating domestic firms with MNCs in order todensify domestic firms into global value chain and also to acquire foreign technologies inthe prioritised industries

xi Moving up the value chain into higher value added functions by enhancingthe current level of global participation and in the meantime also developing own

indigenous industrial base seems a better way ahead for sustainable economicgrowth of Vietnam This will bring opportunity to drive the country toward long-term success with own „invented and made in Vietnam‟ products

CHAPTER 1: INTRODUCTION

1.1 Background

The period of 1991-1995 is widely considered as the turning point in thehistory of economic growth of modern Vietnam In this period, Vietnam achievedremarkable economic growth, on average 8.2 percent, as a result of somecomprehensive and radical economic reforms that were adopted in the late 1980s insectors including foreign trade and foreign investment, as an attempt to overhaul theeconomy Apart from these reforms, some trade related developments also tookplace in order to open the economy, for instance, Vietnam signed trade agreementwith EU, its first western trading partner in 1992; it established its full diplomaticrelationship with the US and also joined ASEAN in 1995 These developmentswould turn into milestones in the later period whenever there is talk about the

„success story‟ of Vietnam

Vietnam started reaping the benefits of those reforms, and tradedevelopments immediately For instance, the Vietnamese economy boomed to 9.3percent in 1996, and on an average of 7 percent over the period of 1996-2000despite occurrence of „Asian Financial Crisis‟ in the ASEAN region during whichalso Vietnam stood stronger with a fair economic growth of about 6 percent Alongwith stronger economic growth, Vietnam also achieved remarkable progress insocio-economic indicators, for example life expectancy increased from 70.5 years in

1990 to 73.3 years in 2000; GDP per capita increased to US$ 434 in 2000 from US$

98 in 1990; poverty reduced from 60 percent in 1990 to 38.78 percent in 2002.Those significant progresses in those socio-economic indicators were also reflected

in improvement of the country‟s position in HDI report, from 0.477 in 1990 to0.576 in 2000 (UNDP, 2016)

Now it has been over 30 years since the adoption of those comprehensive andradical economic reforms, however the story of economic success of Vietnam hasnot stopped yet Vietnam still stands stronger in terms of economic growth and

1

progress in socio-economic indicators, which can also be seen in its quick jump fromthe category of a „poor country‟ to a „middle income country‟ in 2010 A significantnumber of studies, for example Anwar and Nguyen (2010), and Hoang et al (2010) arenow available identifying the growth drivers of Vietnam‟s spectacular growth Thesestudies have identified foreign direct investment (FDI), exports, labour productivity,cheap labour, and macroeconomic reforms in specific as important growth drivers sofar In this study, however the objective is not to compare the contributions of thosegrowth drivers in the economic growth of Vietnam Instead, the objective is to examinethe export dynamics of Vietnam applying „trade in value added‟ (TiVA) approach By

„export dynamics of Vietnam‟ it is meant here the characteristics of Vietnameseexports that have stimulated its economic growth, in particular, its exportcompetitiveness, and its integration into global production network In broaderdefinition of export dynamics, its relationship with trade balance, foreign exchangerates, and environmental consequences may also be considered However, thoseextremities aspects have been excluded from this study and focused has been made toassess Vietnamese industries‟ contribution to value added exports, their exportcompetitiveness, and their integration into global value chain from the perspective ofTiVA approach

At this juncture, the obvious question would be „why TiVA approach‟ Theunderlying answer is that efficacy of conventional approach of trade measure hasbeen questioned by several academicians upon finding presence of multiplecounting in trade data of export-led economies There are increasing number ofpapers including Dervis et al (2013), and Koopman et al (2013) that haveestablished that conventional trade measure has exaggerated the exports value Inaddition, Johnson (2014), and Koopman et al (2014) also found that the revealedcomparative advantage of China and India respectively got reversed while usingTiVA approach in their analyses Such possibilities cannot be denied in exportmeasures of Vietnam too Therefore, assessing export dynamics of Vietnam fromthe perspective of TiVA approach would identify presence of such exaggeration if

any in exports value, contributions of exporting industries and/or theircompetitiveness Moreover, only TiVA approach can assess industries‟ (or Vietnamitself) participation in global value chain More details about TiVA approach hasbeen discussed in subsequent sections For now, in short, TiVA approachdisaggregates the value added embodied in gross exports into domestic and foreignvalue added, and thereby recognises the exports of domestic value added as actualexports of an economy, thus eliminating the problem of multiple counting from theconventional trade statistics This makes TiVA statistics reliable for measuring theactual competitiveness of exporting industries, thereby helping the policy makers indeveloping appropriate trade policies.

