The Effect of Bilateral Trade Agreement on Vietnamese Firms - Research Proposal Example

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The Effect of Bilateral Trade Agreement between Vietnam and the U.S.A on Medium and Small Viet se firms That Export goods to the U.S.A Table of Contents Table of Contents 2 4.Baomoi (n.d) Businesses urged to anticipate difficulties in penetrating US market retrieved on September 12, 2011 from http://en.baomoi.com/Info/Businesses-urged-to-anticipate-difficulties-in-penetrating-US-market/3/128372.epi 21 8.Department of Primary Industries (2011) Analysis of the Food Sector in Vietnam Opportunities for Victorian Exporters retrieved on September 12, 2011 from http://new.dpi.vic.gov.au/agriculture/investment-trade/market-access-and-competitiveness/markets/vietnam/analysis-of-the-food-sector-in-vietnam 22 9.International Law (2011) Vietnam: VN-US Bilateral Trade Agreement Takes Effect retrieved on September 12, 2011 from http://www.mondaq.com/article.asp?articleid=15025 22 Abstract Few studies have examined the impact of the Bilateral Trade Agreement (BTA) in 2000-2001 between Vietnam and USA on Vietnamese firms. This paper analyzes the effects of the BTA on small and medium sized Vietnamese firms that exported to the US market. Both qualitative and quantitative methodologies have been used for research, relying on secondary data sources, macroeconomic and firm level. The signing of the BTA resulted in a significant increase in the value of Vietnamese exports to the USA during the years following the agreement. The paper investigates how the surge in the Vietnamese export sector has encouraged more small and medium scale enterprises in Vietnam to enter the export market. The microeconomic data also indicates that expanded export opportunities in Vietnam had a favorable impact on the production and investment of indigenous firms. Introduction In 1995, Vietnam became a member of the Association of Southeast Asian Nations (ASEAN). On 13 July 2000, the country signed a BTA with the USA: the agreement went into effect on 10 December 2001. This agreement was part of the ongoing economic reform process in Vietnam and contributed significantly towards the country gaining membership in the World Trade Organization. In 2007, the US Congress approved a Permanent Normal Trade Relations (PNTR) agreement with Vietnam. This paper analyzes the influence of the signing of the BTA on the performance of domestic Vietnamese small and medium scale enterprises (SMEs) that were engaged in exporting to the US market. The SMEs occupy a significant position in the economy of Vietnam and it is important to know the effect of the BTA on SMEs. The paper first studies the growth rates of production, investment and employment of these Vietnamese firms before and after signing the BTA. The studies were based on the results of a survey which had earlier been conducted by two Vietnamese Agencies and one US Agency. Then, the paper itself conducts two statistical tests of its own to empirically analyze the effect of the BTA on the SMEs in the Vietnamese economy. The findings of the tests, show the BTA has caused the value of Vietnamese exports to the US market to significantly increase from 2001 onwards which in turn has caused a greater number of Vietnamese SMEs to enter the export market. Therefore, the paper indicates that there is a lot of potential to be tapped in the export sector of Vietnam. As the case of the BTA has shown, Vietnamese firms are prepared to enter the export market and leverage expanded export opportunities with foreign countries. For this, Vietnam has to search for new trading partner countries and look to enhance its trade relations with them as it has done with the USA. At the same time, Vietnam has to maintain its existing trade relationships with its current trade partners. Only then, can Vietnam’s export sector serve as an engine of growth for its overall economy. (Abbot, et al, 2007, p-2; Burmeister n.d; Martin 2009 p-2; McCaig and Pavcnik, 2011, p-2) Literature Review The entire literature can be segregated into two types: the studies of the impact of the BTA on the Vietnamese economy as a whole and the analyses the effect of the agreement on Vietnamese firms. A vast collection of literature describes the BTA 2000-2001 and its effects on the Vietnamese economy. Very little published research has delved into the impact of the BTA on Vietnamese firms and this paper attempts to bridge this gap in literature. STAR-Vietnam’s professional report (n.d) analyzes the impact of the BTA on the bilateral trade between Vietnam and USA from 2002 onwards. The report is listed in three main parts: Vietnam’s Trade and Foreign Investment Policy, the Effect of the BTA on Bilateral Trade and the Effect of the BTA on Vietnamese businesses. Abbott, et al (2008) described Vietnam’s past