UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF FREE TRADE AGREEMENT ON TRADE FLOW OF GOODS IN VIETNAM BY NGUYEN QUANG HUY MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2014 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF FREE TRADE AGREEMENT ON TRADE FLOW OF GOODS IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN QUANG HUY Academic Supervisor: Assc. NGUYEN TRONG HOAI HO CHI MINH CITY, DECEMBER 2014 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEGDEMENT I would like to acknowledge and send heartfelt gratitude to Assc. Dr Nguyen Trong Hoai who is my academic supervisor. His advice and recommendation have helped me to overcome my insufficient knowledge in trade theories and econometric techniques.
Therefore, I can continue our work and finish this study. This thesis cannot be completed without the fine guidance from the VNP Scientific Committee. I would like to thank sincerely to Dr Truong Dang Thuy. I would like to address my deep gratitude to Dr Pham Khanh Nam, Dr Nguyen Minh Duc, Dr Pham Thi Thu Tra, and Dr Dinh Cong Khai for their supporting comments.
I would like to give a great thank to Ms Xuan Hong, Mr Tam, Mr Huy, and Mr Quy in supporting and providing information, lab room for my writing and preparation. On my writing process, I received great support from Ms Yen, Mr Anh, and Mr Chinh, my classmates at class 19. Without their support and sharing, it is really difficult to cope with the huge pressure in finishing thesis on time. TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT This study devotes to analyze the effect of free trade agreement on Vietnam’s trade flow of goods by establishing gravity model for 184 trading partners between 1990 and 2012.
Basing on the theoretical foundation and previous empirical papers, the FTA is expected to have positive relationship with trade flow of member countries. In details, two countries being in a same FTA will trade much more than those without in a same FTA. The results from the current study also find out that FTA’s estimated coefficients are consistently positive. Relating to the methodology, two main problems discussed in gravity model are endogeneity of FTA and zero-value in trade.
Firstly, the thesis points out that FTA is exogenous variable in the gravity model. Secondly, sample selection model, Poisson Pseudo Maximum Likelihood, and Fixed-effect model are used to solve the zero problems in model. The empirical results from all estimation models are consistent with each other in term of sign of FTA’s coefficient. For policy implication, the thesis proposes that FTA is a good trade policy for Vietnam because it can help to improve the total bilateral trade value among FTA members.
However, FTA does not impact on trade flow only, but it also has effect on other aspects of Vietnam economy such as wage structural, investment. Those issues are beyond the objective of this study. Key words: Free Trade Agreement, gravity model, total bilateral trade TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS CHAPTER 1 INTRODUCTION. 4 CHAPTER 2 LITERATURE REVIEW .2 Free Trade Agreement .3 The role of free trade agreement .2 Free Trade Agreement .3 Control ling factors .5 Empirical study on estimation model.
24 CHAPTER 3 OVERVIEW OF VIETNAM’S FREE TRADE AGREEMENT .1 ASEAN Free Trade Agreement (AFTA).2 ASEAN-People’s Republic of China Comprehensive Economic Cooperation Partnership (ACFTA) .3 ASEAN- Australia and New Zealand Free Trade Agreement (AANZFTA) .4 ASEAN-India Free Trade Agreement (AIFTA) .5 ASEAN-Republic of Korea Comprehensive Economic Cooperation Agreement (AKFTA) .6 Japan-Vietnam Economic Partnership Agreement (VJEPA). 37 CHAPTER 4 RESEARCH METHODOLOGY .1 Model Specification and Estimation Method .1 Model for solving endogenous problem .2 Model for Solving Heteroscedasticity and Zero-Trade Value. 44 TIEU LUAN MOI download : skknchat@gmail.3 Log-form gravity model: .4 Multiplicative-form gravity model .1 Dependent Variable in Model Specification .2 Independent variables in the Model Specification.1 Sources of data. 56 CHAPTER 5 EMPIRICAL RESULT .1 Endogenous testing for FTA.2 Testing for Multi-collinearity .1 Log-form gravity model .2 Multiplicative-Form Gravity Model.
