The purpose of this study is to examine the effects of trade liberalization on balance of payments in a few developing countries and to draw lessons for Vietnam. The motivation for this study is to provide valuable insights into the effects of trade liberalization on exports, which is a crucial factor in shaping the countrys economic policy. The desired result of this essay is to study more deeply about Trade Liberalization on Balance of Payments in some developing countries so that we can better understand this topic to draw lessons for our own country. The findings of this study can potentially benefit policymakers, investors, and businesses in Vietnam. Last but not least, we would like to say many thanks to PhD. Mai Thu Hien for her valuable guidance during our research process. Due to the constraint of time, this report may contain unavoidable mistakes, so we are willing to receive any comments or feedback to perfect the report to the fullest.
FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS INTERNATIONAL FINANCE IMPACTS OF TRADE LIBERALIZATION ON BALANCE OF PAYMENTS IN SOME DEVELOPING COUNTRIES AND EXPERIENCE LESSONS FOR VIETNAM Instructor: Assoc Prof., PhD Mai Thu Hien Group: Hà Nội – 6/2023 TABLE OF CONTENTS TABLE OF CONTENTS LIST OF FIGURES LIST OF TABLES .4 ABSTRACT .5 INTRODUCTION SECTION 1: LITERATURE REVIEW AND THEORETICAL FRAMEWORK Literature Review .8 Theoretical Framework 2.1 Balance of Payment .8 2.2 Trade Liberalization 10 2.3 Impacts of Trade Liberalization on Balance of Payments 12 SECTION 2: IMPACTS OF TRADE LIBERALIZATION ON BALANCE OF PAYMENTS IN SOME DEVELOPING COUNTRIES 14 Impacts of Trade Liberalization on Balance of Payments in China 14 1.1 Current account 16 1.2 Capital account and financial account 18 1.3 Foreign exchange reserves 20 Impacts of Trade Liberalization on Balance of Payments in India 22 2.1 Impacts of Free Trade Areas on Balance of Payment in India 22 2.2 Balance of Payment of Inida after joining WTO .27 Impacts of Trade Liberalization on Balance of Payments in Vietnam .30 3.1 Impacts of Free Trade Areas on Balance of Payment in Vietnam .30 3.2 Balance of Payment of Vietnam after joining WTO 40 SECTION 3: DISCUSSION AND EXPERIENCE LESSONS FOR VIETNAM 46 Result Discussion 46 Experience lessons for Vietnam 46 CONCLUSION 49 REFERENCES 51 LIST OF FIGURES Figure 1: China’s import tariff rates in 2011 14 Figure 2: Balance of payment of China measured in percent of GDP from 2001 to 201515 Figure 3: China’s 2015 current account 16 Figure 4: China’s share in the world trade surged after 2001 17 Figure 5: China’s private capital flows 18 Figure 6: Chinese FX reserves from January 2001 to December 2017 21 Figure 7: Trend of India’s BOP during 1990-91 to 2011-12 30 Figure 8: Vietnam’s Current Account from 1995 to 2010 .31 Figure 9: Vietnam’s Current Account from 2012 to 2018 .32 Figure 10: Vietnam’s trade balance during 2010-2018 35 Figure 11: Registering foreign direct investment in Vietnam for 12 years (Unit: Billion USD) 38 Figure 12: Proportion of FDI into Vietnam by country in 2016 39 Figure 13: Current Balance and Foreign Exchange Reserves Source .42 Figure 14: Vietnam's balance of payments 2000 – 2016 43 LIST OF TABLES Table 1: Structural Shift Analysis of India’s BOP (1950-51 to 2000-01) .24 Table 2: India’s BOP during 1990-91 to 2011-12 (values in US $ million) 29 Table 3: Vietnam’s Export and Import Value in 1986-1995 33 Table 4: Vietnam's trade balance in the period 2000-2011 .34 Table 5: Service balance of Vietnam from 2000 to 2011 36 Table 6: Income balance of Vietnam from 2000-2011 37 ABSTRACT The purpose of this study is to examine the effects of trade liberalization on balance of payments in a few developing countries and to draw lessons for Vietnam The motivation for this study is to provide valuable insights into the effects of trade liberalization on exports, which is a crucial factor in shaping the country's economic policy The desired result of this essay is to study more deeply about Trade Liberalization on Balance of Payments in some developing countries so that we can better understand this topic to draw lessons for our own country The findings of this study can potentially benefit policymakers, investors, and businesses in Vietnam Last but not least, we would like to say many thanks to PhD Mai Thu Hien for her valuable guidance during our research process Due to the constraint of time, this report may contain unavoidable mistakes, so we are willing to receive any comments or feedback to perfect the report to the fullest INTRODUCTION Rationale In the current period of globalization, every country is constantly striving to improve and develop in order to integrate with the global economy; this can be seen in all countries, particularly poor countries As a result, opening the economy becomes critical; it facilitates the exchange and integration of economies between countries, raising national income and creating jobs for more people Specifically to assist the economy in becoming stronger and more stable Participating in trade liberalization agreements between other countries and regions is a key economic development strategy for developing countries It is clear that this is not simply the economic development tendency of impoverished and developing countries, but also a global one These agreements aid in the reduction of tariff and nontariff barriers in trade relations with foreign countries, facilitating the development of goods exchange rates between countries, regions, and each country's integration and economic development This demonstrates that trade liberalization has a massive impact on each country's balance of payments From those realities and impacts, the group of students chose the topic "Impacts of Trade Liberalization on Balance uf Payments in Some Developing Countries and Experience Lessons for Vietnam” to research Object and Scope The object of the essay's research is the impact of trade liberalization on the need for payment in developing countries, namely Vietnam, India and China Research Objective This research aims at: - Several domestic and international research are being conducted to better understand the balance of payments - Explain the theoretical underpinnings of balance-of-payments and trade liberalization This demonstrates the importance of trade liberalization and the current state of trade liberalization around the world - A thorough examination of the impact of trade liberalization on the balance