Evaluate the impacts of ftas on Vietnam iron and steel trade flows under ASEAN+3: gravity model analysis

In this study, Reveal Comparative Advantage Index (RCA) of Vietnam iron and steel industry is calculated to show how competitive is iron and steel in Vietnam’s export compar[r]

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EVALUATE THE IMPACTS OF FTAS ON VIETNAM IRON

AND STEEL TRADE FLOWS UNDER ASEAN+3:

Dr Nguyen Anh Thu

Do Thi Mai Hien

University of Economics and Business, Vietnam National University, Hanoi

Abstract

This paper analyzes the impacts of all FTAs in the ASEAN+3 region which Vietnam has signed on Vietnam Iron and Steel trading status In this respect, a gravity model is used with panel data an dordinary least-squares (OLS) regression method covering 27 top trading countries from 2001 to 2012 The final gains of the paper is to point out clearly the positive impact of ACFTA and VJEPA on increasing import flows

of iron and steel into Vietnam while AKFTA, AFTA and VJEPA has played positive effects on exporting AJCEP and AFTA are concluded to have little impact on both import and export volume Besides, effects of other determinants apart from FTAs on trading status are also gained after this paper

Tóm tắt

Bài nghiên cứu đi sâu đánh giá tác động của các Hiệp định thương mại tự do (FTA) mà Việt Nam đã ký kết trong khu vực ASEAN+3 đối với hoạt động xuất nhập khẩu mặt hàng sắt thép của Việt Nam Phương pháp mô hình trọng lực đã được sử dụng với nguồn dữ liệu dạng bảng, ước lượng bình phương nhỏ nhất, chạy hồi quy trên mẫu dữ liệu bao gồm lưu lượng xuất khẩu, nhập khẩu mặt hàng sắt thép với của Việt Nam với 27 quốc gia có cán cân thương mại xuất nhập khẩu lớn với Việt Nam về mặt hàng sắt thép

từ năm 2001 đến năm 2012 Bài nghiên cứu đã chỉ ra Hiệp định ASEAN- Trung Quốc (ACFTA) và Hiệp định song phương Việt Nam- Nhật Bản (VJEPA) có tác động thuận với hoạt động nhập khẩu các mặt hàng sắt thép của Việt Nam trong khi các hiệp định ASEAN

- Hàn Quốc (AKFTA), Hiệp định thương mại tự do (AFTA) có ảnh hưởng tích cực đến hoạt động xuất khẩu mặt hàng sắt thép của Việt Nam ẠJCEP và AFTA được ghi nhận là những hiệp định chưa có nhiều tác động đến hoạt động ngoại thương của ngành sắt thép Việt Nam Mức độ ảnh hưởng của những nhân tố khác ngoài các hiệp định đối với hoạt động xuất nhập khẩu sắt thép của Việt Nam cũng đã được chỉ ra trong bài nghiên cứu

1 Introduction

1 The research could not be completed without kind support of Mr Nguyen Thanh Tung, Mr Pham Van Nho and

Mr Nguyen Tri Si We are truly grateful to say thank to all of them Any remaining mistakes are by the authors alone

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The establishment of FTAs has been regarded as a commitment between member nations towards a free trade area The impacts of increasing Regional trade agreements over years have been figured out in several industries Iron and steel industry is known as

a sensitive industry in Vietnam which also under the significant effects of free trade agreements In this paper, the author tries to address main concern about the impacts of FTAs under ASEAN+3 on Vietnam Iron and Steel industry How is the current status of tariff reduction of Vietnam iron and steel industry under FTAs? Up to now, what is the trading status of Vietnam Iron and Steel Industry in ASEAN+3? These questions are all explored carefully

In this study, Reveal Comparative Advantage Index (RCA) of Vietnam iron and steel industry is calculated to show how competitive is iron and steel in Vietnam’s export compared to the product’s exports in relations to its share in the world trade while Export and import intensity index are cultivated to measure which nations Vietnam has larger share in export and import iron and steel More importantly, to have a clear answer about the effect level of FTAs on trading flows of iron and steel products, a gravity model approach is used Basing upon the available of information, data used in the model are from 2001 to 2012 from trusted sources