74 APPENDICE 80 TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 3-1:ACFTA's Tariff Elimination schedule for Vietnam. 29 Table 3-2: Preferential Tariff Rate commitment by Vietnam for AKFTA. 35 Table 4-1: Model Specifications Summary. 50 Table 4-2: Variable Definition.
58 Table 4-3: Variables Descriptive Statistics. 59 Table 5-1: Testing endogeneity of FTA. 60 Table 5-2: Regression Result for Fixed-Effect Model. 62 Table 5-3: Regression Result for Sample Selection Model.
65 Table 5-4: Testing Results for Collinearity Problem in sample selection model. 66 Table 5-5: Testing results for Interaction Terms in Sample Selection Model. 66 Table 5-6: Regression Results for PPML model Dependent variable Tvjt. 67 LIST OF FIGURES Figure 1-1: Trade share of FTA countries and non-FTA countries.
1 Figure 1-2: Trade share among Vietnam FTAs. 2 Figure 1-3: Trade Share of FTA countries, EU, and USA. 2 Figure 2-1: The Relationship Between FTA and Trade Flow. 13 Figure 2-2: Conceptual Framework.
23 Figure 3-1: Trade Pattern between Vietnam and ASEAN Members, 1990-2012. 26 Figure 3-2: Change in Trade Flow Vietnam and ASEAN Countries, Excluding Brunei. 27 Figure 3-3: Trade Pattern between Vietnam and ACFTA members, 1990-2012. 30 Figure 3-4: Change in Trade Flow between Vietnam and ACFTA Members.
31 Figure 3-5: Trade between Vietnam and Australia-New Zealand, 1990-2012. 32 Figure 3-6: Change In Trade Flow Between Vietnam And AANZFTA Members. 33 Figure 3-7: Trade between Vietnam and India, 1990-2012. 33 Figure 3-8: Change in Trade between Vietnam and India, 1990-2012.
34 Figure 3-9: Trade between Vietnam-Korea, 1990-2012. 36 Figure 3-10: Change In Trade Flow Between Vietnam And AKFTA Members. 36 Figure 3-11: Trade Between Vietnam and Japan, 1990-2012. 37 Figure 3-12: Change in Trade Flow Between Vietnam and Japan.
38 Figure 4-1: Total Bilateral Trade between Vietnam and US. 43 Figure 4-2: ASEAN Trade Balance with China. 44 TIEU LUAN MOI download : skknchat@gmail.com ABBREVATION ACFTA ASEAN Free Trade Agreement AFTA ASEAN Free Trade Agreement AJFTA ASEAN-Japan Free Trade Agreement AIFTA ASEAN-India Free Trade Agreement AKFTA ASEAN-Korea Free Trade Agreement ASEAN Association of Southeast Asian Nation BTA Bilateral Trade Agreement CER Closer Economic Relation EEC European Economic Community EMU Economic and Monetary Union FTA Free Trade Agreement NFTA North America Free Trade Agreement TPP Trans-Pacific Partnership VJEPA Vietnam-Japan Economic Partnership Agreement USA the United States of America TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1 INTRODUCTION 1.1 Problem Statement According to World Trade Organization, Vietnam is now official member of eight free trade agreements which are signed and into force; and, Vietnam is also launching negotiation with a number of countries and economic groups to establish free trade agreement such as TPP, ASEAN-EU FTA. In 2012, trade balances between Vietnam and other members of ASEAN Free Trade Agreement (AFTA), recorded at - US $3.443 billion, and Vietnam – China trade balance, members of ACFTA, is – US $16.