1.2 Statement of the problem

The conventional trade statistics approach captures the value of exportedproducts at national custom borders only; thereby disregarding the value ofintermediate inputs used in the production of such exported products, which resultsinto presence of multiple counting in the gross exports value This has led toquestion the reliability and significance of conventional trade data for policyformulation The well-known case of Apple „iPhone 4‟ as mentioned by Xing andDetert (2010)1 explains this issue very well, showing that, of the US$178.96 factorygate price of an iPhone 4 that is assembled in China, only US$6.50 was contributed

by China The bulk of the components were imported from Japan, Germany, Koreaand the US which shares respectively US$60.60, US$30.15, US$22.96, andUS$10.75 The remaining US$48 was contributed by other countries than China.However, the conventional trade measure does not apportion the value of inputsaccording to the countries of origin and record the export value of iPhone i.e.US$178.96 per piece of the phone as export of China As a result, US for instancewould have a deficit of US$168.21 per iPhone 4 with China Had this transactionbeen measured by TiVA approach, at least the US would not have had such a hugetrade deficit with China alone Instead, this trade deficit would have been

1 The detail has been discussed later in chapter VII.

3

redistributed over Japan, Germany and Korea However, this is not the situationunder conventional trade approach As a result, it might cause serious repercussions

if trade policies are designed and formulated with an aim to reduce the US tradedeficit with China ignoring the true trade partners like Japan, Germany and Korea.One such exemplary repercussion is the case of „anti-dumping duty‟ that theEuropean Commission (EC) imposed on entry of Chinese and Vietnamese leathershoes to EU market in 2006 The duty was imposed on evidence of unfair tradepractices in form of disguised subsidies and unfair state intervention to the leatherfootwear industry in those two countries with an argument that the anti-dumpingduty would help to correct the injury caused to European leather shoe producers(European Commission, 2006) Later in 2012, the National Board of Trade (NBT)conducted a study using TiVA approach to examine the efficacy of this anti-dumping provision, and surprisingly found that leather shoes manufactured in Chinaand Vietnam had incorporated 50 to 80 percent of their value addition fromEuropean Union in forms of activities like designing, marketing, sales anddistribution This means that shoes „manufactured in China or in Vietnam‟ were nottruly manufactured in China or in Vietnam Rather they still could have beenregarded as „made in Europe‟ This report concludes that European shoescompanies were not protected, rather damaged by this anti-dumping provision(NBT, 2012) This is a clear case that shows how a policy, based on conventionaltrade statistics might be misguiding Had the initial analysis on leather shoes made

in China and Vietnam been based on TiVA approach, the anti-dumping duty mighthave not been justified Therefore, measuring trade in value added would give a newperspective to analyse the efficacy and effectiveness of the trade policies

From these aforementioned examples of „iPhone‟ and „EC‟s anti-dumping duty‟ atleast two things become very clear- firstly, the international trade requires re-measurement in terms of value added, otherwise exports of countries at the endstage of manufacturing process would always be exaggerated; and secondly, a tradepolicy based on such exaggerated trade data might be misguiding In addition, such

exaggeration of exports would also lead to question the competitiveness of aparticular exporting industry which until now has been measured employingconventional exports data Therefore, this study aims at assessing the exportdynamics of Vietnam from the perspective of TiVA approach, so that any suchdeviation in the export competitiveness if exists can be brought to the attention ofthe policy makers In the meantime, one shall not overlook the changing pattern inthe Vietnamese trade structure in which the dominance of intermediate products inboth import and export values is growing Therefore, this study also aims atassessing the participation of Vietnamese industries in global value chain Apartfrom these main assessments, this study also seeks answers for the followingquestions in Vietnamese context:

i Where is „domestic value added embodied in gross exports‟ originated in

domestic economy?

ii Which industries are contributing in the increasing „foreign value added

embodied in gross exports‟?

iii What is the contribution of domestic value added exports in economic growth of Vietnam?

