Group 9 - The effect of the Evfta on Vietnam’s exports of electronic products PDF

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THE EFFECT OF THE EVFTA ON VIETNAM’S EXPORTS OFELECTRONIC PRODUCTSVu Thi Thai An Foreign Trade University, Hanoi, Vietnam Tran Ngoc Anh Foreign Trade University, Hanoi, Vietnam Vu Viet Hung Foreign Trade University, Hanoi, Vietnam Nguyen Thi Ngoc Minh Foreign Trade University, Hanoi, Vietnam Le Hong...

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THE EFFECT OF THE EVFTA ON VIETNAM’S EXPORTS OF ELECTRONIC PRODUCTS Vu Thi Thai An Foreign Trade University, Hanoi, Vietnam Tran Ngoc Anh Foreign Trade University, Hanoi, Vietnam Vu Viet Hung Foreign Trade University, Hanoi, Vietnam Nguyen Thi Ngoc Minh Foreign Trade University, Hanoi, Vietnam Le Hong Nhung Foreign Trade University, Hanoi, Vietnam Tran Mai Phuong Foreign Trade University, Hanoi, Vietnam Truong Ngoc Quynh Foreign Trade University, Hanoi, Vietnam Nguyen Duc Truong Foreign Trade University, Hanoi, Vietnam

Abstract This study aims to identify and analyse the impacts of the European Union - Vietnam Free Trade Agreement (EVFTA) on Vietnam’s exports of electronics products. An analysis is undertaken using the Gravity model to analyze the transformation of electronics products exports from Vietnam to the EU under the influence of EVFTA. As a result, the exports of electronics products from Vietnam to the EU witnessed a slight increase in terms of value. This is due to the great majority of increases in EU imports from Vietnam attributable to duty removal, rather than an effective distribution of resources. Therefore, policy makers should implement some remedies to make good use of the opportunities of the EU market, in order to bring bilateral advantages for both Vietnam and Europe. Keywords: EVFTA, Gravity model, Electronics exports, Vietnam, EU 1

1. Introduction Regarding Vietnam’s trading markets, the EU is the largest one with 508 million people and a gross domestic product (GDP) of about 18,000 billion USD. However, because of the high tariff and technical barriers, Vietnam’s exports to the EU still remain unstable. In 2019, exports to the EU reached 41.5 billion USD, which decreased from a higher level in 2018 (Trade Map, 2019). The EVFTA, along with its tariff reduction and non-tariff barrier alleviation, will aid to promote the EU and Vietnam cross-border trading (Doan and Nguyen, 2021). Among Vietnamese goods exported to the EU market, electronics products belong to one of the most important and potential groups. Vietnam’s electronics industry is one of the fastest-growing and the most crucial industries in Vietnam, which continues to grow despite the negative impact of the COVID-19 pandemic, according to the Ministry of Industry and Trade (2021). Dominated by multinational businesses, the Electronics industry has significantly boosted Vietnam’s trade volume and contributed to its GDP in the past decade. Vietnam has climbed the ranks as a key electronics exporter, from a modest 47th place in 2001 to 12th place in 2019 (Dezan Shira & Associates, 2020). Phones and components were the top export products of Vietnam, followed by electronic products, computers, and other components. From a country with agricultural products and labour-intensive products being the main exports, Vietnam was gradually transitioning to producing more high-tech export products with higher added value such as electronics and electronic components (Trinh, 2020). The EVFTA is an ambitious agreement. It is set to eliminate over 99% of customs duties. The EU duties on Vietnamese products will be eliminated over seven years. The tariff eliminations, along with the alleviation of non-tariff measures, are expected to stimulate trading and increase export values. In view of EU-Vietnam free trade agreement (EVFTA) full engagement, this paper attempts to examine potential impacts of EVFTA on Vietnam’s electronics exporting to the EU using Gravity models. All trade data used in this study was sourced primarily from Trade map, World bank database, Vietnam Electronics Industry Association,... and so on. Since the introduction of the paper has been given, the next section gives a literature review about the Electronics industry of Vietnam under traditional and new-generation FTAs,

