HOW FREE TRADE AGREEMENTS EFFECT ON EXPORT AND IMPORT IN VIETNAM

Where natural log of import and export value of good i to and from country j(Vietnam) from and to country k at time t; Dist k is log of distance between Vietnam and country k; GDP kt [r]

HOW FREE TRADE AGREEMENTS EFFECT ON

EXPORT AND IMPORT IN VIETNAM

Nguyen Thi Hoang Oanha,b

a Economics Department - National Chung Cheng University – Taiwan

bThaiNguyen University of Technology Email: info@123doc.org

Abstracts

The important year remarking Vietnam opening and integration is in 1995 as member of ASEAN By 2016, Vietnam has negotiated, signed, and implemented sixteen free trade agreements They include both multilateral and bilateral free trade agreements such as China-ASEAN, Vietnam-Chile, and Vietnam-Japan By signing free trade agreements Vietnam can increase trade flows in bilateral and multilateral developed-country FTA scenarios Trade creation and diversion can find in multilateral developing-country FTA scenario and I find the impacts of each free trade agreement are different if analyze for each 2-digit commodity.

Keywords: Trade agreement, trade, import, export, commodity code.

1 INTRODUCTION

A free-trade area is the region encompassing a trade bloc whose member countries have signed a free-trade agreement (FTA) Such agreements involve cooperation between at least two countries to reduce trade barriers – import quotas and tariffs – and to increase trade of goods and services with each other (Wikipedia)

The opening index of Vietnamese economy increases over time from 20% to 173% in period 1985-2015 One

of reason can explain by signing FTAs Countries signed FTA have advantage not only in import and export goods and services by reducing trade barriers, increasing social welfare also bringing a new competitive for domestic firms with foreign firms in foreign and domestic markets Vietnam signed and implemented 10 FTAs, finishing negotiation 2 FTAs, and is negotiating 4 other FTAs to 2016 (VCCI) Do domestic firms take advantages of trade agreement opportunities? And which kind of goods and services trade most through FTAs? These are issues I want to find answers

in this paper

The relationship between FTAs and international trade attracts interest of researchers Baier and Bergstrand (2007) mention some approaches to deal with the relationship between FTAs and trade such as instrumental variables, control function and penal approach They find that FTAs help increase the trade flows fivefold Chong and Hur (2008) use the hub and spoke concept to find this relationship They conclude that small and open economies prefer hub status

to a free trade zone involving the same country group, and the hidden cost such as those incurred from wooing prospective members, domestic resistance can reduce benefit from FTAs Hur (2010) uses panel data to investigate the effect of FTA and hub and spoke system on trade He finds the positive effect is higher in non-overlapping than hub and spoke system McDonald and Walmsley (2008) mention focus on whether the third parties would be affected by bilateral FTAs And they find that bilateral FTAs can bring noticeable adverse consequences for nations that are not party in the FTA Pan at el., (2008) analyze the effect of FTA between Dominican Republic-Central and America-United States an industry level They find that the U.S cotton yarn and Caribbean cotton apparel industries to be positive while the U.S cotton apparel industry suffers significant losses Benedictis at el., analyze the effect of the Central European Free Trade Agreement (CEFTA) and the Baltic Free Trade Agreement (BFTA) on intra-European trade They use gravity model with GMM method and find the presence of intra-periphery agreements helped expand intra-periphery trade and limited the emergence of a “hub-and-spoke” relationship between Central and Eastern European Countries (CEECs) and EU Nguyen (2015) use three models to investigate the impact of FTAs on trade as gravity model, adjusted sample selection model, and Poisson Pseudo Maximum Likelihood The results are positive relationship between FTAs and trade outflow