1.3 Objectives of the study

The main objective of this study is to assess the export dynamics of Vietnam from theperspective of TiVA approach Nonetheless, in the light of the above researchquestions, the specific objectives of this study have been designed as below that aim to:

i Identify and assess exporting industries that are contributing to the domestic value added embedded in the gross exports of Vietnam

ii Identify and assess exporting industries that are contributing to the foreign value added embedded in the gross exports of Vietnam

iii Assess cointegration of domestic value added exports with economic growth

of Vietnam

iv Assess export competitiveness of Vietnam

v Assess position of Vietnam in global value chain

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1.4 Significances of the study

Researcher considers the following three points as clear significance of this study:

i Researcher has not come across yet any thorough study on export dynamics

of Vietnam based on trade in value added statistics Though two earlier works by Tran et

al (2011) and Thanh et al (2015) have had some rigorous level of quantitativeestimations of import contents and domestic value added content of Vietnam‟s exportsbased on Hummels et al (2001) approach of vertical specialisation, these works haveadopted many restrictive assumptions In addition, these papers have not attempted toestimate the forward linkage of Vietnam in global value chain (i.e extent of Vietnam‟sexports used in the export of direct importing countries) In this context, this study haspresented a refined picture of the value added contents of the gross exports of Vietnam Ithas also assessed the forward and backward linkages of Vietnam in global value chain

ii As there is always possibility of multiple counting in the conventionalapproach to trade measurement, the earlier „export competitive list‟ for Vietnam which isbased on the conventional gross exports value is, thus subject to be noisy and misleading

It may also not reveal the true picture of Vietnam‟s export competitiveness Hence, thisstudy has assessed the export competitiveness of different exporting industries ofVietnam again using TiVA approach and provides a clear picture of those industries interms of their competitiveness

iii This dissertation will serve as literature for anyone who wishes to undertake

a research in the field of international trade of Vietnam or doing trade analysis usingTiVA approach

1.5 Delimitations of the study

i This study has extracted the necessary data on value added exports fromOECD TiVA database (2016 edition), in which the TiVA indicators‟ series are availablefor a period from 1995 to 2011 only This has constrained the covered period of thisstudy as well Though in its recent edition (2018), OECD has published new series ofTiVA indicators covering a period of 2005 to 2015, but it is not directly comparable withthe 2016 edition

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ii This study does not analyse the export dynamics of Vietnam in comparison with other ASEAN countries or any other comparative economies.

iii The research questions to assess in this study have already been so broad thatsome other extremities aspects of it such as its relationship with trade balances, or foreignexchange rates, and environmental consequences have been skipped in this study.Researcher has considered those extremities aspects of export dynamics as futuredirection of the research

1.6 Organisation of the dissertation

This dissertation is spread over EIGHT chapters, each summarised as below:

Chapter 1: ‘Introduction’

This is introductory part of the dissertation that discusses the background of studyand statement of the problem in details in the beginning These give rise of researchquestions based upon which overall and specific objectives of the study have beenset In the later part, significances and limitations of the study have been discussed

In the text, researcher has also discussed the motivation for this study

Chapter 2: ‘Literature review’

This chapter starts with discussion on the works of some prominent researchers thathave delved into the problems associated with the conventional way of measuringexports and have proposed the way to measure the trade in value added terms Italso discusses importance of trade in value added approach for policy makers In theend, this chapter also reviews previous relevant studies on this aspect of exports inVietnam In specific to the Vietnam‟s participation in global value chain anddomestic value added exports, there are limited numbers of studies available.Discussion on other aspects of Literature Review such as research methods,analytical techniques, policy comments, other relevant concepts etc have beenpresented in relevant chapters of the dissertation

Chapter 3: ‘Research methodology’

This chapter discusses the research methodology, processes and procedures undersections related to research design, sources of data, estimation of TiVA, measure of

7

GVC participation and position, analysis of the revealed comparative advantage ofVietnam etc Discussion on the specific research methods and techniques such unitroot test, ARDL bounds test, Balassa‟s index, GVC participation etc have beenpresented in the relevant chapters of the dissertation.

