Heo and Doanh (2009) examine the impacts of AFTA on trade flows in ... world after joining AFTA has increased faster than their trade with ASEAN countries.
Impacts of Economic Integration on Vietnam’s Trade Flows Doan Quang Huy1 · Taikoo Chang2
Abstract
All economies interested in economic integration, such as ASEAN, EU, NAFTA, etc. Economy may better off or worse off due to economic integration. For understanding whole picture of Vietnam economic integration, the paper evaluates aggregate impacts of regional and global integrations (WTO, APEC, ASEAN+3, BTAs) on Vietnamese bilateral trade flows by quantitative analysis using Fixed and Random Effect Estimation with sample data from 53 countries within 15 years (1997- 2011) following the gravity model (exports and imports are analyzed separately). As a result, economic integration is a major positive factor in Vietnamese economic growth in recent years. Bases on these analyses, this paper suggests some useful solutions to Vietnam’s government. Vietnam can and needs to follow the highly successful economic example of South Korea.
Keywords: Vietnam, Economic Integration, Bilateral Trade Agreement, Trade Flow, Gravity Model
1 2
Lecturer, Faculty of Economics, Thai Nguyen Univ. of Economics and Business Administration, Vietnam Professor, Dept of Economics, Daegu Univ. Rep. of Korea. (Corresponding Author)
I. INTRODUCTION In the modern era, business globalization and international integration are the engines of economic growth for all nations. Cooperation and consolidation of countries deeply impacts both the individual countries and all nations worldwide. In the opinion of most policy makers, integration is the best chance for reform and innovation. Globalization and international economic integration not only create opportunities for developing countries, they also force them to face challenges. Removing tariff barriers to facilitate global free trade is a big challenge, for example. Reducing tariffs not only affects tax policy in general; more important is its role in transforming the national economic structure and modernizing the social economic policy of the state. Understanding the benefits of economic integration, on July 28th, 1995, Vietnam became an official member of ASEAN. As an ASEAN member, Vietnam committed to implement CEPT issued by AFTA since January 1st, 1996, and accomplished in 2006. Vietnam joined APEC in 1998, and signed a bilateral trade agreement with U.S effective July 13th, 2000. Finally, Vietnam became the 150th member of WTO in 2007 after 11 years of negotiation. At present, Vietnam has diplomatic relations with more than 170 countries, and exports to more than 80 overseas markets. Vietnam also has bilateral agreements with more than 60 countries in the areas of trade, investment, energy, technology cooperation, and cultural exchange. Vietnam is a developing country with a rapidly changing economy. Economic integration with other countries has brought growth and development, but also poses major new challenges for the national economy, even causing financial crises at times. Globalization has developed very quickly on a large scale, and continues to change and accelerate. To survive and develop, all countries must integrate with others in money markets, manufacturing, business practices, technology, environmental protection, and many other areas. This integration protects individual countries from localized economic threats. On the other hand, economic integration dictates the global economy and limits options for individual countries. In the view of politicians, a global economy requires a global political order that facilitates economic development. Global economic considerations dictate national policy decisions in manufacturing, finance, trade, investment, aid, and international negotiations of all types. International agencies have a role in decisions on tax reform, copyright issues, trans-border crimes, laundering money, and corruption. Hence, economic integration enables small countries to protect themselves politically and economically against pressure from bigger countries during trading.
WTO began a new global negotiation round, known as the Doha round or millennium negotiation, in November of 1999. The target of this negotiation is broadening the market in areas such as industry, service, agriculture, governmental purchasing, and lowering tariff barriers to trade. When the millennium negotiation began, it became more difficult for nations to join the WTO since the requirements for international trade in the 21st century are more sharply defined. However, as a WTO member, Vietnam always actively participates in negotiation to achieve desired results in the Doha round even though progress is difficult to achieve. In addition, globalization leads to extra competition in trade. The reduction of tariff barriers has increased global competition. To develop more fully in this new business environment, Vietnamese enterprises must reform non-stop, improve technology, and adopt new practices such as building brand recognition and value. These are powerful strategies for adapting as the global economy continues to evolve. Government policies have an important role to play in fostering the social and economic conditions that enable the nation to execute these strategies. Although a rich field of literature on the Vietnamese economy is available, further studies are needed. Some studies concentrate on Vietnam’s export (see Tien, 2008; Thai, 2006; Nguyen, 2010; Trang, Tam and Nam, 2011) or the impact of ASEAN members on trade (see Heo and Kien, 2009; Nguyen, 2010; Ruzita, Zarina and Norma, 2009; Kim, 2010). However, no existing study reviews and highlights the aggregate impact of regional and global integration on the national economy of Vietnam. Hence, this paper will evaluate the impact of economic integration on Vietnamese bilateral trade flows (by quantitative analysis using Fixed and Random Effect Estimation with sample data from 53 countries within 15 years (1997-2011) following the gravity model (exports and imports are analyzed separately). This method has a strong theoretical framework and has been used in various studies (see Clarete, Emonds and Wallack, 2003; Lee, Koo and Park, 2008; Heo and Doanh, 2009). Based on these analyses, the paper will suggest some useful solutions for the Vietnamese government to develop more fully and effectively in the rapidly developing global economy. II. LITERATURE REVIEW One of the most useful empirical approaches in trade, especially liberal trade is the gravity model. The model was first used by Tinbergen in 1962 based on the Newton’s law in physics, which equates the gravitational attraction between two objects to the product of their
