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Impacts of Economic Integration on Vietnam’s Trade Flows

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DOI: 10.21485/hufsea.2013.22.3.003

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 Impacts of Economic Integration
on Vietnam’s Trade Flows

Doan Quang Huy* · Taikoo Chang**

I. Introduction

In the modern era, business globalization and international integration are

the engines of economic growth for all nations. Cooperation and
consolidation of countries deeply impacts both the individual countries and
all nations worldwide. In the opinion of most policy makers, integration is
the best chance for reform and innovation. Globalization and international
economic integration not only create opportunities for developing countries,
they also force them to face challenges. Removing tariff barriers to facilitate
global free trade is a big challenge, for example. Reducing tariffs not only
affects tax policy in general; more important is its role in transforming the
national economic structure and modernizing the social economic policy of
the state.
Understanding the benefits of economic integration, on July 28th, 1995,
Vietnam became an official member of ASEAN. As an ASEAN member,
Vietnam committed to implement CEPT issued by AFTA since January 1st,
1996, and accomplished in 2006. Vietnam joined APEC in 1998, and
signed a bilateral trade agreement with U.S effective July 13th, 2000.

*
Lecturer, Faculty of Economics, Thai Nguyen Univ. of Economics and Business
Administration, Vietnam
**
Professor, Dept of Economics, Daegu Univ. Rep. of Korea.(Corresponding
Author)
Finally, Vietnam became the 150th member of WTO in 2007 after 11 years
of negotiation. At present, Vietnam has diplomatic relations with more than
170 countries, and exports to more than 80 overseas markets. Vietnam also
has bilateral agreements with more than 60 countries in the areas of trade,
investment, energy, technology cooperation, and cultural exchange.
Vietnam is a developing country with a rapidly changing economy.
Economic integration with other countries has brought growth and
development, but also poses major new challenges for the national
economy, even causing financial crises at times.
Globalization has developed very quickly on a large scale, and continues
to change and accelerate. To survive and develop, all countries must
integrate with others in money markets, manufacturing, business practices,
technology, environmental protection, and many other areas. This
integration protects individual countries from localized economic threats.
On the other hand, economic integration dictates the global economy and
limits options for individual countries.
In the view of politicians, a global economy requires a global political
order that facilitates economic development. Global economic
considerations dictate national policy decisions in manufacturing, finance,
trade, investment, aid, and international negotiations of all types.
International agencies have a role in decisions on tax reform, copyright
issues, trans-border crimes, laundering money, and corruption. Hence,
economic integration enables small countries to protect themselves
politically and economically against pressure from bigger countries during
trading.
WTO began a new global negotiation round, known as the Doha round
or millennium negotiation, in November of 1999. The target of this
negotiation is broadening the market in areas such as industry, service,
agriculture, governmental purchasing, and lowering tariff barriers to trade.

60 東南亞硏究 22 권 3 호
When the millennium negotiation began, it became more difficult for
nations to join the WTO since the requirements for international trade in
the 21st century are more sharply defined. However, as a WTO member,
Vietnam always actively participates in negotiation to achieve desired
results in the Doha round even though progress is difficult to achieve.
In addition, globalization leads to extra competition in trade. The reduction
of tariff barriers has increased global competition. To develop more fully in
this new business environment, Vietnamese enterprises must reform non-stop,
improve technology, and adopt new practices such as building brand
recognition and value. These are powerful strategies for adapting as the
global economy continues to evolve. Government policies have an important
role to play in fostering the social and economic conditions that enable the
nation to execute these strategies.
Although a rich field of literature on the Vietnamese economy is
available, further studies are needed. Some studies concentrate on
Vietnam’s export (see Tien, 2008; Thai, 2006; Nguyen, 2010; Trang, Tam
and Nam, 2011) or the impact of ASEAN members on trade (see Heo and
Kien, 2009; Nguyen, 2010; Ruzita, Zarina and Norma, 2009; Kim, 2010).
However, no existing study reviews and highlights the aggregate impact of
regional and global integration on the national economy of Vietnam.
Hence, this paper will evaluate the impact of economic integration on
Vietnamese bilateral trade flows (by quantitative analysis using Fixed and
Random Effect Estimation with sample data from 53 countries within 15
years (1997-2011) following the gravity model (exports and imports are
analyzed separately). This method has a strong theoretical framework and
has been used in various studies (see Clarete, Emonds and Wallack, 2003;
Lee, Koo and Park, 2008; Heo and Doanh, 2009). Based on these analyses,
the paper will suggest some useful solutions for the Vietnamese
government to develop more fully and effectively in the rapidly developing

Impacts of Economic Integration on Vietnam’s Trade Flows 61

global economy.

II. Literature Review

One of the most useful empirical approaches in trade, especially liberal

trade is the gravity model. The model was first used by Tinbergen in 1962
based on the Newton’s law in physics, which equates the gravitational
attraction between two objects to the product of their masses divided by the
distance between them. The simplest form of gravity model in international
trade:

Fij = φ (Mi * Mj/Dij)

In which, Fij indicates the exports, imports or trade volume from country
i to country j, depend on author’s purpose. Mi and Mj are the economic
mass of each country, example: Gross Domestic Product (GDP) or GDP
per capital. Dij measures the distance between country i and country j; and
φ is a constant of proportionality. Since late 1970s, the gravity equation
has been improved in order to use for different purposes.
Carrere (2006) uses a gravity model to assess ex-post regional trade
agreements with 130 countries and panel data over the period 1962–1996.
His result mention that correct number of dummy variables allows for
identification of Vinerian trade creation and trade diversion effects, while
the estimation method takes into account the unobservable characteristics
of each pairs of trade partner countries, the endogeneity of some of the
explanatory variables as well as a potential selection bias. Results also
show that regional agreements have generated a significant increase in
trade between members, often at the expense of the rest of the world.