trade agreements with its different trading partners and have enumerated the effects of those agreements. The authors described the nation’s historical policy and trade and analyzed Vietnam’s trade agreements with the help of an economic model. In a previous paper (2007), Abbot et al analyzed how Vietnam’s past trade agreements with its trading partners contributed to gaining membership in the World Trade Organization (WTO). Burmeister (n.d) also dealt with the same issue. He identified steps that Vietnam has taken in the field of trade and commerce in order to gain membership of the WTO. Business in Vietnam (n.d) described significant changes in the trade outlook of Vietnam with the BTA. Following the BTA, the USA encouraged exports from the country by reducing the import duties levied on certain Vietnamese export items. Comparatively, few papers have delved into the impact of the BTA on Vietnamese firms. There is an acute shortage of microeconomic data reflecting how Vietnamese firms were affected by the BTA. Baomoi (n.d) has enumerated the difficulties encountered by the Vietnamese export firms while entering the US export market. Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency and the US Agency for International Development (USAID) Funded Support for Trade Acceleration (2007) published an elaborate paper on the five-year impact of the BTA on Vietnam’s economy as well as its firm level economy. The researchers conducted both qualitative and quantitative research. On a larger level, it analyzed the impact of the BTA on the trade and economic parameters of the country. Alternatively, they conducted a firm level survey to gauge the effects of the Agreement on the production, investment and employment levels of Vietnamese firms. Though a considerable amount of literature exists on the BTA between Vietnam and the USA, there is still scope to engage in research in other relevant areas. This is especially true foe research on the effect of the BTA on Vietnamese firms and on the future export potential of Vietnam to US markets. Identifying and studying the prospective export markets would provide important information for more firms to enter the export sector and explore potential export opportunities. Methodology Three data sources are used to determine the effect of the signing of the BTA in 2000-2001 on the Vietnamese SMEs: (1) First, data on the total value of Vietnamese exports to the US market from 1995 – 2010 have been taken from the General Statistics Office of Vietnam (General Statistics Office of Vietnam 2011). These data are shown in Table I and plotted in Figure I. Trends are analyzed for significant fluctuations from year to year. This method has helped to determine the difference in performance of Vietnamese exports to USA before and after signing the BTA in 2000-2001. (2) The values of Vietnamese exports of manufactured goods to the USA from 2002 through -2006, from Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency and USAID Funded Support for Trade Acceleration 2007 (See Table 2 and Figure 2) help to evaluate the performance of exports of Vietnamese manufactured goods to the US market with the BTA. (3) This paper uses extensive data on 171 firms in Ho Chi Minh City – from a survey conducted by Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency and the USAID Funded Support for Trade Acceleration – to analyze the effects of the BTA in the following ways: (a) That study classified firms according to their export status and noted the number of firms in each category during 2000-2003. These data make it possible to analyze whether the BTA in 2000-2001 encouraged more firms to export to the US market. (b) That study also gathered data on the annual growth rates of sales, exports, equipments, assets and working capital of these 250 firms for 2001 and 2002. This examines whether the BTA has had a significant effect on the above parameters of these firms. (c) Finally, that study included data on the annual growth rates of skilled labor, unskilled labor and wages in those firms in 2001 and 2002. This allows the paper to measure the effects of the BTA on the above three parameters of the firms. The main focus of this paper is (3) (a), (b), (c) above to learn the effects of the BTA on the number of Vietnamese firms entering the export market, on the production and investment related variables of the firms and also on the employment and wages related parameters of the organizations. This paper conducts two statistical tests on data taken from the firm level survey. The total value of Vietnamese exports to the US market from 2000-2003 is the independent variable: “X” and the number of SMEs operating in the export market during the same period is the dependant variable: “Y”. First the correlation coefficient between the two variables is determined. The value of the correlation