Draft only: 25 October 2007

THE STRUCTURE OF VIETNAMS COMPARATIVE ADVANTAGE: TRENDS IN THE ERA OF GLOBALIZATION*

Ian Coxhead University of Wisconsin-Madison, USA. Nhiem T. Phan National Economics University, Hanoi, Vietnam

For presentation at AAE Development Workshop, 25 October 2007. Thanks are due to Le Dong Tam for research assistance and Muqun Li for helpful discussions on earlier drafts of this paper.

Introduction

Vietnams economy has enjoyed very rapid economic growth in the past fifteen years. The liberalization of domestic markets and trade policies has undoubtedly played a major role in stimulating this growth (World Bank 2004; Athukorala 2005). Exports as a percentage of GDP have risen from 35% to 70% (Figure 1a), and export growth (Figure 1b) has averaged almost 18% per year,1 much higher than the East Asian and world averages (11% and 5% respectively). This growth rate of exports is more than double the 7% average growth rate of GDP over the same period. The geographical pattern of Vietnams exports has changed dramatically since the collapse of the socialist bloc in 1990. Its major trading partners are now its regional neighbors ASEAN and China; Japan, the EU and the USA (Figure 2). In addition to Vietnams own reforms, this expansion of trade has been driven by numerous changes, not the least of which has been the opening of foreign markets to Vietnamese exports. A preferential trade agreement signed with the European Economic Community (now the EU) in 1992 generated an increase in exports to Western Europe. In 1994 the US ended a trade embargo and shortly afterwards, normalized relations with Vietnam, paving the way for US trade and investment. In 1995, Vietnam joined ASEAN (the Association of Southeast Asian Nations), and from 1996 began to phase in regional trading rules as a member of the ASEAN Free Trade Area (AFTA). 1995 was also the year in which Vietnam submitted its application to join the WTO, an 11-year process that culminated with its accession in January 2007. As a result of these and similar steps toward international economic reintegration, there was dramatic growth in the mid-1990s in both the volume of trade (as seen in Figure 1b) and in

Geometric mean, excluding the Asian Crisis year 1997.

the number of countries with which Vietnam engaged in trade. Nevertheless, the bulk of the trade was regional: even by 1998, three-quarters of Vietnams exports were to ASEAN, Japan, Korea and Taiwan, with just 17% to the EU and negligible amounts to the US, China and elsewhere (Figure 2). Since 1998, however, the geographical pattern of aggregate exports has undergone two fundamental changes. The share of exports going to the US and to China has risen, from about 5% of the total in 1998 to more than 28% in 2003. China now absorbs one tenth of Vietnams exports, and the US 19%. These increasesand the corresponding relative decline of exports going to other countriesreflect a fundamental reorientation of Vietnamese trade. The growth of trade with the US reflects a steady improvement in diplomatic and economic relations, culminating in a US-Vietnam bilateral trade agreement (BTA), signed in 2000, ratified by the US Congress and the Vietnamese National Assembly in 2001, and put into effect from the beginning of 2002.2 Also in 2001, China became a member of the WTO, thereby gaining reduced-tariff access to global markets and at the same time extending import tariff concessions to its own trade partners, including Vietnam. Given the rapid growth in the prominence of China and the US among Vietnams trading partners, and of course their significant shares of total world trade, it is of particular interest to ask how these trade agreements and Chinas WTO accession, among other trade policy innovations, have affected the pattern and composition of Vietnams export growth. One motivation for doing so is to attempt to learn more about Vietnams comparative advantage in a

The US extended Permanent Normal Trade Relations (PNTR) status to Vietnam in late 2006, paving the way for

Vietnams entry later that year to the WTO. A useful timeline of US-Vietnam relations can be found in Wittman (2007.)

highly integrated global trading system. This in turn may yield insights relevant to the design of development policy in this transitional economy. In this paper we examine these issues by asking three questions: (i) What are the major trade-based determinants of Vietnams exports? (ii) To what extent do barriers imposed by foreign trade partners hurt Vietnamese exports? and (iii) How have bilateral arrangements such as the US-VN BTA, and trade policy reforms by large countries (Chinas WTO accession), impacted Vietnams exports? Answering these questions should help us to determine how sensitive Vietnamese exports are to external factors such as trade barriers, and to structural changes in the global trading system caused by Chinas rise to prominence. A question of particular importance is the effect, if any, of changing trade partnerships on the composition of Vietnams exports. What indications do changes in the commodity mix of exports provide for the future development of the Vietnamese economy? By studying the export response to liberalized global market conditions, we may be able to derive insights into the pattern and trends of Vietnams comparative advantage in an increasingly crowded and competitive global marketplace. To answer these questions, we employ a modified gravity model of foreign trade and a panel of Vietnamese international trade data. We depart, however, from the typical gravity model approach by fitting the model for a single country rather than a cross-section, and by decomposing aggregate exports into their sectoral components. This more focused approach to the estimation of the gravity model yields information that links the results directly to a large set of broader development concerns. The remainder of the paper is structured as follows. Section 2 offers an overview of Vietnams recent trade performance. Section 3 presents the theoretical foundations of the gravity

model and empirical evidence on Vietnams trade. The main estimation results are presented and discussed in Section 4. Section 5 draws some conclusions on the changing pattern of Vietnams comparative advantage, and section 6 concludes.

