Trang 1 SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS ---***---MID-TERM RESEARCH PAPER Subject: International Trade Policy Topic: ASSESSING THE ROLE OF DETERMINANTS AND EVFTA IN SHAPING
FOREIGN TRADE UNIVERSITY SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS -*** - MID-TERM RESEARCH PAPER Subject: International Trade Policy Topic: ASSESSING THE ROLE OF DETERMINANTS AND EVFTA IN SHAPING VIETNAM'S WOOD EXPORT TO EU COUNTRIES: INSIGHTS FROM A GRAVITY MODEL ANALYSIS Group: 09 Class: TMAE301(GD2-HK2-2223).2 Intake: 60 Instructor: Dr Vu Huyen Phuong Bùi Lê Thành An 2112150002 Bách Nguyễn Huyền Anh 2113150004 Nguyễn Hồng Dương 2113150018 Nguyễn Minh Hiếu 2111110097 Vũ Minh Bảo Khánh 2112150084 Lê Hiếu Ngân 2113150050 Ha Noi, May 2023 Equally contributed ASSESSING THE ROLE OF DETERMINANTS AND EVFTA IN SHAPING VIETNAM'S WOOD EXPORT TO EU COUNTRIES: INSIGHTS FROM A GRAVITY MODEL ANALYSIS Bùi Lê Thành An, Bách Nguyễn Huyền Anh, Nguyễn Hồng Dương, Nguyễn Minh Hiếu, Vũ Minh Bảo Khánh, Lê Hiếu Ngân Sinh viên K60 Kinh tế đối ngoại – Viện Kinh tế Kinh doanh quốc tế Trường Đại học Ngoại thương, Hà Nội, Việt Nam Vũ Huyền Phương Giảng viên Viện Kinh tế Kinh doanh quốc tế Trường Đại học Ngoại thương, Hà Nội, Việt Nam _ Abstract Although there have been studies that analyze the factors affecting the import and export of wooden furniture in Vietnam, the specific analysis surrounding the export of wooden products to the European Union under the impact of the agreement The EVFTA and other elements have never been fully implemented Our study uses an extended gravity model for panel data to examine variables affecting Vietnam's furniture exports to the EU market in the 2016-2021 period in the context of the EVFTA in effect Research results show that while factors such as GDP per capita, comparative advantage, geographical distance and the EVFTA agreement have a positive effect, increases in trade openness and tariffs will hinder the wood export industry A number of policies have been proposed based on research results to support the government as well as policy makers to come up with efficient solutions and strategies, promoting timber exports to the EU market Key words: EVFTA, wooden products, export, Vietnam, EU, gravity model 1|Page I Introduction Overview of EVFTA European - Vietnam Free Trade Agreement (EVFTA) is a new generation of Free Trade Agreement between Vietnam and twenty-seven European Union members Once it was signed on 30 June 2019, it has opened numerous opportunities for both parties Vietnam’s economy has been reported to be improving noticeably since the agreement was formed According to WTO and International Trade Center VCCI, the Agreement consists of 17 Chapters, Protocols, Annexes, Memorandum of Understanding and Joint Statements that cover many issues These are the key provisions and implications of the EVFTA's policies: Tariff Reductions: One of the central elements of the EVFTA is the reduction or elimination of tariffs on various goods and services Under the agreement, both the EU and Vietnam commit to gradually lowering or removing import duties on a wide range of products, providing businesses with increased market access This tariff liberalization creates opportunities for exporters and can lead to increased trade volumes between the two parties Non-Tariff Measures: In addition to tariff reductions, the EVFTA addresses non-tariff measures (NTMs) that can act as barriers to trade The agreement includes provisions aimed at reducing technical barriers, simplifying customs procedures, and promoting regulatory cooperation By harmonizing standards and regulations, the EVFTA seeks to facilitate trade by streamlining administrative processes and promoting greater transparency Services and Investment: The EVFTA also covers services and investment, providing a framework for market access and fair treatment of investors It includes commitments to open up and liberalize sectors such as financial services, telecommunications, and transportation By facilitating cross-border trade in services and providing a more predictable and transparent investment environment, the agreement encourages investment flows and promotes economic integration between the EU and Vietnam Intellectual Property Rights (IPR) Protection: Intellectual property rights protection is an essential aspect of the EVFTA The agreement strengthens the legal framework for the protection and enforcement of intellectual property rights in Vietnam, aligning it with international standards This provision enhances the protection of trademarks, patents, copyrights, and geographical indications Strengthened IPR protection can encourage innovation, technology transfer, and investment in research and development, benefiting both EU and Vietnamese businesses Sustainable Development: The EVFTA incorporates a chapter on trade and sustainable development, reflecting the shared commitment to environmental protection, labor rights, and