Abstract

This study employs a stochastic gravity model to estimate the efficiency performance of Vietnam’s trade with its main trading partners from 1995-2015. Trade efficiency is measured as the ratio of actual trade volume to the maximum likelihood. Moreover. it analyzes the effects of both natural and man-made trade barriers on trade efficiency. The empirical results suggest that the actual trade of Vietnam appears to be much smaller than a possible efficiency level and that there is large space for further progress. Export efficiency outweighs that of import. Vietnam’s ASEAN Free Trade Agreement membership has, in general, improved the trade efficiency, whereas tariffs and domestic devaluation have impaired it. Our findings lead to the recommendation that Vietnam should join more Free Trade Agreements and break down the man-made barriers.

Highlights

  • Free Trade Agreements (FTAs) have become increasingly prevalent since the early 1990s as an effective instrument to foster trade

  • We aim to investigate how ASEAN Free Trade Area (AFTA) and trade barriers affect Vietnam’s trade efficiency

  • We differ from them in two main points: first, we focus on the trade efficiency; second, we divide trade barriers into natural and man-made categories and this leads to 2-step estimation

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Summary

Introduction

Free Trade Agreements (FTAs) have become increasingly prevalent since the early 1990s as an effective instrument to foster trade. In the year 2016 the cumulative number of physical FTAs in force was 267. International trade plays an important role in stimulating the Vietnam’s economic development. In order to promote international trade, the responsible Vietnamese authorities have dynamically grown the number of FTAs with its trading partners. As of the beginning of year 2017, Vietnam has signed eleven FTAs. Six out of eleven FTAs were countersigned as a member of ASEAN Free Trade Area (AFTA). The trade volume with these countries (China, Korea, Japan, Australia and New Zealand, India, and Chile) has witnessed a substantial rise

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