In this paper, I focus on analyze the effect of each of FTAs that Vietnam is a negotiator (Vietnam directly take part in negotiation processes) on both export and import flow as pooled commodities as well as each of 97 2-digit commodities There are two kind of FTAs Vietnam as a member, bilateral trade agreement and multilateral trade agreement I use seven FTAs that are in force, two of them are bilateral trade agreement (Japan and Chile are partners in this kind) and multilateral otherwise (list in table 1.b) Trade creation finds from bilateral FTAs The increase of export and import are results from signing bilateral FTA Export to Japan and Chile increase over 300% and 60%, respectively Multilateral FTA can separate into two groups, group one includes Vietnam partners that are high income level (Korea, New Zealand, Australia) and the other includes developing countries (ASEAN, China, and India) The effect of FTA on Vietnam trade flows are difference between them The former helps to create trade creation both in and out flows The latter one is trade creation in import, the other is trade diversion, the same evidences also find in out flow With 2-digit commodities the coverage of commodity affected by each FTA are different among them The greatest numbers are in VJFTA and AFTA with 50%, the least are in VCFTA with 10% The effect of FTAs on trade flows is so different, some commodities are affected strongly from FTAs, and some other ones seem no evidence of effects

The rest of this paper is organized as follow: part 2 as data discretion, part 3 as methodology, part 4 as estimation results, and the last one is conclusion

2 DATA DISCRETION

As mention in part 1, Vietnam signed and is negotiating are sixteen FTAs, however some FTAs signed in 2015

or after 2015, and some are continuing to negotiate, so in this paper I only evaluate the impact on trade from seven FTAs, name of FTAs and the year signed so in appendix table 1.b

Vietnam trade data with its partners takes from Comtrade, including both import and export flows to and from Vietnam with 2-digit goods from 1990 to 2015 The list of 97 2-digit commodities is in appendix table 1.c The advantage of this data is that goods can download with 6-digit with a lot of countries and territories with a quite long period, trade in and out flow as well as the some kinds of good classification as Harmonization System (HS) or Standard international trade classification (SITC) following each reporter The disadvantage is trade data change so much in the same bilateral trade as we change the reporters, however The differences of bilateral trade flows because import flow is generally reported on the basis of Cost, Insurance and Freight, (CIF) while exports is reported on a Free

on Board (FOB) basis It causes change the results when you change the reporters

Vietnam had relating trade with 240 countries and territories in 2013 (VCCI), I download trade data from Comtrade between Vietnam and its partners, Vietnam as reporter data is only from 2000, however and some trade in and out flow Vietnam partners appear little times during period So I keep only 181 countries as sample size and trade data that have FTAs with Vietnam come from their reports Gravity data include GDP (Vietnam and its partners), distance, and colony also use to analyze come from CEPII Information of FTA (which FTA and time to signed) takes from VCCI website As AFTA Vietnam joined in 1995, it began to cut tariff from 1999 (VCCI) although, so the true effects of FTAs with trade flow can happen after or before FTAs signed

Summation of the sample size is shown in table 1 and 2 These tables describe information

of variables using to estimate the relationship between trade flows and FTAs The meaning of notation is detail in part 3, X represent for natural log of trade flows and FTAs Vietnam signed

from 1995 as well as other control variables

Table 1 Summary of import flow from Vietnam partners

Variab

GDP k

11546

GDPv

n

11546

Dist k

11546

AIFT

AKFT

ACFT

A

11546

AFTA

11546

VJFT

A

11546

VCFT

Table

2

Sum

mary

of

expor

t flow

from

Vietn

am

partne

rs

Variab

GDP k 76361 26.380 1.785 16.553 30.523

GDPv

Dist k 76361 8.610 0.859 6.280 9.868

AIFT

AAZN

AKFT

ACFT

VJFT

VCFT

3 METHODOLOGY

Gravity model is a dominated model used to estimate the relationship between bilateral trade flows and market sizes, distances This model is applied from the model mentioned by Tinbergen (1962) as follow:

(1)

Where is bilateral trade flow between country I and country j; and are GDP of country i and

