Trade and Investment Effects of Free Trade Agreements

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thesis.
Trade and Investment Effects of Free Trade Agreements: The
Case of Vietnam
A thesis
submitted in fulfilment
of the requirements for the degree
of
Doctor of Philosophy in Economics
at
The University of Waikato
by
MY THI DIEU DUONG
May 2020
Abstract
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
ii
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.
iii
Notes of Publications
The following papers from this thesis have been published, submitted to a journal,
presented at a conference, or prepared for journal submission.
Chapter 2 is published as:

Duong, M., Holmes, M. J., Strutt, A., & Lim, S. (2019). Effects of trade agreements
and foreign direct investment on trade: Evidence from Vietnam. International
Journal of Economics and Financial Issues, 9(3), 116-126.
Chapter 3 is published as:

Duong, M., Holmes, M. J., & Strutt, A. (2020). The impact of free trade agreements
on FDI inflows: the case of Vietnam. Journal of the Asia Pacific Economy, 1-23.
doi:10.1080/13547860.2020.1765717
Chapter 4 has been prepared for journal submission:

Duong, M., Strutt, A. (2019). Trade and investment effects of the EU-Vietnam free
trade agreement.
Chapter 5 was presented at the EAEA conference and has been prepared for
journal submission:
Duong, M., Strutt, A. (2018). Impacts of the Regional Comprehensive Economic
Partnership on Vietnamese trade and investment. Presented at the 16th International
Convention of the East Asian Economic Association (EAEA), 27-28 October 2018,
Taipei, Taiwan.
iv
Acknowledgements
This thesis represents my individual effort with the assistance and encouragement
from many people and organisations that I would like to thank. First of all, I am
grateful to my mother, Nguyen Thi Dieu Trang, who took care of my daughter with
infinite love and patience during my long PhD journey. She made me feel assured
that my daughter would be fine during my absence so that I could focus on my
studies. I am indebted to my daughter Hoang Minh Chau for not being by her side
in her early important years and thankful to her for becoming a happy little girl in
her first term of primary school. To my husband Hoang Gia Hung, thank you for
encouraging me to pursue this PhD study. I also wish to thank my dear father,
parents-in-law and brothers for their love and support.
I am honoured to have been supervised by Professor Anna Strutt, Professor Mark J.

Holmes and Dr. Steven Lim. I would like to thank all of my respected supervisors
for giving me generous guidance, patiently read a variety of drafts, and helped me
improve academic writing skills. Furthermore, I would like to convey my deep
gratitude to my chief supervisor, Professor Anna Strutt, who introduced GTAP
modelling to me, helped me work more professionally, and continuously supported
me during this PhD, with great patience, valuable advice, comments, and
suggestions. Her networks also contributed significantly to this thesis. I would also
like to express my special thanks to Professor Mark J. Holmes for his excellent
comments and suggestions relating to econometrics, which guided my thought and
encouraged me to get to know about different econometric techniques. I particularly
thank Terrie Walmsley from ImpactECON for very insightful discussions on
modelling FDI and analysing investment results, which helped me improve the
quality of my CGE papers. Thanks also go to Alex Kravchenko from UNESCAP
for providing an early release of his new database of goods non-tariff measures.
I am grateful to staff at the School of Accounting, Finance and Economics for their
enthusiastic assistance, especially Maria Neal, Denise Martin, and Amanda
Sircombe. A big thank you goes to Clive Wilkinson for his helpful guidance in
formatting this thesis.
v
I would like to acknowledge the Vietnamese Ministry of Education and Training
which provided me with the Doctoral Scholarship to complete this PhD research. I
am thankful to Hoang Thi Kim Oanh for her administrative assistance with my
scholarship. I would also like to express my gratitude to staff and my colleagues at
the Hue College of Economics-Hue University for their encouragement.
vi
Table of Contents
Abstract ................................................................................................................... ii
Notes of Publications ............................................................................................. iv
Acknowledgements ................................................................................................. v
Table of Contents .................................................................................................. vii
List of Tables........................................................................................................... x
List of Figures ....................................................................................................... xii
Abbreviations ....................................................................................................... xiii
1 Chapter 1: Introduction ................................................................................... 1
1.1 Overview .................................................................................................. 1

1.2 Background and Research Questions ....................................................... 4
1.3 Summary of Objectives of the Thesis ...................................................... 9
1.4 Methodological Techniques ................................................................... 10
1.5 Contributions of the Thesis .................................................................... 11
1.6 Thesis Outline......................................................................................... 13
References ......................................................................................................... 15
2 Chapter 2: Effects of Trade Agreements and Foreign Direct Investment on
Trade: Evidence from Vietnam ............................................................................. 21
2.1 Introduction ............................................................................................ 21

2.2 Trade Liberalisation, FDI and Trade in Vietnam ................................... 23
2.2.1 Trade Liberalisation and Trade ....................................................... 23
2.2.2 FDI and Trade ................................................................................. 26
2.3 Previous Studies ..................................................................................... 29
2.3.1 Trade Liberalisation and Trade Flows ............................................ 29
2.3.2 FDI and Trade ................................................................................. 31
2.4 Model Specification, Data and Methodology......................................... 32
2.4.1 Gravity Model and Model Specification ......................................... 33
2.4.2 Data ................................................................................................. 35
2.4.3 Methodology ................................................................................... 36
2.5 Empirical Results ................................................................................... 37
2.5.1 Impacts of Trade Agreements and FDI on Trade............................ 37
2.5.2 Trade-FDI Relationship Following Particular Trade Agreements .. 41
2.6 Conclusion .............................................................................................. 44
vii
References ......................................................................................................... 46
Chapter Appendix ............................................................................................. 51
3 Chapter 3: The Impact of Free Trade Agreements on FDI Inflows: The Case
of Vietnam ............................................................................................................. 52
3.1 Introduction ............................................................................................ 52

3.2 Trends and Patterns of FDI in Vietnam .................................................. 55
3.3 Theoretical Framework .......................................................................... 58
3.5 Model Specification, Data and Methodology......................................... 63
3.5.1 Model Specification ........................................................................ 63
3.5.2 Data ................................................................................................. 65
3.5.3 Methodology ................................................................................... 67
3.6 Empirical Results ................................................................................... 68
3.7 Conclusion and Recommendations ........................................................ 73
References ......................................................................................................... 75
4 Chapter 4. Trade and Investment Effects of the EU-Vietnam Free Trade
Agreement ............................................................................................................. 80
4.1 Introduction ............................................................................................ 80

4.3 Trade and Investment between the EU and Vietnam ............................. 84
4.3.1 Vietnam’s Trade with the EU ......................................................... 84
4.3.2 EU’s Investment in Vietnam ........................................................... 88
4.4 Modelling Framework and Scenarios ..................................................... 89
4.4.1 Model and Database ........................................................................ 89
4.4.2 Scenarios ......................................................................................... 90
4.4.2.1 Tariffs .......................................................................................... 91
4.4.2.2 Non-tariff Measures .................................................................... 93
4.4.2.3 Trade Facilitation ........................................................................ 95
4.4.2.4 Investment Liberalisation ............................................................ 96
4.5 Simulated Results of the EVFTA ........................................................... 96
4.5.1 Macroeconomic Impacts ................................................................. 96
4.5.1.1 Real GDP ..................................................................................... 96
4.5.1.2 Investment Effects ....................................................................... 97
4.5.1.3 Aggregate Exports and Imports ................................................. 100
4.5.2 Sectoral Impacts ............................................................................ 101
4.6 Conclusion ............................................................................................ 103
viii
References ....................................................................................................... 105
Chapter Appendix ........................................................................................... 108
5 Chapter 5: Impacts of the Regional Comprehensive Economic Partnership on
Vietnamese Trade and Investment ...................................................................... 114
5.1 Introduction .......................................................................................... 114

5.2 Review of Existing Studies .................................................................. 116
5.3 Modelling Framework and Scenarios ................................................... 120
5.3.1 Model and Baseline Scenario ........................................................ 120
5.3.2 Scenarios Modelled ....................................................................... 122
5.3.2.1 Tariffs ........................................................................................ 123
5.3.2.2 Non-tariff Measures .................................................................. 124
5.3.2.3 Investment Barriers ................................................................... 125
5.4 Potential Impacts of RCEP ................................................................... 128
5.4.1 Real GDP ...................................................................................... 128
5.4.2 Trade Effects ................................................................................. 130
5.4.2.1 Aggregated Levels ..................................................................... 130
5.4.2.2 Sectoral Levels .......................................................................... 130
5.4.3 Investment Effect .......................................................................... 133
5.5 Conclusion ............................................................................................ 138
References ....................................................................................................... 140
Chapter Appendix ........................................................................................... 145
6 Chapter 6: Conclusions ............................................................................... 154
6.1 Main Findings and Policy Implications ................................................ 155

6.2 Limitations and Future Research .......................................................... 159
Thesis Appendix ................................................................................................. 163
ix
List of Tables
Table 2.1: Estimation Results from Gravity Models (Random Effects) ............... 39
Table 2.2: Regression Results with Multiplicative Dummies (Random Effects) . 43
Table 2.3: Global Competitiveness Index Rankings ............................................. 51
Table 2.4: Exports from ASEAN-5 to China ........................................................ 51
Table 3.1: Vietnam's RTAs Entering into Force as of April 2019 ........................ 55
Table 3.2: Sources of Vietnam's Inward FDI (%) ................................................. 57
Table 3.3: Shares of FDI Flows into Vietnam by Sectors (%) ............................. 58
Table 3.4: Estimation Results for FDI Inflows to Vietnam, 1997-2016 ............... 70
Table 3.5: Estimation Results for FDI Inflows to Vietnam, 2005-2016 ............... 73
Table 4.1: Vietnam's Top 10 Trade Products with the EU (million US$ and %),
2005 and 2017 ....................................................................................................... 87
Table 4.2: Accumulation of Projects by Top 10 EU Member States as of 31/12/2017
............................................................................................................................... 89
Table 4.3: Policy Scenarios ................................................................................... 91
Table 4.4: Tariff Rates Imposed by Vietnam and the EU (%) .............................. 93
Table 4.5: Changes in the Short-run Current Rate of Return, Rental Price of Capital
and Price of Capital Goods in Vietnam (%).......................................................... 99
Table 4.6: Changes in the Long-run Current Rate of Return, Rental Price of Capital
and Price of Capital Goods in Vietnam (%)........................................................ 100
Table 4.7: Changes in Total Real Exports, Imports, and Bilateral Trade (% and
million US$) ........................................................................................................ 101
Table 4.8: Changes in Vietnam's Real Exports and Imports by Sector (% and million
US$) .................................................................................................................... 102
Table 4.9: Changes in Vietnam's Sectoral Output (% and million US$) ............ 103
Table 4.10: Regional Aggregation ...................................................................... 108
Table 4.11: Sectoral Aggregation ....................................................................... 109
Table 4.12: Ad-valorem Equivalents of Goods Non-tariff Barriers Imposed by
Vietnam (EU) on EU (Vietnamese) Products (%) .............................................. 110
Table 4.13: Ad-valorem Equivalents of Services Barriers in Vietnam and EU
Member States (%) .............................................................................................. 111
Table 4.14: Time to Import, Vietnam and the EU Member States ..................... 112
x
Table 4.15: Changes in Real Exports and Imports by All Sectors Modelled (million
US$ and %) ......................................................................................................... 113
Table 5.1: Policy Scenarios ................................................................................. 122
Table 5.2: Tariff Rates Imposed by Vietnam (Other RCEP Partners) on Imports
from Other RCEP Partners (Vietnam) (%), 2020 ............................................... 124
Table 5.3: Changes in Vietnam’s FDI Stocks, Capital Stocks, and Equivalent Tax
on Capital (%), with Full Removal of FDI Barriers, 2017 ................................. 128
Table 5.4: Changes in Real GDP of RCEP Members (% and million US$), 2020
............................................................................................................................. 129
Table 5.5: Changes in Total Real Exports, Imports and Bilateral Trade (% and
million US$), 2020 .............................................................................................. 130
Table 5.6: Changes in Vietnam's Real Exports and Imports by Sectors (% and
million US$), 2020 .............................................................................................. 132
Table 5.7: Changes in the Current Rate of Return, Rental Price of Capital, and Price
of Capital Good in the Short-run (%), 2020 ........................................................ 134
Table 5.8: Changes in Long-run Capital Stocks (%) and Trade Balances (million
US$), 2020 .......................................................................................................... 135
of Capital Goods in the Long-run (%), 2020 ...................................................... 137
Table 5.10: Annual Growth Rates of GDP, Population, and Labour Force (%),
2014-2020 ........................................................................................................... 145
Table 5.11: Regional Aggregation ...................................................................... 146
Table 5.12: Sectoral Aggregation ....................................................................... 147
Table 5.13: Ad-valorem Equivalents of Services Barriers in the RCEP Region (%)
............................................................................................................................. 148
Table 5.14: Shares of RCEP FDI Stocks in Total FDI Stocks of Each RCEP
Member (%), 2017 .............................................................................................. 149
Table 5.15: FDI Index, RCEP Members, 2017 ................................................... 150
Table 5.16: Changes in FDI Stocks by Sectors (%), with Full Removal of FDI
Barriers, RCEP Members, 2017 .......................................................................... 151
Table 5.17: Ratios of FDI Stocks to Capital Stocks, RCEP Members, 2017 ..... 152
Table 5.18: Changes in Capital Stocks by Sector (%), with Full Removal of FDI
Barriers, RCEP Member, 2017 ........................................................................... 153
xi
List of Figures
Figure 2.1: Vietnam's Total Exports and Imports, 1995-2017 (US$ billion) ....... 25
Figure 2.2: Total FDI Inflows to Vietnam, 1990-2017 (US$ billion)................... 26
Figure 2.3: FDI Inflows to Vietnam, Share by Source Country, 1988-2017 (%) . 27
Figure 2.4: FDI Inflow Shares to Different Regions in Vietnam, 1988-2017 (%) 28
Figure 2.5: Foreign Invested Sector's Shares of Total Exports and Imports in
Vietnam, 1995-2017 (%)....................................................................................... 29
Figure 3.1: Annual FDI Inflows to Vietnam, 1990-2017 (US$ million) .............. 56
Figure 4.1: Vietnam's Exports to the EU (billion US$ and %) ............................. 84
Figure 4.2: Vietnam's Imports from the EU (billion US$ and %) ........................ 85
Figure 4.3: FDI Flows to Vietnam by Source Country (%), 2000-2017............... 88
Figure 4.4: Changes in Vietnam's Real GDP Due to Liberalising Components of
the EVFTA (%) ..................................................................................................... 97
Figure 4.5: Changes in Vietnam's Capital Stock due to Liberalising Components of
the EVFTA (%) ..................................................................................................... 98
Figure 5.1: Changes in Vietnam's Real GDP by Liberalisation Components (%),
2020 ..................................................................................................................... 129
Figure 5.2: Changes in Vietnam's Capital Stocks by Liberalising Components (%),
2020 ..................................................................................................................... 136
xii
Abbreviations
AFTA ASEAN Free Trade Area
ASEAN Association of Southeast Asian Nations
ACCECA ASEAN-China Comprehensive Economic Cooperation Agreement
AJCEP ASEAN-Japan Comprehensive Economic Partnership
AKCECA ASEAN-Korea Comprehensive Economic Cooperation Agreement
AVEs Ad Valorem Equivalents
CEPII Centre d'Études Prospectives et d'Informations Internationales
CGE Computable General Equilibrium
CPI Consumer Price Index
CPTPP Comprehensive and Progressive Agreement for Trans-Pacific
EU European union
EVFTA EU-Vietnam FTA
FDI Foreign Direct Investment
FE Fixed Effects
FTA Free Trade Agreement
GDP Gross Domestic Product
GMM Generalised Method of Moments
GSO General Statistics Office of Vietnam
GTAP Global Trade Analysis Project
H-O Heckscher-Ohlin
IMF International Monetary Fund
JVEPA Japan-Vietnam Economic Partnership Agreement
MNEs Multinational Enterprises
NTMs Non-tariff Measures
OECD The Organisation for Economic Co-operation and Development
OLI Ownership, Location, and Internalisation
OLS Ordinary Least Squares
PTAs Preferential Trade Agreements (PTAs)
RCEP Regional Comprehensive Economic Partnership
RE Random Effects
RTA Regional Trade Agreement
SPS Sanitary and Phytosanitary
xiii
TBT Technical Barriers to Trade
TPP Trans-Pacific Partnership
TRQs Tariff Rate Quotas
UK United Kingdom
UNCTAD United Nations Conference on Trade and Development
US The United States
WDIs World Development Indicators
WTO World Trade Organisation
xiv
1 Chapter 1: Introduction
1.1 Overview
Regional trade agreements (RTAs) are defined as reciprocal trade agreements

between two or more partners including customs unions and free trade agreements
(FTAs), with a significant dominance of the latter (WTO, 2019). Between the 1960s
and 1980s, RTAs were trivial in number, but there has been an increasing quantity
of RTAs since 1990. In particular, 63 RTAs in goods entered into force over the
2000-2005 period, compared with 53 RTAs for the 1990-1999 period (Crawford &
Fiorentino, 2005). The suspension in 2006 of the Doha Round, a multilateral trade
agreement between WTO members, seems to have accelerated further RTA
negotiations among countries, including Vietnam. In 2015, 265 RTAs were notified
and in force, with 137 liberalising trade in goods, 1 liberalising trade in services,
and the remaining 127 liberalising both goods and services (Acharya, 2016). As of
January 2019, 291 RTAs were in force, with at least one for each WTO member as
of June 2016 (WTO, 2019). By December 2015, more than half of RTAs covered
investment provisions with different scope and coverage (Chornyi, Nerushay, &
Crawford, 2016) and by January 2019, RTAs covered over half of international
trade (OECD, 2019).
A country enters into a RTA largely due to the expectation of increases in intra-
regional trade, members’ welfare (Pant & Paul, 2018), and inward foreign direct
investment (FDI) flows (Blomstrom & Kokko, 1997; Medvedev, 2012). In the long
run, the integration is expected to increase growth rates of members thanks to
greater market access, improved competition capacity, better resource allocation
and positive externalities (Blomstrom & Kokko, 1997). Therefore, the academic
literature has keenly explored the impact of RTAs on trade and FDI flows.
Regarding the relationship between RTAs and trade flows, there is still no firm
conclusion on whether RTAs create more trade than they divert (Lee & Park, 2005).
The concepts of trade creation and trade diversion were developed in the Custom
Union Issue by Viner (2014) which was first published in 1950. Trade creation
occurs when higher-cost domestic production of an FTA member is replaced with
1
lower-cost imports from other members. Trade diversion takes place when an FTA
member diverts its trade activities from non-members to other FTA members due
to tariff reductions. Viner (2014) suggests that the dominance of trade creation or
trade diversion effects will determine whether a RTA improves or reduces welfare.
Bhagwati and Panagariya (1996) indicate that the creation of a preferential trading
agreements (PTA) results in larger trade among members, but also fear that that
PTAs may result in trade diversion.
There has been a variety of empirical studies examining the trade impact of RTAs
in which both trade creation and trade diversion are reported. Based on the findings,
existing studies can be categorised into three groups. Firstly, empirical studies
analysing the impact of overall FTAs for a large sample of countries such as Baier
and Bergstrand (2007), Lee and Park (2007), and Foster (2012) and those focusing
on a particular FTA, including García, Pabsdorf, and Herrera (2013), Clausing
(2001), Hassan (2001), and Sheng, Tang, and Xu (2014), report empirical evidence
of trade creation. Secondly, there is evidence of both trade creation and trade
diversion in empirical studies on multiple FTAs (Carrere, 2006; Kahouli & Maktouf,
2014). In particular, RTAs result in an increase in intra-regional trade, benefiting
RTA members at the cost of the rest of the world. Thirdly, examining the impacts
of various FTAs a particular country has made on its trade flows, some trade
agreements are found to have positive effects, while others have negative or no
impacts (Busse & Gröning, 2012; Ullah & Inaba, 2012). Thus, for a specific country,
it is likely that some types of trade agreements work better than others in terms of
expanding trade for a specific country.
With regard to investment effects of FTAs, there has not been a theoretical
consensus on this issue. The main reason is that there are a variety of mechanisms
through which FTAs can have impacts on FDI flows such as patterns of FDI, the
investment provision of FTAs, sources of FDI, and the locational advantages of
host countries, which may move in diverse directions. Several empirical studies
have focused on investigating the linkage between FTAs and FDI flows and a
definite conclusion has not been reached in the literature. Particularly, for multiple
FTA studies, a group of studies by Yeyati, Stein, and Daude (2003), Medvedev
(2012), Feils and Rahman (2011), and Thangavelu and Narjoko (2014) report that
2
FTAs lead to increased FDI flows. In contrast, other studies by Lederman, Maloney,
and Serven (2003), Ullah and Inaba (2014), Dee and Gali (2003), and Jang (2011)
show empirical evidence that FTAs can have no impact or lead to a decline in FDI
flows. In terms of case studies, those focusing on a particular FTA show empirical
evidence that the FTA is associated with increases in members’ FDI flows (Feils &
Rahman, 2008; Li, Scollay, & Maani, 2016; Lim, 2001; MacDermott, 2007;
Waldkirch, 2003). In addition, overall FTAs a particular country has engaged in can
have a positive (Crotti, Cavoli, & Wilson, 2010) or negative (Bae & Jang, 2013)
impact on its FDI inflows.
The existing literature is characterised by a relative scarcity of studies exploring

trade and investment effects of RTAs for a particular country. This pinpoints the
importance of conducting more country-specific studies, especially for developing
countries, to better understand the benefits of RTAs in terms of enhanced trade and
FDI flows. Moreover, FTAs over time have progressed toward deep and
comprehensive FTAs. Modern FTAs include traditional commitments of increased
market access for goods and services, provisions on rules of origin and trade
remedies such as anti-dumping, countervailing and safeguards (Acharya, 2016).
However, they may also cover more sophisticated and new content in terms of
investment provisions, electronic commerce, government procurement,
competition, state-owned enterprises, intellectual property, labour movement, and
environment. This new generation of FTAs has recently become an area of focus
for both researchers and policymakers. For instance, the Trans-Pacific Partnership
(TPP) and its successor, the Comprehensive and Progressive Agreement for Trans-
Pacific Partnership (CPTPP), are found to have substantial impacts on trade and
investment of its members (Minor, Walmsley, & Strutt, 2016; Petri & Plummer,
2016; Petri, Plummer, & Zhai, 2012; USITC, 2016; Walmsley, Strutt, Minor, &
Rae, 2018).
Looking into the context of RTAs for Vietnam leads to a general question that needs
to be addressed: How do the RTAs that Vietnam has entered into impact on its trade
and investment? This thesis aims to answer this broad question, taking into account
both Vietnam’s RTAs that have entered into force and those Vietnam has more
recently become involved in. Based on econometric and CGE modelling, this thesis
3
attempts to provide a broad picture of the trade and investment effects of RTAs for
Vietnam.
1.2 Background and Research Questions
The Vietnam War ended in 1975 and after the reunification of the country in 1976,
Vietnam focused on building the economy based on a state-centred development
strategy. However, the economy stagnated under the centrally planned system,
leading to a widespread food shortage, with poverty levels above 70% (UNCTAD,
2008). Therefore, at the sixth Party Congress in 1986, the Vietnamese Government
launched the “Doi Moi” (Renovation) Policy, shifting from a centrally planned to a
market-oriented economy. Over the last three decades, Vietnam has received
significant achievements. For instance, the poverty rate in the early 1990s of 58%
had substantially reduced to only 14.5% by 2008, 14.2% by 2010 (World Bank,
2012), and 9.8% by 2016 (Pimhidzai, 2018). The average rate of Vietnam’s GDP
growth was 6.5% in the 1986-2017 period.1 Over the same period, foreign trade
growth averaged 18%.2
Since the beginning of the “Doi Moi” policy, Vietnam has pursued an export-led
growth strategy in which trade, FDI, and trade liberalisation have been promoted.
One of the most significant reforms in Vietnam’s trade policy was the abolition of
state-owned enterprises’ monopoly in foreign trade in the late 1990s, allowing all
enterprises to trade (Vo, 2005). To further support enterprises’ trading activities,
foreign exchange management was relaxed, with the foreign exchange surrender
rate decreasing from 50% in 1999 to 0% in 2003 for all economic entities (Vo &
Nguyen, 2011).3 Other major trade policy reforms relate to tariffs and quotas. More
specifically, the tariff system for exports and imports has been revised to be simpler
and more consistent since 1992 and used to protect domestic production and
promote trade. For instance, imports of intermediate inputs that can be domestically
produced face relatively high tariffs in Vietnam (Nguyen & Ezaki, 2005; To & Lee,
2015), while imported goods used in export production have been subject to tariff
1
Calculated from World Development Indicators, accessed at https://data.worldbank.org/
2
Calculated from the database of Vietnam’s General Statistics Office, accessed at www.gso.gov.vn
3
A foreign exchange surrender requirement relates to the selling of foreign exchange within a certain
period of time.
4
exemption (Chaponnière & Cling, 2009; Vo, 2005). With respect to quotas,
Vietnam’s quantitative controls on most imported goods have largely been removed
since 2001, with the exception of eggs, sugar, tobacco, and salt.
In addition, FDI attraction has been a critical focus of the Vietnamese reform
process since the mid-1980s. The Law on Foreign Investment was first promulgated
in 1987 with three forms of investment including business corporate contract, joint
ventures, and 100% foreign-invested enterprises. Since then it has been revised
several times in 1990, 1992, 1996, 2000, and 2005. Amendments such as
improvements in FDI management procedures, reductions in profit transmittal tax
rates (Leproux & Brooks, 2004), and increases in foreign participation in some
industries have aimed at generating an attractive investment climate for inward FDI.
Together with unilateral reforms, Vietnam has accelerated its trade liberalisation
process. The “Doi Moi” has integrated Vietnam into the world economy. Vietnam
became a member of ASEAN in 1995 and APEC in 1998. Vietnam’s entry into the
Vietnam-US bilateral trade agreement in 2002 was considered as a milestone for
trade liberalisation. The commitments of reform following the agreement were
critical to Vietnam’s negotiation process to become a WTO member. Vietnam’s
accession to the WTO in 2007 after 11 years of negotiation was a breakthrough in
Vietnam’s trade policy, marking Vietnam’s commitment to a multilateral trading
system (Nguyen, 2016). More importantly, Vietnam has engaged in deeper trade
liberalisation through its participation into a variety of bilateral and RTAs. Vietnam
became a member of the ASEAN free trade area (AFTA) in 1996. Between 2005
and 2010, ASEAN had five FTAs entering into force with China, Korea, Japan,
India, New Zealand and Australia. ASEAN’s sixth FTA with an external partner,
the ASEAN-Hong Kong FTA, was signed in November 2017.4 Vietnam has signed
bilateral FTAs with Japan (2008), Chile (2011), Korea (2015), and the EU (2019).
Recent FTAs entering into force include the Vietnam-Eurasian Economic Union
(2016) and the CPTPP. Three FTAs including the Regional Comprehensive
Economic Partnership (RCEP), Vietnam-Israel, and European Free Trade
Association (EFTA)-Vietnam have not been signed yet.
4
https://asean.org/
5
It has also been observed that increased trade and FDI inflows to Vietnam are
accompanied by Vietnam’s involvement in bilateral and RTAs. However, economic
integration through trade agreements and reforms in other areas were
simultaneously implemented during the last three decades (To, 2018). This
motivates me to ask the first and second specific research questions:
Research Question 1: How have trade liberalisation agreements and FDI promoted
Vietnamese exports and imports?
This thesis addresses this question in Chapter 2 by evaluating the impact of trade
liberalisation agreements and FDI on Vietnam’s exports and imports, based on
panel data for Vietnam and its main trading partners over a 1996-2014 study period.
With an application of gravity models, the degree to which various trade agreements
have enhanced the impact on Vietnamese trade flows from inward FDI flows is
examined. Specifically, this study reveals which of the trade agreements has been
more efficient in terms of expanding Vietnamese exports and imports. In addition,
the question of whether Vietnamese trade becomes more sensitive to FDI following
the trade agreements is also addressed. In other words, how particular FTAs impact
trade flows through interaction terms with FDI is also explored.
Research Question 2: How do free trade agreements impact on Vietnam’s inward

FDI flows?
This research question is addressed in Chapter 3 of this thesis where the linkage
between FTAs and FDI is investigated with gravity models. Panel data for
Vietnam’s 17 main foreign investors over the period 1997-2016 and 23 partners for
the sub-period 2005-2016 are used. The inclusion of the later sub-period is to
account for changes in Vietnam’s significant FDI partners, dramatic increases in
Vietnam’s inward FDI flows, and Vietnam’s involvement in a variety of bilateral
and RTAs in this period. The estimation of regressions for the two periods allow us
to compare and contrast the findings, evaluating whether overall FTAs have a
greater impact on FDI inflows in the later sub-period. In addition, further
examination of the later sub-period is implemented to assess whether FTAs have
any effects on Vietnam’s inward FDI flows through interaction terms with key
drivers of FDI. Based on the outcomes for FTAs and other independent variables
6
such as trade, factor endowments, and the interaction term between FTAs and factor
endowments, this research question provides insights into Vietnam’s patterns of
FDI.
In recent years, Vietnam has participated in mega-FTAs, the new generation of

trade agreements, with three notable FTAs including the CPTPP, RCEP, and EU-
Vietnam FTA (EVFTA). CPTPP is an FTA involving Vietnam and other 10
countries in the Asia-Pacific including Japan, Singapore, Malaysia, Brunei,
Australia, New Zealand, Canada, Chile, Mexico, and Peru. This FTA has been in
force since December 2018. It is the successor to the TPP where the US was
included. The TPP members accounted for 36.8% of world GDP in 2018.5 However,
the CPTPP without the US contributed only 13.3% to the world GDP in 2018, with
a total population around 480 million people.6
RCEP is a proposed FTA which was launched in November 2012. RCEP covers
ASEAN member states and six countries having FTAs with the ASEAN-Japan,
China, South Korea, India, New Zealand, and Australia. With the US withdrawal
from the TPP, RCEP has become larger than the CPTPP. In 2018, the 16 countries
included in RCEP accounted for around 32% of world GDP, 28% of global trade,
and a combined population of over 3.5 billion people-almost half of the world’s
population. RCEP without India accounted for 30% of global population and 29%
of world GDP in the same year.7
While the CPTPP and RCEP are RTAs, the EVFTA is a bilateral FTA between
Vietnam and the EU. The EVFTA was signed on 30 June 2019 in Vietnam after 10
years of negotiations. Notably, all of Vietnam’s leading trading and FDI partners
are covered in the EVFTA and RCEP. For instance, in 2018, the top five export
markets for Vietnam include the US, EU, China, ASEAN, and Japan, while
Vietnam’s largest import partner is China, followed by South Korea, ASEAN,
Japan, and the EU. 8 For investment, Japan was the largest foreign investor in
5
Authors’ calculations based on the data from the World Development Indicator, accessed at
https://data.worldbank.org/indicator
6
https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-in-
force/cptpp/cptpp-overview/
7
Calculated from the World Development Indicators, accessed at
https://data.worldbank.org/indicator
8
Calculated from IMF data, Direction of Trade Statistics, accessed at https://data.imf.org/
7
Vietnam in 2018, followed by South Korea, intra-ASEAN, Hong Kong, China, and
the EU. 9 While the TPP/CPTPP has been widely analysed with the impact on
Vietnam reported by several studies such as Petri et al. (2012), Petri and Plummer
(2016), Areerat, Kameyama, Ito, and Yamauchi (2012), and Minor et al. (2016),
studies on RCEP focusing on Vietnam are rare. Furthermore, the EVFTA was
signed in mid-2019, which is expected to bring substantial gains to the Vietnamese
economy. Motivated by potential benefits to Vietnamese trade and investment
following the deep and comprehensive FTAs, this thesis poses the third and fourth
research questions:
Research Question 3: How might Vietnamese trade and investment change

following the EU-Vietnam FTA?
To answer this research question, Chapter 4 of this thesis explores the impact of the
EVFTA, focusing on Vietnamese trade and investment with a computable general
equilibrium (CGE) model. Based on the text of this agreement, I model as close to
the agreement’s contents as possible. Like other modern FTAs, the EVFTA is a
deep and comprehensive FTA covering not only tariff removal but also reductions
in goods and services non-tariff measures (NTMs), improvement in trade
facilitation and liberalisation barriers to FDI. Therefore, all of these liberalisation
components are included in the policy scenarios. However, as EVFTA is a bilateral
FTA between a developed region and developing country, Vietnam is likely to have
a greater extent of liberalisation in some areas. Trade facilitation and investment
liberalisation are therefore modelled for only Vietnam because time to import and
barriers to FDI based on the OECD FDI index in the EU are already relatively small.
Specifically, changes in Vietnam’s trade and investment due to both trade and
investment liberalisation through the EVFTA are examined in the third research
question of this thesis.
In addition to the global trade analysis project (GTAP) database version 10, we
calculate ad valorem equivalents (AVEs) of goods and services NTMs based on
World Bank (2019) and Fontagné et al. (2016) respectively for both Vietnam and
the EU. Time to import data are sourced from the World Bank Doing Business
9
https://data.aseanstats.org/
8
(2019), while the data relating to investment liberalisation share the same sources
as the RCEP modelling.
Research Question 4: How might Vietnamese trade and investment change