62 東南亞硏究 22 권 3 호
 Heo and Doanh (2009) examine the impacts of AFTA on trade flows in
Vietnam and Singapore. Their results show that both Vietnam’s and
Singapore’s trade with the rest of the world after joining AFTA has
increased faster than their trade with ASEAN countries. AFTA will not
lead trade increasing immediately because of dissimilarities in income level,
demand patterns, infrastructures and trade policies, but integration and
globalization will have enhanced communication, broken down cultural
barriers, and facilitated transactions. They also conclude that physical
distance have very important role in term of trade due to transport costs.
Language and ex-colonizers will be advantages in trade and GDP gaps
among members are negative impact on bilateral trade.
Trang, Tam and Nam (2011) evaluate changes of exports base on impact
factors by using Tobit estimate method with 61 Vietnam’s importing
partners from 2004 to 2008. As their result, economic growth of Vietnam,
population of importing countries, economic distance, increment of real
exchange rate value, free trade agreement and factor of sharing common
border (in land) have clearly positive impact on the export value of all
groups. In contrast, the geographical distance has negative impacts on all
groups. Basing on those results, three groups of solution to boost Vietnam’
export value are given: promoting supply of goods; adjusting Vietnam’s
exporting market; managing policy of exchange rate and international
cooperation.
Heo and Kien (2009), instead of using total trade data, they estimated the
impacts of AFTA on Korean trade flows with disaggregated sectorial data,
focus on analyzing the impacts of AFTA on Korean exports by using data
on Korean exports to ASEAN countries, using system GMM estimator.
They found that the impacts of AFTA dummy seem to differ substantially
across sectors. There are 5 out of 15 selected sectors which have negative
impacts on exports from Korea to ASEAN countries whereas the remaining

Impacts of Economic Integration on Vietnam’s Trade Flows 63

sectors have both negative and positive impacts but without statistical
significance. There is a sector which the estimated coefficient is positive
and statistically significant as well.
Since the gravity model was employed in economics, different extensions
have been suggested to the basic model to obtain more reliable estimates of
international trade flows. Nguyen (2010) in his paper, used gravity estimation
technique to investigate the determinants of Vietnamese exports performance
in a panel data framework. His results demonstrate that the gravitational
attraction between the local and destination economies, transport costs and
exchange rate are the important factors which affect the Vietnamese exports.
Besides, ASEAN membership seems also to have been linked to Vietnam’s
export flows, especially since it started to deepen its integration into the
regional economy. In addition, transport costs plays a significant part in
Vietnamese export performance. Higher transport costs hinder export
activities and conversely, reduced transport costs support Vietnamese exports.
However, the effect of transport costs on the Vietnamese exports tends to
decrease over time and his result implies that the government needs also to
pay adequate attention to destination markets with cheaper transport costs.
Thai (2006) finds out the factors influencing the level of trade between
Vietnam and twenty three European countries in OECD, and to evaluate
whether there are potentials for growth in trade between Vietnam and those
countries, in his paper. Using gravity model with panel data and random,
fixed effect estimation covering the period of twelve years from 1993 to
2004, his result indicate that the bilateral trade flows between Vietnam and
EC23 are driven by economic size, market size and exchange rate volatility.
However, distance and history seem to have no effect on bilateral trade
between Vietnam and EC23. He also mention that Evidence of a small but
significant negative effect of real exchange rate on bilateral trade between
Vietnam and EC23 confirms that exchange rate volatility does have impact

64 東南亞硏究 22 권 3 호
on trade. His result suggested that Vietnam needs to sign bilateral trade
agreement with individual country in EC23.
To determinate impacts of ASEAN membership to Cambodia’s trade
flows, Kim (2010) estimated two equations derived from the gravity model
using annual data from 1994 to 2004 with a sample of 20 main trading
countries of Cambodia, including Australia, Belgium, Canada, China,
Hong Kong (China), France, Germany, Ireland, Italy, Japan, Korea,
Malaysia, Netherlands, Singapore, Spain, Switzerland, Thailand, U.K, U.S
and Vietnam. The impacts of its own GDP appear to be at least 4 times as
great as those of the partners’ GDP. As expected in the gravity model, the
geographical indices are powerful in explaining the pattern of Cambodia’s
trade. Although ASEAN membership shows rather curious relationship
with trade in the whole period sample, the positive sign is detected while
the effect of sharing a borderline becomes insignificant. He also
recommends that the government of Cambodia may consider pursuing
bilateral trade or multilateral trade agreements within the region.
With the same way, Lee, Koo, and Park (2008) analyze the impacts of
FTAs on China, Japan, and Korea separately in terms of trade diversion.
They estimated the effects of regional trading blocs on exports of China,
Japan and Korea, with two different models of gravity equation: the static
gravity model and the dynamic partial adjustment model of bilateral trade.
As a result, a diversion effect is observed in small blocks such as BAFTA
(China, Japan and Korea), CACM (China), CAN (China), CEFTA (China
and Japan), CEMAC (China, Japan and Korea), CIS (Japan), COMESA
(Korea), EAEC (Japan), EFTA (China), GCC (China), MERCOSUR
(Japan), SAPTA (Japan), SPARTECA (China and Korea), and UEMOA
WAENU (Japan and Korea). Their empirical results show that Japan’s and
Korea’s fear of discrimination and trade diversion is baseless while China’s
fear is grounded only to a limited extent.

