Vietnam: Selected Issues
Author: International Monetary Fund
Publication Date:
24 Jan 2006
eISBN:
9781451840315
Language:
English
Keywords:
ISCR; CR; Vietnam; lending; ASEN member; ASEN trade statistics database; MFN tariff; ASEN country; trade-diversion effect; Tariffs
Download PDF (401.1 KB)

This Selected Issues paper for Vietnam reports that the framework for policy lending in Vietnam, in conjunction with the active consideration of proposals to enhance the operational autonomy of policy-lending institutions, poses significant risks. The current framework does not adequately address common governance issues related to state involvement in investment decisions, and is insufficient to ensure the quality of investment. Recommended policy actions include removing residual policy lending from commercial banks, and improving prudential regulations and supervision of the Development Assistance Fund and local development funds well before they are granted any significant autonomy.

Abstract

This Selected Issues paper for Vietnam reports that the framework for policy lending in Vietnam, in conjunction with the active consideration of proposals to enhance the operational autonomy of policy-lending institutions, poses significant risks. The current framework does not adequately address common governance issues related to state involvement in investment decisions, and is insufficient to ensure the quality of investment. Recommended policy actions include removing residual policy lending from commercial banks, and improving prudential regulations and supervision of the Development Assistance Fund and local development funds well before they are granted any significant autonomy.

II. Does Vietnam Overtrade With Its Neighboring Countries? A Rsegional Investigation Using A Gravity Model1

A. Introduction

1. Regional trade integration has gained momentum in recent years in the Asia and Pacific region. Intraregional trade has expanded rapidly as countries’ ongoing efforts to achieve international economic integration have been supplemented by the signing of a number of Regional and Bilateral Trade Agreements. Regional trade integration is only one of the multiple facets of enhanced cooperation initiatives in the region that have come about since the Asian crisis. Vietnam stands out for its progress in achieving global, as well as regional, economic integration. During 1993-2004, Vietnam’s trade openness as measured by the sum of exports and imports in relation to GDP more than doubled, while market share of its exports more than tripled (Table 1 and 2). This is an impressive record of performance compared both with other countries in the region as well as with the rest of the world.

Table 1.

Indicators of Trade Openness in Selected Countries

article image
Source: World Economic Outlook (WEO) database.

Exports plus imports in percent of GDP.

Simple average.

Table 2

Export Market Share in Selected Countries

(Exports of goods as a percentage of world imports of goods)

article image
Source: World Economic Outlook (WEO) database.

Simple average.

2. This chapter investigates the extent to which Vietnam’s favorable trade performance may have been excessively centered on trade with other countries in the region, by using a gravity model applied to cross-country trade data for 2002. The model’s specification includes regional dummy variables to capture the influence of regional trade agreements (RTAs) on trade flows, with a view to determining the extent to which the RTAs have affected the level and direction of trade among their members.2

3. Conventional economic theory questions the benefits of RTAs, as discriminatory arrangements are often likely to be inferior even to unilateral trade liberalization. Thus, RTAs can be associated with losses not only to third countries, but to the member countries themselves, as they may divert imports from nonmember sources to member suppliers, whose production costs may be higher. Such cost differences would be borne by the importing member, and are commonly known as trade-diversion effects. On the other hand, resources previously engaged in costly domestic production could be reallocated as a result of the RTA based on each country’s comparative advantage. This would increase economic welfare in RTA members and would constitute a trade-creation effect. Net trade creation is more likely to dominate if RTA members’ rate of protection vis-à-vis nonmembers is low to start with, or if the RTA partners agree on a schedule of swift reductions in their MFN tariffs over time—ideally, to eventually match their preferential rates.

4. The chapter’s findings suggest that RTAs in the Asia and Pacific region have indeed promoted trade among their members, but not at the expense of trade with nonmembers. The model’s estimates fit Vietnam’s crosscountry trade flows well, on average. The empirical results suggest that, while the impact of RTAs on Vietnam’s trade appears to have been strong, it is unlikely that the increasing trade with RTA members has been accompanied by a diversion of trade vis-à-vis nonmembers.

5. The chapter is organized as follows. Section B briefly reviews RTAs in the Asia and Pacific region as well as the progress of Vietnam’s economic integration, both at the regional and the multilateral level. Section C presents the gravity model, while section D provides the results of the regressions. Section E addresses the question of whether Vietnam overtrades or undertrades with its neighboring countries, using the results of Section D, and Section F presents the conclusions of the paper. The specifications of the model are further discussed in the Annex.

