Assessing the Cost of Protection in Vietnam after Becoming WTO's member

Assessing the Cost of Protection in Vietnam
after Becoming WTO’s Member
Nguyen Anh Thu

1

Introduction

Since the economic reform in 1986, Vietnam has experienced extremely quick integration into the world market.
Trade volume has increased sharply and the composition of Vietnam’s trading partners has broadened. Trade turnover
in 1990 was roughly 6.2 billion USD, however, in 2005 it reached 69.2 billion USD and that of 2008 has been 143.4
billion USD. The growth of Vietnam’s trading rate in 2000 2005 period is 18.4%, which is 2.6 times the growth rate of
Vietnam’s GDP. At the same time, the number of trading partners has increased, of which Asian countries constitute the
most important trading partners of Vietnam, accounting for more than 50% of Vietnam’s trade.
Vietnam has become WTO member in 2006, which is one big step of its integration into the world market.
Becoming WTO’s member means that Vietnam has to fulfill its obligations regarding reducing tariffs, opening markets
for foreign products but at the same time it can have more access to foreign markets.
Although the objective of WTO is freer trade all over the world, its negotiations of the Doha Round have been
halted for a long time (Jones, 2009). Almost all countries in the world including Vietnam still maintain many restrictions
on the movements of goods across borders. As widely accepted in economics, this will reduce surplus or gains from
trade of all countries engaged. Restrictions of Vietnam on imports and restrictions of other countries on Vietnam’s export
will reduce the consumers’ choices and will divert resources from industries where there are comparative advantages.
This paper’s objective is to estimate the welfare cost of protection in Vietnam before and after it became WTO
member. Although the welfare cost of protection is confirmed in economics theory, the structure of protection in
Vietnam is vivid (Prema-chandra Athukorala, 2006), quantitative analyses on Vietnam’s welfare cost of protection are
still limited.
This paper applies gravity model to Vietnam’s trade data to evaluate trade potential and welfare cost of protection
in Vietnam. It will then use the result of the regression to further estimate the effect of protection on the volume of
Vietnam’s trade and to obtain rough estimates of the resulting welfare effects before and after Vietnam became WTO
member.
2

2. 1

Methodology and data

Model identiication
Gravity model was first applied to international trade by Tinbergen (1962) and Pöynöhen (1963). The basic and

simplest form of gravity model for international trade posits that the volume of trade between two trading partners is an
increasing function of their national income, and a decreasing function of the distance between them. Gravity model was
widely used in trade because most of its regressions fit data remarkably well (Anderson and Wincoop, 2003). However,


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the model was criticized for lacking a theoretical basis. Works by Anderson(1979), Helpman and Krugman (1985) and
Bergstrand (1985) showed that gravity equations could be derived from trade models with product differentiation and
increasing returns to scale. Deardorff (1998) contributed to gravity model theoretical basis by showing that the gravity
equation is consistent with several variants of the Ricardian and Heckscher-Ohlin models.
Gravity model is applied to answer many questions related to trade. Among them, a number of gravity analyses
deal with various trade policy issues, such as the effects of national borders, the merits of proposed regional trade
arrangements and the effects of protection and openness (Anderson et al., 2001 and Arvind Panagariya, 2002). Wall
(1999) applied gravity model to US trade data to estimate the effects of protection on the volume of US trade and
roughly estimate the resulting welfare effects. Although the theoretical calculations of the cost of trade protection
are well established, the empirical estimates of the costs are still very small due to the lack of estimation method and
data. Wall (1999) has provided a new method of estimating the costs of protection by applying gravity model, which
requires less information than previous methods but still has the advantages of general equilibrium approach. The

estimations of Wall(1999) are much higher than in previous studies such as Baldwin(1984), Feenstra(1992), Hufbauer
and Karen(1994), who found that cost of protection of the U.S. was only 0.38 to 0.73% of the U.S. GDP. The reason
for this low estimation is the use of partial equilibrium method. Wall(1999) had used the gravity model to have general
equilibrium approach.
In this paper, the model of Wall (1999) is applied to trade data of Vietnam with its main trading partners for the
period 2004 2008 in order to estimate the welfare cost of trade protection in Vietnam. The regression equation will take
the form:

LnTijt

1
5

Ln Yit

Dij

6

2

Ln Y / P

it

7 SCij

ASEAN ij

3

LnY jt

8 Index jt

4

Ln Y / P

jt

Index jt
9WTOt

ijt

Where Tijt is the export or import of Vietnam to a partner country in the year t. Yit is the GDP of exporting country,
(Y/P)it is the GDP per capita for the exporting country. j stands for importing country. D is the distance between
the capital of Vietnam

Hanoi

importing country, and

is an error term. To address characteristics of Vietnam’s trade patterns, three dummy variables

and the capital city of the partner country. Index is the trade policy index for the

were added: traditional trade partner variable
and Vietnam’s WTO membership variable

SC (Socialist country), ASEAN trade network variable

ASEAN,

WTO. In order to capture the relation between trade index and the WTO

membership, the model introduces the interaction term between trade index variable and WTO membership dummy.
2. 2

Data
The data set is Vietnam’s merchandise imports and exports to and from 84 countries for the period 2004 2008.

The data are obtained from UNCOMTRADE statistics. Table 1 shows 10 biggest trading partners of Vietnam and their
bilateral trade with Vietnam in 2008.
National income data GDP and per capita GDP are taken from the IMF statistics. All the trade data and GDP are
converted into US dollars. The distance variable is the great-circle distance between Hanoi and capital city of the trading
partner.
In order to quantify the level of freedom, the paper use trade policy index that is part of the Index of Economic
Freedom published by the Heritage Foundation. The indices are calculated based on two inputs: the trade weighted
average of tariffs and the non-tariff barriers (NTBs). NTBs include: quantity restrictions, price restrictions, regulatory
restrictions, investment restrictions, customs restrictions and the government direct interventions. The level of trade


Assessing the Cost of Protection in Vietnam after Becoming WTO’s Member Nguyen Anh Thu

467

93

Table 1 Top 10 Trading Partners of Vietnam (2008)

(In thousand US dollars)
Trade turnover

Country

export

import

1

China

20,823,661

4850109

15973552

2

USA

14,554,848

11902833

2652014

3

Japan

16,708,057

8467749

8240307

4

Singapore

12,091,799

2713824

9377975

5

Korea

9,048,705

1793525

7255179

6

Thailand

6,194,167

1288546

4905620

7

Australia

5,709,476

4351579

1357897

8

Malaysia

4,626,454

2030402

2596052

9

Germany

3,553,332

2073423

1479908

10

Hong Kong

3,510,506

877189

2633317

Source: UNCOMTRADE statistics

Table 2 Top 10 Countries in Trade Policy Index (2008)
Country

Trade policy index

1

Hong Kong

95

2

Singapore

90

3

Switzerland

4

Canada

5

USA

6

Turkey

86.8

7

Israel

86.6

8

Kazakhstan

86.2

9

Norway

86.2

10

Germany

86

87.2
87
86.8

Source: Index of Economic Freedom 2008 The Heritage Foundation

freedom (or protection) of a country is judged on a scale 0 to 100, where 100 is the ideal free of trade. Table 2 reported
10 countries having highest trade policy indices in 2008.

According to this scale, Vietnam’s score is 54.8 in 2004 and 62.8 in 2008, which is relatively low and means quite
high level of protection. In 2005, Vietnam weighted average tariff rate was 13.6% and that of 2008 is 10.7%. Although
the Government has made progress in liberalizing trade volume, NTBs still account for 10% point deduction in Vietnam’
s free trade score. As listed by Heritage Foundation, those NTBs are import bans and restrictions, service market access
barriers, import licensing requirements, nontransparent regulations, state trade in some commodities, weak enforcement
of intellectual property rights, corruption and customs inconsistency.