Impacts of Economic Integration on Vietnam’s Trade Flows 65

III. The Model

1. Model specification and hypotheses

To evaluate impacts of regional and global integration to Vietnamese

economy, especially liberal trade, gravity model is standard way. For more
meaning in evaluating impacts and implicating policies, author use two
different dependent variables with same model: Liberal exports and
imports.
Base on the original model, Tien (2008) in his paper classified
determination of trade flows in three main groups: factors impacting on
demand; factor impacting on supply, and trade - attractive and trade -
restrictive factors.
With factors impacting on demand and supply, income and population of
a country usually are the most suitable candidates. They represent for size
of all economies. Trade is expected to increase with economic size, since
large countries should trade more than small ones, and with per capita
incomes, since rich countries should trade more than poor ones. Hence, the
relationship of these variables and export and import were expected
positive.
Clarete, Emonds and Wallack (2003) estimated a gravity model of
bilateral trade involving 11 trading blocs most of which are from the Asian
and Pacific region, using the gravity model is that of 83 countries from
1980 to 2000. The estimated coefficients of the basic determinants of the
gravity model such as GDP, distance between capitals of trading partners,
population, and physical area explain well cross-country trade flows. Their
results explain that trade between two countries is positively correlated
with economic size and income. When income increases, people will buy
more luxuries products and will import more. Hence, author use GDP per

66 東南亞硏究 22 권 3 호
capita to capture impact of economic size and income in explanation of
trade flows and this variable is expected positive. We give the first
hypothesis: GDP per capita significantly influences to Vietnamese exports
and imports.

Distance and border between trading partners is very important role due to
transaction costs of goods. Since greater distance increases transaction costs.
Especially, same borders will reduce this cost to minimum. McCallum
(1995) investigates whether national borders matter for trade. He examined
trade patterns of Canadian provinces shows that borders matter because the
typical Canadian province trades 22 times more with other provinces than

Impacts of Economic Integration on Vietnam’s Trade Flows 67

with American states of a given size and distance. His result show that
whatever the reasons may be and whatever the future may hold, the fact that
even the relatively innocuous Canada-U.S. border continues to have a
decisive effect on continental trade patterns suggests that national borders in
general continue to matter. Actually, distance factor reflect the cost of
international transactions of goods and services and bring negative effects to
trade, according to Bougheas (1999), Clarete (2003) and Martinez-Zarzoso
(2003). Hence, we give the second and third hypothesis: Distance and border
between Vietnam and trading partners will significantly impact to Vietnam
export and import. We expect that the sign of the coefficient for distance
variable is negative and border is positive.
Most of empirical studies mention that population have deep impact to
trading process. A larger population of trading partners will lead a bigger
domestic market, higher potential customers. The positive effects of GDP
and population are found in Carrere (2006), Kien and Hashimoto (2005).
But in other hand, the bigger absorption effect of this domestic market
causes less reliance on international trade transactions, indicating a
negative impact on bilateral trade. The negative impacts of population in
both importing and exporting country is found in Martinez-Zarzoso and
Nowak-Lehmann (2003). With Vietnam case, all empirical studies such as
Tien (2008), Thai (2006), Trang, Tam and Nam (2011), shows positive
relationship of export with these factors. But no empirical studies about
Vietnam import. Hence, we give the fourth hypothesis: Population of
trading partners will significantly impact to Vietnam export and import.
We expected population variable will be positive.
With policy maker, exchange rate is a very important tool for controlling
trading process. Krugman and Obstfeld (2008) showed that depreciation of
domestic currency against foreign currencies will lead an increase in
domestic’s exports and reduce imports because price of export good in

68 東南亞硏究 22 권 3 호
international market will be cheaper but price of import good in domestic
become more expensive. Micco, Stein and Ordoñez (2003) evaluate impact
of common currency and exchange rate by using gravity model for 22
industrial countries of European Union with sample from 1992 to 2002.
Their result show that monetary union is of great importance factor, not
only for the current EMU members, but also for the rest of the EU. In
addition, exchange rate has significantly impact to bilateral trade. In here,
author introduces the real exchange rate as a control variable to capture the
relative price effects. Hence, the fifth hypothesis: Real exchange rate will
significantly impact to Vietnam export and import. We expected that this
variable will be positive with export and negative with import variable.
Heo and Kien (2009), Nguyen (2010), Ruzita, Zarina and Norma (2009),
Kim (2010) confirmed importance of ASEAN integration with their
member in their paper. Jayasinghe and Sarker (2007) show that regional
economic integration have deep impacts on trade in agrifood products.
Urata and Okabe (2007) showed that FTAs bring about trade creation
effect. Hence, we give the most important hypothesis: Economic
integrations have significantly influenced Vietnam’s trade flows. We test
hypothesis with four integrations namely ASEAN+3 (ASEAN, Japan,
South Korea, China), APEC, WTO and BTAs (Bilateral Trade Agreement).
We define ‘economic integration’ broadly enough to include any-lateral
trade agreements1.