masses divided by the distance between them. The simplest form of gravity model in international trade: Fij = φ (Mi * Mj/Dij) In which, Fij indicates the exports, imports or trade volume from country i to country j, depend on author’s purpose. Mi and Mj are the economic mass of each country, example: Gross Domestic Product (GDP) or GDP per capital. Dij measures the distance between country i and country j; and φ is a constant of proportionality. Since late 1970s, the gravity equation has been improved in order to use for different purposes. Carrere (2006) uses a gravity model to assess ex-post regional trade agreements with 130 countries and panel data over the period 1962–1996. His result mention that correct number of dummy variables allows for identification of Vinerian trade creation and trade diversion effects, while the estimation method takes into account the unobservable characteristics of each pairs of trade partner countries, the endogeneity of some of the explanatory variables as well as a potential selection bias. Results also show that regional agreements have generated a significant increase in trade between members, often at the expense of the rest of the world. Heo and Doanh (2009) examine the impacts of AFTA on trade flows in Vietnam and Singapore. Their results show that both Vietnam’s and Singapore’s trade with the rest of the world after joining AFTA has increased faster than their trade with ASEAN countries. AFTA will not lead trade increasing immediately because of dissimilarities in income level, demand patterns, infrastructures and trade policies, but integration and globalization will have enhanced communication, broken down cultural barriers, and facilitated transactions. They also conclude that physical distance have very important role in term of trade due to transport costs. Language and ex-colonizers will be advantages in trade and GDP gaps among members are negative impact on bilateral trade. Trang, Tam and Nam (2011) evaluate changes of exports base on impact factors by using Tobit estimate method with 61 Vietnam’s importing partners from 2004 to 2008. As their result, economic growth of Vietnam, population of importing countries, economic distance, increment of real exchange rate value, free trade agreement and factor of sharing common border (in land) have clearly positive impact on the export value of all groups. In contrast, the geographical distance has negative impacts on all groups. Basing on those results, three groups of solution to boost Vietnam’ export value are given: promoting supply of
goods; adjusting Vietnam’s exporting market; managing policy of exchange rate and international cooperation. Heo and Kien (2009), instead of using total trade data, they estimated the impacts of AFTA on Korean trade flows with disaggregated sectorial data, focus on analyzing the impacts of AFTA on Korean exports by using data on Korean exports to ASEAN countries, using system GMM estimator. They found that the impacts of AFTA dummy seem to differ substantially across sectors. There are 5 out of 15 selected sectors which have negative impacts on exports from Korea to ASEAN countries whereas the remaining sectors have both negative and positive impacts but without statistical significance. There is a sector which the estimated coefficient is positive and statistically significant as well. Since the gravity model was employed in economics, different extensions have been suggested to the basic model to obtain more reliable estimates of international trade flows. Nguyen (2010) in his paper, used gravity estimation technique to investigate the determinants of Vietnamese exports performance in a panel data framework. His results demonstrate that the gravitational attraction between the local and destination economies, transport costs and exchange rate are the important factors which affect the Vietnamese exports. Besides, ASEAN membership seems also to have been linked to Vietnam’s export flows, especially since it started to deepen its integration into the regional economy. In addition, transport costs plays a significant part in Vietnamese export performance. Higher transport costs hinder
export
activities and conversely, reduced transport costs support Vietnamese exports. However, the effect of transport costs on the Vietnamese exports tends to decrease over time and his result implies that the government needs also to pay adequate attention to destination markets with cheaper transport costs. Thai (2006) finds out the factors influencing the level of trade between Vietnam and twenty three European countries in OECD, and to evaluate whether there are potentials for growth in trade between Vietnam and those countries, in his paper. Using gravity model with panel data and random, fixed effect estimation covering the period of twelve years from 1993 to 2004, his result indicate that the bilateral trade flows between Vietnam and EC23 are driven by economic size, market size and exchange rate volatility. However, distance and history seem to have no effect on bilateral trade between Vietnam and EC23. He also mention that Evidence of a small but significant negative effect of real exchange rate on bilateral trade between Vietnam and EC23 confirms that exchange rate volatility does have impact on trade. His result suggested that Vietnam needs to sign bilateral trade agreement with individual
country in EC23. To determinate impacts of ASEAN membership to Cambodia’s trade flows, Kim (2010) estimated two equations derived from the gravity model using annual data from 1994 to 2004 with a sample of 20 main trading countries of Cambodia, including Australia, Belgium, Canada, China, Hong Kong (China), France, Germany, Ireland, Italy, Japan, Korea, Malaysia, Netherlands, Singapore, Spain, Switzerland, Thailand, U.K, U.S and Vietnam. The impacts of its own GDP appear to be at least 4 times as great as those of the partners’ GDP. As expected in the gravity model, the geographical indices are powerful in explaining the pattern of Cambodia’s trade. Although ASEAN membership shows rather curious relationship with trade in the whole period sample, the positive sign is detected while the effect of sharing a borderline becomes insignificant. He also recommends that the government of Cambodia may consider pursuing bilateral trade or multilateral trade agreements within the region. With the same way, Lee, Koo, and Park (2008) analyze the impacts of FTAs on China, Japan, and Korea separately in terms of trade diversion. They estimated the effects of regional trading blocs on exports of China, Japan and Korea, with two different models of gravity equation: the static gravity model and the dynamic partial adjustment model of bilateral trade. As a result, a diversion effect is observed in small blocks such as BAFTA (China, Japan and Korea), CACM (China), CAN (China), CEFTA (China and Japan), CEMAC (China, Japan and Korea), CIS (Japan), COMESA (Korea), EAEC (Japan), EFTA (China), GCC (China), MERCOSUR (Japan), SAPTA (Japan), SPARTECA (China and Korea), and UEMOA WAENU (Japan and Korea). Their empirical results show that Japan’s and Korea’s fear of discrimination and trade diversion is baseless while China’s fear is grounded only to a limited extent. II. THE MODEL 1. Model specification and hypotheses To evaluate impacts of regional and global integration to Vietnamese economy, especially liberal trade, gravity model is standard way. For more meaning in evaluating impacts and implicating policies, author use two different dependent variables with same model: Liberal exports and imports. Base on the original model, Tien (2008) in his paper classified determination of trade flows in three main groups: factors impacting on demand; factor impacting on supply, and trade attractive and trade - restrictive factors.
