Vietnam s Export to the EU: An Overview and Assessment using the Constant Market Share based Approach

Transcription

1 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh * Vetnam s Export to the EU: An Overvew and Assessment usng the Constant Market Share based Approach Abstract In order to deepen the understandng of Vetnam s export to the EU market, ths paper uses the constant market share (CMS) approach to nvestgate the nfluence of separate crucal factors determnng Vetnam s export performance. The major data source s the COMTRADE database, from whch mport data of reportng countres durng the perod are compled at 2-dgt SITC product categores and grouped for 8 major tradng partners. Our emprcal fndngs suggest that Vetnam s strong export performance s attrbuted to a favourable world trade effect and a postve compettveness resdual. However, the negatve contrbuton of commodty composton and market dstrbuton effects reveals that there s an ample scope for mprovng ts trade pattern through product and market dversfcaton. I. Introducton Over the last 20 years of reforms, Vetnam has acheved great successes n terms of Gross Domestc Product (GDP) growth, macroeconomc stablzaton, export expanson, Foregn Drect Investment (FDI) attracton and poverty reducton. The economy grew at an mpressve level of 7.5 per cent per year durng , whle GDP per capta ncreased by 5.7 per cent per year. As a result of fast economc development, the poverty rate sharply fell * Ths research paper has benefted from the European Commsson s fnancal support along the EU-Vetnam Small Projects Faclty n Economc Cooperaton. It s part of the study Vetnam s export to the EU: market access and facltaton mplemented by the Department for Trade Polcy and Internatonal Economc Integraton Studes of the CIEM (Mnstry for Plannng and Investment, Vetnam).

2 2 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh from 70 per cent n 1986 to 37 per cent n 1998 and 19.5 per cent n Among the crucal factors contrbutng to these remarkable achevements s the export sector, whch consttutes more than 50 per cent of GDP wth an annual growth rate of 16 per cent durng the last ten years. The mpressve performance of the export sector s attrbuted to a great deal of contnung efforts of mprovng trade polces toward a sound regme of trade lberalzaton through strengthened nternatonal economc ntegraton. In 1995, Vetnam joned the Assocaton of Southeast Asan Natons (ASEAN) and commtted tself to fulfll the agreements under the ASEAN Free Trade Area (AFTA) by In the same year, Vetnam appled for WTO membershp and became the 150 th WTO member on 11 January The country s also member of the APEC snce In 2000, Vetnam and the Unted States (US) sgned a Blateral Trade Agreement (BTA) whch became effectve n December Snce then, Vetnam has also joned several regonal ntegraton clubs such as the ASEAN-Chna Free Trade Area (ACFTA) n 2002, ASEAN-Japan Comprehensve Economc Partnershp n 2003, and ASEAN-Korea Free Trade Area n Wth 25 member countres, the European Unon (EU) s currently the largest economc pllar n the world wth approxmately 20 per cent of world GDP n It s the world's leadng exporter and the second-largest mporter of goods, and accounts for 25 per cent of world tradng and servce actvtes. The EU has always been an mportant partner of Vetnam. Ths close relatonshp has developed rapdly and vgorously snce Vetnam and the EU establshed dplomatc relatons n 1990 and sgned a trade agreement n By 2005, the total two-way trade value reached 8,108 mllon USD, of whch Vetnam s exports to the EU valued at 5,520 mllon USD, equvalent to 17 per cent of Vetnam s total exports. Although the export value ncreased year by year, the share of the EU market n Vetnam s export has declned from about 22 per cent durng to 17 per cent n Meanwhle, the shares of Vetnam s exports to other major tradng partners lke the US have ncreased. Ths phenomenon rased great concerns about Vetnam s export compettveness, especally on the EU market. In parallel, thanks to a strong nvolvement n the nternatonal dvson of labour, Chna s foregn trade has developed rapdly snce the mplementaton of reforms and the openng-up polces n Whle trade polcy

3 Vetnam s Export to the EU 3 reforms before 1987 were consdered to be at an expermental stage, the Central government facltated from 1988 on the expanson of multnatonal corporaton actvtes and cross-border producton networks that used FDI and non-fdi relatonshps to explot varous advantages of Chna s locaton (low costs of labor, economes of scale, spatal concentraton). In addton, Chna became a full member of the WTO on 11 December As a large developng country, ths event has exerted and wll contnue to exert profound nfluence on the world economy. Chna has grown nto one of the man compettors n nternatonal markets. It has become the thrd largest exporter n the world n 2004 and s expected to become the frst largest by the begnnng of the next decade (Gauler et al., 2006). Ths phenomenon s mportant for the rest of the world, and especally for the less developng exportng countres lke Vetnam. It requres efforts to fnd out what are the determnants of Vetnam s export performance regardng the world market n general, and the EU market n partcular. At the specfc case of Vetnam, some studes attempted to determne whether Chna s emergence has dverted foregn trade from ts Asan neghbour. However, most of them restrcted ther analyss to revealed comparatve advantage calculaton or only used qualtatve methods to assess Vetnam s export performance. To our acknowledgement, only one quanttatve analyss attempted to measure Vetnam s export compettveness durng (Vo, 1998). However, the level of Vetnam s nternatonal ntegraton at that perod was lmted, so that the quanttatve fndngs are somewhat unconvncng n explanng mpacts of trade polcy reforms on export growth, not to menton the dffculty to access relable data. Accordngly, ths paper presents a research attempt to overcome such lmtatons by usng CMS analyss to nvestgate the nfluence of separate crucal factors determnng Vetnam s export performance. The major data source used for our analyss s the COMTRADE database, where mport data provded by reportng countres wll be compled by 2-dgt SITC product category and grouped for 8 major tradng partners of Vetnam durng the perod Other data, mostly used for qualtatve assessment, wll be obtaned from the General Statstcs Offce (GSO) and other reference books. The rest of the paper s organzed as follows. Secton II presents an overvew of Vetnam s export: t covers a bref revew of trade

