Determinants of trade balance empirical evidence in vietnam from 2010 to 2019

Since the Doi Moi revolution in 1986, the role of external trade in Vietnam’s economy has grown dramatically in the last 30 years. Vietnam’s international trade has become more and more liberalized in recent years. One of the most important issues which need to be studied during this era is the behavior of the trade balance. This paper is aimed to examine the relationship between trade balance and macroeconomic variables: exchange rate, foreign direct investment, final consumption expenditure, labor force, and manufacturing in the case of Vietnam from 2010 to 2019. Using the OLS model and qualitative method with data collected from the General Statistics Office, World Bank, and other qualified sources, and handled by STATA software, whether a causal relationship exists between trade balance and the determinants or not is investigated. The results found that all aforementioned variables statistically affected the trade balance at

FOREIGN TRADE UNIVERSITY FACULTY OF ENGLISH FOR INTERNATIONAL BUSINESS …… ***…… RESEARCH PAPER DETERMINANTS OF TRADE BALANCE: EMPIRICAL EVIDENCE IN VIETNAM FROM 2010 TO 2019 Topic: International Trade Class: ESP231 Instructor: M.A Phan Kim Thoa Group: Group Hanoi, May 2023 Determinants of Trade Balance: Empirical Evidence in Vietnam from 2010 to 2019 School of Economics and International Business, Foreign Trade University Faculty of International Economics, Foreign Trade University ESP231: English for Specific Purposes M.A Phan Kim Thoa Hanoi, May 2023 Abstract Since the Doi Moi revolution in 1986, the role of external trade in Vietnam’s economy has grown dramatically in the last 30 years Vietnam’s international trade has become more and more liberalized in recent years One of the most important issues which need to be studied during this era is the behavior of the trade balance This paper is aimed to examine the relationship between trade balance and macroeconomic variables: exchange rate, foreign direct investment, final consumption expenditure, labor force, and manufacturing in the case of Vietnam from 2010 to 2019 Using the OLS model and qualitative method with data collected from the General Statistics Office, World Bank, and other qualified sources, and handled by STATA software, whether a causal relationship exists between trade balance and the determinants or not is investigated The results found that all aforementioned variables statistically affected the trade balance at 𝛼 = 5% In this case, only the exchange rate and manufacturing have a positive effect on the trade balance, whereas the other variables indicated a negative causal relationship with the trade balance Based on this result and the current situation of the trade balance of Vietnam, further policy implications for Vietnam are also suggested in this study Keywords: Balance trade, Vietnam, OLS, trade liberalization Introduction Before the year 1986, the inefficiencies of the economic system in Vietnam led to deteriorating living conditions Therefore, a need for comprehensively reforming the system was required During the 6TH party congress in December 1986, the communist party decided to reform Vietnam’s economic system, called “Doi Moi” The economic development induced by the reforms was remarkable: the living condition of the Vietnamese has improved drastically since Doi Moi The role of external trade has grown dramatically in the current years The Vietnamese government promotes trade liberalization policies as a result of WTO entrance and integration trends When external trade relations are established, one of the macroeconomic indicators which reflects the efficiency of trade is the trade balance or BoT (Balance of trade) It is generally acknowledged that trade balance tells people more about how a nation’s economy operates and what it prioritizes than how well or poorly a nation’s economy is doing The state of the balance of trade is declared to have an impact on the exchange rate, inflation rate, and other economic factors A trade deficit can result in the devaluation of the domestic currency Thus, trade balance has become one of the most crucial issues needed to be studied The main purpose of this paper is to examine determinants of trade balance in the case of Vietnam during the period between 2010 and 2019 with five macroeconomic variables using the OLS model and secondary data collected from the General Statistics Office, World Bank, and other qualified sources In order to achieve the aforementioned purpose, our three main objectives are (1) to review the prior studies about BoT and its determinants, (2) to apply the OLS model with collected data via STATA software to examine determinants, and (3) to suggest policy implications for Vietnamese governments and researchers who are interested in this topic based on these empirical results and the current view of balance trade in Vietnam Apart from the introduction and conclusion, the remainder of this paper is organized as follows: SECTION 1: THEORETICAL FRAMEWORK OF TRADE BALANCE SECTION 2: LITERATURE REVIEW OF PRIOR STUDIES CONCERNING TRADE BALANCE AND ITS DETERMINANTS SECTION 3: STATUS OF VIETNAM'S TRADE BALANCE IN THE PERIOD FROM 2010 TO 2019 SECTION 4: RESEARCH METHOD AND MODEL SECTION 5: EMPIRICAL RESULTS AND FINDING DISCUSSIONS SECTION 6: IMPLICATION During the process of drafting and finalizing this paper, due to a limited amount of time as well as some certain lack of experience in research, despite all the efforts, the report may undeniably avoid some mistakes We are willing to receive your comments in order to improve the quality of this paper in the future Theoretical Framework Overview of Trade Balance Definition