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impacts of EVFTA, Gravity model and needed data. Section 4 offers the result. Lastly, section 5 summarizes our discussion and conclusion of the paper. 2. Literature review 2.1 Literature review on impact of traditional FTAs on Vietnam exportation Up to now, Vietnam has experienced an over-35-year integration process into the International Economy from the start of economic renovation toward “socialist-oriented market economy”, transfering into a market economy to now with several new generation free trade agreements containing large scope and high level of liberalization. Until May 2021, Vietnam has joined a total of 17 FTAs, of which 14 FTAs are in effect (WTO and Integration Center, 2021). These FTAs analysed through many researches adopting several kinds of models showed different levels of impacts on Vietnam exportation. During the first period of integration, all of the FTAs in which Vietnam joined were related to ASEAN namely in chronological order AFTA, ACFTA, AKFTA, AJCEP and AIFTA. There are lots of researchers, both the Vietnamese and the foreign, assessing the impact of these FTAs on Vietnam exportation in general. It can be seen that studies using the gravity model were very common. For example, Nguyen and Doan (2017) used stochastic frontier gravity model and trade efficiency to evaluate efficiency performance of Vietnam’s trade through AFTA with its main trading partners from 1995 to 2015. It was shown that the average export efficiency with ASEAN countries grew from 37.54% in the years between 1995 and 1999 to 48.73% in the period 2010–2015. Another paper of Nguyen (2012) about assessing the impacts of Vietnam’s integration under AFTA on Vietnam trade flows based on a gravity model indicated that a major portion of Vietnamese exports depends on the imports of the intermediate inputs. As a result, there was an increase in the production costs along with higher price of exported products, which dampened the competitive ability of Vietnam’s exports and made Vietnam not able to enjoy the benefits from domestic currency’s devaluation as its trading partners do (Nguyen and Doan, 2017). A study of Alleyne et al. (2013) used a structured gravity approach to estimate potential export patterns at aggregate and industry level and what ACFTA offers ASEAN exports to China including Vietnam. Gravity model of trade was used in the study assessing the impact of ACFTA on the export of Vietnam from 2001 to 2018.

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2.2 Literature review on impact of new-generation FTAs on Vietnam exportation With the great influence of new-generation FTAs on Vietnam’s economy and trade, especially in exportation, assessment studies of this agreement are becoming greater in number and diversified in study methods and contents with both on the whole economy and recently focusing more on a specific sector. Kieu (2019) evaluated the impact of newgeneration trade agreements on Vietnam bilateral exports by using the Gravity model. Another study of Vu et al (2020) on the CPTPP effect on Vietnam’s fisheries exports to the CPTPP region with the use of Global Simulation Analysis of Industry-Level Trade Policy model (the GSIM model), while Vu (2015) used trade indicators such as Revealed Comparative Advantage, Export Specialization and Trade Intensity to anticipate the potential benefits and losses of the EVFTA. Baker et al. (2014) estimated the impacts of EVFTA on Vietnamese economy and forecasted that textile and apparel trade would be one of the most beneficial sectors when EVFTA comes into force. Vo et al (2018) analysed the impacts in Vietnam’s apparel exports. Nguyen and Pham (2020) using SMART studied the potential impacts of EVFTA on Vietnam’s exports of seafood to the EU market. Ha (2016) employs both SMART and regression models to assess how the EVFTA would influence Vietnam’s timber industry. Pham (2019) analyzes trade creation and trade diversion effects from the SMART’s outputs for Vietnamese seafood. Nguyen and Trinh (2020) applied the SMART model to estimate the impact of EVFTA on exportation of Vietnamese agricultural products to the EU market. It can be seen from those previous researches that newgeneration FTAs have had a great impact on not only Vietnam’s economy in general but many economic segments as well. Simultaneously with each kind of FTA, Vietnam has different key industry segments due to the country partners. Through research on the impact of both traditional and new-generation FTAs that have been in force on international trade lines on Vietnam exportation, the researchers realized that although, overtime, the methods and contents of studies have been multiform, there are only a few studies on the impact assessment in the electronics segment of FTAs in general and EVFTA in particular. 3. Overview 3.1 The electronics industry of Vietnam The Electrical and Electronics Retail market is comprised of the sales of communications equipment, computer hardware and software, consumer electronics, household appliances, 4

and photographic equipment. The electronics industry is one of the fastest-growing and most crucial industries in Vietnam. It is a core element of the Vietnamese manufacturing sector’s success and contributes significantly to GDP growth, export earnings, investment, and employment. According to the evaluation of the Vietnam Electronic Industries Association (2014), Vietnam appeared to be one of the largest manufacturing hubs of mobile phones, photocopy machines, printers, etc. in the world. The export of electronics and components in 2013 has grown to over 34% of Vietnam’s export basket. However, tasks taken over in Vietnam are mainly low value-adding, low tech, and labor-intensive productions. The local content is relatively small and intermediate products are mainly imported.