4 4 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh polcy reforms n Vetnam and an overall descrpton of ts exports, wth a focus on the EU market. Secton III then quanttatvely analyzes factors determnng Vetnam s export performance by usng the CMS approach. Fnally, secton IV concludes the paper and summarzes our man research fndngs. II. An overvew of Vetnam s export A. Trade reforms n Vetnam snce Do Mo Although the announcement of Do Mo ( Renewal n Vetnamese) naugurated the transton experence n 1986, trade reforms n Vetnam were, however, only ntated n 1989 and have experenced a lot of ups and downs so far. The trade reform process was strongly supported between 1989 and the early 1990s, sufferng a standstll durng the md-1990s, resumng wth a convncng speed snce As ponted out by Vo (2005), trade reforms that are closely nterconnected wth the export performance n Vetnam largely refer to tradng rghts, mport protecton, and export promoton wth ncentves, whch are summarzed n Table 1. Evdently over the last 15 years of trade reforms, there has been a sgnfcant lberalzaton of the foregn trade regme n Vetnam. Non-tarff mport restrctons whch create trade dstortons have been abolshed gradually, whle favourable mechansms have been appled to exports. Also, the success of the export sector s not wthout the government s prompt responses towards trade n determned moves for jonng the WTO. 1 A great harmonzaton n legal framework and polces has been made for consstency wth nternatonal norms and practces. Trade promoton actvtes become more dversfed; management mechansm of export and mport polces has been more flexble and predctable. At the same tme, Vetnamese entrepreneurs and traders have gradually become more experenced, professonal and dynamc, resultng n an 1 Formerly, Vetnam s tarff schedule was composed of three tarff rates: Most Favoured Naton (MFN), preferental and normal tarff rates (the latter were usually 50 per cent hgher than the MFN ones). Vetnam s smple MFN average was hgher than the preferental one, but lower than that of neghbourng countres such as Thaland, Phlppnes and Indonesa (Nguyen, 2002). As a consequence of the recent accesson to the WTO and the mplementaton of AFTA, the MFN and preferental tarff schedules replaced the much hgher prevous tarff rates.

5 Vetnam s Export to the EU 5 mprovement and expanson of producton, busness and trade capacty (CIEM, 2006). Table 1: Major developments and reforms of Vetnam s trade polcy (to be contnued) 1. Tradng rghts State monopoly n foregn trade domnant Entry condtons for partcpatng n tradng actvtes relaxed but 1997 stll heavly restrctve. Abolshment of trade lcenses as most sgnfcant step toward 1998 trade lberalzaton Free trade (both mport and export) of commodtes. Foregn owned enterprses granted rght to export goods other 2002 than those they produce. 2. Import protecton Non-Tarff Barrers (NTBs): Quanttatve restrctons and foregn exchange management Introducton of extremely strct control over foregn exchange. Savng account n foregn currency permtted. Partal (80%) foregn exchange surrender requrements mposed on enterprses havng foregn exchange accounts. Introducton and ncreased use of quanttatve controls on goods durng , up from 5 n 1996 to 12 tems n Balancng requrement of foregn exchange for foregn owned enterprses relaxed, allowng them to buy foregn currency from domestc banks to repay loans provded by offshore banks. A turnng pont n trade reform: a trade polcy roadmap publcly ssued the frst tme, allowng for predcton of export-mport envronment over the next 5 years ( ). Quanttatve restrctons reduced to two products (petroleum and sugar). Introducton of tarff-rate quotas, mposed on agrcultural 2003 products such as cotton, tobacco materals, and salt. Tarff barrers Introducton of smplfed tarff scheme: tarff rates of 0-60% 1988 mposed on 130 product categores. Maxmum tarff rates ncreased to 120% on some luxury goods Tarff coverage reduced to 80 product categores. Law on Import and Export Dutes approved, separatng normal 1991 tarffs from preferental ones. HS system of tarff nomenclature ntroduced wth detaled and 1992 consoldated tarff schedule Tarffs reduced sgnfcantly to 16 % on average.

6 6 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh 60% of all tarffs below 10%. Tarffs ncreased to about 18% due to tarffcaton of NTBs n 2005 place of quanttatve restrctons. Table 1 (cont.): Major developments and reforms of Vetnam s trade polcy 3. Export promoton Restrctons on mports relaxed by grantng duty free access to nputs mported for export producton. Implemented wth the 1991 establshment of export processng zones and the ntroducton of mport duty rebate scheme. Export dutes bascally removed, leavng only two commodtes 1998 (crude ol and scrap metal) subject to export dutes. The VAT, ntated n 1999 to replace turnover tax, sgnfcantly mproved wth a reducton from four tax lnes to three tax lnes, allowng export frms to enjoy the same VAT tax band for mports as frms producng for domestc consumpton Unfcaton of corporate ncome tax to 28% for both ndustres and servces. Under unfed system, concessonary rate appled to tax profts from export producton, subjected to the degree of export-orented producton. Source: Vo (2005) and Athukorala (2005). Nevertheless, the current Vetnam s trade polcy s characterzed by a dual approach that the country has been pursung for a number of years. On the one hand, Vetnam states ts ntenton to promote export-orented sectors, where export manufacturng frms, especally the Foregn Owned Enterprses (FIEs) wth regonal and global compettveness, play the leadng role. Thus, trade reform has helped the prvate sector by enhancng ts access to mported nputs and to export outlets. By 1999, t accounted for nearly threequarters of all tradng frms and half of export and mports (Nguyen, 2002). However, consderable bas aganst exports stll exsts n several sub-sectors where Vetnam has an ample scope of achevng export success, such as garments, plastc products, leather goods, ceramcs and other manufacturng. The ant-export bas n the ncentve structure s creatng a major constrant for a sound development of the prvate sector, especally wth regard to small and medum-szed enterprses whch are consdered to be a drvng force for export expanson (Athukorala, 2005). In addton, export-supportng measures are stll weak and nsuffcent. Infrastructure for export actvtes lacks both n quantty and qualty; nformaton provson for analyss and forecast of mport