of Trade Balance The trade balance is the difference between the value of the goods that a nation (or another geographic or economic area) exports and the value of the goods that it imports If exports exceed imports then the nation has a trade surplus and the trade balance is said to be positive If imports exceed exports, the nation or area has a trade deficit and its trade balance is said to be negative However, the words ‘positive’ and ‘negative’ have only a numerical meaning and not necessarily reflect whether the economy of a nation or area is performing well or not A trade deficit may for instance reflect an increase in domestic demand for goods destined for consumption and/or production The total trade balance, including all goods exported and imported, is one of the major components of the balance of payments A big surplus or deficit for a single product or product category can show a particular national competitive advantage or disadvantage in the world market for goods (Eurostat, 2013) The measure of Trade Balance To calculate the balance of trade, people subtract the value of a nation's imports from the value of its exports Balance of Trade = Value of Exports - Value of Imports Where: Value of exports: the value of all goods provided to the rest of the world They exclude compensation of employees and investment income (formerly called factor services) and transfer payments Value of imports: the value of all goods received from the rest of the world They exclude compensation of employees and investment income (formerly called factor services) and transfer payments The Balance of Payments and Trade Balance The balance of payments framework provides a theoretical basis for understanding the determinants of the trade balance According to this framework, the current account, which includes trade in goods and services, plays a pivotal role in influencing the trade balance A positive trade balance occurs when a nation's exports exceed its imports, resulting in a surplus in the current account Conversely, a negative trade balance, or trade deficit, arises when imports surpass exports, leading to a deficit in the current account The balance of payments and the balance of trade’s relationship is viewed from different theoretical perspectives The traditional balance of payments theory states that an increase in nominal currency value improves trade balance The essence of this view is the substitution effects in consumption and production induced by the relative price (domestic versus foreign) changes caused by a devaluation Meanwhile, the absorption approach which emerged at the beginning of the 1950s focuses on total domestic expenditures and income, stating that an improvement in the trade balance requires increased income exceeding domestic expenditures Appearing at the end of the 1950s, the monetary view sees the balance of payments as a monetary phenomenon, where excess demand or supply of money affects the trade balance Literature Review Literature review of prior studies concerning Trade Balance There are many factors that affect the balance of trade in a nation A nation’s balance of trade is defined by its net exports (exports minus imports) and is thus derived from all the factors that affect international trade These include factor endowments and productivity, trade policy, exchange rates, foreign currency reserves, inflation, demand, and so on Through reading and understanding previous studies, our research has synthesized several specific factors that affect the nation's trade balance The theory of value-labor of A Smith shows that all types of productive labor create value, labor is the ultimate measure of value, distinguishing the difference between use value and exchange value and assert use value determines exchange value When analyzing the value of goods, value is expressed in the exchange value of goods, in quantitative relations with other goods, and in the production of developed goods, it is expressed in money The quantity of a commodity's value is determined by the average required labor cost, and two definitions of price are given, the natural price and the market price In essence, market prices are the monetary expression of value According to him, natural prices are objective, while market prices depend on many other factors such as; natural prices, and supply and demand relations The Marshall–Lerner condition (named after Alfred Marshall and Abba P Lerner) is satisfied if the absolute sum of a nation's export and import demand elasticities (demand responsiveness to price) is greater than one If it is satisfied, then if a nation begins with a zero trade deficit when the nation's currency depreciates (e.g., it takes fewer yen to buy a dollar), its balance of trade will improve (e.g., the U.S will develop a trade surplus with Japan) The nation's imports become more expensive and exports become cheaper due to the change in relative prices, and the Marshall-Lerner condition implies that the indirect effect on the quantity of trade will exceed the direct effect of the nation having to pay a higher price for its imports and receive a lower price for its exports Tran (2012) used regression with a logarithmic form to determine the impact of six factors on the trade balance in Vietnam and a statistical program was used to analyze the data The main objectives of the study are to examine the factors that impact the trade balance in Vietnam including foreign direct investment (FDI), exchange rate, labor force, manufacturing growth rate, and agricultural growth rate by using the monthly data during the period 2002 – 2011 Zewudie and Alemu (2016) attempted to identify the short and long-run determinants of trade balance in the case of Ethiopia‘s