The paper is divided into five major sections First, a brief introduction about the content of the paper is pointed out Second part is a specific review of the methodology

of all previous researches While in some ways, the paper is quite similar to the works of URATA Shujiro and OKABE Misa (2007) in having depicted an image of trade flows under the effects of FTAs, or Sohn, Chan-Hyun (2001) in using the gravity model analysis to work out the relationship between the trading flows and regional trading agreements, especially Nguyen Tien Dung (2011), this study still become unique in applying gravity model in a new scope which is the iron and steel trade flows of Vietnam under ASEAN+3.There has not been any study applying gravity model on Vietnam iron

and steel trade flows Section 3 analyzes an integration of Vietnam Iron and Steel

Industry in ASEAN+3 in terms of the openness level of FTAs, competitive advantage of Vietnam iron and steel industry in the regional integration and the change of trading

volume of Vietnam iron and steel industry after FTAs Section 4 applies the gravity

model approach in clarifying whether FTAs has effects on iron and steel export and

imports The final remaining part is followed to make a conclusion and

recommendations for Vietnam towards the integration in ASEAN+3

2 Methodology

In this paper, the separate influences of FTAs and other variables are quantized by percentage change of trading flows The author uses gravity model to quantize the impacts of Free trade Agreement on the import, export value of iron and steel industry with supports of economic software eview 6.0 in order to examine the impact of the FTAs on trade flows by controlling the factors other than tariff reduction

Over the world, there have been a number of researches focusing on the analysis

of the effects of FTAs especially ones using gravity model to clarify the impacts of FTAs within region on significant sectors of a country The first formulations of the gravity model equation are found in Timbergen (1962), Pöyhönen (1963) They applied to the gravity equation to analyze international trade flows Since then, the gravity model has become popular instrument in empirical foreign trade flows Initially, the gravity model

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is used for explaining the exports from country i to country j which depends on the economic sizes (GDP or GNP), their populations, direct geographical distance and a set

of dummies incorporating some kind of institutional characteristics common to specific flows

In the second half of the 1970s several theoretical developments have emerged in support specifically the gravity model Anderson (1979) made the formal attempt to derive the gravity equation by adding assumption of product differentiation In 1995, Deadorff also proved that the gravity equation could be justified from standard trade theories

Up to now, the trend using the gravity model analysis to evaluate the effects of FTAs on trade flows has been increasing sharply The standard gravity model use variables as followed: Real GDP, income gap (to account for intra-industry trade and level of income), a measure of remoteness, adjacency and geographical characteristics such as being landlocked The original gravity equation looks as follows:

=

In which: A, a, b, c are the parameters to be estimated The equation’s logarithmic transformation is given by:

Log = + a.Log + b.Log + c.Log The gravity model has been widely applied in international trade studies Its popularity is due to the concept simplicity, its appropriateness to match well with the available data and the models’ econometric estimation Depend upon the significant purposes of the studies, the gravity model analysis is added more variables in many researches to apply effectively the examination of the relationship among several factors

in international trade cases

Determining suitable variables is one of the primary and most important requirements in setting up econometric models to attain precise economic results This section provides analysis and explanations for variables used in the models

The starting point of building up the models is based on the following specification of the gravity model:

In which:

represents trade flows (exports or imports) between country 1 and country “i”

is the GDP of country “i”

represents the Distance between country 1 and country “i”

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is Dummy variable indicating to which Regional and Preferential Trade Agreement a particular country belongs: “i” runs from 1 to 5, reflecting respectively AFTA, ASEAN-China, ASEAN-Korea, ASEAN-Japan, Japan-Vietnam Economic

Partnership Agreement represents 1 -Membership in the specific FTAs, representing 0-otherwise

In the simple form, the gravity equation can be re-written by logarithmic transformation as bellows:

In which:

Σ (Sij) represents other variables that affect trade like history, language, land locked, borders for example Σ (Sij) represents 1 for Colonial ties, Common language,

