comparative ad
TRANSCRIPT
Draft only: 25 October 2007
THE STRUCTURE OF VIETNAM’S COMPARATIVE ADVANTAGE: TRENDS IN THE ERA OF
GLOBALIZATION*
Ian Coxhead University of Wisconsin-Madison, USA.
Nhiem T. Phan
National Economics University, Hanoi, Vietnam
* For presentation at AAE Development Workshop, 25 October 2007. Thanks are due to Le Dong Tam for research assistance and Muqun Li for helpful discussions on earlier drafts of this paper.
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1 Introduction
Vietnam’s economy has enjoyed very rapid economic growth in the past fifteen years. The
liberalization of domestic markets and trade policies has undoubtedly played a major role in
stimulating this growth (World Bank 2004; Athukorala 2005). Exports as a percentage of GDP
have risen from 35% to 70% (Figure 1a), and export growth (Figure 1b) has averaged almost
18% per year,1 much higher than the East Asian and world averages (11% and 5% respectively).
This growth rate of exports is more than double the 7% average growth rate of GDP over the
same period.
The geographical pattern of Vietnam’s exports has changed dramatically since the
collapse of the socialist bloc in 1990. Its major trading partners are now its regional neighbors
ASEAN and China; Japan, the EU and the USA (Figure 2). In addition to Vietnam’s own
reforms, this expansion of trade has been driven by numerous changes, not the least of which has
been the opening of foreign markets to Vietnamese exports. A preferential trade agreement
signed with the European Economic Community (now the EU) in 1992 generated an increase in
exports to Western Europe. In 1994 the US ended a trade embargo and shortly afterwards,
normalized relations with Vietnam, paving the way for US trade and investment. In 1995,
Vietnam joined ASEAN (the Association of Southeast Asian Nations), and from 1996 began to
phase in regional trading rules as a member of the ASEAN Free Trade Area (AFTA). 1995 was
also the year in which Vietnam submitted its application to join the WTO, an 11-year process
that culminated with its accession in January 2007.
As a result of these and similar steps toward international economic reintegration, there
was dramatic growth in the mid-1990s in both the volume of trade (as seen in Figure 1b) and in
1 Geometric mean, excluding the Asian Crisis year 1997.
2
the number of countries with which Vietnam engaged in trade. Nevertheless, the bulk of the
trade was regional: even by 1998, three-quarters of Vietnam’s exports were to ASEAN, Japan,
Korea and Taiwan, with just 17% to the EU and negligible amounts to the US, China and
elsewhere (Figure 2).
Since 1998, however, the geographical pattern of aggregate exports has undergone
two fundamental changes. The share of exports going to the US and to China has risen, from
about 5% of the total in 1998 to more than 28% in 2003. China now absorbs one tenth of
Vietnam’s exports, and the US 19%. These increases—and the corresponding relative decline of
exports going to other countries—reflect a fundamental reorientation of Vietnamese trade. The
growth of trade with the US reflects a steady improvement in diplomatic and economic relations,
culminating in a US-Vietnam bilateral trade agreement (BTA), signed in 2000, ratified by the US
Congress and the Vietnamese National Assembly in 2001, and put into effect from the beginning
of 2002.2 Also in 2001, China became a member of the WTO, thereby gaining reduced-tariff
access to global markets and at the same time extending import tariff concessions to its own
trade partners, including Vietnam.
Given the rapid growth in the prominence of China and the US among Vietnam’s
trading partners, and of course their significant shares of total world trade, it is of particular
interest to ask how these trade agreements and China’s WTO accession, among other trade
policy innovations, have affected the pattern and composition of Vietnam’s export growth. One
motivation for doing so is to attempt to learn more about Vietnam’s comparative advantage in a
2 The US extended Permanent Normal Trade Relations (PNTR) status to Vietnam in late 2006, paving the way for
Vietnam’s entry later that year to the WTO. A useful timeline of US-Vietnam relations can be found in Wittman
(2007.)
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highly integrated global trading system. This in turn may yield insights relevant to the design of
development policy in this transitional economy.
In this paper we examine these issues by asking three questions: (i) What are the
major trade-based determinants of Vietnam’s exports? (ii) To what extent do barriers imposed by
foreign trade partners hurt Vietnamese exports? and (iii) How have bilateral arrangements such
as the US-VN BTA, and trade policy reforms by large countries (China’s WTO accession),
impacted Vietnam’s exports? Answering these questions should help us to determine how
sensitive Vietnamese exports are to external factors such as trade barriers, and to structural
changes in the global trading system caused by China’s rise to prominence. A question of
particular importance is the effect, if any, of changing trade partnerships on the composition of
Vietnam’s exports. What indications do changes in the commodity mix of exports provide for
the future development of the Vietnamese economy? By studying the export response to
liberalized global market conditions, we may be able to derive insights into the pattern and trends
of Vietnam’s comparative advantage in an increasingly crowded and competitive global
marketplace.
To answer these questions, we employ a modified gravity model of foreign trade and
a panel of Vietnamese international trade data. We depart, however, from the typical gravity
model approach by fitting the model for a single country rather than a cross-section, and by
decomposing aggregate exports into their sectoral components. This more focused approach to
the estimation of the gravity model yields information that links the results directly to a large set
of broader development concerns.
The remainder of the paper is structured as follows. Section 2 offers an overview of
Vietnam’s recent trade performance. Section 3 presents the theoretical foundations of the gravity
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model and empirical evidence on Vietnam’s trade. The main estimation results are presented
and discussed in Section 4. Section 5 draws some conclusions on the changing pattern of
Vietnam’s comparative advantage, and section 6 concludes.