economy for the period 1978 to 2009 In order to achieve the stated objectives a synthesis model of absorption, elasticity, and monetary approaches to trade balance is estimated using Engle-Granger two-step procedures The findings of the study suggest that the most important long-run determinants of trade balance are final consumption expenditure, exchange rate, manufacturing, and terms of trade, while government consumption expenditure, final consumption expenditure, real effective exchange rate, and terms of trade are the short-run determinants of trade balance Saeedi and Rana (2021) measure the impact of leading trade of balance, export, and import such as foreign direct investment, net inflows, final consumption expenditure, GDP, effective exchange rate, and tax revenue The study identifies the trade balance and how it can influence import and export in Selected Emerging Countries, namely India, Indonesia, Ireland, Malaysia, Mexico, and Pakistan The confirmed period is from 1990 to 2015 Based on the previous studies and theories mentioned above, we can conclude that five general factors have an impact on the balance of trade: FDI, exchange rate, final consumption expenditure, manufacturing, and labor force Therefore, our study uses these factors as the independent variables in our model, in order to find out the impact of them on trade balance in Vietnam from 2010 to 2019 Literature Review on factors affecting Trade Balance ● FDI According to the International Monetary Fund (IMF) (1993), FDI is an investment activity made to obtain lasting benefits in an enterprise operating in the territory of an economy other than the host economy According to the Organization for Economic Cooperation and Development (OECD) (2008), Foreign direct investment is made in order to establish relationships long-term economic relationships with an enterprise, especially investments that have the ability to influence the management of the said enterprise Yousaf et al (2008) highlight the impact of FDI on the exports and imports of Pakistan during the period 1973 to 2004 The results suggest that FDI has a positive impact on real exports and real imports in the long run In the short run, FDI has a positive impact on imports and a negative impact on exports Therefore, according to the study, FDI has a negative effect on the trade balance Hailu (2010) determines the relationship between FDI and the trade balance of sixteen African nations for the period from 1980 to 2007 Using the Least Square Dummy Variable (LSDV) regression method, he reports that FDI stock has positive effects on both exports and imports The overall net effect of FDI on the trade balance was inferred to be positive ● Exchange rate According to the World Bank, the exchange rate between two nations is the price at which the currency of one nation can be expressed in terms of the currency of another nation The exchange rate is the relative purchasing power between the domestic currency and the foreign currency The exchange rate, on the one hand, reflects the purchasing power of the domestic currency, and on the other hand, the supply and demand for foreign exchange By examining the trade balances between ASEAN-5 nations and Japan for the sample period from 1986 to 1999, Liew (2003) found that the role of exchange rate changes in initiating changes in the trade balances has been exaggerated It is widely expected that the depreciation of ASEAN-5 exchange rates concerning the Japanese yen would improve these economies’ trade balances with Japan during the sample period of study It is explained that as the exchange rate of a nation's currency rises, the price of imported goods becomes cheaper while the price of exported goods becomes more expensive for foreigners Therefore, the appreciation of the domestic currency exchange rate will be detrimental to exports and favorable to imports, resulting in net exports According to Marshall–Lerner condition, goods are often price inelastic in the short run, because people's consumption habits cannot be changed easily Therefore, the MarshallLerner condition is not met, leading to a currency devaluation that only worsens the balance of payments in the short run ● Final consumption expenditure According to the Central Statistics Office, final consumption expenditure (formerly total consumption) is the sum of household final consumption expenditure (private consumption) and general government final consumption expenditure (general government consumption) Data are in current U.S dollars Zewudie and Alemu (2016) identify the short and long-run determinants of trade balance in the case of Ethiopia‘s economy for the period 1978 to 2009 By using EngleGranger's two-step procedures of cointegration and general to specific error correction model, they prove that final consumption expenditure negatively affects trade balance Saeedi and Rana (2021) identify the trade balance and how it can influence the nation's imports and export in Indonesia The confirmed period is from 1990 to 2015 The result, in contrast, shows that final consumption expenditure affects the trade balance in a positive direction  Labor force According to the World Bank, the labor force comprises people ages 15 and older who supply labor for the production of goods and services during a specified period It includes people who are currently employed and people who are unemployed but seeking work as well as first-time job-seekers Not everyone who works is included, however Unpaid workers, family workers, and students are often omitted, and some nations not count as members of the armed forces Labor force size tends to vary during the year as seasonal workers enter and leave Zewudie and Alemu (2016) find determinants