7 Vetnam s Export to the EU 7 source and export markets s not tmely and suffcent. The lnkage between domestc enterprses n trade actvtes are stll weak, falng to take advantages of ndustry and trade assocatons for better trade promoton (CIEM, 2006). On the other hand, the foregn trade regme s stll consdered to be restrctve to protect specfc ndustres such as steel, cement and fertlzer. The Vetnamese government mantans protecton of captal ntensve State-Owned Enterprses (SOEs) whch are domnant n mport-substtutng sectors. Although they beneft from FDI nflows (FIEs establsh jont-ventures wth those SOEs to enjoy mport-substtuton status), they reman generally weak and neffcent. Such ssues reflect Vetnam s rather specal crcumstances as an Asan country n transton both from a centralzed planned economy to a market economy, and from a developng economy to an ndustralzed one. Indeed, the SOEs enjoy rents from exstng barrers to trade because of ther leadng role n polcy makng, revenue collecton and dstrbuton n the absence of macroeconomc and budget management, or market nsttutons. To remove these rratonaltes, Vetnam needs to conduct trade reforms n parallel wth a wde range of macroeconomc and structural reforms of SOEs, State Owned Commercal Banks (SOCBs), and tax admnstraton (Auffret, 2003; Vo, 2005). B. A vew on Vetnam s exports Vetnam shows an outstandng performance n achevng global, as well as regonal economc ntegraton. It currently has wde trade relatons wth more than 220 natons and terrtores. Durng the perod 1993 to 2004, Vetnam s trade openness (exports plus mports of goods n per cent of GDP) rose from 54.2 per cent to per cent, whle the market share of ts exports (exports of goods n percent of world mports of goods) more than trbbled, from 0.08 per cent to 0.29 per cent (IMF, 2005). Ths s an mpressve performance record compared to other countres n East Asa: Chna n partcular, was less open to trade (26.9 per cent n 1993 and 68.2 per cent n 2004) and only doubled ts export market share (from 5.74 per cent to 9.64 per cent durng the same perod). Moreover, Chna, Inda and Vetnam were the only Asan countres whch strengthened ther postons n world mports between 1993 and 2003.

8 mllon USD 8 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh The trade lberalzaton measures mplemented under varous Regonal Trade Agreements (RTAs) durng the 1990s, together wth the regon s rapd economc growth, have led to sgnfcant growth of Vetnam s trade wth ts East Asan neghbours (Fgure 1). Ths phenomenon also suggests the ongong partcpaton of Vetnam n regonal producton sharng and outsourcng networks that Chna has contrbuted to ntensfy. As Asan trade becomes more and more centred on Chna, the latter has been overtakng Japan as the major tradng partner n the regon. However, Vetnam s heavly dependent on fnal demand outsde the regon, as domestc consumpton stll remans a relatvely weak component of demand n most Asan economes. Thanks to the VN-US BTA effectve snce late 2001, Vetnam has dramatcally ncreased ts exports to the US market, from around 1 bllon USD n 2001 to nearly 6 bllon USD n 2005 (GSO, 2005). Followng the mplementaton of the BTA, the US s currently among the largest mporters of Vetnam, together wth the EU, Japan, Chna and ASEAN4 (see Table 2). In recent years, growth of Vetnam s exports to almost all major destnatons accelerated, but these rates dffered among mportng regons. Notably, whle Vetnam s exports to the EU market just ncreased modestly from 15 per cent per annum durng to 18 per cent per annum durng , ts export growth to the US market quckly went up from 29 per cent per annum to over 70 per cent per annum durng the correspondng perods (see Table 3). Fgure 1: Development of Vetnam s exports by major tradng partners 35,000 30,000 25,000 20,000 15,000 10,000 5,000 ROW Chna Japan US ASEAN EU

9 Source: GSO. Vetnam s Export to the EU 9

10 10 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh Table 2: Vetnam s export structure by destnaton (perod average, n per cent) Table 3: Annual growth of Vetnam s exports by destnaton (n per cent) ASEAN4 CHINA NICs JAPAN OCEANIA EU15 US ROW Source: Authors calculatons from COMTRADE statstcs. Note: ASEAN4: Indonesa, Malaysa, Phlppnes, Thaland. NICs: Newly Industralzng Countres of East Asa (Sngapore, Hong Kong, South Korea). ASEAN4 CHINA NICs JAPAN OCEANIA EU15 US ROW Source: Authors calculatons from COMTRADE statstcs. The mpressve export development of Vetnam durng recent years an be attrbuted to several factors such as growth of world trade, hgher world market prces and market expanson. Accordng to COMTRADE statstcs, world trade growth accelerated from 3 per cent per annum durng to 13 per cent per annum durng Vetnam benefted from hgher world market prces n a number of leadng export goods lke crude ol, rce, coffee, rubber and coal (World Bank, 2005). Accordng to CIEM (2006), the average growth of 11.5 per cent n export prces led to the ncrease of the export value by 3.3 bllon USD. The largest rse n export prces was regstered for crude ol (40.7 per cent), coffee (24.7 per cent), coal (20.7 per cent), rubber (17.9 per cent), tea (15.9 per cent), rce (14.5 per cent) and cashew nuts (12.5 per cent). Meanwhle, the export volume ncreased by about 9.4 per cent on average, resultng n a clmb of about 2.4 bllon USD n export turnover. The tems wth the greatest ncrease n export volume were coal (53.8 per cent), rce (28.1 per cent), peanuts (26.1 per cent), and rubber (11.9 per cent).