coefficient is a measure of the strength of association between the two variables. This test helps to infer whether there was a “cause-effect” relationship between the growth in the value of Vietnamese exports to USA during 2000-2003 and the number of Vietnamese SMEs operating in the export market during the same period. Finally, considering the same parameters as the independent (X) and the dependent variable (Y), a Linear regression test between the two variables helps to determine whether there is a linear relationship between the two variables to analyze whether “the growth in the value of the Vietnamese exports to USA during 2000-2003” and “the increase in the number of Vietnamese SMEs operating in the export sector during the same period” followed any linear pattern. Yi = ? + ?Xi + ???????????????????????????????????????? where Yi: number of SMEs operating in the Vietnamese export sector in 2000-2003 ?: the constant term Xi: value of the Vietnamese exports to the USA during 2000-2003 ?: the error term Data Description Following the signing of the BTA between Vietnam and USA in 2000, the bilateral trade between the two countries increased from $ 900 million in 1999 to $15.7 billion in 2008 (Martin 2009 p-2). Table 1 and Figure 1 below shows the growth in Vietnamese exports during 1995-2010 (General Statistics Office of Vietnam 2011) Figure 1. Vietnamese Exports to USA, 1995-2010 ($ millions) These data are ideal to ascertain the effect of the BTA on the export sector. Vietnamese exports recorded a significant rise of from $ 1065 million in 2001 to $ 2453 million in 2002. This can clearly be attributed to the BTA between the Vietnam and USA in 2000-2001. From 2002 onwards, Vietnam’s exports to the USA have recorded significant values through 2010, the latest data for which complete data are available. (US Department of State 2011; CRS Report for Congress 2011 p8; The World Bank 1998; Department of Primary Industries 2011, Nguyen and Ezaki 2006; Mc Cargo, 2004, p.77; International Law 2011; Martin 2009 p 2) Firm Level Data The objective of the Ho Chi Minh City survey of 250 firms was to determine the effect of the BTA 2000-2001 on the firms’ production, investment and employment level. The surveyors streamlined the sample from 250 to 171 firms, eliminating unwanted and anomalous data. All 171 firms belonged to the manufacturing sector. Of these, 60%, could be classified as small and medium-scale enterprises (SMEs) while the remaining 40% were large businesses. Thus, the sample could be said to be representative of the SMEs. Over 80% of the firms declared that they were engaged in exporting activities, out of which half of them exported to the market of USA. Thus this was an ideal sample of firms to carry out subsequent research. (Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency and the US Agency for International Development-Funded Support for Trade Acceleration (STAR) Project 2007 p-93; Kokko, Sjoholm 2005) All the firms in the sample belonged to the manufacturing sector. Therefore, it was important to first analyze the export performance of this sector post the BTA. Vietnam’s exports of manufactured goods to the USA during 2002-2006 were studied from Table 2 and Figure 2, below: Year Table 2: Vietnam's Manufactured Exports to the USA ($ millions) 2002 1400 2003 3280 2004 3966 2005 4944 2006 6357 (Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency, US Agency for International Development Funded Support for Trade Acceleration (STAR Project) 2007 p-39) Figure 2. Vietnam's Manufactured Exports to the USA, 2002-2006 ($ millions) Vietnam’s exports of manufactured goods to the USA have reported steady increases in all the years following 2002. The manufacturing sector of Vietnam has experienced a surge in exports post BTA. The firm level data reveals whether the signing of the BTA (which resulted in an increase in Vietnamese exports, more specifically which also resulted in a rise in exports of manufacture goods has had an impact on the performance of the firms. Results (1)The first set of macroeconomic data on the Vietnamese exports to the USA from 1995-2010 exhibits a marked increase in export value after 2001, i.e. after the signing of the BTA in 2000-2001. It can be inferred that Vietnam strengthened its export orientation after 2001. (2)The second set of macroeconomic data regarding the performance of the Vietnamese manufactured sector exports to the USA from 2002-2006 also reveals an increase in the value of manufactured goods exported to the US market in the years subsequent to 2002 i.e. post the BTA. (3)The results of the firm level survey can be studied in three parts: (a) Effect of the BTA on the number of SMEs entering the export sector The Number of Firms Classified by their Export Status: 2000 2001 2002 2003 1.SMEs exporting to US and non US Market 16 19 40 44 2.Total