1
International economic integration does not have a clear-cut meaning for all
economists. Pinder (1969) cities the Oxford Dictionary which described
integration as the combination of parts into a whole. Union is the outcome of the
combination of these parts or members. Kahnert (1969) understands integration as
a process of the progressive removal of discrimination that exists along national
borders. Maksimova (1976) argues that economic integration was a process of
developing deep and stable relationships about the division of labour between

Impacts of Economic Integration on Vietnam’s Trade Flows 69

 With above purpose, our augmented gravity model can be explained
following forms:

LnEXPORTit = β0 + β1lnEXit + β2lnGDPPCit + β3lnPOPit +

β4lnDISTi + β5BODERi + β6WTOit + β7APECit
+ β8ASEAN3it + β9BTAit + eit
LnIMPORTit = β0 + β1lnEXit + β2lnGDPPCit + β3lnPOPit +
β4lnDISTi + β5BODERi + β6WTOit + β7APECit +
β8ASEAN3it + β9BTAit + eit

EXPORTit is export of Vietnam to country i at the time t

IMPORTit is import of Vietnam from country i at the time t
EXit is the real exchange rate of countries i against Vietnam dong in year t
GDPPCit is the GDP per capita of country i at the time t
POPit is the population of country i at the time t.
DISTi is geographical distance, measures as the crow flies, between the
capital of Vietnam and the capital of country i.
BORDERi is the dummy variable that equals 1 if country i had same border with
Vietnam and 0 if not.
WTOit is the dummy variable that equals 1 if country i and Vietnam are

national economies. Steve (1998) mention that, any type of arrangement in which
countries agree to coordinate their trade, fiscal, and/or monetary policies is
referred to as economic integration. According to Investopedia Dictionary (2011),
economic integration means an economic arrangement between different regions
marked by the reduction or elimination of trade barriers and the coordination of
monetary and fiscal policies. The aim of economic integration is to reduce costs
for both consumers and producers, as well as to increase trade between the
countries taking part in the agreement. This definition was used in this paper.
Hence, WTO, FTAs, APEC and BTAs are considered as economic integrations.

70 東南亞硏究 22 권 3 호
members of the WTO simultaneously and 0 otherwise at time t.
APECit is the dummy variable that equals 1 if country i and Vietnam are
members of the APEC simultaneously and 0 otherwise at time t.
ASEAN3it is the dummy variable that equals 1 if country i and Vietnam are
members of the ASEAN+3 simultaneously and 0 otherwise at time t.
BTAit is the dummy variable that equals 1 if country i and Vietnam have
Bilateral Trade Agreement and 0 otherwise at time t.
eit is error terms.

2. Methodology

OLS is usually useful tool for analyzing cross-sectional data. But our
paper uses a panel data framework. The advantage of the panel data is that
time series and cross-section observations are combined to increase the
sample size, give more variability and reduce the multicollinearity among
variables. Impacts of independent variables to dependent variable could be
not same between countries and between each year. So, OLS estimate will
be biased.
To deal with this problem, Thai (2006), Lee, Koo and Park (2008), Heo
and Doanh (2009), Nguyen (2010), Kim (2010), Trang, Tam and Nam
(2011) and many other studies use Fixed and Random Effect estimations in
their analyses. They are appropriate models to controlling potential
correlation of explanatory variables with the unobserved effects. If
unobserved effects are uncorrelated with all the explanatory variables,
Random Effects estimation is better, while Fixed Effects estimation is more
appropriate in another case. The Hausman test (1978) was a good way to
suggest better model. And base on this test, Fixed Effects estimation is
more appropriate method (see appendix 2).
The Fixed Effects model allows for country-pair heterogeneity and gives

Impacts of Economic Integration on Vietnam’s Trade Flows 71

each country-pair its own intercept. This estimate can help us reduce
potential specification errors from omitting important variables. However,
there are some important time-invariant variables affecting on trading
process likely distance, border (McCallum, 1995). Using Fixed Effects
model, the regressions may suffer from an omitted variable problem and
consequently produce inconsistent and biased coefficients.
On other hand, the Random Effects model can be incorporate differences
between cross-sectional entities by allowing the intercept to change, as in
the fixed effects model, but the amount of change is random. The
advantage of random effects model is that both time-series and cross-
sectional variations are used.
Hence, we employ two techniques, including the fixed effects model and
random effects model, in which Fixed Effects is main method and Random
Effects is used as the benchmark and interpret time-invariant variables.

3. Data sources

Dependent variables, data on exports, imports were collected from

General Statistics Office of Vietnam, 2012 (GSO).
Explanatory variables, Data on GDP per capita (current dollar) and
population are taken from the World Development Indicators 2012, The
World Bank.
Data on geographical distance between Vietnam and trading partners are
obtained from the website of the Centre d’Etudes Prospectives et
d’Informations Internationales, 2012 (CEPII). It is noted that these
distances are geographic coordinates of the capital cities between countries.
Data on real exchange rate between U.S and other countries were
collected from the Economic Research Service of the US Department of
Agriculture, 2012 (USD currency). Date on real exchange rate between

72 東南亞硏究 22 권 3 호
Vietnam Dong (VND) and U.S was collected from General Statistics
Office of Vietnam, 2012. Then author made a transformation by
multiplying. In principle, author can use USD currency, but because of
US partner, all real exchange rates were transformed into VND. Data on
members of WTO, APEC and ASEAN+3 were taken from their
homepage. Data on bilateral trade agreements (BTA) were collected from
Vietnam Ministry of Planning and Investment, 2012.