following RCEP?
To answer this research question in Chapter 5 of this thesis, a study using a CGE
modelling framework is conducted to investigate the impact of RCEP with a focus
on Vietnamese trade and investment. As this FTA has not been concluded yet,
policy components included in the model rely on guidance in the principles and
objectives for the RCEP negotiation (ASEAN Secretariat, 2012), as well as
completed rounds to date. Four policy components are modelled including tariffs,
goods and services NTMs, and investment liberalisation. Particularly, changes in
trade and investment in Vietnam due to both trade liberalisation and investment
liberalisation through RCEP are addressed in the research question above.
Together with the GTAP database version 10, I use data on AVEs of services NTMs
by Fontagné, Mitaritonna, and Signoret (2016) and goods NTMs by Kravchenko,
Utoktham, Narayanan, and Duval (2019). These data are then applied to sectors and
regions modelled for RCEP. Regarding the data on liberalisation of FDI barriers, I
also make use of the OECD FDI index (OECD, 2018), FDI stock database (Gouel,
Guimbard, & Laborde, 2012), total FDI stock (UNCTAD, 2018), and capital stock
(Feenstra, Inklaar, & Timmer, 2015). Based on these data, I exogenously estimate
increases in sectoral capital stocks which are implemented as appropriate reductions
in tax on capital.
1.3 Summary of Objectives of the Thesis
The overall objective of this thesis is to examine trade and investment effects of the
key FTAs with which Vietnam is involved. More specifically, this thesis has the
following primary objectives:
1. To assess the impact of trade agreements and FDI on Vietnamese trade, the
degree of sensitivity of Vietnamese trade to FDI following the trade agreements and
pinpoint the effective trade agreements in terms of stimulating Vietnamese exports
and imports;
9
2. To evaluate the impact of the overall FTAs on Vietnam’s inward FDI flows;
3. To evaluate how the EVFTA affects Vietnam with a focus on trade and
investment; and
4. To analyse the effects of RCEP on Vietnam through both trade and investment
liberalisation, focusing on changes in trade and investment.
1.4 Methodological Techniques
Gravity Model
Two chapters of this thesis use econometric models. In particular, gravity models
are employed in Chapters 2 and 3 for trade and FDI analysis respectively. Such
models were originally used by Tinbergen (1962) in trade analysis. However, over
time they have also been widely used in studies on FDI flows. The gravity model
predicts that trade or FDI flows between two countries positively depend on their
GDP and negatively rely on transaction cost such as the distance between them. To
reduce potential omitted variable bias, gravity models have been extended with
more explanatory variables for trade and FDI analysis. The advantage of gravity
models mentioned in the study of Brodzicki and Stanisław (2013) is that
characteristics of both countries and regions can be accounted for. To estimate the
gravity model, I make use of ordinary least squares (OLS), fixed effects (FE), and
random effects (RE) estimators. Both FE and RE have their own advantages. In
particular, FE can provide consistent estimates and control for unobserved time-
invariant specific factors, whereas time-invariant variables of gravity models such
as distance and border can be estimated using RE. Thus, based on some
specification tests, the best estimator should be determined.
In terms of other estimators, Webb, Strutt, and Rae (2016) note that Poisson pseudo
maximum likelihood (Santos Silva & Tenreyro, 2006) and Heckman selection
approaches (Helpman, Melitz, & Rubinstein, 2008) are the two major techniques
that have been applied to contemporary gravity models. However, these estimators
have often been used to address the issue of zero observations which is not an issue
in this thesis with the focus only on Vietnam. Moreover, generalised method of
moments (GMM) including both the difference GMM (Arellano & Bond, 1991)
10
and the system GMM (Blundell & Bond, 1998) have also been found in applications
of gravity models. This method is efficient in addressing endogeneity. However,
the technique is appropriate for dynamic panel data with a short time dimension
which does not fit the data in this thesis. Thus, OLS, FE, and RE are better-suited
and are used in this thesis.
Computable General Equilibrium Model
This thesis makes use of the GTAP model (Hertel, 1997) and database (Aguiar,
Chepeliev, Corong, McDougall, & van der Mensbrugghe, 2019) to analyse the
EVFTA and RCEP in Chapters 4 and 5 respectively. The GTAP is a multi-sector,
multi-region CGE model, which has become widely used in global trade analysis.
The benefit of the GTAP model for trade analysis is that it not only takes into
account economic activities and sectoral interactions for a country, but also the
economic relationship between that economy and other economies, as well as the
rest of the world. As the EVFTA has recently been signed and RCEP is still under
negotiation, econometric models which usually require historical data are not
appropriate for these cases. A global CGE model is a much better suited to the task
of assessing potential future impacts of trade agreements.
1.5 Contributions of the Thesis
This thesis comprises four studies which together explore trade and investment
effects of the key trade agreements Vietnam has made. Each study has its own
contributions, making the whole thesis significant in several ways.
First, this thesis extends the evaluation of the effects of FTAs on trade flows.
Empirical studies that decompose the impact of FTAs that a particular country has
entered into on its trade flows are scarce. In addition, existing studies often focus
on analysing the impact on trade flows of either FTAs or FDI flows. This thesis
takes into account the two factors as key drivers of trade flows, with Vietnam as a
case study. By doing so, it is possible to point out the efficient trade agreements
Vietnam has entered into in terms of expanding exports and imports as well as the
extent of sensitivity of Vietnamese trade to FDI following the trade agreements.
11
Second, whether or not the overall involvement in FTAs of a developing country
such as Vietnam impacts on its FDI inflows is investigated. There have been limited
empirical studies on this issue in current literature and all of them have focused on
case studies for developed countries. However, addressing this linkage is crucial for
assessing the magnitude of effectiveness of FTAs as drivers of FDI flows.
Third, this thesis models the EVFTA as closely to the text of the agreement as
possible, using a global CGE framework. This is the first study on the EVFTA that
models all the five policy components, including tariffs, goods NTMs, services
NTMs, trade facilitation, and liberalisation of FDI barriers. Previous studies, such
as Baker, Vanzetti, and Pham (2014) and Philip et al. (2011) analyse the economic
effects of tariff elimination through the EVFTA before this agreement was
concluded. In other studies, the same liberalised assumptions are applied to the
EVFTA and other mega-FTAs of Vietnam for a comparison purpose (Kikuchi,
Yanagida, & Vo, 2018), and liberalisation of FDI barriers is not captured (Baker &
Vanzetti, 2019; European Commission, 2018; Kikuchi et al., 2018). Moreover,
accounting for priority sectors is important for bilateral FTAs, especially those
between a developed and developing side. The developing party is more likely to
have greater liberalisation in some areas. In this thesis, the modelling of services
NTMs and investment liberalisation pays attention to the sectors receiving greater
liberalisation following this agreement.
Fourth, this thesis endeavours to measure the effect of investment liberalisation

under RCEP on trade and investment, again using a CGE model. Most studies on
FTAs using CGE frameworks do not model changes in FDI, partly due to the dearth
of available global FDI data (Strutt, Minor, & Rae, 2015). Those that do largely
rely on CGE-FDI models in which FDI is endogenously incorporated (Ciuriak &
Xiao, 2014; Li, Scollay, & Gilbert, 2017). The construction of these models may
be very convoluted. However, estimation of changes in FDI stocks can be
exogenously implemented, with estimates later used in the CGE model (Petri et al.,
2012). In this thesis, based on the OECD FDI index, increases in sectoral FDI stock
and capital stock are exogenously estimated and then serve as inputs for the CGE
model. With this method, it is possible to capture liberalisation of FDI barriers
under RCEP within a modified standard CGE modelling.
12
In addition to trade effects, this thesis evaluates changes in investment following
the EVFTA and RCEP within modified standard CGE frameworks. A few recent
studies analysing modern FTAs have embarked on some modifications to static
CGE models to capture capital accumulation in the models (Kawasaki, 2015;
Kikuchi et al., 2018), but all of them have focused on trade and welfare effects and
ignored changes in capital stocks. However, trade liberalisation through elimination
of tariffs and non-tariff barriers (Francois, McDonald, & Nordstrom, 1996;
Walmsley, 1998) are found to have significant impacts on capital stocks. Likewise,
investment liberalisation following FTAs also leads to increased FDI flows (Li et
al., 2017; Petri et al., 2012). Indeed, it is critical to assess changes in investment
following an FTA, especially in a developing country where there has been an
investment deficiency. Furthermore, this thesis uses new databases of AVEs of
goods NTMs in the modelling of both the EVFTA and RCEP, from the World Bank
(2019) and Kravchenko et al. (2019) respectively. These data are bilateral and
detailed, facilitating modelling at the GTAP sectoral levels. Thus, they are superior
to the country-specific AVEs of NTMs that each country imposes on rest of the
world, often used in previous studies.
1.6 Thesis Outline
The remaining chapters of this thesis are organised as below. Chapter 2 illustrates
the importance of key trade agreements as well as FDI inflows to Vietnamese trade.
The chapter begins with a description of trade liberalisation, FDI and trade in
Vietnam. This is followed by a review of relevant theoretical and empirical
literature, which indicates that FTAs and FDI are critical drivers of trade flows.
This chapter then moves on to investigate how the two determinants impact
Vietnamese trade flows.
Chapter 3 evaluates another role of FTAs as a key determinant of FDI flows for
Vietnam. In addition to addressing the linkage over an extended period, this chapter
also emphasises a sub-period during which a variety of FTAs have entered into
force. The chapter begins by describing trends and patterns of FDI in Vietnam. It
continues with a theoretical framework and a summary of relevant existing studies.
Then panel analysis is conducted to assess the FTA-FDI relationship.
13
Chapters 4 and 5 continue to explore trade and investment effects of FTAs on
Vietnam through the two modern FTAs, the EVFTA and RCEP. Chapter 4 sheds
fresh light on modelling liberalising components of the EVFTA, carefully based on
the text of this agreement. This chapter evaluates how tariff removals, NTMs cuts
and improvement in trade facilitation lead to changes not only in Vietnamese trade
but also in Vietnamese investment. In addition, the effects of investment
liberalisation are also emphasised. This chapter begins with a succinct description
of key empirical literature analysing FTAs between the EU and its partners,
including those focusing on trade liberalisation and more modern FTAs. It then
discusses Vietnam’s trade with the EU and EU’s investment in Vietnam. This
chapter then proceeds to describe the model used and policy scenarios considered,
based on the content of this agreement, before discussing the simulation results.
Chapter 5 examines how Vietnamese trade and investment may change as a result
of RCEP. This chapter highlights the potential impacts of not only trade
liberalisation but also investment liberalisation under RCEP. First, this chapter
synthesises relevant empirical studies on RCEP. Next, the CGE modelling
framework and policy scenarios are presented. Then, changes in Vietnamese trade
and investment are analysed.
Chapter 6 provides a summary of the key findings of the whole thesis, with a
discussion of the implications for researchers and policymakers. Some limitations
of this thesis are also noted. Finally, some important prospective avenues for future
research are summarised.
14
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20
2 Chapter 2: Effects of Trade Agreements and Foreign
Direct Investment on Trade: Evidence from Vietnam
2.1 Introduction
In recent decades there has been a striking proliferation of regional trade agreements
(RTAs). The World Trade Organization (WTO) notes that 303 RTAs were in force
as of January 2020: A dramatic increase from less than 10 agreements that were in
force in the early 1990s (WTO, 2018). RTAs, along with encouraging foreign direct
investment (FDI) inflows, have been important areas of policy focus for Vietnam;
however, they can have complex and sometimes ambiguous effects on trade. In this
paper, we assess the impact of trade liberalisation agreements and FDI on
Vietnam’s imports and exports.
Despite the current prevalence of RTAs, the impact this type of trade liberalisation
has on trade remains inconclusive. While free trade agreements (FTAs) are
generally expected to increase trade flows (Baier & Bergstrand, 2007; Lee & Park,
2007; Vanhnalat, Phonvisay, & Sengsourivong, 2015), there is also evidence of
trade diversion when evaluating specific RTAs (Carrere, 2006; Kahouli & Maktouf,
2014). Moreover, there are examples of RTAs that do not lead to increased export
flows, such as for Bangladesh when there was restricted regionalism and high non-
tariff barriers (Ullah & Inaba, 2012), or in the case of Jordan when the focus was
on the short term impacts of limited liberalisation (Busse & Gröning, 2012).
In addition to negotiating RTAs, Vietnam has been implementing policies to

encourage inflows of FDI. FDI is often regarded as a particularly important
component of total investment due to its relative stability compared to portfolio
capital flows and commercial lending (UNCTAD, 1999). As well as addressing the
issue of capital shortages in host countries, FDI contributes to the development of
technology, management and an increased understanding of international markets
(Brooks, Roland-Holst, & Zhai, 2008). Due to its crucial importance to host
countries, FDI has been widely studied, with special attention paid to the linkage
between FDI and trade. While some researchers find a complementary relationship
between FDI and trade (Clausing, 2001; De Mello Jr & Fukasaku, 2000; Jawaid,
21
Raza, Mustafa, & Karim, 2016), others find that FDI and exports are substitutes
(Belderbos & Sleuwaegen, 1998; Beugelsdijk, Smeets, & Zwinkels, 2008).
Furthermore, mixed effects are found in the studies of Svensson (1996), Blonigen
(2001) and Swenson (2004).
Despite their potentially ambiguous impacts, FTAs and inward FDI are considered
to be key drivers of Vietnam’s trade. Since Vietnam’s “Doi Moi” or Renovation
Policy10 was launched in the mid-1980s to facilitate change from a centrally planned
to a market-oriented economy, Vietnamese trade policy has been based on pursuing
an export-led growth strategy (Nguyen & Xing, 2008), in which trade liberalisation,
exports and FDI have been promoted (Chaponnière & Cling, 2009). Therefore,
examining the effects of both trade liberalisation and FDI on Vietnam’s trade is
important, especially when foreign trade has become a primary factor driving
economic growth (Kastelle & Liesch, 2013). Most developing countries are heavily
dependent on imports of machinery, equipment and energy to support economic
development, with imports being crucial for technology transfer (Acharya & Keller,
2009). Moreover, increased exports may result in higher labour productivity and
the creation of well-paying jobs, thanks to greater competition with foreign firms
(Mijiyawa, 2017).
From the start of the Renovation Policy, Vietnam experienced an expansion of

foreign trade, with an annual growth rate of almost 18% over the period 1995-
2017.11 Likewise, there has been a surge of FDI inflows to Vietnam, increasing from
US$ 1.8 billion in 1995 to US$ 14.1 billion in 2017 (UNCTAD, 2018). The
acceleration of Vietnam’s foreign trade has accompanied its deeper involvement in
trade liberalisation, achieved through a series of trade agreements. With this general
observation in mind, it is of interest to examine the extent to which various bilateral
and FTAs have enhanced the impact from FDI inflows.
The current study investigates the extent to which trade agreements and FDI inflows
stimulate Vietnamese exports and imports. We make a number of significant
10
The “Doi Moi” (Renovation) Policy was launched by the Vietnamese Government at its Sixth
Party Congress in December 1986 with the goal of creating a market-oriented economy.
11
Calculated from the database of the Vietnam’s General Statistics Office, accessed at
www.gso.gov.vn
22
contributions to the literature. First, while most previous studies focus on analysing
the impacts of either trade liberalisation or FDI on trade, we take into account the
impacts of both factors, due to their mutual importance to trade in a transitional
economy such as Vietnam. The second contribution of this paper is that we
decompose the different effects of various FTAs and FDI on both exports and
imports for Vietnam. Initial evidence confirms that both trade and FDI have
increased in recent years, but there are two important questions that warrant further
investigation in this paper. Of the trade agreements that Vietnam has entered into,
which of these has been the more effective in terms of stimulating exports and
imports? In addition, to what extent has Vietnamese trade become more sensitive
to FDI as a result of the trade agreements?
The remainder of this paper is organised as follows. Section 2.2 briefly describes
Vietnamese trade liberalisation, FDI and trade, followed by a discussion of the
previous studies of relevance in Section 2.3. Section 2.4 outlines the model
specification, data and methodology used to examine Vietnam over the 1996-2014
study period using random effects estimation. Section 2.5 discusses the empirical
results, finding that there is significant variation in the impacts of the various trade
agreements, and the sensitivity of imports and exports to FDI has also changed.
Section 2.6 presents our concluding remarks.
2.2 Trade Liberalisation, FDI and Trade in Vietnam
2.2.1 Trade Liberalisation and Trade
Since the Renovation Policy was introduced in the mid-1980s, trade reforms
focusing on liberalisation have been considered a primary focus of Vietnam’s
economic reform. Together with unilateral reforms, Vietnam has accelerated its
trade liberalisation process through bilateral and RTAs. In particular, Vietnam
became a member of the ASEAN free trade area (AFTA) in 1996. Foreign trade
between Vietnam and its ASEAN partners increased considerably between 2002
and 2007, with an average growth rate of almost 27% for this period before the
Global Financial Crisis.12
12
Calculated from the database of Vietnam’s General Statistics Office, accessed at www.gso.gov.vn.
23
Trade between Vietnam and the United States (US) has increased since the
elimination of the US embargo in 1994. The bilateral trade agreement between
Vietnam and the US (USBTA) came into force in 2002 and is considered a
milestone in Vietnam’s trade liberalisation process. This was the most
comprehensive trade agreement between the US and a developing country
(Athukorala, 2006). According to the GSO (2018), Vietnam’s exports to the US
amounted to US$ 2.5 billion in 2002, which was more than double the previous
year. This bilateral trade agreement also accommodated a dramatic increase in
Vietnam’s imports from the US, from US$ 411 million in 2001 to US$ 1.1 billion
in 2003 (GSO, 2018).
Due to the commitments of reforms, the USBTA was good preparation for
Vietnam’s negotiation to become a WTO member. With accession to the WTO in
2007, following 11 years of negotiation, Vietnam’s exports have benefitted from
most-favoured nation (MFN) status. In particular, Vietnam’s exports in 2008 were
more than 57% above those in 2006 (GSO, 2018). Similarly, compared to the level
reached before Vietnam’s accession to the WTO, Vietnam’s imports saw a 80%
increase, surging from US$ 44.9 billion in 2006 to US$ 80.7 billion in 2008 (GSO,
2018).
As shown in Figure 2.1 Vietnam’s foreign trade has increased substantially since
the mid-1990s. While the Global Financial Crisis caused a dip in this growth, the
strong growth has resumed in more recent years.
24
Figure 2.1: Vietnam's Total Exports and Imports, 1995-2017 (US$ billion)
450
400
US billion dollars 350
300
250
200
150
100
50
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total exports Total imports Total trade
Source: GSO (2018)
In recent years, Vietnam has been involved in deeper trade liberalisation through
its participation in a variety of bilateral and RTAs which include the following:
ASEAN-China Comprehensive Economic Cooperation Agreement (ACCECA)
starting in 2005, ASEAN-India Comprehensive Economic Cooperation Agreement
in 2010, ASEAN-Japan Comprehensive Economic Partnership (AJCEP) in 2008,
ASEAN-Korea Comprehensive Economic Cooperation Agreement (AKCECA) in
2010, ASEAN-Australia and New Zealand Free Trade Agreement in 2010, Chile-
Vietnam Free Trade Agreement in 2014 and the Japan-Vietnam Economic
Partnership (JVEPA) in 2009.13 It appears these FTAs have largely contributed to
the increase in Vietnam’s exports and imports since the Global Financial Crisis.
However, compared with Singapore, Malaysia, Thailand and Indonesia, Vietnam is
characterised by a much weaker global competitiveness ranking (Appendix, Table
2.3), as well as through generally lower exports to China (Appendix, Table 2.4).
This points towards the need for increasing competitiveness being a key priority in
Vietnam’s trade liberalisation process.
13
The entry into force years noted are WTO data, accessed at www.wto.org.
25
2.2.2 FDI and Trade
Investment is a significant factor spurring economic development in Vietnam. To

address the problem of capital deficiency, the Vietnamese government has been
trying to improve access to investment, especially through FDI, which is regarded
as more stable than portfolio capital and debt flows (Maher, Christiansen, &
Fortainer, 2001).
Figure 2.2 indicates that Vietnam has performed well in attracting FDI inflows,
amounting to US$ 14.1 billion in 2017 as opposed to the minimal level of US$ 0.18
billion in 1990. As can be seen from Figure 2, Vietnam experienced significant
decreases in FDI as a result of the Asian Financial Crisis, though even before this,
the impact of policy backsliding was impacting the FDI boom (Athukorala & Tran,
2012). However, reforms implemented in response to this decline helped to reverse
the downturn, particularly reforms implemented since 2003 (Athukorala & Tran,
2012). It is interesting to note that while most other ASEAN members saw a sharp
decrease in FDI inflows in 2008 due to the Global Financial Crisis, Vietnam
continued to attract increased FDI inflows amounting to US$ 9.6 billion, a 37%
expansion relative to 2007, demonstrating Vietnam’s capacity in sustaining FDI
interest despite the crisis (ASEAN Secretariat, 2009).
Figure 2.2: Total FDI Inflows to Vietnam, 1990-2017 (US$ billion)
FDI inflow to Vietnam

16
14
12
Billions of $ US
10
0
2004
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: UNCTAD (2018)
26
Figure 2.3 indicates that from 1988 up to late 2017, more than 70% of the total
registered FDI in Vietnam originated from Asia. Specifically, East Asian countries
including Hong Kong, Taiwan, Republic of Korea and China accounted for 37% of
the total registered FDI in Vietnam, with Korea ranking first. Japan and Singapore
were the second and third largest investors in Vietnam.
Figure 2.3: FDI Inflows to Vietnam, Share by Source Country, 1988-2017 (%)
FDI by source countries: Total registered FDI

Rep. of Korea,
Others, 17.2 18.1
Thailand, 2.9
China, 3.8
Malaysia, 3.8 Japan, 15.4

United States, 3.1
Hong Kong, 5.6
British Virgin Singapore, 13.3

Island, 7.1 Taiwan, 9.7
Source: Vietnam’s Statistical Yearbook 2017
As shown in Figure 2.4, FDI inflows to Vietnam have been highly concentrated,
mostly surging to regions with better economic development. In particular, the
South East region has been the largest FDI destination with 42.7% of the total
registered FDI during the period 1988-2017, followed by the Red River Delta
region (27.9%) and the North Central and Central coastal region (17.9%). In
contrast, the three remaining areas have attracted limited FDI flows (11.4%) with
Central Highlands receiving a minimal share (0.3%).
27
Figure 2.4: FDI Inflow Shares to Different Regions in Vietnam, 1988-2017 (%)
FDI by regions: Total registered FDI
6.3
27.9
42.7
4.8
17.9
0.3
Red River Delta Northern midlands and mountain areas

North Central and Central coastal areas Central Highlands
South East Mekong River Delta
Source: Vietnam’s Statistical Yearbook 2017
In addition to providing investment capital for Vietnam, FDI flows into Vietnam
have an important role in stimulating Vietnam’s trade. As can be seen in Figure 2.5,
the foreign invested sector14 has contributed greatly to Vietnam’s total trade, with
increasing shares in total exports and total imports. Exports by the foreign invested
sector accounted for half of total exports for the first time in 2003, as opposed to
27% in 1995. In 2017, the foreign-invested sector accounted for more than 70% of
Vietnam’s total exports. Like exports, imports by the foreign invested sector have
increased dramatically, from a relatively small share of total imports in 1995 (18%)
to more than a half of total imports in 2017 (60%), more than tripling its share over
this period.
14
Total exports and imports of Vietnam are the combined values from the domestic economic
sector and foreign invested sector. The foreign invested sector refers to enterprises in which
foreign ownership accounts for at least a 51 percent threshold, as stated in the 2014 Law on
Investment in Vietnam, accessed at the website of Ministry of Justice of Vietnam:
www.moj.gov.vn/vbpq/lists/vn%20bn%20php%20lut/view_detail.aspx?itemid=30315
28
Figure 2.5: Foreign Invested Sector's Shares of Total Exports and Imports in
Vietnam, 1995-2017 (%)
80
% of total exports and imports 70
60
50
40
30
20
10
0
2000
2002
1995
1996
1997
1998
1999
2001
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Exports by foreign invested sector Imports by foreign invested sector
Source: GSO (2018)
2.3 Previous Studies
2.3.1 Trade Liberalisation and Trade Flows
Trade liberalisation is expected to increase welfare because both consumers and

producers have access to a variety of cheaper products and intermediate goods
respectively as a result of an RTA (Sheng, Tang, & Xu, 2014) and exporters have
improved access to international markets. However, Viner (2014) argues that in
addition to welfare improvements, a RTA might reduce welfare, depending on trade
creation or trade diversion effects. Trade creation involves replacing higher-cost
domestic production of an FTA’s member with lower-cost imports from other
member countries. By contrast, trade diversion occurs when the removal of tariffs
leads an FTA member to divert its import activities from non-members to other
FTA members, even though imports from non-members would be cheaper if such
countries were not discriminated against (Clausing, 2001; Deme & Ndrianasy, 2017;
Viner, 2014).
There is little research on the impact of trade liberalisation on exports and imports
in Vietnam. The very limited research includes that of Pham (2011) who conducts
a panel data analysis of Vietnam and its 17 partner countries between 1990 and
29
2008, focussing on the evaluation of Vietnam’s accession to the WTO affected
Vietnam’s exports and imports. Her findings show that WTO accession has
increased Vietnam’s imports because there was a considerable decrease in tariffs as
a consequence of joining. By way of contrast, there was no conclusive evidence on
whether Vietnam’s accession to the WTO affected exports (Pham, 2011). There is
also some related literature on how trade liberalisation affects export quality and
productivity in Vietnam, with Nguyen (2016) finding that trade liberalisation has
been important for improving Vietnam’s export quality and suggesting that FDI
inflows may help to raise the degree of export sophistication. However, Doan,
Nguyen, Vu, Tran, and Lim (2016) find that exposure to competition from imports
may lead to lower productivity for smaller firms in Vietnam, though the impact is
small and there is some evidence of positive effects for larger firms.
Despite the limited extent of studies on the impact of FTAs in Vietnam, empirical
studies of other countries have provided evidence of both trade creation and trade
diversion effects of FTAs. For instance, in gravity models that include either one
dummy FTA variable (Baier & Bergstrand, 2007) or two RTA dummy variables
called RTA-Insider and RTA-Outsider to capture intra-bloc and extra-bloc trade
respectively (Lee & Park, 2007), it was found that RTAs stimulate trade among
members. These results are supported by Foster (2012), who finds that RTAs result
in increasing imports between RTA partners. Moreover, when focusing on a
specific RTA, findings by García, Pabsdorf, and Herrera (2013), Clausing (2001),
Hassan (2001) and Sheng et al. (2014) identify trade creation effects on members’
trade of the Mercado Comun del Sur (MERCOSUR), the FTA between Canada and
the US (CUSFTA), the South Asian Association for Regional Cooperation
(SAARC) and the ASEAN-China FTA respectively. On the other hand, some
studies on multiple RTAs have found mixed effects, including trade creation and
trade diversion. For instance, Kahouli and Maktouf (2014) and Carrere (2006) adopt
gravity models and apply panel data to a large sample of countries to examine the
impact of multiple RTAs on trade flows. Their findings indicate that RTAs have
generated an increase in intra-regional trade, benefiting members within RTAs at
the cost of the rest of the world.
30
Empirical studies by Ullah and Inaba (2012) and Busse and Gröning (2012) apply
gravity models to examine the impacts of various FTAs for particular countries and
find that the effects on trade flows can be negative in some cases. In particular,
Ullah and Inaba (2012) show that while the South Asian Free Trade Agreement
(SAFTA) and the Bay of Bengal Initiative for Multisectoral Technical and
Economic Cooperation Free Trade Area (BIMSTEC FTA) have no statistically
significant impacts on Bangladesh’s exports, other RTAs such as the Asia Pacific
Trade Agreement (APTA) and SAARC have negative impacts. Moreover, Busse
and Gröning (2012) find that with the exception of the FTA with the US, which has
stimulated Jordan’s exports, other multilateral or preferential trade liberalisation
have not resulted in statistically significant effects on exports and imports.
2.3.2 FDI and Trade
The Heckscher-Ohlin (HO) model was the first theoretical attempt at explaining
FDI (Faeth, 2009) whereby movements of production factors including FDI across
countries can be substituted by foreign trade. Based on the ‘public goods’ or
‘jointness’ of characterisation of firm-specific activities, Markusen (1984) supports
the substitutionary relationship. Furthermore, the proximity-concentration trade-off
has suggested that horizontal FDI, which duplicates an existing production facility
in foreign markets, and trade are substitutes (Brainard, 1993; Helpman, Melitz, &
Yeaple, 2003). In contrast to this, Lipsey and Weiss (1981) hypothesise a
complementary relationship between trade and FDI whereby vertical FDI, which
involves locating different stages of production in a variety of host countries,
complements trade (Helpman, 1984).
There have been few studies examining the relationship between Vietnam’s trade
and FDI. For instance, using panel data covering 19 major trading partners of
Vietnam between 1990 and 2007, Anwar and Nguyen (2011) explore the link
between FDI and trade in Vietnam before, during and after the Asian Financial
Crisis. They show that a 1% increase in FDI would increase exports and imports of
Vietnam by 0.45% and 0.23% respectively. Similarly, with an application of the
gravity model, Nguyen and Xing (2008) also evaluate the impact of FDI inflows on
Vietnam’s exports during the period of 1990-2004 and find that a 1% increase in
FDI results in a 0.13% increase in exports of Vietnam. Pham (2012) examines the
31
empirical relationship between FDI flows and trade for Vietnam from 1990-2007,
finding a positive impact of FDI on exports and imports. Other studies such as
Minor, Walmsley, and Strutt (2018) have emphasised the impact of other
potentially complementary reforms, such as reform of state-owned enterprises,
which may also positively impact Vietnam’s trade flows.
Empirical studies of other countries that explore the impact of FDI on trade include
De Mello Jr and Fukasaku (2000), Bajo-Rubio and Montero-Muñoz (2001),
Dritsaki, Dritsaki, and Adamopoulos (2004), Waheed and Jawaid (2010), Hailu
(2010), Jawaid et al. (2016) and Mijiyawa (2017). It is clear that FDI can have
mixed effects on trade. In particular, Svensson (1996) reports that while production
in Sweden’s foreign subsidiaries has a complementary effect on Sweden’s exports
of intermediates, it has negative impacts on Sweden’s exports of finished goods.
The findings of mixed effects have been supported by Blomstrom, Lipsey, and
Kulchycky (1988) and Blonigen (2001). Moreover, Swenson (2004) finds that FDI
inflows into the US, which are disaggregated into product, industry and overall
manufacturing components, have mixed effects on the US’s imports. Furthermore,
the findings of Beugelsdijk et al. (2008) conclude that horizontal FDI and exports
are substitutes. A more recent study by Tabassum, Nazeer, and Ahmed (2012)
concludes that FDI has no significant relationship on Pakistan’s exports in both the
short-run and the long-run.
In this paper, we analyse how particular trade agreements and FDI impact on
Vietnamese trade, which facilitates insights well beyond existing studies that focus
on the effects of either trade liberalisation or FDI on trade in a particular country.
By doing so, it is possible for us to examine the efficiency of key trade agreements
Vietnam has entered into in terms of expanding exports and imports, as well as the
sensitivity of Vietnamese trade to FDI following the trade agreements.
2.4 Model Specification, Data and Methodology
To examine the impact of trade agreements and FDI inflows on Vietnam’s trade,
we use gravity models which have been widely employed for international trade
analysis. We begin by summarising a basic gravity model before presenting
extended gravity models.
32
2.4.1 Gravity Model and Model Specification
Gravity models were so named due to the use of gravitational force to explain
bilateral trade flows. Tinbergen and Poyhonen are considered as the first authors
using these models in international trade analysis (Kahouli & Maktouf, 2014) in the
1960s. The theoretical foundations of the gravity model have been improved over
time, particularly due to the contributions of Anderson (1979), Bergstrand (1985),
Helpman and Krugman (1985) and Anderson and Van Wincoop (2003).
The basic gravity model is as follows:
ln 𝑋𝑖𝑗 = α0 + α1 ln 𝑌𝑖 +α2 ln 𝑌𝑗 +α 3 ln 𝑡𝑖𝑗 +𝑒𝑖𝑗 (1)
where Xij indicates trade flows between the two countries; Yi and Yj is GDP of
country i and country j respectively; and tij is trade costs between two countries
such as distance, adjacency and institutions. With the increasing number of studies
applying gravity models to international trade analysis, more explanatory variables
have been added to the gravity model to reduce potential omitted variable bias.
Following Baier and Bergstrand (2007), Carrere (2006) and Kahouli and Maktouf
(2014), the current study includes various dummy variables for trade agreements.
Extended gravity models may be respectively defined for exports and imports as
follows:
ln EX vit =α0 +α1 ln GDPvt +α2 ln GDPit +α3 ln DISvi +α4 BOR vi +α5 ln RER vit +α6 ln FDIivt−1
A G
+ α7 ln DGDPPCvit + α8 CRISvit + α9 CRISvit + α10 AFTAvit + α11 ACCECAvit + α12 AJCEPvit +
α13 AKCECAvit +α14 JVEPAvit +α15 USBTAvit +εijt (2)
ln IMivt =α0 +α1 ln GDPvt +α2 ln GDPit +α3 ln DISvi +α4 BOR vi +α5 ln RER vit +α6 ln FDIivt−1
A G
+ α7 ln DGDPPCvit + α8 CRISvit + α9 CRISvit + α10 AFTAvit + α11 ACCECAvit + α12 AJCEPvit +
α13 AKCECAvit +α14 JVEPAvit +α15 USBTAvit +εijt (3)
where v denotes Vietnam and i is the country partner of Vietnam. EXvit is real
exports from Vietnam to country i. IMPivt is real imports into Vietnam from country
i. GDPvt and GDPit represent real GDP of Vietnam and country i, respectively. DISvi
is the distance between the capital of Vietnam and that of country i. BORvi is a
dummy variable that takes the value of 1 if Vietnam and country i share a common
border. RERvit is the real exchange rate between the currency of Vietnam (VND)
33
and that of country i. CRISG and CRISA represent the Global Financial Crisis and
the Asian Financial Crisis respectively. CRISG gets the value of 1 for the period
2008-2009 (Shelburne, 2010) while CRISA takes the value of 1 during the period
1997-1998 if Vietnam’s partners were really struck by the crisis (Cuyvers, Soeng,
Plasmans, & Van Den Bulcke, 2011). FDIivt-1 represents real FDI flows from
country partner i to Vietnam.15 There is a dual causality between FDI and GDP.
While MNEs prefer large market potential (GDP), additional FDI inflow also
enlarges market potential which attracts further still more MNEs. To address the
possibility of endogeneity due to the dual causality, FDIivt-1 is in lagged form
(Nguyen & Xing, 2008). DGDPPCvit represents the absolute value difference in
GDP per capita between Vietnam and its partners. While the positive sign on
DGDPPCvit might lend support to the H-O framework, a negative sign might reflect
support for the Linder hypothesis (Antonucci & Manzocchi, 2006; Kahouli &
Maktouf, 2014). One might argue that since trade agreements are usually
implemented gradually over a period of time, there is a case for considering the use
of some form of non-binary dummy variable. This might take a form such as (… 0,
0, 0.25, 0.5, 0.75, 1, 1, 1,…) or (…0, 0, 0.33, 0.67, 1, 1, 1,…) etc. The choice of
which form of non-binary dummy to employ and with this, the imposition of the
trade agreement effect may become somewhat arbitrary. Therefore, the use of
binary trade dummy variables is preferred. In this study, AFTA, ACCECA, AJCEP,
AKCECA, JVEPA, and USBTA represent dummy variables. The dummy variables
used here take the value of 1 if Vietnam and the country partner have participated
in an FTA and 0 otherwise, based on the FTA’s entry into force (Bae & Jang, 2013;
Baier & Bergstrand, 2007; Lee & Park, 2007). Of course, the dummy variables
could be picking up influences from factors other than the trade agreements.
Therefore, the date of the FTA's coming into force is chosen as the key date rather
than when the FTA was signed. This way, the dummy variable captures the FTA
impacts on trade flows occurring from its date of commencement. Finally, εijt = αij+
vijt. While αij denotes the specific country-pair effect that accounts for the
15
Investment produces impacts on outputs over a period of time and so its influence on trade
volumes would be also distributed over several future periods. However, the inclusion of additional
lags in FDI led to results that were inferior. The estimation of additional parameters might have
adversely affected test power and hence the number of significant coefficients in the regressions.
34
unobservable and time-invariant characteristics that are specific to each pair of
countries, vijt represents the error term that is assumed to be log normally distributed.
2.4.2 Data
This study employs panel data covering Vietnam and its 17 country partners over
the period 1996-2014. Based on Vietnam’s main FDI and trading partners as well
as the availability of the data, 17 partners are selected, namely: Indonesia, Malaysia,
Singapore, Thailand, China, Japan, Korea, Canada, United States, Hong Kong,
Taiwan, France, Germany, Italy, Netherland, United Kingdom, and Sweden.
During the last 2 decades, from 1995 to 2014, these 17 partners have accounted for
more than 84% of Vietnam’s total FDI inflows, 74% of Vietnam’s exports and 84%
of Vietnam’s imports. 16 In 2014, FDI flows to Vietnam from these partners
comprised 91%17 of Vietnam’s total FDI inflows while these countries accounted
for almost 80% of Vietnam’s total trade.
Data for bilateral exports and imports between Vietnam and its partners are
collected from the General Statistics Office of Vietnam (GSO), while inward FDI
into Vietnam by source countries are obtained from the ASEAN Secretariat. The
data are then scaled by the consumer price index (CPI) of the US to generate real
values.
The bilateral real exchange rate data between Vietnam and its partners are not
directly available. Therefore, they are measured as follows, using US$ exchange
rates:
RERvit = (CPIit/CPIvt) * (nERvt/$ / nERit/$)
where CPIit and CPIvt are the annual consumer price index of country i and Vietnam
at year t respectively. nERvt/$ and nERit/$ are the nominal exchange rates, indicating
the amount of each country’s currency per 1 US$ at year t. The data are sourced
from the World Development Indicators (WDIs) with the exception of Taiwan, for
which CPI and nominal exchange rate data are obtained from the National Statistics
16
17
The remaining 9% of FDI is primarily sourced from Virgin Islands, Cayman Islands, Cyprus,
Samoa, Bermuda and other regions.
35
Republic of China and the Federal Reserve Bank of St. Louis respectively.
Taiwan’s nominal GDP, GDP deflator and population data are obtained from the
IMF, while real GDP and population data for other countries are sourced from the
World Bank’s WDIs. DGDPPCvit is calculated as the absolute value of the
difference between Vietnam’s GDP per capita and its partners’ GDP per capita:
𝐺𝐷𝑃 𝐺𝐷𝑃
𝐷𝐺𝐷𝑃𝑃𝐶𝑣𝑖𝑡 =ln |𝑃𝑂𝑃𝑣𝑡 − 𝑃𝑂𝑃𝑖𝑡 |
𝑣𝑡 𝑖𝑡
Information on Vietnam’s different FTAs is available from the website of WTO

whereas data on distance and border are from Centre d'Études Prospectives et
d'Informations Internationales (CEPII).
2.4.3 Methodology
The available panel estimators include ordinary least squares (OLS), fixed effects
(FE) and random effects (RE) techniques. According to Goh and Tham (2013) and
others, the disadvantage of pooled OLS is the assumption of homogeneity for all
countries, which can result in biased estimates because of the relationship between
the explanatory variables and unobservable effects. A key benefit attached to FE is
the provision of consistent estimates (Goh & Tham, 2013; Martínez, Bengoa-Calvo,
& Sánchez-Robles, 2012). Unobserved time-invariant specific factors such as
distance, border, language and colonial history, which might affect trade flows, are
controlled for by FE. However, important time-invariant variables of gravity
models, such as border and distance, cannot be easily estimated separately in a FE
model. RE, on the other hand, can provide estimates for specific time-invariant
variables. Recent empirical studies such as (Mijiyawa, 2017) and (Kahouli & Omri,
2017) have applied the system-generalised method of moments (GMM) technique
to panel data due to its superior efficiency in dealing with the issue of endogeneity.
However, the authors state that the technique is more appropriate for dynamic panel
data with a short time dimension, which is not the case for our study period.
Therefore, RE is used in this paper.
36
2.5 Empirical Results
Table 2.1 reports the results for the gravity models based on estimation using RE
regressions. Breusch-Pagan LM tests (RE vs. OLS) were carried out and the LM
statistics are statistically significant at 1%, indicating that RE models are
statistically preferable to OLS for both the export and import gravity equations. The
Wald tests for groupwise heteroscedasticity reject the null hypothesis that the
variance of the disturbance term in each gravity model is constant over time.
Therefore, the White robust standard error is used to address the problem.
We begin our discussion with analysis of the impacts of trade agreements and FDI
on Vietnam’s exports and imports, which is the main focus of this paper. We then
analyse the effects of other factors on trade.
2.5.1 Impacts of Trade Agreements and FDI on Trade
Our econometric results are reported in Table 2.1. As expected, the trade
agreements have different effects on Vietnam’s trade. The bilateral trade
agreements considered, including both the Japan-Vietnam Economic Partnership
(JVEPA) and Vietnam-US bilateral trade agreement (USBTA) generate trade
creation. Specifically, JVEPA increases Vietnam’s exports to Japan by 48%
(computed as exp(0.394)-1) and Vietnam’s imports from Japan by 71%
(exp(0.538)-1). Using the same method of calculation, the USBTA has a stronger
expansion impact on trade between Vietnam and the US, with Vietnam’s exports
and imports increasing by 368% and 70% respectively. There is also evidence of
trade creation effects in the ASEAN-Korea Comprehensive Economic Cooperation
Agreement (AKCECA), which stimulates Vietnam’s exports by 41%.
It is noteworthy that the ASEAN-China Comprehensive Economic Cooperation