B. Selected Regional and Bilateral Trade Arrangements in the Asia and Pacific Region

6. Regional trade agreements have proliferated in the Asia and Pacific region during the 1990s. At the same time, the region has achieved a successful track record in pursuing nonpreferential trade liberalization, even within the context of regional integration.3

7. The Association of Southeast Asian Nations (ASEN) was established in 1967 to accelerate economic growth and promote peace and stability in the region.4 In January 1992, the creation of the ASEN Free Trade Area (AFTA) was announced. Its objective was to eliminate tariff and nontariff barriers among the Southeast Asian countries with a view to integrating the ASEN economies into a regional market of more than 500 million people. The agreement on the Common Effective Preferential Tariff (CEPT) scheme for AFTA required that tariff rates levied on a wide range of products traded within the region be progressively reduced to no more than 5 percent. For the five original members (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) and Brunei Darussalam (which together comprise the ASEN-6), this tariff reduction was to be completed by 2003. A somewhat longer adjustment period was allowed for the four newer members, with Vietnam committed to reduce its CEPT to no more than 5 percent by 2006, Lao P.D.R. and Myanmar by 2008, and Cambodia by 2010. All import duties are to be eliminated by 2010 for the former six countries and by 2015 for the latter four.

8. ASEN members have made significant progress in the lowering of intra-regional tariffs through the CEPT scheme for AFTA (Table 3). More than 99 percent of the products in the CEPT Inclusion List of the ASEN-6 have been brought down to the zero percent tariff rate. Vietnam has been a member of ASEN since 1995. It began to reduce its tariffs vis-à-vis the other ASEN members in January 1996 and is expected to fully implement its AFTA commitments by June 2006. Currently it is not far from full implementation of these commitments. As of 2004, Vietnam’s CEPT rates had fallen to an average of 5.9 percent, down from an average of 7.1 percent in 1999.

Table 3.

ASEN Members: Simple Average MFN Tariff Rate and CEPT Rates, 2002

article image
Sources: IMF Trade Policy Information Database (TPID); and Statistical Appendix.

Common Effective Preferential Tariff scheme under AFTA.

9. The trade liberalization measures implemented under the AFTA, together with the region’s rapid economic growth, have led to significant growth of trade among ASEN countries in recent years(Table 4). Vietnam’s trade data, in particular, highlight its dramatic progress towards economic integration with both ASEN as well as non-ASEN members.

Table 4.

Intra and Extra-ASEN Trade, 1993-2003

(In millions of U.S. dollars)

article image
Sources: ASEN Trade Statistics Database; and IMF, Direction of Trade database.

10. The Asia Pacific Economic Cooperation (APEC) Forum is another regional initiative, which seeks to promote regional integration in tandem with continuing unilateral and multilateral liberalization.5 Since its inception, APEC has worked to reduce tariffs and other trade barriers across the Asia and Pacific region, and has been the cornerstone of a larger effort to deepen the policy dialogue and economic cooperation among countries in the region. The 1994 APEC Bogor Declaration was aimed at forming a free trade area in the region by 2010 for developed countries and by 2020 for developing countries. Rather than focusing on trade preferences, however, APEC trade liberalization is based on concerted unilateral liberalization in accordance with the most-favored-nation (MFN) principle. The current APEC tariffs are, in fact, below the world average (Table 5) and declining. Vietnam became a member of APEC in 1998. Its MFN tariff is still above regional and world averages. Vietnam’s trade flows with APEC have become increasingly important in recent years (Table 6).

Table 5.

Simple Average Tariffs, 2002

(In percent)

article image
Source: IMF Trade Policy Information Database (TPID).
Table 6.

Vietnam. Trade with APEC Members, 1993-2003

(In millions of U.S. dollars)

article image
Source: IMF, Direction of Trade Database.