Table 1: Summary statistics

Standard
Variable Observation Mean Minimum Maximum
Deviation
LnIMPORTit 795 4.28 2.28 -5.65 9.71
LnEXPORTit 795 4.50 1.93 -0.48 9.38
LnEXit 795 7.55 2.60 -0.23 12.01
LnGDPPCit 795 8.98 1.48 4.61 11.46
LnPOPit 795 17.10 1.44 13.50 21.01
LnDISTi 795 8.66 0.85 6.17 9.85
BODERi 795 0.06 0.23 0 1
WTOit 795 0.19 0.39 0 1
APECit 795 0.25 0.43 0 1
ASEAN3it 795 0.15 0.35 0 1
BTAit 795 0.58 0.49 0 1

IV. Empirical Results and Discussion.

Author estimates the gravity model for Vietnam over the period of 15
years, from 1997 through 2011 with other 53 trading partners (see appendix
1). Exports and imports are two dependent variables and analyzed
separately, but same independent variables.

Impacts of Economic Integration on Vietnam’s Trade Flows 73

 With the first hypothesis, the coefficients of GDP per capita variable
with both Vietnamese export and import variables in both estimation
methods all are significant at the 0.01 level. So we can conclude that
income has a very important role in the trading process. When income per
capita of trading partner increase 100 percent, Vietnam’s export will
increase 96.6 percent and Vietnam’s import will increase 84.9 percent.
Trading with high GDP-per-capita countries will bring Vietnam more
benefits. However, high income-per-capita is different from high-GDP
countries.
The analysis with random effect estimation confirms that the distance
between Vietnam and its trading partners has a significant negative impact
to Vietnamese export and import. 100 percent increase of distance will
reduce exports reduce 105.2 percent and reduce import 146.4 percent.
Border has a very important effect on exports, there is a 155.7 percent
increase, but there is no influence on import.
Population of trading partners has a significant positive impact on Vietnam
exports and imports. A larger population of trading partners will lead to a
larger domestic market and more potential customers. This result is entirely
in accordance with previous studies about Vietnam (see Tien, 2008; Thai,
2006; Trang, Tam and Nam, 2011).
Exchange rate, as expected, is a useful tool to reduce import. When the
exchange rate depreciates 100 percent, it will reduce total import by 17.2
percent. Exports do not have a significant exchange rate coefficient. This
result can be explained by the relationship between enterprises with
fluctuating exchange rates. According to the MPI report (2011), 80 percent of
input materials of export enterprises come from imports. So, when domestic
currency depreciates, the price of exports will be cheaper, but the cost price
will increase. Hence, to maintain benefits, enterprises must be increased in
price. As a result, nothing changes or maybe worse off. This policy will only

74 東南亞硏究 22 권 3 호
be appropriate if the country can self-control its input materials, for example
China.

Table 2: Regression results for pooled data with exports and imports
LnEXPORTit LnIMPORTit
Independen Fixed Effects Random Effects Fixed Effects Random Effects
t variables Estimation Estimation Estimation Estimation
t- z- t- z-
Coef. Coef. Coef. Coef.
statistic statistic statistic statistic
LnEXit -0.104 -1.33 -0.046 -1.09 -0.172c -1.91 -0.114c -1.89
a a a a
LnGDPPCit 0.966 12.93 1.10 18.06 0.849 9.83 1.064 13.64
a a a a
LnPOPit 5.59 9.88 0.799 10.67 8.09 12.37 0.999 8.93
a a
LnDISTi - - -1.052 -6.65 - - -1.464 -6.27

a
BODERi - - 1.557 2.96 - - 0.416 0.52
a a a a
WTOit 0.48 6.69 0.607 9.04 0.49 5.92 0.677 8.32
a a a a
APECit 0.484 5.50 0.777 9.44 0.492 4.84 0.92 9.32

ASEAN3it 0.073 0.39 0.475a 2.65 -0.123 -0.56 0.291 1.33

a a a a
BTAit 0.67 8.99 0.809 11.33 0.38 4.41 0.618 7.19
a a a a
Constant -99.61 -10.36 -10.51 -5.51 -140.8 -12.68 -9.607 -3.42

No. of obs. 795 795 795 795

R-Square 0.6882 0.7712 0.6314 0.6988

Note: a: Significant at the 0.01 level

b: Significant at the 0.05 level
c: Significant at the 0.1 level
Other: Not significant

Economic integration has a very important role in Vietnam trading.

Accessions always bring benefits to Vietnam’s economy, which lead to
greater trade and help developing Vietnam’s economy. Coefficients of
ASEAN+3 membership in both exports and imports with fixed random
estimation are not statistically significant. That means membership of
ASEAN+3 does not seem to be important when other relevant variables are