Agreement (ACCECA) has supported Vietnam’s imports by 55%. According to
GSO (2018), China has traditionally been the largest import partner for Vietnam,
thus it is understandable that Vietnam’s imports from China went up sharply as a
result of the FTA. However, our results indicate that this FTA has not stimulated
Vietnam’s exports to China. This may be due to the very strong competition
37
Vietnam faces from other ASEAN exporting countries, with China regarded as a
key export market for all ASEAN members.
The ASEAN free trade area (AFTA) has no significant impact on Vietnam’s trade,
due in part to the delay and only small decrease in tariffs in the first years of AFTA
implementation (Vanhnalat et al., 2015). Our results suggest that the ASEAN-Japan
Comprehensive Economic Partnership (AJCEP) has negative effects on Vietnam’s
trade. This is in line with Busse and Gröning (2012) and Ullah and Inaba (2012)
who find evidence of negative impacts of particular FTAs on trade for Jordan and
Bangladesh respectively. This result is also consistent with increased competition
occurring among members as a result of the AJCEP. However, we note our dataset
is only able to examine the first six years during which this RTA has been in force;
future studies might throw more light on its trade effects during the next stages of
implementation.
38
Table 2.1: Estimation Results from Gravity Models (Random Effects)
Dependent variables
Independent variables ln EXvit ln IMivt
***
ln GDPvt 1.993 1.510***
(0.187) (0.179)
**
ln GDPit 0.515 0.452*
(0.229) (0.233)
***
ln DISvi -0.693 -1.444***
(0.249) (0.459)
BORvi 0.088 0.678
(0.504) (0.669)
**
ln RERvit 0.043 0.003
(0.020) (0.041)
*
ln FDIivt-1 0.038 0.048***
(0.021) (0.010)
ln DGDPPCvit -0.051 0.173
(0.097) (0.272)
A
CRIS 0.214 -0.036
(0.142) (0.047)
G *
CRIS -0.108 0.067
(0.063) (0.062)
AFTA 0.201 0.034
(0.272) (0.125)
ACCECA 0.062 0.441***
(0.096) (0.152)
**
AJCEP -0.490 -0.424*
(0.192) (0.228)
**
AKCECA 0.341 0.067
(0.171) (0.209)
*
JVEPA 0.394 0.538**
(0.218) (0.264)
***
USBTA 1.544 0.528***
(0.105) (0.113)
***
Constant -37.604 -19.679***
(5.169) (5.134)
***
Wooldridge test, F 86.78 24.62***
Breusch-Pagan LM test 344.17*** 866.81***
Wald test statistics 589.60*** 5180.83***
Number of observations 323 323
Robust standard errors are in parentheses. ***, ** and * denote significance at the 1, 5
and 10% levels
Regarding the impacts of FDI on trade, the estimated coefficient suggests that a 1%
increase in FDI will lead to a 0.04% increase in exports over the period of 1996-
2014, which supports the findings of Nguyen and Xing (2008), Anwar and Nguyen
39
(2011) and Pham (2012). Although the size of the coefficient is quite small, one can
gain a good idea by looking at the study of Anwar and Nguyen (2011) in which the
impact of FDI on exports in different periods is examined. Using RE approach, they
find that Vietnamese exports increase by 0.38% in the 1990-1997 period, only 0.17%
in the 1998-2000 period, and 0.16% in the 2001-2007 period. One possible reason
for the lower sensitivity of exports to FDI in more recent periods is that the domestic
demand for products of FDI firms in Vietnam has significantly increased. The
positive impact of FDI inflows on Vietnam’s exports can be explained as follows.
Firstly, the export capacity of domestic firms in Vietnam has increased on account
of FDI spill-over effects in terms of superior technology and management from
multinational enterprises (MNEs) (Brooks et al., 2008). Moreover, Vietnam’s
domestic firms have improved their technology due to increased competition with
MNEs (Mijiyawa, 2017). Secondly, the complementary relationship between FDI
inflows and exports in Vietnam might be partly explained by the exports of foreign
affiliates constructed by vertical FDI to their home countries, due to fragmentation
of various production stages across countries (Helpman, 1984). Thirdly, the rapidly
increased shares of the foreign invested sector in Vietnam’s total exports suggest
there is a high possibility that Vietnam is becoming an increasingly important
‘export platform’ by many MNEs. Through MNEs, a source country would launch
FDI in a host country and consider the foreign country as a production platform for
exports to its other partners (Ekholm, Forslid, & Markusen, 2007; Faeth, 2009;
Kneller & Pisu, 2004). For instance, Samsung Electronics from South Korea has
surpassed Petro Vietnam, a state-owned enterprise, to be the largest firm in Vietnam
and significant contributor to Vietnam’s total exports.
The results reported in Table 2.1 also suggest that FDI inflows have stimulated
Vietnam’s imports from partners, which is consistent with Anwar and Nguyen
(2011) and Pham (2012). The positive impact of FDI inflows on imports is also
found in some other ASEAN countries, such as Indonesia, Malaysia and Thailand
between 1970 and 1994 (De Mello Jr & Fukasaku, 2000) and Pakistan (Waheed &
Jawaid, 2010). The expansion effects of inward FDI on Vietnam’s imports might
be attributable to different types of FDI. Firstly, when a firm engages in vertical
FDI in a variety of host countries to take advantage of relatively cheap and abundant
factor endowments, firm-specific assets would be applied in all of its production
40
plants in addition to the one located in the home country (Helpman, 1984). This
suggests that inward FDI increases imports into the host country due to the demand
for the principal components of these affiliates from their home countries. Secondly,
horizontal FDI also results in an increase in a host country’s imports, due to foreign
affiliates’ demand for intermediate inputs from their home countries. This is
consistent with the finding that a higher level of production for a US firm in a host
country is associated with the host country’s increased imports from the US firm
(Lipsey & Weiss, 1984).
In terms of the control variables, Vietnam’s exports and imports depend on the GDP
of both Vietnam and Vietnam’s partners, with much stronger dependence on the
economic growth of Vietnam. Distance has a significantly negative effect on both
Vietnam’s exports and imports. The significantly positive coefficient of the real
exchange rate between Vietnam and country partners suggests that a depreciation
of the Vietnamese dong would increase the competitiveness of Vietnamese
products which, in turn, has an expansion impact on Vietnam’s exports. However,
the real exchange rate has no impact on Vietnam’s imports. Maybe this is because,
compared with exports, imports are more sensitive to FDI than the real exchange
rate. The dummy variable for the Global Financial Crisis is negative and statistically
significant, indicating an adverse impact on Vietnam’s exports. This supports the
conclusion of Kahouli and Maktouf (2014) that the crisis reduced exports among
countries. Unlike exports, Vietnam’s imports were not affected by the crisis. One
possible reason is that Vietnam’s exports markets during the Global Financial Crisis
were adversely affected (due to economic slowdown in the economies of trading
partners), but domestic demand for imports remained strong.
2.5.2 Trade-FDI Relationship Following Particular Trade Agreements
As discussed above and shown in Table 2.1, we find that FDI and trade are
complementary. Among the key six trade agreements, only USBTA and JVEPA are
found to stimulate both Vietnam’s exports and imports. Vietnam’s exports are also
stimulated by AKCECA and imports by ACCECA. Therefore, it is of interest to
consider whether the trade agreements have had any impacts on the trade-FDI
relationship. Following Hejazi and Safarian (2005), multiplicative dummies
between FDI and the particular trade agreements are included in the estimation. In
41
particular, ln FDIivt-1*USBTA, ln FDIivt-1*JVEPA and ln FDIivt-1*AKCECA are
included in the exports model and ln FDIivt-1*USBTA, ln FDIivt-1*JVEPA and ln
FDIivt-1*ACCECA are included in the imports model. The regression results with
these interactive terms are reported in Table 2.2.
42
Table 2.2: Regression Results with Multiplicative Dummies (Random Effects)
Dependent variable
Independent variables ln EXvit ln IMivt
ln GDPvt 1.998*** 1.488***
(0.189) (0.173)
ln GDPit 0.507** 0.477**
(0.233) (0.218)
ln DISvi -0.701*** -1.480***
(0.253) (0.457)
BORvi 0.164 0.799
(0.531) (0.761)
ln RERvit 0.041** -0.001
(0.021) (0.044)
ln FDIivt-1 0.040* 0.061***
(0.024) (0.014)
ln DGDPPCvit -0.027 0.212
(0.108) (0.297)
CRISA 0.213 -0.024
(0.143) (0.047)
CRISG -0.118* 0.063
(0.064) (0.062)
AFTA 0.207 0.062
(0.267) (0.107)
ACCECA 0.050 1.991
(0.100) (1.619)
AJCEP -0.635** -0.407**
(0.265) (0.194)
AKCECA 3.086 0.086
(2.105) (0.185)
JVEPA -0.619 0.802*
(0.566) (0.421)
USBTA 0.901** 1.110***
(0.367) (0.288)
ln FDIivt-1*USBTA 0.034* -0.031*
(0.020) (0.016)
ln FDIivt-1*JVEPA 0.055** -0.014
(0.024) (0.022)
ln FDIivt-1*AKCECA -0.139
(0.111)
ln FDIivt-1*ACCECA -0.087
(0.091)
Constant -37.733*** -20.052***
(5.107) 5.013
Wooldridge test, F 83.99*** 24.17***
Breusch-Pagan LM test 351.59*** 855.09***
Wald test statistics 503.49*** 4649.70***
Number of observation 323 323
Robust standard errors are in parentheses. ***, ** and * denote significance at the 1,
5 and 10 percent levels.
43
All the independent variables maintain the same sign as those reported in Table 2.1.
Therefore, we focus on the impact of the interactive terms.
For exports, there is no significant change in FDI slope with the inception of
AKCECA. In contrast, the slope on FDI increases from 0.040 to 0.074
(0.040+0.034) as a result of USBTA. Following JVEPA, the FDI slope more than
doubles, increasing from 0.040 to 0.095 (0.040 + 0.055). The dramatic increase in
FDI slopes implies that Vietnam’s exports have become more sensitive to FDI as a
result of USBTA and JVEPA. This suggests that the complementary relationship
between FDI and exports has become more salient as a result of the two trade
agreements. For imports, JVEPA and ACCECA appear not to result in a significant
change of slope on FDI. However, the slope on FDI decreases from 0.061 to 0.030
(0.061-0.031) following USBTA. This suggests that USBTA has reduced the
complementary relationship between FDI and imports.
The changes in sensitivity of Vietnam’s trade to FDI following the particular trade
agreements are consistent with a change in the foreign investment behaviour of
multinational firms. For instance, Buckley, Clegg, Forsans, and Reilly (2007) point
out that US multinational firms’ foreign investment decisions in Canada, which
were mainly dependent on market size and exchange rate factors prior to the North
American FTA, were driven by the Canadian market and financial market factors
following the FTA. Vietnam has become an attractive destination for FDI due to
the advantages brought about by the particular FTAs, which could affect Vietnam’s
trade. The reduction in trade cost due to particular trade agreements could also
affect the type of FDI flows in Vietnam, which in turn impacts on Vietnam’s trade
as well.
2.6 Conclusion
While Vietnam has participated in numerous bilateral and FTAs, we find that the
bilateral trade agreements with the US and Japan have led to the most noticeable
expansion in Vietnamese exports and imports. The impacts from other RTAs are
more mixed, due in part to increasing competition among members and the long
tariff reduction process. In terms of FDI inflows, there is strong evidence of FDI
inflows stimulating Vietnam’s exports and imports. However, the impact on
44
Vietnamese trade from FDI inflows is not as strong as that from some of the trade
agreements. Furthermore, our findings suggest that Vietnam’s exports (imports)
have become more (less) sensitive to FDI as a result of the bilateral trade agreement
with the US and exports have become more sensitive to FDI following the free trade
agreement with Japan.
These findings have important implications for Vietnam’s policy makers. Firstly,
to continue building growth in trade it is important that Vietnam continues its trade
liberalisation process, including through FTAs. Furthermore, to take advantage of
a number of RTAs Vietnam is participating in, Vietnam needs to increase its
competitive ability, including with ASEAN member countries. Secondly, in
addition to addressing the problem of capital deficiency, FDI inflows to Vietnam
can help to increase trade. Therefore, intensifying policies that help to attract FDI
are expected to be useful in promoting trade.
It seems that certain types of agreements work better than others in terms of
stimulating Vietnamese trade. In particular, policymakers may benefit from looking
closely at the trade agreements with Japan and the US when it comes to future trade
deals. Given that government policy is interested in stimulating FDI, closer trading
ties with Japan and the US may confer most benefit in terms of Vietnamese exports.
Therefore, a useful avenue for future research might be to more closely explore the
nature of these agreements and whether or not lessons are available for trade
agreements involving other countries. In terms of the changed sensitivities of trade
to FDI, further research might also explore more closely the particular forms of FDI
that have the most impact on this.
45
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50
Chapter Appendix
Table 2.3: Global Competitiveness Index Rankings

2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015- 2016- 2017-
Country 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Singapore 8 7 5 3 3 2 2 2 2 2 2 2
Malaysia 19 21 21 24 26 21 25 24 20 20 18 25
Thailand 28 28 34 36 38 39 38 37 31 31 32 34
Indonesia 54 54 55 54 44 46 50 38 34 34 37 41
Philippines 75 71 70 75 85 76 65 59 52 52 47 57
Vietnam 64 68 71 87 59 65 75 70 68 68 56 60
Source: Created from World Economic Forum’s Global Competitiveness Reports 2006-2007 to
2017-2018.18
Table 2.4: Exports from ASEAN-5 to China
Exports of ASEAN-5 to China

60.0
50.0
Exports (billion USD)
40.0
30.0
20.0
10.0
0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Singapore Thailand Indonesia Malaysia Vietnam
Source: IMF (2017)
18
http://www.weforum.org/
51
3 Chapter 3: The Impact of Free Trade Agreements on FDI
Inflows: The Case of Vietnam
3.1 Introduction
Foreign direct investment (FDI) occurs as a result of corporate strategies and

investment decisions of multinational corporations (De Mello Jr & Fukasaku, 2000).
It is favoured around the world, especially in developing countries, for the great
benefits it brings, including a critical source of finance, technology diffusion
(UNCTAD, 2015), knowledge spill-over effects on domestic firms in terms of
production process, innovative products, patents, establishment of production and
distribution networks (Mijiyawa, 2017). While large FDI flows have surged to a
limited number of developing countries such as China, India and Mexico
(Waldkirch, 2010), increasing capital has been challenging for governments in
many developing countries, particularly as it often requires significant economic
reforms.
Free trade agreements (FTAs) have been viewed as an increasingly important driver
of FDI in emerging countries (Yeyati, Stein, & Daude, 2003). One of the most
important reasons a country enters into an FTA is the expectation of increased FDI
flows (Blomstrom & Kokko, 1997; Medvedev, 2012). In the long run, the
integration is expected to increase growth rates of members thanks to greater
markets, improved competition capacity, better resource allocation and positive
externalities (Blomstrom & Kokko, 1997). However, the effects of FTAs on FDI
depend on different channels such as patterns of FDI, the investment provision of
FTAs, intra- and extra-FTA source countries, the locational advantages of host
countries and interactions among them. In addition, individual members of a
regional trade agreement (RTA) may experience gains or even losses in FDI flows
(Feils & Rahman, 2011). Therefore, it has been difficult to draw a definite
conclusion on the role of FTAs on FDI because some of the channels might be in
opposite directions (Yeyati et al., 2003), thus the expected effect of FTAs on FDI
remains an open question (Medvedev, 2012).
52
Existing analysis of the linkage between FDI and FTAs has mainly focused on
either multiple FTAs for a group of countries or case studies of a specific FTA. The
question of how a particular country’s general participation in FTAs impacts on its
FDI flows has not received much attention. The limited studies include Crotti,
Cavoli, and Wilson (2010) and Bae and Jang (2013) for Australia and Korea
respectively. However, there remains a paucity of studies assessing the overall
impact of FTAs on FDI in a developing country where there has been a shortage of
investment. This paper contributes to the existing literature by examining the
impact on FDI inflows of the overall FTAs that Vietnam has participated in. This
allows us to evaluate whether FTAs, in general, have been associated with increased
FDI flows, which is a major motive for Vietnam and other developing countries
pursuing FTAs. A secondary question is whether FTAs have changed investors’
sensitivity to key determinants of FDI flows in Vietnam.
Furthermore, vertical FDI is more likely between industrialised and developing

countries while there is a prevalence of horizontal FDI among industrialised
countries (Aizenman & Noy, 2006). Therefore, vertical FDI might be more popular
in developing countries (Egger & Winner, 2005). However, multinational
enterprises (MNEs) can have a mixed option including both vertical FDI and
horizontal FDI in practice (Aizenman & Noy, 2006). Based on the outcomes for the
FTAs and other determinants of FDI, we can further explain patterns of FDI flows
in Vietnam, which have been ignored in studies analysing FDI flows in Vietnam.
Vietnam is a particularly interesting case study for several reasons. Firstly, FDI
flows in Vietnam have recently become the main source of external financing for
the domestic savings-investment gap. Over the period 2007-2009, FDI inflows to
Vietnam, on average, accounted for 61% in capital flows (Tran, 2013) and this has
remained a high share, with a slight decrease to 59% during the 2010-2017 period.19
Secondly, although Vietnam has not received a large amount of FDI flows
compared to other developing countries such as China, India and Mexico, its
increasing success in attracting FDI flows has been impressive. In particular, FDI
flows into Vietnam in 2017 (14.1 billion US$) were 70 times larger than the flows
19Calculated from Balance of Payments and International Investment Position Statistics, IMF, accessed at
http://data.imf.org
53
in 1990 (180 million US$), while the figures are 21.1, 3.7, 17.3, 11.1, and 3.0 times
for Indonesia, Malaysia, Philippines, Singapore and, Thailand respectively
(UNCTAD, 2018). Vietnam became the second largest FDI recipient (after
Singapore) in ASEAN for the first time in 2008, continuing in 2009. In 2017,
Vietnam was the third largest FDI destination in the ASEAN region, following
Singapore and Indonesia (UNCTAD, 2018).
Thirdly, FDI has played a key role in Vietnam’s exports. Exports from the foreign
invested sector have accounted for more than 60% of Vietnam’s exports since 2012,
reaching 73% in 2017 (GSO, 2018).20
Fourthly, there has been rapid trade liberalisation in the world economy, achieved
through a number of RTAs, with 291 RTAs in force as of January 2019 (WTO,
2019). Consistent with the global trend, Vietnam has been actively and deeply
involved in trade liberalisation process, with 11 FTAs entered into force as of April
2019, as shown in Table 3.1.21 Significant changes in Vietnam’s inward FDI have
been observed following these FTAs.
20
The foreign invested sector refers to enterprises in which foreign ownership accounts for at least a 51
percent threshold, as stated in the 2014 Law on Investment in Vietnam, accessed at the website of Ministry of
Justice of Vietnam http://www.moj.gov.vn
21
Although the US-Vietnam trade agreement is an important trade agreement, it is not categorised as a RTA,
therefore is not included in this table. See
http://rtais.wto.org/UI/PublicSearchByMemberResult.aspx?MemberCode=704&lang=1&redirect=1 and
http://wtocenter.vn/fta.
54
Table 3.1: Vietnam's RTAs Entering into Force as of April 2019
RTAs Date of signature Date of entry into force
ASEAN Free Trade Area (AFTA) Jan-1992 Jan-1993
ASEAN-China Nov-2004 Jan-2005
ASEAN-Korea Aug-2006 Jan-2010
ASEAN-Japan Mar-2008 Dec-2008
ASEAN-Australia-New Zealand Feb-2009 Jan-2010
ASEAN-India Aug-2009 Jan-2010
Vietnam-Eurasian Economic Union May-2015 Oct-2016
Vietnam-Japan Dec-2008 Oct-2009
Vietnam-Chile Nov-2011 Jan-2014
Vietnam-Korea May-2015 Dec-2015
Comprehensive and Progressive Agreement March-2018 Dec-2018

for Trans-Pacific Partnership (CPTPP)
Source: WTO (2019)
The remainder of this paper is organised as follows. Section 3.2 briefly presents
trends and patterns of FDI flows in Vietnam. Section 3.3 summarises the theoretical
framework of FDI, followed by a discussion of previous relevant studies in Section
3.4. Model specification, data, and methodology are presented in Section 3.5, with
Section 3.6 discussing the empirical results. Section 3.7 presents our concluding
remarks.
3.2 Trends and Patterns of FDI in Vietnam
In this section, we present trends of FDI in Vietnam, followed by a discussion of

changes in Vietnam’s sources of FDI and the sectoral composition of Vietnam’s
inward FDI flows. Figure 3.1 indicates FDI flows into Vietnam between 1990 and
2017. In the immediate aftermath of the Renovation Policy in the mid-1980s,
55
Vietnam became an attractive destination of foreign firms due to a variety of
investment opportunities in infrastructure and resource extraction boom
(Athukorala & Tran, 2012), which explains much of the rapid increase in Vietnam’s
inward FDI flows over the 1990-1996 period.
After reaching its peak in 1996, FDI inflows to Vietnam experienced significant
decreases over the 1997-2001 period. This decrease was largely due to adverse
impacts on Vietnam’s investment environment due to the revised FDI law in 1996
which included some restrictions on foreign firms (Athukorala & Tran, 2012;
Schaumburg-Müller, 2003). The Asian Financial Crisis, however, contributed to
the deterioration of this downturn (Schaumburg-Müller, 2003).
Since 2003, Vietnam has experienced a substantial increase in inward FDI. It is

notable that FDI inflows to Vietnam in 2008, 2009, and 2010 were higher than the
annual levels before the Global Financial Crisis. A survey carried out by the
Economist Intelligence Unit characterised Vietnam, along with Brazil, Russia,
India, and China, as the most attractive FDI destination between 2008 and 2010
(Breu, Dobbs, Remes, Skilling, & Kim, 2012). This is in line with UNCTAD (2010),
which ranked Vietnam one of the most attractive destination for FDI over the 2007-
2009 period.
Figure 3.1: Annual FDI Inflows to Vietnam, 1990-2017 (US$ million)
FDI inflow to Vietnam

16.0
14.0
12.0
Billions of $ US
10.0
8.0
6.0
4.0
2.0
0.0
1998
2011
1990
1991
1992
1993
1994
1995
1996
1997
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2012
2013
2014
2015
2016
2017
Source: UNCTAD (2018)
56
Table 3.2 presents sources of Vietnam’s inward FDI flows from FTA partners as
well as other key partners. Over the 1996-2000 period, FDI flows from intra-
ASEAN accounted for almost one-fifth of Vietnam’s total inward FDI, followed by
Japan (16.9%), Taiwan (14.4%), South Korea (10.9%), and Hong Kong (9.8%).
However, these main investors contributed smaller shares between 2001 and 2005.
The remaining periods experienced increasing FDI shares of partners having FTAs
with Vietnam, such as ASEAN, China, Japan, and South Korea. In the most recent
period from 2016 to 2017, ASEAN+6 together accounted for 71.1% of Vietnam’s
total FDI inflows, with the top 3 investors including South Korea (26.1%), Japan
(18.4%), and intra-ASEAN (18.1%). In contrast, although Australia, India, and
New Zealand invested more in Vietnam following FTAs, their FDI shares in
Vietnam’s total inward FDI remain minimal.
Table 3.2: Sources of Vietnam's Inward FDI (%)

1996- 2001- 2006- 2011- 2016-
Source country 2000 2005 2010 2015 2017
Intra-ASEAN 19.7 12.2 14.9 18.7 18.1
China 0.7 2.1 1.8 4.6 6.8
India 0.1 0.0 0.4 0.2 0.5
Japan 16.9 12.4 10.4 18.3 18.4
South Korea 10.9 6.9 12.8 21.6 26.1
Australia 0.5 0.9 0.5 0.7 1.1
NZ 0.0 0.0 0.1 0.0 0.0
*
ASEAN+6 48.8 34.6 40.9 64.2 71.1
Hong Kong 9.8 4.4 4.3 9.1 5.4
Taiwan 14.4 7.3 9.5 6.9 5.8
US 3.8 6.0 16.3 1.1 2.1
Others 23.2 47.6 29.0 18.7 15.7
Total (%) 100.0 100.0 100.0 100.0 100.0
Total (Mil. $US) 8,987.0 7,714.0 34,560.0 45,787.0 26,700.0
Source: Calculated based on ASEAN Secretariat database (ASEAN Secretariat, 2019)
Note: * Includes nine ASEAN members plus China, India, Japan, South Korea, Australia, and New
Zealand.
The sectoral composition of Vietnam’s FDI inflows are shown in Table 3.3. The
manufacturing sector has been the largest FDI recipient. This sector has recently
become more important, accounting for more than 70% of Vietnam’s annual inward
FDI in three successive years of 2012, 2013 and 2014, due to a surge of Korean
investment. In 2016, 64% of Vietnam’s inward FDI flows surged to this sector, with
Korea making the greatest contributions (ASEAN Secretariat, 2017). In contrast,
57
mining and quarrying, which used to be the traditional beneficiaries of FDI, have
seen their shares decrease over time. Their annual shares have been less than 10%
since 2006, compared with the average annual shares of 28.2% for the 2000-2004
period. Similarly, FDI shares of agriculture, fishery and forestry have gradually
declined, from 7.1% in 2000 to 0.6% in 2014. It is notable that real estate, which
attracted minimal FDI prior to 2005, has recently become a favoured sector for
foreign investors, absorbing one-third of Vietnam’s FDI flows in 2009. While
reducing in importance somewhat, this sector maintained relatively high shares of
11% and 7% in 2015 and 2016 respectively (ASEAN Secretariat, 2017).
Table 3.3: Shares of FDI Flows into Vietnam by Sectors (%)

Agriculture,
fishery & Mining & Manufacturing Construction Trade Financial Real Others Total
forestry quarrying services estate
2000 7.1 24.1 39.5 8.2 0.0 0.9 0.0 20.3 100.0
2001 9.2 23.0 38.2 5.7 0.0 1.2 0.0 22.6 100.0
2002 7.3 33.9 47.8 2.8 0.9 3.3 0.5 3.6 100.0
2003 2.9 29.8 40.2 0.3 1.8 1.2 0.4 23.4 100.0
2004 3.5 30.0 35.0 0.6 1.9 1.1 0.6 27.4 100.0
2005 2.8 12.9 59.9 1.2 3.0 1.0 2.2 17.1 100.0
2006 2.2 1.8 63.0 5.3 1.3 0.9 22.4 3.2 100.0
2007 2.3 1.8 62.4 5.4 1.4 0.8 21.9 3.9 100.0
2008 3.6 1.2 56.8 15.9 2.5 1.1 13.2 5.8 100.0
2009 0.6 1.8 15.4 2.4 1.4 0.0 34.0 44.4 100.0
2010 0.1 0.0 30.6 10.1 1.5 0.4 29.3 28.1 100.0
2011 1.0 0.5 48.5 17.2 2.9 0.0 5.0 24.8 100.0
2012 0.6 1.0 71.6 2.1 4.7 0.0 12.1 7.8 100.0
2013 0.4 0.4 76.9 1.0 2.5 0.0 4.4 14.4 100.0
2014 0.6 0.5 71.1 5.0 1.9 0.0 13.0 8.0 100.0
22
Source: Data compiled from the ASEAN Investment Reports 2011, 2013-2014, and 2015
3.3 Theoretical Framework
In this section, we analyse firms’ motivations to invest abroad before moving to

discuss channels through which FTAs affect FDI flows. With regard to theories
explaining why firms invest abroad, the well-known eclectic paradigm (Dunning,
1981), also known as the OLI (Ownership, Location, and Internalisation)
framework, discusses three conditions for FDI to occur. Firstly, the firm needs
22
https://asean.org/
58
ownership advantages including both tangible and intangible firm-specific assets
such as proprietary technology, trademarks, production management,
organisational and marketing systems, or R&D capacity. Secondly, based on
location-specific advantages such as input prices, transport and communication
costs, government intervention, education, and infrastructure, the firm chooses the
best foreign destination. Thirdly, internalisation advantages of a MNE mean that
the firm will get more benefits if it internally exploits ownership advantages itself
rather than licensing them to foreign producers. Blomstrom and Kokko (1997) and
Globerman (2002) support the view that FDI is driven by the motivation to exploit
firm-specific intangible assets. Horstmann and Markusen (1987) argue that serving
foreign markets though horizontal FDI would be preferable to licensing strategy
because it helps preserve secrecy in terms of firm-specific assets. The proximity-
concentration hypothesis suggests that given greater transport costs, trade barriers,
lower plant scale economies, and investment barriers, a firm is more likely to
choose overseas production over exports (Brainard, 1993).
FDI patterns reflect firms’ motivations for investing abroad. A firm will engage in
vertical FDI (resource seeking) to take advantage of relatively cheap and abundant
factors of production across countries, while it may launch horizontal FDI (tariff-
jumping or market seeking) to jump trade barriers such as tariffs, distance,
transportation, and insurance (Bae & Jang, 2013).
A number of key factors contribute to how FTAs impact on FDI. Firstly, FTAs have
different effects on the two patterns of FDI. Firms of an FTA member are likely to
serve FTA members’ demand through exports and benefit from economies of scale
rather than through foreign production, due to reduced trade costs following FTAs.
Thus, FTAs tend to have adverse impacts on horizontal FDI. In contrast, FTAs
increase vertical FDI as it becomes cheaper for MNEs within the integrated region
to export intermediate goods to FTA members and import final goods from these
countries to their home countries.
Secondly, FTAs’ investment provisions create an FDI-friendly environment (Bae

& Jang, 2013), which stimulates inward FDI to FTA members. For example,
following the AFTA, two investment packages including the ASEAN Industrial
Cooperation and the ASEAN Investment Area were established to encourage both
59
intra- and extra-ASEAN FDI flows (Ismail, Smith, & Kugler, 2009; Te Velde &
Bezemer, 2006).
Thirdly, as a result of RTAs, non-members become important sources of increased

FDI inflows due to two possible reasons. Firstly, possible increases in relative
protection against firms from non-members result in enhanced FDI from outsiders
into the whole region (Blomstrom & Kokko, 1997). Secondly, RTAs also generate
greater market size, making the integrated areas more attractive (Buckley, Clagg,
Forsans, & Reilly, 2001). Outside investors can launch horizontal FDI in one or
more FTA members to serve the demand of these countries and use them as
platforms to export to other locations of the region (Feils & Rahman, 2008;
Lederman, Maloney, & Serven, 2003; Te Velde & Bezemer, 2006).
Fourthly, locational advantages of host countries are also channels through which
FTAs affect FDI. A RTA may not benefit all its members in terms of increased FDI
flows, depending largely on FDI competition and location-specific advantages
(Feils & Rahman, 2008, 2011). FTA members with stronger locational advantages
are more likely to receive FDI inflows from remaining members and outsiders
(Blomstrom & Kokko, 1997).
In this section, we review empirical studies examining the relationship between

FTAs and FDI. We start with studies focusing on multiple FTAs for a group of
countries before proceeding to summarise case studies, with a focus either on one
specific FTA or country, followed by a summary of FDI studies on Vietnam.
In terms of multi-FTA studies for a large number of countries, mixed results of