sustainable 2|Page development goals The agreement includes provisions to promote and enforce internationally recognized labor standards, as well as to support environmental protection and sustainable resource management By integrating sustainability considerations into trade and investment activities, the EVFTA aims to foster long-term economic growth that is socially and environmentally responsible Dispute Settlement Mechanism: The EVFTA includes a comprehensive dispute settlement mechanism to resolve any conflicts or disputes arising from the interpretation or implementation of the agreement This mechanism provides a transparent and predictable framework for resolving traderelated disputes, ensuring that both parties have recourse to address any violations or breaches of the agreement's provisions EVFTA’s effectiveness exceeds any of existing trade agreements The agreement between the €200 billion Vietnamese market and the €16 trillion European single market establishes an institutional foundation with common rules, regulations and values Intellectual property rights, dispute resolution, environmental standards and food safety have always been difficult for trade agreements to set such high requirements due to their complexity However, EVFTA manages to regulate those areas of commercial transaction, which consequently leads to a more convenient and less risky trade agreement This is the key for enormous opportunities for both parties in terms of business and trade After all, the core purpose of the EVFTA is to make it easier to business between the two markets Currently, the trade turnover between Vietnam and the European single market is €37 billion Background information of wooden product trade Timber and wooden products have always been one of the major exports of Vietnam in recent years In 2022, it is ranked 6th out of all Vietnamese exported products, with a total value of 15.86 billion US dollars The ideal natural conditions of Vietnam allow for even larger timber cultivation hence, its potential is predicted to even grow more dramatically in the future In the structure of the wooden furniture supply market, Vietnam is the 5th largest wooden furniture supplier to the EU in 2022, reaching 140.5 thousand tons, worth 679.7 million (equivalent to USD 734 million), an increase of 3% in volume and an increase of 38% in value compared to 2021 However, the proportion of imports from Vietnam only accounts for 1.9% of the total import value of wooden furniture of Vietnam Nevertheless, according to estimates of the General Department of Customs, the export turnover of wood and wood products to the EU market in March 2023 reached 55.2 million USD, down 26.4% compared to March 2022 Generally, in the first three months of 2023, the export turnover of wood and wood products to the EU market is estimated at 133.2 million USD, down 37.1% over the same period in 2022 This is due to inflation, depression and other economical factors that happened in Europe Another major factor is that a large amount of 3|Page Vietnamese wooden products did not meet the EU’s requirement in terms of quality, transparency and other ethical elements Hence, Vietnamese government timber businesses ought to determine factors that influence the exportation to the EU, both positively and negatively, in order to adjust the policies as well as strategies for the sake of boosting the timber industry Significance of the study The timber sector has always been one of the sectors that contribute to the major part of total Vietnamese exportation Research on the determinants of Vietnamese wooden product export to the EU allows to show and quantify the impact of these factors on the export of Vietnamese timber goods, both meaningful in terms of practical as well as scientific significance The results of that study together with in-depth qualitative studies will serve as an important basis for developing solutions to boost Vietnam's wooden product exports and maintaining its position as one of the largest exporters in the EU market Research objectives This study will determine the factors that have an influence on the change in wooden products exportation from Vietnam to EU countries and how each of them plays the role in altering the exporting data, using the gravity model After analyzing and explaining results, suggestions of policy implications and business strategies will be made for the government and timber businesses In order to implement the study and achieve research objectives, several questions are made that need answering: What are the factors that might have an impact on wooden products exportation? What is the level of impact resulting from the listed factors? What is the impact trend? What are the suggested solutions to the corresponding affairs? Subject and scope of the study The research subject is the impact of EU- Vietnam FTA (EVFTA) on Vietnam’s timber exports The scope of the research revolves around Vietnam’s