Impacts of Economic Integration on Vietnam’s Trade Flows 75

controlled and distance and border was removed. This result is consistent
with Heo and Doanh (2009), whose study examined the impacts of
ASEAN+3 on trade flows in Vietnam. Original ASEAN members includes
10 countries (except Singapore) have the same location and the same level of
development. Hence, comparative advantages, preferences, tastes, export and
import commodities of ASEAN members are relatively uniform. They tend
to trade with markets, such as U.S, EU, etc. Other members of ASEAN+3
have joined only one or two years ago, hence they need more time to adjust.
In addition, main trading partner of Vietnam in ASEAN is Singapore. Before
ASEAN integration, tariff of main trading commodities between Vietnam
and Singapore was low and tariffs between Singapore and other ASEAN
members also are very low. So, when Vietnam joins ASEAN, changes are
not much. In random effect estimation, when distance is covered, ASEAN+3
membership seems to have a positive impact on Vietnam’s trade flows.
APEC seems to bring more chances than ASEAN+3, although Vietnam
has a deeper integration with ASEAN. In reality, Vietnam and ASEAN
countries have same comparative advantage. This indicates that Vietnam
and other ASEAN countries export and import similar products. However,
APEC is different. It is a mix developing level. So, according to
Heckscher-Ohlin theory, Vietnam will have more chances to export labor-
intensive products and import more capital-intensive products. We hope,
with cooperation and FTA with Japan, Indian, China, South Korea and
Australia will bring more benefit to its members.
WTO showed that, this is not an easy playground. International market is
filled with fierce competition and challenges to Vietnamese enterprises.
Accessing the WTO is a very important step for Vietnam’s development
strategy and will have a significantly positive impact to Vietnamese trade
flows. BTAs also need to be considered seriously and developed extensively
because all regional and global integration are next steps and based on prior

76 東南亞硏究 22 권 3 호
bilateral cooperation. BTAs are the shortest way to increase bilateral trade
and easier to achieve though bilateral negotiation. So, the Vietnamese
government must make more efforts to establish newly effective BTAs.

V. Policy Implications

1. Exchange rate policy

The exchange rate is a very important tool for controlling the trading
process. Depreciation of domestic currency against foreign currencies will
theoretically cause an increase in domestic exports and a reduction in
imports because the price of export goods in the international market will
be cheaper, and the price of imported goods in the domestic market will
become more expensive.
Vietnamese policy makers have used the foreign exchange rate as a tool
to control the trading problem. They have often depreciated the exchange
rate with the goal of reducing trade deficit. But depreciating the exchange
rate does not really increase exports, but rather just reduces imports a bit.
In addition, depreciating the Vietnamese domestic currency causes many
problems, including currency dollarization, gold hoarding versus necessity
spending, and distrust of the domestic currency. Many Vietnamese firms
require payment in dollars to protect themselves from exchange rate
depreciation. And many Vietnamese find other investment channels to
protect their currency value such as buying gold or foreign currency or
assets. Although the interest rate for the dollar is very low, many people
prefer saving dollars over VND savings.
Currency depreciation policy must be replaced by other solutions to
make prices cheaper and to enlarge the export market. Technology

Impacts of Economic Integration on Vietnam’s Trade Flows 77

transfers and upgrades, training more highly skilled labor, greater focus on
R&D efforts, helping enterprises build their brands, helping enterprises
access new markets, all are superior strategies to simple currency
depreciation.

2. Adjusting Vietnam’s exporting destination and

improving social infrastructure

Distance negatively impacts Vietnamese trade flows in many foreign

markets. In the near term, the first priority must be given to nearby markets,
especially those in Asia. (Note that Japan, Korea, and China will always be
top priority Vietnamese markets in any case.)
In the long term, Vietnam needs to develop transportation systems and
infrastructure to facilitate export, especially for primary products which are
influenced most negatively by geographical distance. In addition, common
geographical borders are a big advantage for export. Hence, Vietnam must
focus upon the Cambodia and Laos markets, and most especially upon the
Chinese market. Common borders provide advantages such as short
distance, similarity of culture leading to similar demand for goods, close
neighbor relationships, and similar political priorities. These factors easily
remove barriers to Vietnamese trade, and make smooth export flow to
neighbor countries relatively simple.
Vietnam should focus on export markets with large populations, such as
the EU, the U.S, India, and China. Higher population means a bigger
market, and more potential customers will bring more chances for
Vietnamese exports.
Coefficient of GDP per capita of Vietnamese trading partners is
significantly positive. Vietnam should focus on exporting to markets with
high income per capita; specifically, countries which have high income per

78 東南亞硏究 22 권 3 호
capita and large populations. These markets bear more potential.

3. Improve investment environment and attract more

FDI

The FDI sector has played a major role in the high growth of Vietnamese
export-import turnover. Certain groups of exported items account for a
large portion of export turnover, such as textiles at 60.8% footwear at
72.7% electronics and computing equipment at 98.2%, and machinery,
equipment and spare parts at 87.7%. Also, certain groups of imported items
account for a large proportion of import turnover, such as electronics and
computing equipment at 73.1%, fabrics at 61.6%, and steel at 40.2%.
The investment environment in a country is a key factor in attracting FDI.
Urata and Mitsuyo (2009) performed research on this issue for the ASEAN
countries in March of 2009. Results of their research appear in the table
below:
These results indicate that the investment environment index for
Vietnam is 0.66, lower than the average for all ASEAN countries. The
Vietnamese government can and must take corrective action to improve the
investment environment and attract more FDI.

Impacts of Economic Integration on Vietnam’s Trade Flows 79

 The Vietnamese government should establish a separate government
organization for investment promotion in all provinces. The Department of
Planning and Investment is currently charged with promoting investment,
but the department is seriously overburdened, and is quite ineffective. This
new, discrete organization will focus on identifying and analyzing
investment opportunities with businesses in local areas. This will be very
useful for investors.
There is also a critical need to reform Vietnamese investment laws to
encourage foreign investment. Training and other guidance is also needed
for investment project officers in order to upgrade their management and
overall financial skill sets.