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Table 3 Regressions Results for Gravity Model of Vietnam s Trade in 2004 2008
Dependent Variable: log of bilateral exports

Coefficient

Std. Error

12.22

1.29

9.50

0.00

0.93

0.06

15.91

0.00

Constant
Origin GDP (log)

t-Statistic

Prob.

Origin GDP per capita (log)

0.10

0.06

1.67

0.10

Destination GDP (log)

0.60

0.06

10.16

0.00

Destination GDP per capita (log)

0.04

0.09

0.50

0.62

Distance (log)

0.99

0.13

7.70

0.00

ASEAN

0.80

0.34

2.33

0.02

Socialist

0.16

0.17

0.91

0.36

Trade policy index

0.02

0.01

1.89

0.06

WTO*index

0.00

0.00

0.99

0.32

R-squared

0.65

Observations

840

3

Empirical results

Two least squared regressions of the gravity models were performed. The first, as described in
restriction that the trading-pair intercepts are all equal, and the second, as in

, is under the

, relaxed this restriction by including

fixed effects to control for unobservable pair-specific effects. However, the fixed effects were found insignificant.

LnTijt
Ln Y P
ijt

it

LnY jt

1

Ln YitLnTijt 2 Ln Y /Ln
P itYit

Ln Y PWTO
Index jt
5Index
jt
t
jt

WTOt * Index jt

6
ijt

3

Ln Y PLnit Y / PLnY jt
LnY
jt
4
jt

Ln Y P
Index

jt

jt

Index jt

ijt

Although the restriction equation (1) assumed that trading-pair intercepts are all equal, it has included many
explanatory variables which might capture specific effects of the trading pairs.
The results of this regression are reported in Table 3. Most of the explanatory variables are found to be significant.
The coefficients of GDP have positive sign and has the value of 0.93 for exporting countries and 0.60 for importing
country, which indicate that Vietnam trades more with the countries of bigger economic size. This result is consistent
with the basic hypothesis of the gravity model.
In contrast, the estimation shows that the per capita GDP variables are not significant factors in explaining
Vietnam’s trade volumes. This implies that trade volumes of Vietnam much depend on the size of the partner economy
rather than on the per capita income. The empirical result is different from that of Frankel (1997), in which a predicted
1% increase in per capita GDP leads to about 0.1% increase in bilateral trade volume.
The distance variable is statistically significant with expected negative coefficient, meaning that geographical
distance is an important factor in reducing Vietnam’s trade volume.
ASEAN variable is highly significant with the expected coefficient of 0.80. This implies the increase of 0.8% in
trade volume of Vietnam with the partner country if the partner is an ASEAN member. High trade flows due to lower
tariff and other trade facilitating commitments of ASEAN Free Trade Area (AFTA), which aims at 0 5% tariffs for all
goods traded among ASEAN member countries. In contrast, the Socialist variable’s coefficient has negative sign and is


Assessing the Cost of Protection in Vietnam after Becoming WTO’s Member Nguyen Anh Thu

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Table 4 Effects of Protection on Vietnam s Imports and Exports (2004)
Actual Vietnam’s trade
(thousands US dollars)

Effects of protection
(thousands US dollars)

Effects of protection as
percent of trade

Effects of protection as
percent of Vietnam’s
GDP

Vietnam’s Imports
From countries in sample

28,166,299

12,195,468

43.3

From all countries

31,968,820

13,842,499

43.3

30.39

Vietnam’s Exports
To countries in the sample

25,225,697

12,380,118

49.07

To all countries

26,485,035

12,996,207

49.07

28.53

Table 5 Effects of Protection on Vietnam s Imports and Exports (2008)
Actual Vietnam’s trade
(thousands US dollars)

Effects of protection
(thousands US dollars)