Distance between two countries as proxy for transportation cost when trade flows are delivered However, tariff barriers are also one of the important factors to prevent trade flows Preferential schemes or liberalization of trade and investments bring the advantages for bilateral trade because a lot of tariff rows and other provisions are removed after signing the FTAs From equation 1, taking natural log of its both sides and because I focus on the evaluation the

effect of FTA on Vietnam’s trade then, I add seven FTA-dummy variables They are zero before FTAs signed and one otherwise as in equation 2 In equation 2, beside controlling the market sizes by GDP of Vietnam and its partners, CEPII data also supply other variables also affect bilateral trade as common language, colony Vietnam does not have common language with any its trade partners, however and colony variable is one if its partner is France and zero otherwise I run equation 2 either including colony variable or not but the size of coefficients and standard errors are quite similar So in this paper I do not include this variable Trade flows also are affected by economic shocks as financial crises or other shocks or correlation among years I control those effects by adding the fixed year effects The values of trade also are different among commodity groups such as manufactured goods are traded more than agricultural goods To control this effect I use the fixed commodity effect for 97 2-digit commodities

Where natural log of import and export value of good i to and from country j(Vietnam) from and to country

k at time t; Distk is log of distance between Vietnam and country k; GDPkt is log of GDP of country k at time t; GDPjt: log of Vietnam GDP at time t; FTA is dummy variable as FTA signed between Vietnam and its partners at time t (both bilateral and multilateral FTAs), including Asian-India, Asian- Australia and New Zealand, Asian-Korea, Asian-China, Vietnam-Asian, Vietnam-Japan and Vietnam-Chile, respectively (abbreviation for each FTA are equivalent AIFTA, AAZNFTA, AKFTA, ACFTA, AFTA, VJFTA, and VCFTA) αt and αi are fixed year effect and fixed commodity code effect, respectively; µijkt: error term I use equation (2) to estimate the impact of FTA on trade for pooled goods, then for each of 2-digit goods (exclude fixed effect of commodity goods in latter case)

4 ESTIMATION RESULTS

The estimation of pool of trade affected by FTAs is shown in table 3 As expectation of sign of GDP, and distance’s coefficients, they are statistically significant Sign of coefficients of GDP is positive for both import and export flow If Vietnam and its partners’ market size increase then trade flows increase Distance coefficient is negative, trade flows decrease if transportation cost as distances increase

Seven FTAs can be divided into two kind of FTAs: bilateral FTAs (VJFTA and VCFTA) and multilateral FTAs otherwise Bilateral FTA is so-called new generation of FTA base on commitments between countries deeper and larger than multilateral FTAs The results prove that bilateral FTAs increase both Vietnam import and export, VJFTA and VCFTA’s coefficients are significantly positive VJFTA helps increase trade to and from Japan over 300% and nearly 100%, respectively VCFTA affect more on trade to than from Chile Multilateral FTAs are separated into multilateral FTAs with developed countries (AKFTA, AANZFTA) so-called as developed-country FTAs and with developing countries (AIFTA, ACFTA, and AFTA) so-called as developing-country FTAs Both import and export flows increase in cases of developed-country FTAs, in cases of developing-country FTA trade flows increase, or decrease, or have no evidence Vietnam imports decrease in AIFTA, AFTA and increase in ACFTA Exports increase

in AFTA, no evidence in ACFTA

Both bilateral agreements help Vietnam trade flows increase significantly The results are not surprised because bilateral agreements cover more and deeper sectors In case of VJFTA, agriculture sector is sensitive Japan usually avoid to negotiate in agreements, but in this agreement Japan make a lot of preference schemes for Vietnam Level of tariff reduce from Japan create advantage in Vietnam exportation The other reason is industrial structures between Vietnam and Japan, they are complementary each other Vietnam strengthens in labor good intensive, Japan strengthens in capital good intensive Especially, Japan is the highest share of foreign direct investments (FDI) in Vietnam, Japanese firms import machines, technologies from Japan, and implement production process in Vietnam, then export final goods to Japan Vietnam becomes as a part in Japanese production chain The effect of VCFTA on Vietnam trade is also explained by complementary in production process While Vietnam exports the final goods to Chile, Chile exports raw materials for exporting products to Vietnam

