-
12. Vietnam's Integration into AFTA: Theoretical and Empirical Perspectives
- ISEAS–Yusof Ishak Institute
- Chapter
- Additional Information
Vietnam’s Integration into AFTA 283© 2001 Institute of Southeast Asian Studies, Singapore 283 12 Vietnam’s Integration into AFTA: Theoretical and Empirical Perspectives1 CAROLYN L. GATES Since the introduction of doi moi (renovation) in 1987, Vietnam has progressively opened itself to international market economies. Trade reform in Vietnam has been accelerated by its integration into the Association of Southeast Asian Nations (ASEAN) and the ASEAN Free Trade Area (AFTA). By January 2006, Vietnam will acquire full accession to AFTA, which requires all ASEAN members to reduce tariffs to 0-5 per cent on all goods traded among member economies, eliminate non-tariff barriers, and dismantle obstacles to trade among ASEAN in other ways. Vietnam’s trade deregulation is prompting disparate responses from various segments of the economy and state. One prevalent reaction is that trade deregulation and restructuring are no more than external obligations that are essential to further other Vietnamese objectives. They are rarely viewed as opportunities to increase the competitiveness of domestic enterprises and industries. These attitudes derive partly from the reality that trade reform and economic opening entail demanding changes in a relatively short period of time and sometimes high immediate adjustment costs, while the realization of potentially substantial benefits from the process is likely to require a much longer time horizon. The impact of trade deregulation on the economy in the medium run is more difficult to assess. It can be assumed that Vietnam will be very different in six to seven years from today: it is likely to have enjoyed real economic growth of 4–5 per cent per annum for more than a decade and half; it can be expected to produce more ISEAS DOCUMENT DELIVERY SERVICE. No reproduction without permission of the publisher: Institute of Southeast Asian Studies, 30 Heng Mui Keng Terrace, SINGAPORE 119614. FAX: (65)7756259; TEL: (65) 8702447; E-MAIL: publish@iseas.edu.sg 284 Carolyn L. Gates© 2001 Institute of Southeast Asian Studies, Singapore competitive and diversified goods in a marketized economy; and it will comprise a market of at least 85 million people, inter alia. Trade reform, therefore, must be placed in the context of Vietnam’s dynamic economic environment. This chapter will examine theoretical and empirical issues salient to Vietnam’s trade liberalization under AFTA, the potential adjustment costs and dislocationary effects of trade restructuring, and the long-run opportunities and challenges that this openness may present. It is organized as follows. The first section examines various theoretical perspectives on trade and their applicability to Vietnam. The following two sections discuss Vietnam–ASEAN trade and Vietnam’s integration into AFTA. The issue of trade deregulation and its impact on structural change in Vietnam is the subject of the fourth section. The chapter continues by discussing the potential effects of trade liberalization on Vietnam’s industrial competitiveness. The fifth section examines the relationship between fiscal performance and tariff reduction in Vietnam. Concluding remarks are presented in the final section. Trade Theory, Models, and Approaches We will first examine theories and methodologies which are most appropriate to analyse Vietnam’s trade policies, liberalization process, and their effects on the economy. Is traditional trade theory most suitable for this task? Is new trade theory germane to Vietnam’s conditions? While the grand tradition of trade theory has embraced Ricardian comparative advantage, new trade theory concentrates on Smithian specialization and increasing returns. Traditional trade theory answers the basic question on the “why” of international trade in a way that was generally accepted as conventional wisdom until the 1980s: nations trade because they are different, whether in resources, technology, tastes, or other variables. New trade theory does not reject that answer, but adds other reasons for trading: firms may wish to trade to take advantage of specialization, because of economies of scale and increasing returns in production, inter alia. Paul Krugman argues: conventional trade theory views world trade as taking place entirely in goods like wheat; new trade theory sees it as being largely in goods like aircraft. Since a good part of world trade is in goods like wheat, and since even trade in aircraft is subject to some of the same influences that bear on trade in wheat, traditional theory has by no means been disposed of completely. Yet the new theory introduces a whole set of new possibilities and concerns (Krugman 1994, pp. 1–2). It is evident in the case of Vietnam, however, that most of its trade at its current stage of development is in goods...