Vietnams Exports: Trends and Structural Changes

After the adoption of Doi Moi (renovation) policies in 1986, Vietnam embarked on a transition from central planning to a market economy. Trade policy reform has been an essential component of this reform process. Reforms to the trade and foreign exchange regimes, and a policy of regional and international economic reintegration have both resulted in rapid export growth. In dollar terms, total merchandise exports surged sixfold from 1990 to 2000. In the same decade, the dollar value of non-oil exports grew at an average annual rate of 20 percentdouble the average for developing countries as a group. Vietnams non-oil exports reached $US24 billion in 2005 (Table 1), accounting for over 50% of GDP. [Table 1 about here] Vietnams exports have undergone significant structural change since the 1990s. The main geographical trend, as noted, was a reorientation away from the former socialist economies toward market economies in Europe and Asia. After a transition period in which most exports went to Asian neighbors (excluding China), by 2005 three countriesChina, Japan and the USaccounted for 43 percent of Vietnams total exports. Exports have become more concentrated by destination: in 1999, the same share of exports (43%) went to 10 countries. By 2005, just ten trading partners accounted for over 75% of Vietnams merchandise exports. The change in export destination has been accompanied by a significant shift in the commodity composition of exports. Oil and other energy products account for about a quarter of

total exports, but the commodity composition of the remaining exports has shifted from mainly agricultural and raw material goods, which had dominated pre-1998 trade, to manufactures (Table 1). In 1998, agricultural products and resource-based materials such as rubber made up more than 40% of non-oil exports; by 2005 they accounted for only 34%. In 1998, manufactures accounted for 43% of exports, a figure that rose to over 56% by 2005. Labor-intensive, light industry manufactures rose from 33% to 43% of non-oil exports. Of particular interest is a seeming break in the data after 2001, when the shares of agricultural products and capitalintensive manufactures dropped sharply, while that of light manufactures jumped 5%. Vietnams major garment and footwear export markets are the US, EU, and Japan. In 2005, the US and EU accounted for 57% and 17% respectively of total garment and textile exports. Vietnams exports of these products to the US have greatly increased since the approval of the BTA. Electronics and components also began to gain ground following the BTA, though they are still relatively small as a share of total manufactured exports. Within the category of resource-based goods, exports of processed food, especially seafood and fish, have grown faster than other items. Given the countrys agricultural and aquacultural resources and the growing world demand for seafood, canned fruits, vegetables and meat, Vietnam has considerable untapped potential for further export expansion in processed food.

The gravity model

Theoretical and empirical foundations The gravity model is a standard method for measuring influences on bilateral trade among countries. Its basic structure resembles Newtons law, which equates the gravitational attraction

between two objects to the product of their masses divided by the distance between them. In international trade applications, the value of bilateral trade takes the place of gravitational attraction; this is seen as directly related to the product of incomes in the two trading partners and inversely related to the distance between them. In this simplest form, the model is:
X ij = A(YiY j / d ij )

(1)

where X ij is the value of exports from country i to country j, Yi and Y j are the GDPs of i and j,
d ij is a measure of distance between i and j, and A is a constant of proportionality.

Empirical antecedents for the gravity equation as a model of international trade date back to Tinbergen (1962), Poyhonen (1963) and Linnemann (1966). Subsequent theoretical work has showed the model to be consistent with a number of different models of international trade. Anderson (1979) and Bergstrand (1985) showed that the gravity equation could be derived from a model of trade in products differentiated by country of origin (the Armington assumption). Bergstrand (1989) derived a version of the gravity equation using a hybrid of the perfectly competitive Heckscher-Ohlin (H-O) model and the one-sector monopolistic competition model of Krugman (1979). Feenstra et al. (1998) further derived a gravity equation from a reciprocal dumping model of trade with homogenous goods. Finally, Deardorff (1998) derived the gravity equation from the standard H-O model. Due to the development of this theoretical foundation, it is generally accepted that a number of trade models are consistent with the empirical gravity equation specification. The highly stylized statement of equation (1) fits global trade data remarkably well. It cannot, however, capture the complete empirical richness of bilateral trade patterns. In addition to the primary variables in (1), others such as per capita GDP, population, and land area are typically included in the gravity model to account for differences in levels of living, country size,

and geographic endowments. Dummy variables are frequently added to capture country-specific historical and cultural factors thought to affect bilateral trade, including shared features such as a common language, border, or colonial history, as well as membership in trade blocs and other groupings. Thus the empirical gravity equation literature is rich in variations on the basic model (Frankel et al., 1997; Helliwell, 1998). The gravity equation is now a standard tool of empirical trade analysis. Applications are widespread in studies of bilateral trade, regional trade blocs, home-market effects, and other trade-related phenomena, such as the effects of the EC and EFTA on trade patterns (Bayoumin and Eichengreen, 1995); economic reform in Eastern Europe (Wang and Winters, 1992), and the formation of regional trading blocs (Frankel et al., 1995, 1997). More recently, country-specific studies have been used to estimate the potential implications of Russias accession to the WTO (Oxana and Mathilde, 2004; Lissovolik and Lissovolik, 2004), and that of the Ukraine (Dean et al., 2003). International integration implies changes both in total trade, and in trade patterns by commodity. In another departure from standard models, some other recent studies have examined not merely aggregate bilateral trade, but trade in specific products or the output of specific sectors. Mulapruk and Coxhead (2005) use a gravity model to estimate the impact of Chinas integration into the world market on the trade patterns of middle-income regional neighbors (Indonesia, Malaysia, Philippines and Thailand), focusing on electrical and electronic products. Eichengreen et al. (2004) employ a gravity model to analyze the impact of Chinas growth on specific sectoral exports of other Asian countries; both studies conclude that there is a tendency for Chinas exports of labor-intensive products to crowd out the exports of other Asian countries, but results for more sophisticated products are ambiguous. Frankel et al. (1997) used

some sectoral disaggregation in assessing the influence of regional trading blocs such as the EU. A similar disaggregated approach has not, however, been applied specifically to the case of Vietnam.3

Elements of the empirical gravity equation The gravity model assumes that countries tend to trade more with larger partners, other things equal. This assumption is reflected in the predicted positive influence on bilateral trade of the product of the two partners GDPs. However, larger countries also have relatively smaller trade ratios due to the size of their domestic markets. This dimension of economic size is often captured by including population along with GDP, allowing the model to distinguish among economies of similar aggregate size but with varying sizes of domestic markets. There are several mathematically equivalent ways to include both aggregate GDP and population measures (Frankel 1997). The distance between trade partners (a proxy for cost of transportation) reduces the magnitude of aggregate trade; the greater the distance, the higher the barriers to bilateral trade. Of course, in models dealing with disaggregated components of trade, distance should have differential effects according to the type of commodity being traded. In East Asia, where tradable manufacturing is concentrated in commodities such as garments, electronics and machinery, distance may impose a much smaller barrier than in the case of agricultural and natural resource products such as timber, ores and crude oil.