FTAs on FDI have been found, with a dominance of positive effects. Yeyati et al.
(2003) use panel data covering 20 source countries from the OECD and 60 host
countries during the 1982-1999 period to examine how FTAs impact on the location
of FDI. Based on a gravity model, they find that FTAs increase FDI stocks between
members by 27%. Medvedev (2012) accounts for all existing preferential trade
agreements (PTAs) and uses a large panel covering 153 countries over the 1980-
2004 period. His findings show that PTA membership results in a substantial
increase in net FDI inflows. Using gravity models and panel data from 1980 to 2003,
60
Feils and Rahman (2011) analyse FDI flows from 59 countries into 24 OECD host
countries. They report that there is an increase in FDI flows among regional
integrated area members, with greater impacts for larger economies. Thangavelu
and Narjoko (2014) find that FTAs increase FDI inflows to the ASEAN region
between 2000 and 2009, based on an extended gravity model.
In contrast, Lederman et al. (2003) find that the coefficient on free trade area
dummy has no impact on FDI flows. Ullah and Inaba (2014) analyse FDI flows to
nine Asian host countries from 23 source countries over the 1995-2010 period.
Similarly, estimation results of the gravity model suggests that both bilateral
investment treaties and bilateral trade agreements are not associated with increased
FDI flows due to existing liberal FDI policies. Dee and Gali (2003) examine effects
of PTAs on foreign investment over the period from 1988 to 1997 using a gravity
model. They find evidence of net investment creation in six of the nine PTAs
examined. One PTA creates negative net investment effects, while the two
remaining PTAs show no effects. Employing a knowledge capital model, Jang
(2011) shows that bilateral FTAs have a negative effect on bilateral FDI in intra-
OECD country pairs and a positive effect in extra-OECD country pairs. These
outcomes are consistent with their hypothesis that there is a dominance of
horizontal FDI in intra-OECD country pairs and vertical FDI in extra-OECD
country pairs.
Case studies, which focus on a specifically well-known FTA, usually report positive
results, with significant difference in FDI gains among FTA members. For instance,
the North American FTA (NAFTA) has received a lot of attention, with Waldkirch
(2003) finding that this agreement is associated with enhanced FDI flows into
Mexico from the US and Canada. Feils and Rahman (2008) indicate the US and
Canada are great beneficiaries in terms of inward FDI due to the implementation of
NAFTA. Based on a fixed-effects gravity model, MacDermott (2007) finds that
NAFTA increases FDI flows into the US, Canada, and Mexico by 0.96%, 1.54%,
and 1.73% respectively. Regarding the European Union, Dunning (1997) finds that
there has been an increase in both intra- and extra-European Community FDI
following the Internal Market Program (IMP) launched in 1986. Lim (2001) reports
the Mercado Comun del Sur (MERCOSUR) has had a stronger impact on FDI flows
61
in Brazil than in Argentina, with FDI as a percent of GDP rising by 578% and 71%
respectively. Ismail et al. (2009) use a gravity model and point out that during the
implementation period of the AFTA from 1995 to 2003, FDI flows among original
AFTA members were not as much as the bilateral FDI flows from these countries
to Brunei, Laos, Myanmar and Vietnam. Li, Scollay, and Gilbert (2017) suggest
that the ASEAN-China FTA has increased FDI flows to China and ASEAN-6
countries (Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam) based
on an extended knowledge capital model.
There are very few case studies assessing the impact on FDI flows of overall FTAs
in a specific country. The limited studies include Crotti et al. (2010) and Bae and
Jang (2013) for cases of two developed countries, Australia and Korea respectively,
with inconsistent results. In particular, Crotti et al. (2010) examine FDI flows into
Australia from 27 source countries using panel data between 1993 and 2003. They
find that Australia’s bilateral trade agreements are associated with increased FDI
flows into Australia based on a gravity model. However, with a knowledge-capital
model, Bae and Jang (2013) find that between 2000 and 2010, while FTAs increase
Korea’s outward FDI by more than 50%, their effects on Korea’s inward FDI are
negative due in part to the possible dominance of horizontal FDI over vertical FDI.
For Vietnam, there have been a variety of studies on Vietnam’s FDI, with many of
them analysing the role of FDI. For instance, Athukorala and Tran (2012) explore
the importance of FDI in reaping developmental gains in Vietnam. Le and Pomfret
(2011) assess the impact on the productivity of Vietnam’s domestic firms of
technology spillovers through FDI. Anwar and Nguyen (2010) and Vu, Gangnes,
and Noy (2008) evaluate the impact of FDI on growth in Vietnam. Some studies
examine the linkage between FDI and trade (Anwar & Nguyen, 2011; Nguyen &
Xing, 2008; Pham & Nguyen, 2013). Other studies, such as Pham (2002) and Hoang
and Goujon (2014), assess the drivers of FDI inflows among Vietnamese provinces.
Xaypanya, Rangkakulnuwat, and Paweenawat (2015) investigate key determinants
of FDI in Vietnam and other ASEAN countries. However, very few studies account
for changes in Vietnam’s inward FDI following FTAs. In particular, Nguyen and
Haughton (2002) examine whether there is an expansion of FDI flows into Vietnam
as a result of the bilateral trade agreement between Vietnam and the US between
62
1990 and 1999. They find that FDI flows into Vietnam go up by 30% in the first
year following this agreement. Using the Hausman-Taylor estimator approach for
the panel data covering Vietnam’s 18 major FDI partners, Hoang, Do, Bui, and
Dang (2013) find evidence of investment diversion for Vietnam following the
AFTA and the ASEAN-Australia-New Zealand FTA during the 1995-2011 period.
In contrast, Le (2017) applies the Prais-Winsten panel-corrected standard error
(PCSE) estimation to the 1996-2012 panel data for Vietnam’s 25 main partners,
showing that the ASEAN-Korea FTA and the Japan-Vietnam FTAs are associated
with increased FDI flows into Vietnam during the period 1996 to 2012. These
results are mixed and inconsistent, depending on study periods, methodologies used
and specific FTAs. Therefore, it is imperative to have a study assessing whether
FTAs have, in general, been efficient in attracting FDI flows to Vietnam.
In conclusion, there have been a wide range of studies on the link between RTAs
and FDI, with mixed results. However, there has been a lack of empirical studies
evaluating the impact of overall FTAs on inward FDI for a particular country,
especially in the case of developing countries. The current study therefore
contributes to the existing literature on FDI-FTA linkages in developing countries,
with a case study of Vietnam. We also examine whether there are any changes in
foreign investors’ sensitivity to key drivers of FDI following FTAs in Vietnam.
Furthermore, based on the outcomes for FTAs and other drivers of FDI, we provide
insights into Vietnam’s patterns of FDI, which are generally ignored in existing
studies.
3.5 Model Specification, Data and Methodology
3.5.1 Model Specification
In this section, we measure the impact of FTAs on Vietnam’s inward FDI flows
using a gravity model approach.23 Brenton, Di Mauro, and Lücke (1999) show that
theoretical models explaining FDI such as OLI framework and others developed by
Brainard (1997) and Markusen and Venables (2000) consider economic size and
other country characteristics as important drivers of FDI, which stimulate
23
The gravity model was first adopted by Tinbergen (1962) and Pöyhönen (1963) in trade analysis.
63
applications of gravity models to studies on FDI. The gravity model, which seems
to fit FDI flows well (Feils & Rahman, 2011; Hejazi & Safarian, 2005), predicts
that FDI flows between two countries positively depend on the countries’ economic
sizes and negatively relates to the distance between them.
Faeth (2009) states that a variety of theoretical models should be combined to

explain FDI. Consistent with Bevan and Estrin (2004), we extend the basic model
to account for comparative and locational advantages in Vietnam. A dummy
variable is also added to the model to account for the impact of FTAs on FDI flows
(Crotti et al., 2010; Yeyati et al., 2003).
The extended gravity model for FDI flows is specified as follows:
ln rFDIivt = α0 + α1 ln GDPvt−1 + α2 ln GDPit−1 + α3 ln DISvi + α4 ln rER vit−1 +

α5 ln rIMPivt−1 + α6 ln DIFFvit−1 + α7 ln INFRAvt−1 + α8 HCvt−1 + α9 FTAvit +
α10 CRISA +α11 POLITIvt−1+α12 BOR vi +εivt (1)
where v denotes Vietnam and i is the country partner of Vietnam. The independent
variables, with the exception of the time invariant and dummy variables, are lagged
one-year on the grounds that MNEs may rely on previous information to make
investment decisions (Bellak, Leibrecht, & Damijan, 2009; Bevan & Estrin, 2004).
This is also helpful in dealing with the possibility of endogeneity (Ullah & Inaba,
2014).24 rFDIivt represents real FDI flows from country partner i to Vietnam. GDPvt
and GDPit represent real GDP of Vietnam and country i, respectively. DISvi is the
distance between the capital of Vietnam and that of country i. BORvi is a dummy
variable that takes the value of 1 if Vietnam and country i share a common border.
rERvit is the real exchange rate between the currency of Vietnam (VND) and that of
country i. Following Feils and Rahman (2008), rIMPivt, which is Vietnam’s real
bilateral imports from home country i, is a determinant of FDI flows. Factor
endowments are important determinants of FDI flows (Bae & Jang, 2013; Park &
Park, 2008; Yeyati et al., 2003). Therefore, DIFFvit, which is the ratio of GDP per
capita of Vietnam and GDP per capita of country partner i, is defined as a proxy for
the differences in factor endowments between the two countries (Bae & Jang, 2013).
24
Also see Crotti et al. (2010) and Nguyen and Xing (2008) who use lagged independent variables
to avoid the problem of endogeneity.
64
INFRAvt-1 denotes a proxy for infrastructure development in Vietnam. HCvt-1 is
defined as human capital, representing the importance of labor quality in Vietnam.
It is the percentage of Vietnamese students in Vietnam’s total population. CRISA
represents the Asian Financial Crisis, taking the value of 1 during the period 1998-
1999 for countries affected. POLITIvt-1 denotes a proxy for governance indicator.
The World Development Indicators (WDIs) of the World Bank provide six
governance indicators including control of corruption, government effectiveness,
regulatory quality, rule of law, voice and accountability, political stability and
absence of violence. A principal component of these six indicators was calculated
and included in the model, but no impact was observed. Among these six individual
indicators, only political stability and absence of violence positively impacts on FDI
flows into Vietnam. Therefore, it is used as a governance indicator in this study,
which is in line with Edwards (1990) and Chakrabarti (2001). FTAvit is the key
variable, getting the value of 1 if Vietnam and country partner i have participated
into an FTA (date of entry into force), and 0 otherwise. Finally, εivt = αvi+ vvit. While
αvi denotes the specific country-pair effect that accounts for the unobservable and
time-invariant characteristics that are specific to each pair of countries, vvit
represents the error term that is assumed to be log normally distributed.
3.5.2 Data
This study employs panel data comprising Vietnam and its 17 country partners over
the 1997-2016 period. Based on Vietnam’s main FDI partners and the availability
of the data, the 17 partners selected include Indonesia, Malaysia, Singapore,
Thailand, China, Japan, Korea, Canada, US, Hong Kong, Taiwan, France, Germany,
Italy, Netherland, United Kingdom, and Sweden. During the last two decades, from
1995 to 2016, these 17 partners have accounted for almost 84% of Vietnam’s total
inward FDI. 25 Indeed, in 2016 at the end of the study period, FDI flows into
Vietnam from these partners contributed 83% of Vietnam’s FDI inflows.
We also include a sub-period spanning from 2005 to 2016 with Vietnam’s 23

trading partners due to three reasons. Firstly, AFTA was Vietnam’s first FTA, and
25
65
it took almost ten years before Vietnam had its second FTA (ASEAN-China FTA),
at the end of 2004. Since then, Vietnam has participated in a variety of FTAs.
Secondly, Brunei, India, Australia, Denmark, Belgium and Luxembourg have
become Vietnam’s significant FDI partners in this sub-period and this change in
partners should be accounted for. Furthermore, the 2005-2016 period has
experienced dramatic increases in Vietnam’s FDI inflows.
FDI flows into Vietnam by source countries are obtained from the ASEAN
Secretariat, while Vietnam’s imports from its partners are collected from the
General Statistics Office of Vietnam (GSO). The data are then scaled by the
consumer price index of the US to generate real values.
The bilateral real exchange rate data between Vietnam and its partners are not
directly available. Following Duong, Holmes, Strutt, and Lim (2019), they are
calculated as follows:
rERvit = (CPIit/CPIvt) * (nERvt/$ / nERit/$)
where CPIit, CPIvt are the annual consumer price index of country i and Vietnam at
year t respectively. nERvt/$ and nERit/$ are the nominal exchange rates, indicating
the amount of each country’s currency per 1 $US at year t. CPI and nominal
exchange rate data for Taiwan are from the National Statistics Republic of China
and the Federal Reserve Bank of St. Louis respectively, whereas the data for others
are from the World Bank’s WDIs.
Real GDP and population data are sourced from the WDIs of the World Bank except
for Taiwan whose data are collected from the IMF. Political stability and absence
of violence index is from the WDIs, ranging from -2.5 (weak) to 2.5 (strong) for
governance performance. Human capital (percentage of Vietnamese students in its
total population) is from the General Statistical Office of Vietnam. The length of
railways (a proxy for infrastructure) is from the WDIs. Information on Vietnam’s
FTAs are from the World Trade Organization, whereas data on distance and border
are from Centre d'Études Prospectives et d'Informations Internationales (CEPII).
66
3.5.3 Methodology
As a panel dataset is used, panel estimators, such as ordinary least squares (OLS),
fixed effects (FE), and random effects (RE) methods can be employed. First, based
on Wald statistics for groupwise heteroscedasticity, we test whether there is the
presence of heteroscedasticity across panel data for the whole period and sub-
period. The Wald tests, as reported in Table 3.4 and Table 3.5, reject the null
hypothesis that the variance of the disturbance term in each model is constant over
time. To address the issue, the White-adjusted robust standard errors are used. Next,
we check the serial correlation for the models in the two periods. The Wooldridge
test suggests that there is no serial correlation in the idiosyncratic error term in the
sub-period model, while it indicates that autocorrelation exists in the whole period
model. To deal with the problem of autocorrelation, generalised least squares (GLS)
should be used (Barreto & Howland, 2005; Wooldridge, 2012). We then utilise the
Hausman’s specification test (FE vs. RE) and the Breusch and Pagan LM test (OLS
vs. RE) to determine the preferred estimator for each model.
In terms of dynamic panel data, the difference generalised method of moments

(GMM) estimator (Arellano & Bond, 1991) and the system GMM estimator
(Blundell & Bond, 1998) have been increasingly applied to studies on FDI analysis
(Kahouli & Omri, 2017; Mijiyawa, 2017; Saini & Singhania, 2018; Ullah & Khan,
2017). However, it is well-known that GMM estimator is efficient for panels with
small or moderate time points (T) and large cross-section units (N), which is not the
case for the whole period (T=20>N=17). In this respect, large T may lead to
inconsistent GMM estimators (Han & Phillips, 2010). In the sub-period, we have
N>T. However, the GMM technique is still inapplicable because the data do not
meet the requirements of GMM estimation.26 Therefore, the GMM estimator is not
an alternative to estimate the panel data in this study.
26Two conditions need to be met for the application of the GMM (Kahouli & Omri, 2017). First, the differenced
error term should be serially correlated at the first order, but no autocorrelation at the second order. Second,
based on Sargan/Hansen test of over-identifying restrictions, the instruments and the error term need to be
uncorrelated.
67
3.6 Empirical Results
We estimate two separate regressions, allowing us to compare and contrast the

findings. The first regression includes data for the whole period, whereas the second
regression is restricted to the more recent data with Vietnam’s additional FDI
partners included.
The estimated results for the whole period, from 1997 to 2016, are shown in Table
3.4 using OLS, FE and RE methods. The LM statistic (643.68) of the Breusch and
Pagan LM test (RE vs. FE), is significant at 1%, suggesting that RE model is
superior to the OLS model. In addition, the test statistic (1.22) of the Hausman’s
specification test (FE vs. RE) indicates that RE model is preferable to FE model.
We therefore focus on the estimated results based on RE estimation reported in the
fourth column. We begin with a discussion of the impacts from the control variables
before focusing on our main variable (FTAs).
Home country market size positively affects FDI inflows to Vietnam, with an
elasticity of 0.71. Vietnam’s market size, however, has no significant effects on
inward FDI. Although this seems to contrast with the literature showing that host
country market size is a driver of FDI, this finding reflects the fact that source
country market size is much larger than the size of the Vietnamese market.
Therefore, overseas investors may not base on Vietnam’s market size to determine
whether they invest in Vietnam or not.
The significantly positive estimated elasticity of FDI inflows with respect to the
real exchange rate between Vietnam and its partners suggests that a depreciation of
Vietnamese currency contributes to enhanced FDI flows. Foreign investors benefit
from a weak host country currency as they receive a larger investment (Blonigen,
2005; Feils & Rahman, 2011). However, inward FDI responds negatively to the
distance between Vietnam’s capital and its partners’ capitals. Greater geographic
distance between two countries results in less FDI due to increased costs such as
transportation, transaction and management costs. Regarding the quality of human
capital (HC), infrastructure (INFRA) and political stability (POLITI) of Vietnam,
these are found to be associated with increased FDI flows.
68
With regards to the relationship between trade and FDI, the elasticity of FDI inflows
with respect to imports by Vietnam from partners is 0.39 and significant at 5%,
underlining a complementarity between them (Lipsey & Weiss, 1981; Markusen,
1984). This is partly because MNEs need intermediate inputs and services from
headquarters in their home countries (De Mello Jr & Fukasaku, 2000). We can
further infer that vertical FDI seems to dominate FDI flows into Vietnam because
the increase in imports by Vietnam from partners (or exports from partners to
Vietnam) does not reduce FDI flows from partners to Vietnam.
In terms of factor endowments, the DIFFvit-1 coefficient carries a negative sign as

expected and is significant at the 1% level, with a 1 % increase in DIFFvit-1
resulting in a 1.06% decrease in Vietnam’s FDI inflows. An increase in the ratio of
GDP per capita of Vietnam to GDP per capita of country partner i (ln DIFFvit-1)
indicates a decreased difference in factor endowments between Vietnam and its
partners. In other words, Vietnam’s factor endowments have become relatively
more expensive. Therefore, vertical FDI, which has been motivated by cheaper
factor endowments, tends to decrease. This decrease, in turn, reduces FDI flows to
Vietnam. This finding also supports the dominance of vertical FDI over horizontal
FDI flows in Vietnam. This is in agreement with Bae and Jang (2013), who find
that a smaller gap of GDP per capita between Korea and its developed partners
decreases FDI flows from these partners into Korea. In contrast, for the dominance
of horizontal FDI in total FDI, Hattari and Rajan (2008) find that the smaller the
income divergence between the host and source countries, the larger will be
bilateral FDI flows between them.
FTAs, the main focus area of our study, are found to be associated with increased
FDI flows to Vietnam, on average, of 129% (exp(0.827)-1). This finding is
consistent with positive impacts of the ASEAN-Korea FTA and the Japan-Vietnam
FTA on FDI flows in Vietnam (Le, 2017), investment creation in China and
ASEAN-6 following the ASEAN-China FTA (Li et al., 2017), and significant
increase in FDI flows to Brunei, Laos, Myanmar and Vietnam from original
ASEAN members as a result of the AFTA (Ismail et al., 2009). Although there is
evidence of investment diversion of the AFTA and the ASEAN-Australia-New
Zealand FTA in Vietnam (Hoang et al., 2013), our results show that FTAs, in
69
general, are significantly beneficial to Vietnam in terms of enhanced FDI flows.
This increase is largely due to the prevalence of vertical FDI. A more friendly-FDI
environment following FTAs also contributes to the positive change in Vietnam’s
inward FDI.
Table 3.4: Estimation Results for FDI Inflows to Vietnam, 1997-2016

Variables OLS FE RE
ln GDPvt-1 -0.548 -0.402 -0.063
(1.107) (2.447) (0.623)
ln GDPit-1 0.324*** 1.216 0.705*
(0.119) (2.624) (0.421)
***
ln DISvi -1.108 - -1.927***
(0.211) - (0.503)
***
ln rERvit-1 0.120 0.156* 0.138**
(0.043) (0.089) (0.070)
***
ln rIMPivt-1 0.807 0.340 0.392**
(0.111) (0.198) (0.188)
***
ln DIFFvit-1 -0.840 -0.688 -1.062***
(0.148) (2.768) (0.279)
** ***
ln INFRAvt-1 2.471 2.298 2.306***
(1.149) (0.548) (0.566)
*
HCvt-1 0.859 0.985 0.976**
(0.840) (0.462) (0.439)
** ***
FTA 0.443 0.840 0.827***
(0.192) (0.258) (0.172)
CRISA 0.207 0.257 0.238
(0.263) (0.245) (0.236)
* ***
POLITIvt-1 1.821 1.757 1.760***
(0.948) (0.515) (0.516)
BOR -0.712 - -0.716
(0.474) - (1.007)
**
Constant -9.653 -36.376 -16.781
(23.455) (15.000) (13.350)
Breusch-Pagan LM test 643.68***
Hausman test 1.22
Wald test statistics 240.13***
Wooldridge test, F 4.90*
Number of observations 340
***, **, *: Significance levels at 1%, 5%, and 10% respectively. White robust standard errors are
in parentheses.
Table 3.5 reports the results for the sub-period between 2005 and 2016. We estimate
the gravity model using OLS, FE, and RE methods. Similarly, both the Breusch-
70
Pagan LM test (RE vs. OLS) and the Hausman test (RE vs. FE) suggest that RE
should be used. As most of Vietnam’s FTAs entered into force in this sub-period,
we also examine whether foreign investors’ sensitivity to key determinants of FDI
has changed following FTAs. Therefore, we base on RE (3) and RE (4) for the result
explanation.
As shown in Table 3.5, the signs and significance of most of the estimated
coefficients for the sub-period remain unchanged. However, Vietnam’s market size
has become an important determinant of FDI. One possible reason is that Vietnam
has experienced significantly decreased gaps between the GDP of Vietnam and its
partners since 2005, which may make the market size of Vietnam more important.
Consistent with the outcome for the whole period, FTAs are also found to stimulate
FDI flows. As expected, the impact of FTAs is much stronger in this sub-period,
increasing FDI inflows to Vietnam by 246% (exp(1.240)-1). Therefore, there has
been a significant role for FTAs in attracting FDI. In addition, in this FTA period,
the effect of FTAs on FDI flows instead works interactively through DIFF, HC, and
rER, as shown in (4).
Regarding the interaction terms FTA*ln rERvit-1, the sub-period has seen FDI and
the real exchange rate becoming negatively related following FTAs, with a more
important role of the real exchange rate. The negative sign on the FTA*ln rERvit-1
suggests that a real exchange rate depreciation leads to a fall in FDI. This outcome
is opposite to the finding in Table 4 and the general literature as well. However, this
result may be partly explained by the Vietnamese nominal exchange rate
(VND/1US$), a component used in calculations of the real exchange rate in this
study. The nominal exchange rate in Vietnam has experienced substantial
fluctuations since 2008, with a depreciating trend of the VND against the US dollar
between 2009 and 2011 (Le et al., 2016), and a variety of adjustments from the
State Bank of Vietnam, especially in the exchange rate band. In addition, the habit
of keeping US dollars, either as a hedge against inflation or with expectations of a
depreciation in VND against US$, leads to an artificial demand for US dollars and
generates pressures on the nominal exchange rate (State Bank of Vietnam, 2015).
Although a nominal exchange rate depreciation benefits foreign investors, high
volatility in the exchange rate may reduce the confidence of overseas investors. As
71
most of the FTAs Vietnam has made coming into force in the period with significant
fluctuations in the nominal exchange rate, it is understandable that foreign investors,
especially from FTA partners, may be more cautious and respond negatively to
changes in the Vietnamese nominal exchange rate and the real exchange rate
between Vietnam and its partners as well.
The FTA*HC coefficient is positive and statistically significant at 5 %. The results

are in line with Yeyati et al. (2003), who interact FTA dummy with human capital
(proportion of the labour force with complete secondary education) and find the
positive impact of the interaction on FDI flows. Our finding shows that human
capital has become more important as a driver of FDI following the FTAs. For
Samsung, Vietnam has become an attractive alternative to China due to not only
younger labour force and cheaper labour costs, but improvement of quality of
labour as well.
Consistent with Yeyati et al. (2003) and Bae and Jang (2013), we include the
interaction term between FTA dummy and relative factor endowments, FTA* ln
DIFFvit-1. If FDI is more likely to be vertical FDI, then we expect the impact of
the FTAs on FDI flows to be large. The FTA* ln DIFFvit-1 coefficient is
significantly positive as expected. This finding is in line with Bae and Jang (2013),
who also find a positive impact from this kind of interaction term on FDI inflows
to Korea where Korea’s partners have higher GDP per capita than Korea. This result,
together with the consistent findings for FTAs, trade, and factor endowments in
both the whole period and sub-period, strongly suggest the prevalence of vertical
FDI in Vietnam.
72
Table 3.5: Estimation Results for FDI Inflows to Vietnam, 2005-2016
Variables OLS (1) FE (2) RE (3) RE (4)
ln GDPvt-1 1.421 1.973 1.482* 1.711**
(1.077) (3.670) (0.766) (0.755)
ln GDPit-1 0.746***
3.063 0.873 *** 0.833***
(0.163) (3.071) (0.273) (0.236)
ln DISvi -2.228*** - -2.462*** -2.693***
(0.271) - (0.462) (0.483)
ln rERvit-1 0.028 3.858 **
0.066 0.215
(0.052) (1.544) (0.123) (0.183)
ln rIMPivt-1 0.140 0.110 0.120* 0.094
(0.089) (0.084) (0.069) (0.060)
ln DIFFvit-1 -1.548 ***
0.851 -1.661*** -1.816***
(0.292) (2.907) (0.225) (0.205)
ln INFRAvt-1 2.839** 2.981*** 2.837*** 2.760***
(1.274) (1.032) (1.036) (1.069)
HCvt-1 0.772 0.286 0.755 0.221
(1.072) (0.798) (0.747) (0.877)
FTA 1.149*** 1.022** 1.240*** 1.138
(0.386) (0.491) (0.467) (0.979)
POLITIvt-1 2.501 2.422 *
2.495 * 2.487*
(1.522) (1.353) (1.351) (1.402)
BOR 0.125 -0.078 -0.068
(0.477) (0.801) (0.663)
FTA* ln DIFFvit-1 0.419***
(0.063)
FTA*HC 1.323**
(0.664)
FTA*ln rERvit-1 -0.182*
(0.110)
Constant -52.566* -172.408*** -55.865*** -58.324***
(26.658) (49.483) (20.297) (19.400)
Breusch-Pagan LM 101.97 *** 102.44***
Hausman test 9.13 6.78
Wald test statistics 2,195.84*** 2,420.94***
Wooldridge test, F 2.652 2.633
No. of obser. 276 276
***, **, *: Significance levels at 1%, 5%, and 10% respectively. White robust standard errors are
in parentheses.
3.7 Conclusion and Recommendations
The impact of FTAs on FDI has been ambiguous in the literature to date. Our study
focuses on Vietnam to provide evidence on the effect of the overall FTAs on FDI
73
flows in a developing country. Panel regression results indicate that the overall
FTAs have substantially stimulated FDI inflows to Vietnam in the whole period,
with a much stronger impact in the later sub-period. This indicates that FTAs have
become efficient drivers of Vietnam’s inward FDI. Therefore, the more Vietnam’s
involvement in economic integration through FTAs, the more likely it is to induce
FDI inflows, suggesting the importance of further FTA negotiations. This result,
along with the outcomes for trade, factor endowments, and the interaction term
between FTAs and factor endowments, suggests the dominance of vertical FDI in
Vietnam, which is consistent with the theoretical reasoning indicating that vertical
FDI is more prevalent in developing countries.
We also examine whether the FTAs result in any changes in foreign investors’
sensitivity to the key determinants of FDI in the sub-period. We find that the real
exchange rate, human capital, and factor endowments become more important as
drivers of FDI following the FTAs. These findings have important implications for
Vietnam’s policy makers. In addition to relatively cheaper labour costs as
Vietnam’s locational advantages, Vietnam should continue to develop human
capital. Furthermore, maintaining stability of the exchange rate appears important
to enhance overseas investors’ confidence.
As factor endowments are found to be associated with increased FDI inflows into
Vietnam, future research might explore threshold effects of factor endowments on
inward FDI in an extended study on the ASEAN, such as ASEAN-6. Given that the
real exchange rate has a more important role on FDI flows in Vietnam following
FTAs, another avenue for future research might be to more closely explore the
linkage between them. Furthermore, this study could not account for Vietnam’s
involvement in recent mega-FTAs, such as the CPTPP (Comprehensive and
Progressive Agreement for Trans-Pacific Partnership), RCEP (Regional
Comprehensive Economic Partnership), and EU-Vietnam FTA, which cover most
of Vietnam’s main FDI partners. Future research might look at how these FTAs
impact on Vietnam’s total and sectoral FDI.
74
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4 Chapter 4. Trade and Investment Effects of the EU-
Vietnam Free Trade Agreement
4.1 Introduction
The suspension of the Doha Development Round negotiations has encouraged

countries to reap economic gains through regional trade agreements (RTAs)
(Kutlina-Dimitrova & Lakatos, 2014). Likewise, Vietnam has been actively
involved in a variety of RTAs, among which the EU-Vietnam free trade agreement
(EVFTA) is the most ambitious and comprehensive FTA ever concluded between
the EU and a developing country. This FTA was first negotiated in October 2012
and signed on 30 June, 2019. This is the EU’s second FTA with an ASEAN member
after Singapore, making further contributions towards the goal of a potential EU-
ASEAN FTA.
The EU plays a critical role in Vietnam’s trade. For instance, in 2018, the EU was
Vietnam’s second largest export destination after the US and the fifth largest import
partner, with trade between Vietnam and the EU accounting for 12.0% of Vietnam’s
total trade. The magnitude of trade complementary between the two regions is
relatively high (Baker, Vanzetti, & Pham, 2014). Vietnam tends to export relatively
labour-intensive products to the EU, whereas the EU’s main exports to Vietnam are
more likely to be high-tech products. Thus, the agreement is expected to benefit
trade between the two sides.
The EU is a significant investor in ASEAN, but the EU investment varies

significantly among ASEAN member states. Over the period from 2000 to 2017,
Singapore received 71.4% of total EU investment to ASEAN, followed by Malaysia
(9.5%), and Indonesia (5.9%), while the rest of ASEAN shared the remaining
13.2%, with Vietnam receiving only 4.1%. 27 Given that the EU investment in
Vietnam is still small in comparison with some ASEAN members, liberalisation
under the EVFTA is expected to attract more foreign direct investment (FDI) from
the EU to Vietnam. Therefore, there is still great potential for enhanced FDI inflows
to Vietnam from the EU and trade development between the two regions. Thus, it
27
Authors’ calculations based on the ASEAN FDI database, accessed at https://data.aseanstats.org/
80
is of interest to examine changes in both Vietnamese trade and investment
following the EVFTA.
The EVFTA is ambitious and comprehensive, but existing studies on this agreement
have not modelled liberalisation of FDI barriers following this agreement (Baker &
Vanzetti, 2019; European Commission, 2018b; Kikuchi, Yanagida, & Vo, 2018).
Furthermore, these studies do not analyse how investment in Vietnam changes as a
result of this agreement. Thus, the goal of this paper is to explore the impact of the
EVFTA using a CGE modelling framework, with a focus on Vietnamese trade and
investment. Both trade and investment liberalisation under this agreement are
modelled through reductions in tariffs, non-tariff measures (NTMs) to both goods
and services trade, improved trade facilitation, and reduced barriers to FDI.
The remaining paper is organised as follows. Section 4.2 briefly summarises the
existing literature. Section 4.3 describes trade and investment between Vietnam and
the EU. Section 4.4 presents the modelling framework and policy scenarios. Our
simulated results are presented in Section 4.5, with Section 4.6 noting our
conclusions.
The EU has concluded a variety of bilateral FTAs with both developed and
developing countries. Many of them are based on tariff elimination and have been
found to stimulate trade between the EU and EU’ developing FTA partners such as
the EU-Chile FTA (Jean, Mulder, & Ramos, 2014; Nowak-Lehmann, Herzer, &
Vollmer, 2007), the EU-Ukraine FTA (Frey & Olekseyuk-Viber, 2011), and the
EU-Mexico FTA (Slootmaekers, 2004).
With regard to deep and comprehensive FTAs, the EU-Korea FTA, which came
into effect in 2011, is the first agreement ever concluded between the EU and a
partner (Lakatos & Nilsson, 2017). To assess the economic impact of this FTA,
Decreux, Milner, and Péridy (2010) use a computable general equilibrium (CGE)
model called MIRAGE (Modelling International Relationships in Applied General
Equilibrium) in which tariffs, goods, and services NTMs are modelled. They find
that relative to the baseline assuming no conclusion to the Doha Round, Korea’s
81
GDP goes up by 0.84%, compared with 0.07% for the EU. In addition, EU’s exports
to Korea grow by 82.6%, whereas exports from Korea to the EU rise by 38.39%.
Based on a dynamic general equilibrium model, Kutlina-Dimitrova and Lakatos
(2014) examine the economic impacts of the EU-Singapore FTA which was
concluded in December 2012. Their simulation results indicate that as a result of
reductions in tariffs and NTMs, Singapore’s GDP increases by 0.94% (2.7 € billion),
while EU’s GDP grows marginally (0.00%), with a gain of 550 € million.
Furthermore, EU’s exports to Singapore and Singapore’s exports to the EU are
expected to increase by 1.4 € billion and 3.5 € billion respectively.
Like the EU-South Korea and EU-Singapore FTAs, the EVFTA is one of a new
generation of FTAs. However, studies on this agreement are still limited. In
particular, before the EVFTA was concluded, Philip et al. (2011) and Baker et al.
(2014) focus on analysing the potential impacts of tariff reductions under this
agreement using CGE models. Philip et al. (2011) find that in the case of rapid tariff
dismantling, the FTA would increase Vietnam’s annual GDP and aggregate imports
by around 2.7% and 1.8% respectively. In addition, they indicate that the impacts
of the EVFTA on Vietnam’s investment vary significantly depending on the
scenarios, with the largest increase up to 3.4% by 2020. The simulation results by
Baker et al. (2014) indicate that Vietnam’s GDP would increase by 7-8% relative
to the 2025 baseline following this FTA. In addition, Vietnam’s exports to the EU
increase by around 50%, while its imports from the EU go up by 43% relative to
the 2020 baseline.
Recent studies on the EVFTA include Duong (2016), Vu (2016), Kikuchi et al.
(2018), European Commission (2018b), and Baker and Vanzetti (2019). In
particular, based on a gravity model and panel data covering Vietnam and 27 EU
member states over the 1997-2013 period, Duong (2016) reports that tariff cuts
under the EVFTA lead to an expansion in the bilateral trade between Vietnam and
the EU. With a partial equilibrium model, namely SMART (Software for Market
Analysis and Restrictions on Trade) model, Vu (2016) examines the ex-ante impact
of the EVFTA on Vietnamese imports of pharmaceutical products from the EU. She
finds that as a result of tariff elimination, Vietnam’s pharmaceutical imports from
the EU would not experience a significant increase (around 3%). Employing a static
82
global CGE model, Kikuchi et al. (2018) compare economic impacts of different
mega-RTAs on Vietnam. Policy scenarios include tariff removals, reductions in
goods and services NTMs, and spill-over to non-member countries for goods. They
find that the EVFTA would expand Vietnam’s GDP by 8.1%, which is larger than
the CPTPP (6.5%), but smaller than RCEP (9.2%) and TPP (13.2%). In addition, at
the sectoral level, they find that exports of a variety of Vietnamese agricultural
sectors decline following these FTAs. The European Commission (2018b) uses a
dynamic GTAP model to explore the economic impacts of the EVFTA. In addition
to tariffs, trade facilitation, goods and services NTMs are modelled. The economic
impacts on trade, public procurement, and global value chain integration are
analysed. For instance, by 2035, exports from the EU to Vietnam and Vietnam to
the EU grow by 29% and 18% respectively. Baker and Vanzetti (2019) use a
recursive dynamic CGE model to explore the impact of the EVFTA on the United
Kingdom (UK) economy. They model reductions in tariffs and NTMs following
this agreement and find that real GDP and real wages in the UK grow slightly by
0.01% and 0.03% respectively, while those of Vietnam rise by 1.20% and 3-4% by
2030. In addition, UK’s exports to Vietnam rise by 60% and its imports from
Vietnam (Vietnam’s exports to the UK) rise by 33% by 2030. In contrast, UK’s
total exports and imports increase slightly by 0.09% and 0.01% respectively,
compared with 2.14% and 1.59% in Vietnam. Among the sectors modelled, they
show that both UK and EU27 exports to Vietnam rise significantly in services
sectors. With respect to sectoral output, output of the leather and wearing apparel
sectors in the UK and EU decline, but expands in Vietnam.
With the exception of Philip et al. (2011), none of the existing studies on the
EVFTA analyses changes in investment following this agreement. Although Philip
et al. (2011) provide some estimates on Vietnam’s investment as a result of the
EVFTA, they only analyse the impacts of tariff elimination. Moreover, reductions
in FDI barriers have not yet been modelled in existing studies on the EVFTA. This
study aims at analysing the impact of the EVFTA on Vietnam, focusing on
Vietnamese trade and investment. This is the first study on the EVFTA which
models both trade and investment liberalisation and examines changes in
Vietnamese capital stocks in addition to changes in Vietnamese trade.
83
4.3 Trade and Investment between the EU and Vietnam
4.3.1 Vietnam’s Trade with the EU
The EU, along with China, Japan, and the US have traditionally been key trading
partners of ASEAN. In 2017, the EU was ASEAN’s second largest export
destination after China, while it was ASEAN’s third largest import partner after
China and Japan (ASEAN Secretariat, 2018).
Like other ASEAN members, the EU has been Vietnam’s main trading partner in
terms of exports and imports of goods. Figure 4.1 indicates Vietnam’s exports to
the EU in the 2000-2018 period. The shares of Vietnam’s exports to the EU in its
total exports, which are shown in the line chart of this figure, are quite stable,
ranging between 16.2% and 21.1%. In 2018, the EU was Vietnam’s second largest
export market, accounting for 17.8% of Vietnam’s total exports after the US
(19.7%), followed by China (17.3%), ASEAN (10.3%), and Japan (7.9%).28 The
bar chart of Figure 4.1 points out that exports from Vietnam to the EU have
substantially increased over the last two decades except for in 2009, due to the
Global Financial Crisis. In 2018, Vietnam’s exports to the EU reached 42.4 billion
US$, which was approximately14 times larger than it was in 2000.
Figure 4.1: Vietnam's Exports to the EU (billion US$ and %)
Vietnam's exports to EU
45.0 25.0
40.0
Percent of total exports
Exports to EU (bil. $US)
35.0 20.0
30.0
15.0
25.0
20.0
10.0
15.0
10.0 5.0
5.0
0.0 0.0
2001
2008
2015
2000
2002
2003
2004
2005
2006
2007
2009
2010
2011
2012
2013
2014
2016
2017
2018
Exports to EU Percent of total exports
Source: Direction of Trade Statistics, IMF (2019)
28
84
Figure 4.2 shows Vietnam’s imports from the EU between 2000 and 2018. As can
be seen in the bars of this figure, there was a rapid expansion in Vietnam’s imports
from the EU, increasing from 1.4 billion US$ in 2000 to 13.8 billion US$ in 2018,
with an average import growth of 14.6% for this period. The line in this figure
indicates that shares of Vietnam’s imports from the EU in its total imports had a
stronger downward trend than those of its exports. Nevertheless, in 2018, the EU
was still among Vietnam’s top five import partners, constituting 6.0% of Vietnam’s
total imports, while China, South Korea, ASEAN, and Japan accounted for 28.3%,
20.6%, 13.8%, and 8.3% respectively.29
Figure 4.2: Vietnam's Imports from the EU (billion US$ and %)
Vietnam's imports from EU

