TRADE AND INVESTMENT EFFECTS OF THE EU-VIETNAM FREE TRADE AGREEMENT

Abstract

We implement simulations for two policy scenarios to explore how Vietnamese trade and investment change following the EU-Vietnam free trade agreement (EVFTA), based on a computable general equilibrium model. Simulation results indicate that the bilateral trade between Vietnam and the EU grows substantially, and by a much greater amount than the growth of total exports and total imports for the two regions. 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 experience significant export growth, whereas the remaining four sectors witness declines in exports. In terms of 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. The 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.