11. Vietnam signed a bilateral trade agreement (BTA) with the United States in 2001. Under the BTA, the United States granted MFN status to Vietnam’s goods and services. As a result, tariffs on U.S. imports from Vietnam fell dramatically on average to around 3–4 percent from around 40 percent.6 The BTA has required Vietnam to reduce its tariffs by 25–50 percent, mostly on agricultural products. In addition, it includes obligations on market access for trade in goods and services, intellectual property rights, foreign investment regulations, business facilitation, dispute settlement mechanisms, customs procedures, and transparency of laws and regulations. Because many of these obligations reflect similar commitments required by the World Trade Organization (WTO), the BTA has encouraged Vietnam to liberalize its economy in a way that should facilitate its prospective WTO accession (see below). In addition, the BTA has offered other WTO members a useful framework as a reference for their bilateral negotiations with Vietnam on its WTO accession. Following the implementation of the BTA, Vietnam’s exports to the U.S. have risen dramatically, both in nominal terms and as a share of total exports (Figure 1).

Figure 1.
Figure 1.

Vietnam: Export Performance

Citation: IMF Staff Country Reports 2006, 020; 10.5089/9781451840315.002.A002

Source: IMF, Direction of Trade Database.

12. Vietnam applied to join the WTO in 1995 and has so far concluded bilateral negotiations with 20 WTO members. It is expected to become a WTO member in 2006.

C. The Gravity Model

13. The gravity model is an empirical model of bilateral trade flows that is generally used to assess the extent of a country’s trade flows with its partners. This model is based on the idea that trade between two countries is normally a function of their “mass” (in this case GDP and population), as well as of the distance between them.7 Gravity model estimations provide a useful framework for assessing the impact of RTAs on both the level and the direction of trade. The gravity model equation used in this chapter is as follows:

LnTradeij=α+β1Ln[GDPiGDPj]+β2Ln[GDPiPopiGDPjPopj]+β3Ln[Distij]+β4RTAij+ϵ(1)

This equation regresses the total trade between countries i and j on the economic size of the two countries (the product of their GDP), their level of development (proxied by the product of their GDP per capita), the distance between the economic centers of the two countries, and common membership in a regional agreement. A negative coefficient is expected on the distance variable and positive coefficients on all other variables. All variables are expressed in natural logarithms, with the exception of the variables representing RTAs which are dummy variables.

Data issues, methodology and specification

14. The data sample used for the estimation of Equation (1) above includes 182 countries and 32,942 observations. Actual bilateral trade data refer to the year 2002 and are extracted from the COMTRADE database. An OLS regression technique is used to estimate the coefficients of the explanatory variables, using cross-sectional data.

15. The regression results are used to estimate the effects of two preferential arrangements on bilateral trade flows, APEC and ASEN. We also introduce in some regressions an “Asia effect” to capture the impact on trade of any other Asia-specific features of these economies, which may be unrelated to whether they are members of an RTA or not (e.g., to account for the dynamism of Asian economic growth). This makes it possible to separate the effects on trade of belonging to an RTA from the general effect of belonging to the Asian region.8 We also test for the existence of a differential impact of membership in a subgroup of ASEN—ASEN-5—which includes the original ASEN members. Because the ASEN-5 have a lower average MFN tariff than the combined ASEN members, we would expect to find a higher degree of trade creation as a result of belonging to the ASEN-5 group, compared with the broader ASEN group.

16. Two different specifications of Equation (1) are used to capture the effects of membership in regional groups on trade flows. The first specification identifies the extent to which an RTA promotes its members’ overall trade, while the second identifies whether this occurred at the expense of trade with nonmembers (see Annex II.1 for more details). In particular:

  • The first specification, which is the basic gravity model framework, estimates the effect of an RTA on intra-members trade. Membership in each RTA is represented by a dummy variable, RTA2, where the suffix 2 implies that both countries, i and j, are members of the same RTA. RTA2 is equal to 1 when both countries are members of the same RTA and 0 otherwise. A positive coefficient for the RTA2 variable indicates that the RTA tends to generate more trade among its members.

  • The second specification aims to disentangle the effects of an RTA on bilateral trade flows between members and nonmembers. In doing so, it provides an indication of whether an RTA is more likely to produce trade creation or trade diversion. This specification includes an additional dummy, RTA1, where the suffix 1 implies that either i or j belongs to the tested RTA. RTA1 takes the value 1 if the pair includes one country that belongs to the tested RTA and one that does not, and zero otherwise. The coefficient of RTA1 captures the amount of trade between one RTA member and one non-RTA member relative to trade between a random pair of countries that are not members of that RTA. A negative coefficient on the RTA1-dummies implies that trade between a member of an RTA and a nonmember is smaller, on average, than that between two otherwise similar countries that are not RTA members. This suggests possible trade diversion.