With factors impacting on demand and supply, income and population of a country usually are the most suitable candidates. They represent for size of all economies. Trade is expected to increase with economic size, since large countries should trade more than small ones, and with per capita incomes, since rich countries should trade more than poor ones. Hence, the relationship of these variables and export and import were expected positive. Clarete, Emonds and Wallack (2003) estimated a gravity model of bilateral trade involving 11 trading blocs most of which are from the Asian and Pacific region, using the gravity model is that of 83 countries from 1980 to 2000. The estimated coefficients of the basic determinants of the gravity model such as GDP, distance between capitals of trading partners, population, and physical area explain well cross-country trade flows. Their results explain that trade between two countries is positively correlated with economic size and income. When income increases, people will buy more luxuries products and will import more. Hence, author use GDP per capita to capture impact of economic size and income in explanation of trade flows and this variable is expected positive. We give the first hypothesis: GDP per capita significantly influences to Vietnamese exports and imports.
Figure 1:
Gravity model in international trade
Push
Border of exporting country
Border of importing country
Pull
Importing country
Exporting country
Production ability of exporting country
Policy of encouraging and managing export and import of exporting country
Factors impacting on supply
Distance between two countries
Policy of encouraging and managing export and import of importing country
Trade - attractive and trade - restrictive factors
Purchasing power of importing market
Factors impacting on demand
Factors impacting on international trade Source: Tien (2008)
Distance and border between trading partners is very important role due to transaction costs of goods. Since greater distance increases transaction costs. Especially, same borders will reduce this cost to minimum. McCallum (1995) investigates whether national borders matter for trade. He examined trade patterns of Canadian provinces shows that borders matter because the typical Canadian province trades 22 times more with other provinces than with American states of a given size and distance. His result show that whatever the reasons may be and whatever the future may hold, the fact that even the relatively innocuous Canada-U.S. border continues to have a decisive effect on continental trade patterns suggests that national borders in general continue to matter. Actually, distance factor reflect the cost of international transactions of goods and services and bring negative effects to trade, according to Bougheas (1999), Clarete (2003) and Martinez-Zarzoso (2003). Hence, we give the second and third hypothesis: Distance and border between Vietnam and trading partners will significantly impact to Vietnam export and import. We expect that the sign of the coefficient for distance variable is negative and border is positive.
Most of empirical studies mention that population have deep impact to trading process. A larger population of trading partners will lead a bigger domestic market, higher potential customers. The positive effects of GDP and population are found in Carrere (2006), Kien and Hashimoto (2005). But in other hand, the bigger absorption effect of this domestic market causes less reliance on international trade transactions, indicating a negative impact on bilateral trade. The negative impacts of population in both importing and exporting country is found in Martinez-Zarzoso and Nowak-Lehmann (2003). With Vietnam case, all empirical studies such as Tien (2008), Thai (2006), Trang, Tam and Nam (2011), shows positive relationship of export with these factors. But no empirical studies about Vietnam import. Hence, we give the fourth hypothesis: Population of trading partners will significantly impact to Vietnam export and import. We expected population variable will be positive. With policy maker, exchange rate is a very important tool for controlling trading process. Krugman and Obstfeld (2008) showed that depreciation of domestic currency against foreign currencies will lead an increase in domestic’s exports and reduce imports because price of export good in international market will be cheaper but price of import good in domestic become more expensive. Micco, Stein and Ordoñez (2003) evaluate impact of common currency and exchange rate by using gravity model for 22 industrial countries of European Union with sample from 1992 to 2002. Their result show that monetary union is of great importance factor, not only for the current EMU members, but also for the rest of the EU. In addition, exchange rate has significantly impact to bilateral trade. In here, author introduces the real exchange rate as a control variable to capture the relative price effects. Hence, the fifth hypothesis: Real exchange rate will significantly impact to Vietnam export and import. We expected that this variable will be positive with export and negative with import variable. Heo and Kien (2009), Nguyen (2010), Ruzita, Zarina and Norma (2009), Kim (2010) confirmed importance of ASEAN integration with their member in their paper. Jayasinghe and Sarker (2007) show that regional economic integration have deep impacts on trade in agrifood products. Urata and Okabe (2007) showed that FTAs bring about trade creation effect. Hence, we give the most important hypothesis: Economic integrations have significantly influenced Vietnam’s trade flows. We test hypothesis with four integrations namely ASEAN+3 (ASEAN, Japan, South Korea, China), APEC, WTO and BTAs (Bilateral Trade Agreement). We define ‘economic integration’ broadly enough to include any-lateral trade agreements3. 3