11 Vetnam s Export to the EU 11 Table 4: Vetnam s export structure by commodty (n per cent) Commodty group (one-dgt SITC) Prmary products (SITC 0-4) Food and lve anmals Beverages and tobacco Crude materals, nedble, except fuels Mneral fuels, lubrcants and related materals Anmal and vegetable ols, fats and waxes Manufactured products (SITC 5-8) Chemcals and related products, n.e.s Manufactured goods classfed chefly by materal Machnery and transport equpment Mscellaneous manufactured artcles Commodtes and transactons not classfed elsewhere n the SITC Total Source: Authors calculatons from COMTRADE and GSO statstcs. Wth an apparent ncrease of manufactured products from 52 per cent n 1997 to 60 per cent n 2004 at the expense of prmary products, Vetnam s exports tructure mproved, n accordance wth the export-led growth strategy (see Table 4). The trade structure clearly has dversfed, hghlghted by a notable ncrease of SITC-8 (mscellaneous manufactured artcles) from per cent to per cent. Lke other Asan countres, Vetnam s external trade

12 12 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh becomes more and more drven by ts nvolvement n the regonal segmentaton of producton processes, as shown by the rse of SITC-7 (whch ncludes parts and components) from 6.8 per cent to 9.34 per cent. However, more than two-thrds of export revenues are stll concentrated on seven key commodtes - namely crude ol, textle and garment, footwear, seafood, agrcultural products, furnture, and electroncs applances. Lookng at the export structure n more detal at the 2-dgt SITC aggregates, we fnd the followng major export tems n 2004: crude ol (about 20 per cent of total exports), garments (16.5 per cent), footware (16 per cent), agrcultural and fshery products (11 per cent and 8 per cent respectvely). In short, the export sector s stll domnated by natural resource ntensve, labour-ntensve and low value-added products; many of them are also vulnerable to fluctuatons n the world markets. Although Vetnam should boost the exstng leadng export sectors, Chna s comparatve advantage n the same products has ncreased global competton and may affect Vetnam s ablty to mprove ts poston n the world. On the other sde, such nternatonal specalzaton rases concerns about the approprate export pattern for the country to pursue ts export-led growth strategy n the long run. C. Vetnam s exports to the EU Economc and trade relatons between Vetnam and the EU have been establshed snce long tme. Ths specal relatonshp has developed rapdly and vgorously snce Vetnam and EU establshed dplomatc relatons n The EU s one of Vetnam s largest tradng partner and export market, absorbng nearly one-ffth of Vetnam s exports durng the past ten years. Two-way trade has ncreased four tmes over the last ten years, and was worth 8.1 bllon USD n 2005 (EUECC, 2006). Generally speakng, the EU grants Vetnam a specal status lke other developng countres. It apples a trade regme wth relatvely lberal regulatons towards mports from Thrd World countres. Import lcensng s generally not requred for commodtes orgnatng from those countres, except for some senstve products such as agrcultural goods, tobacco, weapons and products under survellance, quanttatve restrctons, or safeguard measures. In addton, the EU has appled the Generalzed System of Preferences (GSP) snce 1971, defnng preferental arrangements for dutes on

13 Vetnam s Export to the EU 13 EU s mports orgnatng from Thrd World countres. Under the GSP, mports from least developed and developng natons are not subject to normal customs dutes, and traders n the EU enjoy ncentves when mportng products from developng countres. The latest verson of the EU s GSP 2 was approved on 27 June 2005, effectve for 3-years from January 1, 2006 to December 31, Accordngly, Vetnam s currently beneftng from the GSP. Regardng the commodty structure (see Table 5), Vetnam s exports to the EU are heavly concentrated n a lmted range of commodtes, almost wthout changes over the past years. In partcular, the bulk of Vetnam s export to the EU (more than 80 per cent) conssts of manufactured products, notably SITC-8 (almost three-quarters). On the opposte, Vetnam s man mports from the EU are machne tools, electrcal equpment, and pharmaceutcal products to meet Vetnam s demand for modern technology and materals as the ndustral development proceeds. Table 5: Vetnam s export structure wth the EU by commodty (to be contnued) Commodty group (onedgt SITC) Prmary products (0-4) 0 - Food and lve anmals 1 - Beverages and tobacco 2 - Crude materals, nedble, except fuels 3 - Mneral fuels, lubrcants and related materals per cent of total exports to EU Councl Regulaton (EC) No 980/2005.

14 14 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh Table 5 (cont.): Vetnam s export structure wth the EU by commodty per cent of total exports to EU Commodty group (onedgt SITC) 4 - Anmal and vegetable ols, fats and waxes Manufactured products (5-8) Chemcals and related products, n.e.s. 6 - Manufactured goods classfed chefly by materal 7 - Machnery and transport equpment 8 - Mscellaneous manufactured artcles 9 - Commodtes and transactons not classfed elsewhere n the SITC Total Source: Authors calculatons from COMTRADE and GSO statstcs.