The effects of multilateral FTAs divide into two directions, developed-country FTAs increase both Vietnam trade in and out flow The same effects do not find in developing-country FTAs Trade increases in developed-country FTA are also explained by complementation in industrial structures Korea and Australia are capital intensities, both

import labor intensive goods from Vietnam and export capital intensity And the other reason sounds like same in Japan, Korea is the second largest share of FDI in Vietnam, FDI helps Korean firms capture the advantages from Vietnam to products, then they export produced goods to Korea While the ASEAN countries have quite same in structural products, they focus to product the labor intensive goods like textiles, garments, apparels, or agriculture products The similar industrial structures can find from China and India, their advantages are inexpensive, productive manpower Competition among ASEAN, ASEAN and other members are unavoidable Vietnam exportation to India and China in AIFTA and ACFTA decrease or no increase because other ASEAN countries also export the similar products to two these markets and in this competitions Vietnamese firms seem lower productivity and lose The other reasons, Vietnam as the same other Asian countries signed a lot of FTAs and they are in force in the same time, each FTAs have differences in preferential schemes and requirements as rules of origin (ROOs) Multiple ROOs in overlapping FTAs pose a severe burden on small enterprises, which have less ability to meet cost of ROOs Import reduction in AIFTA and AFTA in the “noodle bowl” FTAs scenario can come from choice of preferential schemes with other FTAs, Vietnam firms switch from these FTAs to others or to non-members, create trade diversion

Vietnam and its FTA partners commit to create preference schemes on commodities traded but not all, meaning that preference schemes are not applied on all commodities To know which commodities are affected by FTAs, I apply equation (2) for 97 2-digit commodities in table 1.c and the results are shown in table 4

Following the columns I evaluate the effect of each FTA on each commodity First, I explain some notations in table 4 The plus mark (+) represents the significant positive relationship, the subtract mark (-) represent the significant negative relationship, N+ is insignificant positive coefficients, N- is insignificant negative coefficients, Z represents the

no value of coefficients (no observations after signing FTA), N is observations in sample, and R^2 represents R-squared

Notation Z appear both bilateral FTAs, varies so much however, in VJFTA only one time (commodity 2), 58 and 39 times on import and export flows respectively in VCFTA These numbers imply that VCFTA between Vietnam and Chile although have positive impact, the range of effect is quite small, only a half of commodities are traded between two countries If we add N- and N+, this ratio is smaller, only one-firth importing and one-sixth exporting commodities are truly affected by VCFTA The results cause history of trade between two countries, before signing FTA bilateral trade between Vietnam and Chile owns very small share Example in 2007 import value from Chile was

$110.1 million while from Japan is $6,188.9 million And as previous paragraph confirms, Vietnam imports raw material that used to product exporting products as commodity 3, 6, 8, 14, 15, 16, etc and export commodity 36, 54, 55,

56, etc

In VJFTA, commodity 2 is not traded between Vietnam and Japan We look at in preferential scheme apply for commodity, this one appear a lot of convention of R and X, mean that exclude tariff commitments in VJFTA Closely 60% of importing and 45% of exporting commodities are not impacted by VJFTA After ten years, 87.6% tariff rows are removed mean that in 2019 this provision becomes in force My data only to 2015, so range of commodities affected is not large The most important finding in VJFTA is 51/97 commodities that are positive effect on exporting goods This number is greatest positive number in both import and export flow comparing with other FTAs In list of 97 commodities, first 20 commodities are agriculture products, Vietnam export successfully eight of them to Japan and also greatest positive number relating to agricultural products Again this confirms Japan gives easier conditions for Vietnam agricultural products The last but not least, positive coefficients between import and export commodities happen in the same row mostly (45%), this implies that trade between two countries are complementary goods From counting of notations, this FTA is evaluated success in bilateral trade