International economic integration does not have a clear-cut meaning for all economists. Pinder (1969) cities the
Oxford Dictionary which described integration as the combination of parts into a whole. Union is the outcome of the
With above purpose, our augmented gravity model can be explained following forms:
LnEXPORTit = β0 + β1lnEXit + β2lnGDPPCit + β3lnPOPit + β4lnDISTi + β5BODERi + β6WTOit + β7APECit + β8ASEAN3it + β9BTAit + eit LnIMPORTit = β0 + β1lnEXit + β2lnGDPPCit + β3lnPOPit + β4lnDISTi + β5BODERi + β6WTOit + β7APECit + β8ASEAN3it + β9BTAit + eit
EXPORTit is export of Vietnam to country i at the time t IMPORTit is import of Vietnam from country i at the time t EXit is the real exchange rate of countries i against Vietnam dong in year t GDPPCit is the GDP per capita of country i at the time t POPit is the population of country i at the time t. DISTi is geographical distance, measures as the crow flies, between the capital of Vietnam and the capital of country i. BORDERi is the dummy variable that equals 1 if country i had same border withVietnam and 0 if not. WTOit is the dummy variable that equals 1 if country i and Vietnam are members of the WTO simultaneously and 0 otherwise at time t. APECit is the dummy variable that equals 1 if country i and Vietnam are members of the APEC simultaneously and 0 otherwise at time t. ASEAN3it is the dummy variable that equals 1 if country i and Vietnam are members of the ASEAN+3 simultaneously and 0 otherwise at time t. combination of these parts or members. Kahnert (1969) understands integration as a process of the progressive removal of discrimination that exists along national borders. Maksimova (1976) argues that economic integration was a process of developing deep and stable relationships about the division of labour between national economies. Steve (1998) mention that, any type of arrangement in which countries agree to coordinate their trade, fiscal, and/or monetary policies is referred to as economic integration. According to Investopedia Dictionary (2011), economic integration means an economic arrangement between different regions marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs for both consumers and producers, as well as to increase trade between the countries taking part in the agreement. This definition was used in this paper. Hence, WTO, FTAs, APEC and BTAs are considered as economic integrations.
BTAit is the dummy variable that equals 1 if country i and Vietnam have Bilateral Trade Agreement and 0 otherwise at time t. eit is error terms.
2. Methodology OLS is usually useful tool for analyzing cross-sectional data. But our paper uses a panel data framework. The advantage of the panel data is that time series and cross-section observations are combined to increase the sample size, give more variability and reduce the multicollinearity among variables. Impacts of independent variables to dependent variable could be not same between countries and between each year. So, OLS estimate will be biased. To deal with this problem, Thai (2006), Lee, Koo and Park (2008), Heo and Doanh (2009), Nguyen (2010), Kim (2010), Trang, Tam and Nam (2011) and many other studies use Fixed and Random Effect estimations in their analyses. They are appropriate models to controlling potential correlation of explanatory variables with the unobserved effects. If unobserved effects are uncorrelated with all the explanatory variables, Random Effects estimation is better, while Fixed Effects estimation is more appropriate in another case. The Hausman test (1978) was a good way to suggest better model. And base on this test, Fixed Effects estimation is more appropriate method (see appendix 2). The Fixed Effects model allows for country-pair heterogeneity and gives each countrypair its own intercept. This estimate can help us reduce potential specification errors from omitting important variables. However, there are some important time-invariant variables affecting on trading process likely distance, border (McCallum, 1995). Using Fixed Effects model, the regressions may suffer from an omitted variable problem and consequently produce inconsistent and biased coefficients. On other hand, the Random Effects model can be incorporate differences between crosssectional entities by allowing the intercept to change, as in the fixed effects model, but the amount of change is random. The advantage of random effects model is that both time-series and cross- sectional variations are used. Hence, we employ two techniques, including the fixed effects model and random effects model, in which Fixed Effects is main method and Random Effects is used as the benchmark and interpret time-invariant variables.
3. Data sources Dependent variables, data on exports, imports were collected from General Statistics Office of Vietnam, 2012 (GSO). Explanatory variables, Data on GDP per capita (current dollar) and population are taken from the World Development Indicators 2012, The World Bank. Data on geographical distance between Vietnam and trading partners are obtained from the website of the Centre d’Etudes Prospectives et d’Informations Internationales, 2012 (CEPII). It is noted that these distances are geographic coordinates of the capital cities between countries. Data on real exchange rate between U.S and other countries were collected from the Economic Research Service of the US Department of Agriculture, 2012 (USD currency). Date on real exchange rate between Vietnam Dong (VND) and U.S was collected from General Statistics Office of Vietnam, 2012. Then author made a transformation by multiplying. In principle, author can use USD currency, but because of US partner, all real exchange rates were transformed into VND. Data on members of WTO, APEC and ASEAN+3 were taken from their homepage. Data on bilateral trade agreements (BTA) were collected from Vietnam Ministry of Planning and Investment, 2012.
