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Trade and investment effects of free trade agreements: The case of Vietnam

Regional trade agreements (RTAs) are reciprocal trade agreements between two or more partners. The relatively recent emergence of deep and comprehensive RTAs is expected to have substantial impacts on members, especially developing countries. For a particular country, the impacts of RTAs on trade and foreign direct investment (FDI) depend on various factors, with certain types of trade agreements working better in stimulating these flows. This thesis contributes four studies analysing the effects of RTAs that Vietnam has entered into, focusing on Vietnamese trade and investment. Based on econometric modelling, the first study investigates the effects of trade agreements and FDI on Vietnamese trade flows, while the second study explores whether Vietnam’s overall involvement in FTAs enhances its FDI inflows. The remaining two studies employ computable general equilibrium (CGE) modelling to analyse the EU-Vietnam FTA (EVFTA) and Regional Comprehensive Economic Partnership (RCEP), with a focus on Vietnamese trade and investment. Using the random effects technique to estimate the gravity models, the first study reveals that the bilateral trade agreements with the US and Japan have resulted in the greatest expansion in Vietnamese exports and imports, while the impacts from other RTAs are more mixed. Furthermore, the impacts on Vietnamese trade flows of FDI inflows are not as strong as those of some of the trade agreements. Results also suggest that Vietnam’s exports have become more sensitive to FDI following the bilateral trade agreements with the US and Japan, whereas Vietnam’s imports have become less sensitive to FDI as a result of the trade agreement with Japan. The regression results from gravity models in the second study indicate that, overall, FTAs are associated with enhanced FDI flows in Vietnam. The results also indicate a dominance of vertical FDI in Vietnam. Further investigation of a recent sub-period reveals that FTAs also affect inward FDI flows to Vietnam through interaction terms with the real exchange rate, human capital, and factor endowments. The CGE modelling of the EVFTA provides strong evidence of trade diversion following the EVFTA because the bilateral trade between Vietnam and the EU experiences tremendous growth, compared with the growth of their total exports and imports. At the sectoral level, only the processed food, transport equipment, and labour-intensive manufacturing sectors in Vietnam witness significant export expansion, whereas the remaining sectors exhibit declines in exports. In terms of the investment effect of the EVFTA, the results indicate that Vietnam’s short-run current rates of return increase considerably, largely due to the rise in the rental price of capital. These findings explain Vietnam’s significant long-run capital gains. The results further suggest that Vietnam’s capital gains resulting from tariff elimination are much larger than those arising from other policy actions. Finally, the CGE modelling of the impacts of RCEP indicates that Vietnam’s total real exports and imports both expand, with the growth rate of total exports slightly exceeding that of total imports. The results indicate strong evidence of trade diversion following RCEP, with the rise in Vietnam’s imports from other RCEP members being greater than the increase in its total imports in both relative and absolute terms. In addition, Vietnam benefits from export expansion in most of the sectors modelled, except for some agricultural sectors. With regard to the investment effects of RCEP, the simulation results indicate that among RCEP members, Vietnam’s short-run current rates of return experience the largest percentage increase, which explains the significant rise in the long-run capital stock in Vietnam. The findings also suggest that all the policy components modelled contribute to Vietnam’s capital growth, with goods NTMs contributing most in the scenario with the greatest liberalisation.
Type of thesis
Duong, M. T. D. (2020). Trade and investment effects of free trade agreements: The case of Vietnam (Thesis, Doctor of Philosophy (PhD)). The University of Waikato, Hamilton, New Zealand. Retrieved from https://hdl.handle.net/10289/13632
The University of Waikato
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