2 Vietnam’s Exports: Trends and Structural Changes
After the adoption of Doi Moi (renovation) policies in 1986, Vietnam embarked on a transition
from central planning to a market economy. Trade policy reform has been an essential
component of this reform process. Reforms to the trade and foreign exchange regimes, and a
policy of regional and international economic reintegration have both resulted in rapid export
growth. In dollar terms, total merchandise exports surged sixfold from 1990 to 2000. In the same
decade, the dollar value of non-oil exports grew at an average annual rate of 20 percent—double
the average for developing countries as a group. Vietnam’s non-oil exports reached $US24
billion in 2005 (Table 1), accounting for over 50% of GDP.
[Table 1 about here]
Vietnam’s exports have undergone significant structural change since the 1990s. The
main geographical trend, as noted, was a reorientation away from the former socialist economies
toward market economies in Europe and Asia. After a transition period in which most exports
went to Asian neighbors (excluding China), by 2005 three countries—China, Japan and the
US—accounted for 43 percent of Vietnam’s total exports. Exports have become more
concentrated by destination: in 1999, the same share of exports (43%) went to 10 countries. By
2005, just ten trading partners accounted for over 75% of Vietnam’s merchandise exports.
The change in export destination has been accompanied by a significant shift in the
commodity composition of exports. Oil and other energy products account for about a quarter of
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total exports, but the commodity composition of the remaining exports has shifted from mainly
agricultural and raw material goods, which had dominated pre-1998 trade, to manufactures
(Table 1). In 1998, agricultural products and resource-based materials such as rubber made up
more than 40% of non-oil exports; by 2005 they accounted for only 34%. In 1998, manufactures
accounted for 43% of exports, a figure that rose to over 56% by 2005. Labor-intensive, light
industry manufactures rose from 33% to 43% of non-oil exports. Of particular interest is a
seeming break in the data after 2001, when the shares of agricultural products and capital-
intensive manufactures dropped sharply, while that of light manufactures jumped 5%.
Vietnam’s major garment and footwear export markets are the US, EU, and Japan. In
2005, the US and EU accounted for 57% and 17% respectively of total garment and textile
exports. Vietnam’s exports of these products to the US have greatly increased since the approval
of the BTA. Electronics and components also began to gain ground following the BTA, though
they are still relatively small as a share of total manufactured exports.
Within the category of resource-based goods, exports of processed food, especially
seafood and fish, have grown faster than other items. Given the country’s agricultural and
aquacultural resources and the growing world demand for seafood, canned fruits, vegetables and
meat, Vietnam has considerable untapped potential for further export expansion in processed
food.
3 The gravity model
Theoretical and empirical foundations
The gravity model is a standard method for measuring influences on bilateral trade among
countries. Its basic structure resembles Newton’s law, which equates the gravitational attraction
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between two objects to the product of their masses divided by the distance between them. In
international trade applications, the value of bilateral trade takes the place of gravitational
attraction; this is seen as directly related to the product of incomes in the two trading partners
and inversely related to the distance between them. In this simplest form, the model is:
)/( ijjiij dYYAX = (1)
where ijX is the value of exports from country i to country j, iY and jY are the GDPs of i and j,
ijd is a measure of distance between i and j, and A is a constant of proportionality.
Empirical antecedents for the gravity equation as a model of international trade date back
to Tinbergen (1962), Poyhonen (1963) and Linnemann (1966). Subsequent theoretical work has
showed the model to be consistent with a number of different models of international trade.
Anderson (1979) and Bergstrand (1985) showed that the gravity equation could be derived from
a model of trade in products differentiated by country of origin (the Armington assumption).
Bergstrand (1989) derived a version of the gravity equation using a hybrid of the perfectly
competitive Heckscher-Ohlin (H-O) model and the one-sector monopolistic competition model
of Krugman (1979). Feenstra et al. (1998) further derived a gravity equation from a reciprocal
dumping model of trade with homogenous goods. Finally, Deardorff (1998) derived the gravity
equation from the standard H-O model. Due to the development of this theoretical foundation, it
is generally accepted that a number of trade models are consistent with the empirical gravity
equation specification.
The highly stylized statement of equation (1) fits global trade data remarkably well. It
cannot, however, capture the complete empirical richness of bilateral trade patterns. In addition
to the primary variables in (1), others such as per capita GDP, population, and land area are
typically included in the gravity model to account for differences in levels of living, country size,
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and geographic endowments. Dummy variables are frequently added to capture country-specific
historical and cultural factors thought to affect bilateral trade, including shared features such as a
common language, border, or colonial history, as well as membership in trade blocs and other
groupings. Thus the empirical gravity equation literature is rich in variations on the basic model
(Frankel et al., 1997; Helliwell, 1998).
The gravity equation is now a standard tool of empirical trade analysis. Applications are
widespread in studies of bilateral trade, regional trade blocs, home-market effects, and other
trade-related phenomena, such as the effects of the EC and EFTA on trade patterns (Bayoumin
and Eichengreen, 1995); economic reform in Eastern Europe (Wang and Winters, 1992), and the
formation of regional trading blocs (Frankel et al., 1995, 1997). More recently, country-specific
studies have been used to estimate the potential implications of Russia’s accession to the WTO
(Oxana and Mathilde, 2004; Lissovolik and Lissovolik, 2004), and that of the Ukraine (Dean et
al., 2003).
