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
Trang 1SCHOOL 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
2 Bách Nguyễn Huy n Anh ề 2113150004
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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 và Kinh doanh quốc tế
Trường Đại học Ngoại thương, Hà Nội, Việt Nam
Vũ Huyền Phương
Giảng viên Viện Kinh tế và 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
Trang 3One 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
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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 trade-related 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 do business between the two markets Currently, the trade turnover between Vietnam and the European single market is €37 billion
2 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
Trang 53 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
4 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?
5 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
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relevant previous research will be discussed first, followed by the identification of the literature's research gaps
1 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
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Trang 8The 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
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 do not take the initiative to produce a reliable and sustainable source of raw materials
2 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 sectors 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
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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
3 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
1 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
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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
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2 Determinants of trade between Vietnam and the European countries
Wood export: Several studies have examined the import and export of wood and wood products globally For instance, Skog et al (1998) focused on wood fiber supply and demand in the United States, determining that the country is a net importer of forest products with an expected increase in pulpwood and woodpulp imports Ince (2000) analyzed industrial wood productivity in the United States from 1900 to 1998, observing
a 39% increase over that period, mainly attributed to the utilization of wood residues and recycled wood fiber Haynes (2003) explored the timber situation in the United States from 1952 to 2050, predicting a 42% rise in forest product consumption by 2050
In a gravity model, the determinant of wood export can refer to the factors that influence the flow of wood exports between countries These determinants typically include economic, geographical, and policy-related factors
GDP per capita: GDP per capita reflects a country's GDP divided by its population, indicating market size and economic scale Larger economies and higher income levels are associated with increased trade volume Tran et al (2020) studied China-ASEAN trade relations from 2000-2018, finding significant growth and highlighting China's economic size as a key influencer This suggests that Vietnam's trade with countries like Vietnam and the Euro countries will be affected by their economic scale In summary, GDP per capita is an important factor influencing Vietnam's trade with other nations In
a gravity model, the determinant of GDP per capita refers to the factor that influences the flow of trade between countries based on their respective GDP per capita levels Trade openness: Trade openness has long been recognized as beneficial in international trade Hye, Wizarat, and Lau (2016) developed a trade openness index, finding a positive association with future and short-term economic growth However, due to data limitations, they used the Trade/GDP index as a substitute, which they argue carries the same meaning and yields similar results In a gravity model, the determinant of trade openness refers to the degree of openness and liberalization of trade policies between two countries Trade openness is a significant factor that influences trade flows and is commonly included as a determinant in gravity models
Distance: In trade literature, gravity models suggest that trade costs, often associated with distance, play a significant role in trade creation and diversion (Urata & Okabe, 2010) These costs encompass various factors such as time, market penetration, cultural differences, personal preferences, and institutional disparities (Hoo and Doanh, 2015; Blum and Goldfarb, 2006) David Ricardo's theory of comparative advantage, the foundation of arguments for free trade, assumes zero transportation fees for trading goods between countries However, this assumption does not hold in the real world, especially for long distances where shipping costs are higher Additionally, perishable goods, such as fishery products, face greater risks of damage or loss with longer transit times Hence, geographical distance can pose a barrier to international trade In a gravity model, the determinant of distance refers to the geographical separation between two
Trang 12is higher than the share at the trade area level, it is considered to have a comparative advantage in that product However, there have been doubts about the accuracy of the Balassa index as a measure of comparative advantages RCA is a concept used in international trade analysis to assess a country's relative advantage in producing and exporting specific goods or services compared to other countries It is often employed
in the context of the gravity model, which is a widely used empirical model to explain bilateral trade flows between countries
Trang 13The variable "Trade openness" refers to the degree of involvement or participation of a country
or economy in international trade activities with other nations It is quantified by calculating the ratio of the combined value of exports and imports of a country to its Gross Domestic Product (GDP)
Increased trade openness boosts wooden product exports from Vietnam to EU countries Trade openness refers to the reduction of trade barriers, such as import tariffs and quotas, between countries When trade barriers are reduced, it facilitates smoother trade flows and creates more opportunities for exporting countries In the case of Vietnam, higher trade openness between Vietnam and EU countries can result in expanded market access and increased export volumes
of wooden products to the EU
H3: Distance between Vietnam and EU countries negatively affects wooden product export values