Landlocked, Common borders; and Σ (Sij) equals 0 for otherwise

It is depend upon the paper’s purpose which is to build up the appropriate model

to clarify out the answer for the research questions, the relationship between trade flows and various explanatory variables will be estimated by ordinary least-squares (OLS) regression methods

For this paper, in order to evaluate the impacts of FTAs in ASEAN+3 region which Vietnam has signed until now, including AFTA, ACFTA, AKFTA, AJCEP, VJEPA on the Vietnam iron and steel industry, the author has made decision of using the gravity model to cultivate how much these FTA affect the Vietnam iron and steel industry’s trading This model will be hoped to analyze the trade flows of Vietnam Iron and Steel products with other nations on the account of the several factors, such as Real GDP, Real GDP per capita, Real exchange rate, Income Gap, Distance between countries The author do hope that this gravity model will indicates whether FTAs affected the Vietnam iron and steel industry in the scope of research, FTAs increase or decrease the trading flows of Vietnam iron and steel industry with ASEAN+3 nations compared to the previous normal trades flows To examine the impacts of FTAs, dummy variables are added into the model If these dummy variables have positive and significant coefficients, this means that FTA will have a good effect of accelerating the trade flows among countries

The gravity model in this study will have general variables in the standard gravity model and such a number of additional dummy variables of FTAs, Border and Land locked Lack of coastline increases the time and cost of transportation as well as the dependence on the quality of the infrastructure network across the region as a whole, particularly that of the neighboring countries Besides, the author also finds that the increase in total trade of iron and steel products of Vietnam comes from improvement in infrastructure, followed by logistics and efficiency of customs and other border agencies The non-tariff barriers also are taken into consideration, as the main challenges of exporting iron and steel of Vietnam into other countries in ASEAN seems to be the nontariff barriers imposed by the home countries’ government, besides tariff The FTAs dummy were put into this equation are the FTAs membership When adding FTAs dummy, this paper mentions to the impacts of being membership of FTAs in general

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After all, there were many motives from the author to examine the effects of several factors on Vietnam iron and steel trade flow, however, depending on the availability of the data base, the author will build the exporting model and importing model as bellowed:

In here: and are the export volume and import volume of Vietnam Iron

and steel products to the country j, Gap is the differences of Real GDP per capita of Vietnam and the country j; Distw is the geographical distance from Vietnam to country j

which is standardized for populations; are the dummy variables measuring the impacts of FTAs membership on the export and import flows between Vietnam and the countries

Export and Import flows (Yi) measured in dollars; Real GDP and Gap measured in dollars, Distance are in thousands of kilometers, Borders represents 1 if they share a common border and 0 otherwise The FTAs dummy represents 0 if the trading partner is not the member of corresponding FTA and 1 if the trading partner is the member of that FTA since the year FTA goes into effects Consequently, the dummy variables AFTA, ACFTA, AKFTA, AJCEP and VJEPA will be 1 since the following years, respectively,

2006, 2006, 2007 and 2010 for the AJCEP, VJEPA Landlocked equals 1 if the trading country j is landlocked, 0 otherwise The author choose those years as from this years, such a significant tariff elimination of FTAs has been practically undertaken on Vietnam iron and steel products and have big effects on Iron and steel industry trades

Besides, some other important index in international trade is also used in this study Firstly, the Reveal Comparative Advantage Index (RCA) of Vietnam iron and steel industry is calculated to show how competitive is iron and steel in Vietnam’s export compared to the product’s exports in relations to its share in the world trade The equation to calculate RCA is shown below:

Where and are the values of Vietnam’s exports of iron and steel products and world exports of iron and steel; and represents Vietnam’s total exports and world total exports

Secondly, other indexes which are also cultivated are Export Intensity Index and Import intensity Indices These indices reflects the ratio of the share of country i’s trade with country j relative to the share of the world trade destined for country j They can be defined as follows:

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Where: : Country i’s exports to country j; : country i’s total exports to the world : country j’s total imports from the world; : world total imports; : country i’s total imports from the world; : country i’s exports to country j; : country j’s total exports to the world; : world total exports