International integration implies changes both in total trade, and in trade patterns by
commodity. In another departure from standard models, some other recent studies have
examined not merely aggregate bilateral trade, but trade in specific products or the output of
specific sectors. Mulapruk and Coxhead (2005) use a gravity model to estimate the impact of
China’s integration into the world market on the trade patterns of middle-income regional
neighbors (Indonesia, Malaysia, Philippines and Thailand), focusing on electrical and electronic
products. Eichengreen et al. (2004) employ a gravity model to analyze the impact of China’s
growth on specific sectoral exports of other Asian countries; both studies conclude that there is a
tendency for China’s exports of labor-intensive products to crowd out the exports of other Asian
countries, but results for more sophisticated products are ambiguous. Frankel et al. (1997) used
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some sectoral disaggregation in assessing the influence of regional trading blocs such as the EU.
A similar disaggregated approach has not, however, been applied specifically to the case of
Vietnam.3
Elements of the empirical gravity equation
The gravity model assumes that countries tend to trade more with larger partners, other things
equal. This assumption is reflected in the predicted positive influence on bilateral trade of the
product of the two partners’ GDPs. However, larger countries also have relatively smaller trade
ratios due to the size of their domestic markets. This dimension of economic size is often
captured by including population along with GDP, allowing the model to distinguish among
economies of similar aggregate size but with varying sizes of domestic markets. There are
several mathematically equivalent ways to include both aggregate GDP and population measures
(Frankel 1997).
The distance between trade partners (a proxy for cost of transportation) reduces the
magnitude of aggregate trade; the greater the distance, the higher the barriers to bilateral trade.
Of course, in models dealing with disaggregated components of trade, distance should have
differential effects according to the type of commodity being traded. In East Asia, where
tradable manufacturing is concentrated in commodities such as garments, electronics and
machinery, distance may impose a much smaller barrier than in the case of agricultural and
natural resource products such as timber, ores and crude oil.
3 There are very few studies applying the gravity model to Vietnamese data. Recently, Patrizia (2006) estimated the
impacts of regional trade agreements (RTAs) on Vietnam’s trade flows, and concluded that Vietnam overtrades with
ASEAN countries, especially with Singapore, and Euro zone and the Russian Federation.
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Another type of trade flow restriction arises due to policy impediments. Tariffs, quotas,
subsidies, export taxes, exchange controls, and different marketing restrictions are all means by
which governments or their agencies can create such barriers, in effect increasing the ‘distance’
to trading partners. Conversely, economic and political unions like the Association of Southeast
Asian Nations (ASEAN) or the European Union (EU) or bilateral trade agreements may confer
trade policy preferences that have the opposite effects. Regional or preferential trade
arrangements include the traditional welfare gains from preferential tariff reductions, the market-
power benefit of forming a larger unit for tariff setting and bargaining, and strategic benefits
from integrating markets and committing to preferential arrangements. To analyze the effects of
regionalism and preferential trade agreements, it is typical to add dummy variables for
participation in regional or bilateral preferential trade arrangements. Empirical analyses suggest
that the benefits from these forms of market assurance may in fact be quite large, particularly in
case of a small country (Whalley 1998). It is particularly important also to note, in the case of a
transition economy like Vietnam, that substantive bilateral trade agreements may sometimes
involve lowering of the policy barriers to trade by both partners. In this way bilateral deals
contrast with Generalized System of Preferences (GSP) and other trade concessions sometimes
extended by wealthy countries or groupings (such as the EU and the US) to partners in the
developing world.
4 Data, estimation and results
Based on these considerations and on various preferential trade agreements between Vietnam
and its trade partners, in this paper we use the following specification:
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lnVNEXjt = !0 + !1 ln(GDPVtGDPjt ) + !2 ln(GDPPCVtGDPPCjt ) + !3 lnDISTVj +!4 lnTRIN jt
+ !5TREATY + !6REGION + " (2)
where VNEXjt stands for Vietnam’s exports to country j in year t. The first two right-hand side
terms denote the products, respectively, of Vietnam’s and it’s trading partner’s GDP and per
capita GDP. DISTVj is the distance between Vietnam and country j. TRIN jt is a measure of the
openness of partner country j to trade in general, discussed in more detail below. TREATY is a
vector that includes two significant trade deals struck by Vietnam during the period covered by
our data, and a third-party effect, China’s accession to the WTO in 2001. These are also
discussed in more detail below. REGION is a vector of dummy variables for regional trade
groupings and includes EU, NAFTA, ASEAN, and the Asia-Pacific Economic Cooperation
group (APEC).
Data definitions are provided in Table 2.4 Data on bilateral trade flows are from the UN
Commodity Trade Statistics Database (UN Comtrade). The data set spans a period of 8 years
from 1998 to 2005 and encompasses on average 180 countries in each year.5 Data on GDP and
per capita GDP, both in constant 2000 U.S dollars, are from the World Bank World
Development Indicators (WDI) database. The distance between two countries is the distance
between their capital cities, measured in kilometers.6
[Table 2 about here]
4 At present the data set used in estimation excludes Taiwan (or, in Comtrade terminology, “Other Asia, n.e.s.”). 5 The numbers of trading partners in each year are: 1998: 106, 1999: 166, 2000: 175, 2001: 208, 2002:216, 2003:
202, 2004: 180, 2005: 205.