The results are reported inTable 7 columns i, and ii. For each specification, seven regressions are estimated to measure the effects of membership in several—and sometimes simultaneous—RTAs on bilateral trade flows.

Table 7.

Estimations of the Gravity Equation1/

article image
Source: Author’s estimations. GDP and population data from WEO. Distance data from CEPII database. Trade data from COMTRADE.

The dependent variable is the bilateral trade of 182 countries in 2002. Data do not include Brunei Darussalam and Taiwan Province of China. Trade is defined as the sum of exports and imports. Standard error in parenthesis. **, * and † denote significantly different from zero at 99 percent, 95 percent level, and 90 percent respectively. The regional variables (Asia and Pacific, APEC, ASEAN and ASEAN-5) are dummy variables. Regional 2 variables (i.e., ASIA 2, APEC 2, ASEAN 2, ASEAN-5, 2) take value 1 if both countries (i and j) in the pair belong to the tested regional group. Regional 1 variables (i.e., ASIA 1, APEC 1, ASEAN 1, ASEAN-5, 1) take value 1 if one of the countries (i or j) in the pair belongs to tested regional group. All variables, except dummy variables, are in logs. The standard errors and R-squared values were adjusted to correct for the duplication of observations present in the original data set based on 32,942 observations, while the corrected number of observations is 16,471.

D. Empirical results

17. The empirical estimates show that all three standard gravity variables—economic size, per capita income, and bilateral distance—are statistically significant at the 99 percent confidence level and have the expected signs (Table 7.). Size and per capita income have positive coefficients, while the distance variable has the expected negative coefficient. For example, in regression 1 (Column i), the coefficient on GDP is equal to 1.07 and the coefficient on the GDP per capita is equal to 0.16, which confirms the familiar pattern that trade increases as the country’s size increases and that higher-income countries trade more than poorer ones. The estimated negative coefficient on distance indicates, as expected, that bilateral trade flows decrease as distance increases, reflecting higher transportation costs. In particular, when the distance between two countries is increased by 1 percent, trade between them falls by 1.13 percent.

18. The results under the first specification indicate that the RTAs established under the auspices of the ASEN and APEC have generally had a positive impact on bilateral trade flows among their members. The coefficients of the regional dummies in regressions 1, 5, 6 and 7, in particular, are all highly significant and positive. More specifically:

  • While the results of regression 6 suggest that trade between two ASEN countries is four times larger than between two otherwise similar countries, ASEN countries are estimated to trade only 1.2 times more than any other similar pairing of countries when we test simultaneously for the ASEN and APEC effects (regression 5).9 Moreover, the coefficient on the ASEN dummy is no longer significant when tested simultaneously with dummies for Asia and/or APEC (regressions 2 and 4). These results suggest that it may be difficult to disentangle the extent to which the high degree of intraregional trade is attributable to membership in each of these groups (with eight of the eleven ASEN members also belonging in APEC, the ASEN and APEC dummy variables are highly collinear). Previous studies have found a larger effect of ASEN on intra-ASEN trade.10 However, these studies did not include any dummy variables to capture the possible APEC and Asia-specific effects.

  • Trade among the ASEN-5 countries is five times greater than that between two otherwise similar countries, even after allowing for an APEC effect (regression 7). The difference in the results when we test for an ASEN–5 effect—as opposed to a broader ASEN effect, as in equation 5—may be partly due to the fact that the ASEN-5 countries have liberalized their trade regimes to a considerably greater extent than the broader ASEN group (Table 5.). Therefore the positive impact of membership in the ASEN–5 group is greater than that of membership in the broader group of ASEN countries.

  • The results of regression 1 suggest that two Asian countries trade 2.6 times more than two similar countries of which at most one belongs to the Asia region, even when we test simultaneously for the effect of APEC membership.

  • The dummies on APEC show a consistently high degree of intraregional trade for its member countries. Two APEC countries tend to trade 3.6 times more than another similar pair of non-APEC countries when we control for an Asia effect (regression 1). This estimate is similar to those found in previous studies (e.g., Frankel (1997)).