Table 1: Variable
Summary statistics Observation
Mean
LnIMPORTit
795
4.28
LnEXPORTit
795
LnEXit
Standard
Minimum
Maximum
2.28
-5.65
9.71
4.50
1.93
-0.48
9.38
795
7.55
2.60
-0.23
12.01
LnGDPPCit
795
8.98
1.48
4.61
11.46
LnPOPit
795
17.10
1.44
13.50
21.01
LnDISTi
795
8.66
0.85
6.17
9.85
BODERi
795
0.06
0.23
0
1
WTOit
795
0.19
0.39
0
1
APECit
795
0.25
0.43
0
1
ASEAN3it
795
0.15
0.35
0
1
BTAit
795
0.58
0.49
0
1
Deviation
III. EMPIRICAL RESULTS AND DISCUSSIONS Author estimates the gravity model for Vietnam over the period of 15 years, from 1997 through 2011 with other 53 trading partners (see appendix 1). Exports and imports are two dependent variables and analyzed separately, but same independent variables. With the first hypothesis, the coefficients of GDP per capita variable with both Vietnamese export and import variables in both estimation methods all are significant at the 0.01 level. So we can conclude that income has a very important role in the trading process. When income per capita of trading partner increase 100 percent, Vietnam’s export will increase 96.6 percent and Vietnam’s import will increase 84.9 percent. Trading with high GDP-per-capita countries will bring Vietnam more benefits. However, high income-per-capita is different from high-GDP countries. The analysis with random effect estimation confirms that the distance between Vietnam and its trading partners has a significant negative impact to Vietnamese export and import. 100 percent increase of distance will reduce exports reduce 105.2 percent and reduce import 146.4 percent. Border has a very important effect on exports, there is a 155.7 percent increase, but there is no influence on import. Population of trading partners has a significant positive impact on Vietnam exports and imports. A larger population of trading partners will lead to a larger domestic market and more potential customers. This result is entirely in accordance with previous studies about Vietnam (see Tien, 2008; Thai, 2006; Trang, Tam and Nam, 2011). Exchange rate, as expected, is a useful tool to reduce import. When the exchange rate depreciates 100 percent, it will reduce total import by 17.2 percent. Exports do not have a significant exchange rate coefficient. This result can be explained by the relationship between enterprises with fluctuating exchange rates. According to the MPI report (2011), 80 percent of input materials of export enterprises come from imports. So, when domestic currency depreciates, the price of exports will be cheaper, but the cost price will increase. Hence, to maintain benefits, enterprises must be increased in price. As a result, nothing changes or maybe worse off. This policy will only be appropriate if the country can self-control its input materials, for example China.
Table 2:
Regression results for pooled data with exports and imports LnEXPORTit
LnIMPORTit
Independent
Fixed Effects
Random Effects
Fixed Effects
Random Effects
variables
Estimation
Estimation
Estimation
Estimation
Coef.
t-statistic
Coef.
z-statistic
Coef.
z-statistic
LnEXit
-0.104
-1.33
-0.046
-1.09
-0.172c
-1.91
-0.114c
-1.89
LnGDPPCit
0.966a
12.93
1.10a
18.06
0.849a
9.83
1.064a
13.64
LnPOPit
5.59a
9.88
0.799a
10.67
8.09a
12.37
0.999a
8.93
LnDISTi
-
-
-1.052a
-6.65
-
-
-1.464a
-6.27
BODERi
-
-
1.557a
2.96
-
-
0.416
0.52
0.48a
6.69
0.607a
9.04
0.49a
5.92
0.677a
8.32
APECit
0.484
a
5.50
0.777
a
ASEAN3it
0.073
0.39
BTAit
0.67a -99.61a
WTOit
Constant No. of obs. R-Square
Coef. t-statistic
9.44
0.492
a
4.84
0.92
a
9.32
0.475a
2.65
-0.123
-0.56
0.291
1.33
8.99
0.809a
11.33
0.38a
4.41
0.618a
7.19
-10.36
-10.51a
-5.51
-140.8a
-12.68
-9.607a
-3.42
795
795
795
795
0.6882
0.7712
0.6314
0.6988
Note: a: Significant at the 0.01 level b: Significant at the 0.05 level c: Significant at the 0.1 level Other: Not significant Economic integration has a very important role in Vietnam trading. Accessions always bring benefits to Vietnam’s economy, which lead to greater trade and help developing Vietnam’s economy. Coefficients of ASEAN+3 membership in both exports and imports with fixed random estimation are not statistically significant. That means membership of ASEAN+3 does not seem to be important when other relevant variables are controlled and distance and border was removed. This result is consistent with Heo and Doanh (2009), whose study examined the impacts of ASEAN+3 on trade flows in Vietnam. Original ASEAN members includes 10 countries (except Singapore) have the same location and the same level of development. Hence, comparative advantages, preferences, tastes, export and import commodities of ASEAN members are relatively uniform. They tend to trade with markets, such as U.S, EU, etc. Other members of ASEAN+3 have joined only one or two years ago, hence they need more time to adjust. In