6 Source: http://www.wcrl.ars.usda.gove/cec/java/capitals.htm
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For the trade intervention variable TRIN we use the Heritage Foundation (HF) index of
trade freedom.7 This index ranges in value from 100 (for “free”) to 0 (for “repressed”) on the
basis of two indicators: the degree of trade-weighted tariff protection applied to imports and the
presence of non-tariff barriers (Beach and Kane 2007). Higher values of this indicator indicate a
more open trade policy stance on the part of the country concerned, other things equal. However,
the HF data do not capture specific bilateral trade measures and may thus misrepresent a given
county’s trade policy stance with respect to any other country. Nor do they discriminate among
commodity categories; a country may have high protective barriers for agriculture, say, and low
barriers for manufactures, and yet register the same value of the HF measure as another country
with moderate barriers to all commodity trade. Lastly, the method by which the index is
constructed reduces the probability of low values, and thus probably overstates the openness of
many economies.8
During the period covered by the data, Vietnam undertook three significant trade treaty
initiatives (prior to 1998, Vietnam was awarded MFN status by the EU (1994) and joined
ASEAN and the ASEAN Free Trade Area (1996, with trade concessions phased in over several
years). In 1999, Vietnam became a member of APEC, a loose Pacific Rim coalition of countries
committed to freer regional trade, though in a non-binding manner. Also in 1999, Japan awarded
the country Most Favored Nation (MFN) status, thereby reducing very significantly the tariff and
other protection measures applied to Vietnamese imports. Finally and most importantly, in 2001
Vietnam and the US signed a far-reaching bilateral trade agreement. Its implementation in 2002
7 Source: http://www.heritage.org/research/features/index/index.cfm
8 See Beach and Kane 2007. The calculated tariff measure is subtracted from 100 (free trade) then up to an additional 20 percentage points are subtracted for non-tariff barriers. This bound means that some economies with significant non-tariff and bureaucratic impediments to trade presumably receive a higher trade openness measure than is justified.
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brought US tariffs on a wide range of Vietnamese goods down from high double-digit rates to
low single digits, in line with rates applied to almost all other US trading partners. In return,
Vietnam committed to an equally (or more) far-reaching liberalization of its own trade and
commercial policies (Le and Coxhead, 2006). The US BTA was a major step for Vietnam
toward the application of WTO-consistent trading rules, in the lead-up to its accession to that
body in 2007. Both countries’ concessions should have helped reduce the barriers to Vietnamese
exports to the US (and thus also to NAFTA).
Finally, the TREATY vector also includes a variable representing China’s 2001 accession
to the WTO. In doing so, China, the largest East Asian economy and an increasingly important
trade partner to Vietnam, also implemented wide-ranging trade policy liberalization and received
comparable concessions from other WTO members. In view of the size of the Chinese economy,
it is reasonable to ask whether China’s actions measurably impact Vietnamese export potential.
Taken together, the trade policy variables TRIN and TREATY should capture large parts
of the ongoing reduction in foreign barriers to Vietnamese exports, as well as the reciprocal
reduction in Vietnam’s own barriers to trade. Their inclusion in the empirical model serves an
important purpose. If the Vietnamese economy was initially characterized by significant internal
and external barriers to trade, then their effects should not only have reduced total trade, but also
distorted its composition across commodities. The latter effect is a function both of the
distortionary effects of trade policies and of the varying levels of trade barriers presented by
Vietnam’s trade partners. These interventions are potentially large sources of bias in ex post
measures of comparative advantage, since these measures interpret observed trade flows as
indicators of underlying comparative advantage. Policy liberalization should therefore serve to
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reveal, in trend form at least, if not in absolute numbers, a more true measure of comparative
advantage. We return to this discussion in Section 5.
The available data cover a relatively short time-span. Due to the rapid growth of the
Vietnamese economy, however, there is no lack of variation across years. Between the first and
last years of the data set, the Vietnamese economy expanded by 130%; its total trade grew by
more than 200% and as already seen, both the shares of exports going to major trading partners
and the commodity composition of exports underwent dramatic transformations.
Using variants on the model in equation (2), we run several sets of regressions. We begin
with simple cross-country ordinary least squares (OLS) models by year. These allow us to
observe correlates of Vietnam’s exports within a given time period. We then exploit the panel
dimensions of the data by running pooled fixed effects and random effects regressions. We also
explore several modifications to the underlying model as a check on the robustness of our results.
Single-year estimates
Table 3 presents the cross-section results, which are tabulated as sequential independent
regressions for each year 1998-2005. The outcomes appear reassuring in many respects. The
gravity model seems to fit Vietnam’s export data quite well, as can be seen from the adjusted R-
squared values, which range between 0.66 and 0.74 for all years except 1998.
[Table 3 about here]
The estimated effects of country size (the product of GDPs) and distance are highly
significant and of expected signs. Other than in the first year, however, the product of per capita
GDPs has no significant effect on trade flows. Since Vietnam’s GDP and per capita GDP are the
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same for all observations in each year, the second right-hand side variable is merely capturing
the effects of population in trade partners.
The trade freedom index plays no appreciable role in the results, although it is
statistically significant and positive in 2002 and has positive (though insignificant) coefficient
estimates in subsequent years. Finally, these regressions include regional dummy variables for
the EU and APEC. These are generally positive; the APEC dummy, moreover, is significant and
large in magnitude for each year after 1998, that is, for each year that Vietnam was an APEC
member state. The persistently positive signs on these variables mean that, even after controlling
for economic size, trade barriers and distance, APEC and the EU are important destinations for
Vietnam’s exports.9
Panel data estimates
We now turn to estimates on pooled data, reported in Tables 4 and 5. The trade data make up an
unbalanced panel, with between 1 and 8 observations on each trading partner. Taking account of
country-level fixed effects and panel-level between effects should improve the efficiency of the
gravity model estimates. We present four variants of the model: two of the four include the
TRIN variable as a regressor, and an overlapping pair explore the implications of using an APEC
dummy variable as opposed to separate dummies for ASEAN and NAFTA, most of whose
member states are also members of APEC. In addition, we specify four distinct dependent
variables: total exports, and exports of manufactures, agricultural goods, and natural resource
products. The division of commodity exports is done in the following way. The UN Comtrade
data are classified on the basis of the third revision of the Standard International Trade
9 Other combinations of regional groupings are possible. However, the degree of overlap between ASEAN and APEC means that only one dummy is significant in any equation in which they are both included.