15 Vetnam s Export to the EU 15 Table 6: Shares of Vetnam's major export commodtes to the EU per cent of total exports to EU No. Commodtes (two-dgt SITC) SITC-03: Fsh, crustaceans, molluscs and aquatc nvertebrates, and preparatons thereof SITC-07: Coffee, tea, cocoa, spces, 2 and manufactures thereof SITC-82: Furnture, and parts thereof; beddng, mattresses, mattress supports, cushons and smlar stuffed furnshngs SITC-83: Travel goods, handbags 4 and smlar contaners SITC-84: Artcles of apparel and 5 clothng accessores SITC-85: Footwear SITC-89: Mscellaneous 7 manufactured artcles, n.e.s Source: Authors calculatons from COMTRADE statstcs. On the 2-dgt SITC level, four export sectors can be dentfed as potental nterestng tems n our nvestgaton (see Table 6). On the one hand, footwear and garments are manufacturng actvtes where Vetnam s confronted wth Chna s competton on the EU market and, at the same tme, wth mportant barrers to access EU markets. 3 On the other hand, fshery and agrcultural products are among commodtes exported to the EU market where Vetnamese producers have to meet qualty standards and very strct rules 4 on the grounds of food safety. All of these export products are subject to survellance and safeguard measures. 3 4 Accordng to Gauler et al. (2006), the rse of Chna n European mports more than compensated the relatve declne of other Asan economes. Snce 2003, the EU has a new Common Fsheres Polcy (CFP), amng at achevng bologcally, envronmentally, and economcally sustanable fsheres by, nter ala, better conservng fsh stocks, protectng the marne envronment, and ensurng the economc vablty of the European fleets (WTO, 2004).

16 16 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh 1. Vetnam s the EU s second largest footwear suppler after Chna. The majorty of Vetnam s footwear output (90 per cent) s for export, concentratng on sport shoes (approxmately 70 per cent) and lady shoes (20 per cent) (ActonAd and Lefaso, 2006). In terms of turnover, Vetnam s total export of footwear products ncreased by approxmately 24.6 per cent a year durng However, the share of footwear exports to the EU has declned from 74.5 per cent n 2001 to 59 per cent n 2005 (EUECC, 2006). Snce 2006, the sector also has to arrange wth the EU ant-dumpng petton that mposed progressve tarffs on Vetnamese leatherupper shoes. The ant-dumpng proceedngs has almost nstantly affected footwear enterprses wth a sharp fall n orders and producton of 50 per cent, causng producton contracton, economc losses wth ncome reducton of per cent and massve layoffs. Some frms changed to produce mtaton leather products, but they fnd t dffcult to compete wth Chna due to ts abundant materals and frequent changes n shoes desgn/styles. 2. In the last 10 years, Vetnam wtnessed a remarkable performance of the garment and textle ndustry, wth an ncrease of export revenues by 21 per cent on average per year (EUECC, 2006). The three major markets are the US, wth 53.6 per cent of Vetnam's garment and textle export value, followed by the EU and Japan (VENO, 2005). The sgnng of the Vetnam-US Blateral Trade Agreement resulted n spectacular growth for Vetnamese garment and textle exports. On the opposte, ts export to the EU grew much more slowly - around 10 per cent n 2005 (despte the removal of quotas on textles and clothng by 31 December 2004), compared to the average annual growth of 21 per cent durng One of the reasons behnd lower garment and textle exports was the strong competton from Chna. Accordng to VENO (2005), output of Vetnam s garments and textles durng the frst fve months of 2005 accounted for just about 1.3 per cent market share of the EU market, aganst 26 per cent for Chna. 3. As one of the leadng foregn currency earners of Vetnam, the export of fshery products mantans a hgh growth rate, wth an average annual ncrease of 16.5 per cent for seafood durng (EUECC, 2006). In recent years, Vetnam s exports to the US ncreased sharply, although stll sufferng from ant-dumpng tarffs mposed snce 2003 by the US on two major fshery products (catfsh and black tger shrmp). Vetnam found ts way out of ths dffculty by changng the export commodty structure and

17 Vetnam s Export to the EU 17 explorng new nternatonal markets. Ranked as the thrd largest customer of Vetnam s fshery (behnd Japan and US), the EU market mantaned a hgh growth rate n 2005, by 79 per cent. The rapd development of export markets has encouraged new seafood processng enterprses, ncreasng from 405 n 2004 to 439 n Among them, by late 2005, a total of 171 enterprses wth access to the EU market and 300 enterprses to the US market (EUECC, 2006). 4. Agrcultural products are currently exported to hundreds of countres worldwde and contrbute substantally to Vetnam s total export revenues. In addton to polcy reforms n agrculture that have nduced ncentves for farmers, t s market and export orentaton that plays a key role n the sector development, resultng n an average growth of 4.5 per cent per annum durng (EUECC, 2006). By regon, Asa s the largest market for Vetnam s agrcultural products, manly rce, rubber, fruts and vegetables, pepper and cashews. The emergng US market consumes rather coffee, pepper and pneapple juce, whle the EU market mports coffee, honey, processed fruts and vegetables (EUECC, 2006). Wth current low mport tarffs mposed on agrobased products, the EU market s vewed to have a hgh potental for the entrance of Vetnamese agro-products, provded that they comply wth the EU s strct qualty and preservatve requrements. In addton, agrcultural products contnue to be subject to safeguard clauses appled under the Common Agrcultural Polcy. III. Vetnam s export performance: a Constant Market Share Approach A. The Constant Market Share Model Constant Market Share (CMS) analyss s a methodology whch was appled for the frst tme to nternatonal trade flows by Tyszynsk (1951). It was orgnally used n the emprcal studes of structural change n ndustral and regonal economcs. Bascally, the CMS model s bult on the assumpton that wthout changes abroad and mantaned compettveness at home, a country s export share n the world market should reman unchanged over tme. Any devaton of the actual export growth from ths constant market share s broken down nto four components: world trade, commodty composton, market dstrbuton, and a resdual usually referred to as an ex-post compettveness. The decomposton method has to be appled to export data at a dsaggregated level

