The impact of free trade agreement on trade flow of goods in vietnam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGU E VIET NAM THE NETHER LANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF FREE TRADE AGREEMENT ON TRADE FLOW OF GOODS IN VIETNAM BY NGUYEN QUANG HUY MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2014 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF FREE TRADE AGREEMENT ON TRADE FLOW OF GOODS IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN QUANG HUY Academic Supervisor: Assc Prof Dr NGUYEN TRONG HOAI HO CHI MINH CITY, DECEMBER 2014 ACKNOWLEGDEMENT I would like to acknowledge and send heartfelt gratitude to Assc Prof Dr Nguyen Trong Hoai who is my academic supervisor His advice and recommendation have helped me to overcome my insufficient knowledge in trade theories and econometric techniques Therefore, I can continue our work and finish this study This thesis cannot be completed without the fine guidance from the VNP Scientific Committee I would like to thank sincerely to Dr Truong Dang Thuy I would like to address my deep gratitude to Dr Pham Khanh Nam, Dr Nguyen Minh Duc, Dr Pham Thi Thu Tra, and Dr Dinh Cong Khai for their supporting comments I would like to give a great thank to Ms Xuan Hong, Mr Tam, Mr Huy, and Mr Quy in supporting and providing information, lab room for my writing and preparation On my writing process, I received great support from Ms Yen, Mr Anh, and Mr Chinh, my classmates at class 19 Without their support and sharing, it is really difficult to cope with the huge pressure in finishing thesis on time ABSTRACT This study devotes to analyze the effect of free trade agreement on Vietnam’s trade flow of goods by establishing gravity model for 184 trading partners between 1990 and 2012 Basing on the theoretical foundation and previous empirical papers, the FTA is expected to have positive relationship with trade flow of member countries In details, two countries being in a same FTA will trade much more than those without in a same FTA The results from the current study also find out that FTA’s estimated coefficients are consistently positive Relating to the methodology, two main problems discussed in gravity model are endogeneity of FTA and zero-value in trade Firstly, the thesis points out that FTA is exogenous variable in the gravity model Secondly, sample selection model, Poisson Pseudo Maximum Likelihood, and Fixed-effect model are used to solve the zero problems in model The empirical results from all estimation models are consistent with each other in term of sign of FTA’s coefficient For policy implication, the thesis proposes that FTA is a good trade policy for Vietnam because it can help to improve the total bilateral trade value among FTA members However, FTA does not impact on trade flow only, but it also has effect on other aspects of Vietnam economy such as wage structural, investment Those issues are beyond the objective of this study Key words: Free Trade Agreement, gravity model, total bilateral trade TABLE OF CONTENTS CHAPTER CHAPTER CHAPTER OVERVIEW OF VIETNAM’S FREE TRADE AGREEMENT Cooperation Partnership (ACFTA) (AANZFTA) Agreement (AKFTA) CHAPTER CHAPTER CHAPTER REFERENCE APPENDICE LIST OF TABLES Table 3-1:ACFTA's Tariff Elimination schedule for Vietnam 29 Table 3-2: Preferential Tariff Rate commitment by Vietnam for AKFTA .35 Table 4-1: Model Specifications Summary 50 Table 4-2: Variable Definition 58 Table 4-3: Variables Descriptive Statistics 59 Table 5-1: Testing endogeneity of FTA 60 Table 5-2: Regression Result for Fixed-Effect Model 62 Table 5-3: Regression Result for Sample Selection Model 65 Table 5-4: Testing Results for Collinearity Problem in sample selection model 66 Table 5-5: Testing results for Interaction Terms in Sample Selection Model 66 Table 5-6: Regression Results for PPML model Dependent variable Tvjt .67 LIST OF FIGURES Figure 1-1: Trade share of FTA countries and non-FTA countries Figure 1-2: Trade share among Vietnam FTAs Figure 1-3: Trade Share of FTA countries, EU, and USA .2 Figure 2-1: The Relationship Between FTA and Trade Flow 13 Figure 2-2: Conceptual Framework .23 Figure 3-1: Trade Pattern between Vietnam and ASEAN Members, 1990-2012 26 Figure 3-2: Change in Trade Flow Vietnam and ASEAN Countries, Excluding Brunei 27 Figure 3-3: Trade Pattern between Vietnam and ACFTA members, 1990-2012 30 Figure 3-4: Change in Trade Flow between Vietnam and ACFTA Members 31 Figure 3-5: Trade between Vietnam and