4. Strengthening accession and cooperation

Research shows that both bilateral and multilateral cooperation with

trading partner countries deliver huge benefits for the Vietnamese economy.

80 東南亞硏究 22 권 3 호
The Vietnamese government must cooperate with trading partner nations
sincerely and without reservation of any kind.
Vietnam must reform to meet WTO commitments. The goal is to
develop new trading partners and new markets. Since WTO is made up of
152 countries, there are 152 potential foreign trading partners. To date,
however, Vietnam only trades with 84 countries. A great deal of economic
potential is not utilized at the present time.
The Trans-Pacific Partnership, also known as the Trans-Pacific Strategic
Economic Partnership Agreement or TPP agreement, is a multilateral free
trade agreement that aims to integrate the economies of the Asia-Pacific
region. The original agreement between the countries of Brunei, Chile,
New Zealand and Singapore was signed on June 3, 2005, and entered into
force on May 28, 2006. Five additional countries, including Australia,
Malaysia, Peru, the United States, and Vietnam are currently negotiating to
join the group.
The objective of the original agreement was to eliminate 90 percent of
all tariffs between member countries by January 1, 2006, and to reduce all
trade tariffs to zero by the year 2015. TPP is a comprehensive agreement
covering all the components of a free trade agreement, including trade in
goods, rules of origin, trade remedies, sanitary and phytosanitary measures,
technical barriers to trade, trade in services, intellectual property,
government procurement, and competition policy.
Vietnam should fully engage in the TPP agreement to facilitate and
accelerate trading integration with member nations. TPP will provide
trading and economic benefits for Vietnam very similar to those provided
by APEC or WTO membership.
Vietnam lacks free trade agreements with individual countries around the
world. FTAs with the United States and with the European Union could
provide exponential growth for the Vietnamese economy. Vietnam must

Impacts of Economic Integration on Vietnam’s Trade Flows 81

work tirelessly and without reservation to establish FTAs with these vast and
wealthy potential trading partners.

5. Improve competitive advantage of domestic firms

Economic integration brings many benefits to the Vietnamese economy,

and it also poses challenges for Vietnamese enterprises. Lowering tariffs
and other trade barriers will stimulate Vietnamese exports, but also opens
local Vietnamese markets to stiff competition from foreign firms.
Improving domestic competitiveness is a vital priority for Vietnam. The
problem set includes the following items:
First, most Vietnamese firms do not have enough market information
because information channels are inadequate. Business plans are often
based on very limited experience and on personal feelings. Business plans
not founded on facts and solid experience can be ruinous for the enterprises
following them.
Second, approximately 90% of Vietnamese enterprises are small.
Vietnam lacks large, multinational firms such as Samsung and Hyundai,
and the country is generally unable to benefit from economies of scale in
commerce.
Third, most private companies in Vietnam operate on limited capital.
Capital shortages dictate that enterprises will not have enough money to
improve equipment and infrastructure. This in turn dictates that Vietnamese
companies will never be able to compete in areas where modern equipment
and techniques are required in order to be competitive.
Fourth, management capability in Vietnamese enterprises is very weak,
and labor skill levels are low. Human resources are a very important factor
for success in any company. Although significant numbers of Vietnamese
personnel have been trained in advanced countries to date, a great deal of

82 東南亞硏究 22 권 3 호
work remains to be done in this area.
Fifth, Vietnamese firms are burdened with an extremely high domestic
interest rate. In the first quarter of 2011 this was 17%. For comparison, the
Japanese rate for 2009 was 0.1%, the U.S. rate was 0.5%, and the South
Korean rate was 3% 2 . This is a key issue in the capital shortages
experienced by many Vietnamese firms.
Sixth, information on integration with trading partners is not available to
Vietnamese businesses. Vietnam is a member of the WTO, ASEAN+6,
APEC, and many other BTAs, but there is no web site or other central
information source to guide Vietnamese businesses so that they can
properly utilize these trade agreements.
In the present era of trade agreements and economic integration with
trading partners, Vietnamese firms must be prepared to change rapidly.
They must constantly update market information and seek new markets.
The Vietnamese government must make the business environment more
transparent, and must develop easily accessible, highly reliable business
information channels. Personnel training in advanced countries must be
expanded, and the government must provide financial support for
enterprises facing capital shortages and stiff foreign competition.

VI. Conclusion

Trade is an important necessity for economic development. No country

can be economically independent without continuous economic growth.
Rich countries can benefit by buying raw materials from countries with
developing economies. People can buy goods and services which are not