of payments Structure Apart from Abstract, Introduction, Conclusion and References our research has three main sections: Section - Literature Review And Theoretical Framework; Section 2- Impacts Of Trade Liberalization On Balance Of Payments In Some Developing Countries, Section 3- Discussion And Experience Lessons For Vietnam This report includes the following content: I Abstract II Introduction III Section 1: Literature Review And Theoretical Framework IV Section 2: Impacts Of Trade Liberalization On Balance Of Payments In Some Developing Countries V Section 3: Discussion And Experience Lessons For Vietnam VI Conclusion VII References VIII Individual assessment SECTION 1: LITERATURE REVIEW AND THEORETICAL FRAMEWORK Literature Review The impacts of trade liberalization on the balance of payments in developing countries have been extensively studied by economists and scholars This literature review aims to provide a comprehensive overview of the existing research on the subject, highlighting key findings and theoretical frameworks that have emerged from previous studies One stream of the related empirical literature focuses on the effects of trade liberalization on exports, where the findings are more mixed Some of them show that countries that embarked on liberalization programs have improved their export performance (Thomas, Nash, and Edwards, 1991; Ahmed, 2000; and Santos-Paulino, 2002b) The key finding of these articles is that trade liberalization is an important determinant of export performance, but its impact varies across continents Export taxes have a small adverse effect on export growth, while relative price changes and world income growth show signs of being expected There are also empirical research attempts to determine how trade liberalization affects a country’s imports and generally finds a positive impact (Melo and Vogt, 1984; Bertola and Faini, 1991; and Santos-Paulino, 2002a) Whereas other articles have found little evidence of such a relationship (Greenaway and Sapsford, 1994; Jenkins 1996) Theoretical Framework 2.1 Balance of Payment The balance of payments is a key concept in international economics that measures the economic transactions between a country and the rest of the world over a specified period Understanding the theoretical framework of the balance of payments helps to analyze the factors influencing its components and their implications for a country's economic well-being The following sections outline the main theoretical frameworks used to study the balance of payments: The monetary approach suggests that an increase in the money supply leads to inflation, which, in turn, leads to a depreciation of the currency A depreciation makes a country's exports more competitive and imports more expensive, thereby improving the trade balance Conversely, a decrease in the money supply can result in deflation, leading to an appreciation of the currency and potentially worsening the trade balance According to the elasticity approach, a depreciation of the currency makes exports cheaper and imports more expensive, leading to an improvement in the trade balance The magnitude of this improvement depends on the price elasticity of demand for exports and imports If demand for exports and imports is highly elastic, a depreciation can have a substantial positive impact on the balance of payments Similarly, changes in income levels can influence the balance of payments When income increases, the demand for imports may rise, potentially worsening the trade balance Conversely, a decrease in income may lead to a reduction in import demand, improving the balance of payments In the view of the absorption approach, an increase in domestic absorption, resulting from higher consumption or investment, can lead to increased import demand and potentially deteriorate the balance of payments Conversely, a decrease in domestic absorption can reduce import demand, leading to an improvement in the balance of payments The absorption approach highlights the importance of considering domestic economic activity and its impact on trade flows when analyzing the balance of payments These theoretical frameworks provide different perspectives on the factors influencing the balance of payments They emphasize the role of monetary factors, price and income elasticities of demand, and domestic absorption in shaping the balance of payments position of a country By employing these frameworks, economists and policymakers can gain insights into the drivers and implications of changes in the balance of payments, helping guide policy decisions related to exchange rates, trade policies, and macroeconomic management 2.2 Trade Liberalization Trade liberalization, the process of reducing barriers to international trade, has been the subject of extensive research and analysis in the field of economics Theoretical frameworks provide a foundation for understanding the mechanisms and potential impacts of trade liberalization This section outlines the key theoretical frameworks that contribute to our understanding of trade liberalization One of the fundamental theories underlying trade liberalization is the Comparative Advantage Theory developed by David Ricardo According to this theory, countries should specialize in producing goods and services in which they have a comparative advantage, based on differences in resource endowments, technology, and productivity Trade liberalization enables countries to focus on producing goods and services where they have a comparative advantage, leading to increased efficiency and overall welfare The Heckscher-Ohlin Theory further expands on the concept of comparative advantage by emphasizing the role of factor endowments in determining a country's comparative advantage and trade patterns This theory highlights that countries with abundant resources, such as land, labor, or capital, should specialize in industries that utilize these resources Trade liberalization facilitates the efficient allocation of resources across countries, allowing them to specialize in industries that align with their factor endowments This specialization enhances productivity, promotes economic growth, and contributes to overall welfare improvement New Trade Theories have also emerged to explain trade patterns and the gains from trade beyond comparative advantage Economies of Scale theory suggests that trade liberalization enables firms to access larger markets, leading to economies of scale and