19. The estimation results for the second specification suggest that the regional trade agreements within all the groups under consideration (APEC, ASEAN, ASEAN-5) have been trade-creating in a broader context. This is an important result. Given that the coefficients on both the RTA2 and RTA1 dummies are positive for all regional groups wherever they are statistically significant (as in equations 1, 3, 6 and 7), the evidence strongly suggests that membership in any one of these groups is associated with increasing trade both with members and nonmembers of the group. More specifically:

  • In regression 5, both ASEAN and APEC members are estimated to have traded more with both each other and with nonmembers than would have been predicted by a standard version of the gravity model that abstracts from the effects of RTAs, as both coefficients on the RTA1 dummies have positive signs.14

  • When possible trade-creation and trade-diversion effects are both allowed for, the trade between two APEC countries is estimated to be 4.2 times greater than the trade between a member of APEC and a non-APEC member (regression 5).15

  • Bilateral intra-ASEAN trade is estimated to be 180 percent greater than the bilateral trade of ASEAN members with nonmembers (regression 6); however, the effect of ASEAN membership in no longer significant when an APEC effect is introduced (regression 5).

E. Does Vietnam Overtrade or Undertrade with its Neighboring Partners?

20. The gravity model specified in the previous section fits Vietnam’s actual trade flows on average very well. Table 8 reports Vietnam’s actual versus predicted trade flows based on the estimates of the gravity model. The model’s estimates explain Vietnam’s crosscountry trade particularly well when the dummies for Asia and APEC are included as explanatory variables in addition to the standard variables of the gravity model.16 17 More specifically:

  • The model appears to account for 84 percent of Vietnam’s world trade flows, and it provides at least as good an account of its trade with emerging Asia and NIEs.

  • The differences between the actual and predicted trade values between Vietnam and the APEC countries, as well as the Asia and Pacific region as a whole, indicate that there is still, on average, some unexploited trade potential.

  • The model points to a significant amount of overtrading between Vietnam and ASEN countries (i.e., actual trade flows are higher than those predicted by the model). However, these results may be largely due to the estimated overtrade with Singapore, which is not particularly surprising given the role Singapore plays as a transshipment trade center. This interpretation is corroborated by the positive sign on the estimated coefficient for ASEN 1 in regression 6.

  • The model accounts almost fully for bilateral trade flows between Vietnam and China, but it points to significant undertrading with Japan, which would seem to suggest that there remains considerable potential for future expansion of trade between the two countries. This result could be due to the fact that Japan granted MFN status to Vietnam only in 1999, and therefore there is still scope for Vietnam to increase its exports to Japan in the future.18 The same result applies to Korea and, to a smaller extent, Hong Kong SAR.

  • The model suggests that there is a large amount of overtrading with the Euro zone and the Russian Federation. To a large extent, this may reflect Vietnam’s past political, historical, and cultural links with these areas, which are not captured in the standard gravity model of trade used in this chapter.

  • The data appear to predict accurately bilateral trade with the United States. The specification of the gravity model, however, does not include any dummy to capture the effect of the 2001 BTA. Should this effect be included in the model, the data would probably show that there is still some unexploited trade potential between Vietnam and the United States.

Table 8.

Vietnam Bilateral Trade: Actual Versus Predicted Trade

(Based on Table 7, equation 1, column ii)

article image
Sources: Actual data from COMTRADE database; and author’s estimations.

One hundred indicates perfect prediction of Vietnam’s actual bilateral trade by the gravity model. Numbers below (above) 100 indicate that Vietnam currently overtrades (undertrades) with the corresponding country, compared to what is predicted by the gravity model. Data do not include Brunei Darussalam and Taiwan Province of China.

F. Conclusions

21. Vietnam has made considerable progress in integrating its economy at both the regional and multilateral levels. Vietnam’s trade flows with ASEN and APEC countries have increased rapidly over the last decade, with the help of its participation in these trade agreements. The BTA signed in 2001 with the United States has also been conducive to a sharp expansion in exports to the U.S., and is likely to have had a salutary impact on multilateral liberalization. In all, Vietnam has made impressive progress towards opening its trade system since the early 1990s, and it has made great strides in increasing its export market share. These developments attest to the successful implementation of an outwardoriented growth strategy. Nevertheless, the level of Vietnam’s MFN tariff remains relatively high, possibly reflecting ongoing tariffication of nontariff trade barriers, and there is room for significant further progress towards multilateral trade liberalization in the period ahead.

22. The results of the gravity model suggest that APEC and ASEN-5 have indeed promoted trade among their members. The estimated equations also indicate that participation in these groupings has not generally led to trade diversion. This could be due to the fact that the main participants in these groups already have a relatively liberal trade regime, including significantly lower than average tariff rates. As a result, the risks of trade diversion have been small. The empirical results have also corroborated the finding of previous studies that APEC’s open regionalism approach has had particularly strong trade-creating effects.