In stark contrast, the net export of Vietnam to the Australia and New Zealand, members of ASEAN-ANZ FTA, is US $ 1.2258 billion in 2012(computed base on Customs Handbook on International Merchandise Trade Statistics of Vietnam, 2012. It can be observed that trade patterns of Vietnam among FTA partner are different. As can be seen from the Figure 1-1, share of FTA countries was around 50 percent of Vietnam total trade over the period of 1990-2012, thus the FTA-trading partners play essential role in the trade of Vietnam. However, from 2000 afterwards, the share of non-FTA countries gradually rose; this can be explained by the increase in trade between Vietnam and European countries and the United States of America presented in Figure 1-2 Figure 1-1: Trade share of FTA countries and non-FTA countries 100.00% 1995 1996 2009 2010 1990 1991 1992 1993 1994 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2011 2012 Year Share of FTA countries Non-FTA share Source: Author’s Construction Page | 1 TIEU LUAN MOI download : skknchat@gmail.com Figure 1-2: Trade Share of FTA countries, EU, and USA 80% 70% 60% 50% 40% 30% 20% 10% 0% Share of FTA countries US share EU share Other Source: Author’s Construction Furthermore, among Vietnam FTAs, AFTA share was decreasing from around 30 percent in 1996 to 15 percent in 2012.
The decreasing trend can be attributed from the increase in share of AFTA plus. For instance, the trade between Vietnam and China, member of ASEAN- China FTA, increased nearly three times from 2000 to 2012. Another positive change after signing FTA is with Korea to establish ASEAN- Korea FTA. Yet, the change in trade share of other AFTA plus are not significantly.
Therefore, a question posed is that whether the impact of FTA on Vietnam trade flow is significant or not. Figure 1-3: Trade share among Vietnam FTAs 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Non-FTA share China Share ASEAN share Japan share AANZ share India Share Korea Share Source: Author’s Construction Page | 2 TIEU LUAN MOI download : skknchat@gmail.com Relating to academic perspective, the free trade is espoused in improving the trade and welfare of signing countries. This belief is developed from the absolute advantage by Adam Smith, comparative advantage by David Ricardo, Heckscher- Ohlin model by Eli Heckscher and Bertil Ohlin to Paul Krugman with economies of scale and product differentiation. On the other hand, Viner (1950) not only accepted the gain from free trade but he also pointed out the loss if countries build trading blocs.
The “trade diversion” is the terminology for the diverting trade from countries to countries. Therefore, question should be asked is how trade flow of Vietnam is affected by her free trade agreements. There are many papers investigated the relationship between free trade agreement and bilateral trade. On the one hand, Hur, Alba &Park (2009) conducted a research to evaluate the Hub-and-Spoke problem in free trade agreements by using panel data analysis of 96 countries from 1960 to 2000; and concluded that in spite of the existing of overlapping free trade agreement, export also increased.
Other relevant paper by Baier & Berstrand (2009) which gives comprehensive contribution to the empirical model to investigate the effect of free trade agreement on international trade flow also found the positive linkage. On the other hand, Aitken (1972) does an empirical research on trade creating and trade diverting after the establishment of EEC and EFTA. He found that EEC increase trading value of member countries significantly by trade creating and external trade diverting, whereas the effect of EFTA is not considerably because of trade diverting. Besides, Bhavish, Jugurnath, Stewart & Brooks (2007), evaluate ASEAN FTA, APEC, CER, MERCOSUR and NFTA, assert that ASEAN FTA, CER increase significantly its members’ trade, while MERCOSUR, NFTA and APEC created the trade diversion.
As a result, the demand for study for international trade effect on specific context needs a critical exploration. However, papers analyses the linkage between free trade agreement and trade flow in Vietnam is limited. For instance, Thai (2006) used gravity model to calculate the trade between Vietnam and twenty-three European countries. The paper found the determinants in trading such as economic characteristics, exchange rate volatility and the demand of destination.
However, Free trade Agreement is not mentioned in the paper because Vietnam and those countries have not signed Free trade Agreement yet. Page | 3 TIEU LUAN MOI download : skknchat@gmail.com Other paper investigates the impact of ASEAN Free Trade Agreement (AFTA) on Vietnam’s economy is by Fukase & Martin (2001).