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A Quantitative evaluation of Vietnam's accession to the ASEAN Free Trade Area

  • Fukase, Emiko
  • Martin, Will

Vietnam's accession into the ASEAN Free Trade Area (AFTA) has been an important step in its integration into the world economy. The authors use a multi-region, multi-sector computable general equilibrium model to evaluate how different trade liberalization policies of Vietnam and its main trading partners affect Vietnam's welfare, taking into account the simultaneous impacts on trade, output, and industrial structure. They conclude that: A) The static economywide effects of the AFTA liberalization to which Vietnam is currently committed are small. On the import side, the exclusion of a series of products from the AFTA commitments appears to limit the scope of trade creation, and the discriminatory nature of AFTA liberalization would divert Vietnam's trade from non-ASEAN members. B) Vietnam's small initial exports to ASEAN make the gains from improved access to partner markets relatively modest. Since Singapore dominates Vietnam's ASEAN exports and initial protection in Singapore is close to zero, there are few gains from preferred status in this market. C) When Vietnam extends its AFTA commitments to all of its trading partners on a most favored nation basis, its welfare increases substantially - partly because of the greater extent of liberalization partly because the broader liberalization undoes the costly trade diversion created by the initial discriminatory liberalization, and finally, because of the more efficient allocation of resources among Vietnam's industries. D) AFTA, APEC, and unilateral liberalizations affect Vietnam's industries in different ways. AFTA appears to benefit Vietnam's agriculture by improving its access to the ASEAN market. E) Broad unilateral liberalization beyond AFTA is likely to shift labor away from agriculture and certain import-competing activities toward relatively labor -intensive manufacturing. Reduced costs for intermediate inputs will benefit domestic production. These sectors conform to Vietnam's current comparative advantage, and undertaking broad unilateral liberalization now seems a promising way to facilitate the subsequent development of competitive firms in more capital- and skill- intensive sectors. By contrast, more intensive import competition may lead some import substitution industries (now dependent on protection) to contract. F)The higher level of welfare resulting from more comprehensive liberalization implies that the sector protection currently given to capital-intensive and strategic industries is imposing substantial implicit taxes on the rest of the economy. G) All of the above suggests that AFTA should be treated as an important initial step toward broader liberalization. Binding international commitments in AFTA and, in due course, at the World trade Organization can provide a credible signal of Vietnam's commitment to open trade policies that will help stimulate the upgrading of existing firms and investment in efficient and dynamic firms.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2220.

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Date of creation: 30 Nov 1999
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Handle: RePEc:wbk:wbrwps:2220
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  1. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  2. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, vol. 35(71), pages 226-238, 08.
  3. Diego Puga & Anthony J. Venables, 1995. "Preferential Trading Arrangements and Industrial Location," CEP Discussion Papers dp0267, Centre for Economic Performance, LSE.
  4. Martin, Will J. & Warr, Peter G., 1994. "Determinants of agriculture's relative decline: Thailand," Agricultural Economics, Blackwell, vol. 11(2-3), pages 219-235, December.
  5. Huff, Karen & Thomas W. Hertel, 2001. "Decomposing Welfare Changes in GTAP," GTAP Technical Papers 308, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  6. Puga, Diego & Venables, Anthony J, 1999. "Agglomeration and Economic Development: Import Substitution vs. Trade Liberalisation," Economic Journal, Royal Economic Society, vol. 109(455), pages 292-311, April.
  7. Martin, W. & Winters, L.A., 1995. "The Uruguay Round and the Developing Countries," World Bank - Discussion Papers 307, World Bank.
  8. repec:cup:cbooks:9780521586016 is not listed on IDEAS
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