Figure 1. Vietnamese electronics imports and exports Source: Trademap (2020) Although the electronics industry is dominated by foreign giants like Samsung and Panasonic, the nation still reaps a lot of benefits since these multinational corporations have set up industries in Vietnam that employ local people. Given the rapid growth of electronics production, trade, and investment seen in recent years, the time has never been better to make use of Vietnam as a cost center for larger Asian operations or as a full-fledged production hub (Nguyen, 2020). The electronics industry will continue to grow strongly due to rising consumer demand amid the pandemic, according to a forecast from the Ministry of Industry and Trade (MoIT). The industry’s growth will also contribute significantly to Vietnam’s recovery process and 2021 growth targets. This industry is proven to be highly integrated with global value chains. 5

3.2. Electronics exports from Vietnam to the EU 3.2.1 Vietnam’s electronics export The electronic industry is the biggest export-earner for Vietnam. The largest single-investor, Samsung, now produces more than half of its smartphones globally in Vietnam; Intel, Foxconn, and others are following suit, according to the study of Herr et al. (2016). The Monetary Authority of Singapore (MAS) found that with investments from China, South Korea, and the US, Vietnam has seen phenomenal growth in its exports of mobile phones and printers/photocopiers in the past decade. Its share in world production of mobile phones at less than 10% is far below China’s 50% and the EU’s 20%; however, is already almost on par with the US. Vietnam has also carved out a similar global share in exports of printers/photocopiers, overtaking Japan and the US (MAS, 2020).

Figure 2. Vietnam exports of electrical, electronic equipment period 2010-2020 Source: Trademap (2020) The Vietnamese electrical appliance industry has experienced steady growth as the global economy continues to recover and demand improves. At present, Vietnam has exported computer products and electronic components to over 100 markets globally, including China, the United States, ASEAN, Japan, the Republic of Korea, as well as the Netherlands, Germany, the Czech Republic, Poland, Finland, and others in the European Union. 3.2.2 Vietnam-EU trade of electronics products The EU is Vietnam's fourth-largest export market. Export turnover of Vietnamese HJN $18.5 billion last year. Vietnam's main exports to the EU are electronic products, footwear, textiles and clothing, coffee, rice, seafood, and furniture. 6

Table 1. Key export products from Vietnam to EU in 2020 Product

Value (Mio euros)

% Total

Electrical machinery and appliances

18,412

53.5

Footwear, hats, and other headgear

3,613

10.5

Textiles and textile articles

3,501

10.2

Vegetable products

1,881

5.5

Miscellaneous manufactured articles

1,295

3.8

Source: European Commission (2021) Currently, the EU is Vietnam’s main trading partner, with the import values representing 20 percent of Vietnam’s global exports in goods and services from Vietnam in 2020. Most of Vietnam’s exports in goods and services to the EU are demanded by Germany (22 percent of total exports to the EU), the Netherlands (13 percent), and France (11 percent). Over the years, Vietnamese exports to EU member states have managed impressive growth and the electronic industry is one of the best-performing sectors, with the export values remaining at a steady growth, amounting to 15.3% of the total electronics export to the world.

Figure 3. Vietnam exports of electronic products to EU and the world Source: Trademap (2020)

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Therefore, besides the US market, Europe is a promising market for Vietnamese electronics with export turnover reaching 95.8US$ billion in 2020, equal to one-third of the total export turnover of Vietnam. 3.3 EVFTA and the impacts of tariff elimination impact on electronics export 3.3.1 EVFTA The Europe Vietnam Free Trade Agreement (EVFTA) is a new-generation FTA signed between Vietnam and the 27 EU’s Member States. Recent research (Dezan Shira & Associates, 2020) showed that it is considered a new generation bilateral agreement – it contains important provisions for intellectual property rights, investment liberalization, and sustainable development. The EVFTA will eliminate over 99 percent of all tariffs relating to trade in goods and partly remove the remainder by means of Tariff Rate Quotas (TRQs). Almost half of the duties on Vietnamese imports from the EU will be eliminated at the time of the entry into force of the agreement, with the remainder gradually removed over a 10-year period. In comparison, 81 percent of duties on European imports from Vietnam will be eliminated at entry into force, with the remainder progressively eliminated over a 7-year period. Customs duties will be removed over a transitional period (of a maximum period of seven years for Vietnamese goods and 10 years for EU goods) so that domestic producers can gradually adapt, according to the European Commission (2019). Consumers from both sides will benefit from lower prices and exporters from strengthened competitiveness. 3.3.2 Impacts of the EVFTA on electronics export