3 Data

The model uses the export and import statistics from UN COMTRADE data base from the year 2001 to 2012 as the availability of Vietnam’s data base in this period Real GDP are sourced from World Bank; the Gap is calculated from Real GDP per capita taken from World Bank; Distw; Border and Landlocked are taken from CEPII There are total 27 top trading partners in iron and steel which are recorded in the model for the period 2001-2012 from the data base of UNCOMTRADE2

According to Economic theory, real GDP will correlate positively with trade activities Higher income levels will lead to higher demand on the trading of goods Therefore, the volume of exchange goods will be greater Iron and steel are the typical goods following that trend Distances are supposed to have negative impact on both exporting and importing The farther the distance is, the higher transportation costs might

be High transportation cost will hinder the exchanges of goods among nations In other words, the greater the distance is, the less trade between countries is The Income Gap variable is calculated as the differences between real GDP per capita of each countries and it is used to check out whether the trade depends on intra-trade or inter-trade It may

be positive or negative When the coefficient of this variable is positive, this means trade flows are mainly depend upon the inter-industry trade based on differences in factors of production resources In contrast, if the income gap has a negative sign, it shows impact

of intra-industry trade

Data used in the model are from 2001 to 2012, and is collected from trusted sources such as:

 Real GDPs, real GDP per capita (taken fixed 2005 USD’s price), are taken from

in the World Bank’s World Development Indicators

 Export and import flows is picked up from WIST

2Trading partners are used in this model: Australia, Belgium, Benin, Brunei, Cambodia, Canada, Chile, China, Colombia, Haiti, Hong Kong, India, Indonesia, Taiwan, Japan, Korea, Lao, Malaysia, Netherlands, New Zealand, Philippines, Russia Singapore, Thailand, United Kingdom and United States Myanmar is excluded as the lack of statistics

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 Distances, border and landlocked are taken from the Centre d’Etudes Prospectives at d’InformationsInternationales (CEPII)

Econometric results

Table I: RCA for ASEAN+3 countries in Iron and Steel industry

Thailand 0.38 0.44 0.49 0.48 0.45 0.42 0.74 0.40 0.31 0.30 0.27 0.50

Philippines 0.05 0.07 0.09 0.15 0.18 0.28 0.25 0.24 0.18 0.16 0.13 0.09

Brunei 0.00 0.02 0.03 0.02 0.00 0.03 0.00 0.00 0.00 0.00 0.00 0.06

Malaysia 0.19 0.36 0.43 0.28 0.32 0.47 0.38 0.27 0.40 0.38 0.31 0.23

Indonesia 0.29 0.34 0.44 0.30 0.46 0.36 0.40 0.23 0.31 0.26 0.17 0.15

Singapore 0.17 0.23 0.26 0.20 0.20 0.25 0.27 0.18 0.24 0.23 0.21 0.23

Lao 0.04 0.06 0.45 0.15 0.01 0.00 0.02 0.01 0.03 0.01 0.02 0.03

Cambodia 0.00 0.01 0.01 0.01 0.02 0.01 0.03 0.03 0.04 0.05 0.00 0.01

Vietnam 0.06 0.09 0.12 0.16 0.21 0.22 0.28 0.88 0.32 0.61 0.72 0.43

China 0.46 0.36 0.36 0.70 0.72 0.94 1.07 1.15 0.50 0.71 0.79 0.77

Korea 1.84 1.60 1.69 1.51 1.65 1.56 1.44 1.55 1.91 1.81 1.87 1.97

Japan 1.51 1.63 1.53 1.36 1.50 1.46 1.37 1.54 2.19 1.96 1.93 2.11

Source: Calculated by the author from the data base of UN COMTRADE

From the table I, the outstanding outcome to be noted is the RCA of Vietnam in Iron and steel industry appear to be the highest index compared to ASEAN nations in each year from 2001 to 2012 The computation of RCA for iron and steel showed that Vietnam has developed comparative advantage in the product category over the period of time The general trend of RCA through years was upward trend and on account of the further integration of Vietnam into the international market, RCA of Vietnam has been hoped to keep increasing in the near future