Chapter 4: ‘Sources and destinations of value added embodied in gross exports

of Vietnam’

This chapter analyses and identifies the exporting industries that have contributedsignificantly in the domestic value added (DVA) and foreign value added (FVA)exports of Vietnam It takes pictorial approach to present the contributions ofindustries in DVA and FVA, as well as in identifying the origin and destinations ofthose sorts of value addition

Chapter 5: ‘An empirical analysis of export-led growth of Vietnam’

This chapter provides a comparative analysis of the existence of long-runrelationship between export and GDP of Vietnam using ARDL bounds test ofcointegration from the perspective of both gross exports and value added exports.There is ample discussion on diagnosis of the data series and the models used

Chapter 6: ‘Export competitiveness of Vietnam’

This chapter deals with the re-computation of the RCA index at the industrial level

of Vietnam using „domestic value added exports‟ data to assess the exportcompetitiveness of those exporting industries At the same time, the value addedexports based RCA indices have been compared with that of the conventionalstatistics based RCA in order to find presence of noise in export competitiveness ifany

Chapter 7: ‘Where is Vietnam in global value chain?’

This chapter discusses in detail the participation of Vietnam in global value chainalong with identification of industries that have deeper integration into the globalvalue chain Moreover, it also validates the position of Vietnam as „assemblypowerhouse‟ in the value chain

Chapter 8: Summary, findings and suggestions

This is the end chapter of the dissertation that includes the summary, findings andsuggestions for developing strategies to increase value added exports orcompetitiveness and global integration of industries This chapter is also a broaderdiscussion on what Vietnam has achieved and what challenges or bottlenecks itfaces or will face in the future and what might be the way ahead from strategic point

of view

The references and appendices are given at the end of the dissertation

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CHAPTER 2: LITERATURE REVIEW

2.1 Overview

This chapter discusses the conceptual arguments, development of framework, andthe importance of TiVA approach Discussion on other aspects of literature reviewsuch as research methods, analytical techniques, policy discussion, and otherrelevant concepts have been presented in the relevant chapters of dissertation

Progress in information and communication technology (ICT), reforms in tradepolicies and reduction in regulatory barriers on global logistics chain (transport,finance, telecommunications etc.) have led the production-line to be fragmentedacross several locations across the world (Jones and Kierzkowski, 2001) As aresult, over past three decades, the share of intermediate products has increasedsignificantly in international trade, in fact, more than half in value This is because

of dominance of intermediate products in international trade, participation ofcountries like China, Mexico and Vietnam, for instance in global value chain hasincreased significantly in comparison to their connectivity they used to have adecade ago In the light of these fundamental changes, the relevance of conventionaltrade statistics has now become questionable Maurer and Degain (2010) turnsarcastic on the relevance of conventional measure and say that „what you see is notwhat you get‟ Going further on the issue, Miroudot and Yamano (2013) identifythree issues in particular with the conventional trade statistics viz.-

i presence of multiple counting,

ii unable to recognise the real contribution of a given sector‟s export in terms ofincome and employment creation to an economy, also unable to demonstrate sectorswhere value added actually originates,

iii unable to reflect the real contribution of trade to an economy‟s growth

Nonetheless, several papers, workshops and conferences have attempted to address those issues in recent time suggesting application of TiVA approach in trade measure The firstintent to formalise it shall be attributed to Leontief in 1960s

(Leontief and Strout, 1963) Later, Sanyal and Jones (1982) in their seminal papermention that the bulk of international trade is in intermediate products and that trade

in intermediates mainly consists not of raw material or primary inputs but ofproducts that have already received some value added Growth of trade inintermediates has also been highlighted by several recent surveys, in particular inAsia However, in terms of decomposing the value added contents of gross exportsand developing a broader framework for trade in value added, credit shall go toHummels et al (2001), Daudin et al (2009), Johnson and Noguera (2012), Foster et

al (2011) and Koopman et al (2008, 2010, and 2012)

Hummels et al (2001) introduced the concept of „vertical specialisation (VS)‟ tomeasure both directly and indirectly imported content in a country‟s exports Forthis they use a country level input-output table on the assumption that input–outputcoefficients in the production for exports, and those in the production for domesticconsumption are the same However, this assumption is more likely to get violated

in „processing based trade‟ where imported machinery and inputs are extensivelyused in the production of goods for export China may be a good reference fordiscussion, for which processing exports account for about half of the overallexports Wholly foreign owned firms and Sino-foreign joint ventures are the heavyusers of processing based export scheme Likewise, in Mexico, processing basedexports account for even greater shares, largely because of prevalence of exports byMaquiladora firms (Mattoo et al., 2013) Moreover, Koopman et al (2008, 2010,and 2012) have also shown concern on Hummels et al.‟s assumption stating thatthis may lead to a significant under-estimation of foreign value added content ingross exports when processing exports are pervasive