There are very few studies applying the gravity model to Vietnamese data. Recently, Patrizia (2006) estimated the

impacts of regional trade agreements (RTAs) on Vietnams trade flows, and concluded that Vietnam overtrades with ASEAN countries, especially with Singapore, and Euro zone and the Russian Federation.

Another type of trade flow restriction arises due to policy impediments. Tariffs, quotas, subsidies, export taxes, exchange controls, and different marketing restrictions are all means by which governments or their agencies can create such barriers, in effect increasing the distance to trading partners. Conversely, economic and political unions like the Association of Southeast Asian Nations (ASEAN) or the European Union (EU) or bilateral trade agreements may confer trade policy preferences that have the opposite effects. Regional or preferential trade arrangements include the traditional welfare gains from preferential tariff reductions, the marketpower benefit of forming a larger unit for tariff setting and bargaining, and strategic benefits from integrating markets and committing to preferential arrangements. To analyze the effects of regionalism and preferential trade agreements, it is typical to add dummy variables for participation in regional or bilateral preferential trade arrangements. Empirical analyses suggest that the benefits from these forms of market assurance may in fact be quite large, particularly in case of a small country (Whalley 1998). It is particularly important also to note, in the case of a transition economy like Vietnam, that substantive bilateral trade agreements may sometimes involve lowering of the policy barriers to trade by both partners. In this way bilateral deals contrast with Generalized System of Preferences (GSP) and other trade concessions sometimes extended by wealthy countries or groupings (such as the EU and the US) to partners in the developing world.

Data, estimation and results

Based on these considerations and on various preferential trade agreements between Vietnam and its trade partners, in this paper we use the following specification:

ln VNEX jt = ! 0 + !1 ln(GDPVt GDPjt ) + ! 2 ln(GDPPCVt GDPPC jt ) + ! 3 ln DISTVj + ! 4 ln TRIN jt + ! 5TREATY + ! 6 REGION + "

(2)

where VNEX jt stands for Vietnams exports to country j in year t. The first two right-hand side terms denote the products, respectively, of Vietnams and its trading partners GDP and per capita GDP. DISTVj is the distance between Vietnam and country j. TRIN jt is a measure of the openness of partner country j to trade in general, discussed in more detail below. TREATY is a vector that includes two significant trade deals struck by Vietnam during the period covered by our data, and a third-party effect, Chinas accession to the WTO in 2001. These are also discussed in more detail below. REGION is a vector of dummy variables for regional trade groupings and includes EU, NAFTA, ASEAN, and the Asia-Pacific Economic Cooperation group (APEC). Data definitions are provided in Table 2.4 Data on bilateral trade flows are from the UN Commodity Trade Statistics Database (UN Comtrade). The data set spans a period of 8 years from 1998 to 2005 and encompasses on average 180 countries in each year.5 Data on GDP and per capita GDP, both in constant 2000 U.S dollars, are from the World Bank World Development Indicators (WDI) database. The distance between two countries is the distance between their capital cities, measured in kilometers.6 [Table 2 about here]

4 5

At present the data set used in estimation excludes Taiwan (or, in Comtrade terminology, Other Asia, n.e.s.). The numbers of trading partners in each year are: 1998: 106, 1999: 166, 2000: 175, 2001: 208, 2002:216, 2003:

202, 2004: 180, 2005: 205.

6

Source: http://www.wcrl.ars.usda.gove/cec/java/capitals.htm

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For the trade intervention variable TRIN we use the Heritage Foundation (HF) index of trade freedom.7 This index ranges in value from 100 (for free) to 0 (for repressed) on the basis of two indicators: the degree of trade-weighted tariff protection applied to imports and the presence of non-tariff barriers (Beach and Kane 2007). Higher values of this indicator indicate a more open trade policy stance on the part of the country concerned, other things equal. However, the HF data do not capture specific bilateral trade measures and may thus misrepresent a given countys trade policy stance with respect to any other country. Nor do they discriminate among commodity categories; a country may have high protective barriers for agriculture, say, and low barriers for manufactures, and yet register the same value of the HF measure as another country with moderate barriers to all commodity trade. Lastly, the method by which the index is constructed reduces the probability of low values, and thus probably overstates the openness of many economies.8 During the period covered by the data, Vietnam undertook three significant trade treaty initiatives (prior to 1998, Vietnam was awarded MFN status by the EU (1994) and joined ASEAN and the ASEAN Free Trade Area (1996, with trade concessions phased in over several years). In 1999, Vietnam became a member of APEC, a loose Pacific Rim coalition of countries committed to freer regional trade, though in a non-binding manner. Also in 1999, Japan awarded the country Most Favored Nation (MFN) status, thereby reducing very significantly the tariff and other protection measures applied to Vietnamese imports. Finally and most importantly, in 2001 Vietnam and the US signed a far-reaching bilateral trade agreement. Its implementation in 2002

7 8

Source: http://www.heritage.org/research/features/index/index.cfm

See Beach and Kane 2007. The calculated tariff measure is subtracted from 100 (free trade) then up to an additional 20 percentage points are subtracted for non-tariff barriers. This bound means that some economies with significant non-tariff and bureaucratic impediments to trade presumably receive a higher trade openness measure than is justified.

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brought US tariffs on a wide range of Vietnamese goods down from high double-digit rates to low single digits, in line with rates applied to almost all other US trading partners. In return, Vietnam committed to an equally (or more) far-reaching liberalization of its own trade and commercial policies (Le and Coxhead, 2006). The US BTA was a major step for Vietnam toward the application of WTO-consistent trading rules, in the lead-up to its accession to that body in 2007. Both countries concessions should have helped reduce the barriers to Vietnamese exports to the US (and thus also to NAFTA). Finally, the TREATY vector also includes a variable representing Chinas 2001 accession to the WTO. In doing so, China, the largest East Asian economy and an increasingly important trade partner to Vietnam, also implemented wide-ranging trade policy liberalization and received comparable concessions from other WTO members. In view of the size of the Chinese economy, it is reasonable to ask whether Chinas actions measurably impact Vietnamese export potential. Taken together, the trade policy variables TRIN and TREATY should capture large parts of the ongoing reduction in foreign barriers to Vietnamese exports, as well as the reciprocal reduction in Vietnams own barriers to trade. Their inclusion in the empirical model serves an important purpose. If the Vietnamese economy was initially characterized by significant internal and external barriers to trade, then their effects should not only have reduced total trade, but also distorted its composition across commodities. The latter effect is a function both of the distortionary effects of trade policies and of the varying levels of trade barriers presented by Vietnams trade partners. These interventions are potentially large sources of bias in ex post measures of comparative advantage, since these measures interpret observed trade flows as indicators of underlying comparative advantage. Policy liberalization should therefore serve to

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reveal, in trend form at least, if not in absolute numbers, a more true measure of comparative advantage. We return to this discussion in Section 5. The available data cover a relatively short time-span. Due to the rapid growth of the Vietnamese economy, however, there is no lack of variation across years. Between the first and last years of the data set, the Vietnamese economy expanded by 130%; its total trade grew by more than 200% and as already seen, both the shares of exports going to major trading partners and the commodity composition of exports underwent dramatic transformations. Using variants on the model in equation (2), we run several sets of regressions. We begin with simple cross-country ordinary least squares (OLS) models by year. These allow us to observe correlates of Vietnams exports within a given time period. We then exploit the panel dimensions of the data by running pooled fixed effects and random effects regressions. We also explore several modifications to the underlying model as a check on the robustness of our results.

Single-year estimates Table 3 presents the cross-section results, which are tabulated as sequential independent regressions for each year 1998-2005. The outcomes appear reassuring in many respects. The gravity model seems to fit Vietnams export data quite well, as can be seen from the adjusted Rsquared values, which range between 0.66 and 0.74 for all years except 1998. [Table 3 about here] The estimated effects of country size (the product of GDPs) and distance are highly significant and of expected signs. Other than in the first year, however, the product of per capita GDPs has no significant effect on trade flows. Since Vietnams GDP and per capita GDP are the

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same for all observations in each year, the second right-hand side variable is merely capturing the effects of population in trade partners. The trade freedom index plays no appreciable role in the results, although it is statistically significant and positive in 2002 and has positive (though insignificant) coefficient estimates in subsequent years. Finally, these regressions include regional dummy variables for the EU and APEC. These are generally positive; the APEC dummy, moreover, is significant and large in magnitude for each year after 1998, that is, for each year that Vietnam was an APEC member state. The persistently positive signs on these variables mean that, even after controlling for economic size, trade barriers and distance, APEC and the EU are important destinations for Vietnams exports.9

Panel data estimates We now turn to estimates on pooled data, reported in Tables 4 and 5. The trade data make up an unbalanced panel, with between 1 and 8 observations on each trading partner. Taking account of country-level fixed effects and panel-level between effects should improve the efficiency of the gravity model estimates. We present four variants of the model: two of the four include the TRIN variable as a regressor, and an overlapping pair explore the implications of using an APEC dummy variable as opposed to separate dummies for ASEAN and NAFTA, most of whose member states are also members of APEC. In addition, we specify four distinct dependent variables: total exports, and exports of manufactures, agricultural goods, and natural resource products. The division of commodity exports is done in the following way. The UN Comtrade data are classified on the basis of the third revision of the Standard International Trade

Other combinations of regional groupings are possible. However, the degree of overlap between ASEAN and APEC means that only one dummy is significant in any equation in which they are both included.

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Classification (SITC). Manufactured goods include chemicals and plastics (SITC 5), semimanufactures such as sawn timber and plywood (SITC 6), machinery, transport equipment and all kinds of assembly (SITC 7), and miscellaneous manufactured articles (SITC 8). Agricultural goods include food (SITC 0), beverages and tobacco (SITC 1), animals and vegetables (SITC 4), and rubber (SITC 22). Resource-based goods include crude materials (SITC 2, except #22), fuels, lubricants and related materials (SITC 3), and non-ferrous metals (SITC 68). [Table 4 and Table 5 about here] In these regressions we also take advantage of the multi-period dimension to drop many observations that contribute nothing to an economic analysis. Nearly all of Vietnams trade is conducted with a small group of countries; for the rest, trade flows and the composition of trade can vary enormously from year to year for reasons that cannot be captured by the variables in our data set. In order to focus on the main story, the panel data regressions exclude all observations on countries whose shares in Vietnams exports by value (in a given year) are less than onefourth of the mean share. Since the mean share is 0.0055 (or 0.55%), the countries excluded have export shares of 0.0014 (0.14%) or less. The cost of this action is substantially fewer observations; the gain is greater efficiency.10 All the estimators reported are specified as random effects models; these permit us to explore directly the effects of time-invariant variables such as regional trade groupings. Hausman tests (shown in the tables) for the null hypothesis of relative consistency of the RE estimators against FE estimators fail to reject in twelve out of 16 cases. The core gravity model variables produce similar estimates across all specifications. The products of bilateral GDPs and of bilateral per capita GDPs, are positive and mostly significant. Distance has a negative effect on trade as expected, and this is significant except in the models of
10

The estimation results are not sensitive to other cut-off points. Details available from the authors.

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commodity-specific trade when controlling separately for Vietnams own regional trade group (ASEAN), i.e. parts of Model 3 and Model 4. Models 2 and 4 include as an explanatory variable TRIN, the general measure of trade freedom. Surprisingly, once specific trade groupings and agreements are controlled for, this has a negative and significant association with total exports. Controlling for other factors, Vietnam exports less to more countries that the Heritage Foundation measure classes as more open to trade! A clue to this seemingly paradoxical result is found by noticing that the negative effect of TRIN on total exports is echoed (only) in the estimates for agricultural trade. Agricultural protectionism has resisted global trade liberalization efforts very robustly, and rich and poor countries alike typically seek exemptions for agricultural products when negotiating bilateral and regional trade deals. As the global trading system has become more open on average, agricultural trade has lagged behind, and this effect appears in our estimates even after controlling for the influence of some of the most protectionist large economies (i.e., the EU). Among the TREATY variables several interesting stories emerge. First, Japans extension of MFN in 1999 had a large and positive impact on Vietnams total exports, and of manufactures in particular. As Hill (2000) has noted, Vietnam gained access to the Japanese market for its laborintensive manufactures, such as garments and footwear, at a time when the worlds largest and most vigorous market for such products, the USA, was virtually inaccessible to it.11 Second, the influence of the bilateral trade agreement with the US is hard to overestimate. The BTA between Vietnam and the US had been expected to have a big positive impact on Vietnams exports (Fukase and Martin 1999). In fact, Vietnams exports to the US increased more than fourfold over just two years from December 2001, growing from US$1.05 billion in
11

In 1996, Vietnams garment exports to the US made up only 2.2% of its total garment exports. At comparable stages of their industrial development (i.e. in 1985), Indonesia, Thailand and China sold 58%, 41% and 28% respectively of their garment exports to the US (Hill 2000, table 6).

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2001 to US$4.55 billion in 2003. Manufactured exports, especially clothing, dominated this trend. Vietnam' exports to the US exceeded $US5 billion in 2005, and accounted for nearly 20% of total export earnings. Large as it is, the magnitude of the export response is no surprise given the size of the US market in relation to the global market; what is perhaps novel is the speed with which Vietnamese exporters were able to capitalize on market access. For example, SITC 8 exports (miscellaneous manufactures, mainly garments, footwear and accessories) from Vietnam to the US leapt after 2001 (Figure 3). Moreover, most of the growth in exports to the US resulted from export creation associated with increases in production and employment, rather than from a diversion away from exports to other countries (Vo Chi Thanh, 2005). Third, the influence on Vietnams exports of Chinas accession to the WTO, which might have been expected to be strongly negative, was in fact positiveat least for manufactures. Although China and Vietnam are direct competitors in the global market for many manufactured items, it seems that the opening of Chinas own market has been a positive influence on Vietnams exports. In the period 1998-2003, Chinas share in Vietnams total exports rose from 2% to over 13%. It may also be the Chinas generally negative influence on global prices of labor-intensive manufactures has helped Vietnam, one of the few countries that has labor costs low enough to compete with Chinese manufacturers, to take advantage of rapidly growing global demand. Finally, an interesting contrast in results comes from the EU regional dummy variable. The EU granted Vietnam MFN-like status and GSP concessions in the mid-1990s. Its relative size and openness to Vietnamese exporters of manufacturers is borne out in the manufactured export results in all models. However, EU concessions to developing country exporters of manufactures have not been matched by equivalent generosity to agricultural exporters. This

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appears in our models as negative estimates of the influence of the EU on Vietnams exports of agricultural and natural resource productsmost notably once Vietnams trade in such products to its ASEAN neighbors is taken into account (Models 3 and 4). The EU, it seems, still retains significant barriers to farm exports from Vietnam.

Vietnams evolving comparative advantage

The concept of comparative advantage, while theoretically compact, is notoriously difficult to pin down in empirical work. Ex ante measures based on national factor endowments are poor predictors of trade patterns (Trefler 1995); consequently, the empirical literature relies heavily on ex post measures. Measures of revealed comparative advantage (RCA; Balassa 1965) capture the intensity of a countrys exports of a good relative to the intensity of world exports of that
j j X kt X Kt good. For country j, good k and time period t, the RCA is defined as RCA jkt = W W , where K X kt X Kt

denotes the sum of all exports from country j or the world (W) respectively. By this definition, RCAjkt > 1 means that the share of product k in the exports of country j in year t is greater its share in total world exports in the same year. It is conventional to interpret RCAjkt values greater than 1 as meaning that country j has comparative advantage in production of good k. However, the RCA measure is based on observed exports, and these in turn are subject to policy interventions both at home and abroad. Product-specific measures as well as anti-export bias in the domestic economy are both influential, especially in economies in transition (Athukorala 2006). At the same time, protection by large trade partners that discriminates either by country or by commodity has an influence on the pattern of production and trade from the exporter. This paper raises the possibility of detecting trends in trade patterns that take account of at least some such discriminatory behavior, as well as capturing some of the effects of exogenous 18

growth in large competitor or complement economies (such as China) that influence the global terms of trade for other exporters. By doing so, we maybe able to derive information about longrun comparative advantage based on observed trends in the flows and composition of exports as policy reforms are implemented. In the Vietnamese case, trade has expanded dramatically during the doi moi era, but the country still has very far to go along the path to complete liberalization (Athukorala 2006; Hill 2000). Bilateral trade deals, such as that with the USA, move Vietnams trade pattern closer to its underlying comparative advantage both by reducing import barriers and by demanding reductions in domestic distortionary policies. Vietnams integration into the ASEAN regional grouping has clearly (from Table 5) had similarly large effects on the composition of its exports. Its Southeast Asian regional trade growth has been rapid in resource products, less so in manufactures, and negligible in agriculture, where the differences between Vietnams endowments and those if its neighbors are least pronounced.

Conclusions

The aim of this paper has been to determine the major factors of Vietnams exports for the period covered by available data, 1998-2003. We have focused on three issues: the influence of trade agreements signed with Japan, the EU, ASEAN and the US; examination of the extent to which Vietnamese exports are hurt by barriers imposed by its trade partners, and the effects of Chinas WTO accession. We employed the gravity model, a workhorse of empirical trade analysis. However, our use of this model departs from most standard applications first in focusing on the exports of just one country, and second in decomposing aggregate trade flows into their sectoral components.

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Our analysis shows that although ASEAN partners and China are important destinations for Vietnams exports, the role of the US and EU has increased, especially since the US BTA became effective in 2002. Chinas entry to the WTO has also had a large and surprisingly positive impact on Vietnams exports of manufactures. Our basic results are consistent with those of other gravity model applications. However, standard gravity models provide only average results both for countries and for trade in all sectors. Our approach is more specific in both respects. By focusing on a single country it yields information about that country (rather than about the average country in a cross-section), and the decomposition of exports by sector yields information that links the results directly to a large set of broader development concerns: structural change, income distribution, environment and natural resources, potential for moving up quality or skill ladders in manufacturing, and more.12

12

NB for future research: Rapidly increasing role of FDI firms in exports: these accounted for 20% of exports by

value in early 1990s up to 70% by early 2000s (Athukorala 2002b, cited in A. 2005:26). Is there a link between the origin of FDI and the destination of exports? Seems unlikely, given rising trend of exports to US and China, since these are small investors in VN manufacturing.

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Deardorff, A. V. (1998). Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?, in Jeffrey A. Frankel ed., The Regionalization of the World Economy. Chicago: University of Chicago Press, pp. 7-78. Feenstra, R. C., J. R. Markusen and A. K. Rose (1998). Understanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods. NBER Working Paper No. 6804. Frankel, J. A. (1997). Regional Trading Blocs in the World Economic System. Institute for International Economics Fukase, Emiko and Will Martin (1999). A Quantitative Evaluation of Vietnam's Accession tio the ASEAN Free Trade Area (AFTA). Development Research Group, World Bank. Helpman, W. (1987). Imperfect Competition and International Trade: Evidence from Fourteen Industrial Countries. Journal of the Japanese and International Economies (1): 62-81. Hummels, D. and L. James. (1995) Monopolistic Competition and International Trade: Reconsidering the Evidence. Quarterly Journal of Economics (110): 799-836. Ianchovichina, Elena and Will Martin (2001). "Trade Liberalisation in China's Accession to WTO." Journal of Economic Integration 16(4): 421-45. Ianchovichina, Elena, Will Martin, et al. (2000). "Economic Effect of the Vietnam-US Bilateral Trade Agreement." World Bank Report. Dean, J. W., I. Eremenko and N. Mankovska (2003). Will WTO Membership Really Improve Market Access for Ukrainian Exports? CEA 37th Annual Meetings Thursday, May 29 - Sunday, June 1, 2003, Carleton University, Ottawa, Ontario, Canada. Krugman, P. R. (1979), Increasing Returns, Monopolistic Competition, and International Trade. Journal of International Economics (9): 469-79. Le Anh Tu, Packard and Stephan S. Thurman (1996). "A Model Design for Vietnam as an Open Economy in Transition." ASEAN Economic Bulletin 13: 241-64. Lissovolik, B., and Lissovolik, Y. (2004). "Russia and the WTO: The "Gravity" of Outsider Status". IMF Working Paper No. WP/04/159 Available at SSRN: http://ssrn.com/abstract=878984

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Marius, B. and M. J. Kelly (1999). Irelands Trading Potential with Central and Eastern European Countries: A Gravity Study. The Economic and Social Review 30(2): 159-74. Matyas, L. (1997). Proper Econometric Specification of the Gravity Model. The World Economy. Nguyen Nhu Binh and Jonathan Haughton (2002). "Trade Liberalisation and Foreign Direct Investment in Vietnam." ASEAN Economic Bulletin 19(3): 302-18. Oxana, B. and M. Maurel (2004). Russians Accession to The WTO: The Potential for Trade Increase. Journal of Comparative Economics (32): 680-99. Paas, Tiiu (2000). "The Gravity Approach for Modeling International Trade Patterns for Economies in Transition." International Advances in Economic Research 6(4): 633-48. Patrizia IMF Country Report No. 06/20, 2006 Pishayasinee, M. and I. Coxhead (2005). Competition and Complementarity in Chinese and ASEAN Manufacturing Industries. Papers presented at CCER, Nov. 18 2005. Tang, Donny (2003). "The Effect of European Integration on Trade with the APEC Countries: 1981-2000." Journal of Economics and Finance 27(2): 262-78. Savage, I. R. and K. W. Deutsch (1960). A Statistical Models of the Gross Analysis of Transaction Flows. Econometrica 28: 551-72. Tinbergen, J. (1962). Shaping the World Economy: Suggestions for an International Policy. New York: The Twentieth Century Fund. Vittas, H. and P. Mauro (1997). Potential Trade with Core and Periphery: Industry Differences in Trade Patterns, in S. W. Black ed., Europeans Economy Looks East. Implication for Germany and the European Union. Cambridge University Press, Cambridge. Wall, H. J. (1999). Using the Gravity Model to Estimate the Costs of Protection. Federal Reserve Bank of St. Louis. Wittman, S. (2007). Chronology of U.S.-Vietnam Relations. URL: http://www.oakton.edu/user/~wittman/chronol.htm, accessed 12 June 2007.

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Table 1: Vietnam: Merchandise export trends

1998 Total exports ($USm) Non-oil, % Fuels, lubricants, etc. (SITC 3), % 1999 2000 2001 2002 2003 2004 2005

9,360 11,541 14,483 15,029 16,706 20,149 26,485 32,447 84.6 15.4 79.5 20.5 73.6 26.4 77.1 22.9 78.8 21.2 79.4 20.6 76.5 23.5 74.2 25.8

Commodity shares in non-oil exports (%) Food and live animals (SITC 0) Beverages and tobacco (SITC 1) Crude materials except fuels (SITC 2) Animal, veg. oils, fats, wax (SITC 4) Chemicals, reltd. prod. nes (SITC 5) Manufactured goods (SITC 6) Machines, transport equip (SITC 7) Misc manufactured artcls (SITC 8) Goods not classd by kind (SITC 9) 35.5 0.1 3.3 0.2 1.1 5.4 9.5 33.2 11.6 35.0 0.1 3.1 0.2 1.5 9.4 10.6 38.5 1.7 33.2 0.2 3.6 0.6 1.3 7.3 11.8 37.7 4.4 33.7 0.4 3.5 0.3 1.9 8.1 11.2 37.7 3.1 31.1 0.6 3.9 0.1 1.9 8.5 9.6 43.0 1.3 27.4 0.9 3.9 0.1 2.1 8.4 10.9 45.2 1.1 25.9 0.8 4.1 0.2 2.1 9.3 12.6 44.5 0.6 26.3 0.6 5.1 0.1 2.2 8.9 13.0 43.2 0.6

Source: Comtrade

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Table 2: Variable definitions

Variable VNEXjt GDPjt GDPPCjt DISTj TRINjt EU, ASEAN, NAFTA CHINAWTOt USABTAt JAPANMFNt

Definition Vietnams exports to trade partner j in year t. GDP of country j in year t (in 2000 $US). Per capita GDP of country j in year t (in 2000 $US). Source: WDI. Great circle distance from Hanoi to capital city of country j. Heritage Foundation trade freedom indicator for country j in year t APEC, Time-invariant dummy variables for economic groupings Dummy variable (1 = China as partner and t > 2001, when China joined WTO) Dummy variable (1=USA as partner and t > 2001, when US and Vietnam signed Bilateral Trade Agreement) Dummy variable (1=Japan as partner and t > 1999, when Japan awarded Vietnam Most Favored Nation status)

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Table 3: Vietnams exports by year Dependent variable: natural log of VN exports

1998 ln(GDPVGDPj) ln(GDPPCVGDPPCj) ln(DISTj) ln(TRINj) EU APEC Constant Adj. R2 N F Prob > F 0.51*** (0.18) 4.49** (1.79) -2.28*** (0.74) -0.61 (0.68) -0.35 (0.75) 0.63 (0.79) -32.4*** (10.45) 0.41 88 10.94 0.00 1999 0.83*** (0.10) 0.32 (0.93) -1.93*** (0.45) -0.24 (0.54) 0.85 (0.53) 1.41** (0.53) -18.8** (6.02) 0.66 136 44.78 0.00 2000 0.89*** (0.09) -0.50 (0.90) -1.83*** (0.43) -0.09 (0.52) 0.89* (0.52) 1.53** (0.51) -16.3* (5.82) 0.68 140 49.59 0.00 2001 0.87*** (0.09) -0.51 (0.89) -1.91*** (0.40) -0.07 (0.57) 0.99** (0.48) 1.53** (0.47) -14.7 (5.86) 0.70 137 55.10 0.00 2002 0.95*** (0.09) -1.10 (0.89) -1.92*** (0.39) 1.80** (0.64) 0.85* (0.49) 1.29* (0.50) -22.1*** (5.83) 0.74 139 65.56 0.00 2003 1.00*** (0.09) -1.17 (0.90) -1.88*** (0.39) 0.88 (0.55) 0.88* (0.50) 1.39* (0.51) -19.9** (5.93) 0.73 139 64.70 0.00 2004 0.93*** (0.10) -0.92 (0.97) -1.33** (0.42) 0.70 (0.64) 0.64 (0.53) 1.48** (0.54) -19.90** (6.36) 0.67 136 47.50 0.00 2005 0.93*** (0.09) -1.35 (0.91) -1.24** (0.38) 0.44 (-0.72) 0.71 (0.47) 1.55** (0.48) -15.1 (5.90) 0.71 136 56.35 0.00

Note: Figures in parentheses are standard errors ***, **, * denote coefficients statistically significant at 1%, 5% or 10%