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Classification (SITC). Manufactured goods include chemicals and plastics (SITC 5), semi-
manufactures such as sawn timber and plywood (SITC 6), machinery, transport equipment and
all kinds of assembly (SITC 7), and miscellaneous manufactured articles (SITC 8). Agricultural
goods include food (SITC 0), beverages and tobacco (SITC 1), animals and vegetables (SITC 4),
and rubber (SITC 22). Resource-based goods include crude materials (SITC 2, except #22),
fuels, lubricants and related materials (SITC 3), and non-ferrous metals (SITC 68).
[Table 4 and Table 5 about here]
In these regressions we also take advantage of the multi-period dimension to drop many
observations that contribute nothing to an economic analysis. Nearly all of Vietnam’s trade is
conducted with a small group of countries; for the rest, trade flows and the composition of trade
can vary enormously from year to year for reasons that cannot be captured by the variables in our
data set. In order to focus on the main story, the panel data regressions exclude all observations
on countries whose shares in Vietnam’s exports by value (in a given year) are less than one-
fourth of the mean share. Since the mean share is 0.0055 (or 0.55%), the countries excluded
have export shares of 0.0014 (0.14%) or less. The cost of this action is substantially fewer
observations; the gain is greater efficiency.10
All the estimators reported are specified as random effects models; these permit us to
explore directly the effects of time-invariant variables such as regional trade groupings.
Hausman tests (shown in the tables) for the null hypothesis of relative consistency of the RE
estimators against FE estimators fail to reject in twelve out of 16 cases.
The core gravity model variables produce similar estimates across all specifications. The
products of bilateral GDPs and of bilateral per capita GDPs, are positive and mostly significant.
Distance has a negative effect on trade as expected, and this is significant except in the models of 10 The estimation results are not sensitive to other cut-off points. Details available from the authors.
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commodity-specific trade when controlling separately for Vietnam’s own regional trade group
(ASEAN), i.e. parts of Model 3 and Model 4.
Models 2 and 4 include as an explanatory variable TRIN, the general measure of trade
freedom. Surprisingly, once specific trade groupings and agreements are controlled for, this has
a negative and significant association with total exports. Controlling for other factors, Vietnam
exports less to more countries that the Heritage Foundation measure classes as more open to
trade! A clue to this seemingly paradoxical result is found by noticing that the negative effect of
TRIN on total exports is echoed (only) in the estimates for agricultural trade. Agricultural
protectionism has resisted global trade liberalization efforts very robustly, and rich and poor
countries alike typically seek exemptions for agricultural products when negotiating bilateral and
regional trade deals. As the global trading system has become more open on average,
agricultural trade has lagged behind, and this effect appears in our estimates even after
controlling for the influence of some of the most protectionist large economies (i.e., the EU).
Among the TREATY variables several interesting stories emerge. First, Japan’s extension of
MFN in 1999 had a large and positive impact on Vietnam’s total exports, and of manufactures in
particular. As Hill (2000) has noted, Vietnam gained access to the Japanese market for its labor-
intensive manufactures, such as garments and footwear, at a time when the world’s largest and
most vigorous market for such products, the USA, was virtually inaccessible to it.11
Second, the influence of the bilateral trade agreement with the US is hard to overestimate.
The BTA between Vietnam and the US had been expected to have a big positive impact on
Vietnam’s exports (Fukase and Martin 1999). In fact, Vietnam’s exports to the US increased
more than fourfold over just two years from December 2001, growing from US$1.05 billion in
11 In 1996, Vietnam’s garment exports to the US made up only 2.2% of its total garment exports. At comparable stages of their industrial development (i.e. in 1985), Indonesia, Thailand and China sold 58%, 41% and 28% respectively of their garment exports to the US (Hill 2000, table 6).
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2001 to US$4.55 billion in 2003. Manufactured exports, especially clothing, dominated this
trend. Vietnam' exports to the US exceeded $US5 billion in 2005, and accounted for nearly 20%
of total export earnings. Large as it is, the magnitude of the export response is no surprise given
the size of the US market in relation to the global market; what is perhaps novel is the speed with
which Vietnamese exporters were able to capitalize on market access. For example, SITC 8
exports (miscellaneous manufactures, mainly garments, footwear and accessories) from Vietnam
to the US leapt after 2001 (Figure 3). Moreover, most of the growth in exports to the US
resulted from export creation associated with increases in production and employment, rather
than from a diversion away from exports to other countries (Vo Chi Thanh, 2005).
Third, the influence on Vietnam’s exports of China’s accession to the WTO, which might
have been expected to be strongly negative, was in fact positive—at least for manufactures.
Although China and Vietnam are direct competitors in the global market for many manufactured
items, it seems that the opening of China’s own market has been a positive influence on
Vietnam’s exports. In the period 1998-2003, China’s share in Vietnam’s total exports rose from
2% to over 13%. It may also be the China’s generally negative influence on global prices of
labor-intensive manufactures has helped Vietnam, one of the few countries that has labor costs
low enough to compete with Chinese manufacturers, to take advantage of rapidly growing global
demand.