fishery exports data to 27 EU countries (Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden) The time frame for the data collected is from 2016 to 2021 II Literature review Wooden products have become increasingly important in the trade relationship between Vietnam and the European Union (EU), which has seen significant growth For policymakers and industry stakeholders, it is crucial to understand the factors that influence the wooden product export from Vietnam to the EU This literature review intends to review existing research on the topic with an emphasis on studies that have used a gravity model method The 4|Page relevant previous research will be discussed first, followed by the identification of the literature's research gaps Related Previous Research: a Determinants of wooden product export from Vietnam to the EU Using a gravity model method, several studies have looked into the factors that influence the wooden product export from Vietnam to the EU These researches have offered insightful information about the variables affecting trade flows In a comprehensive study conducted by Thi Thanh Huyen Vu, Gang Tian, Bin Zhang & Thanh Van Nguyen (2020), the determinants of Vietnam's wood product trade were extensively examined using a gravity model The study discovered that trade flows were significantly influenced by GDP, population, and distance The study revealed that countries with larger economies and populations exhibited higher levels of trade with Vietnam Moreover, it also emphasized the significance of market access and trade agreements in promoting the export of wooden products from Vietnam to the EU According to the report, trade with Vietnam in the wooden product sector grew for nations that maintained lower trade barriers and participated in preferential trade agreements It is noteworthy to point out that this study did not focus specifically on the EU market, showing a research gap regarding the particular determinants relevant to the trade relationship between Vietnam and the EU Furthermore, Kangas and Niskanen's 2003 study of the factors affecting trade in forestry products discovered that distance, per capita income, importer and exporter GDP all had an impact on trade flows These results underlined how important economic variables are in determining trade patterns in the wooden product sector In order to study the multilateral flow of logs from tropical regions and evaluate how political and economic systems affect trade, Buongiorno, Tenny, and Gilless (1980) used a gravity model The researchers found that the distance needed for transportation was the main factor affecting the volume of trade in the wooden product sector The study also found that a number of other variables, including the size of the importing country, relative prices, the level of development and the availability of wood in the exporting country, and the overall volume of trade between countries, had an impact on the flow of logs Additionally, a number of studies have examined a number of variables that affect the trade in wooden products between Vietnam and the EU According to many studies (Akyüz et al., 2010; Buongiorno, 2015, 2016; Das et al., 2018; Hujala et al., 2013; Zhang & Yanshu, 2009), these variables include population, exchange rates, trade agreements, common languages, and common borders The results of these studies have shown that the export of wooden products is significantly impacted by population size and the level of openness of partner countries Additionally, Vietnam's participation in trade agreements has benefited its exports of wooden products, and shipping distance has been highlighted as a crucial factor in determining trade intensity 5|Page Document continues below Discover more from: cstmqt Trường Đại học… 20 documents Go to course Cstmqt K60CLC 46 ML48 NHOM 11 2022 cstmqt 15 None 64297-Điều văn bản-169589-1-10-… cstmqt None 19 Tac dong cua Hiep dinh thuong… cstmqt 37 [TL] [Kinh Doanh Quốc Tế] Report… cstmqt 42 None None Chính SÁCH THƯƠNG MẠI QUỐ… cstmqt None Chính sách kinh tế 18 đối ngoại cstmqt None b Impacts of EVFTA on wooden product export from Vietnam to the EU i Opportunities According to the research by Tu, P H., & Phuong, D T (2022), due to agreements to reduce tariffs in major EU markets, joining the EVFTA will give Viet Nam's export goods a competitive advantage, supporting export growth The EVFTA offers opportunities to increase the export of Vietnamese advantaged goods including wooden furniture, and other items because it commits to removing import taxes up to nearly 100% of the tariff and trade value that the two sides have agreed The research stated that Vietnamese exports of wood and wood products to the United States totaled $5.1 billion in 2019, an increase of 42% from the previous year As a result of signing the EVFTA, it climbed to $7.1 billion in 2020, up 39.2% from 2019, and it now accounts for 57.39% of all wood and wood-related exports from Vietnam