2
CIA World FaceBook, 2011

Impacts of Economic Integration on Vietnam’s Trade Flows 83

available in their own countries because of international trade. Economic
integration is a key for trade improvement.
This paper analyzes agreegate impacts of economic integration on
Vietnamese trade flows using Fixed and Random Effect Estimation with
sample data from 53 countries within 15 years (1997-2011) following the
gravity model. This method has a strong theoretical framework and has been
used in various studies (see Clarete, Emonds and Wallack, 2003; Lee, Koo
and Park, 2008; Heo and Doanh, 2009). As expected, GDP per capita and
population of trading partners provide a positive impact; distance has a
negative influence; border has a positive effect on Vietnamese exports; the
exchange rate is a good tool for reducing imports.
Membership of ASEAN+3 does not seem to be important at this time
when other relevant variables are controlled and distance and border was
removed. In random effect estimation, when distance is covered, ASEAN+3
membership seems to have a positive impact on Vietnam’s export. APEC
has very high positive impact to Vietnam’s trade flows. Accessing the
WTO is a very important step for Vietnam’s development strategy and will
have a significantly positive impact. BTAs also have high positive influence
and need to be considered seriously and developed extensively. In fact, BTAs
are the shortest way to increase bilateral trade and easier to achieve though
bilateral negotiation. In sum, economic integration is a major positive factor
in Vietnamese economic growth in recent years.
Key suggestions for improvements to the Vietnamese economy appear in
this paper. Changing policies for exchange rates, exports, FDI, and
business support will have a major positive effect. Even more important is
the need for domestic firms to reform business practices, upgrade
equipment and technologies, and improve management skills and corporate
cultures. Government must support domestic companies, especially with
information channels and macroeconomic stability. Finally, the Vietnamese

84 東南亞硏究 22 권 3 호
government must focus on developing global economic forces like
Samsung, LG, and Hyundai. The highly successful economy of South
Korea is a very good example for Vietnam..

Impacts of Economic Integration on Vietnam’s Trade Flows 85

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APPENDICIES

Appendix 1: List of countries for estimation

Starting point for available
Country
WTO APEC ASEAN BTA
Cambodia 2007 - 1999 1998
Indonesia 2007 1999 1995 1995
Laos - - 1997 -
Malaysia 2007 1999 1995 1993
Philippines 2007 1999 1995 -
Singapore 2007 1999 1995 1993
Thailand 2007 1999 1995 -
Taiwan 2007 1999 - -
Korea, Rep. 2007 1999 2007 -
Hong Kong
2007 1999 - -
SAR (China)
Japan 2007 1999 2009 -
China 2007 1999 2004 1992
India 2007 - - 2002
Iran - - - 1994
Saudi Arabia 2007 - - -
Poland 2007 - - 1991
Bulgaria 2007 - - -
Hungary 2007 - - 1992
Russian
- 1999 - -
Federation
Czech Rep. 2007 - - 1995
Slovakia 2007 - - 1995
Ukraine 2008 - - -
Denmark 2007 - - 2000
United
2007 - - 2000
Kingdom

Impacts of Economic Integration on Vietnam’s Trade Flows 89

 Norway 2007 - - -
Sweden 2007 - - 2000
Italy 2007 - - 2000
Spain 2007 - - 2000
Austria 2007 - - 2000
Germany 2007 - - 2000
Belgium 2007 - - 2000
Netherlands 2007 - - 2000
France 2007 - - 2000
Switzerland 2007 - - 2004
Canada 2007 1999 - 1996
United States 2007 1999 - 2000
Brazil 2007 - - -
Mexico 2007 1999 - -
South Africa 2007 - - 2000
New Zealand 2007 1999 - 1995
Australia 2007 1999 - 1991
Pakistan 2007 - - 2001
Cyprus 2007 - - 2004
Turkey 2007 - - 1998
Romania 2007 - - 1992
Ireland 2007 - - 2000
Finland 2007 - - 2000
Portugal 2007 - - 2000
Greece 2007 - - 1996
Argentina 2007 - - 1997
Chile 2007 1999 - 1994
Peru 2007 1999 - -
Myanmar 2007 - 1997 1994

90 東南亞硏究 22 권 3 호
Note:
1, Year of starting point is year of implementation.
2, Implementation of APEC started from year 1999 with Vietnam.
3, Implementation of AJFTA started from year 2009.
4, China counts 1 from 2004 because of program “Early Harvest”.
5, BTA only included bilateral trade agreements. Other agreements were
excluded.

Appendix 2: Result of Hausman test

Test Summary χ2 Statistic χ2 d.f P-value
Export model 70.96 7 0.00
Import model 123.41 7 0.000
Null Hypothesis: There is no misspecification for random effects model

Impacts of Economic Integration on Vietnam’s Trade Flows 91

92 東南亞硏究 22 권 3 호
 ABSTRACT

Impacts of Economic Integration

on Vietnam’s Trade Flows

Doan Quang Huy

(Thai Nguyen Univ. of Economics and
Business Administration, Vietnam)
Taikoo Chang
(Daegu Univ., Rep. of Korea, Corresponding Author)

All economies interested in economic integration, such as ASEAN, EU,

NAFTA, etc. Economy may better off or worse off due to economic
integration. For understanding whole picture of Vietnam economic
integration, the paper evaluates aggregate impacts of regional and global
integrations (WTO, APEC, ASEAN+3, BTAs) on Vietnamese bilateral
trade flows by quantitative analysis using Fixed and Random Effect
Estimation with sample data from 53 countries within 15 years (1997-
2011) following the gravity model (exports and imports are analyzed
separately). As a result, economic integration is a major positive factor in
Vietnamese economic growth in recent years. Bases on these analyses, this
paper suggests some useful solutions to Vietnam’s government. Vietnam
can and needs to follow the highly successful economic example of South
Korea.

Key Words : Vietnam, Economic Integration, Bilateral Trade

Agreement, Trade Flow, Gravity Model,

Impacts of Economic Integration on Vietnam’s Trade Flows 93

 ▸ 논문접수일 2012. 11. 08
▸ 논문심사일 2012. 12. 18
▸ 게재확정일 2013. 01. 08

94 東南亞硏究 22 권 3 호

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