Finally, an interesting contrast in results comes from the EU regional dummy variable. The
EU granted Vietnam MFN-like status and GSP concessions in the mid-1990s. Its relative size
and openness to Vietnamese exporters of manufacturers is borne out in the manufactured export
results in all models. However, EU concessions to developing country exporters of
manufactures have not been matched by equivalent generosity to agricultural exporters. This
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appears in our models as negative estimates of the influence of the EU on Vietnam’s exports of
agricultural and natural resource products—most notably once Vietnam’s trade in such products
to its ASEAN neighbors is taken into account (Models 3 and 4). The EU, it seems, still retains
significant barriers to farm exports from Vietnam.
5 Vietnam’s evolving comparative advantage
The concept of comparative advantage, while theoretically compact, is notoriously difficult to
pin down in empirical work. Ex ante measures based on national factor endowments are poor
predictors of trade patterns (Trefler 1995); consequently, the empirical literature relies heavily on
ex post measures. Measures of “revealed” comparative advantage (RCA; Balassa 1965) capture
the intensity of a country’s exports of a good relative to the intensity of world exports of that
good. For country j, good k and time period t, the RCA is defined asRCAjkt =Xkt
jXKt
j
Xkt
WXKt
W, where K
denotes the sum of all exports from country j or the world (W) respectively. By this definition,
RCAjkt > 1 means that the share of product k in the exports of country j in year t is greater its
share in total world exports in the same year. It is conventional to interpret RCAjkt values greater
than 1 as meaning that country j has comparative advantage in production of good k. However,
the RCA measure is based on observed exports, and these in turn are subject to policy
interventions both at home and abroad. Product-specific measures as well as anti-export bias in
the domestic economy are both influential, especially in economies in transition (Athukorala
2006). At the same time, protection by large trade partners that discriminates either by country
or by commodity has an influence on the pattern of production and trade from the exporter.
This paper raises the possibility of detecting trends in trade patterns that take account of at
least some such discriminatory behavior, as well as capturing some of the effects of exogenous
19
growth in large competitor or complement economies (such as China) that influence the global
terms of trade for other exporters. By doing so, we maybe able to derive information about long-
run comparative advantage based on observed trends in the flows and composition of exports as
policy reforms are implemented.
In the Vietnamese case, trade has expanded dramatically during the doi moi era, but the
country still has very far to go along the path to complete liberalization (Athukorala 2006; Hill
2000). Bilateral trade deals, such as that with the USA, move Vietnam’s trade pattern closer to
its underlying comparative advantage both by reducing import barriers and by demanding
reductions in domestic distortionary policies. Vietnam’s integration into the ASEAN regional
grouping has clearly (from Table 5) had similarly large effects on the composition of its exports.
Its Southeast Asian regional trade growth has been rapid in resource products, less so in
manufactures, and negligible in agriculture, where the differences between Vietnam’s
endowments and those if its neighbors are least pronounced.
6 Conclusions
The aim of this paper has been to determine the major factors of Vietnam’s exports for the period
covered by available data, 1998-2003. We have focused on three issues: the influence of trade
agreements signed with Japan, the EU, ASEAN and the US; examination of the extent to which
Vietnamese exports are hurt by barriers imposed by its trade partners, and the effects of China’s
WTO accession. We employed the gravity model, a workhorse of empirical trade analysis.
However, our use of this model departs from most standard applications first in focusing on the
exports of just one country, and second in decomposing aggregate trade flows into their sectoral
components.
20
Our analysis shows that although ASEAN partners and China are important destinations
for Vietnam’s exports, the role of the US and EU has increased, especially since the US BTA
became effective in 2002. China’s entry to the WTO has also had a large and surprisingly
positive impact on Vietnam’s exports of manufactures.
Our basic results are consistent with those of other gravity model applications. However,
standard gravity models provide only average results both for countries and for trade in all
sectors. Our approach is more specific in both respects. By focusing on a single country it yields
information about that country (rather than about the average country in a cross-section), and the
decomposition of exports by sector yields information that links the results directly to a large set
of broader development concerns: structural change, income distribution, environment and
natural resources, potential for moving up quality or skill ladders in manufacturing, and more.12
12 NB for future research: Rapidly increasing role of FDI firms in exports: these accounted for 20% of exports by
value in early 1990s up to 70% by early 2000s (Athukorala 2002b, cited in A. 2005:26). Is there a link between the
origin of FDI and the destination of exports? Seems unlikely, given rising trend of exports to US and China, since
these are small investors in VN manufacturing.
21
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24
Table 1: Vietnam: Merchandise export trends
1998 1999 2000 2001 2002 2003 2004 2005
Total exports ($USm) 9,360 11,541 14,483 15,029 16,706 20,149 26,485 32,447
Non-oil, % 84.6 79.5 73.6 77.1 78.8 79.4 76.5 74.2
Fuels, lubricants, etc. (SITC 3), % 15.4 20.5 26.4 22.9 21.2 20.6 23.5 25.8
Commodity shares in non-oil exports (%)
Food and live animals (SITC 0) 35.5 35.0 33.2 33.7 31.1 27.4 25.9 26.3
Beverages and tobacco (SITC 1) 0.1 0.1 0.2 0.4 0.6 0.9 0.8 0.6
Crude materials except fuels (SITC 2) 3.3 3.1 3.6 3.5 3.9 3.9 4.1 5.1
Animal, veg. oils, fats, wax (SITC 4) 0.2 0.2 0.6 0.3 0.1 0.1 0.2 0.1
Chemicals, reltd. prod. nes (SITC 5) 1.1 1.5 1.3 1.9 1.9 2.1 2.1 2.2
Manufactured goods (SITC 6) 5.4 9.4 7.3 8.1 8.5 8.4 9.3 8.9
Machines, transport equip (SITC 7) 9.5 10.6 11.8 11.2 9.6 10.9 12.6 13.0
Misc manufactured artcls (SITC 8) 33.2 38.5 37.7 37.7 43.0 45.2 44.5 43.2
Goods not classd by kind (SITC 9) 11.6 1.7 4.4 3.1 1.3 1.1 0.6 0.6
Source: Comtrade
25
Table 2: Variable definitions
Variable Definition
VNEXjt Vietnam’s exports to trade partner j in year t.