18 18 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh wth respect to markets and products. It then allows the analyss of the separate nfluence of these dfferent factors on export performance. Followng Leamer and Stern (1970), the CMS dentty decomposes actual change n a country s exports between two perods as follows: ' ' V V rv r r V rj r Vj Vj Vj rjv j j j Where: V value of country X s total exports n perod 1 V value of country X s total exports n perod 2 V X s export value of commodty n perod 1 V X s export value of commodty n perod 2 V j value of X s exports to country j n perod 1 V j value of X s exports to country j n perod 2 V j X s export value of commodty to country j n perod 1 V j X s export value of commodty to country j n perod 2 r percentage ncrease n total world exports from perod 1 to 2 r percentage ncrease n world exports of commodty from perod 1 to 2 percentage ncrease n world exports of commodty to r j country j from perod 1 to 2 Appendx 1 descrbes the decomposton procedures for producng the aforementoned CMS dentty. Country X s export growth can then be attrbuted to: 1. Overall trade effect. It represents what the country s growth n exports would have been f they had grown at the same rate as the total value of world exports,.e. f the country mantaned ts market share. 2. Commodty composton effect. It ndcates the dfference n the growth rate of exports that each commodty may have experenced compared to the world average. A country s export may grow because t concentrates n commodtes wth growth rates hgher than the world average. 3. Market dstrbuton effect. A country s export may grow because t exports to geographcal markets experencng hgh growth.

19 Vetnam s Export to the EU Compettveness effect. It ndcates the dfference between the actual ncrease n exports and the hypothetcal ncrease f the country mantaned ts export share n each market, wth respect to each commodty group and to each country. A postve sgn of the resdual reveals an mprovement n export compettveness. In spte of some conceptual and emprcal lmtatons as ndcated by Rchardson (1971), the CMS approach s a commonly accepted procedure of accountng for the sources of a country s export growth, dependng on the avalablty of data. Bowen and Pelzman (1984), or Azam and Azam (1994), used a CMS model to analyze the export performance of the US n manufactured goods. In emprcal studes for East Asan countres, the CMS approach was appled by Chen et al. (1999) who evaluated the ex-post compettveness of Chna s exports n agr-food products durng Indeed, Chna was a net exporter of agr-food to the world market n the perod under consderaton. The authors attempted to examne whether the rse of Chna s export n agr-food products was assocated wth a rse n ts nternatonal compettveness. The CMS results revealed a downward trend of Chna s compettveness n agr-food products over the years 1986 to Hence, the observed ncrease n agr-food exports was manly due to growth of world mport demand and a favourable market dstrbuton effect. Smlarly, Juswanto and Mulyant (2003) examned Indonesa s manufactured exports durng the 1990s. The analyss revealed that Indonesa s export growth had a severe problem wth ts commodty composton and low response to world demand. The ADB Insttute (2002) also used CMS estmates as standard export performance ndcators to determne whether the emergng East Asan economes lost export compettveness before the crss n md Contrary to the belef that Asa was no longer a domnant force, the study found that the East Asan economes regstered hgh export growth n the early 1990s. For Vetnam, Vo (1998) used the CMS approach to analyze the export performance of the country durng Durng that perod however, despte a strong pace of trade reforms, Vetnam just started ts nternatonal ntegraton, so that exports were not actually seen as a leverage of the Vetnamese economy. B. Data and methodology As ponted by Rchardson (1971), better results are obtaned by usng dsaggregated data n such calculatons. Consequently, the

20 20 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh CMS decomposton s estmated here by complng data from COMTRADE on an annual bass at a two-dgt SITC level of commodty aggregaton, where mport data provded by reportng countres are used as proxes for export values. The hghly aggregate nature of the commodty data used here s due to statstcal constrants. Vetnam s world tradng partners are grouped nto eght destnatons: ASEAN4 (Indonesa, Malaysa, Phlppnes, Thaland), CHINA, EU-15 5 (Austra, Belgum, Denmark, Fnland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Span, Sweden, Unted Kngdom), JAPAN, NICs 6 (Sngapore, Hong Kong, South Korea), OCEANIA (Australa, New Zealand), US, and ROW (Rest Of the World,.e. remanng countres). Our analyss focuses on the perod from 1997 to 2004, consderng data avalablty for Vetnam and ts major tradng partners. The CMS decomposton of Vetnam s exports for the perod under consderaton allows us to analyze the performance of Vetnam s exports over the past ten years. However, n an attempt to lnk export performance wth major nfluental events or reforms durng the past ten years, the CMS analyss s carred out at the same tme for the two consecutve sub-perods and The year 2001 s chosen as a breakng pont n order to capture the mpact of the Vetnam-US Blateral Trade Agreement (effectve snce December 2001), whch has been thought to accelerate Vetnam s exports to the US sgnfcantly. Correspondngly, the year 2001 also benchmarks Chna s entry nto the WTO. Because of smlar commtments requred by the WTO, the Chnese experence should facltate trade prospects for Vetnam after jonng the WTO. Therefore, the same CMS-based analyss s also conducted for Chna under the two sub-perods and n order to assess the mpact of Chna s accesson to the WTO on ts export performance. 5 6 Durng the perod under consderaton ( ), the share of Vetnam s exports to the ten new members of the EU was not sgnfcant compared to EU-15, not to menton the accessblty of data. Thus, EU-15 can be used as a good proxy for the EU as a whole. Tawan s not ncluded due to data unavalablty and thus s grouped n ROW.