Multilateral agreements affect all commodities, although insignificant effect is quite great from 45 to 65% of commodities The greatest number is in ACFTA, the second ones in AIFTA and the lowest number is in AFTA So the aim of access large markets such as China and India is not truly successful In international arena, Vietnam’s competitiveness is modest Developing-country FTAs affect commodities differently In AIFTA most commodities are negatively significant both import and export (one-third commodities), only 8 and 5 are positive in import and export, respectively And reductions happen in both agricultural and manufactured products The number of commodities impacted in ACFTA and AFTA are quite similar (except import flow in ACFTA) Interesting point in two these FTAs

is that 16/27 commodities that are significant effect have opposite sign in import flow This proves that Vietnam firm switch from AFTA to VCFTA or trade diversion occurs in AFTA Developed-country FTAs affect positively both import and export Trade creation in import flow occurs with the greatest number of commodities in AKFTA (39 items) And again the same sign of coefficients of import and export in both AKFTA and AANZFTA happen in the same rows, this refers to the complementary goods traded between Vietnam and those two partners (50% of commodities)

Following the rows I evaluate the effect of all FTAs on each commodity From column sum, I can find evidence that no commodity is impacted by all FTAs and also at least two FTAs affect one commodity Total numbers

of coefficients for each commodity affected by FTA are 14, commodity 81, 83, and 86 have 12 insignificant or non effect coefficients they still are impacted by two different FTAs Two FTAs affect a commodity also happen in case the total number is 10 or 11 And I find commodity 2 and 4 also are impacted by two FTAs The greater number of sum the less number of FTAs affects a commodity So five above commodities are least effected by FTAs, this result can occur when their trade volume with non-member take greater share or trade value before and after signing FTAs change very little The major export items increase through preferential schemes such as commodity 10 (cereals), 16, 48, 49 (papers and printed books), 56, 61 to 64 (textile, closing, footwear), 90 They are items that Vietnam has comparative advantages There are three items that are not impacted by FTAs in outflow, where two of five commodities in the least effect are 81, 83 and the other 60 In import flow, the largest trade creation finds from commodity 6, 44, and 47, the largest trade diversion finds from commodity 66, a little lower from commodity 43 and 64 From table 4, the impact of FTAs on trade flows are only one side or increase or decrease such as item 2 only decrease, item 25, 33, and 38 only increase I add number of plus and subtract marks, sum from that calculation evaluates number of FTAs that affect one commodity This result is opposite meaning with sum of insignificant effect, the greater number the more FTAs impact

on a commodity The results show that commodity 6,8,50, 57, and 66 are affected by the greatest number of FTAs

5 CONCLUSIONS

Participation FTAs help to improve free trade by reducing trade barriers, then increase development economy and welfare as classical trade theories mentioning Vietnamese firms take part in global plays in both foreign and domestic markets (flat markets) create not only opportunities to develop but also more pressure in competitions Exploiting opportunities from FTAs and reducing disadvantages also are outstanding requirements

Signing FTA Vietnam expects to increases trade flows This is true in bilateral FTAs and developed-country FTAs, but developing-country FTAs this expectation does not truly occur Trade flows increase, or decrease, or no evidence to conclude This results happen in multilateral FTAs because the competition among members or trade diversion with non-members Both export and import decrease in AIFTA, import decrease in AFTA and no evidence of export in ACFTA The success of bilateral FTAs and developed-country FTAs comes from the industrial structures They have complementary goods with Vietnam Vietnam need to exploit more advantage of FTAs by increasing more commodities traded through preferential schemes, especially in VCFTA only few percentages of commodities are traded FTAs also help Vietnam take its comparative advantage by exporting more commodities to other markets and reduce the production cost by importing the factors with lower prices However the aim to market access is not really successful, evidence from the number of commodities that are not affected by each FTA is quite great (from 45%-60%,

in VCFTA is 85%) Vietnam firms’ productivity need to increase to serve more markets, not only move from one preferential to other scheme to take advantage

REFERENCES

[1] Baier, S.L., Bergstrand, J.H (2007), “Do free trade agreements actually increase members' international trade?”