Daudin et al (2009) identify „who produces what and for whom‟ by re-allocatingthe value added contained in final goods for 113 countries or groups of countriesand 55 sectors using GTAP (Global Trade Analysis project) database onmultiregional input-output table However, this work follows an approach similar toHummels et al (2001) to compute the „vertical specialisation trade (VS)‟ i.e share

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of imported inputs in the exports of a country Daudin et al (2009) go furthercomputing VS1 (the share of export used as inputs to further exports), and VS1*(the domestic content of imports).

Johnson and Noguera (2011) present similar calculations but based on the ratio ofvalue added to gross exports (VAX ratio) as a measure of the intensity of productionsharing They combine input-output and bilateral trade data to compute the valueadded content of bilateral trade As opposed to Hummels et al (2001), theirframework allows two-way trade in intermediates (each country can both importand export intermediates, while in the VS framework the last country exports finalgoods only) (stated in Miroudot and Yamano, 2013)

Foster et al (2011) focus on net trade in value added, rather than exports or imports

of value added separately to show that a country‟s net export in value added equalsits net exports in gross trade thus linking it to national accounting identities Theirframework also splits trade in value added into various forms of domestic andforeign content of exports and imports which also links to recent measures ofvertical specialization in production networks, thus linking the literature on trade invalue added and vertical specialization and on the factor content of trade

Koopman et al.‟s (2008, 2010, and 2012) work provides a full decomposition of thevalue added embodied in exports in a single conceptual framework This frameworkencompasses all the previous measures of vertical specialization and value addedtrade in the literature and decomposes a country‟s gross exports into value addedcomponents by source In fact, the gross exports are disaggregated into fourcomponents of domestic value added- (i) domestic value added embodied in exports

of final goods and services consumed by the importing country, (ii) domestic valueadded embodied in exports of intermediate inputs used by the importing country toproduce its domestically needed products, (iii) domestic value added embodied inintermediate exports used by the importing country to produce goods for exports tothird countries, and (iv) domestic value added embodied in intermediate exportsused by the importing country to produce goods shipped back to source country,

and the one component of foreign value added They verify that the component offoreign value added in a country‟s exports‟ is mathematically identical to the VSmeasure as proposed by Hummels et al (2001) in multi-country settings, howeverwithout their restrictive assumption Also, that the sum of domestic value added andforeign value added of a country is equal to that of the country‟s gross exports.

It is because of these sets of papers that we have now better understanding about theconceptual frameworks, methods of estimation of „trade in value added‟ embodied

in exports, and participation of a country in global value chain These have alsobeen used in calculation of a series of indicators that shed light on trade reality andparticipation of a country in global value chain In this regard, Dean (2013) notesthat greater the fragmentation and dispersion of the production tasks based oncomparative advantage, the more low-income countries can participate in theseproduction chains Saito and Salgado (2013) argue that the real effective exchangerates based on value added trade weights would measure competitiveness moreaccurately than those based on gross trade weights, thus improving the exchangerate assessments which in turn would improve ability to estimate the impact ofchanges in relative prices

2.2 Importance of ‘Trade in Value Added (TiVA)’ approach

TiVA is a statistical approach that estimates the sources of value added, by countryand industry in exported goods and services by disaggregating the value addedembodied in gross exports into domestic and foreign contents Thereby it recognisesthe „domestic value added embodied in gross exports‟ as the actual exports of thereference country

The obvious question is that „what is the use of developing „trade in value added‟statistics on international trade?‟ As discussed earlier that fragmented productionprocess and trade in intermediate goods have become increasingly dominantfeatures of global economic integration that have also challenged the conventionalwisdom on how we look at and interpret trade and, in particular, the policies that wedevelop around it Few areas where measuring trade in value added brings a newperspective and is likely to impact policy choices, have been discussed as follows:

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2.2.1 A better understanding of bilateral trade imbalances