16.0 12.0
Imports from EU (bil. $US)
14.0
Percent of total imports

10.0
12.0
8.0
10.0
8.0 6.0
6.0
4.0
4.0
2.0
2.0
0.0 0.0
2000
2017
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2018
Imports from EU Percent of total imports
Source: Direction of Trade Statistics, IMF (2019)
The main products traded between Vietnam and the EU are presented in Table 4.1.
They accounted for 84% of Vietnam’s total exports to the EU and 73.1% of
Vietnam’s total imports from the EU in 2017.30 As shown in this table, there have
been significant changes in the composition of Vietnam’s main export commodities
to the EU. In particular, in 2005, Vietnam’s exports of footwear represented 32%
of Vietnam’s total exports to the EU, followed by apparel and clothing accessories
(14.7%), furniture (8.6%), coffee (7.1%), and fish (6.5%). Although these products
remained among Vietnam’s top ten export products to the EU in 2017, they
contributed much smaller shares than in 2005. Instead, electrical machinery and
29
30
Authors’ calculations based on the ASEAN Statistics Database, accessed at
85
appliances accounted for 39.8% of Vietnam’s total exports to the EU in 2017,
compared with 1.6% in 2005. With respect to imports, Vietnam has mainly
imported electrical machinery and appliances, nuclear reactors and boilers,
pharmaceutical products, optical and photographical instruments, and transport
equipment. The five main import products accounted for around 61% of Vietnam’s
total imports from the EU in both 2005 and 2017. Although electrical machinery
and appliances are both Vietnam’s key export and import products with the EU,
Vietnam’s exports of these products are much greater than its imports in dollar
terms. The key trade products suggest that trade between Vietnam and the EU is
likely to be complementary.
86
Table 4.1: Vietnam's Top 10 Trade Products with the EU (million US$ and %), 2005 and 2017
Mil. % Mil. %
Export products (Vietnam to the EU), 2005 Export products, 2017
US$ Total US$ Total
1 Footwear; gaiters and the like; parts of such articles 1,394 32.0 Electrical machinery and appliances 15,260 39.8
2 Apparel and clothing accessories; not knitted or crocheted 474 10.9 Footwear, gaiters and the like, etc 4,785 12.5
3 Furniture, furnishings, lighting, signs, etc 376 8.6 Nuclear reactors, and boilers, etc 2,821 7.4
4 Coffee, tea, mate and spices 308 7.1 Apparel (not knitted or crocheted), etc 2,603 6.8
5 Fish, crustaceans, and molluscs, etc 284 6.5 Coffee, tea, mate and spices 1,573 4.1
6 Apparel and clothing accessories; knitted or crocheted 166 3.8 Apparel (knitted or crocheted), etc 1,142 3.0
7 Leather, saddlery, travel goods, and animal gut 143 3.3 Furniture, furnishings, and signs, etc 1,103 2.9
8 Nuclear reactors, boilers, and machinery, etc 119 2.7 Edible fruit and nuts, etc 1,062 2.8
9 Edible fruit and nuts; peel of citrus fruit or melons 94 2.2 Fish, crustaceans, and molluscs, etc 941 2.5
10 Ceramic products 89 2.0 Leather, saddlery, and travel goods, etc 899 2.3
Mil. % Mil. %
Import products (EU to Vietnam), 2005 Import products, 2017
US$ Total US$ Total
1 Nuclear reactors, boilers, and machinery, etc 535 21.5 Electrical machinery and appliances 2,316 19.1
2 Electrical machinery and appliances 380 15.3 Nuclear reactors and boilers, etc 2,135 17.6
3 Transport equipment 357 14.4 Pharmaceutical products 1,705 14.1
4 Pharmaceutical products 151 6.1 Optical instruments, etc 688 5.7
5 Live animals; animal product 99 4.0 Transport equipment 507 4.2
6 Optical and photographic instruments, etc 81 3.2 Plastics and articles thereof 378 3.1
7 Plastics and articles thereof 68 2.7 Chemical products n.e.c. 341 2.8
8 Chemical products n.e.c. 68 2.7 Raw hides and skins and leather 303 2.5
9 Iron and steel 55 2.2 Organic chemicals 251 2.1
10 Organic chemicals 47 1.9 Live animals; animal product 246 2.0
Source: ASEAN Secretariat (2019)

Note: % Total is defined as share in Vietnam’s exports (imports) to (from) the EU
87
Services trade between the EU and Vietnam is still limited (UNCTAD, 2019).
Indeed, Vietnam’s trade in services accounted for only 10% of Vietnam’s total trade
over the period from 2005 to 2014 and decreased to 7.5% and 6.6% in 2015 and
2017 respectively. 31 Among the services sectors, travel and transport together
accounted for 82.6% of Vietnam’s total services trade in 2017.32
4.3.2 EU’s Investment in Vietnam
The EU was ASEAN’s largest foreign investor during the last decade, accounting
for 18.5% of total FDI inflows to ASEAN, followed by intra-ASEAN (18.1%), the
US (12.4%), Japan (11.8%), China (6.1%), and South Korea (3.6%) (ASEAN
Secretariat, 2018). The EU is also Vietnam’s important investor. Figure 4.3
indicates FDI inflows to Vietnam by source country in the 2000-2017 period. The
EU was Vietnam’s fourth largest investor, accounting for one-tenth of Vietnam’s
total inward FDI, after Korea (19.0%), intra-ASEAN (17.0%), and Japan (15.6%).
Other significant investors in Vietnam include Taiwan, Hong Kong, the US, and
China.
Figure 4.3: FDI Flows to Vietnam by Source Country (%), 2000-2017
Korea
19.0%
Rest of World
30.8%
ASEAN
17.0%
Taiwan
7.6%
EU Japan
10.1% 15.6%
Source: ASEAN Secretariat (2019)
31
Authors’ calculations based on the database of UNCTAD, accessed at
https://unctadstat.unctad.org/
32
Authors’ calculations based on the database of ASEAN Secretariat, accessed at
https://www.aseanstats.org/
88
Regarding FDI to Vietnam from the EU member states, Table 4.2 shows
accumulation of projects with total registered capital of the ten largest EU investors
in Vietnam as of December 2017. These countries accounted for 6.8% of Vietnam’s
total registered capital, with Netherlands contributing the most (2.6%). Most of the
projects and registered FDI from the EU are associated with those from Netherlands,
United Kingdom, France, Luxembourg, and Germany. In 2017, Netherlands,
Germany, and United Kingdom together accounted for 83% of the EU investment
in Vietnam, with more than a half from Netherlands.33 The European Commission
(2018a) states that as of 2017, industrial processing and manufacturing sectors
accounted for 35% of EU’s total investment stock in Vietnam.
Table 4.2: Accumulation of Projects by Top 10 EU Member States as of 31/12/2017

Country No. of projects Registered capital (Mil. US$) Share* (%)
Netherlands 306 8177.1 2.6
United Kingdom 318 3464.7 1.1
France 513 2786.6 0.9
Luxembourg 45 2336.6 0.7
Germany 293 1759.5 0.6
Cyprus 17 975.4 0.3
Belgium 63 914 0.3
Denmark 130 883.4 0.3
Italy 87 388.7 0.1
Slovakia 10 197.3 0.1
Source: General Statistics Office of Vietnam (2018)
Note: * is defined as percentage of Vietnam’s total registered capital
4.4 Modelling Framework and Scenarios
4.4.1 Model and Database
The current paper uses the global trade analysis project (GTAP) model (Hertel,
1997) to analyse the impact of the EVFTA on Vietnam, with a focus on trade and
investment. This type of model is ideal for analysing FTAs as changes in a policy
component may result in both domestically and globally economic impacts. In order
to examine the change in capital stock, we use a long-run closure (Francois,
McDonald, & Nordstrom, 1996; Walmsley, 1998). A rise in income leads to
33
Authors’ calculations based on the ASEAN Statistics Database, accessed at
89
increases in both savings and investment, with the rise in savings being
proportionate to additional income (Kawasaki, 2015).
In this study, we use the GTAP version 10 database (Aguiar, Chepeliev, Corong,
McDougall, & van der Mensbrugghe, 2019), which contains 141 countries/regions
and 65 sectors, with a base year of 2014. Existing trade agreements to 2014 are
included in the GTAP database used and we note that the EVFTA is the first FTA
that both Vietnam and the EU are members of. For the purpose of our analysis, the
regions have been aggregated into 26 regions (Appendix, Table 4.10). In addition
to modelling Vietnam’s key trading partners, we model 17 regions within the EU
so that the bilateral trade flows between Vietnam and its important trading partners
in the EU are accounted for. In terms of the sectoral aggregation, in order to be able
to focus on key trade products between Vietnam and the EU, we aggregate the 65
GTAP sectors into 22 sectors, as shown in Appendix, Table 4.11.
4.4.2 Scenarios
Trade in goods and services, trade facilitation, and investment liberalisation are
included in the text of the EVFTA. Therefore, we take into account these factors in
our policy scenarios.
Table 4.3 briefly summarises two scenarios simulated in the current study. Each
scenario includes five components, with Scenario 2 assuming a greater
liberalisation in NTMs, trade facilitation and FDI barriers.34
34
Although the EVFTA is already signed, there remains uncertainty about exactly how much
liberalisation will be achieved under these aspects of the agreement. Therefore, it is appropriate to
model a range of outcomes.
90
Table 4.3: Policy Scenarios
Policy components Scenario 1 Scenario 2
Tariff cuts 99% cut on all goods by Vietnam 99% cut on all goods by Vietnam and
and the EU the EU
Goods NTMs A symmetric reduction (for A symmetric reduction (for Vietnam and
Vietnam and the EU) of 10% the EU) of 20%
Services NTMs Vietnam: Vietnam:
- Business, finance, - Business, finance, communication, and
communication, and transport: transport: 20% cut
10% cut - Other services: 3% cut
- Other services: 3% cut EU: 3% cut in all services
EU: 3% cut in all services
Trade facilitation 7.5% cut in time to import by 15% cut in time to import by Vietnam
(only Vietnam) Vietnam
FDI barriers (Only - Food products, beverages, - Food products, beverages, chemicals,
Vietnam) chemicals, plastics products, plastics products, textiles, and apparel:
textiles, and apparel: 50% cut 75% cut
- Other manufacturing sectors: - Other manufacturing sectors: 50% cut
25% cut - Services sectors: 50% cut
- Services sectors: 25% cut
4.4.2.1 Tariffs
A key goal of FTAs is to reduce trade barriers among members. Tariffs and quotas,
the most basic forms of trade barriers, will be largely eliminated as a result of the
EVFTA. In particular, 99% of tariffs will be eliminated (Delegation of the European
Union to Vietnam, 2019), with the exception of a few minor products retaining
partial liberalisation through tariff rate quotas (TRQs). The EU will apply zero-duty
TRQs on some sensitive agricultural products imported from Vietnam including
birds’ egg and egg yolks, garlic, sweetcorn, rice, cassava starch, tuna, surimi, and
speciality sugar.35 Specially, among these products, up to 80 thousand metric tonnes
of Vietnamese rice (husked rice and milled rice) are allowed to be imported into the
EU duty-free. Indeed, in the fourth quarter of 2018, Cambodia and Thailand
accounted for 37% and 27% respectively of EU’s rice imports, while Vietnam made
up only 2% (European Commission, 2019), a modest figure for the third largest rice
exporter in the world. The agreement, therefore, is expected to bring large benefits
to the Vietnamese rice. In Vietnam, TRQs are imposed on imports of eggs, sugar,
35
See Annex 2-A “Reduction or elimination of customs duties”, accessed at
https://trade.ec.europa.eu/doclib/docs/2018/september/tradoc_157340.pdf and Appendix 2-A-1
“Tariff schedule of the European Union” of the EVFTA, accessed at
http://trade.ec.europa.eu/doclib/press/index.cfm?id=1437
91
tobacco, and salt from the EU.36 These products with partial liberalisation agreed
by the EU and Vietnam comprise a small number of tariff lines and are not key
export products of the two regions.37 Therefore, we make an ambitious assumption
on tariff cuts that both the EU and Vietnam reduce tariffs by 99% on all
commodities in both scenarios.
Table 4.4 reports tariff rates imposed by Vietnam and the EU on imports from the
EU and Vietnam respectively. Processed food and labour-intensive products from
the EU, on average, face quite high tariff rates of 12.31% and 11.38% respectively
in Vietnam, compared with 6.97% and 7.67% faced by the Vietnamese counterparts
in the EU. In addition, the EU imposes relatively minimal import tariff rates on
agriculture (0.60%), extraction (0.61%), and other manufactures (0.13%) from
Vietnam. In contrast, the EU still faces relatively high tariff rates of 2.57%, 4.66%,
and 4.11% respectively in Vietnam.
36
See Appendix 2-A-2 “Tariff schedule of Vietnam” of the EVFTA, accessed at
37
See http://trade.ec.europa.eu/doclib/docs/2015/august/tradoc_153674.pdf and
https://trade.ec.europa.eu/doclib/docs/2016/june/tradoc_154622.pdf
92
Table 4.4: Tariff Rates Imposed by Vietnam and the EU (%)
Sector Tariffs imposed by Vietnam Tariffs imposed by the EU
Agriculture 2.57 0.60
Rice 24.87 20.39
Fishing 8.76 3.60
OthAgri 2.06 0.06
Livestock 2.54 2.88
Processed food 12.31 6.97
MeatProds 13.72 7.09
FoodBever 12.24 6.96
Extraction 4.66 0.61
Labor-intensive manufactures 11.38 7.67
Textiles 10.59 5.31
AppaLeath 11.95 7.83
Other manufactures 4.11 0.13
Wood 0.56 0.14
Chemicals 3.22 1.00
Metals 3.99 0.47
ElecEquip 1.09 0.02
Machinery 3.03 0.01
TransEquip 9.32 1.42
OthManufac 6.48 0.05
Source: Authors’ calculations based on the GTAP 10 database
4.4.2.2 Non-tariff Measures
Given that many tariffs have been reduced, trade barriers in the form of NTMs have
become increasingly important. NTMs are classified into technical measures and
non-technical measures. The former comprises technical barriers to trade (TBT),
sanitary and phytosanitary (SPS) measures, while the latter includes contingent
trade measures, quantitative restrictions, price controls, exports restrictions, finance
measures, and behind-the-border measures (UNCTAD, 2015).
Goods NTMs
In terms of goods NTMs, technical NTMs are modelled in this study as the EVFTA
has two separate chapters on TBT and SPS.38 The UNCTAD (2015) indicates that
SPS measures deal with restricting specific substances, ensuring food safety,
preventing the spread of disease or pests as well as conformity assessment
38
See Chapter 5 on Technical Barriers to Trade and Chapter 6 on Sanitary and Phytosanitary
Measures of the EVFTA, assessed at http://trade.ec.europa.eu/doclib/press/index.cfm?id=1437
93
procedures relating to food safety such as certification and testing. In addition,
technical measures refer to those largely dealing with labelling requirements and
conformity assessment procedures involving technical requirements such as
certification and testing (UNCTAD, 2015).
It is noted that assumptions of reductions in goods NTMs following FTAs range

between 20% and 50% in much of the current literature. It is very difficult to assess
the precise magnitude to which goods NTMs will be reduced as a result of the
EVFTA. Therefore, from a conservative perspective, we assume symmetric
reductions in goods NTMs for the two regions of 20% for the ambitious scenario
and 10% for the conservative scenario.
Data on ad valorem equivalents (AVEs) of good NTMs at the GTAP sectoral level
are sourced from the World Bank (2019), which are based on the estimation method
of Kee and Nicita (2016) developed from their previous work (Kee, Nicita, &
Olarreaga, 2009). AVEs of goods NTMs for the sectors modelled are presented in
Appendix, Table 4.12.
Services NTMs
The text of the EVFTA shows that EU firms would have significantly increased
access to a variety of services sectors in Vietnam, including business services,
financial services, communication, and transportation services. 39 In contrast, the
agreement indicates much smaller liberalisation of the EU services sectors.
In terms of reductions in services NTMs, studies analysing the recent bilateral FTAs
between the EU and partners show conservative views. In particular, Kutlina-
Dimitrova and Lakatos (2014) assume that both the EU and Singapore reduce
services NTMs by 3% due to the EU-Singapore FTA. Decreux et al. (2010) assume
a 10% cut by only Korea in services NTMs for telecommunication, financial, and
business services as a result of the EU-Korea FTA. Following Kutlina-Dimitrova
and Lakatos (2014), in this paper we assume the EU reduces services NTMs by 3%
in all services sectors. As Vietnam has committed to large reductions in finance,
39
See Annex 8-B “Vietnam’s Schedule of Specific Commitments” of Chapter 8 “Liberalisation of
Investment, Trade in Services and Electronic Commerce” in the EVFTA, accessed at
94
business, communication, and transport, we start with a 10% cut by Vietnam in
these four services sectors in the conservative scenario (Scenario 1) and 20% in the
ambitious scenario (Scenario 2). For other services sectors, we assume that Vietnam
reduces services NTMs by 3% in both scenarios.
We use the latest available estimates of AVEs of services NTMs by Fontagné,

Mitaritonna, and Signoret (2016) (Appendix, Table 4.13). Their estimated sectors
include communication, construction, insurance, business services, financial
services, government service, trade and transport, which are consistent with the
GTAP 10 database.
4.4.2.3 Trade Facilitation
The World Trade Organisation (2019) defines trade facilitation as the simplification,
modernisation, and harmonisation of export and import processes, reducing
unnecessarily bureaucratic delays in cross-border trade in goods. Following
Walmsley, Strutt, Minor, and Rae (2018), we estimate improvement in trade
facilitation through a 7.5% and a 15% cut in time to import for Vietnam in Scenario
1 and Scenario 2 respectively. We do not model the impact of this policy component
for the EU member states because their time to trade is already very small
(Appendix, Table 4.14).
The World Bank Doing Business (2019) reports data on trading across borders, with
the number of days delay in both good exports and imports for 175 countries due to
border compliance and documentary compliance. Hummels, Minor, Reisman, and
Endean (2007) estimate tariff equivalents of one day waiting for exports and
imports. Based on the estimates by Hummels et al. (2007), Minor and Hummels
(2013) create a global database which includes ad valorem of per day time cost in
trade for use in CGE models, making it possible for the inclusion of trade
facilitation in CGE modelling framework. Combining these estimates with the
trading across borders data from the World Bank Doing Business (2019), we then
convert the days of delay in imports to tariff equivalents for the sectors modelled
for Vietnam.
95
4.4.2.4 Investment Liberalisation
Vietnam’s investment liberalisation described in the EVFTA mainly focuses on

manufacturing sectors. Following this agreement, the EU investors will benefit
from substantially increased access to a wide range of Vietnam’s key manufacturing
sectors including food products and beverages, chemicals (other than explosives),
rubber and plastics products, textiles, and apparel.40 In this study, reductions in FDI
barriers are not modelled for the EU as Vietnam’s investment in the EU has been
minimal. In particular, as of 31 December 2017, Germany was the main destination
of Vietnam’s direct investment in the EU, followed by the UK, with Vietnam’s total
registered capital of 105.3 million US$ and 11.1 million US$ in Germany and the
UK respectively (General Statistics Office of Vietnam, 2018). We assume that
Vietnam liberalises FDI barriers in the key sectors by 50% and other manufacturing
sectors and services sectors by 25% in the conservative scenario (Scenario 1). In
the more ambitious scenario (Scenario 2), the reductions are assumed up to 75%
and 50% respectively.41
4.5 Simulated Results of the EVFTA
This section begins with a representation of macroeconomic gains following the

EVFTA in terms of real GDP, investment, and aggregate exports and imports. Then,
the sectoral effects of this agreement are depicted.
4.5.1 Macroeconomic Impacts
4.5.1.1 Real GDP
The simulation results indicate that in percentage terms, there are almost no changes
in the EU’s real GDP, whereas Vietnam’s real GDP increases by 1.54% in Scenario
40
See Annex 8-B: Vietnam’s Schedule of Specific Commitments, Chapter 8 on Liberalisation of
Investment, Trade in Services and Electronic Commerce, assessed at
41
Reductions in FDI barriers are implemented as tax on capital by sector. However, this policy
instrument has marginal (negligible) economic impacts on Vietnam in both scenarios. We,
therefore, do not present the results of this component. Full details of investment modelling and a
literature review on modelling FDI liberalisation are provided in Chapter 5 of this thesis, as this
modelling is much more important in the case of RCEP.
96
1 and 1.98% in Scenario 2. Figure 4.4 decomposes the changes in Vietnam’s real
GDP by policy components. The GDP gains in Scenario 1 are largely attributable
to tariff elimination, which results in an increase of 1.15%, followed by good NTMs
and trade facilitation (0.30%)42, and services NTMs (0.09%). In Scenario 2, cuts to
goods and services NTMs, trade facilitation, and FDI barriers are greater, but tariff
elimination continues to dominate the results.
Figure 4.4: Changes in Vietnam's Real GDP Due to Liberalising Components of

the EVFTA (%)
2.50
1.98
2.00
Growth in GDP percent
0.16
1.54
1.50 0.09 0.63
0.30
1.00
1.15 1.20
0.50
0.00
Scenario 1 Scenario 2
Tariffs Goods NTMs & TF Services NTMs
Source: Authors’ model results
4.5.1.2 Investment Effects
This section begins with an analysis of the change in Vietnam’s long-run capital
stock. This is followed by the change in the current rate of return, rental price of
capital, and price of capital goods in both the short- and long-run. Following the
EVFTA, Vietnam receives considerable gains in the long-run capital stock, whereas
the capital changes for the EU member states are close to 0%. In particular,
Vietnam’s long-run capital stock rises by 2.93% in Scenario 1 and 3.57% in
Scenario 2. Figure 4.5 presents changes in Vietnam’s long-run capital stock by
liberalising components as a result of this agreement. All the policy components
have positive impacts on Vietnam’s capital growth, but the magnitude of their
contributions vary significantly. Most of these gains are from tariff elimination,
42
Goods NTMs contribute 0.23%.
97
which increases Vietnam’s long-run capital stock by 2.39% in Scenario 1, followed
by goods NTMs and trade facilitation (0.46%)43, and services NTMs (0.08%). With
larger cuts to goods NTMs & trade facilitation and services NTMs in Scenario 2,
their contributions to Vietnam’s capital growth increase to 0.94% 44 and 0.14%
respectively. However, tariff removal continues to dominate the results (2.49%).
Figure 4.5: Changes in Vietnam's Capital Stock due to Liberalising Components of

the EVFTA (%)
4.00 3.57
3.50 0.14
Change in capital stock (%)
2.93
3.00 0.94
0.08
2.50 0.46
2.00
1.50
2.39 2.49
1.00
0.50
0.00
Tariffs Goods NTMs & TF Services NTMs
The significant increases in Vietnam’s long-run capital stock relate to the short-run
current rate of return, which is specified as follows (Hertel, 1997):
rorc(r) = GRNETRATIO(r) × [rental(r) − pcgds(r)] (1)
In which r is a particular region; GRNETRATIO is the ratio of GROSS/NET rates

of return on capital; rorc is the current rate of return; pcgds is the price of capital
goods; rental is the rental price of capital.
Equation (1) indicates that the change in the current rate of return positively
depends on the change in the rental price of capital and negatively relates to the
change in the price of capital goods. Table 4.5 provides changes in Vietnam’s
current rates of return, rental prices of capital, and prices of capital goods in the
short-run for both Scenarios 1 and 2. It is notable that as a result of the EVFTA,
43
Goods NTMs contribute 0.40%
44
Goods NTMs contribute 0.84%
98
Vietnam’s prices of capital goods rise by 0.39% in Scenario 1 and 0.47% in
Scenario 2. Changes in the price of capital goods depend on two factors moving in
the opposite direction. In particular, reductions in tariffs and NTMs are likely to
reduce the price of imported capital goods, whereas the increase in the demand for
these products leads to the enhanced price (Walmsley, 1998). Therefore, the
positive change in the price of capital goods suggests that the impact of the latter
dominates the results. Indeed, Vietnam imports around 30.7% of products used in
the production of the capital goods, but the EU is not Vietnam’s largest import
partner.45 Instead, Vietnam largely imports from China, South Korea, ASEAN, and
Japan.
As the price of capital goods rises as a result of the EVFTA, the increase in the
current rate of return in Vietnam is due to the change in the rental price of capital
which grows by 2.55% in Scenario 1 and 3.11% in Scenario 2. The rise in the rental
price of capital in Vietnam is due to the increased demand for the services of capital
stock following the EVFTA, given the available capital stock. The significant
increases in Vietnam’s short-run current rates of return (3.50% in Scenario 1 and
4.26% in Scenario 2) can explain the expansion in Vietnam’s capital stock in the
long-run when the capital stock is no longer fixed, and the supply of capital will
rise to meet the increased demand for capital.
Table 4.5: Changes in the Short-run Current Rate of Return, Rental Price of Capital
and Price of Capital Goods in Vietnam (%)
Variables Scenario 1 Scenario 2
Current rate of return on capital 3.50 4.26
Rental price of capital 2.55 3.11
Price of capital goods 0.39 0.47
Source: Authors’ model resullts
Table 4.6 indicates the long-run current rate of return, rental price of capital, and
price of capital goods of Vietnam, which are relatively small compared with those
in the short-run. Changes in the current and expected rates of return are equated for
all regions in the long-run, at minamal rates of 0.01% in Scenario 1 and 0.02% in
Scenario 2 following the EVFTA. Therefore, changes in the rental price of capital
45
Authors’ calculation from the GTAP 10 data base
99
are mainly determined by changes in the price of capital goods. 46 In Vietnam,
changes in long-run rental prices of capital and prices of capital goods are almost
the same, around 0.1% in both scenarios.
Table 4.6: Changes in the Long-run Current Rate of Return, Rental Price of Capital
and Price of Capital Goods in Vietnam (%)
Variables Scenario 1 Scenario 2
Current rate of return on capital 0.01 0.02
Rental price of capital 0.10 0.12
Price of capital goods 0.09 0.11
4.5.1.3 Aggregate Exports and Imports
Table 4.7 describes changes in total exports, total imports, and bilateral trade
between Vietnam and the EU. This agreement substantially benefits both Vietnam
and the EU in terms of bilateral trade. In Scenario 1, Vietnam’s exports to the EU
increase by 24.8% (almost 8.2 billion US$) and EU’s exports to Vietnam exhibit a
37.2% increase (5.1 billion US$). In Scenario 2, they increase to 30.0% (9.9 billion
US$) and 44.5% (6.1 billion US$) respectively. The significant expansion in the
bilateral trade is not surprising as the EU has been Vietnam’s key trading partner.
In addition, the EU benefits from increased access to the Vietnamese market as
Vietnam imposed much higher import tariffs on EU products than the tariffs
imposed by the EU against Vietnamese exports prior to the agreement. Although
the export growth of the EU is greater than that of Vietnam, the absolute values
imply Vietnam has a trade surplus with the EU. Among the EU member states,
Vietnam would trade more with Italy, France, Spain, Germany, and UK.
While the bilateral trade between Vietnam and the EU grow substantially, total
trade of both Vietnam and the EU experiences much smaller growth. In particular,
both EU’s total real exports and total imports grow marginally (0.01%) in both
scenarios. Likewise, the percentage increases in Vietnam’s total exports and
imports range between 3.11% and 4.17% in the two scenarios. The results indicate
that although the EVFTA creates more trade for both Vietnam and the EU, there is
strong evidence of trade diversion effects as well. The EU and Vietnam
46 1
rental(r) = [ ] × rorc(r) + pcgds(r)
GRNETRATIO(r)
100
dramatically increase their bilateral trade and trade less with the rest of the world.
In particular, the expansion in Vietnam’s exports to the EU is much greater than in
Vietnam’s total exports, and the increase in Vietnam’s total imports are largely
attributable to the rise in Vietnam’s imports from the EU.47 In addition, for the EU,
the rise in the EU’s exports to Vietnam is much larger than in the EU’s total exports.
Similarly, the increase in the EU’s imports from Vietnam exceeds the expansion in
the EU’s total imports.48
Table 4.7: Changes in Total Real Exports, Imports, and Bilateral Trade (% and
million US$)
% MIL. US$ % MIL. US$
Total exports
Vietnam 3.11 5,206 3.84 6,417
EU 0.02 1,141 0.02 1,290
Total imports
Vietnam 3.39 6,637 4.17 8,158
EU 0.02 1,096 0.02 1,239
Bilateral trade
Vietnam exports to the EU 24.82 8,176 29.97 9,870
EU exports to Vietnam 37.20 5,077 44.45 6,066
When the increase in Vietnam’s total exports is decomposed by policy components,

we find that tariff elimination contributes the most to the export growth rate of
Vietnam, with 83.1% in Scenario 1 and 71.2% in Scenario 2. This is followed by
the contributions of goods NTMs and trade facilitation, services NTMs, and tax on
capital.
4.5.2 Sectoral Impacts
Table 4.8 presents changes in Vietnam’s real sectoral exports and imports. The six
aggregated sectors from the 22 sectors modelled reveal that that the agricultural,
extraction, and other manufacturing sectors exhibit export contraction. One of the
main reasons is that these sectors do not benefit from tariff reductions under the
EVFTA as the EU imposed minimal import tariffs against these Vietnamese
47
Vietnam’s imports from the EU are similar to EU’s exports to Vietnam
48
EU’s imports from Vietnam are similar to Vietnam’s exports to the EU
101
products (<1%) prior to the creation of this FTA. Export contraction also occurs in
the services sector.
In contrast, the processed food and labour-intensive manufacturing sectors are

beneficiaries in terms of exports following this agreement. These sectors gain more
access to the EU market thanks to tariff reductions as they used to have relatively
high tariffs imposed by the EU before the creation of the FTA. Exports of the
processed food sector on average rise by around 3.0% in both scenarios. Exports of
the labour-intensive manufacturing sector expand mainly due to apparel & leather
products, whose exports grow by 19.6% (6.8 billion US$) in Scenario 1 and to 23.5%
(8.1 billion US$) in Scenario 2 due to larger cuts to NTMs, time to trade, and FDI
barriers. In dollar terms, among the 22 sectors modelled, apparel & leather products
experience the greatest expansion in exports, followed by food & beverages, textiles,
transport equipment, livestock, and meat products. The export expansion in these
six sectors compensates for the declines in exports of the remaining sectors (See
Appendix, Table 4.15). Regarding the changes in sectoral imports, all the
aggregated sectors experience import growth, as shown in Table 4.8. Within these
sectors, textiles, apparel and leather products exhibit rapid expansion in imports,
partly due to the need for large exports in these sectors, followed by chemicals, food
and beverages (See Appendix, Table 4.15).
Table 4.8: Changes in Vietnam's Real Exports and Imports by Sector (% and million
US$)
Export Import
Scenario 1 Scenario 2 Scenario 1 Scenario 2
% MIL. US$ % MIL. US$ % MIL. US$ % MIL. US$
Agriculture -2.4 -250 -2.7 -290 2.6 297 3.2 367
Processed food 3.2 320 3.1 306 3.7 601 4.3 704
Extraction -2.9 -320 -3.2 -352 2.1 244 2.5 291
Labor-intensive 17.4 6,991 21.1 8,445 12.8 3,832 15.4 4,589
Other manufac -1.6 -1,361 -1.7 -1,473 1.3 1,591 1.7 2,026
Services -1.8 -159 -2.2 -193 5.1 605 7.8 932

Note: Aggregate sector compositions are defined in Appendix, Table 4.11
The changes in real exports and imports by sector suggest that following the
EVFTA, the domestic agricultural, extraction, other manufacturing, and services
sectors may face difficulty due to both export contraction and import expansion.
102
Table 4.9 depicts changes in Vietnam’s sectoral output. Output declines in
extraction and other manufactures, but slightly expands in agriculture and processed
food. Notably, output of labour-intensive manufactures rise substantially by 15.7%
(8.5 billion US$) in Scenario 1 and 18.8% (10.1 billion US$) in Scenario 2, mainly
due to the large expansion in exports of these sectors.
Table 4.9: Changes in Vietnam's Sectoral Output (% and million US$)

Agriculture 0.1 85 0.2 109
Processed food 0.7 221 0.7 218
Extraction -0.4 -135 -0.4 -122
Labour-intensive manufactures 15.7 8,462 18.8 10,135
Other manufactures -1.2 -1,541 -1.2 -1,631
Services 1.6 2,152 1.9 2,555
Note: Aggregate sector compositions are defined in Appendix, Table 4.11
4.6 Conclusion
This study implements simulations for two policy scenarios to explore the impacts
of the EVFTA on Vietnamese trade and investment, using a global CGE model.
The five components in each scenario are tariff elimination, reductions in goods
and services NTMs, improvement in trade facilitation associated with reductions in
time to import, and investment liberalisation. The second scenario models a greater
magnitude of liberalisation for all components except tariffs.
Simulation results reveal that the bilateral trade between Vietnam and the EU grow
substantially, and by a much greater amount than the growth of total exports and
total imports for the two regions. These findings suggest that trade diversion occurs
as a result of the EVFTA. In addition, when aggregating the sectors modelled into
six aggregate sectors including agricultural, processed food, extraction, labour-
intensive manufacturing, other manufacturing, and services sectors, we find that the
processed food and labour-intensive manufacturing sectors in Vietnam experiences
significant export growth, whereas the remaining four sectors witness declines in
exports. Therefore, the Vietnamese government may need to consider policies
aiming to mitigate the adverse impacts of the EVFTA in these sectors.
103
With regard to the investment effect of the EVFTA, we find that the EVFTA leads
to positive changes in Vietnam’s short-run current rates of return, which is due to
the change in the short-run rental price of capital. These findings suggest that
Vietnam would receive significant capital gains in the long-run. We further find
that all the policy components contribute to the capital growth in Vietnam in the
long-run. However, capital gains resulting from tariff elimination are much larger
than those from other policy components.
104
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Chapter Appendix
Table 4.10: Regional Aggregation

No. Regions Description GTAP regions Aggregated regions
modelled for reporting
1 Vietnam Vietnam VNM Vietnam

2 RestASEAN Other ASEAN countries IDN, MYS, PHL, THA, SGP, LAO, KHM, BRN, XSE Rest of the world
3 China China CHN Rest of the world
4 Japan Japan JPN Rest of the world
5 South Korea South Korea KOR Rest of the world
6 Hong Kong Hong Kong HKG Rest of the world
7 Taiwan Taiwan TWN Rest of the world
8 United States United States USA Rest of the world
9 Austria Austria AUT EU28
10 Belgium Belgium BEL EU28
11 Czech Czech Republic CZE EU28
12 Denmark Denmark DNK EU28
13 Finland Finland FIN EU28
14 France France FRA EU28
15 Germany Germany DEU EU28
16 Ireland Ireland IRL EU28
17 Italy Italy ITA EU28
18 Netherlands Netherlands NLD EU28
19 Poland Poland POL EU28
20 Portugal Portugal PRT EU28
21 Slovakia Slovakia SVK EU28
22 Spain Spain ESP EU28
23 Sweden Sweden SWE EU28
24 UK United Kingdom GBR EU28
25 RestEU28 Other EU-28 countries CYP, EST, GRC, HUN, LVA, LTU, LUX, MLT, SVN, BGR, HRV, ROU EU28
26 ROW Rest of World XOC, MNG, XEA, BGD, NPL, PAK, LKA, XSA, CAN, MEX, XNA, Rest of the world
ARG, BOL, BRA, CHL, COL, ECU, PRY, PER, URY, VEN, XSM,
CRI, GTM, HND, NIC, PAN, SLV, XCA, DOM, JAM, PRI, TTO,
XCB, BHR, IRN, ISR, JOR, KWT, OMN, QAT, SAU, TUR, ARE,
XWS, EGY, MAR, TUN, XNF, BEN, BFA, CMR, CIV, GHA, GIN,
NGA, SEN, TGO, XWF, XCF, XAC, ETH, KEN, MDG, MWI, MUS,
MOZ, RWA, TZA, UGA, ZMB, ZWE, XEC, BWA, NAM, ZAF, XSC,
CHE, NOR, XEF, ALB, BLR, RUS, UKR, XEE, XER, KAZ, KGZ,
XSU, ARM, AZE, GEO, XTW, AUS, NZL, IND
Source: Authors’ aggregation based on 141 regions of GTAP 10 Data Base
108
Table 4.11: Sectoral Aggregation
No. Sectors Description GTAP sectors Aggregated sectors
1 Rice Paddy rice; Processed rice PDR; PCR Agriculture
2 Fishing Fishing FSH Agriculture
3 OthAgri Wheat; Other grains nec; Oil seeds; WHT; GRO; OSD Agriculture
Vegetables, fruit and nuts; Sugar cane and sugar beet; V_F; C_B
Plant-based fibers; Crops nec; Forestry PFB; OCR; FRS
4 Livestock Bovine cattle and sheep; Other animal products nec; CTL; OAP; Agriculture
Raw milk; Wool, silk-worm cocoons RMK; WOL;
5 MeatProds Bovine cattle and sheep products; Other meat products CMT; OMT; Processed food
6 Wood Wood products LUM Other manufactures
7 Extraction Coal; Oil; Gas; Minerals nec; COA; OIL; GAS; OXT Extraction
Petroleum and coal products; Mineral products nec P_C; NMM
8 FoodBever Vegetable oils and fats; Dairy products; Sugar; VOL; MIL; SGR; Processed food
Food products nec; Beverages and tobacco products OFD; B_T
9 Textiles Textiles TEX Labor-intensive manufac
10 AppaLeath Wearing apparel; Leather products WAP; LEA Labor-intensive manufac
11 Chemicals Chemicals; Pharmaceutical products; Rubber & plastic CHM; BPH; RPP Other manufacture
12 Metals Ferrous metals; Metals nec; Metal products; I_S; NFM; FMP Other manufacture
13 ElecEquip Electronic equipment ELE Other manufacture
14 Machinery Electrical equipment; Machinery and equipment nec EEQ; OME Other manufacture
15 TransEquip Motor vehicles and parts; Transport equipment nec MVH; OTN Other manufacture
16 OthManufac Paper products and publishing; Manufactures nec PPP; OMF Other manufacture
17 Construction Construction CNS Services
18 FinBusTra Insurance; Finance; Other business services; Trade INS; OFI; OBS; TRD Services
19 Transport Transport nec; Water transport; Air transport OTP; WTP; ATP Services
20 Communication Communication CMN Services
21 GovSvs Government services OSG Services
22 OthSvs Electricity; Gas manufacture and distribution; ELY; GDT; Services
Water; Recreational and other services; WTR; ROS;
Accommodation, food and service activities AFS
Warehousing and support activities WHS
Real estate activities; Education RSA; EDU
Human health and social work activities; Dwellings HHT; DWE
Source: Authors’ aggregation based on 65 sectors of GTAP 10 Data Base
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Table 4.12: Ad-valorem Equivalents of Goods Non-tariff Barriers Imposed by
Vietnam (EU) on EU (Vietnamese) Products (%)
Imposed by EU Imposed by VN
Aggregated sector on VN products on EU products
Rice 14.13 106.52
Fishing 0.71 2.26
Other agriculture 5.22 25.23
Livestock 32.56 1.32
Meat products 10.05 4.12
Wood 5.90 33.36
Food and beverages 5.54 8.91
Textiles 5.31 2.66
Wearing apparel and leather products 18.34 5.43
Chemicals 1.01 7.21
Metals 5.45 10.41
Electronic equipment 0.28 2.62
Machinery 4.61 2.33
Transport equipment 5.92 3.39
Source: World Bank (2019). Trade weighted by the authors for the aggregated sectors and regions
110
Table 4.13: Ad-valorem Equivalents of Services Barriers in Vietnam and EU
Member States (%)
Finance, business Government
Country Construction and trade Transport Communication services
Austria 33.56 37.45 21.45 30.43 64.94
Belgium 41.05 24.51 10.49 17.30 56.63
Czech Republic 67.58 48.05 39.79 45.50 80.40
Denmark 18.02 25.97 11.12 15.08 63.71
Finland 53.66 31.52 34.72 51.80 90.14
France 47.44 45.94 19.59 52.33 61.50
Germany 16.36 26.42 7.32 31.00 44.99
Ireland 71.34 3.87 24.91 26.30 59.79
Italy 37.26 35.50 22.38 38.01 51.47
Netherlands 39.64 25.68 24.72 21.24 50.88
Poland 45.56 44.19 37.23 52.20 64.26
Portugal 70.04 58.15 23.82 41.20 68.06
Slovakia 41.85 57.88 40.53 65.27 76.17
Spain 42.84 37.37 26.66 38.86 70.11
Sweden 35.90 24.50 20.06 29.89 69.16
United Kingdom 44.77 27.48 9.11 19.49 63.71
RestEU28 40.76 17.84 16.06 28.11 60.03
Vietnam 34.49 59.78 41.26 47.35 59.90
Source: Fontagné et al. (2016). Trade weighted by the authors for the aggregated sectors and
regions
111
Table 4.14: Time to Import, Vietnam and the EU Member States
Time to import
Border Documentary Total
compliance(h) compliance (h) (days)
Austria 0 1 0.0
Belgium 0 1 0.0
Czech 0 1 0.0
Denmark 0 1 0.0
Finland 2 1 0.1
France 0 1 0.0
Germany 0 1 0.0
Ireland 24 1 1.0
Italy 0 1 0.0
Netherlands 0 1 0.0
Poland 0 1 0.0
Portugal 0 1 0.0
Slovakia 0 1 0.0
Spain 0 1 0.0
Sweden 0 1 0.0
UK 3 2 0.2
Cyprus 15 2 0.7
Estonia 0 1 0.0
Greece 1 1 0.1
Hungary 0 1 0.0
Latvia 0 1 0.0
Lithuania 0 1 0.0
Luxembourg 0 1 0.0
Malta 2 1 0.1
Slovenia 0 1 0.0
Bulgaria 1 1 0.1
Croatia 0 1 0.0
Romania 0 1 0.0
EU28 1 1 0.1
Vietnam 56 76 5.5
Source: World Bank Doing Business (2019). Trade weighted
by the authors for the EU28
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Table 4.15: Changes in Real Exports and Imports by All Sectors Modelled (million
US$ and %)
Export Import
Rice -1.9 -45 -2.8 -64 5.3 2 6.4 3
Fishing -2.0 -3 -2.9 -5 3.0 36 3.5 42
OthAgri -2.7 -212 -3.1 -242 2.4 215 3.0 268
Livestock 1.1 4 2.0 7 3.5 44 4.5 56
Meat products 5.9 3 6.1 4 2.8 88 3.4 106
FoodBever 3.2 312 3.0 292 3.9 514 4.6 601
Extraction -2.9 -323 -3.2 -359 2.1 245 2.5 294
Textiles 2.6 142 2.6 142 13.3 2,344 16.0 2,812
AppaLeath 19.6 6,769 23.5 8,135 12.2 1,496 14.6 1,796
Wood -2.8 -65 -3.1 -74 2.3 38 3.0 49
Chemicals -1.5 -112 -1.8 -135 3.0 733 3.7 902
Metals -1.2 -72 -1.1 -67 0.1 17 0.3 55
ElecEquip -1.8 -902 -2.0 -998 -0.5 -172 -0.4 -158
Machinery -1.2 -129 -1.2 -127 1.7 448 2.1 570
TransEquip 1.6 42 1.7 45 4.9 354 5.7 406
OthManufac -1.8 -144 -1.9 -151.86 2.9 169 3.5 205
Construction -1.3 0 -1.6 0 4.4 1 5.3 2
FinBusTra -2.4 -85 -2.8 -99 6.1 339 9.8 541
Transport -0.4 -8 -0.5 -11 4.0 85 6.2 133
Communication -2.0 -19 -2.4 -24 6.0 78 9.7 127
GovSvs -3.5 -6 -4.1 -8 3.8 8 4.6 9
OthSvs -3.0 -52 -3.5 -62 3.5 92 4.3 115
113
5 Chapter 5: Impacts of the Regional Comprehensive
Economic Partnership on Vietnamese Trade and
Investment49
5.1 Introduction
Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade

agreement (FTA) involving ASEAN and six FTA partners (Australia, New Zealand,
China, Japan, Korea and India), with China and India being the largest and fastest
growing economies (Kikuchi, Yanagida, & Vo, 2018). The first RCEP negotiation
was in 2012, with 28 rounds completed as of September 2019. 50 However, in
December 2019, India opted out of RCEP because of concerns about imports from
China. In the recent negotiating round 29, April 2020, the proposal to India, with a
package of flexibilities, was agreed by the 15 RCEP parties, expecting that India
can resolve its outstanding issues and RCEP will be signed by all 16 parties in
November 2020.51 The goal of RCEP is to create a modern, comprehensive, high-
quality and mutually beneficial economic partnership agreement, in which trade in
goods, trade in services, investment, economic and technical cooperation,
intellectual property, competition and dispute settlement are included (ASEAN
Secretariat, 2012). RCEP is expected to harmonise overlapping rules and
regulations of existing preferential trade agreements in the region, such as the
ASEAN + 1 FTAs, which have hindered firms, especially small and medium ones
from private sectors, from using the preferential systems (Basu Das, 2015;
Fukunaga & Isono, 2013).
With the US withdrawal from the Trans-Pacific Partnership (TPP), RCEP has
become Vietnam’s largest FTA negotiation. The RCEP region already contributes
significantly to Vietnam’s integration in the world economy. Among the four
largest export partners of Vietnam including the US, EU, ASEAN, and Japan, two
49
We are grateful to Alex Kravchenko of UNESCAP for providing new preliminary estimates of
goods NTMs. Thanks are also due to Terrie Walmsley of ImpactECON for very insightful
discussions on modelling FDI and analysing investment results.
50
https://www.mfat.govt.nz/en/trade/free-trade-agreements/agreements-under-negotiation/
51
https://www.mfat.govt.nz/assets/Uploads/Regional-Comprehensive-Economic-Partnership-
Negotiating-Round-29-Apr....pdf
114
of them (ASEAN and Japan) are included in the RCEP region. Vietnam also has
large imports from other RCEP members including China, ASEAN, Korea and
Japan. In 2018, RCEP members accounted for almost 60%52 of Vietnam’s total
trade and 72%53 of Vietnam’s total foreign direct investment (FDI) inflows. Given
the importance of this regional grouping to Vietnam, it is of interest to explore the
potential impact of RCEP on Vietnam.
Although a variety of FTAs include provisions intended to reduce barriers to FDI,

very few studies on FTAs using computable general equilibrium (CGE) models
have accounted for liberalisation of investment barriers, due in part to the dearth
of detailed global FDI data (Strutt, Minor, & Rae, 2015). Indeed, most existing
studies on RCEP analyse trade liberalisation of this agreement through only tariff
cuts and non-tariff measures (NTMs) reductions (Cheong & Tongzon, 2013; Gilbert,
Furusawa, & Scollay, 2018; Itakura, 2014; Kawasaki, 2015; Rahman & Ara, 2015).
The limited research on RCEP covering Vietnam that model reductions in barriers
to FDI and other trade liberalisation components under RCEP is the study of Petri,
Plummer, Urata, and Zhai (2017). However, all of these studies focus on
macroeconomic effects of RCEP for all members. Therefore, they do not provide
insights into the impacts of RCEP on a particular member, including Vietnam, in
terms of investment effects, sectoral trade effects, and the contribution of each
liberalising component. For RTA studies on Vietnam, the impacts of RCEP on the
Vietnamese economy are analysed by Nguyen et al. (2014) and Kikuchi et al. (2018)
who focus on only trade liberalisation of this agreement, like most current studies
on RCEP.
The goal of this paper is to analyse the potential impacts of RCEP on Vietnam,
focusing on trade and investment when liberalisation of investment barriers, along
with reductions in tariffs and NTMs, are modelled. We use the global trade analysis
project (GTAP) model with a long-run closure so that changes in both trade and
investment can be examined. We first project the GTAP database to 2020, with the
tariff baseline capturing the implementation of the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (CPTPP) and other regional trade
52
Authors’ calculations based on the data from Vietnam’s General Statistics Office accessed at
https://www.gso.gov.vn/default_en.aspx?tabid=780
53
Authors’ calculations based on data from ASEAN Secretariat at https://www.aseanstats.org/
115
agreements (RTAs) within RCEP members. This study models reductions in
barriers to FDI following RCEP based on the OECD FDI restrictiveness index,
which has not been used in previous studies of trade agreements for Vietnam. This
is the first study that investigates the effects of RCEP on Vietnam in which
increased FDI stock is accounted for. This is also the first study that provides
insights into the investment effect of RCEP on Vietnam in both the short- and long-
run. Furthermore, this study uses the new bilateral ad valorem equivalents (AVEs)
of goods NTMs at the GTAP sectoral level (Kravchenko, Utoktham, Narayanan, &
Duval, 2019) and we carefully include existing FTAs in the baseline to avoid
double-counting benefits.
This paper is organised as follows. Section 5.2 briefly summarises the existing
literature. Section 5.3 describes the modelling framework and policy scenarios. Our
simulated results are presented in Section 5.4, and Section 5.5 notes our conclusions.
5.2 Review of Existing Studies
Among the three notable modern FTAs Vietnam has signed or are under negotiation,
including the CPTPP, RCEP, and EU-Vietnam FTA (EVFTA), most modelling
attention has focused on the CPTPP and its precursor, the TPP. Based on models
building on GTAP, the impact of this agreement focusing on either a member or a
non-member has been widely evaluated, including for the US (USITC, 2016), New
Zealand (Walmsley, Strutt, Minor, & Rae, 2018), China (Li & Whalley, 2014; Lu,
2015), Turkey (Oduncu, Mavuş, & Güneş, 2014), the Philippines (Cororaton &
Orden, 2015), and India (Narayanan & Sharma, 2016). For Vietnam, the TPP has
been estimated to result in the largest percentage gains in comparison to other TPP
members in terms of real GDP (Areerat, Kameyama, Ito, & Yamauchi, 2012;
Burfisher et al., 2014), welfare (Itakura & Lee, 2012), real income and exports (Petri
& Plummer, 2016; Petri, Plummer, & Zhai, 2012b). Of particular note is the study
of Minor, Walmsley, and Strutt (2016) who use a dynamic GTAP model to analyse
the impact of the TPP on Vietnam. They find that following this agreement,
Vietnam’s real GDP would increase by a cumulative 8.1% by 2035, while
investment would reach its peak at a 23% increase relative to the 2025 baseline.
116
Furthermore, Petri et al. (2017) analyse the TPP without the US and indicate that
Vietnam still reaps large benefits, though these are now reduced.
While there is a large number of studies on the TPP, RCEP as a proposed RTA in
the Asia-Pacific has received more limited attention in the literature. There are some
studies on RCEP which do not report any results for Vietnam. For instance, Li,
Scollay, and Gilbert (2017) analyse the impact on China’s FDI inflows of RCEP.
They use an innovative CGE model which is based on the theory of firm
heterogeneity and extended to include FDI. Balistreri and Tarr (2017) assess the
impact of RCEP on the Philippines using a CGE model with three different market
structures including the Armington, Melitz, and Krugman. The two studies focus
on China and the Philippines, thus the regions modelled are highly aggregated, with
three regions (Li et al., 2017) and eight regions (Balistreri & Tarr, 2017)
respectively, reducing the size of the effects to be observed (Gilbert et al., 2018).
As Vietnam is not separately modelled in these studies, how RCEP affects Vietnam
is not assessed. Unlike Li et al. (2017) and Balistreri and Tarr (2017), the regions
modelled in the study of Rahman and Ara (2015) include Vietnam. However, the
economic impacts of tariff elimination under RCEP are reported for the whole
ASEAN region instead of individual member states because South Asian countries
are their area of focus.
With respect to RCEP studies covering Vietnam, some of them analyse RCEP along
with other RTAs for comparative purposes (Cheong & Tongzon, 2013; Gilbert et
al., 2018; Kawasaki, 2015). Regarding the economic impacts of RCEP on Vietnam,
Cheong and Tongzon (2013) analyse tariff elimination under RCEP using a
dynamic GTAP model and find that among RCEP members, Vietnam witnesses the
largest GDP gains of 5.9% by 2027. Kawasaki (2015) modifies a standard GTAP
model to account for some dynamic aspects of capital formation. His findings
suggest that Vietnam is the greatest beneficiary of income gains in percentage terms
following either tariff removals or tariff removals plus NTMs reductions through
RCEP, compared with other RCEP members. In contrast, Gilbert et al. (2018)
employ a modified GTAP model in which medium and long-run closures are used
to allow factors to move across sectors and capital stock to vary. Their simulation
results indicate that Korea experiences the largest increase in welfare (4.1%),
117
whereas Vietnam’s welfare rises by 1.4% due to RCEP trade liberalisation in the
long-run.
RCEP is also analysed by Itakura (2014) and Itakura (2015). Based on a dynamic
CGE model, Itakura (2014) finds that tariff removal alone or full implementation
of RCEP with tariff elimination, reductions in services trade barriers, and
improvements in logistics result in the largest GDP and welfare gains for Vietnam
and Thailand in percentage terms, compared with other ASEAN member states. In
particular, Vietnam’s GDP and welfare rise by 13.4% and 11.2% respectively
following the full implementation of RCEP. Itakura (2015) uses a dynamic CGE
model to analyse different policy simulations of RCEP. He finds that the RCEP
implementation through the four policy components, including tariff cuts, services
NTMs reductions, logistics improvements, and country-specific risk reductions,
increases both Vietnam’s GDP and exports by 2.9% relative to the 2030 baseline,
which are smaller than the percentage increases in Cambodia, Thailand, and Korea.
Moreover, Vietnam’s investment experiences an increases by 7.7%, while
investment in Korea, Cambodia, and New Zealand increase by 24.7%, 23.4%, and
14.9% respectively.
Although the above studies provide some simulation results for Vietnam, all of
them focus only on the macroeconomic effects of RCEP on all members, including
real GDP, welfare, aggregate exports, imports, and investment. None of these
studies provide insights into the contributions of different liberalising components
to the changes, which may vary among members. Analysis of the sectoral effects
of RCEP is also not covered. Furthermore, these studies do not model reductions in
barriers to FDI as a result of RCEP.
Most of the existing studies on RCEP have focused only on RCEP trade
liberalisation through tariffs and NTMs, with the exception of some limited
research by Li et al. (2017), Balistreri and Tarr (2017), and Petri et al. (2017), in
which changes in FDI are also modelled. In particular, Li et al. (2017) endogenously
incorporate FDI in the CGE model and FDI liberalisation is conducted through
reductions in fixed trading costs of foreign firms. Balistreri and Tarr (2017) model
reductions in FDI barriers based on the ad valorem equivalent (AVEs) of the
barriers against foreign providers of services, which are taken from Jafari and Tarr
118
(2014). As previously mentioned, the two studies focus on China and the
Philippines, with no results reported for Vietnam. Petri et al. (2017) use a dynamic
CGE model in which tariffs, NTBs, FDI barriers, and non-preferential NTBs are
captured. They model reductions in FDI barriers following TPP12, TPP11, TPP16,
US-Japan, and RCEP using the approach discussed in Petri et al. (2012b) and Petri
and Plummer (2016). In particular, potential increases in the bilateral FDI stock,
which are later used in the model, are exogenously estimated based on a proxy for
the investment climate (the World Bank’s Doing Business rank), the score of the
FDI-related provisions, and the baseline bilateral FDI stock (Petri et al., 2012b).
Consistent with Gilbert et al. (2018), they find that RCEP members such as China,
Japan, Korea, and India are winners in terms of welfare gains. Their results also
indicate that Vietnam’s exports rise by 4.9% in 2030, after Japan (11.4%), India
(9.7%), Korea (5.7%), and China (5.2%). Like most of the current studies on RCEP,
Petri et al. (2017) only focus on the macroeconomic effects of this agreement
regarding the welfare gains and aggregate exports. Petri et al. (2017) do not provide
analysis on changes in Vietnamese trade at sectoral levels and investment as a result
of RCEP, as well as the policy instrument having the largest impact on the changes
in Vietnam.
For Vietnam, Nguyen et al. (2014) analyse the impacts of phasing out tariff barriers
under RCEP on Vietnam, using the GTAP model. In addition to their main focus of
tariffs, reductions in services trade costs are included in their three scenarios, with
different levels of ambition. They find that the rise in Vietnam’s national exports
ranges from 2.4% to 3.9%, and the change in its imports is between 3.7% and 5.6%
relative to 2020 baseline. Furthermore, Vietnam’s real wage increases by 3% to 5%
by 2020 as a result of RCEP. Regarding sectoral output, textiles, apparel, and
leather witness the major expansion in percentage terms. Kikuchi et al. (2018)
employ a static CGE model to analyse the effects of mega-RTAs on Vietnam
including the EVFTA, TPP, CPTPP, and RCEP. Policy instruments include tariffs,
time costs as proxies for trade costs on goods trade, services NTMs, and spill-over
to non-member countries for goods. They find that as a result of RCEP liberalisation,
Vietnam’s real GDP expands by 9.2% and agricultural sectors are not as adversely
affected as they are under the EVFTA or TPP. However, the current study is able
to expand on this previous work in a number of ways. In particular, we also model
119
potential reductions in barriers to FDI as a result of RCEP. Capturing investment
liberalisation of RCEP is important as intra-RCEP FDI flows are significant sources
of investment for each of the RCEP members. With respect to merchandise trade
barriers, while Kikuchi et al. (2018) model improvements in time costs, other NTMs
such as sanitary and phytosanitary measures, as well as other technical measures
regarding labelling requirements and conformity assessment (UNCTAD, 2015) are
not modelled in both studies. These goods NTMs may have significant impacts on
the Vietnamese economy, given the increasingly important role of NTMs relative
to tariffs. Finally, although these studies provide analyses on sectoral trade effects,
there is no analysis of the investment effect of RCEP in both the short- and long-
run and the current study is also able to contribute in this space.
The current study fills these gaps by applying a global CGE model to analyse the
potential impact of RCEP through both trade and investment liberalisation on
Vietnam. Policy instruments modelled include reductions in tariffs, goods NTMs,
services NTMs, and reductions in FDI barriers based on the OECD FDI index.
Indeed, this is the first study to date that analyses RCEP, focusing on Vietnam, in
which changes in FDI stocks are modelled. In addition to the trade effects of RCEP,
this study evaluates changes in Vietnamese investment in the short-and long-run.
5.3 Modelling Framework and Scenarios
5.3.1 Model and Baseline Scenario
We use the GTAP model (Hertel, 1997) to analyse the impact of RCEP. The model
is multi-sectoral and multi-country, allowing us to explicitly capture interactions
between regions and sectors. Therefore, this type of model is ideal for analysing
impacts of future trade agreements. Principle characteristics of the model include
perfect competition, constant returns to scale, and maximisation of consumers’
welfare and firms’ profits based on budget and resource limitations respectively.
Imports are differentiated by countries of origin due to the Armington elasticities.
As capital stocks are fixed in the standard GTAP model, modifications need to be
made to capture capital accumulation (Francois & Reinert, 1997; Walmsley, 1998).
Therefore, we modify the standard GTAP model so that changes in both trade and
investment following RCEP can be examined. In particular, we employ a steady-
120
state closure (long-run closure) with the assumption of fixed saving rates (Francois,
McDonald, & Nordstrom, 1996). An increase in income results in increases in both
savings and investment, and increases in saving are proportional to increases in
income (Kawasaki, 2015). Furthermore, the trade balance is endogenous in our
model, allowing capital to move across countries.
Given the importance of economic effects of liberalising investment barriers, FDI

has been incorporated into CGE models so that reductions in barriers to FDI are
accounted for. The key characteristic of CGE-FDI models is the existence of both
domestic and foreign investors in each sector and each region, which is different
from one composite investor in the standard GTAP model (Ciuriak & Xiao, 2014).
For instance, Petri (1997) was one of the pioneers who constructed FDI in a CGE
framework to assess the impact of APEC liberalisation. Jensen, Rutherford, and
Tarr (2007) develop a small open economy CGE model to examine the impact of
accession to the World Trade Organization (WTO) on the Russian economy. Based
on CGE-FDI models, Lejour, Rojas-Romagosa, and Verweij (2008) analyse the
Services Directive aiming at opening up commercial services markets within the
EU, while Mérette, Papadaki, Hernandez, and Yu (2008) explore the impact of
eliminating FDI barriers on Canada and the United States. As investment provisions
are covered in new-generation FTAs, recent studies applying CGE-FDI models to
the analysis of FTAs include Ciuriak and Xiao (2014) and Li et al. (2017).
Particularly, Ciuriak and Xiao (2014) modify the dynamic GTAP model to add
foreign-owned firms in each services sector so that services trade can be captured
through foreign affiliates. The FDI-CGE model of Li et al. (2017) is a comparative
static model, which is based on firm heterogeneity framework and can account for
changes in both intensive and extensive margins as a result of trade liberalisation
as well as new entry of foreign firms. Construction of CGE-FDI models, however,
may be complicated and time-consuming, with data difficult to source. On the other
hand, investment liberalisation can also be addressed based on an exogenous
approach (Petri et al., 2012b). Petri, Plummer, and Zhai (2012a) and Petri et al.
(2012b) estimate changes in FDI stocks due to improvements in the investment
climate and reductions in FDI barriers respectively. These potential increases in
FDI stocks are then used in their CGE model. In this study, to model investment
liberalisation, we exogenously estimate changes in FDI stocks based on the OECD
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FDI restrictiveness index. Following Lotze (1999), these estimates are introduced
in our modified CGE model through changes in sectoral capital stocks. FDI
liberalisation is then implemented as reductions in tax equivalents.
The latest GTAP 10 database (Aguiar, Chepeliev, Corong, McDougall, & van der
Mensbrugghe, 2019) is used as our starting point. Before simulating RCEP, we first
project the 2014 baseline to 2020 with the assumption that national real GDP,
population, skilled and unskilled labour grow at exogenous rates for each region
modelled. GDP and population growth rates are from the World Bank. We also
include labour force growth rate projections (Appendix, Table 5.10). The baseline
we model also accounts for existing trade agreements to avoid double-counting
benefits. In particular, the tariff rates in the baseline refer to the tariffs after the
implementation of the CPTPP and other existing agreements within RCEP
members, drawing on estimates from Walmsley et al. (2018). For the purpose of
our analysis, we aggregate the 141 regions and 65 sectors of this data base into 18
regions and 21 sectors, as described in Appendix, Table 5.11 and Table 5.12.
5.3.2 Scenarios Modelled
As guided in the principles and objectives for the RCEP negotiation (ASEAN
Secretariat, 2012) and the 27 rounds negotiated, trade in goods, trade in services
and investment liberalisation are included under RCEP. Therefore, they are
included in our policy scenarios. Table 5.1 briefly summarises two scenarios
simulated in the current study. Each scenario has four components, with Scenario 2
having greater degree of liberalisation.
Table 5.1: Policy Scenarios

Scenario 1 RCEP members reduce tariffs by 85% on all goods, NTMs on both goods and
services by 7%, and investment barriers by 50%.
Scenario 2 RCEP members reduce tariffs by 95% on all goods, NTMs on both goods and
services by 25%, and investment barriers by 50%.
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5.3.2.1 Tariffs
In the five existing ASEAN+1 FTAs including ASEAN-Australia-New Zealand,

ASEAN-China, ASEAN-India, ASEAN-Japan and ASEAN-Korea, the average
tariff reduction committed to by ASEAN members was 90.9%, compared with the
average committed rate of 92.6% by the ASEAN’s FTA partners (Fukunaga &
Kuno, 2012). Fukunaga and Kuno (2012) point out that RCEP should aim for a
higher rate of 95% so that its members receive additional benefits. Therefore, we
assume a 95% tariff cut by each of the RCEP members in the more ambitious
scenario (Scenario 2). However, sensitive and exempt lists that apply to dozens or
hundreds of tariff lines may significantly weaken the liberalising effect. Although
the tariff cuts under RCEP have not been specified, past agreements may provide a
basis for making judgment of these cuts. Previous FTAs between ASEAN and India,
China, Korea, and Japan specify long lists of sensitive and exempt products, which
tend to be the same in each agreement. For instance, in the ASEAN-Korea FTA,
Korea excluded a variety of tariff lines of products covering fish and aquatic
invertebrates, prepared foodstuffs, meat and edible offal, edible vegetables &
certain roots, cereal, edible fruits & nuts, coffee & tea, and products of milling
industry. Vietnam excluded products such as tobacco, cars, car accessories and
spare parts of cars, motorbikes, bikes, home electric appliances, etc. 54 Baker,
Vanzetti, and Pham (2014) calculated tariffs changes at the six digit level using
TASTE (Tariff Analytical and Simulation Tool for Economists), however, since an
updated version of this tool is not yet available, we model a 85% cut as an
approximation of the potential outcome in the more conservative scenario (Scenario
1).55
Table 5.2 indicates the average tariff rates imposed by Vietnam (other RCEP) on
imports from other RCEP (Vietnam) after the implementation of the CPTPP and
other existing agreements between the RCEP members. Manufactured products
from other RCEP, on average, face relatively high tariffs in Vietnam, especially
labour-intensive products (8.3%). Examining this in more detail, we find that
54
See Appendix 2. Highly Sensitive List of the ASEAN-Korea agreement, accessed at
http://wtocenter.vn/chuyen-de/12745-asean-republic-of-korea-free-trade-area
55
The 85% cut enables less sensitive sectors to approach very low tariff rates, while more sensitive
sectors maintain higher relative tariffs.
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Vietnam’s import tariffs applied to apparel and leather products are the highest
(12.0%), followed by transport equipment (7.8%), and textiles (5.8%). In contrast,
other RCEP partners, on average, impose negligible import tariffs on manufactured
products from Vietnam except for chemicals (1.64%). Similarly, Vietnam imposes
import tariffs of 2.8% against extraction products from the RCEP, compared with
only 0.2% imposed by other RCEP. Unlike manufacture and extraction, Vietnam
on average imposes an import tariff of 1.4%, which is much lower than the average
rate imposed by other RCEP (5.6%) in agriculture. Among Vietnam’s agricultural
products, Vietnam’s rice faces the highest tariff (20.6%) in the RCEP region.
Table 5.2: Tariff Rates Imposed by Vietnam (Other RCEP Partners) on Imports
from Other RCEP Partners (Vietnam) (%), 2020
Sector Tariffs imposed by Vietnam Tariffs imposed by RCEP
Agriculture 1.42 5.57
Rice 0.17 20.62
Fishing 0.03 0.34
OthAgri 0.93 7.69
MeatLstk 0.02 0.04
ForesWood 0.76 1.47
FoodBever 2.92 1.23
Labor-intensive manufactures 8.25 0.07
Textiles 5.75 0.11
AppaLeath 12.01 0.05
Chemicals 1.03 1.64
Metals 0.60 0.05
ElecEquip 0.57 0.00
Machinery 1.43 0.04
TransEquip 7.76 0.29
OthManufac 3.39 0.01
Source: Authors’ model results, drawing on Walmsley et al. (2018)
5.3.2.2 Non-tariff Measures
In addition to tariff reductions, we take into account reductions in non-tariff barriers

on both goods and services. NTMs face a range of data and modelling challenges
(Walmsley et al., 2018) and we note that it is difficult to accurately determine the
extent of reductions in NTMs following RCEP. The estimation results of Hayakawa
and Kimura (2015) show that NTMs of FTA members are, in general, 6.5% point
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lower than those of non-members. Following Itakura (2015), we start with a
relatively conservative assumption of a 7% cut in NTMs on goods and services in
Scenario 1. In the second scenario, the assumptions are more ambitious when we
reduce NTMs on both goods and services by 25%.
In terms of NTMs on goods, we apply the bilateral technical AVEs of NTMs

estimates by Kravchenko et al. (2019)56 which are different from the average AVEs
of NTMs that each country imposes on rest of the world, as generally used in
previous studies.
With respect to NTMs on services, we use the latest estimates of AVEs of non-tariff
barriers on services by Fontagné, Mitaritonna, and Signoret (2016) (Appendix,
Table 5.13). Sectors estimated include communication, construction, insurance,
business services, financial services, government service, trade, and transport,
which are consistent with the GTAP 10 database.
5.3.2.3 Investment Barriers
In this section, we start with assumptions for liberalising barriers to FDI in the
RCEP region. We then move to explanations for the calculations of shocks used in
this model.
Modelling investment liberalisation through declines in investment barriers is

important as it may impact on changes in investment, trade, and other economic
indicators. Most existing studies on FTAs that model FDI assume substantial
reductions in the level of investment restrictions. For instance, FDI barriers are
reduced by 50% following RCEP (Balistreri & Tarr, 2017; Li et al., 2017) and 59%
following the TPP (Ciuriak & Xiao, 2014). In a case study of unilateral
liberalisation, Lakatos and Fukui (2014) assume a cut of 75% in barriers to FDI in
India’s distribution sector. Consistent with these existing studies, we assume that
RCEP members reduce barriers to FDI by 50% in both scenarios. However, in
Scenario 2, the ambitious scenario, we assume that increases in sectoral FDI stocks
in each RCEP member are due to a 50% reduction in FDI barriers affecting both
56
We are grateful to Alex Kravchenko for supplying us with preliminary estimates from this new
database.
125
RCEP members and non-members. These assumptions are based upon the
observation that intra-RCEP investment is important to each member, accounting
for a relatively significant share of each member’s total FDI stocks (Appendix,
Table 5.14). In addition, as RCEP is a RTA, investment liberalisation from this
agreement may encourage investment not only between members but from non-
members into the region as well. In Scenario 1, the more conservative scenario, the
increases in FDI stocks by sector in each member are due to only RCEP members,
based on the RCEP FDI stock share in each member’s total FDI stocks.
Reductions in barriers to FDI in this paper are based on the OECD’s annual FDI
regulatory restrictiveness index described in Kalinova, Palerm, and Thomsen
(2010). FDI indices are commonly used to measure the restrictiveness in a sector or
an economy (Lakatos & Fukui, 2014), ranging from 0 to 1, with higher values
indicating higher restrictions on FDI. This index measures the restrictiveness of FDI
in a country based on four different restrictions on FDI including foreign equity
limitations, discriminatory screening, restrictions on the employment of foreigners,
and other operational restrictions (OECD, 2018). The latest FDI indices in 2017 are
used. We map the GTAP database’s more detailed sectors with OECD’s broader
sectors. For instance, sub-sectors of agriculture in the GTAP database belong to the
agricultural sector of the OECD with the same FDI index. FDI indices for the 21
aggregated sectors modelled are shown in Appendix, Table 5.15.
To estimate the impact of this policy component on RCEP members, we

exogenously estimate the increase in FDI stocks in RCEP members, at the sectoral
level. We use the ratios of FDI stocks and capital stocks in each sector to determine
increases in sectoral capital stocks, which are later used in the model as exogenous
variables (Lotze, 1999). Liberalisation of barriers to FDI is then simulated as
reductions in tax on sectoral capital.
In order to estimate how much sectoral FDI stocks will increase as a result of
removing all FDI barriers, Lakatos and Fukui (2014) apply a gravity-like
econometric specification, with further details described in Fukui and Lakatos
(2012). They find that the estimated elasticity of FDI stocks with respect to the FDI
restrictiveness index (α) is -1.44. Ciuriak and Xiao (2014) use a gravity model
similar to that of Lakatos and Fukui (2014) and also report that FDI restrictiveness
126
indices adversely affect inward FDI stocks. Following Lakatos and Fukui (2014),
percentage changes in FDI stocks for the 21 sectors modelled for RCEP members,
given full liberalisation of FDI barriers, are presented in Appendix, Table 5.16.
These values are calculated by multiplying the above estimate (α) adopted from
Lakatos and Fukui (2014) with the OECD FDI index. For instance, the percentage
change in FDI stocks of Vietnam’s extraction sector is 2.9%. This means that if
Vietnam removes all the barriers to FDI in the extraction sector, there will be a 2.9%
increase in FDI stocks in this sector.
Regarding the data needed for the calculations of estimated sectoral FDI stock and
estimated capital stock ratios in Vietnam, annual FDI stocks are available at
UNCTAD (2018), while annual capital stocks can be collected from the Penn World
Table 9.1 (Feenstra, Inklaar, & Timmer, 2015). To split total FDI stocks into the
sectors modelled, we use the global FDI stock database (Gouel, Guimbard, &
Laborde, 2012; Lakatos, Walmsley, & Chappuis, 2011), which is the latest and most
appropriate for CGE analysis. In addition, information on capital component of
producer expenditure (EVFA from the GTAP database) is used to split total capital
stocks within 21 sectors in our model. Based on the data, ratios of FDI stocks and
capital stocks in 2017 are calculated (Appendix, Table 5.17). Combining the ratios
with increases in sectoral FDI stocks (Appendix, Table 5.16), given full
liberalisation of barriers to FDI, increases in sectoral capital stocks are calculated
(Appendix, Table 5.18).57 Investment liberalisation is then simulated as shocks to
taxes on sectoral capital. Table 5.3 indicates changes in Vietnam’s FDI stocks,
capital stocks, and tax on capital given full removal of FDI barriers. Final shock
values used in our model assume 50% reductions in barriers to FDI in both scenarios,
with shocks in the more conservative scenario (Scenario 1) adjusted to reflect shares
of RCEP FDI stocks in each member’s total FDI stocks (Appendix, Table 5.14).
57
Increases in sectoral capital are shocked together with equivalent increases in total capital.
127
Table 5.3: Changes in Vietnam’s FDI Stocks, Capital Stocks, and Equivalent Tax
on Capital (%), with Full Removal of FDI Barriers, 2017
FDI stock Capital stock Tax on capital
Rice 11.95 0.05 (0.004) -0.29
Fishing 2.88 0.00 (0.000) -0.02
OthAgri 11.95 0.00 (0.000) -0.01
MeatLstk 11.95 0.41 (0.034) -0.88
ForesWood 6.49 0.02 (0.004) -0.04
Extraction 2.88 0.02 (0.009) -0.30
FoodBever 6.48 0.06 (0.009) -0.16
Textiles 6.48 0.04 (0.007) -0.04
AppaLeath 6.48 0.02 (0.003) -0.02
Chemicals 2.88 0.11 (0.037) -0.13
Metals 2.88 0.07 (0.023) -0.07
ElecEquip 2.88 0.07 (0.026) -0.08
Machinery 2.88 0.08 (0.029) -0.08
TransEquip 2.88 0.05 (0.018) -0.06
OthManufac 6.48 0.04 (0.005) -0.06
Construction 2.88 0.00 (0.000) 0.00
FinBusTra 7.30 3.64 (0.499) -3.81
Transport 76.03 0.22 (0.003) -0.24
Commu 83.95 0.94 (0.011) -1.12
GovSvs 32.69 0.16 (0.005) -0.15
OthSvs 16.56 0.01 (0.001) -0.02
Source: Authors’ calculations and model results
Note: Values in the brackets are ratios of sectoral FDI stocks and capital stocks.
5.4 Potential Impacts of RCEP
5.4.1 Real GDP
Table 5.4 summarises simulated changes in real GDP under RCEP liberalisation.
In percentage terms, real GDP in Vietnam increases by 4.63% (10.9 billion US$)
in Scenario 2, compared with a 2.35% increase corresponding to 5.5 billion US$ in
Scenario 1. Other RCEP members also benefit from this agreement, with real GDP
on average rising by 0.51% (124.5 billion USD) in Scenario 1 and 1.19% (293.4
billion USD) in Scenario 2.
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Table 5.4: Changes in Real GDP of RCEP Members (% and million US$), 2020
PER CENT
Vietnam 2.35 4.63
Other RCEP * 0.51 1.19
US $ MILLION
Vietnam 5,533 10,911
Other RCEP * 124,494 293,417
Note: Aggregation of regional compositions is defined in Appendix, Table 5.11
Figure 5.1 decomposes the impact of liberalising components on Vietnam’s real

GDP following Strutt et al. (2015). Liberalisation of FDI barriers has the smallest
effect on Vietnam’s real GDP in the two scenarios. Similarly, reductions in services
NTMs make relatively small contributions to the increase in real GDP, due in part
to a small services share of Vietnam’s total exports (7.0%).58
In contrast, tariff reductions largely account for the percentage increase in

Vietnam’s real GDP (1.59%) in Scenario 1, followed by goods NTM reductions
(0.65%). However, the contribution of reductions in goods NTMs (2.59%)
surpasses that of reductions tariffs (1.78%) in Scenario 2.
Figure 5.1: Changes in Vietnam's Real GDP by Liberalisation Components (%),

2020
5.00 4.63
4.50 0.16
4.00
Growth in GDP percent
3.50
3.00 2.59
2.35
2.50
2.00 0.65
1.50
1.00 1.78
1.59
0.50
0.00
Tariffs Goods NTMs Services NTMs Tax on capital
58
Authors’ calculations from the GTAP 10 database
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5.4.2 Trade Effects
5.4.2.1 Aggregated Levels
Table 5.5 shows changes in total real exports, imports, and bilateral trade of
Vietnam and other RCEP. As a result of RCEP liberalisation, Vietnam’s total real
exports rise by 6.40% in Scenario 1 and 10.05% in Scenario 2, whereas its total real
imports experience a slighter increase by 5.39% and 9.10% respectively. In addition,
Vietnam’s exports to other RCEP members rise by 4.13% in Scenario 1 and 8.33%
in Scenario 2, reflecting an increase of 4.2 billion US$ and 8.5 billion
US$ respectively. In addition, both scenarios indicate that Vietnam’s imports from
other RCEP (other RCEP members’ exports to Vietnam) are larger than Vietnam’s
total imports in both relative and absolute terms, reflecting evidence of trade
diversion following RCEP. For other RCEP members, their bilateral trade with
Vietnam has larger percentage increases, compared with their total trade in both
scenarios.
Table 5.5: Changes in Total Real Exports, Imports and Bilateral Trade (% and
million US$), 2020
Total exports
Vietnam 6.40 14,153 10.05 22,218
Other RCEP 1.99 136,951 3.73 257,195
Total imports
Vietnam 5.39 13,897 9.10 23,485
Other RCEP 2.46 153,365 4.64 289,128
Bilateral trade
Vietnam exports to other RCEP 4.13 4,196 8.33 8,472
Other RCEP export to Vietnam 8.60 16,211 13.09 24,681
Note: Aggregation of regional compositions is defined in Appendix, Table 5.11.
5.4.2.2 Sectoral Levels
Table 5.6 describes changes in Vietnam’s real exports and imports by sectors.
Aggregating the sectors modelled into six sectors including agriculture, extraction,
labour-intensive, other manufactures, and services, we find that all of them
experience growth in both exports and imports following RCEP. With respect to
130
exports, the increase in Vietnam’s real aggregate exports is largely attributable to
manufactured exports. Particularly, labour-intensive manufactures and other
manufactures, on average, expand by 21.1% and 3.3% respectively, reflecting an
increase of 10.3 billion US$ and 3.8 billion US$ in Scenario 1. These export
expansions are much greater with more ambitious assumptions in Scenario 2. In
general, manufactured exports expand largely due to wearing apparel and leather
products, textiles, metals, and electric equipment.
By contrast, agriculture, extraction, and services, on average, experience minimal

export growth. In particular, the services sector witnesses small export growth, from
0.7% in Scenario 1 to 1.7% in Scenario 2, exhibiting a gain of 82 million US$ and
190 million US$ respectively. The agricultural sector, on average, exhibits a
negligible export growth in Scenario 1, mainly due to rice. However, agricultural
exports decline with greater liberalisation in Scenario 2.
Our simulation results suggest that Australia and New Zealand have become
increasingly important export markets for Vietnam as a result of RCEP. Export
growth rates of apparel and leather products from Vietnam to Australia and New
Zealand are high.
Among the six aggregated sectors, increases in imports are much greater than in
exports of agriculture, extraction, other manufactures, and services with the
exception of labour-intensive manufactures in dollar terms, mainly because
Vietnam’s key import partners such as China, ASEAN, Japan, and Korea are
covered in RCEP. Notably, each sector modelled experiences an increase in imports
except for the fishing sector. Among these sectors, wearing apparel and leather
products and textiles experience the largest expansion in both percentage and dollar
terms. The main reason is the dramatic increase in exports of these products with
heavy dependence on imported inputs used to produce them (Lu, 2015; Minor et al.,
2016).
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Table 5.6: Changes in Vietnam's Real Exports and Imports by Sectors (% and
million US$), 2020
Export Import
Agriculture 0.1 27 -1.1 -308 2.7 993 5.5 2,001
Rice 29.8 908 34.1 1,038 16.6 8 23.9 11
Fishing 0.5 1 -1.3 -3 -1.3 -21 -0.1 -2
OthAgri -4.7 -412 -7.4 -659 2.2 232 3.5 377
MeatLstk -7.1 -32 -6.4 -28 3.6 211 7.3 426
ForesWood -2.2 -98 -4.2 -186 3.5 100 6.5 183
FoodBever -3.0 -339 -4.1 -469 3.0 463 6.5 1,006
Extraction 0.7 121 1.7 303 7.0 1,133 12.7 2,057
Labor-intensive 21.1 10,277 27.5 13,374 18.5 6,759 24.6 8,976
Textiles 10.9 764 14.3 1,003 16.7 3,635 22.9 4,981
AppaLeath 22.9 9,512 29.8 12,371 21.2 3,124 27.1 3,995
Other manufac 3.3 3,763 7.7 8,848 3.8 6,198 7.7 12,370
Chemicals 2.3 234 2.0 206 4.3 1,358 7.1 2,245
Metals 2.3 211 13.9 1,281 2.6 747 6.9 1,982
ElecEquip 3.3 2,181 8.8 5,821 3.4 1,664 8.2 3,954
Machinery 4.0 618 5.2 791 3.1 1,131 5.8 2,092
TransEquip 1.7 65 3.8 146 8.2 765 12.3 1,153
OthManufac 4.2 453 5.6 602 7.2 533 12.7 945
Services 0.7 82 1.7 190 2.8 423 7.5 1,115
Construction 0.9 0 1.7 0 5.1 2 11.8 5
FinBusTra 0.1 2 1.8 84 3.5 248 8.9 630
Transport 4.4 121 7.5 206 1.4 40 4.9 134
Communication 0.3 3 2.2 28 2.9 45 7.3 113
GovSvs -2.4 -6 -4.3 -10 2.6 7 8.1 21
OthSvs -1.5 -39 -4.7 -118 2.6 81 6.7 213

Note: Aggregation of sectoral compositions is defined in Appendix, Table 5.12.
Agriculture includes processed food
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5.4.3 Investment Effect
To explain changes in long-run capital stocks, it is critical to first explore

investment effects of RCEP in the short-run. Therefore, this section analyses the
investment effects of RCEP in both the short- and long-run, focusing on Vietnam.
In the GTAP model, investment is depicted as purchases of capital goods (Malcolm,
1998). The supply of capital goods is based on the demand for investment. From an
investor’s point of view, it depends on the rate of return which is in turn determined
by the rental price of capital and the price of capital goods. According to Hertel
(1997), the current rate of return is specified as follows:
rorc(r) = GRNETRATIO(r) × [rental(r) − pcgds(r)] (1)
In which r is a particular region; GRNETRATIO is the ratio of GROSS/NET rates

of return on capital; rorc is the current rate of return; pcgds is the price of capital
goods; and rental is the rental price of capital. Table 5.7 depicts changes in the short-
run current rate of return, rental price of capital, and price of capital goods. Among
the RCEP members, Vietnam experiences the largest percentage change in the
current rate of return, 5.00% in Scenario 1 and 9.20% in Scenario 2. These increases
are largely attributable to the increase in the rental price of capital in Vietnam.
As can be seen in this table, all of the RCEP members witness positive changes in
their rental prices of capital. RCEP liberalisation results in increased demand for
capital in each of RCEP member. Given the available regional supply of capital
stocks in the short-run, there is an increase in the rental price of capital and a
reallocation of capital stocks across industries in response to the enhanced demand
in each region (Walmsley, 1998). The rental price of capital in Vietnam rises by
2.90% in Scenario 1 and 5.89% in Scenario 2 which is much larger than other RCEP
members.
Unlike the rental price of capital, changes in the price of capital goods in RCEP
members can be either positive or negative because they depend on two factors
moving in opposite directions. Prices of imported capital goods are likely to reduce
following trade liberalisation, whereas increased demand for capital goods results
in a higher price (Walmsley, 1998). The price of capital goods in Vietnam declines
by 0.17% in Scenario 1, but rises by 0.21% in Scenario 2, indicating that with
133
greater liberalisation, the increased price of capital goods resulting from the
enhanced demand for capital goods dominates the net change in Vietnam’s prices
of capital goods.
of Capital Good in the Short-run (%), 2020
Regions Scenario 1 Scenario 2
rorc rental pcgds rorc Rental pcgds
Vietnam 5.00 2.90 -0.17 9.20 5.89 0.21
Indonesia 0.76 0.41 -0.15 2.08 1.48 -0.06
Malaysia 1.63 0.93 -0.26 3.95 2.48 -0.41
Philippines 1.36 0.76 -0.26 4.48 3.55 0.17
Thailand 2.41 1.16 -0.47 5.69 3.37 -0.47
Singapore 1.19 0.80 -0.17 5.87 4.38 -0.40
OthASEAN 1.33 0.35 -0.73 2.91 1.18 -1.16
Australia 0.97 0.64 0.12 3.07 2.66 0.99
NewZealand 2.75 2.59 0.68 3.99 3.83 1.05
China 0.53 0.17 -0.09 1.52 0.71 -0.07
Japan 1.21 2.57 1.78 1.82 3.63 2.42
SouthKorea 0.94 0.87 0.30 1.92 1.83 0.67
*
Other RCEP - 0.86 0.14 - 1.82 0.29
Notes: Aggregation of regional compositions is defined in Appendix, Table 5.11
Rental for other RCEP countries is based on the capital weighted average of other RCEP
Pcgs for other RCEP countries is based on the capital goods weighted average of other RCEP
The significant increases in the short-run current rate of return in Vietnam in both
scenarios suggest that Vietnam’s capital stocks would expand significantly in the
long-run when the regional supply of capital is no longer fixed. Table 5.8 shows the
changes in long-run capital stocks and trade balances of RCEP members. All of the
RCEP members experience gains in capital stocks and a deterioration in the trade
balance. In particular, Vietnam’s capital stocks grow markedly from 4.35% in
Scenario 1 to 8.17% in Scenario 2. Other RCEP members including Singapore,
Thailand, the Philippines, Malaysia, and New Zealand also benefit from the
significant growth of capital stocks. This table also indicates that Vietnam is among
the countries exhibiting the largest reductions in its trade balance, indicating an
increase in foreign investment. For instance, in Scenario 2 with greater
liberalisation, the trade balance of Vietnam reduces by 2.9 billion US$, after China
(9.7 billion US$).
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Table 5.8: Changes in Long-run Capital Stocks (%) and Trade Balances (million
US$), 2020
Capital stock Trade balance Capital stock Trade balance
(%) (mil. US$) (%) (mil. US$)
Vietnam 4.35 -1,500 8.17 -2,938
Indonesia 0.90 -675 2.45 -955
Malaysia 2.28 -253 5.64 42
Philippines 2.10 -593 7.03 -2,459
Thailand 3.55 -328 8.34 -520
Singapore 1.86 56 9.73 -613
OthASEAN 1.81 -153 3.91 -129
Australia 0.77 -569 2.44 -1,965
NewZealand 3.54 -478 4.95 -614
China 0.35 -1,649 1.00 -9,727
Japan 1.42 -920 1.93 -868
SouthKorea 1.00 -1,716 1.92 -2,078
Other RCEP - - - -
Figure 5.2 decomposes changes in Vietnam’s capital stocks by liberalising

components. In Scenario 1, tariff elimination contributes 3.10% to the changes,
followed by goods NTMs (1.04%), tax on capital (0.16%), and services NTMs
(0.06%). In Scenario 2, larger cuts to tariffs, NTMs, and tax on capital lead to
changes in the contributions among the components. In particular, goods NTMs
now contribute the most (4.11%), followed by tariffs (3.59%), tax on capital
(0.26%), and services NTMs (0.21%). Our simulation results suggest that the
impact of reducing the tax on capital has a more important role to the growth rate
of capital in other RCEP compared with Vietnam, partly because of the higher
barriers to FDI through the FDI restrictiveness index in a number of RCEP members.
135
Figure 5.2: Changes in Vietnam's Capital Stocks by Liberalising Components (%),
2020
9.00 8.17
8.00 0.26
Change in capital stock (%)
7.00
6.00
4.11
5.00 4.36
4.00 0.16
1.04
3.00
2.00 3.59
3.10
1.00
0.00
Tariffs Goods NTMs Services NTMs Tax on capital
Changes in the long-run current rate of return, rental price of capital, and price of
capital goods of RCEP members are provided in Table 5.9. In terms of the rental
price of capital, the above equation (1) can be rewritten as follows:
1
rental(r) = [GRNETRATIO(r)] × rorc(r) + pcgds(r) (2)
The long-run rental price of capital of Vietnam reduces by 0.56% in Scenario 1 and
0.44% in Scenario 2, whereas that of other RCEP, on average, increases by 0.24%
in Scenario 1 and 0.40% in Scenario 2. This fall in the long run rental price relative
to the short run (rise) is due to the increase in the supply of capital, which in turn
reduces the return.
As can be seen in Equation (2), the change in the rental price of capital is determined
by changes in the current rate of return and price of capital goods. However, in the
long-run, changes in the current, expected, and global rates of return are equated.
As shown in Table 5.9, the current rates of return in all regions increase by 0.15%
in Scenario 1 and 0.42% in Scenario 2. Therefore, prices of capital goods have
become more important in determining changes in rental prices of capital among
regions. Table 5.9 indicates that the price of capital goods in Vietnam reduces by
0.66% in Scenario 1 and 0.70% in Scenario 2, compared with an average reduction
of only 0.01% and 0.07% in other RCEP members respectively. Indeed, some
136
RCEP members experience positive changes in the price of capital goods, while
others witness negative changes. This is due to the high share of imported capital
goods in Vietnam. Vietnam imports more than 30.7% of goods for the production
of capital goods, whereas the imported shares of inputs in other RCEP members,
on average, is around 8.5%. 59 Therefore, Vietnam tends to have much larger
reductions in prices of capital goods following implementation of this agreement.
of Capital Goods in the Long-run (%), 2020
Regions Scenario 1 Scenario 2
rorc rental pcgds rorc rental pcgds
Vietnam 0.15 -0.56 -0.66 0.42 -0.44 -0.70
Indonesia 0.15 -0.21 -0.32 0.42 -0.19 -0.50
Malaysia 0.15 -0.31 -0.42 0.42 -0.48 -0.78
Philippines 0.15 -0.41 -0.52 0.42 -0.31 -0.62
Thailand 0.15 -0.82 -0.92 0.42 -1.21 -1.49
Singapore 0.15 -0.15 -0.28 0.42 -0.50 -0.84
OthASEAN 0.15 -0.82 -0.94 0.42 -1.30 -1.64
Australia 0.15 0.00 -0.08 0.42 0.53 0.31
NewZealand 0.15 0.15 0.04 0.42 0.41 0.12
China 0.15 -0.11 -0.19 0.42 -0.13 -0.35
Japan 0.15 1.52 1.42 0.42 2.15 1.87
SouthKorea 0.15 0.23 0.14 0.42 0.59 0.34
*
Other RCEP 0.15 0.24 -0.01 0.42 0.40 -0.07
Notes: Aggregation of regional compositions is defined in Appendix, Table 5.11
Rental for other RCEP countries is based on the capital weighted average of other RCEP
Pcgs for other RCEP countries is based on the capital goods weighted average of other RCEP
59
Authors’ calculations based on the projected GTAP 10 database to 2020
137
5.5 Conclusion
This paper sheds light on the potential impacts of RCEP through both trade and
investment liberalisation on Vietnam, with a focus on the trade and investment
impacts. A long-run closure in the GTAP model is used so that changes in both
trade and investment can be examined. RCEP trade liberalisation is modelled
through three policy components, including reductions in tariffs, goods and services
NTMs, while RCEP investment liberalisation is based on reductions in FDI barriers.
Each of the two scenarios modelled comprises the four policy components, with
Scenario 2 being more ambitious.
The simulation results indicate that Vietnam’s total real exports increase by 6.4%
in Scenario 1 and 10.1% in Scenario 2, while Vietnam’s total real imports rise by
slighter rates of 5.4% in Scenario 1 and 9.1% in Scenario 2. The results further
indicate that although RCEP creates an increase in trade flows among members,
there is evidence of trade diversion following this agreement. Indeed, Vietnam’s
increased imports from other RCEP are greater than its total imports in both relative
and absolute terms. At the sectoral levels, all of the five aggregated sectors,
including agriculture, extraction, labour-intensive manufactures, other
manufactures, and services, witness both export and import growth. Among the
more detailed sectors modelled, only meat & livestock and food & beverages
experience significant declines in exports, while exports of apparel and leather
products grow substantially.
Regarding the investment effects of RCEP, our simulation results indicate that
among RCEP members, the short-run current rate of return in Vietnam experiences
the largest increase, suggesting a significant increase in Vietnam’s long-run capital
stocks. In the long-run, Vietnam’s capital stocks grow remarkably from 4.36% in
Scenario 1 to 8.17% in Scenario 2. These increases are due to both trade and
investment liberalisation under RCEP. Among the policy instruments, tariffs and
goods NTMs have the largest impacts on Vietnam’s growth of capital. With greater
liberalisation in Scenario 2, the contribution of goods NTMs exceeds that of tariffs.
Exports of some agricultural and processed food sectors contract following RCEP.
Therefore, it may be necessary to have particular policies aiming at easing the
138
adverse impacts and assisting transitions of workers between sectors. In addition,
Vietnam should diversify its export markets to include countries such as Australia
and New Zealand in addition to Vietnam’s key and traditional export markets.
Furthermore, reductions in barriers to FDI are found to have positive impacts on
capital. Thus, restrictions on foreign equity, approval mechanisms, employment of
foreigners, and operation such as branching and capital repatriation (OECD, 2018)
should be eased to attract more investment.
139
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Chapter Appendix
Table 5.10: Annual Growth Rates of GDP, Population, and Labour Force (%), 2014-2020
Annual GDP growth Annual population growth Annual labour force growth rates
2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020
Vietnam 6.0 6.7 6.2 6.8 7.3 7.1 6.7 1.1 1.1 1.1 1.0 0.9 0.8 0.8 1.1 0.9 0.8 0.7 0.6 0.6 0.5
Indonesia 5.0 4.9 5.0 5.1 6.7 6.7 6.6 1.2 1.2 1.1 1.1 0.8 0.8 0.7 1.3 1.3 1.2 1.2 1.2 1.1 1.0
Malaysia 6.0 5.1 4.2 5.9 4.8 4.7 4.6 1.7 1.6 1.5 1.4 1.4 1.4 1.4 1.9 1.9 1.8 1.7 1.7 1.6 1.5
Philippines 6.1 6.1 6.9 6.7 4.9 4.9 4.8 1.6 1.6 1.6 1.5 1.6 1.6 1.6 2.2 2.2 2.2 2.2 2.1 2.1 2.0
Thailand 1.0 3.0 3.3 3.9 5.1 5.1 5.1 0.4 0.4 0.3 0.3 0.5 0.5 0.4 0.7 0.6 0.5 0.4 0.3 0.2 0.1
Singapore 3.9 2.2 2.4 3.6 3.6 3.4 3.2 1.3 1.2 1.3 0.1 0.6 0.5 0.5 1.9 0.5 0.8 0.4 0.0 -0.2 -0.3
OthASEAN 6.4 6.0 5.1 6.2 6.1 5.9 5.7 1.1 1.1 1.1 1.1 0.6 0.6 0.6 1.2 1.0 0.9 0.8 0.7 0.6 0.6
Australia 2.6 2.4 2.8 2.0 3.4 3.3 3.2 1.5 1.4 1.6 1.7 1.5 1.5 1.4 1.2 1.1 1.1 1.0 1.0 1.0 1.0
NewZealand 3.5 4.4 3.5 2.8 2.3 2.2 2.2 1.5 1.9 2.1 2.1 1.0 1.0 1.0 0.7 0.7 0.6 0.6 0.5 0.5 0.5
China 7.3 6.9 6.7 6.9 8.1 7.7 7.3 0.5 0.5 0.5 0.6 0.2 0.2 0.2 0.5 0.3 0.1 0.0 -0.1 -0.2 -0.2
Japan 0.4 1.4 0.9 1.7 0.9 0.9 0.9 -0.1 -0.1 -0.1 -0.2 -0.2 -0.2 -0.3 -1.0 -1.0 -0.9 -0.9 -0.8 -0.7 -0.6
SouthKorea 3.3 2.8 2.9 3.1 3.8 3.7 3.6 0.6 0.5 0.5 0.4 0.2 0.2 0.2 0.3 0.1 0.0 -0.2 -0.3 -0.5 -0.6
India 7.4 8.0 8.2 7.2 6.9 6.8 6.7 1.2 1.2 1.1 1.1 1.2 1.2 1.1 1.7 1.6 1.5 1.5 1.4 1.4 1.4
US 2.8 3.0 3.0 3.0 3.0 2.9 2.7 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.5 0.5 0.4 0.4 0.4 0.4 0.4
HongKomg 3.6 3.7 3.8 3.8 3.7 3.6 3.3 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.4 0.2 0.0 -0.2 -0.3 -0.4 -0.5
Taiwan 3.6 3.8 4.1 4.1 4.0 3.8 3.4 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.3 0.1 0.0 -0.2 -0.3 -0.5 -0.6
EU28 1.7 1.7 1.8 1.8 1.8 1.8 1.8 0.3 0.3 0.3 0.3 0.2 0.2 0.2 -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
ROW 4.0 4.1 4.1 4.0 4.0 3.9 3.9 1.5 1.5 1.5 1.5 1.5 1.5 1.4 1.8 1.7 1.7 1.6 1.6 1.6 1.6
Source: Projections draw on middle of the road ‘business as usual’ trends (O’Neill et al., 2014) and the World Bank
145
Table 5.11: Regional Aggregation
No. Regions Description GTAP regions Aggregated regions
1 Vietnam Vietnam VNM Vietnam
2 Indonesia Indonesia IDN Other RCEP
3 Malaysia Malaysia MYS Other RCEP
4 Philippines Philippines PHL Other RCEP
5 Thailand Thailand THA Other RCEP
6 Singapore Singapore SGP Other RCEP
7 OthASEAN Other ASEAN countries LAO, KHM, BRN, XSE Other RCEP
8 Australia Australia AUS Other RCEP
9 New Zealand New Zealand NZL Other RCEP
10 China China CHN Other RCEP
11 Japan Japan JPN Other RCEP
12 South Korea South Korea KOR Other RCEP
13 India India IND Rest of the world
14 United States United States USA Rest of the world
15 Hong Kong Hong Kong HKG Rest of the world
16 Taiwan Taiwan TWN Rest of the world
17 EU28 European Union AUT, BEL, CYP, CZE, DNK, EST, FIN, FRA, DEU, GRC, HUN Rest of the world
IRL, ITA, LVA, LTU, LUX, MLT, NLD, POL, PRT, SVK, SVN
ESP, SWE, GBR, BGR, HRV, ROU
18 ROW Rest of World XOC, MNG, XEA, BGD, NPL, PAK, LKA, XSA, CAN, MEX, XNA, Rest of the world
ARG, BOL, BRA, CHL, COL, ECU, PRY, PER, URY, VEN, XSM,
CRI, GTM, HND, NIC, PAN, SLV, XCA, DOM, JAM, PRI, TTO,
XCB, BHR, IRN, ISR, JOR, KWT, OMN, QAT, SAU, TUR, ARE,
XWS, EGY, MAR, TUN, XNF, BEN, BFA, CMR, CIV, GHA, GIN,
NGA, SEN, TGO, XWF, XCF, XAC, ETH, KEN, MDG, MWI, MUS,
MOZ, RWA, TZA, UGA, ZMB, ZWE, XEC, BWA, NAM, ZAF, XSC,
CHE, NOR, XEF, ALB, BLR, RUS, UKR, XEE, XER, KAZ, KGZ,
XSU, ARM, AZE, GEO, XTW
Source: Authors' aggregation based on 141 regions of GTAP 10 Data Base
146
Table 5.12: Sectoral Aggregation
No. Sectors Description GTAP sectors Aggregated sectors
1 Rice Paddy rice; Processed rice PDR; PCR Agriculture
2 Fishing Fishing FSH Agriculture
3 OthAgri Wheat; Other grains nec; Oil seeds; WHT; GRO; OSD; Agriculture
Vegetables, fruit and nuts; Sugar cane and sugar beet; V_F; C_B;
Plant-based fibers; Crops nec PFB; OCR
4 MeatLstk Bovine cattle and sheep; Other animal products nec; CTL; OAP; Agriculture
Raw milk; Wool, silk-worm cocoons; RMK; WOL;
Bovine cattle and sheep products; Other meat products CMT; OMT
5 ForesWood Forestry; Wood products FRS; LUM Agriculture
6 Extraction Coal; Oil; Gas; Minerals nec; COA; OIL; GAS; OXT; Extraction
Petroleum and coal products; Mineral products nec P_C; NMM
7 FoodBever Vegetable oils and fats; Dairy products; Sugar; VOL; MIL; SGR; Agriculture
Food products nec; Beverages and tobacco products OFD; B_T
8 Textiles Textiles TEX Labour-intensive manu
9 AppaLeath Wearing apparel; Leather products WAP; LEA Labour-intensive manu
10 Chemicals Chemicals; Pharmaceutical products; Rubber & plastic CHM; BPH; RPP Other manufactures
11 Metals Ferrous metals; Metals nec; Metal products; I_S; NFM; FMP Other manufactures
12 ElecEquip Electronic equipment ELE Other manufactures
13 Machinery Electrical equipment; Machinery and equipment nec EEQ; OME Other manufactures
14 TransEquip Motor vehicles and parts; Transport equipment nec MVH; OTN Other manufactures
15 OthManufac Paper products and publishing; Manufactures nec PPP; OMF Other manufactures
16 Construction Construction CNS Services
17 FinBusTra Insurance; Finance; Other business services; Trade INS; OFI; OBS; TRD Services
18 Transport Transport nec; Water transport; Air transport OTP; WTP; ATP Services
19 Communication Communication CMN Services
20 GovSvs Government services OSG Services
21 OthSvs Electricity; Gas manufacture and distribution; ELY; GDT; Services
Water; Recreational and other services; WTR; ROS;
Accommodation, food and service activities AFS
Warehousing and support activities WHS
Real estate activities; Education RSA; EDU
Human health and social work activities; Dwellings HHT; DWE
Source: Authors' aggregation based on 65 sectors of GTAP 10 Data Base
147
Table 5.13: Ad-valorem Equivalents of Services Barriers in the RCEP Region (%)
Finance, business Government Other
Country Construction & trade Transport Communication Services Services
Vietnam 34.49 59.78 41.26 47.35 59.90 -
Indonesia 50.78 64.02 48.44 65.45 87.15 -
Malaysia 12.82 38.83 22.78 32.17 57.28 -
Philippines 100.72 83.78 52.06 87.88 83.64 -
Singapore 51.40 16.93 0.00 19.02 43.99 -
Thailand 31.40 35.22 19.98 71.12 60.03 -
OthASEAN 28.76 131.29 50.68 77.71 82.25 -
Australia 126.66 68.61 34.43 75.56 76.02 -
New Zealand 52.83 53.36 22.91 53.09 62.45 -
Japan 38.43 65.95 38.82 104.77 93.02 -
China 68.02 66.92 68.83 106.29 104.11 -
Korea 34.63 44.36 13.98 67.18 69.56 -
India 77.75 53.97 46.20 81.90 112.85 -
Source: Fontagne (2016). Trade weighted to aggregated sectors and regions by the authors
*RestASEAN includes Lao, Cambodia, Myanmar, and Brunei. AVEs of services barrier for
Myanmar are imputed using average values of similar countries (Vietnam, Lao, and Cambodia).
148
Table 5.14: Shares of RCEP FDI Stocks in Total FDI Stocks of Each RCEP Member (%), 2017
Country Australia China Indonesia Japan Korea Malaysia NZ Philippines Singapore Thailand VN ASEAN4
Australia 10,535 5,882 647 669 4,586 48,433 761 15,772 1,232 1,580 35
Brunei 0 2,444 31 0 5 0 0 0 428 30 0 29
Cambodia 0 189 0 0 5 0 0 21 160 -22 0 10
China 36,175 10,539 3,197 5,983 4,915 2,492 820 44,568 5,358 4,965 17,849
Indonesia 0 690 283 61 0 0 183 18,660 301 0 17
Japan 68,682 116,970 30,389 36,592 14,309 3,730 14,986 58,969 61,496 15,608 1,393
Korea 12,457 77,800 7,219 5,135 4,962 206 2,477 11,999 3,561 14,582 4,547
Lao 0 17 0 0 0 0 0 0 43 -35 0 1
Malaysia 5,993 2,122 11,348 135 -58 0 339 315 23,171 2,337 1,596 1,759
Myanmar 0 61 1 0 1 0 0 0 1,043 16 0 0
New Zealand 8,574 33 2 295 56 0 0 966 -10 0 1
Philippines 57 384 95 -1 0 11 1 1,289 0 45 0
Singapore 36,573 100,326 48,184 11,518 6,358 33,656 1,427 5,637 19,118 6,600 4,233
Thailand 3,120 3,728 3,859 3,684 187 3,659 62 702 12,184 5,239 8,952
Vietnam 0 6 71 0 -27 0 0 4 518 -47 372
FDI stocks from RCEP 171,630 315,305 117,619 24,894 49,831 66,097 56,691 25,906 189,772 93,335 50,214 39,199
Total FDI stock 689,396 1,488,676 231,492 200,193 229,399 146,602 76,028 79,016 1,393,380 223,816 129,491 62,550
Share* 24.90 21.18 50.81 12.44 21.72 45.09 74.57 32.79 13.62 41.70 38.78 62.67
Source: UNCTAD and IMF