GDPjt GDP of country j in year t (in 2000 $US).
GDPPCjt Per capita GDP of country j in year t (in 2000 $US). Source: WDI.
DISTj Great circle distance from Hanoi to capital city of country j.
TRINjt Heritage Foundation trade freedom indicator for country j in year t
EU, ASEAN, APEC, NAFTA
Time-invariant dummy variables for economic groupings
CHINAWTOt Dummy variable (1 = China as partner and t > 2001, when China joined WTO)
USABTAt Dummy variable (1=USA as partner and t > 2001, when US and Vietnam signed Bilateral Trade Agreement)
JAPANMFNt Dummy variable (1=Japan as partner and t > 1999, when Japan awarded Vietnam Most Favored Nation status)
26
Table 3: Vietnam’s exports by year Dependent variable: natural log of VN exports
1998 1999 2000 2001 2002 2003 2004 2005
ln(GDPVGDPj) 0.51*** (0.18)
0.83*** (0.10)
0.89*** (0.09)
0.87*** (0.09)
0.95*** (0.09)
1.00*** (0.09)
0.93*** (0.10)
0.93*** (0.09)
ln(GDPPCVGDPPCj) 4.49** (1.79)
0.32 (0.93)
-0.50 (0.90)
-0.51 (0.89)
-1.10 (0.89)
-1.17 (0.90)
-0.92 (0.97)
-1.35 (0.91)
ln(DISTj) -2.28*** (0.74)
-1.93*** (0.45)
-1.83*** (0.43)
-1.91*** (0.40)
-1.92*** (0.39)
-1.88*** (0.39)
-1.33** (0.42)
-1.24** (0.38)
ln(TRINj) -0.61 (0.68)
-0.24 (0.54)
-0.09 (0.52)
-0.07 (0.57)
1.80** (0.64)
0.88 (0.55)
0.70 (0.64)
0.44 (-0.72)
EU -0.35 (0.75)
0.85 (0.53)
0.89* (0.52)
0.99** (0.48)
0.85* (0.49)
0.88* (0.50)
0.64 (0.53)
0.71 (0.47)
APEC 0.63 (0.79)
1.41** (0.53)
1.53** (0.51)
1.53** (0.47)
1.29* (0.50)
1.39* (0.51)
1.48** (0.54)
1.55** (0.48)
Constant -32.4*** (10.45)
-18.8** (6.02)
-16.3* (5.82)
-14.7 (5.86)
-22.1*** (5.83)
-19.9** (5.93)
-19.90** (6.36)
-15.1 (5.90)
Adj. R2 0.41 0.66 0.68 0.70 0.74 0.73 0.67 0.71
N 88 136 140 137 139 139 136 136
F 10.94 44.78 49.59 55.10 65.56 64.70 47.50 56.35
Prob > F 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Note: Figures in parentheses are standard errors
***, **, * denote coefficients statistically significant at 1%, 5% or 10%
27
Table 4: Vietnam’s exports, random effects estimates Sample restricted to obs with expsha > 0.25*mean
Model 1 Model 2
Total
exports
Manuf
exports
Agric
exports
Nat. res.
exports
Total
exports
Manuf
exports
Agric
exports
Nat. res.