In 2009, the conventional data reports that the US had a trade deficit with Mexico ofUS$48 billion and a trade deficit with Canada of US$22 billion However, in valueadded term these numbers were found 25 percent lesser in each case It furtherreveals that 12 and 8 percent of total exports from Mexico and Canada to the world,respectively, reflects US value added trade (Dervis et al., 2013) Likewise,Koopman et al (2013) in their research find that in 2010, US has 25 percent lessertrade deficit with China in value added terms (US$131 billion as compared toUS$176 billion), while its trade deficit increased by 60 percent with that of Japan(from US$23 billion to US$36 billion) These two instances sufficiently reveal thatthe conventional approach apart from double counting problem, also fails to capturethe role of third countries in bilateral trading relationships (for example roles ofJapan, Korea etc are not adequately captured in the US-China iPhone trade despiteadding a large value to iPhone exports to the US)

Benedetto‟s work (2012) throws ample light on this issue and highlights thesignificance of value added approach He establishes that the trade in value addedapproach does not change the overall trade balance of a country with the rest of theworld; instead it redistributes the surpluses and deficits across partner countries,thus giving credits to the true trade partners (table 2.1) At the level of bilateraltrade, however the (1) and (2) terms do not necessarily cancel and so a bilateralvalue added trade balance can be different from a reported bilateral trade balance(conventional data)

Differences between reported and value added bilateral trade relationships haveimportant implications for trade policy For example, in 2012 the US had bilateraltrade in goods deficits with China (US$315 billion), Japan (US$76 billion), Mexico(US$61 billion) and Germany (US$60 billion), and bilateral trade surpluses withAustralia (US$22 billion), Brazil (US$12 billion), Chile (US$10 billion) andPanama (US$9 billion) And it is the size of the trade deficit that feeds all manner ofconcerns in the US about declining competitiveness, job losses, and unfair tradepractices by Chinese companies However, the size of US trade deficit with China

decreases by 25 percent when measured in value added terms One important tradepolicy insight here from the value added data is that trade barriers to Chineseimports will often harm US consumers through higher prices for final goods Inaddition, US manufacturers would end up paying more for intermediate goods,which would reduce the competitiveness of their final goods in the US and in exportmarkets overseas Furthermore, to the extent that US trade barriers reduce demandfor Chinese imports, they also reduce demand for the US goods and servicesincorporated into China‟s exports Value added trade also reveals why it is also inChina‟s interest to reduce its trade barriers Given the significant trade inintermediate goods and services used in China, reducing its trade barriers wouldmake Chinese products even more competitive domestically and overseas (Dervis etal., 2013) This is only one example of how value added data can change the way

we understand the role of trade and its implications for trade policy

Table 2.1: The equivalence of reported and value added trade balances at the level

of trade with the entire world

Gross Domestic VA that stays Foreign VA that stays Domestic VA that

Foreign VA that(1) Domestic VA that will (1) Domestic VA that is

(2) Foreign VA that is (2) Foreign VA that will

embedded in exports be embedded in exports

Foreign VA thatstays home

Source: Benedetto (2012): p 43

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2.2.2 An effective measure of the efficacy of trade barriers and trade measures

In a global value chain framework, competition is not between nations but betweenfirms to access to competitive inputs and/or technology Also, domestic value added

is found not only in exports but also in imports (when exports are intermediate, andimports are final products) In such a condition, tariffs, non-tariff barriers and trademeasures (such as anti-dumping rights) as a consequence are likely to impactdomestic producers in addition to foreign producers

The case of „anti-dumping duty‟ that the European Commission (EC) imposed onentry of Chinese and Vietnamese leather shoes to EU market in 2006 reveals thisissue clearly The duty was imposed on evidence of unfair trade practices in form ofdisguised subsidies and unfair state intervention to the leather footwear industry inthese two countries with an argument that the anti-dumping duty would help tocorrect the injury caused to European leather shoe producers (EuropeanCommission, 2006) Later in 2012, the Swedish National Board of Trade (NBT)conducted a study using „trade in value added‟ approach to examine the efficacy ofthis anti-dumping provision, and interestingly found that leather shoes manufactured

in China and Vietnam had had incorporated 50 to 80 per cent of their value additionfrom European Union This means that shoes manufactured in China or in Vietnamwere not truly manufactured in China or in Vietnam; rather these still could havebeen regarded as „made in Europe‟ shoes This report concluded that Europeanshoes companies were not protected, in fact damaged by anti-dumping provision(NBT, 2012) From this case, one can see how a policy based on conventional grosstrade data might be misguiding Had the initial analysis on leather shoes „made inChina and Vietnam‟ been based on trade in value added approach, the anti-dumpingduty might have not been justified From this what can be inferred that measuringtrade in value added gives a new perspective to analyse efficacy and effectiveness oftrade policies