addition, main trading partner of Vietnam in ASEAN is Singapore. Before ASEAN integration, tariff of main trading commodities between Vietnam and Singapore was low and tariffs between Singapore and other ASEAN members also are very low. So, when Vietnam joins ASEAN, changes are not much. In random effect estimation, when distance is covered, ASEAN+3 membership seems to have a positive impact on Vietnam’s trade flows. APEC seems to bring more chances than ASEAN+3, although Vietnam has a deeper integration with ASEAN. In reality, Vietnam and ASEAN countries have same comparative advantage. This indicates that Vietnam and other ASEAN countries export and import similar products. However, APEC is different. It is a mix developing level. So, according to Heckscher-Ohlin theory, Vietnam will have more chances to export labor- intensive products and import more capital-intensive products. We hope, with cooperation and FTA with Japan, Indian, China, South Korea and Australia will bring more benefit to its members. WTO showed that, this is not an easy playground. International market is filled with fierce competition and challenges to Vietnamese enterprises. Accessing the WTO is a very important step for Vietnam’s development strategy and will have a significantly positive impact to Vietnamese trade flows. BTAs also need to be considered seriously and developed extensively because all regional and global integration are next steps and based on prior bilateral cooperation. BTAs are the shortest way to increase bilateral trade and easier to achieve though bilateral negotiation. So, the Vietnamese government must make more efforts to establish newly effective BTAs. IV. POLICY IMPLICATIONS 1. Exchange rate policy The exchange rate is a very important tool for controlling the trading process. Depreciation of domestic currency against foreign currencies will theoretically cause an increase in domestic exports and a reduction in imports because the price of export goods in the international market will be cheaper, and the price of imported goods in the domestic market will become more expensive. Vietnamese policy makers have used the foreign exchange rate as a tool to control the trading problem. They have often depreciated the exchange rate with the goal of reducing trade deficit. But depreciating the exchange rate does not really increase exports, but rather just reduces imports a bit. In addition, depreciating the Vietnamese domestic currency causes many problems,
including currency dollarization, gold hoarding versus necessity spending, and distrust of the domestic currency. Many Vietnamese firms require payment in dollars to protect themselves from exchange rate depreciation. And many Vietnamese find other investment channels to protect their currency value such as buying gold or foreign currency or assets. Although the interest rate for the dollar is very low, many people prefer saving dollars over VND savings. Currency depreciation policy must be replaced by other solutions to make prices cheaper and to enlarge the export market. Technology transfers and upgrades, training more highly skilled labor, greater focus on R&D efforts, helping enterprises build their brands, helping enterprises access new markets, all are superior strategies to simple currency depreciation. 2. Adjusting Vietnam’s exporting destination and improving social infrastructure Distance negatively impacts Vietnamese trade flows in many foreign markets. In the near term, the first priority must be given to nearby markets, especially those in Asia. (Note that Japan, Korea, and China will always be top priority Vietnamese markets in any case.) In the long term, Vietnam needs to develop transportation systems and infrastructure to facilitate export, especially for primary products which are influenced most negatively by geographical distance. In addition, common geographical borders are a big advantage for export. Hence, Vietnam must focus upon the Cambodia and Laos markets, and most especially upon the Chinese market. Common borders provide advantages such as short distance, similarity of culture leading to similar demand for goods, close neighbor relationships, and similar political priorities. These factors easily remove barriers to Vietnamese trade, and make smooth export flow to neighbor countries relatively simple. Vietnam should focus on export markets with large populations, such as the EU, the U.S, India, and China. Higher population means a bigger market, and more potential customers will bring more chances for Vietnamese exports. Coefficient of GDP per capita of Vietnamese trading partners is significantly positive. Vietnam should focus on exporting to markets with high income per capita; specifically, countries which have high income per capita and large populations. These markets bear more potential.