21 Vetnam s Export to the EU 21 C. Decomposton results As llustrated n Table 7, CMS decomposton for the perod as a whole shows that the rse n Vetnam s exports can be largely explaned by a world trade effect (whch contrbuted about 30 per cent to the overall export performance) and a compettveness effect (whch accounted for 82.5 per cent), whereas commodty and market effects are found to have a negatve contrbuton. Indeed, COMTRADE statstcs ndcate that world trade growth has accelerated dramatcally durng the perod under consderaton, leadng to a sgnfcant rse n export volume and prce. The compettveness effect, on the other hand, attests the mpressve progress Vetnam has made towards reformng ts trade system snce the early 1990s. However, decomposton for the two sub-perods reveals a sgnfcant dfference n the shares of determnng factors. Durng the frst sub-perod , the compettveness effect domnated Vetnam s export growth, explanng up to 95 per cent of rsng exports, whereas the world trade effect contrbuted to only 24 per cent. Ths development attests the consderable speed of the trade reform process followng the regonal crss n md By contrast, the second sub-perod was marked by a strong growth of world mport demand (from 3 per cent per annum durng to 13 per cent per annum durng ), resultng n a rapdly ncreased contrbuton of ths factor to Vetnam s export growth. Overall, despte adverse effects of commodty and market dstrbuton, a sgnfcant dfference between actual export growth and the world trade effect durng both sub-perods and the whole perod s clearly attrbutable to a compettveness resdual effect.

22 22 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh Table 7: CMS decomposton of Vetnam's export performance durng Category USD Value Share USD Value Share USD Value Share Total change n export 5,260,619, % 13,365,044, % 18,625,664, % value World trade effect 1,256,836,258 24% 6,262,342,354 47% 5,732,922, % Commodty composton -422,051,335-8% -461,205,131-3% -1,007,568, % effect Market dstrbuton -579,982,065-11% -1,311,451,241-10% -1,458,758, % effect Compettveness effect 5,005,816,892 95% 8,875,358,300 66% 15,359,068, % Source: Authors calculatons from Comtrade statstcs. After ts WTO accesson, Chna s export growth ncreased sharply, from an average annual level of 10 per cent durng to 23 per cent durng the perod The two most mportant factors contrbutng to rsng exports are world trade and compettveness effects, wth no substantal change between the two sub-perods (see Table 8). However, Vetnam stands out for ts mpressve compettveness effect on the whole compared to Chna, albet more moderately durng The dfference n the results may be explaned by the fact that Vetnam has lberalzed ts trade regme to a consderably greater extent than Chna. In comparson, Chna s export compettveness less eroded than Vetnam s n the second sub-perod due to Chna s WTO entry and ts consequences (market access, busness facltaton, etc.). The post-wto accesson perod also wtnessed a postve contrbuton of the commodty composton effect (changng from -17 per cent to 2 per cent). Ths suggests that Chna has sgnfcantly mproved ts product composton by concentratng ts exports on commodtes n whch demand has been more dynamc than the world average.

23 Vetnam s Export to the EU 23 Table 8: CMS decomposton of Chna's export performance durng Category USD Value Share USD Value Share USD Value Share Total change n export 133,967,049, % 358,843,450, % 492,810,499,631100% value World trade effect 60,889,322,458 45% 145,478,848,897 41% 180,451,164,127 37% Commodty composton -22,828,346,829-17% 6,836,214,078 2% -25,977,701,172-5% effect Market dstrbuton -16,992,817,016-13% -56,351,535,734-16% -37,871,181,297-8% effect Compettveness effect 112,898,890,401 84% 262,879,923,377 73% 376,208,217,974 76% Source: Authors calculatons from Comtrade statstcs. Chna s case provdes strong evdence that WTO membershp wll nfluence Vetnam s export growth through a product composton effect. Further dscusson should therefore be gven to Vetnam s export structure by commodty. Ths mght also provde explanaton for the country s declnng export share to the EU n recent years. The negatve contrbuton of the commodty effect to Vetnam s export growth mples that Vetnam had concentrated on commodtes n whch the market was growng relatvely slower than the world average. An analyss of COMTRADE data shows that except crude ol, the majorty of Vetnam s leadng export commodtes under SITC 03, SITC 07, SITC 84, and SITC 85 regstered growth of mport demand at a lower rate than the average level of world demand. However, the postve move towards trade dversfcaton n accordance wth the export-led growth strategy (as shown n Table 3), s consstent wth the fndngs of the CMSbased analyss, where the commodty composton effect n the subperod , despte stll negatve, was less severe than the prevous one. To some extent, a lmted export dversfcaton (or concentraton on few mscellaneous artcles) may be among the key reasons explanng Vetnam s erodng export capacty to the EU n comparson wth other large markets. Ths may help to explan the