Effects of protection as
percent of trade

Effects of protection as
percent of Vietnam’s
GDP

Vietnam’s Imports
From countries in sample

71,660,127

10,070,641

14.05

From all countries

80,713,829

11,340,292

14.05

12.62

Vietnam’s Exports
To countries in the sample

60,146,137

17,172,225

28.55

To all countries

62,685,129

17,896,604

28.55

19.92

insignificant, which means that Vietnam’s trade pattern does not depend on the former partners.
Coefficient on trade policy index is positive and significant at 10% level, showing that Vietnam will trade more
with countries of lower protection or higher level of trade freedom. The interaction term between trade policy index
and WTO membership dummy is found insignificant in this regression. This can be explained by the fact that Vietnam
became WTO member in 2007, however, some of its commitments have been performed before 2007, and many of
them will be fulfilled in the following years. Therefore, it requires longer time for this variable to show its significant
effect on Vietnam’s trade.
4

Welfare cost of protection

To calculate the total effects of Vietnam’s protection on Vietnam’s import and protection of other countries on
Vietnam’s export, the regression results are applied to the data of 2004 and 2008. Firstly, the paper calculated the
volume of goods that Vietnam would have imported from the countries in the sample if Vietnam has no protection, i.e.

the trade policy index equal to 100. Secondly, it then calculated the volume of goods that Vietnam would have exported
to other countries in the sample if those countries have no protection. Finally, assuming that the effect of protection
as percentage of trade is the same for the countries within and outside the sample, we will have the overall effect of
protection on Vietnam’s trade with all the countries in the world. The results of these calculations are shown in Table 4
and Table 5.


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Table 4 obviously shows that, in 2004, Vietnam imported more than 31.9 billion U.S. dollar of goods from other
countries, but would have imported 13.8 billion more if Vietnam had the policy of free trade. This means that protection
has reduced the imports of Vietnam by 49.07%. Given the fact that Vietnam’s GDP is quite small and trade contributes
greatly to GDP, this number amounts for about 30.39% of Vietnam GDP. By the empirical study of Wall (1999) for the
year 1996, protection has caused to the U.S. 15.4% reduction in import, which is about 1.66% of U.S. GDP.
For the export side, Vietnam exported more than 26.4 billion U.S. dollar of goods to other countries in 2004, but
would have exported 12.9 billions more if other countries had free trade. Protection decreased the amount of Vietnam’
s export by 47.07%, which was 28.53% of Vietnam’s GDP. For the U.S. in 1996, Wall (1999) estimated the reduction of
26.2% of export, which equals to 1.94% of GDP.
The results of 2008 have proved that the implementation of Vietnam’s commitments under WTO have significantly
reduced the relative welfare cost of protection of Vietnam (Table 5). Specifically, the cost of protection for imported
products in 2008 accounted for only 14.05% of trade, compared to 43.3% in 2004. Moreover, protection of other
countries’ to Vietnam has reduced export of Vietnam by 28.55%, which is much lower than that of 2004. This fact
clearly shows the benefits of joining WTO to Vietnam, although the fulfillment of Vietnam’s commitments under WTO
is still limited (Roland-Holst, 2002 and Thanh, 2005).
5

Conclusion

By using Vietnam’s bilateral trade data with 84 countries for the period 2004 2008 to estimate gravity model, this
paper has found main influential factors on Vietnam’s trade, which are GDP, distance, ASEAN membership and trade
policy index. These estimations follow closely the basic hypothesis of gravity model.
By using the results of the regressions to data of 2004 and 2008, the paper roughly estimates the welfare cost
of protection of Vietnam’s before and after Vietnam became WTO member. Obviously, the relative welfare cost of
protection has decreased along with the fulfillment of Vietnam commitments under WTO.
These results suggest the widely accepted and supported idea by economists: countries will gain from free trade.
ASEAN Free Trade Area (AFTA) is also a good evidence for the advantage of free trade. That is, its membership has
increased Vietnam’s trade volume with member countries by about 0.8%. By becoming WTO member in 2007, Vietnam
is on the way to reduce its tariffs and eliminate NTBs, with the hope to obtain more gains from trade.

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“Nguyen Anh Thu, Lecturer, University of Economics and Business, Vietnam National University”