Australia-New Zealand, 1990-2012 32 Figure 3-6: Change In Trade Flow Between Vietnam And AANZFTA Members 33 Figure 3-7: Trade between Vietnam and India, 1990-2012 33 Figure 3-8: Change in Trade between Vietnam and India, 1990-2012 34 Figure 3-9: Trade between Vietnam-Korea, 1990-2012 36 Figure 3-10: Change In Trade Flow Between Vietnam And AKFTA Members 36 Figure 3-11: Trade Between Vietnam and Japan, 1990-2012 37 Figure 3-12: Change in Trade Flow Between Vietnam and Japan 38 Figure 4-1: Total Bilateral Trade between Vietnam and US 43 Figure 4-2: ASEAN Trade Balance with China 44 ABBREVATION ACFTA ASEAN Free Trade Agreement AFTA ASEAN Free Trade Agreement AJFTA ASEAN-Japan Free Trade Agreement AIFTA ASEAN-India Free Trade Agreement AKFTA ASEAN-Korea Free Trade Agreement ASEAN Association of Southeast Asian Nation BTA Bilateral Trade Agreement CER Closer Economic Relation EEC European Economic Community EMU Economic and Monetary Union FTA Free Trade Agreement NFTA North America Free Trade Agreement TPP Trans-Pacific Partnership VJEPA Vietnam-Japan Economic Partnership Agreement USA the United States of America CHAPTER INTRODUCTION 1.1 Problem Statement According to World Trade Organization, Vietnam is now official member of eight free trade agreements which are signed and into force; and, Vietnam is also launching negotiation with a number of countries and economic groups to establish free trade agreement such as TPP, ASEAN-EU FTA In 2012, trade balances between Vietnam and other members of ASEAN Free Trade Agreement (AFTA), recorded at US $3.443 billion, and Vietnam – China trade balance, members of ACFTA, is – US $16.397 billion (Customs Handbook on International Merchandise Trade Statistics of Vietnam, 2012) In stark contrast, the net export of Vietnam to the Australia and New Zealand, members of ASEAN-ANZ FTA, is US $ 1.2258 billion in 2012(computed base on Customs Handbook on International Merchandise Trade Statistics of Vietnam, 2012 It can be observed that trade patterns of Vietnam among FTA partner are different As can be seen from the Figure 1-1, share of FTA countries was around 50 percent of Vietnam total trade over the period of 1990-2012, thus the FTA-trading partners play essential role in the trade of Vietnam However, from 2000 afterwards, the share of non-FTA countries gradually rose; this can be explained by the increase in trade between Vietnam and European countries and the United States of America presented in Figure 1-2 Figure 1-1: Trade share of FTA countries and non-FTA countries Share of FTA countries Page | 1993 1992 1991 80.00% 60.00% 40.00% 20.00% 0.00% 1990 Percentage 100.00% Sample Selection Model Equation (1B) Linear regression F( 30, Prob R-squared Root Page | 88 Equation (2B) Linear F( regression 50, Prob R-squared Root (Std Err adjusted for 162 clusters in id) Page | 89 Equation (3B) Linear regression F( 28, Prob R-squared Root (Std Err adjusted for 136 clusters in id) Page | 90 Equation (4B) Page | 91 Linear F( 45, regression Prob R-squared Root (Std Err adjusted for 136 clusters in id) Page | 92 Poisson Pseudo Maximum Likelihood model Equation (1C) Number of parameters: 32 Number of observations: 3456 Number of observations dropped: Pseudo log-likelihood: -2.985e+11 R-squared: 82180852 ttrade fta ldist lshare_gdp newdum97 newdum08 wto2 wtov wtop preer_vn preer_p _Iyd_3 _Iyd_4 _Iyd_5 _Iyd_6 _Iyd_7 _Iyd_8 _Iyd_9 _Iyd_10 _Iyd_11 _Iyd_12 _Iyd_13 _Iyd_14 _Iyd_15 _Iyd_16 _Iyd_17 _Iyd_18 _Iyd_19 _Iyd_20 _Iyd_21 _Iyd_22 _Iyd_23 _cons Page | 93 Equation (2C) Number of parameters: 31 Number of observations: 2522 Number of observations dropped: Pseudo log-likelihood: -2.583e+11 R-squared: 82097161 ttrade fta ldist lshare_gdp newdum97 newdum08 wto2 wtov wtop preer_vn preer_p ervvn ervp _Iyd_6 _Iyd_7 _Iyd_8 _Iyd_9 _Iyd_10 _Iyd_11 _Iyd_12 _Iyd_13 _Iyd_14 _Iyd_15 _Iyd_16 _Iyd_17 _Iyd_18 _Iyd_19 _Iyd_20 _Iyd_21 _Iyd_22 _Iyd_23 _cons Page | 94 ... thesis, there are two primary research questions are as follow Do free trade agreements impact on trade flow of goods in Vietnam? How much free trade agreements impact on trade flow of goods in Vietnam? ... Objectives The main objective of thesis is:  To investigate the impact of free trade agreement on trade flow of goods in Vietnam 1.3 Research questions To attain the research objective of this thesis,... M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF FREE TRADE AGREEMENT ON TRADE FLOW OF GOODS IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN