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Assessing the impacts of some major factors on Vietnam- United States trade: a gravity model - Nguyen Thi Thu Hoan

tháng 8 20, 2022
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Nguồn bài viết:
Nguyen Thi Thu Hoan (2022), Assessing the impacts of some major factors on Vietnam- United States trade: a gravity model in ECONOMICS, BUSINESS, INNOVATIONS: Proceedings of the XX International Scientific and Practical Conference. – Penza, Russia: ICNS "Science and Education", pp. 39-45, ISBN 978-5-00173-445-1

ASSESSING THE IMPACTS OF SOME MAJOR FACTORS ON VIETNAM- UNITED STATES TRADE: A GRAVITY MODEL

Nguyen Thi Thu Hoan
M.A., Lecturer
Diplomatic Academy of Vietnam, Ministry of Foreign Affairs,
Hanoi, Vietnam


Abstract: After 29 years of the normalization of relations, Vietnam and the US have now become comprehensive partners in all areas, especially bilateral trade, with a milestone of signing a Bilateral Trade Agreement (BTA) in 2000. To better understand the impacts of the BTA and some other main factors on bilateral trade between the two countries and provide some related policy implications, this study applies Gravity model in assessing the impacts of some main factors, including the BTA, on export and import between Vietnam and United States from 2000 to present. The study shows that the signed BTA has shown a clear positive impact on both import and export of goods and services between the two countries from 2000 up to now.

Keywords: BTA, Vietnam- United States trade, export value model, import value model


ОЦЕНКА ВЛИЯНИЯ НЕКОТОРЫХ ОСНОВНЫХ ФАКТОРОВ НА ТОРГОВЛЮ ВЬЕТНАМА И СОЕДИНЕННЫХ ШТАТОВ: МОДЕЛЬ ГРАВИТАЦИИ


Нгуен Тхи Тху Хоан
магистр, преподаватель
Дипломатическая академия Вьетнама, Министерство иностранных дел,
г. Ханой, Вьетнам

Аннотация: После 29 лет нормализации отношений Вьетнам и США теперь стали полноправными партнерами во всех областях, особенно в двусторонней торговле, с подписанием Двустороннего торгового соглашения (ДТС) в 2000 году. Чтобы лучше понять последствия БТА и некоторые другие основные факторы двусторонней торговли между двумя странами, а также некоторые связанные с этим последствия для политики. В этом исследовании применяется гравитационная модель для оценки воздействия некоторых основных факторов, включая БТА, на экспорт и импорт между Вьетнамом и США с 2000 г. по подарок. Исследование показывает, что подписанное ДТС оказало явное положительное влияние как на импорт, так и на экспорт товаров и услуг между двумя странами с 2000 года по настоящее время.

Ключевые слова: БТА, торговля между Вьетнамом и США, модель стоимости экспорта, модель стоимости импорта.


1. INTRODUCTION

Since 1993, when the United States lifted the economic embargo against Vietnam, Vietnam's international trade in general, and bilateral trade in particular, have increased significantly. This is a good starting point for commercial activities to guide Vietnam's economy into the general trend of regional and international integration. Since then, Vietnam has actively participated in numerous free trade agreements with the aim of forming and developing a socialist-oriented market economy, managed and regulated by the State. Typically, the Vietnam-US Bilateral Trade Agreement (BTA) was signed in 2000 between the two countries.

The signing and participation in free trade agreements (FTAs) in general, and BTA in particular, have brought many opportunities and positive impacts on the Vietnamese economy: The import-export market has been expanded and diversified, as well as the financial services market has also more developed with the participation of many foreign investors; at the same time, the system of institutions and policies has been gradually improved to meet the requirements of integration and international standards. However, the implementation of FTA commitments in general, and the Vietnam- US BTA in particular, also poses many challenges that Vietnam’s economy needs to overcome due to a number of reasons such as: the added value of exports is quite low, the production and business capacity of enterprises is still limited; The supporting industry has not yet developed, and the size of the financial market is still small, etc. To better understand the impact of the signing of the BTA on Vietnam-US trade and provide some related policy implications, this study focuses on analyzing and evaluating a number of important factors, including the BTA, affecting the import and export between Vietnam and the US in the period from 2000 to present.

Up to now, there have been many studies on the factors affecting trade. In which, there are a number of researches examines country-specific factors such as income per capita, income gaps, average differences in country size and geographical distance, common borders, economic openness, foreign direct investment, and free trade agreements, etc. While other researches concentrate on industry-specific factors such as: product differences, industry size, etc., and some studies tend to examine both groups of factors.


2. METHODOLOGY AND LITERATURE REVIEW

The Gravity Model is widely used in studies of factors affecting trade. The gravity model studies predictions of bilateral trade flows depending on the size of the economy and the distance between countries. Accordingly, the volume of international trade between two countries is directly proportional to the size of the two economies and inversely proportional to the distance between the two countries. Then the Gravity model is adjusted by expanding the variables in the model such as difference in income per capita, FDI, economic openness, etc.

The trend of applying gravity model to evaluate the impacts of FTAs on trade flows has becomed popular ỉn recent years. The standard gravity model has dependent variables including real GDP, distance, income gap, and others, such as adjacency and geographical characteristics, policy factors,... The orginal forrm of gravity equation is as follows:



In which:

Xij : exports (or trade) from country i to country j

C: constant

Y: sỉze of economy (GDP)

t: trade costs between two countries, such as distance, adjacency, policy factors,…

Export (or trade) between two countries depends on their size of economies and negatively related to trade costs between them.

Empirical equation for basic gravity model is as follows:

LnXij = b0 + b1ln(Yi) + b2ln(Yj) + b3ln(tij) + eij

In which: b1, b2 >0; b3<0 . A 1% change in Yi is associated with a b1% change in Xij.

In terms of empirical research, many economists have used the Gravity model in the their researches of interntional trade. According to Anderson (1979), this theory has most successfully explained the trade relations between countries based on factors that have a major impact on trade activities. Research by Chipman (1992) and Davis (1996) used the gravity model to study intra-industry trade. McCallum's study (1995) analyzes trade between Canadian provinces and US states - the dependent variable is the exports of each Canadian province to each US state. The results showed that: GDP size and sharing the same border explained with high significance to the volatility of exports. Thornton and Goglio (2002) also showed in their economic model that geographical distance and intra-ASEAN bilateral trade policy have an impact on bilateral trade between countries.

Moses Muse Sichei (2007) studied the factors affecting intra-services trade between the US and South Africa from 1994 to 2002, which combined country-specific and industry-specific factors of services is emphasized in Greenaway and Milner (1983). The array data model is estimated in the general linear model (GLM).

In addition, the expansion of gravity theory is also studied in other researches such as the empirical research on the impact of FDI factors on exports in Moody's et al. (2002). Authors created an information model to show how to attract FDI to increase exports. Economist Xing (2003) studied the specific case of China with the conclusion that: FDI has a close relationship with "reverse imports", that is, FDI companies tend to export goods from the host countries back to their home country, or sell to neighboring countries where they also have investments, thereby increasing export turnover for the host country.

In addition, some notable quantitative studies on factors affecting trade can be mentioned as follows: H.Cohen (2003) has quantified and tested using a quantitative model to demonstrate the impact of trade barriers to Canada's manufacturing and exports. Similarly, A.Turner (2008), Katz (2006, 2008) created a quantitative research model to conclude that trade barriers have a certain impact on exports from New Zealand to the US, China, and Japan. L.Sun et al (2010) also quantified the impact of tariff and non-tariff factors on Canada's trade. The research results show that although non-tariff barriers are less common, they have a similar or greater impact on trade.

Maplesden and Horgan (2016) also conducted a quantitative research to demonstrate that trade barriers have a great impact on New Zealand's trade. Using a different approach, based on the survey of enterprises, L.Eastin et al. (2004) used 8 quantitative methods by statistics and statistical tests to make the evaluations and conclusions. The factors of business size, shortened distribution channels, product diversity, branch representatives in Japan, and close relationships with Japanese customers are important factors affecting the high volumn of exports from the Pacific Northwest region to Japan. Samsinar and Azizi Hj (2008) also ran a regression model to prove that advertising activities (marketing) have a close relationship with Malaysia’s exports.

Priyono (2009) based on the study of Pemarisi (2005) and Gu (2005) to determine the factors affecting Indonesia's exports in a research model including GDP of Indonesia, GDP of other partner countries, distances between countries, exchange rates, and regulations on trade barriers.

C.Jordaan and Eita (2011) did not mention the exchange rate factor and non-tariff barriers like Agus Priyono, but they tested the population factor and market openness through dummy variables of free trade agreements and English-speaking as main factors influencing South Africa's exports to the world, along with traditional variables such as domestic GDP, partner countries' GDP, and geographic distance between countries.

Among the qualitative studies on the factors affecting trade, typically Harun et al (2014) based on qualitative analyzes and descriptive statistics have shown that government’s development policies of wood processing industry, R&D activities, and market openness are main factors influencing Malaysia's export trends and turnovers. Mukolaivna (2015) also relied on qualitative assessments and analyzes to draw conclusions about the impact of ecological safety on export activities of enterprises.

Conducting both qualitative and quantitative studies on trade, Domson (2002) based on SWOT analysis and quantitative analysis have recognized the ability to reach customers, understand regulations in the importing country, requirements strictness from importers are the factors hindering Gana's exports to the US market. Also based on SWOT analysis technique and combined with forecasting model, Scudder (2012) showed the potential exploitation volume, potential production capacity of Montana factories, distribution capacity and demand. The demand of Chinese importers will have a strong influence on Montana's exports to the Chinese market.

In Vietnam, there have been a number of researchers interested in this issue, but most of these studies are qualitative researches. There are some quantitative studies on measuring the factors affecting Vietnam's trade with a group of other countries, but they are still quite few and not really comprehensive.

This article will study some main factors affecting export and import between Vietnam and the US, including the factor of BTA, on the basis of applying gravity model for quantitative analysis.

3. RESEARCH MODEL

Based on previous researches, this study uses gravity model to assess the impact of AEC on Vietnam's goods trade. The model used in this study includes some usual variables in the gravity model and is supplemented with dummy variables for Vietnam- US bilateral trade agreement (BTA). The author builds separate equations for exports and imports to analyze the impact of BTA on exports and imports between Vietnam and the United States. On that basis, the study makes assessments on the impact of BTA on bilateral trade between the two countries from 2000 to present.

The gravity model for Vietnam's exports and imports with its US counterpart is as follows:

ln (EXj) = G + β1ln(GDPitGDPjt) + βjln(GDPPCit GDPPCjt) + β3ln (INCOMEGAP) + ln(REERịt) + αBTA

ln (IMj) = G + β1ln(GDPitGDPjt) + βjln(GDPPCit GDPPCjt) + β3ln (INCOMEGAP) + ln(REERịt) + αBTA

In there:

- ln: natural logarithm;

- i: Vietnam, j: United States;

- EXj and IMj are Vietnam's exports and imports to the United States, respectively;

- GDPit and GDPjt are the GDP of Vietnam and the United States, respectively;

- INCit and INCjt are GDP per capita of Vietnam and the United States, respectively;

- INCOMEGAP is the difference in per capita income between Vietnam and the United States;

- REERijt is the real effective exchange rate between Vietnam and the United States at year t;

- BTA is a dummy variable measuring the impact of the BTA free trade agreement on Vietnam's exports and imports.

For both models, GDPit and GDPjt are proxies for market size. According to economic theory, the larger the economy or the higher the level of income, the greater the volume of goods traded. Therefore, GDPit and GDPjt are expected to be positively correlated with trade. The INCOMEGAPijt coefficient can have a negative or positive sign because the impact of GDP per capita disparity on trade is not clear on the basis of previous studies.

The real effective exchange rate between the Vietnamese Dong and the US Dollar REERijt is expected to be positive or negative depending on the mode of goods supply. Dummy variable allow us to assess whether the BTA increases or decreases bilateral trade between two countries. The BTA dummy variable takes on a value of 0 for the period before 2000 and takes a value of 1 when the BTA free trade agreement was signed.

4. RESEARCH DATA

· The data on exports and imports between Vietnam and the United States in the regression model are obtained from the US Census Bureau.

· The data on GDP, population of countries, real effective exchange rates are extracted from the databases of the International Monetary Fund (IMF).

· The quarterly data series for the research model are taken in the period from Q1/1993 to Q2/2022.

5. RESEARCH RESULTS

The author has tested the defects of the regression model (multicollinearity, autocorrelation, variable variance), and the results show that the model does not have the above defects. The results of gravity model estimation for Vietnam's exports and imports are presented in Table 1.

Table 1: Gravity Model Estimation Results for Exports and Imports between Vietnam and the United States from Q1/1993 to Q2/2022

 

Export

              Ln(EX)                                                                                   

Import

Ln(IM)

Log(GDPiGDPv)

1,263***

(0,00)

1,021***

(0,00)

Log(GDPPCiGDPPCv)

-0,205***

(0,00)

-0,347***

(0,003)

Log(INCOMEGAP)

0,421***

(0,00)

0,357***

(0,001)

REER

0,791**

(0,02)

-1,033**

(0,03)

BTA

1,203***

(0,00)

0,813***

(0,004)

Constant

-21,098***

(0,00)

-20,195***

(0,05)

R-squared

0,826

0,763

Adj.R-squared

0,852

0,783

Obs

570

570

                   Robust standard errors in parentheses *** p< 0.01, ** p<0.05, * p<0.1

                   Source: The author’s compilation




The estimated results show that many variables have signs as expected. The R-squared coefficient in the two export and import equations is relatively high, 0.826 and 0.763, respectively, showing that the model explains quite well the Vietnam - US trade. The GDP variable representing the size of the economy is positive in both equations and is statistically significant. Thus, the volume of trade exchange between Vietnam and partner countries is proportional to the size of the economy, which is consistent with the analysis of the gravity model. Comparing the coefficient of GDP variable in the two equations, it can be seen that the coefficient of the export equation has a larger value (1.263) than that of the import (1.021). This is completely consistent with the fact that Vietnam has a surplus of goods to the US. Specifically, according to the US General Statistics Office, Vietnam has a trade surplus with the US for many years in the period from 2000 to present (Vietnam's export growth rate is much faster than imports).

The income gap between Vietnam and the US is positive in both models, which is statistically significant in both the export and import equations. This is consistent with the fact that Vietnam often exports commodities such as agricultural products, seafood, furniture, textiles, footwear, and electronic components to the United States, and also imports high-tech items and services from the United States to Vietnam.

The exchange rate has a positive sign in the export equation and a negative sign in the import equation, consistent with economic theory. This explains that the real devaluation of the Vietnamese Dong has a positive effect on Vietnam's exports, while it has the opposite effect, reducing the US’s demand for Vietnamese imports.

However, the impact of the exchange rate on US-Vietnam trade flows is relatively small. This can be explained in fact, in recent years accounting for a large proportion of Vietnam's export turnover to the US are agricultural products and unprocessed raw fuel. These are items that offer low added value and also have low price elasticity. At the same time, in recent years, Vietnam imported from the US machinery and materials for production and domestic consumption, which are also items with low price elasticity. Therefore, relative price fluctuations due to exchange rate fluctuations do not have a significant impact on Vietnam-US bilateral trade.

The coefficient of the dummy variable represents the implementation of the bilateral BTA between the two countries, basically in accordance with the reality. BTA has a positive impact on both Vietnam's exports and imports with its US trading partner, the process of tariff reduction started in December 2001 since the BTA came into effect, with a roadmap to cut tariffs. Tariff reduction in the long run brings great incentives to Vietnam's trade. The preferential agreements in the BTA are of great significance, contributing to promoting the value of bilateral trade between Vietnam and the United States in a win- win game that benefits both countries. Vietnam is both an important export market and a significant importer of many products from the United States from 2000 to present, thanks to the signing and emplementing of the BTA and fruitful diplomatic relation between the two countries.

In particular, the coefficient of the BTA variable in the export model is 1.203 > 1, which is quite high and statistically significant. In fact, since the BTA took effect in 2001, Vietnam's export value to the US has grown steadily and continuously year by year. From Q1/2020 to Q2/2022, despite being affected by the world economic downturn due to Covid-19 Pandemic, Vietnam's export value to the US market still increased. BTA has also boosted Vietnam's import turnover since this agreement came into effect. This dummy variable has also a positive coefficient and is statistically significant in import model.

6. CONCLUSIONS AND POLICY IMPLICATIONS

This research shows that inter-industry trade still dominates the US-Vietnam trade, in which exports over the past years have been based on differences in factors of production. The bilateral trade agreement between Vietnam and the US has shown a positive impact on both import and export flows of Vietnam and the US, as the two countries have enjoyed a win-win game that is beneficial to the both sides for a long period of time. In particular, this agreement has shown a positive impact on both exports and imports of Vietnam, the process of tariff reduction started in December 2001 after the BTA took effect, with a roadmap to reduce tariffs in long time.

The results of the model imply that in order to promote trade in goods and services and expand opportunities for consumers of the two countries to use more diversified goods and services, Vietnam and the United States need to further promote the implementation of commercial cooperation activities within the framework of BTA, and at the same time take advantage of incentives from other cooperation mechanisms. For trade in goods, the model results show that the impact on exports to the US tends to be stronger than the impact on imports from the US into Vietnam. However, it should be noted that Vietnam's balance of trade in services with the US is likely to have a more serious deficit. Therefore, in order to better take advantage of opportunities to promote trade in services, Vietnamese enterprises need to make more efforts to improve the quality and quantity of services provided; understand their strengths and weaknesses to better compete with US service businesses. Vietnamese businesses also need to understand and take advantage of incentives from this BTA to increase exports to the US market.

In addition, Vietnam needs to continue to promote trade in services with the United States. That will help Vietnamese consumers access a wider range of services with better quality, and at the same time give Vietnamese service providers more motivation to improve quality and competitiveness as well as participate in higher stages of the global value chain in services.


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