Firms exporting to US and non US market (including the SMEs) 23 26 58 67 3.Firms exporting to non US market 81 90 80 70 4.Firms not exporting 67 55 33 34 Total Firms 171 171 171 171 (Firm Level Survey, Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency, US Agency for International Development Funded Support for Trade Acceleration (STAR Project) 2007 p87) From the data in the above table, it can be seen, that after the signing of the BTA between Vietnam and USA in 2000-2001, the SMEs in the Vietnamese economy (1) shifted from only operating in the domestic market to functioning in the export market as well, especially exporting to the USA. The number of firms exporting to the US market (2) increased significantly during the first two years of the BTA while the number of firms exporting to countries other than the USA (3) remained constant. The average number of firms that only catered to the domestic economy (4) declined by almost half in 2002 and 2003. This indicates that the BTA encouraged Vietnamese firms to foray into the export business. However, following the BTA, there was no significant export diversion i.e. there were not many firms which shifted from exporting to non US markets to exporting to the US market. (b) Effects of the BTA on the Production and Investment of the Firms The firms were divided into four categories according to their export status and their annual rates of growth of sales, exports, equipment, assets and working capital in 2001 and 2002 were recorded i.e. just before and after signing the BTA. This was the most effective way to determine the effects of the BTA on the performance of the firms. Any impact of the BTA would definitely be reflected in the firms’ data in 2002. The Annual Growth Rates (%) in Sales, Exports and Assets of the Firms classified according to their Export Status Total Sales Total Exports Equipment Assets Working Capital Total Firms 2001 2.3 19.9 15.3 10.8 13 2002 31.3 35.7 14.6 18 24.9 Firms exporting to the non-US market 2001 8.4 9.5 12 10.1 29 2002 14.4 2.9 24.5 16.6 16.1 Firms exporting to the US and non-US market, before and after BTA 2001 24.5 30.6 10.4 12.8 16.1 2002 25.8 22 22.4 25.7 21.8 Firms exporting to the USA only after BTA 2001 7.2 -7.3 11 8.5 24.9 2002 57.3 144 48.7 23.9 58.7 Firms that do not export 2001 -5.7 16.4 10.7 6.9 2002 30.4 -0.3 13.8 20.1 (Firm level Survey, Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency, US Agency for International Development Funded Support for Trade Acceleration (STAR Project) 2007 p88) The data in the above table indicates that all categories of firms experienced considerable growth in their sales, exports, equipments, assets and working capital in 2002, the first year after signing the BTA. The Vietnamese firms that started exporting to the US market for the first time in 2002 reported the highest growth rates. (c) Effects of the BTA on the Employment of the Vietnamese Firms The firms were again divided into four categories according to their export status and their annual rates of growth of their skilled workers, unskilled workers and the wages were recorded for 2001 and 2002. If the BTA had any impact on the employment and wage levels of the firms, it would be reflected in the firms’ data in 2002. Annual Growth Rates (%) in Employment and Wages of Firms Classified by their Export Status (Firm level Survey, Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency, US Agency for International Development Funded Support for Trade Acceleration (STAR Project) 2007 p89) The data in the table shows that the BTA had a modest effect on the employment growth of the Vietnamese firms. However, the results of this effect may be restricted by the limitations of the research. Firms may not have been forthcoming in revealing their true employment data. Also, the survey was conducted for only 2002, the first year after signing the BTA. Thus the research does not consider the effects of the BTA on the production, investment and employment of the sample firms during the subsequent years of signing the BTA. (4) Whether the signing of the BTA in 2000-2001 and the subsequent rise in Vietnamese exports encouraged more SMEs to enter the export market can be determined with the help of a statistical test. The paper considers two sets of variables: Vietnamese exports to the USA (variable x) and the number of SMEs operating in the export sector (variable y) and proceeds to calculate the correlation between them. Correlation measures the strength of association between two variables which is indicated by the Correlation coefficient (R). It determines whether the variables are positively correlated or negatively correlated (ascertained by the sign of the coefficient). Usually “R” ranges from -1 to +1. The greater is the value of “R” (approaching +1), the stronger is the correlation between the two variables. Then