exports
ln(GDPVGDPj) 0.17** (0.06)
0.22** (0.09)
0.29** (0.13)
0.65*** (0.22)
0.20*** (0.07)
0.27*** (0.09)
0.38*** (0.13)
0.69*** (0.23)
ln(GDPPCVGDPPCj) 1.43*** (0.28)
2.06*** (0.36)
1.51*** (0.46)
1.32** (0.66)
1.55*** (0.29)
2.21*** (0.36)
1.60*** (0.45)
1.39** (0.68)
ln(DISTj) -1.13*** (0.28)
-0.86** (0.39)
-1.15** (0.59)
-4.24*** (0.95)
-1.21*** (0.29)
-0.85*** (0.36)
-1.48*** (0.56)
-4.33*** (0.98)
ln(TRINj) -0.51*** (0.17)
-0.24 (0.22)
-1.10*** (0.25)
-0.26 (0.34)
CHINAWTO 0.88** (0.41)
1.00* (0.54)
0.47 (0.63)
0.62 (0.78)
0.82** (0.41)
0.88* (0.54)
0.38 (0.60)
0.58 (0.78)
USABTA 1.67*** (0.41)
3.15*** (0.51)
0.93 (0.63)
0.15 (0.78)
1.63*** (0.41)
3.08*** (0.51)
0.90 (0.60)
0.12 (0.78)
JAPANMFN 0.93** (0.45)
1.36** (0.56)
1.09 (0.70)
-0.04 (0.87)
0.88*** (0.44)
1.31** (0.55)
1.04 (0.67)
-0.07 (0.87)
EU 0.21 (0.27)
1.02*** (0.37)
-0.81 (0.54)
-1.39 (0.88)
0.27 (0.27)
0.99*** (0.33)
-0.67 (0.51)
-1.50* (0.87)
APEC 0.85*** (0.27)
0.84** (0.38)
0.23 (0.56)
1.66* (0.86)
0.91*** (0.27)
0.85** (0.34)
0.29 (0.52)
1.54* (0.86)
Constant 2.51 (2.83)
-7.69* (4.00)
-5.65 (5.33)
-13.17 (8.49)
2.36 (2.91)
-10.6*** (3.79)
-4.73 (5.14)
-14.32* (8.64)
Overall R2 0.54 0.58 0.36 0.51 0.55 0.58 0.40 0.51
N 331 322 327 286 324 316 320 283
Groups 72 65 69 57 69 63 66 54
Wald Chi2
Prob > chi2 179.87 (0.00)
204.33 (0.00)
62.22 (0.00)
79.01 (0.00)
194.75 (0.00)
230.73 (0.00)
91.03 (0.00)
78.44 (0.00)
Hausman chi2 prob > chi2
12.85** (0.025)
1.56 (0.91)
2.55 (0.77)
3.87 (0.57)
10.99* (0.09)
4.90 (0.56)
3.52 (0.74)
3.06 (0.80)
Note: Figures in parentheses are standard errors ***, **, * denotes p < 0.01, 0.05, and 0.1 respectively
28
Table 5: Vietnam’s exports, random effects estimates Sample restricted to obs with expsha > 0.25*mean
Model 3 Model 4
Total
exports
Manuf
exports
Agric
exports
Nat. res.
exports
Total
exports
Manuf
exports
Agric
exports
Nat. res.
exports
ln(GDPVGDPj) 0.26*** (0.07)
0.29*** (0.10)
0.37*** (0.13)
0.98*** (0.21)
0.30*** (0.07)
0.40*** (0.09)
0.45*** (0.13)
1.02*** (0.22)
ln(GDPPCVGDPPCj) 1.32*** (0.29)
1.98*** (0.37)
1.36*** (0.47)
0.74 (0.66)
1.41*** (0.29)
2.10*** (0.37)
1.47*** (0.46)
0.82 (0.67)
ln(DISTj) -0.68* (0.37)
-0.63 (0.39)
-0.42 (0.75)
-2.05* (1.16)
-0.77** (0.38)
-0.48 (0.46)
-0.89 (0.72)
-2.00* (1.19)
ln(TRINj) -0.47*** (0.17)
-0.20 (0.22)
-1.09*** (0.25)
-0.24 (0.34)
CHINAWTO 0.96** (0.41)
1.08* (0.54)
0.49 (0.63)
0.68 (0.78)
0.89** (0.41)
0.98* (0.54)
0.40 (0.60)
0.63 (0.78)
USABTA 1.56*** (0.41)
3.03*** (0.51)
0.95 (0.63)
0.14 (0.78)
1.51*** (0.41)
2.93*** (0.52)
0.90 (0.60)
0.11 (0.78)
JAPANMFN 1.05** (0.45)
1.47*** (0.56)
1.12* (0.70)
0.10 (0.87)
1.00** (0.44)
1.45*** (0.55)
1.06 (0.67)
-0.06 (0.87)
EU -0.06 (0.27)
0.82** (0.37)
-0.98* (0.53)
-2.22*** (0.82)
-0.02 (0.27)
0.75** (0.32)
-0.85* (0.51)
-2.32*** (0.79)
ASEAN 1.22*** (0.40)
0.95* (0.56)
1.21 (0.79)
1.66* (0.86)
1.23*** (0.41)
1.16** (0.48)
1.01 (0.75)
4.07*** (1.16)
NAFTA 0.09 (0.53)
0.43 (0.74)
-0.69 (1.04)
-1.41 (1.54)
0.09 (0.53)
0.22 (0.62)
-0.57 (0.98)
-1.58 (1.51)
Constant -2.68 (3.32)
-11.51** (4.88)
-11.10* (6.22)
-32.7*** (9.69)
-3.23 (3.42)
-16.1*** (4.46)
-9.67 (6.05)
-34.9*** (9.83)
Overall R2 0.57 0.58 0.40 0.60 0.57 0.59 0.44 0.60
N 331 322 327 286 324 316 320 283
Groups 72 65 69 57 69 63 66 54
Wald Chi2
Prob > chi2 177.34 (0.00)
200.06 (0.00)
65.30 (0.00)
94.52 (0.00)
190.23 (0.00)
232.09 (0.00)
92.99 (0.00)
96.06 (0.00)
Hausman chi2 prob > chi2
13.10** (0.022)
2.14 (0.83)
3.31 (0.65)
5.47 (0.36)
14.66** (0.02)
8.45 (0.21)
3.56 (0.74)
4.21 (0.65)
Note: Figures in parentheses are standard errors ***, **, * denotes p < 0.01, 0.05, and 0.1 respectively
Figure 1a
Exports as Per Cent of GDP: Vietnam in Comparative Perspective
Figure 1b
Export Growth (annual per cent): Vietnam in Comparative Perspective
0%
5%
10%
15%
20%
25%
30%
1998 2000 2003
Figure 2: Geographic Composition of Exports, 1998-2003
Europe
USA
ASEAN
China
Japan
Other Asia
ROW
Source: UN Comtrade
Figure 2 Destination of Vietnamese Exports, 1998-2003
Figure 3: Exports of SITC 8 commodities to major trading partners