ii Challenges Tu, P H., and Phuong, D T discovered in their research, which was published in 2022, that Vietnam had not fully benefited from the opportunities given by the implementation of EVFTA to enhance the export of wood products to member countries Despite the fact that the EVFTA went into effect on August 1, 2020, many markets in this region have seen a decrease in the export turnover of wood and wood products as a result of the numerous difficulties caused by the challenging COVID-19 epidemic in the EU, record-high logistics and import material costs, and a severe shortage of empty containers The report also mentioned that the EU and Vietnam signed the Voluntary Partnership Agreement on Forest Law Enforcement, Governance, and Trade as part of the EVFTA, and that it went into effect in June 2019 As a result, Vietnamese companies must make sure that all legal standards under the agreement are met when exporting raw materials to the EU The lack of raw wood materials in the near future or even over the long term creates a serious concern for Vietnamese businesses if they not take the initiative to produce a reliable and sustainable source of raw materials Research Gap: Although earlier study has helped us understand the factors that influence the export of wooden product from Vietnam to the EU, there are still a number of knowledge gaps that call for further research: Sector-specific Analysis: The majority of studies have concentrated on particular subsectors like wooden furniture or the overall trade in wooden products The study of other wooden product categories, such as plywood, timber, and wood-based panels, is necessary For policymakers and industry stakeholders, analyzing the distinctive characteristics, demand patterns, and trade variables of each sub-sector would offer useful insights 6|Page Non-economic Measures: The majority of research has concentrated on analyzing the effects of economic factors, such as the size of the economies and the level of trade barriers But other elements, like the quality of the wood products and the accessibility of trade finance, might also be important Comparative Analysis: It would be helpful to determine Vietnam's competitive advantages and disadvantages by conducting a comparative analysis with other countries exporting wooden goods to the EU More important insights into the particular variables affecting Vietnam's trade in wooden products with the EU can be realized by comparing trade patterns and determinants across countries This analysis will be helpful in identifying potential improvement areas and competitiveness-boosting strategies for the EU market Panel data analysis: The majority of research has examined the factors influencing trade at a single point in time using cross-sectional data, or panel data analysis However, because trade flows are subject to change over time, it would be more accurate to use panel data that examines trade flows over a longer time frame Determinants of Trade between Particular EU Countries: Although most studies have concentrated on the factors that influence trade between Vietnam and the EU as a whole, it is important to take into account the factors that influence trade between Vietnam and particular EU countries Studying trade variables at the country level would yield more insightful results because the EU is a group of nations with various economic and political structures Conclusion: Policymakers and industry stakeholders can create effective strategies to improve trade in wooden products between Vietnam and the EU by filling in the research gaps mentioned above through future study Future research's findings would also help the wooden products industry grow sustainably and promote improved trade relationships between Vietnam and the EU III Theoretical Framework Overview of the gravity model and its applications in international trade The gravity model is an economic concept and a widely used empirical model in international trade analysis It is based on the idea that the volume of trade between two countries is proportional to their economic sizes (measured by GDP) and inversely proportional to the distance between them The gravity model takes its name from the analogy to Newton's law of universal gravitation, where larger masses attract each other more strongly and the force of attraction decreases with distance The basic gravity model equation can be expressed as: Tij = A * (Yi * Yj) / Dij 7|Page Where: Tij represents the volume of trade between country i and country j A is a constant term Yi and Yj are the GDPs of countries i and j, respectively Dij is the distance between countries i and j The gravity model assumes that trade flows are influenced by the economic size of countries and the costs associated with distance, which capture factors like transportation costs, cultural proximity, language, and trade barriers However, variations of the gravity model can also incorporate other factors