3. Improve investment environment and attract more FDI The FDI sector has played a major role in the high growth of Vietnamese export-import turnover. Certain groups of exported items account for a large portion of export turnover, such as textiles at 60.8% footwear at 72.7% electronics and computing equipment at 98.2%, and machinery, equipment and spare parts at 87.7%. Also, certain groups of imported items account for a large proportion of import turnover, such as electronics and computing equipment at 73.1%, fabrics at 61.6%, and steel at 40.2%. The investment environment in a country is a key factor in attracting FDI. Urata and Mitsuyo (2009) performed research on this issue for the ASEAN countries in March of 2009. Results of their research appear in the table below: These results indicate that the investment environment index for Vietnam is 0.66, lower than the average for all ASEAN countries. The Vietnamese government can and must take corrective action to improve the investment environment and attract more FDI. Table 3:
Investment environment in ASEAN Market
National
Review and
Movement
Ability for
accession
treatment
Evaluation
of investors
operating
0,40
0,20
0,10
0,10
0,10
0,10
1,00
Brunei
0,76
0,20
0,57
0,41
0,82
0,82
0,61
Cambodia
0,86
0,60
0,25
1,00
0,25
0,88
0,70
Indonesia
0,69
0,95
0,24
0,95
0,48
0,95
0,73
Laos
0,60
0,70
0,34
0,67
0,54
0,79
0,61
Malaysia
0,59
0,17
0,76
0,62
0,89
0,91
0,59
Myanmar
0,55
0,61
0,30
0,61
0,24
0,61
0,52
Philippines
0,74
0,81
0,89
0,48
0,96
0,89
0,78
Singapore
0,83
0,95
0,86
0,75
0,95
0,95
0,88
Thailand
0,58
1,00
0,91
0,98
0,37
0,90
0,75
Vietnam
0,66
0,74
0,64
0,71
0,53
0,85
0,69
Average
0,69
0,67
0,58
0,72
0,60
0,85
0,69
0,11
0,29
0,28
0,20
0,28
0,10
0,11
Countries
Standard deviation
Managers
Total
(Sources: Urata and Mitsuyo, 2009, www.eria.org) The Vietnamese government should establish a separate government organization for
investment promotion in all provinces. The Department of Planning and Investment is currently charged with promoting investment, but the department is seriously overburdened, and is quite ineffective. This new, discrete organization will focus on identifying and analyzing investment opportunities with businesses in local areas. This will be very useful for investors. There is also a critical need to reform Vietnamese investment laws to encourage foreign investment. Training and other guidance is also needed for investment project officers in order to upgrade their management and overall financial skill sets. 4. Strengthening accession and cooperation Research shows that both bilateral and multilateral cooperation with trading partner countries deliver huge benefits for the Vietnamese economy. The Vietnamese government must cooperate with trading partner nations sincerely and without reservation of any kind. Vietnam must reform to meet WTO commitments. The goal is to develop new trading partners and new markets. Since WTO is made up of 152 countries, there are 152 potential foreign trading partners. To date, however, Vietnam only trades with 84 countries. A great deal of economic potential is not utilized at the present time. The Trans-Pacific Partnership, also known as the Trans-Pacific Strategic Economic Partnership Agreement or TPP agreement, is a multilateral free trade agreement that aims to integrate the economies of the Asia-Pacific region. The original agreement between the countries of Brunei, Chile, New Zealand and Singapore was signed on June 3, 2005, and entered into force on May 28, 2006. Five additional countries, including Australia, Malaysia, Peru, the United States, and Vietnam are currently negotiating to join the group. The objective of the original agreement was to eliminate 90 percent of all tariffs between member countries by January 1, 2006, and to reduce all trade tariffs to zero by the year 2015. TPP is a comprehensive agreement covering all the components of a free trade agreement, including trade in goods, rules of origin, trade remedies, sanitary and phytosanitary measures, technical barriers to trade, trade in services, intellectual property, government procurement, and competition policy. Vietnam should fully engage in the TPP agreement to facilitate and accelerate trading integration with member nations. TPP will provide trading and economic benefits for Vietnam very similar to those provided by APEC or WTO membership.
Vietnam lacks free trade agreements with individual countries around the world. FTAs with the United States and with the European Union could provide exponential growth for
the
Vietnamese economy. Vietnam must work tirelessly and without reservation to establish FTAs with these vast and wealthy potential trading partners. 5. Improve competitive advantage of domestic firms Economic integration brings many benefits to the Vietnamese economy, and it also poses challenges for Vietnamese enterprises. Lowering tariffs and other trade barriers will stimulate Vietnamese exports, but also opens local Vietnamese markets to stiff competition from foreign firms. Improving domestic competitiveness is a vital priority for Vietnam. The problem set includes the following items: First, most Vietnamese firms do not have enough market information because information channels are inadequate. Business plans are often based on very limited experience and on personal feelings. Business plans not founded on facts and solid experience can be ruinous for the enterprises following them. Second, approximately 90% of Vietnamese enterprises are small. Vietnam lacks large, multinational firms such as Samsung and Hyundai, and the country is generally unable to benefit from economies of scale in commerce. Third, most private companies in Vietnam operate on limited capital. Capital shortages dictate that enterprises will not have enough money to improve equipment and infrastructure. This in turn dictates that Vietnamese companies will never be able to compete in areas where modern equipment and techniques are required in order to be competitive. Fourth, management capability in Vietnamese enterprises is very weak, and labor skill levels are low. Human resources are a very important factor for success in any company. Although significant numbers of Vietnamese personnel have been trained in advanced countries to date, a great deal of work remains to be done in this area. Fifth, Vietnamese firms are burdened with an extremely high domestic interest rate. In the first quarter of 2011 this was 17%. For comparison, the Japanese rate for 2009 was 0.1%, the U.S. rate was 0.5%, and the South Korean rate was 3%4 . This is a key issue in the capital shortages experienced by many Vietnamese firms. 4
CIA World FaceBook, 2011
Sixth, information on integration with trading partners is not available to Vietnamese businesses. Vietnam is a member of the WTO, ASEAN+6, APEC, and many other BTAs, but there is no web site or other central information source to guide Vietnamese businesses so that they can properly utilize these trade agreements. In the present era of trade agreements and economic integration with trading partners, Vietnamese firms must be prepared to change rapidly. They must constantly update market information and seek new markets. The Vietnamese government must make the business environment more transparent, and must develop easily accessible, highly reliable business information channels. Personnel training in advanced countries must be expanded, and the government must provide financial support for enterprises facing capital shortages and stiff foreign competition.