of the trade balance in Ethiopia for the period 1978 to 2009 Meanwhile, Saeedi and Rana (2021) research on the trade balance in Indonesia between 1990 and 2015 Both research find out that the labor force has a negative impact on the trade balance ● Manufacturing (value added) Manufacturing refers to industries belonging to ISIC divisions 15-37 Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources The origin of value added is determined by the International Standard Industrial Classification (ISIC), revision Data are in current U.S dollars Orr (1991) examines the extent to which the growth in overall foreign ownership of U.S manufacturing firms is likely to improve the U.S trade balance over the long term The evidence from this two-step analysis suggests that the growth in manufacturing will increase the trade balance in the longer term It is explained that if a nation experiences an eroding manufacturing base, its productivity growth declines, and it then suffers trade deficits in spite of repeated currency devaluations 15 Model Theoretical model specification Specify the model To build an econometric model, it is pivotal to identify the factors related to the interaction and description of economic variables The models are often suggested by economics To compute and analyze the output, we choose the statistical method in these fields, which is the estimation and verification of the hypothesis As a result, to analyze the factors involved in Trade Balance, we use the regression model to show the link between variables With the observation, the sample regression model is a function with specific numerical and differential values such as derivatives, differentia, and direct meaning analysis.  Dependent variable: Trade Balance Independent variable (5 variables): Exchange Rate, FDI, Final Consumption Expenditure, Labor Force, Manufacturing (Value added) Population regression model: TBit = + ERit + FDIit + FCEit + LFit + MVAit + ui where: ● TBit: Net trade in goods and services of the nation i at time t (BoP, current US$) ● ERit: The exchange rate of the nation i at time t (LCU per US$) ● FDIit: Foreign direct investment of nation i at time t (current US$) ● FCEit: Final consumption expenditure i at time t (% of GDP) ● LFit: Labor force of nation i at time t (people) ● MVAit: Manufacturing, value added of the nation i at time t (current US$) Variable Description Table Variable Description Role Variable Variable name Unit of measure Expectation symbol Dependent variable TB Trade Balance BoP, current US$ Source 16 ER Exchange rate FDI Foreign direct investment LCU per US$ Current US$ + Liew (2003) + Hailu (2010) Independent Yousaf et al (2008) variables FCE Final % of GDP + consumption Saeedi and Rana (2021) expenditure - Zewudie and Alemu (2016) LF Labor force People - Zewudie and Alemu (2016) Saeedi and Rana (2021) MVA Manufacturing, Current US$ + Orr (1991) value added Research hypotheses After reviewing theoretical bases as well as previous research, we hypothesize for the research topic about factors affecting the Trade Balance of Vietnam between 2010 and 2019: H1: Exchange rate has a positive impact on Trade Balance H2: Foreign direct investment has a positive/negative impact on Trade Balance H3: Final consumption expenditure has a positive impact on Trade Balance 17 H4: The labor force has a negative impact on Trade Balance H5: Manufacturing, value added has a positive impact on Trade Balance Hypothesis Testing Test the overall significance of the observed multiple regression The F-distribution is used to test hypotheses involving several independent variables Hypotheses are as follows: H0 : β1 = β2 = β3 = β4 = β5 = H1 :β1 = β2 = β3 = β4 = β5 ≠ or equivalent to: H0 : = H1 : > Test the individual significance The t-test is used to test the individual significance of a variable in Stata by assessing whether the coefficient of a variable in a regression model is significantly different from zero Hypotheses: H0: βj = H1: βj ≠ Testing the Assumptions of Linear Regression + Testing the model has no omitted variables The Ramsey RESET test is used to detect potential specification errors, such as omitted variables or functional form misspecifications, in a regression model Hypothesis testing: H0: The model has no omitted variables H1: The model has omitted variables + Testing the model has the phenomenon of multicollinearity VIF (Variance Inflation Factor) test is used to assess multicollinearity by measuring the extent to which the variance of an estimated regression coefficient is inflated due to correlation with other independent variables Hypothesis testing: H0: The model has the phenomenon of multicollinearity H1: The model does not have multicollinearity + Testing the model has residuals that not follow a normal distribution 18 The Jarque-Bera test is used to assess if a dataset follows a normal distribution based on its skewness and kurtosis properties Hypothesis testing: H0: The model has residuals following a normal distribution H1: The model has residuals not follow a normal distribution + Testing the model has the constant variance The Jarque-Bera test is used to check the normality assumption of a dataset by examining its skewness and kurtosis It assesses whether the data significantly deviates from a normal distribution Hypothesis testing: H0: The model has no heteroscedasticity H1: The model has heteroscedasticity Empirical results and finding discussions Descriptive statistics Table Statistic Description Variable Obs Mean Std Dev Min Max TB 110 1.19e+10 2.91e+10 -5.10e+10 1.04e+11 ER 110 4220.317 6706.816 23050.24 FDI 110 -5.87e+09 1.05e+10 -5.90e+10 9.91e+09 FCE 110 72.90979 24.0261 31.50238 174.5696 LF 110 2.86e+07 3.59e+07 195182 1.36e+08