such as common borders, regional integration agreements, and other economic variables Applications of the gravity model in international trade analysis include: Trade flows analysis: The gravity model helps explain and predict bilateral trade flows between countries by quantifying the impact of various factors, such as economic size and distance Trade policy analysis: The model provides a framework for assessing the effects of trade policies, such as tariffs, quotas, or trade agreements, on trade patterns between countries Estimating trade potentials: The gravity model can be used to estimate the potential volume of trade between countries by considering their economic sizes and distances, providing insights into untapped trade opportunities Evaluating the impact of transportation infrastructure: The model can assess the effects of improvements in transportation infrastructure, such as the construction of highways or ports, on trade volumes between countries Regional integration analysis: The gravity model helps evaluate the effects of regional integration agreements, such as free trade agreements or customs unions, on trade flows among member countries Foreign direct investment (FDI) analysis: The gravity model can be adapted to analyze FDI flows, taking into account factors like the size of the economies, distance, and other relevant variables It's worth noting that while the gravity model is a useful tool for understanding and predicting trade patterns, it has its limitations It assumes a linear relationship between the variables and doesn't capture all the complexities of international trade, such as non-economic factors or country-specific characteristics Nonetheless, it remains a widely used and valuable framework for analyzing international trade relationships 8|Page lnTROP lnDIST lnTAR lnRCA EVFTA cons Coef -2.378779 2.035906 -1.678817 Std Err P-value Coef Std Err 0.3446148 0.000 4.724074 1.757472 1.16172 0.082 0.6734889 0.013 1.548154 4.298233 P-value Coef Std Err P-value 0.008 -0.4448124 0.8769776 0.613 Coef Std Err Omitted because of collinearity 1.04034 0.4031872 0.011 0.719 0.0298282 0.3544405 0.933 0.9428373 0.1468481 0.3102196 0.1204753 0.4276433 0.1215332 P-value Coef 0.000 0.09148 0.011 0.3391941 0.000 0.1548156 Std Err P-value 0.373375 0.807 0.1428221 0.019 0.1393268 0.266 Coef Std Err -52.74299 26.57464 -21.08606 7.68326 -18.66674 65.74618 P-value Observations R-squared 0.049 162 55.44% 0.007 0.776 162 162 27.53% 42.45% Source: Author calculated in Stata17 The table presents coefficients, standard errors, P-values, and R-squared values from three regression models: Fixed Effect Model (FEM), Random Effect Model (REM), and Pooled OLS These measures help assess the significance, precision, and goodness-of-fit of each model To choose between the three models, the authors will employ feasible tests b The appropriate model i FEM test To choose between FEM and Pooled OLS, the authors use FEM test as follow: Hypotheses: H0: The model does not have fixed effects H1: The model has fixed effects Running the command xtreg [Dependent variable] [Independent variables], fe, the results are as follow: Table 4: FEM test results 17 | P a g e F test that all u_i=0: F(26, 130) = 50.36 Prob > F = 0.0000 Source: Author calculated in Stata17 Based on the provided results, the P-value is observed to be 0.0000, which is smaller than the predetermined significance level of 5% Therefore, we can reject the null hypothesis Consequently, it can be inferred that the FEM model is more suitable and preferable compared to the OLS model ii Breusch-Pagan Test To choose between REM and Pooled OLS, the authors use Breusch and Pagan Lagrangian test as follow: Hypotheses: H0: Pooled OLS is more appropriate H1: REM is more appropriate Running the command xtreg [Dependent variable] [Independent variables], re and xttest0, the results are shown below: Table 5: Breusch and Pagan Lagrangian test result Breusch and Pagan Lagrangian test for random effects chibar2(01) = 287.71 Prob > chibar2 = 0.0000 Source: Author calculated in Stata17 Based on the obtained results, the P-value is found to be 0.0000, indicating its significance below the predetermined 5% threshold As a result, we can reject the null hypothesis and conclude that the REM model is more appropriate and favorable when compared to the OLS model iii Hausman Test The Hausman test helps determine whether the Fixed Effect Model (FEM) or the Random Effect Model (REM) is more suitable for a dataset It examines the consistency of the estimators and checks for correlation between the random effects and explanatory variables If the correlation is significant, the FEM is preferred; otherwise, the REM is considered appropriate Hypotheses: H0: Difference in coefficients not systematic H1: Difference in coefficients is systematic After store two model with the command est sto [Name of the model], run the command hausman fem rem, the results are shown below: 18 | P a g e