V. CONCLUSION Trade is an important necessity for economic development. No country can be economically independent without continuous economic growth. Rich countries can benefit by buying raw materials from countries with developing economies. People can buy goods and services which are not available in their own countries because of international trade. Economic integration is a key for trade improvement. This paper analyzes aggregate impacts of economic integration on Vietnamese trade flows using Fixed and Random Effect Estimation with sample data from 53 countries within 15 years (1997-2011) following the gravity model. This method has a strong theoretical framework and has been used in various studies (see Clarete, Emonds and Wallack, 2003; Lee, Koo and Park, 2008; Heo and Doanh, 2009). As expected, GDP per capita and population of trading partners provide a positive impact; distance has a negative influence; border has a positive effect on Vietnamese exports; the exchange rate is a good tool for reducing imports. Membership of ASEAN+3 does not seem to be important at this time when other relevant variables are controlled and distance and border was removed. In random effect estimation, when distance is covered, ASEAN+3 membership seems to have a positive impact on Vietnam’s export. APEC has very high positive impact to Vietnam’s trade flows. Accessing the WTO is a very important step for Vietnam’s development strategy and will have a significantly positive impact. BTAs also have high positive influence and need to be considered seriously and developed extensively. In fact, BTAs are the shortest way to increase bilateral trade
and easier to achieve though bilateral negotiation. In sum, economic integration is a major positive factor in Vietnamese economic growth in recent years. Key suggestions for improvements to the Vietnamese economy appear in this paper. Changing policies for exchange rates, exports, FDI, and business support will have a major positive effect. Even more important is the need for domestic firms to reform business practices, upgrade equipment and technologies, and improve management skills and corporate cultures. Government must support domestic companies, especially with information channels and macroeconomic stability. Finally, the Vietnamese government must focus on developing global economic forces like Samsung, LG, and Hyundai. The highly successful economy of South Korea is a very good example for Vietnam.
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APPENDIX Appendix 1: List of countries for estimation
Country Cambodia Indonesia Laos Malaysia Philippines Singapore Thailand Taiwan Korea, Rep. Hong Kong SAR (China) Japan China India Iran Saudi Arabia Poland Bulgaria Hungary Russian Federation Czech Rep. Slovakia Ukraine Denmark United Kingdom Norway Sweden Italy Spain Austria Germany Belgium Netherlands France Switzerland Canada United States
WTO 2007 2007 2007 2007 2007 2007 2007 2007
Starting point for available APEC ASEAN 1999 1999 1995 1997 1999 1995 1999 1995 1999 1995 1999 1995 1999 1999 2007
BTA 1998 1995 1993 1993 -
2007
1999
-
-
2007 2007 2007 2007 2007 2007 2007 2007 2007 2008 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007
1999 1999 1999 1999 1999
2009 2004 -
1992 2002 1994 1991 1992 1995 1995 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2004 1996 2000
Brazil Mexico South Africa New Zealand Australia Pakistan Cyprus Turkey Romania Ireland Finland Portugal Greece Argentina Chile Peru Myanmar
2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007
1999 1999 1999 1999 1999 -
1997
2000 1995 1991 2001 2004 1998 1992 2000 2000 2000 1996 1997 1994 1994
Note: 1, Year of starting point is year of implementation. 2, Implementation of APEC started from year 1999 with Vietnam. 3, Implementation of AJFTA started from year 2009. 4, China counts 1 from 2004 because of program “Early Harvest”. 5, BTA only included bilateral trade agreements. Other agreements were excluded.
Appendix 2: Result of Hausman test χ2 Statistic
χ2 d.f
P-value
Export model
70.96
7
0.00
Import model
123.41
7
0.000
Test Summary
Null Hypothesis: There is no misspecification for random effects model
Appendix 3: Correlation between imports and its determinants Variables LnImportit LnEXit LnGDPPCit LnPOPit LnDISTi BODERi WTOit APECit ASEANit BTAit LnImportit
1
LnEXit
-0.140
1
LnGDPPCit
0.195
0.544
1
0.364 -0.216
-0.389
1
0.506
0.471
-0.066
1
0.132 -0.402
-0.427
0.090
-0.492
1
LnPOPit LnDISTi BODERi
-0.386
WTOit
0.268
0.093
0.192
0.009
0.026
-0.034
1
APECit
0.487 -0.179
0.035
0.215
-0.187
-0.003
0.104
1
AFTAit
0.267 -0.400
-0.425
0.036
-0.671
0.269
0.030
0.248
1
0.079
-0.023
0.153
0.010
0.180
-0.081
0.020
BTAit
0.007
0.097
1
Appendix 4: Correlation between exports and its determinants
Variables LnExportit LnEXit LnGDPPCit LnPOPit LnDISTi BODERi WTOit APECit ASEANit BTAit LnExportit
1
LnEXit
-0.041
1
LnGDPPCit
0.321
0.544
1
0.316 -0.216
-0.389
1
0.506
0.471
-0.066
1
0.152 -0.402
-0.427
0.090
-0.492
1
LnPOPit LnDISTi BODERi
-0.282
WTOit
0.322
0.093
0.192
0.009
0.026
-0.034
1
APECit
0.462 -0.179
0.035
0.215
-0.187
-0.003
0.104
1
AFTAit
0.235 -0.400
-0.425
0.036
-0.671
0.269
0.030
0.248
1
0.079
-0.023
0.153
0.010
0.180
-0.081
0.020
BTAit
0.121
0.097
1