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Table 4: Vietnams exports, random effects estimates Sample restricted to obs with expsha > 0.25*mean
Model 1 Total exports ln(GDPVGDPj) ln(GDPPCVGDPPCj) ln(DISTj) ln(TRINj) CHINAWTO USABTA JAPANMFN EU APEC Constant Overall R2 N Groups Wald Chi2 Prob > chi2 0.88** (0.41) 1.67*** (0.41) 0.93** (0.45) 0.21 (0.27) 0.85*** (0.27) 2.51 (2.83) 0.54 331 72 179.87 (0.00) 1.00* (0.54) 3.15*** (0.51) 1.36** (0.56) 1.02*** (0.37) 0.84** (0.38) -7.69* (4.00) 0.58 322 65 204.33 (0.00) 0.47 (0.63) 0.93 (0.63) 1.09 (0.70) -0.81 (0.54) 0.23 (0.56) -5.65 (5.33) 0.36 327 69 62.22 (0.00) 0.62 (0.78) 0.15 (0.78) -0.04 (0.87) -1.39 (0.88) 1.66* (0.86) -13.17 (8.49) 0.51 286 57 79.01 (0.00) 0.17** (0.06) 1.43*** (0.28) -1.13*** (0.28) Manuf exports 0.22** (0.09) 2.06*** (0.36) -0.86** (0.39) Agric exports 0.29** (0.13) 1.51*** (0.46) -1.15** (0.59) Nat. res. exports 0.65*** (0.22) 1.32** (0.66) -4.24*** (0.95) Total exports 0.20*** (0.07) 1.55*** (0.29) -1.21*** (0.29) -0.51*** (0.17) 0.82** (0.41) 1.63*** (0.41) 0.88*** (0.44) 0.27 (0.27) 0.91*** (0.27) 2.36 (2.91) 0.55 324 69 194.75 (0.00) 10.99* (0.09) Model 2 Manuf exports 0.27*** (0.09) 2.21*** (0.36) -0.85*** (0.36) -0.24 (0.22) 0.88* (0.54) 3.08*** (0.51) 1.31** (0.55) 0.99*** (0.33) 0.85** (0.34) -10.6*** (3.79) 0.58 316 63 230.73 (0.00) 4.90 (0.56) Agric exports 0.38*** (0.13) 1.60*** (0.45) -1.48*** (0.56) -1.10*** (0.25) 0.38 (0.60) 0.90 (0.60) 1.04 (0.67) -0.67 (0.51) 0.29 (0.52) -4.73 (5.14) 0.40 320 66 91.03 (0.00) 3.52 (0.74) Nat. res. exports 0.69*** (0.23) 1.39** (0.68) -4.33*** (0.98) -0.26 (0.34) 0.58 (0.78) 0.12 (0.78) -0.07 (0.87) -1.50* (0.87) 1.54* (0.86) -14.32* (8.64) 0.51 283 54 78.44 (0.00) 3.06 (0.80)

Hausman chi2 12.85** 1.56 2.55 3.87 prob > chi2 (0.025) (0.91) (0.77) (0.57) Note: Figures in parentheses are standard errors ***, **, * denotes p < 0.01, 0.05, and 0.1 respectively

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Table 5: Vietnams exports, random effects estimates Sample restricted to obs with expsha > 0.25*mean
Model 3 Total exports ln(GDPVGDPj) ln(GDPPCVGDPPCj) ln(DISTj) ln(TRINj) CHINAWTO USABTA JAPANMFN EU ASEAN NAFTA Constant Overall R2 N Groups Wald Chi2 Prob > chi2 0.96** (0.41) 1.56*** (0.41) 1.05** (0.45) -0.06 (0.27) 1.22*** (0.40) 0.09 (0.53) -2.68 (3.32) 0.57 331 72 177.34 (0.00) 1.08* (0.54) 3.03*** (0.51) 1.47*** (0.56) 0.82** (0.37) 0.95* (0.56) 0.43 (0.74) -11.51** (4.88) 0.58 322 65 200.06 (0.00) 0.49 (0.63) 0.95 (0.63) 1.12* (0.70) -0.98* (0.53) 1.21 (0.79) -0.69 (1.04) -11.10* (6.22) 0.40 327 69 65.30 (0.00) 0.68 (0.78) 0.14 (0.78) 0.10 (0.87) -2.22*** (0.82) 1.66* (0.86) -1.41 (1.54) -32.7*** (9.69) 0.60 286 57 94.52 (0.00) 0.26*** (0.07) 1.32*** (0.29) -0.68* (0.37) Manuf exports 0.29*** (0.10) 1.98*** (0.37) -0.63 (0.39) Agric exports 0.37*** (0.13) 1.36*** (0.47) -0.42 (0.75) Nat. res. exports 0.98*** (0.21) 0.74 (0.66) -2.05* (1.16) Total exports 0.30*** (0.07) 1.41*** (0.29) -0.77** (0.38) -0.47*** (0.17) 0.89** (0.41) 1.51*** (0.41) 1.00** (0.44) -0.02 (0.27) 1.23*** (0.41) 0.09 (0.53) -3.23 (3.42) 0.57 324 69 190.23 (0.00) 14.66** (0.02) Model 4 Manuf exports 0.40*** (0.09) 2.10*** (0.37) -0.48 (0.46) -0.20 (0.22) 0.98* (0.54) 2.93*** (0.52) 1.45*** (0.55) 0.75** (0.32) 1.16** (0.48) 0.22 (0.62) -16.1*** (4.46) 0.59 316 63 232.09 (0.00) 8.45 (0.21) Agric exports 0.45*** (0.13) 1.47*** (0.46) -0.89 (0.72) -1.09*** (0.25) 0.40 (0.60) 0.90 (0.60) 1.06 (0.67) -0.85* (0.51) 1.01 (0.75) -0.57 (0.98) -9.67 (6.05) 0.44 320 66 92.99 (0.00) 3.56 (0.74) Nat. res. exports 1.02*** (0.22) 0.82 (0.67) -2.00* (1.19) -0.24 (0.34) 0.63 (0.78) 0.11 (0.78) -0.06 (0.87) -2.32*** (0.79) 4.07*** (1.16) -1.58 (1.51) -34.9*** (9.83) 0.60 283 54 96.06 (0.00) 4.21 (0.65)

Hausman chi2 13.10** 2.14 3.31 5.47 prob > chi2 (0.022) (0.83) (0.65) (0.36) Note: Figures in parentheses are standard errors ***, **, * denotes p < 0.01, 0.05, and 0.1 respectively

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Figure 1a Exports as Per Cent of GDP: Vietnam in Comparative Perspective

Figure 1b Export Growth (annual per cent): Vietnam in Comparative Perspective

Figure 2: Geographic Composition of Exports, 1998-2003

30% 25% 20% 15% 10% 5% 0% 1998 2000 2003 Europe USA ASEAN China Japan Other Asia ROW

Source: UN Comtrade

Figure 2 Destination of Vietnamese Exports, 1998-2003

Figure 3: Exports of SITC 8 commodities to major trading partners