International Economics: Individual Assignment

Name: Vuong Thi Quynh

Student ID: 11225596

Topic: Analyze the process of comparative advantage shifting in Vietnam based

on Hecksher- Ohlin theory.

The Heckscher-Ohlin model, as known as the H-O model, is a theoretical

framework based on David Ricardo's theory of comparative advantage. It is a
comprehensive equilibrium model in international trade theory and international
labor allocation used to predict which country has comparative advantage based on
the available production factors of that country. According to this theory, a
country's comparative advantage depends on its ability to own and efficiently
utilize production resources. Vietnam has applied the H-O theory in directing
national production and international trade. This report will analyze Vietnam's
process of shifting comparative advantage since US – Vietnam normalization.

This study concentrates on three periods: from 1986 to 1991; from 1991 to 1996
and from 1986 to the present.

Firstly, in 1986, Vietnam started its economic reforms, this period witnessed that
Vietnam’s economy still primarily relied on agriculture and mineral exploitation.
Meanwhile, Vietnam’s industrial factors were very week. This can be explained by
H-O model that Vietnam has a strong labor force; therefore, this country’s
comparative advantages are mainly relied on primary commodities such as
agriculture’s goods… Moreover, from 1986 to 1991, it was noticed that traditional
export markets in Eastern Europe was weakened, and FDI was almost non-existent
in Vietnam’s economy. Therefore, this country hasn’t showed its comparative
advantages on capital – intensive products.

During the period of 1991-1996, the new Law on Foreign Investment initiated in
1987 enabled a surge of the first wave of foreign direct investments (FDI) flowing
into Vietnam, Vietnam's economic structure had undergone a transition from
primarily relying on agriculture and mining to some simple manufacturing
industries with low technology and capital intensity, employing a large amount of
labor (such as textiles, footwear). Looking at the major exports of Vietnam (Table
3.2), it can be easily recognized that most of them are agricultural or mining
products like crude oil and rice (based on natural resources), and light
manufactured products like garments and leather products (mainly labor-intensive).

This was reflected in the shift of Vietnam's comparative advantage structure during
this period towards light industries or the shift in comparative advantages structure
from primary products towards labor- intensive manufacturing. Although the
proportion of agricultural and mining production decreased gradually, they still
maintained an important role in the economy as well as in the comparative
advantage structure.

From 2000 since then, Vietnam's economic structure has shifted towards higher-
value-added industries such as motorcycles, electronics, and electrical distribution
equipment. The proportion of export value of processed and manufactured
industrial products has grown from 53.6% of the total export turnover in 2010 to
85.2% in 2020. Meanwhile, the proportion of minerals and fuels products has
plunged sharply, from 11.2% in 2010 to 1% in 2020. The proportion of processed
and manufactured industrial products has gone up mainly due to the rise in export
turnover of phones and components, while the proportion of light industrial
products and handicrafts fell. Although the proportion of agriculture and mining
has gradually decreased, Vietnam’s comparative advantage is still largely based on
country endowment of labor and natural resources labor-intensive and .

In conclusion, the analysis of Vietnam's economic trajectory through the lens of the
Heckscher-Ohlin (H-O) model reveals a significant evolution in its comparative
advantage structure since the normalization of relations with the United States.
Despite these shifts, Vietnam's comparative advantage remains rooted in its
abundant labor force and natural resources.