it can be concluded, that the two variables have a cause and effect relationship between them i.e. the value of the dependant variable (y) is influenced by the value of the independent variable (x) The data for calculation is listed in the following table Years Vietnamese Exports to USA ($ millions) (x) No. SMEs exporting to US and non US Market (y) 2000 733 16 2001 1065 19 2002 2453 40 2003 3939 44 (Firm level Survey, Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency, US Agency for International Development Funded Support for Trade Acceleration (STAR Project) 2007 p87) From the data in the above table, the correlation coefficient between the two set of variables (x,y) is estimated as: R = 0.951442167 Regression Statistics Multiple R 0.951442 R Square 0.905242 Adjusted R Square 0.857863 Standard Error 5.388081 Observations 4 ANOVA   df SS MS F Significance F Regression 1 554.6872 554.6872 19.10644 0.048558 Residual 2 58.06284 29.03142 Total 3 612.75         Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 10.74099 5.115656 2.099631 0.170595 -11.2699 32.75189 -11.2699 32.75189 X Variable 1 0.009284 0.002124 4.371092 0.048558 0.000145 0.018423 0.000145 0.018423 The p-value for the coefficient of X-variable (number of firms) is less than 0.05 (0.048558) and hence the coefficient is positive and significant at 5 % level of significance. When the number of firms is regressed on the volume of exports over the period 2000-2003 (to check the impact of bilateral trade agreement) we find a significant and positive association between the two variables. Hence logically one can say that as the trade volume (exports from Vietnam to US and non US economies) increased, the number of firms moving into the export scenario also increased significantly. The value of the correlation coefficient is quite high; therefore the two variables (x, y) have a strong positive correlation between them. It can also be inferred from the statistical test that the increase in the dependant variable y i.e. the increase in the number of SMEs engaged in exporting observed during the years 200-2003 is caused by the independent variable x, i.e. by the growth in the value of Vietnamese exports to the USA (in $ million) recorded during the same period. Therefore, after signing the BTA in 2000-2001, as the value of Vietnamese exports to the USA recorded a significant increase; many Vietnamese SMEs entered the export market and started exporting to the US market as well as the other foreign market. Conclusion In 2000-2001, Vietnam signed a Bilateral Trade Agreement with the USA. This provided an impetus to the Vietnamese export sector and empirical results establish that the value of Vietnam’s exports to USA steadily increased in the subsequent years. The manufacturing sector goods occupied the most important position in the Vietnamese exports and they also recorded an increase post 2002. Vietnam’s economy is mainly dominated by SMEs. The expanded opportunities in the export sector encouraged new SMEs to enter the export market and start exporting to the US and the non US market. The growth of Vietnam’s exports to the USA also had a favorable effect on the growth of production and investment of the Vietnamese firms operating in the export sector. However, the effect of the same on the employment level of the firms was not significant. In all, the signing of the BTA had a favorable impact on the small and medium sized Vietnamese firms operating in the export market. References 1. An Assessment of the Economic Impact of the United States-Vietnam Bilateral Trade Agreement (n.d) retrieved on September 12, 2011 from http://pdf.usaid.gov/pdf_docs/PNADC703.pdf 2. Abbot P, Bentzen J, Tarp F (2009) Trade and Development: Lessons from Vietnam’s Past Trade Agreements World Development 37 (2) p 341-353 retrieved on September 12, 2011 from http://viet-studies.info/kinhte/Trade_Development_VN_Lesson.pdf 3. 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Taylor J, Brasher D (2009) Vietnamese Export Opportunities to the United States retrieved on September 12, 2011 from http://www.vvg-vietnam.com/exports.htm 18. The World Bank (1998) Rising to the Challenge retrieved on September 12, 2008 from http://www.worldbank.org.vn/rep1/rep001.htm 19. U.S Department of State (2011) Background Note: Vietnam retrieved on September 2011 from http://www.state.gov/r/pa/ei/bgn/4130.htm 20. Vietnam’s Ministry of Planning and Investment’s Central Institute of Economic Management and Foreign Investment Agency and the US Agency for International Development-Funded Support for Trade Acceleration (STAR) Project (2007) Assessment of the Five Year Impact of the U.S-Vietnam Bilateral Trade Agreement on Vietnam’s Trade Investment and Economic Structure retrieved on September 12, 2011 from http://www.dai.com/pdf/Parker_Report_FiveYearImpact_Vietnam.pdf Read More