24 24 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh modest fall of Vetnam s export share wth the EU compared to Vetnam s export share wth the whole world. As a consequence, more attenton should be pad to ncreased export dversfcaton so that Vetnam may mprove ts access to the EU market and, at the same tme, mtgate negatve competton pressures arsen from Chna. The CMS decomposton also ponts to the negatve sgn of the market dstrbuton effect n Vetnam s exports, that s even larger than the product composton effect. Chna regstered the same negatve effect (even worse), although ts exports ncreased sharply durng the perod under consderaton. It mples that WTO accesson n 2001 dd not mprove the market dstrbuton effect as the latter stll contrbuted negatvely (about 16 per cent) to the overall export performance. Ths result ndcates that both countres concentrated ther exports on markets wth lower demand growth than the world average. As Vetnam s trade flows wth ts East Asan neghbours rapdly ncreased over the last decade, the negatve contrbuton of the market dstrbuton effect was largely due to the collapse of growth throughout the regon that began n md-1997, as well as Japan s recesson durng the perod under consderaton. Table 9 reports the average annual rates of mport growth for the 8 major tradng partners of Vetnam durng the perod Whle the frst sub-perod was marked by the East Asan crss, we can see that Japan, the US and the ROW regstered a lower mport growth than the world demand durng the second sub-perod. However, these markets accounted for 40 per cent of Vetnam s exports. Moreover, the negatve sgn of the market dstrbuton effect n the second sub-perod seems to contradct the expectaton that the Vetnam-US Blateral Trade Agreement would have a great mpact on Vetnam s export performance. Hence, the CMS analyss reveals that Vetnam and Chna had a severe problem wth ther market dstrbuton. Table 9: Growth of mports from Vetnam n of selected regons Import growth from Vetnam n per cent perod ASEAN4 CHINA NICs JAPAN OCEANIA EU15 US ROW World Source: Authors calculatons from Comtrade statstcs.

25 Vetnam s Export to the EU 25 IV. Conclusons Snce the early 1990s, Vetnam made an mpressve progress n openng ts trade system. Its trade flows ncreased rapdly over the past decade due to Vetnam s partcpaton n blateral and regonal trade agreements. In addton, the comprehensve ncrease n ts export market shares attest the successful mplementaton of ts outward-orented growth strategy. In order to deepen understandng our of Vetnam s export performance, ths paper uses the CMS approach to nvestgate the nfluence of separate crucal factors. The major data source s the COMTRADE database, from whch mport data of reportng countres durng the perod are compled by 2-dgt SITC product categores and grouped for 8 major tradng partners. The perod under consderaton s splt nto two sub-perods and n order to capture the mpact of the Vetnam-US Blateral Trade Agreement. The quanttatve analyss s also conducted for Chna to compare the fndngs and to learn lessons from Chna s post-wto accesson. The emprcal results suggest that Vetnam s strong export performance can be attrbuted to favourable factors. Among them s the rapd ncrease n world mport demand. Over the perod , the growth rate of world trade nfluenced Vetnam s export performance to a large extent wth a postve contrbuton n both sub-perods. However, despte adverse effects of commodty and market dstrbuton, a sgnfcant dfference between the actual export growth and growth of world trade durng both sub-perods and as well as n the whole perod s clearly attrbutable to a resdual compettveness effect. Ths postve compettveness effect s lnked to the mpressve progress of Vetnam n reformng ts trade system snce the early 1990s. The negatve sgn of commodty composton effect reveals that the majorty of Vetnam s exports reman resource-based and labour-ntensve products and, n fact, world demand for those commodtes tends to be low. In addton to mantanng current leadng export sectors, the negatve commodty composton effect may suggest that n a longer term perspectve, Vetnam should thnk of expandng captal ntensve, as well as more advanced endproducts. Wth regards to labour-ntensve ndustres, especally those facng strong competton from Chna, Vetnam needs to rase labour productvty and to mprove knowledge content n fnal products. Although the commodty composton effect was stll

26 26 Th Anh-Dao Tran, Tr Thanh Vo, Hen Mnh Dnh, Anh Duong Nguyen, Then Hoang Pham and Quang Long Trnh negatve, we could see a sgn of mprovement n the export commodty structure n the sub-perod In ths context, t should be noted that the level of dversfcaton of Vetnam s export to EU markets lags behnd that of the country s export to the world market as a whole, whch may be one of the reasons explanng the decrease of Vetnam s export share to the EU n recent years. Therefore, there exsts a consderable potental for upgradng Vetnam s export performance through product dversfcaton. The negatve contrbuton of the market dstrbuton effect to Vetnam s overall export performance suggests that there s an ample scope for mprovng market dversfcaton beyond large markets lke Japan, the EU and the US, whch reman the man export markets for fnal goods. Market strengthenng and expanson should take nto account the mportant contrbutons of trade promoton and trade negotatons wth the proactve supports of the government, n lne wth the nternatonal practce. The strong emergence of Chna as a huge export machne gves a clear message, namely that the less developng countres may be margnalzed and cannot compete wth hm unless they pay due attenton to Chna-nduced challenges. Thus, even though Vetnam recently acheved hgh growth rates, there s no guarantee that t wll be able to sustan such hgh growth n the future, unless t mproves ts compettveness as nternatonal ntegraton proceeds. Opportuntes of Vetnam s WTO accesson heavly depend on how the government succeeds n changng ts ndustral structure towards more value-added products. References ActonAd and Lefaso (2006), Half of A Mllon Vetnamese Footwear Jobs at rsk: where s the balance between trade and development?, ActonAd Internatonal Vetnam and Vetnam Leather and Footwear Assocaton, ActonAd Vetnam Publcatons: Hano, May. Asan Development Bank (ADB) Insttute (2002), Dd East-Asan Developng Economes Lose Export Compettveness n the Pre- Crss 1990s?, Research Paper Seres No. 34, Asan Development Bank Insttute, Tokyo.