Nevertheless, the RCA of Vietnam was below one We aware that RCA were regarded as low if it is below one and strong if it is over one or two The case of Vietnam, all of RCA index over years were still below 1, which reveals that Vietnam seemed not to have comparative advantages in iron and steel products This industry depends on the availability of natural resources in country and the development of the industry A snapshot of Vietnam iron and steel industry in the integration phase can explain clearly

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why Vietnam has comparative disadvantage in iron and steel industry, although the role

of this industry is typically important for the reform of country

Besides, the RCA of ASEAN nations were below one, in other words, all of these countries got comparative disadvantage with big trading partner China, Korea, Japan Therefore, most of the ASEAN countries including Vietnam, can facilitate importing iron and steel from Japan, China and Korea in ASEAN+3 region

Apart from measuring the competitive advantages of Vietnam iron and steel with other nations, the trade intensities is the typical index for pointing out the share of Vietnam iron and steel trade with another country The value of index may range from 0

to 100 It reflects that country is importing more (or less) from country j than might be expected from that country’s share in total world trade In export side, if the value is 0 or nearer to 0, it implies that export link between these countries is negligible and if the value is nearer to 100 that indicates that the performance is relatively significant and if it exceeds 100 it reveals that a country export more than expected with the other countries The trade intensity is usually divided into the export intensity and import intensity

Table II: Vietnam’s Export and Import intensity index with ASEAN+3

countries, sector: Iron and steel industry

Japan K ore

2006

EII 5.31 6.64 4.46 1.68 19.66 126.95 2.14 1.58 6.22

2007

EII 5.32 8.53 13.97 0.83 12.16 205.35 1.79 1.31 4.60

2008

EII 6.51 7.13 8.69 1.11 4.83 86.95 2.27 2.26 3.18

2009

EII 4.59 8.72 12.39 0.97 2.40 53.12 1.53 2.19 3.00

2010

EII 2.99 6.49 12.91 1.33 1.63 119.23 1.81 3.16 3.29

2011

EII 3.40 5.75 9.19 1.54 1.97 0.53 2.43 3.72 2.53

2012

EII 2.70 1.29 3.35 2.04 0.98 67.24 2.58 3.12 3.01

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Source: Computed from Trade Map Statistics

The table II demonstrates that Vietnam’s export intensity and import intensity index are mostly greater than one with all ASEAN+3 nations in iron and steel industry, implying a strong link between Vietnam and individual members with associated FTAs

in the region Vietnam’s import intensity index (MII) was quite small with Japan for many years before 2010 but has improved strongly after signing the VJEPA Vietnam’s export has forced with Singapore recently, while declined with several countries, namely Indonesia, Thailand and Malaysia Cambodia and Lao become outstanding with high value of export intensity index (EII) and MII with Vietnam, this comes froma low total volume in both total export and import of these two country which the volume with Vietnam plays a majority of

This section, through the statistical analysis of trade intensity and RCA, the strength and nature of bilateral trading relationships between countries, is examined Some concluding remarks are achieved Vietnam has comparative disadvantage in iron and steel industry Meanwhile, Korea, China and Japan, with high RCA index of more than one are confirmed to have comparative advantage in iron and steel sectors ASEAN nations have lower RCA than these big countries Vietnam, in near future might keep importing more from China, Japan and Korea The export and import intensity indices have proved for this trend, especially after the years of FTAs establishment A last thing

to note is a strong trading relation among countries in iron and steel industry

The table III gives the results for the regression coefficients of all variables for Exports and Imports model Almost all the standard gravity variables have the expected and statistically significant sign Besides, R-squared value in export and import model are respectively 0.657 and 0.554, quite high and be accepted for depicting the export and import equation

Table III: The econometric results

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Adjusted

R-squared

*: p< 0.15, **: p< 0.05, ***: p< 0.01

Source: The author’s calculation

Before examining the effects of FTAs on trade flows of Vietnam iron and steel industry, the author does wish to high light the general e ffects of other concerning variables in the model to check out its impacts on trade flows of

Vietnam iron and steel