23. The trade-creating effects of ASEN membership, however, appear to have been less pronounced. The reason for this could be that the average MFN tariff of the ASEN members is still higher than the average MFN tariff of other groups. These considerations reinforce the need for ASEN members with more restrictive trade regimes to continue to decrease their MFN tariffs along with their ongoing integration in the regional markets, so as to minimize the risks of possible trade diversion.

24. A comparison between the actual and predicted values of the estimated gravity model of trade indicate that there may still be unexploited trade potential between Vietnam and other countries in the Asia and Pacific region. In particular, there would appear to be considerable scope for a continuing expansion of Vietnam’s exports to Japan. While the model provides a reasonably good fit for trade flows with the United States as a member of APEC, it does not take into account the effects of the more recently-signed BTA. As a result, it may tend to underestimate the scope for further increase in trade with the United States. The model provides a poor fit for trade flows with the EU and the Russian Federation, possibly because it does not take into account important historical links.

25. Although multilateral and regional trade liberalization are not necessarily inconsistent frameworks, regional integration cannot be a substitute for multilateral liberalization. Thus, while continuing to enhance Vietnam’s intra-Asian integration may be desirable, the government would be well-advised to also strengthen the outward-orientation of its policies vis-à-vis the rest of the world. In this connection, the government’s efforts to join the WTO in the near future are warranted and are worthy of the international community’s support. Continuing multilateral liberalization should serve to ensure that Vietnam will reap the benefits from its regional economic integration to the fullest extent possible without suffering from any significant trade diversion.

References

  • CIEM and Star—Vietnam Project, 2003, An Assessment of the Economic Impact of the United States—Vietnam Bilateral Trade Agreement, Vietnam Central Institute of Economic Management and USAID.

    • Search Google Scholar
    • Export Citation

  • Deardorff, A., 1984, “Testing Trade Theories and Predicting Trade flows,” in Handbook of International Economics, Vol. 1, ed. by R. Jones and P. Kenen (Amsterdam: Elsevier Science Publisher).

    • Search Google Scholar
    • Export Citation

  • Feridhanusetyawan, T., 2005, “Preferential Trade Agreements in the Asia-Pacific Region,” IMF Working Paper 05/149 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation

  • Frankel, J., 1997, Regional Trading Blocs, (Washington DC: Institute for International Economics).

  • Fukase, E., and W. Martin, 1999, “A Quantitative Evaluation of Vietnam’s Accession to the ASEAN Free Trade Area (AFTA),” Policy Research Working Paper No. 2220, (Washington DC: The World Bank).

    • Search Google Scholar
    • Export Citation

  • Helpman E., and P. Krugman, 1985, Market Structure and Foreign Trade (Cambridge Massachusetts: MIT Press).

  • Soloaga, I., and A. Winters, 2001, “Regionalism in the Nineties: What Effect on Trade,” North American Journal of Economics and Finance, No. 12, pp. 1- 29.

    • Search Google Scholar
    • Export Citation

  • Thornton, J., and A. Goglio, 2002, “Regional Bias and Intra-regional Trade in Southeast Asia,” Applied Economic Letters, Vol. 9, pp. 205- 208.

    • Search Google Scholar
    • Export Citation

  • Wang, Z., and A. Winters, 1991, “The Trading Potential of Eastern Europe,” Centre for Economic Policy Research, Discussion Paper Series, No. 610, UK.

    • Search Google Scholar
    • Export Citation

  • Wei, S., and J. Frankel, 1997, “Open versus Closed Regional Trade Blocs,” in Regionalism versus Multilateral Trade Arrangements, ed. by T. Ito and A. Krueger (Chicago University Press).

    • Search Google Scholar
    • Export Citation

ANNEX I Gravity Model Specifications

The first specification of the gravity model is as follows:

LnTradeij=α+β1Ln[GDPiGDPj]+β2Ln[GDPiPopiGDPjPopj]+β3Ln[Distij]+β4RTA2+ϵ⁢(2)

The coefficient of the RTA2 dummy, β4, measures the amount of trade between two members of the same RTA in excess of that between two countries at least one of which is not a member of that RTA.