Journal of International Economics, 71 (2007) 72–95

[2] Benedictis, L., Santis, R., Vicarelli, C (2005), “Hub-and-Spoke or else? Free trade agreements in the ‘enlarged’

European Union,” The European Journal of Comparative Economics , Vol 2, n 2, pp 245-260

[3] Chong, Soo Yuen & Hur, Jung (2008), “Small Hubs, Large Spokes and Overlapping Free Trade Agreements,”

The World Economy, 10.1111/j.1467-9701

[4] Das, R.U., Rishi, M., Dubey, J.D (2016), “Asean plus six and successful ftas: can india propel intra-industry trade

flows?”, The Journal Developing Arears, Vol 50, No 2

[5] Hayakawa, K., (2014), “Impact of diagonal cumulation rule on FTA utilization: Evidence from bilateral and

multilateral FTAs between Japan and Thailand,” J Japanese Int Economies, 32 (2014) 1–16.

[6] Hur, J., Alba, J D., & Park, D (2010), “Effects of hub -and-spoke free trade agreements on trade: A panel data

analysis,” World Development, 38(8), 1105-111

[7] Jennifer Y Leung, (2016), “Bilateral vertical specialization between the U.S and its trade partners—before and

after the free trade agreements,” International Review of Economics and Finance, 45 (2016) 177–196

[8] Jongwanich, J., & Kohpaiboon, A (2017), “Exporter responses to FTA tariff preferences: evidence from

Thailand,” Asian Pacific Economic Literature.

[9] Lakatos, C., & Walmsley, T (2012), “Investment creation and diversion effects of the ASEAN–China free trade

agreement,” Economic Modelling, 29 (2012) 766–779.

[10] McDonald, S & Walmsley, Terrie (2008), “Bilateral Free Trade Agreements and Customs Unions: The Impact of

the EU Republic of South Africa Free Trade Agreement on Botswana,” The World Economy, 10.1111/j.1467-9701

[11] Nguyen, Q.H., & Nguyen, T.H (2015), “The impact of free trade agreement on trade flow of goods in Vietnam.” [12] Pan, S., Welch, M., Mohanty, S., Fadiga, M., & Ethridge, D (2008), “Welfare analysis of the Dominican

Republic-Central America-United States free trade agreement: the cotton textile and apparel industries,” The International Trade Journal, Volume XXII, No 2, 1521-0545

[13] Vanhnalat, B., at el (2015), “Assessment the Effect of Free Trade Agreements on Exports of Lao PDR,”

International Journal of Economics and Financial Issues, 2015, 5(2), 365-376.

[14] Vietnam Chamber of Commerce and Industry (VCCI), “Freedom of international trade in Vietnam,” Research report, Vietnam.

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Table 4 Summary the estimation results for each FTA and each commodity

odit

y

TA

NZ

FT

A

FT A

FT

FT A

FT

Su

0.1

0.3

0.2 2

2,2 90

0.1 82

1,8 80

0.1

0.2

0.3 42

1,7 11

0.3 7

1,5 48

0.3

0.3

1,0 38

0.5

1,1 95

0.4 12

1,1 39

1,0 51

0.5 45

1,0 52

0.1

0.4

0.3

0.4 87

2,2 72

0.4 27

1,8 69

0.3

0.3

1,0 78

0.2 29

1,0 15

0.5 39

1,4 31

0.4 81

1,0 35

0.5 18

2,2 62

0.5 41

2,3 21