The distance between Vietnam and EU countries affects wooden product export values Longer distances can present logistical challenges and increase transportation costs These factors may influence the competitiveness of Vietnamese wooden products in the EU market With higher transportation costs, the final prices of wooden products may rise, potentially making them less attractive compared to products from closer or local sources Therefore, it is hypothesized that the value of wooden product exports from Vietnam to EU countries may be lower when the distance between the two regions is greater
H4: Tariffs on wooden product imports negatively impact Vietnam's exports to EU countries
Tariffs on wooden product imports impact Vietnam's exports to EU countries Tariffs are taxes
or duties imposed on imported goods, which increase their cost and make them less competitive
in the importing country's market If EU countries impose higher tariffs on wooden products imported from Vietnam, it can raise the prices of Vietnamese wooden products, potentially reducing their demand and export values Thus, it is hypothesized that higher tariff rates on wooden product imports can negatively impact the value of Vietnam's wooden product exports
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measures a country's comparative advantage in a specific product or industry by comparing its share of global exports in that sector to its overall share of global exports If Vietnam's RCA in wood export to EU countries is significantly higher than its overall RCA in wood export, it implies a concentration of resources and efforts in serving the EU market
H6: The dummy variable EVFTA has a positive impact on Vietnam’s wooden export value to EU countries
The EVFTA (European Union-Vietnam Free Trade Agreement) is a bilateral trade agreement between the European Union (EU) and Vietnam It aims to promote trade and investment between the two parties by reducing or eliminating trade barriers, including tariffs and non-tariff barriers
Based on this hypothesis, it is expected that the EVFTA has a positive impact on Vietnam's wooden product exports to EU countries Here's the rationale behind this hypothesis:
Tariff Reduction: The EVFTA aims to eliminate or reduce tariffs on a wide range of products, including wooden products
Market Access: The EVFTA improves market access for Vietnamese wooden products in EU countries It includes provisions that facilitate trade and reduce non-tariff barriers, such as streamlining customs procedures and addressing technical barriers to trade
Investor Confidence: The EVFTA also includes provisions to enhance investment cooperation between the EU and Vietnam This can attract foreign direct investment (FDI) from EU countries into Vietnam's wooden product industry, boosting export volume
Economic Integration: The EVFTA promotes economic integration between the
EU and Vietnam, fostering closer economic ties and collaboration, contributing
to enhancing the competitiveness and productivity of Vietnam's wooden product industry, thereby positively impacting exports to EU countries
Based on these factors, it is hypothesized that the implementation of the EVFTA has a positive impact on Vietnam's wooden product exports to EU countries, leading to increased trade volumes and economic benefits for both parties
IV Methodology
1 Specification of the gravity model and its variables
The initial equation of the gravity model, which relates bilateral trade flows to economic size and distance, has evolved into a logarithmic form to enhance its suitability for econometric analysis The logarithmic transformation serves several purposes:
Linearization: Taking the natural logarithm of variables in the gravity model equation helps linearize the relationship between these variables This linearization is
Trang 15a one percent change in each independent variable
Symmetry: The logarithmic transformation introduces symmetry to the model by treating the exporter and importer symmetrically In the linear form, the equation may have different interpretations for the exporter and importer, whereas the logarithmic form ensures that the effects of variables are symmetrically applied
The logarithmic form of the gravity model equation typically appears as:
ln(Trade) = β₀ + β₁ln(GDP₁) + β₂ln(GDP₂) - β₃ln(Distance) + ε
Where:
Trade: Bilateral trade flow between countries
GDP₁, GDP₂: Economic size (GDP or GDP per capita) of the exporter and importer, respectively
Distance: Physical distance between countries
β₀, β₁, β₂, β₃: Coefficients to be estimated
ε: Error term accounting for unexplained factors and random variations
The logarithmic transformation allows econometric techniques to estimate the coefficients and test the statistical significance of the variables in explaining bilateral trade flows
In addition to GDP per capita and distance, the research has expanded the gravity model by including variables such as Trade openness, Tariff rates, Revealed Comparative Advantage (RCA), and the effect of EVFTA These additional variables provide a more comprehensive understanding of bilateral trade flows, considering factors such as trade liberalization, trade barriers, sectoral advantages, and the specific dynamics of the wood export industry Incorporating these variables enhances our analysis and sheds light on the determinants of wood exports
2 Discussion of the estimation method and model diagnostics
The research will employ the Fixed Effects Model (FEM), Random Effects Model (REM), and Pooled Ordinary Least Squares (POLS) methods to estimate and develop a comprehensive model for the dependent variable, Wood export The authors will consider various independent variables to capture the potential factors influencing wood exports These independent variables include GDP per capita, Trade openness, Distance, Tariff, Revealed Comparative Advantage
Trang 16ln(TAR) represents the natural logarithm of the tariff rate imposed by the European countries
on wood exports from Vietnam
ln(RCA) represents the natural logarithm of the revealed comparative advantage of Vietnam in wood exports to European countries
EVFTA is a binary dummy variable that takes the value of 1 if the European Union-Vietnam Free Trade Agreement is in effect and 0 otherwise
β0, β1, β2, β3, β4, β5, and β6 are the estimated coefficients of the model
The error term ε captures unobserved factors and random disturbances that affect wood exports but are not accounted for by the included variables
The regression model estimates the relationship between wood exports and various factors while controlling for the effects of GDP per capita, distance, trade openness, tariff, revealed comparative advantage, and the presence of the EVFTA By utilizing the FEM, REM, and POLS techniques, the research aims to uncover the relationships between these variables and wood export volumes This analysis will provide valuable insights into the determinants of wood exports and contribute to a deeper understanding of international trade dynamics in the forestry sector
3 Results and Analysis
a Descriptive statistics of the variables and correlation analysis
i Summary statistics
Before evaluating the obtained data, we will provide a broad description of the model and its parameters using STATA17's command This command displays the number of