The second specification is as follows:

LnTradeij=α+β1Ln[GDPiGDPj]+β2Ln[GDPiPopiGDPjPopj]+β3Ln[Distij]+β5RTA2+β6RTA1+ϵ⁢(3)

The coefficient of RTA1, β6, expresses the amount of trade between one RTA member and one non-RTA member relative to that of two non-RTA members. The coefficient on the RTA2 dummy, β5, now represents the extra amount of trade between two RTA members relative to that of two non-RTA members. Finally, the difference between the RTA2 and RTA1 dummies represents the level of trade between two RTA members relative to that of one RTA member and one non-RTA member. Because the second specification makes it possible to disentangle the effects of trade among members and non-members of RTAs, it provides an indication as to whether RTAs in the region may have been trade creating or trade diverting.

While the coefficients of the dummies of the first specification measure the extra amount of trade between two member countries of a regional group compared with “any other pairing,” the second specification is able to further distinguish within the “any other pairing” group the extra trade between a member of the regional group and a country that does not belong to that group. For example, in the case of a dummy for ASEN, the first specification could measure the extra amount of trade between Vietnam and Indonesia because of their common membership to ASEN, relative to any other pair of countries of which at most one belongs to ASEN (e.g., Vietnam and Albania, or Albania and Angola), but without distinguishing among them. The second specification, however, can distinguish the pair Vietnam and Albania (i.e., when at least one country is part of ASEN), from a pair of countries where neither belongs to ASEN, such as Albania and Angola.

In the first specification (Table 7., Column i,), the RTA2 dummy takes value 1 when both countries belong to the same RTA and 0 otherwise (e.g., either when both countries are nonmembers of RTAs, or when only one country in the pair is a member of an RTA). In the second specification (Table 7., Column ii), RTA1 takes value 1 if the pair includes one country that belongs to the tested RTA and one that does not, and zero otherwise. An example regarding ASEN RTA is shown in the matrix below.

article image
1

Prepared by Patrizia Tumbarello (APD).

2

This specification is in line with that developed by Wei and Frankel (1997). It differs from other gravity models in the literature (Wang and Winters, 1991; Frankel, 1997; and Thornton and Goglio,2002), in that it uses a gravity equation that permits gauging whether RTAs’ effects on trade within their membership may have occurred at the expense of trade with nonmembers.

3

See Feridhanusetyawan (2005) for a comprehensive description of the Asia and Pacific RTAs.

4

The ASEN members are: Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

5

APEC comprises: Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong SAR, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taiwan Province of China, Thailand, the United States, and Vietnam.

7

The authors associated with developing the theory underlying the gravity model include Deardorff (1984); and Helpman and Krugman (1985).

8

Soloaga and Winters (2001) also introduce an Asia effect in their model.

9

The estimated change in trade when a dummy variable is equal to one is calculated as the exponential of the estimated coefficient minus one (i.e. [exp (1.649)-1=4.2] and [exp (0.806)- 1=1.2], respectively).

10

Frankel (1997) found that ASEN countries trade 6 times the amount that would be traded by two otherwise similar countries and concluded that ASEN is one of the most significant trading areas in the world. See also Wang and Winters (1991)

14

A negative coefficient in ASEN 1 or APEC 1 would have pointed to possible trade diversion.

15

This estimated effect is significantly lower than the corresponding estimate in the first specification of regression 5. This is because the APEC 2 coefficient in the first specification measures trade between two APEC countries relative to any other pair of similar countries, while in the second specification the comparison is with a pair composed of one APEC andone non-APEC country.

16

The fitted values are based on the second specification of the gravity model that allows for a separation of trade-creating and trade-diverting effects.

17

The predicted values reported in Table 8. are based on regression 1 (Table 7., coulum ii) for a number of reasons. Coefficients on the regional dummies in regressions 2, 4 and 5 are not significant, and therefore it is not possible to use these specifications to assess the possible undertrade/overtrade of Vietnam with its partners. Regression 6 (Table 7.) does not provide a good enough fit for the purposes of this exercise, in that the ASEN dummy, together with the other standard variables of the gravity model, explains only about 20 percent of Vietnam’s trade flows with its neighboring countries.

18

The data used in the gravity model refer to the year 2002 (i.e., only three years after Japan granted MFN status to Vietnam).

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Vietnam: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2006: Issue 020
Publisher:
International Monetary Fund
ISBN:
9781451840315
ISSN:
1934-7685
Pages:
46
DOI:
https://doi.org/10.5089/9781451840315.002

Vietnam: Export Performance