Note: * RCEP FDI stock shares in total FDI stocks of each RCEP member.
Some bilateral outward FDI stocks from Lao, Cambodia, Myanmar, Brunei are unavailable. They are assumed to be zero. Even in case they are available (but
small), they can hardly change the RCEP FDI stocks shares in each RCEP member
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Table 5.15: FDI Index, RCEP Members, 2017
Sectors Vietnam Indonesia Malaysia Philippines Thailand Singapore Rest ASEAN Australia New Zealand China Japan South Korea
Rice 0.083 0.347 0.150 0.760 0.419 0.064 0.142 0.200 0.200 0.220 0.025 0.500
Fishing 0.020 0.735 0.200 0.565 0.500 0.244 0.179 0.075 0.690 1.000 0.150 0.500
OthAgri 0.083 0.347 0.150 0.760 0.419 0.064 0.142 0.200 0.200 0.220 0.025 0.500
MeatLstk 0.083 0.347 0.150 0.760 0.419 0.064 0.091 0.200 0.200 0.220 0.025 0.500
ForesWood 0.045 0.060 0.014 0.073 0.046 0.020 0.082 0.102 0.190 0.050 0.002 0.000
Extraction 0.020 0.112 0.000 0.582 0.331 0.029 0.249 0.085 0.190 0.193 0.052 0.000
FoodBever 0.045 0.060 0.004 0.072 0.045 0.018 0.074 0.100 0.190 0.050 0.000 0.000
Textiles 0.045 0.060 0.004 0.072 0.045 0.018 0.082 0.100 0.190 0.050 0.000 0.000
AppaLeath 0.045 0.060 0.004 0.072 0.045 0.018 0.073 0.100 0.190 0.050 0.000 0.000
Chemicals 0.020 0.087 0.000 0.065 0.051 0.018 0.037 0.075 0.190 0.060 0.008 0.000
Metals 0.020 0.060 0.000 0.075 0.045 0.018 0.058 0.075 0.190 0.095 0.000 0.000
ElecEquip 0.020 0.060 0.000 0.065 0.042 0.018 0.021 0.075 0.190 0.060 0.000 0.000
Machinery 0.020 0.060 0.000 0.075 0.045 0.018 0.060 0.075 0.190 0.095 0.000 0.000
TransEquip 0.020 0.060 0.031 0.065 0.052 0.018 0.025 0.075 0.190 0.245 0.000 0.000
OthManufac 0.045 0.060 0.004 0.072 0.045 0.018 0.068 0.100 0.190 0.050 0.000 0.000
Construction 0.020 0.210 0.250 0.465 0.308 0.018 0.095 0.075 0.190 0.170 0.000 0.000
Finbustra 0.051 0.437 0.352 0.603 0.392 0.049 0.108 0.079 0.179 0.274 0.000 0.074
Transport 0.528 0.426 0.296 0.655 0.459 0.210 0.139 0.268 0.273 0.540 0.275 0.508
Commu 0.583 0.260 0.375 0.665 0.433 0.083 0.041 0.400 0.390 0.750 0.265 0.325
GovSer 0.227 0.400 0.326 0.430 0.385 0.081 0.232 0.181 0.226 0.396 0.077 0.141
OthSer 0.115 0.256 0.374 0.447 0.376 0.104 0.125 0.192 0.207 0.423 0.059 0.299
Source: OECD FDI index and authors’ calculations

Note: FDI indices for aggregated sectors and regions are calculated by weighting estimated FDI stocks of sectors and regions
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Table 5.16: Changes in FDI Stocks by Sectors (%), with Full Removal of FDI Barriers, RCEP Members, 2017
Rice 11.95 49.97 21.60 109.44 60.34 9.22 20.47 28.80 28.80 31.68 3.60 72.00
Fishing 2.88 105.84 28.80 81.36 72.00 35.14 25.80 10.80 99.36 144.00 21.60 72.00
OthAgri 11.95 49.97 21.60 109.44 60.34 9.22 20.52 28.80 28.80 31.68 3.60 72.00
MeatLstk 11.95 49.97 21.60 109.44 60.34 9.22 13.12 28.80 28.80 31.68 3.60 72.00
ForesWood 6.49 8.67 2.07 10.46 6.66 2.94 11.88 14.76 27.36 7.20 0.27 0.00
Extraction 2.88 16.12 0.00 83.86 47.70 4.11 35.82 12.25 27.36 27.80 7.44 0.00
FoodBever 6.48 8.64 0.58 10.37 6.53 2.59 10.67 14.40 27.36 7.20 0.00 0.00
Textiles 6.48 8.64 0.58 10.37 6.53 2.59 11.74 14.40 27.36 7.20 0.00 0.00
AppaLeath 6.48 8.64 0.58 10.37 6.53 2.59 10.56 14.40 27.36 7.20 0.00 0.00
Chemicals 2.88 12.53 0.00 9.36 7.30 2.59 5.33 10.80 27.36 8.64 1.15 0.00
Metals 2.88 8.64 0.00 10.80 6.48 2.59 8.35 10.80 27.36 13.68 0.00 0.00
ElecEquip 2.88 8.64 0.00 9.36 6.00 2.59 3.09 10.80 27.36 8.64 0.00 0.00
Machinery 2.88 8.64 0.00 10.80 6.48 2.59 8.58 10.80 27.36 13.68 0.00 0.00
TransEquip 2.88 8.64 4.46 9.36 7.49 2.59 3.55 10.80 27.36 35.28 0.00 0.00
OthManufac 6.48 8.64 0.58 10.37 6.53 2.59 9.76 14.40 27.36 7.20 0.00 0.00
Construction 2.88 30.24 36.00 66.96 44.40 2.59 13.61 10.80 27.36 24.48 0.00 0.00
Finbustra 7.30 62.87 50.62 86.79 56.48 7.11 15.57 11.34 25.84 39.52 0.00 10.67
Transport 76.03 61.34 42.62 94.32 66.10 30.24 19.98 38.59 39.31 77.76 39.60 73.15
Commu 83.95 37.44 54.00 95.76 62.40 11.95 5.97 57.60 56.16 108.00 38.16 46.80
GovSer 32.69 57.60 46.94 61.92 55.49 11.66 33.42 26.06 32.54 57.02 11.09 20.30
OthSer 16.56 36.90 53.84 64.30 54.09 15.01 17.95 27.58 29.75 60.84 8.48 43.11
Source: Authors’ calculations based on OECD FDI index and Lakatos and Fukui (2014).
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Table 5.17: Ratios of FDI Stocks to Capital Stocks, RCEP Members, 2017
Rice 0.0041 0.0024 0.0188 0.0068 0.0046 1.0000 0.0018 0.0719 0.2256 0.0071 0.0030 0.0175
Fishing 0.0000 0.0000 0.0006 0.0000 0.0001 0.2143 0.0000 0.0183 0.0015 0.0000 0.0010 0.0085
OthAgri 0.0000 0.0000 0.0000 0.0000 0.0000 0.1426 0.0000 0.0123 0.0005 0.0000 0.0014 0.0084
MeatLstk 0.0341 0.0019 0.0033 0.0042 0.0067 0.6416 0.0061 0.0331 0.0536 0.0006 0.0028 0.0392
ForesWood 0.0038 0.0007 0.0025 0.0036 0.0045 0.2254 0.0013 0.0487 0.0245 0.0017 0.0062 0.0378
Extraction 0.0085 0.0019 0.0116 0.0675 0.0198 1.0000 0.0133 0.1299 0.4519 0.0043 0.0682 0.1206
FoodBever 0.0093 0.0028 0.0218 0.0028 0.0099 1.0000 0.0124 0.1298 0.1807 0.0046 0.0051 0.1003
Textiles 0.0067 0.0010 0.0042 0.0021 0.0047 0.3254 0.0525 0.0536 0.0985 0.0011 0.0283 0.0272
AppaLeath 0.0029 0.0015 0.0019 0.0021 0.0038 0.6761 0.0021 0.0314 0.0870 0.0006 0.0339 0.0187
Chemicals 0.0368 0.0060 0.0136 0.0259 0.0105 0.1547 0.2175 0.4181 0.3252 0.0051 0.0421 0.0403
Metals 0.0234 0.0006 0.0031 0.0027 0.0028 0.3860 0.0308 0.0397 0.0508 0.0002 0.0153 0.0079
ElecEquip 0.0259 0.0044 0.0011 0.0006 0.0022 0.0591 0.0303 0.3214 0.4652 0.0017 0.0268 0.0055
Machinery 0.0293 0.0050 0.0086 0.0064 0.0076 0.3241 0.1081 0.3131 0.2121 0.0017 0.0105 0.1174
TransEquip 0.0178 0.0022 0.0204 0.0172 0.0061 0.7304 0.0457 0.2481 0.4685 0.0023 0.1964 0.0437
OthManufac 0.0054 0.0015 0.0102 0.0083 0.0056 0.5967 0.0164 0.0724 0.1303 0.0015 0.0145 0.0452
Construction 0.0002 0.0003 0.0159 0.0001 0.0025 0.0649 0.0004 0.0462 0.0037 0.0001 0.0051 0.0032
Finbustra 0.4987 0.0962 0.1898 0.0818 0.1147 1.0000 0.3128 0.4514 0.2903 0.0549 0.0102 0.0520
Transport 0.0029 0.0004 0.0029 0.0004 0.0009 0.0167 0.0008 0.0112 0.0324 0.0002 0.0023 0.0084
Commu 0.0111 0.0028 0.0114 0.0029 0.0142 0.2644 0.0165 0.0221 0.0394 0.0024 0.0010 0.0271
GovSer 0.0048 0.0014 0.0034 0.0016 0.0017 0.0904 0.0049 0.0054 0.0151 0.0007 0.0012 0.0008
OthSer 0.0008 0.0003 0.0040 0.0012 0.0018 0.0726 0.0012 0.0125 0.0084 0.0003 0.0005 0.0025
Source: Authors’ calculations
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Table 5.18: Changes in Capital Stocks by Sector (%), with Full Removal of FDI Barriers, RCEP Member, 2017
Rice 0.05 0.12 0.41 0.74 0.27 9.22 0.04 2.07 6.50 0.22 0.01 1.26
Fishing 0.00 0.00 0.02 0.00 0.00 7.53 0.00 0.20 0.15 0.00 0.02 0.62
OthAgri 0.00 0.00 0.00 0.00 0.00 1.31 0.00 0.35 0.01 0.00 0.01 0.60
MeatLstk 0.41 0.09 0.07 0.46 0.40 5.91 0.08 0.95 1.54 0.02 0.01 2.83
ForesWood 0.02 0.01 0.01 0.04 0.03 0.66 0.01 0.72 0.67 0.01 0.00 0.00
Extraction 0.02 0.03 0.00 5.66 0.95 4.11 0.48 1.59 12.36 0.12 0.51 0.00
FoodBever 0.06 0.02 0.01 0.03 0.06 2.59 0.13 1.87 4.94 0.03 0.00 0.00
Textiles 0.04 0.01 0.00 0.02 0.03 0.84 0.62 0.77 2.70 0.01 0.00 0.00
AppaLeath 0.02 0.01 0.00 0.02 0.02 1.75 0.02 0.45 2.38 0.00 0.00 0.00
Chemicals 0.11 0.08 0.00 0.24 0.08 0.40 1.16 4.52 8.90 0.04 0.05 0.00
Metals 0.07 0.01 0.00 0.03 0.02 1.00 0.26 0.43 1.39 0.00 0.00 0.00
ElecEquip 0.07 0.04 0.00 0.01 0.01 0.15 0.09 3.47 12.73 0.01 0.00 0.00
Machinery 0.08 0.04 0.00 0.07 0.05 0.84 0.93 3.38 5.80 0.02 0.00 0.00
TransEquip 0.05 0.02 0.09 0.16 0.05 1.89 0.16 2.68 12.82 0.08 0.00 0.00
OthManufac 0.04 0.01 0.01 0.09 0.04 1.55 0.16 1.04 3.57 0.01 0.00 0.00
Construction 0.00 0.01 0.57 0.01 0.11 0.17 0.01 0.50 0.10 0.00 0.00 0.00
Finbustra 3.64 6.05 9.61 7.10 6.48 7.11 4.87 5.12 7.50 2.17 0.00 0.56
Transport 0.22 0.02 0.13 0.04 0.06 0.51 0.02 0.43 1.27 0.02 0.09 0.62
Commu 0.94 0.10 0.61 0.28 0.89 3.16 0.10 1.27 2.21 0.26 0.04 1.27
GovSer 0.16 0.08 0.16 0.10 0.10 1.05 0.16 0.14 0.49 0.04 0.01 0.02
OthSer 0.01 0.01 0.21 0.08 0.10 1.09 0.02 0.34 0.25 0.02 0.00 0.11
Source: Authors’ calculations
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6 Chapter 6: Conclusions
Regional trade agreements (RTAs) have increased at a significant pace and there is
significant interest in investigating their effects. Regarding the trade effects, the
current literature is characterised by a limited studies examining how the different
RTAs a country has made affect its trade flows. Some types of trade agreements
appear to work better than others in terms of stimulating trade flows (Busse &
Gröning, 2012; Ullah & Inaba, 2012). With respect to the investment effect, how
an RTA affects members’ foreign direct investment (FDI) inflows depends on a
variety of factors such as patterns of FDI, the investment provision of FTAs, sources
of FDI, and location-specific advantages in terms of input prices, transport and
communication costs, government intervention, education, and infrastructure
(Dunning, 1981). However, whether the overall involvement in FTAs of a
developing country enhances its FDI inflows has not been paid sufficient attention.
Furthermore, a variety of RTAs have progressed toward deep and comprehensive
RTAs, which are expected to have substantial impacts on trade and investment of
members, especially developing countries. In order to provide a deeper
understanding of the linkage between RTAs and trade and investment, it is critical
to conduct more case studies. Therefore, the theme of this thesis is to investigate
the key RTAs that a developing country, such as Vietnam, has entered into. The
assessment is through their trade and investment effects for Vietnam.
Vietnam is an interesting case study as it is one of the most active countries in the
Asia-Pacific regarding integration into the world economy through RTAs. Vietnam
is now involved with 16 RTAs and is one of the seven countries in the Asia-Pacific
participating in the two largest agreements in this region, namely the
Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
and Regional Comprehensive Economic Partnership (RCEP). Vietnam is also the
second member of ASEAN having an FTA with the EU, after Singapore.
This thesis is a compilation of addressing the following research questions: (i) how
do trade liberalisation agreements and FDI promote Vietnamese exports and
imports?; (ii) how do free trade agreements impact on Vietnam’s inward FDI flows?;
(iii) how might Vietnamese trade and investment change following the EU-Vietnam
free trade agreement (EVFTA)?; (iv) how might Vietnamese trade and investment
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change following RCEP? These research questions are addressed by making use of
econometric and computable general equilibrium (CGE) modelling.
6.1 Main Findings and Policy Implications
Chapter 2 employs the random effects technique to estimate the gravity models
which are used to investigate the effects of trade agreements and FDI on
Vietnamese trade. This study reveals that Vietnamese exports and imports have the
greatest expansion following the bilateral trade agreements with the US and Japan.
The impacts from other RTAs are more mixed. This study also provides empirical
support for FDI inflows stimulating both exports and imports in Vietnam. However,
the impacts on Vietnamese trade flows of some of the trade agreements are much
stronger than that of FDI inflows. Furthermore, this study suggests 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.
These findings have important policy implications for Vietnam. First, the results
suggest that trade liberalisation through bilateral and RTAs is a good channel to
build growth in trade for Vietnam. The study also suggests that certain types of
agreements are better at promoting Vietnamese trade. Therefore, Vietnamese
policymakers should closely look at the trade agreements with Japan and the US,
which are helpful for the negotiations of future trade deals. In addition, it should be
noted that policies aiming at attracting FDI flows are also likely to stimulate trade.
Chapter 3 investigates whether the overall involvement in FTAs of Vietnam

increases FDI inflows. Therefore, this study contributes to the current literature with
an empirical study evaluating the impact of overall FTAs on inward FDI of a
developing country, which has been ignored. The regression results from gravity
models suggest that FTAs, overall, are associated with increases in FDI flows.
Based on these results and the outcomes for other FDI determinants such as trade,
factor endowments, and the interaction term between FTAs and factor endowments,
this study indicates that there is evidence of the dominance of vertical FDI in
Vietnam. Further investigation of the later sub-period reveals that FTAs also affect
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inward FDI flows to Vietnam through interaction terms with the real exchange rate,
human capital, and factor endowments.
From a policy perspective, the findings of this chapter suggest that FTAs are
associated with increased FDI inflows. However, FTAs can be enhanced to
encourage growth in investment. For instance, FTAs with investment protection
agreements will help protect investors and investments in a host country. In addition,
investment provisions should aim to reduce restrictions on foreign firms, allowing
them to participate in a variety of sectors. Tax incentives can also be used to
encourage FDI projects, particularly where there are substantial positive
externalities for the rest of the economy. Moreover, in addition to Vietnam’s
relatively cheaper labour costs, the Vietnamese government should continue to
boost human resources and keep the exchange rate stable, given that the two FDI
determinants have more important roles as a result of FTAs.
Chapter 4 assesses the impact of the EVFTA, focusing on Vietnamese trade and
investment, with a global trade analysis project (GTAP) model. Five policy
components are modelled, including tariffs, non-tariff measures (NTMs) on goods
and services, trade facilitation, and barriers to FDI. Among the policy instruments,
improvements in trade facilitation and reductions in FDI barriers are only modelled
for Vietnam which is characterised by relatively high barriers in comparison with
the EU. This chapter finds that the EVFTA leads to a stronger rise in Vietnam’s
total imports than Vietnam’s total exports, suggesting a deterioration in the trade
balance. This study also finds that the bilateral trade between Vietnam and the EU
grows enormously and much faster than the growth rates of total exports and
imports for the two sides. The simulation results indicate the presence of trade
diversion which is explained by the findings that Vietnam imports more from the
EU and less from the rest of the world. Similarly, the trade diversion effect of the
EVFTA is also found for the EU. At the sectoral level, this study indicates that
several Vietnamese sectors suffer from this agreement. Processed food, labour-
intensive manufacturing sectors, and transport equipment experience export growth
in Vietnam, whereas there are declines in exports in the remaining sectors.
With regard to the investment effect of the EVFTA, the simulation results indicate
that this agreement would not increase the EU’s capital stocks, which is consistent
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with the fact that Vietnam’s investment in the EU has been minimal. In contrast,
this study suggests that Vietnam benefits from this agreement in terms of increased
capital stocks in the long-run, due to the significant increase in Vietnam’s short-run
current rates of return mainly resulting from the rise in the short-run rental price of
capital. By decomposing the policy instruments, this study further find that tariffs
contribute the most to Vietnam’s capital growth in both the conservative and
ambitious scenarios.
The findings of this chapter have important policy implications. Vietnam’s trade
grows substantially following the agreement. However, at the sectoral level, the
export expansion occurs in very few sectors, whereas a variety of Vietnamese
sectors experience deep declines in exports. Therefore, the government should
support workers in the industries that have been adversely affected following the
trade agreement. This can be done through career transitions and training, assisting
workers to find a new job as soon as possible.
Chapter 5 employs a GTAP model with a long-run closure so that changes in both
trade and investment following RCEP are examined. Reductions in tariffs, NTMs
on goods and services, and barriers to FDI are modelled so that both RCEP trade
and investment liberalisation are captured. Specially, this study uses bilateral ad-
valorem-equivalents (AVEs) of NTMs (Kravchenko, Utoktham, Narayanan, &
Duval, 2019). The modelling of reductions in FDI barriers is based on the OECD
FDI index. This chapter finds that Vietnam’s total real exports grow slightly faster
than its total real imports. However, for bilateral trade, Vietnam’s imports from
other RCEP countries exhibit greater expansion than its exports to other RCEP. The
results further indicate that Vietnam is likely to divert its trade activities, especially
imports, toward other RCEP members. With respect to the sectoral level, all of the
aggregated sectors modelled, including agriculture, extraction, labour-intensive
manufactures, other manufactures, and services, experience both export and import
growth. Within the aggregated sectors, only some agricultural sectors suffer from
the contraction in exports, whereas wearing apparel and leather products witness
substantial export growth. The findings also suggest that Australia and New
Zealand become more important export markets for Vietnam thanks to RCEP.
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Regarding the investment effects, Chapter 5 finds that among RCEP members, the
short-run current rate of return in Vietnam experiences the largest increase, which
can explain the substantial gains in Vietnam’s long-run capital stocks.
Decomposing the changes in capital stocks, this study concludes in general that all
the policy components modelled contribute to the increase in capital stocks.
However, with greater liberalisation in the ambitious scenario, goods NTMs have
the most significant impact on Vietnam’s capital growth. Therefore, this study
provides support for the importance of focusing on NTMs, especially goods NTMs.
In addition, this study suggests that it is worthwhile to model investment
liberalisation of RCEP as reductions in FDI barriers affect changes in Vietnam’s
capital, though the impacts are not as large as those for reductions in tariffs and
goods NTMs. This policy component, however, has a more important role on
changes in capital stocks of other RCEP, mainly because some RCEP partners have
relatively high restrictions on FDI.
Chapter 5 has significant policy relevance. First, policymakers should be aware that
investment liberalisation is a critical area of negotiations in modern FTAs, which
has an important role in attracting FDI inflows. Therefore, to attract more FDI flows,
the Vietnamese government should ease the restrictions on foreign equity, approval
mechanisms, employment of foreigners, and operation such as branching and
capital repatriation (OECD, 2018). Second, consideration should be given to
specific policies aiming at reducing the adverse impacts on some agricultural and
processed food sectors while taking advantage of the immense export growth of
textiles, apparel and leather products. Vietnamese industries need to increase
competitiveness and there may be a role for the Government to play in supporting
this or assisting with the transition to alternative industries. Third, Vietnam should
diversify its destination for exports such as Australia and New Zealand in addition
to Vietnam’s key and traditional export markets such as the US, ASEAN, EU, and
Japan.
The simulation results of the EVFTA and RCEP indicate that both agreements have
considerable economic impacts on Vietnam in terms of real GDP, trade, and
investment. However, RCEP has greater economic impacts as it covers a variety of
Vietnam’s important trading and FDI partners. Furthermore, in the scenario with
158
greatest liberalisation, results indicate that economic gains from reductions in goods
NTMs following RCEP are the greatest, whereas tariff reductions contribute most
to economic gains in Vietnam as a result of the EVFTA. The main reason for this
is that tariff rates imposed within the RCEP region are relatively low, particularly
as the baseline used accounts for the implementation of the CPTPP and other
existing agreements in RCEP, however, there are higher tariffs between the EU and
Vietnam. With respect to real exports by sector, the two agreements result in the
greatest export growth of labour-intensive manufactures, especially apparel and
leather products. Notably, most of the sectors modelled experience export growth
following RCEP. In contrast, as a result of the EVFTA, exports of only some sectors,
including labour-intensive manufactures, transport equipment, and processed food,
expand, whereas those of the remaining sectors decline. The results reflect the fact
that trade between Vietnam and the EU is complementary, and Vietnam is more
likely to export relative labour-intensive products to the EU.
6.2 Limitations and Future Research
There are some limitations in this thesis, many of which may form the basis for
future research. First, the panel datasets used in Chapters 2 and 3 comprise a limited
number of cross-sections. The focus of this thesis is on Vietnam, thus the panel
datasets cover the data for Vietnam and its key trading and FDI partners. One
advantage is that the gravity models used in the two chapters do not suffer from the
issue of extensive zero values that needs some appropriate econometric techniques
to deal with. More techniques may be applicable to the estimation of the gravity
models such as the differenced generalised method of moments (GMM) or the
system GMM for panel datasets with more cross-sections and observations. Second,
although the lagged variable approach was used to address possible endogeneity
issues in this thesis, the approach might not necessarily overcome the problem if
autocorrelation is present in data series. Third, investments produce impacts on
outputs over a period of time, but did not recognise some type of distributed lag to
explore the FDI impacts on exports.
Fourth, it should be noted that the FDI indices used in the modelling of investment
liberalisation of RCEP in Chapter 5 cannot fully measure the investment climate of
a country (OECD, 2018). The OECD (2018) points out that other factors may affect
159
restrictions on FDI such as the implementation of FDI rules, state ownership in key
sectors, the market size, the degree of integration with neighbours, and more general
geographical issues. Modelling these factors is well beyond the scope of this thesis.
Fifth, in the current modelling effort, the GTAP model used includes a number of
well-documented potential limitations. For example, there is an assumption of
perfect competition, however, significantly different market structures often exists
in the real world, such as monopoly power and imperfect competition (Zhang &
Folmer, 1998). For the current focus, a particular limitation is imperfect modelling
of capital accumulation over time in the comparative static GTAP model. While we
use a long-run closure to capture accumulation, we are not able to capture other
aspects such as income flows associated with international investment
(Ianchovichina & Walmsley, 2012).
There is a variety of potential avenues for future research arising from this thesis.
Firstly, based on Chapter 2, further research may explore the nature of the trade
agreements that are more efficient in promoting Vietnamese trade. Lessons may be
available for other countries. Regarding changes in sensitivities of trade to FDI,
future studies may examine which of Vietnam’s FDI patterns (horizontal or vertical
FDI) has the greatest impact on this.
Secondly, the panel datasets in both Chapters 2 and 3 can be extended by including
other ASEAN countries such as Indonesia, Malaysia, Philippines, Singapore and
Thailand. Based on the new datasets, future research may investigate the impact of
FTAs on ASEAN trade and FDI flows. Developing the empirical study in this
direction is worthwhile as ASEAN member states have involved in a wide range of
FTAs. In addition, the CPTPP and EVFTA have been signed and so they should be
incorporated into future panel data analysis of Vietnamese trade and FDI flows.
Thirdly, from Chapters 4 and 5, future research may focus on examining changes
in investment over time following the EVFTA and RCEP. For instance, the
investment creation and diversion effects (Baldwin, Forslid, & Haaland, 1995;
Kalotay, 2007; Lakatos & Walmsley, 2012) of RCEP may be explored. To do this,
potential research may follow the expanded GTAP model developed by Lakatos
and Walmsley (2012). In addition, future research may evaluate net effects of the
160
EVFTA and RCEP on Vietnam, given that some sectors are adversely affected by
the EVFTA, but they benefit from RCEP.
In summary, this thesis has provided a broad picture of how the RTAs Vietnam has
entered into change Vietnamese trade and investment. I identify which of
Vietnam’s trade agreements have been more efficient in terms of expanding trade
and how Vietnamese trade has become sensitive to FDI following the trade
agreements. I contribute to the literature a case study which investigates whether
the overall involvement in FTAs of a developing country, such as Vietnam, is
associated with an increase in FDI flows. To examine the EVFTA, I model as
closely to the text of this agreement as possible. With respect to RCEP, I model
reductions in FDI barriers in addition to other trade liberalisation components that
may be agreed. In addition to exploring the changes in Vietnamese trade at both
aggregated and sectoral levels, I investigate the investment effects of the two
agreements in both the short- and long-run.
161
References
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investment diversion: Simulation analysis of thesingle market programme
(NBER Working Paper, No. 5364). Cambridge, MA: National Bureau of
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Dunning, J. H. (1981). International production and the multinational enterprise.
London, England: George Allen & Unwin.
Ianchovichina, E. I., & Walmsley, T. L. (Eds.). (2012). Dynamic modeling and
applications for global economic analysis. New York: Cambridge
University Press.
Kalotay, K. (2007). Investment creation and diversion in an integrating Europe. In
P. Vahtra & E. Pelto (Eds.), Future competitiveness of the EU and its
Eastern neighbours: Proceddings of the conference (pp. 49-65). Turku,
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Kravchenko, A., Utoktham, C., Narayanan, B., & Duval, Y. (2019. New global
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162
Thesis Appendix
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of the requirements for the degree

Doctor of Philosophy in Economics

The University of Waikato

MY THI DIEU DUONG

Chapter 2 is published as:

Chapter 3 is published as:

Chapter 4 has been prepared for journal submission:

I am honoured to have been supervised by Professor Anna Strutt, Professor Mark J.

Notes of Publications ............................................................................................. iv

Table of Contents .................................................................................................. vii

List of Figures ....................................................................................................... xii

Abbreviations ....................................................................................................... xiii

1 Chapter 1: Introduction ................................................................................... 1

1.1 Overview .................................................................................................. 1

2.1 Introduction ............................................................................................ 21

3.1 Introduction ............................................................................................ 52

4.1 Introduction ............................................................................................ 80

5.1 Introduction .......................................................................................... 114

6.1 Main Findings and Policy Implications ................................................ 155

Regional trade agreements (RTAs) are defined as reciprocal trade agreements

The existing literature is characterised by a relative scarcity of studies exploring

1.2 Background and Research Questions

Research Question 2: How do free trade agreements impact on Vietnam’s inward

In recent years, Vietnam has participated in mega-FTAs, the new generation of

Research Question 3: How might Vietnamese trade and investment change

Research Question 4: How might Vietnamese trade and investment change

1.3 Summary of Objectives of the Thesis

1.4 Methodological Techniques

Computable General Equilibrium Model

1.5 Contributions of the Thesis

Fourth, this thesis endeavours to measure the effect of investment liberalisation

1.6 Thesis Outline

Acharya, R. (2016). Regional trade agreements and the multilateral trading

In addition to negotiating RTAs, Vietnam has been implementing policies to

From the start of the Renovation Policy, Vietnam experienced an expansion of

2.2 Trade Liberalisation, FDI and Trade in Vietnam

2.2.1 Trade Liberalisation and Trade

Source: GSO (2018)

Investment is a significant factor spurring economic development in Vietnam. To

Figure 2.2: Total FDI Inflows to Vietnam, 1990-2017 (US$ billion)

FDI inflow to Vietnam

Source: UNCTAD (2018)

FDI by source countries: Total registered FDI

Malaysia, 3.8 Japan, 15.4

Hong Kong, 5.6

British Virgin Singapore, 13.3

Source: Vietnam’s Statistical Yearbook 2017

FDI by regions: Total registered FDI

Red River Delta Northern midlands and mountain areas

Source: Vietnam’s Statistical Yearbook 2017

Source: GSO (2018)

2.3 Previous Studies

2.3.1 Trade Liberalisation and Trade Flows

Trade liberalisation is expected to increase welfare because both consumers and

2.3.2 FDI and Trade

2.4 Model Specification, Data and Methodology

The basic gravity model is as follows:

ln 𝑋𝑖𝑗 = α0 + α1 ln 𝑌𝑖 +α2 ln 𝑌𝑗 +α 3 ln 𝑡𝑖𝑗 +𝑒𝑖𝑗 (1)