2.2.3 A better way to analyse job contribution of trade

An analysis on „job content‟ of trade (i.e where is job created because of trade?) isrelevant when one looks at the value added trade that tells where exactly jobs are

created Also, by decomposing the value of imports by source economy (includingthe domestic one) one can see who actually benefits from trade The above anti-dumping case can also be interpreted in terms of jobs protection or job loss in theEU‟s shoe industry Conventional thinking in gross terms may perceive that imports

of leather shoes from China and Vietnam to EU caused job transfer from EU toChina and Vietnam However, rethinking the situation from the perspective of valueadded terms can make one realise that only assembly jobs have been transferredfrom the EU, while the jobs in the research and development, design and marketingactivities are still contributing to the employment there Such shift occurred becausethe fragmented production process kept costs low and EU companies competitive Itwas in fact a case of application of comparative advantages to „tasks‟ rather than to

„final products.‟ Had the initial analysis on leather shoes „made in China andVietnam‟ been based on trade in value added approach, the anti-dumping dutymight have not been justified again

2.2.4 A better measure of trade competitiveness

In the light of the fact that gross exports suffer from double counting in the world offragmented productions with high possibility of being inflated for the countries such asChina, Mexico, Vietnam etc which are located at the end of production process, it ismost likely that the indicators of trade competitiveness such as „revealed comparativeadvantage (RCA)‟ might be noisy and misleading The well-known Apple „iPhone 4‟example (Xing and Detert, 2010) explains the issue very clearly taking example of

„assembly of iPhone 4 in China‟ They found that of the US$178.96 factory gate price

of an iPhone 4 assembled in China, only US$6.50 was contributed by China itself, andthe bulk of the components were imported from Japan, Germany, Korea and the USwhich shares US$60.60, US$30.15, US$22.96, and US$10.75 respectively Theremaining US$48 was contributed by other countries than China Under conventionaltrade approach we know that the gate price US$178.96 would be recorded as theexports of China per piece of the iPhone 4

In terms of trade specialisation, China seems to have a comparative advantage inproducing iPhones on the basis of gross exports which is not true Instead, its

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comparative advantage is in the assembly work In his empirical work, Johnson(2013) using gross exports finds that China has a comparative advantage incomputers however his conclusion gets reversed while using value added terms Inanother empirical work, Koopman et al (2014) using gross exports find that bothChina and India have strong revealed comparative advantages in „finished metalproducts.‟ However, when using domestic value added exports of this sector, bothcountries RCA ranking drops precipitously For India in fact the sector switchedfrom a comparative advantage sector to a comparative disadvantage sector Thesetwo empirical works clearly reveal how exaggeration in the gross exports can haveserious repercussion in estimation of revealed comparative advantage for a sector orindustry which may also alter the industrial policies as the policymakers may makeincorrect decision while identifying the export sectors for promotion It makes acompelling case for the production of trade statistics in value added term No doubt,that such analysis is highly relevant from a policy perspective.

2.2.5 Measuring backward and forward linkages of an economy

The domestic value added and foreign value added embodied in gross exports arecomponents of „Trade in value added‟ that are essential for knowing how areference country would involve into global value chain, that is whether viabackward linkage as buyer of intermediate products, or via forward linkage assupplier of intermediate products for the exports of buyer countries The „backwardlinkage‟ here shows the extent to which imports from supplier countries are used inthe production of the reference country‟s exports and is measured as the share offoreign value added embodied, in the gross exports of the reference country.Likewise, the „forward linkage‟ shows the extent to which the reference country‟sintermediate products would form part of the buyer countries‟ exports to thirdcountries, and is measured as the share of domestic value added contained in theexport of such intermediate goods or services, in the gross exports of the referencecountry The sum of these two linkages is the global value chain (GVC)participation index Nonetheless, without looking at the individual component of the