Vietnam is likely to be the major beneficiary of the agreement as the liberalization of tariff barriers will benefit key export industries, including the manufacturing of smartphones and electronic products. These industries are also very labor-intensive. Increasing Vietnam’s export volume to the EU, the FTA will facilitate the expansion of these industries, both in terms of capital and increasing employment. The EVFTA should be a fantastic opportunity for both nations as a reduction of up to 99% on tariffs is an opportunity to increase sales and produce more lucrative electronics products in Vietnam. Although Vietnam is yet to have an extensive developed electronics manufacturing industry at present, the FTA provides Vietnam with an unprecedented chance to take a lead in electronics products, and hence expansion of this budding industry could be a smart move for local businesses. 8

The EU-Vietnam trade and investment agreements will create the momentum to further strengthen the already robust trade and investment ties between the EU and Vietnam. The implementation of key trade agreements, strong demographic tailwinds, and supportive government policies are likely to continue this trend and present a variety of opportunities for investors (Nguyen, 2020). The new-generation FTA would be one of the important factors driving Vietnam’s exports in the forthcoming time. 4. Research methodology and data 4.1 Gravity model Our study adopts the Gravity model, which has been used frequently by a variety of global economists with a view to understanding the pattern of trade in a globalised world. To be specific, this model is used to indicate the bilateral trade between two countries. This model was first applied in 1962 by Jan Tinbergen, a Dutch economist, who proposed that the size of bilateral trade flows between any two countries can be approximated by employing the ‘gravity equation’, which is derived from Newton’s theory of gravitation. While planets are attracted to each other in proportion to their sizes and proximity, so too are countries. Relative size is determined by current GDP, and economic proximity is determined by trade costs – the more economically ‘distant’ the greater the trade costs. It has been demonstrated how Gravity models can emerge from a variety of trade theories, based on several extensive studies. For instance, Bergstrand (1985) used Paul Krugman's (1980) microeconomic basis to show that the gravity model is a direct consequence of a trade model. The country's trade supply is generated from the profit maximization of firms, while the country's trade demand is derived by maximizing the constant elasticity of substitution utility function subject to an income constraint. Using market equilibrium clearance, the gravity equation is then calculated. In addition, while Deardorff (1998) demonstrated that the gravity model may be derived from two extreme examples of the Hecksher-Ohlin model with and without trade barriers, Martinez-Zarzoso et al. (2004) categorize export sectors based on their sensitivity to geographic and economic distance, and use a gravity model framework to determine which commodities have strong export potential. From a theoretical model of international commerce in differentiated goods with business heterogeneity, Chaney obtained a gravity-type equation in 2008.

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In general, we have a common model as below: Xij = G*Si*Mj*φij Where: Xij: The trade value of exports from i to j Mj: All importer-specific factors that make up the total importer’s demand Si: Exporter-specific factors that represent the total amount exporters are willing to supply G: A variable that does not depend on i or j such as the level of world liberalization Φij: The ease of exporter i to access of market j After reviewing the previous research and papers conducted using the gravity model, we believe that this model is the most suitable tool for us to fulfill our study’s objectives. In this study, we apply the gravity model to analyze the transformation of electronic products exports as well as the bilateral trade between Vietnam and EU in terms of this industry under the influence of EVFTA. To be specific, we assume that Si and Mj represent the GDP of nations i and j, respectively, and φij represents the inverse of trade costs between two countries, including shipment/distance costs plus tariffs. In fact, Austria, Netherlands, Germany, Italy and Poland are all in the same zone, so the costs of shipping from Vietnam to these countries are likewise the same. As a result, we have decided to make the distance variable's value equal to a unit (million dollars). As a result, the Gravity model is as follows: Xij = (G*Si*Mj)/(Qij*1+Vij*tij) or Xij = (G*Si*Mj)/(Qij+Vij*tij) Where Xij, Si, Mj, and G have the same meaning as before, Qij is the quantity of electronics exported from Vietnam, Vij is the value of the exported electronic products, and tij is the tariffs applied by the EU to items. In order to achieve our study’s objectives, we must acquire data from credible sources to support the work of computation based on the Gravity equation. The figures acquired from the Gravity equa...