How the day will be organised

1. Introduction to international trade economics and regional integration – focus on Vietnam and ASEAN Presenter:Dr. Mareike Meyn Ho Chi Minh City, 06 April 2016

2. How the day will be organised • Presentation: Why and what to trade, concept of comparative and competitive advantages, links between trade and development, relevance of terms of trade, overview of Vietnam’s trade pattern to identify supportive factors and challenges, concept of global value chains • Short movie and group discussion:“Made in the World” – Comparative and competitive of Vietnam and chances and challenges to move into demand-driven value chains • Presentation:Types and effectsof regional economicintegration (RI), tradepolicyinterventions, RI schemesacrosstheworld. • Group work and discussion: Commonalities and differences between selected RI schemes (NAFTA and MERCOSUR)

3. How the day will be organised (2) • Presentation: ASEAN integrationobjectives, ASEAN economicindicators and intra-regional trade, Vietnam and ASEAN, Chances and challengesof ASEAN Plus Agreements • Business perspectivesof ASEAN Economic Community (AEC) • Group work and discussion:Major characteristics, differences and commonalities of ASEAN economies and implications for ASEAN economic integration and Vietnam’s businesses.

4. Why trade? • To acquire goods and services that • cannot be produced domestically; • are inputs/investment for domestically produced goods/services; • require more inputs to produce domestically than to import. • To acquire foreign exchange • Using land, labour, capital to produce goods that you do not consume makes you poorer unless you use the foreign exchange to import more or better goods/services than could have been produced using the same land/labour/capital.

5. What should countries import? • Theory suggests that countries should: • import those goods/services in which they have a comparative disadvantage; • export those in which they have a comparative advantage. • A country has a comparative disadvantage if the opportunity cost of domestic production exceeds that of imports. • The opportunity cost of using factors of production: • to produce a good domestically is set by • the value of the goods that could alternatively have been made with these factors of production • Example of chicken raising

6. What should countries export? • The determinants of comparative advantage: • relative resource endowments; • technology, history. • What is a resource? • Anything that cannot easily be moved between countries: • Minerals, soil, climate, infrastructure, people – are all resources; • Capital is not a resource – it will flow globally to good projects. • What is a ‘relative endowment’? • The proportions of different resources compared to the proportions in every other country in the world. • Does comparative advantage change? • Yes, because it is a relative concept; • So it is continuously changing - but slowly.

7. What do countries trade in practice? Every country has a comparative advantage in something - by definition: • even a very competitive state is particularly competitive in some things; • even a very uncompetitive state is less uncompetitive in some things; • So the first state should specialise and import some things from the second state. • Practice shows that countries export the goods/services in which they are competitive. • Comparative advantage and competitiveness differ because all states use government policy to ‘distort’ trade: • allowing them to export products in which they do not have a comparative advantage; • which may stop other countries exporting products in which they do have a comparative advantage.

8. Does trade make a country richer? • Short Answer: • Yes, it makes a country richer than it otherwise would be. • More nuanced answer: • Not all countries will gain the same – some theory predicts convergence, but this is controversial. • Scale of gains will depend partly on resource endowment and partly on socio-political and institutional factors; • Global experience shows great differences in performance.

9. Links between trade and development • Standard theory of economic convergence: poor countries grow faster than rich ones as they are able to import capital and modern technologies from advanced economies • Increased volumes of trade lead to increased competition, resulting in the allocation of resources according to a country’s comparative advantages. • Increased imports of capital- and technological intensive goods stimulate the processing of innovations and new technologies, which results in increased productivity and economies of scale; • Enhanced know-how transfer from foreign cooperation • Result: poorer countries grow faster and “catch-up”, the income gap is closing over time • The standard theory therefore recommends an open trade and investment regime (e.g. Sachs & Warner

10. Links between trade and development • Critics (e.g. Rodrik): Open trade regime does not inevitably translate into economic growth: • Many small developing countries produce a narrow set of agricultural and simple manufactured products that may be produced more competitively by large developing countries; • Oversupply of these goods results in a downward trend on prices and the deterioration of terms of trade between South and North; • Risk of “immiserizing growth” (Bhagwati): increased export quantities do not compensate for terms of trade losses but actually contribute to a further deterioration of terms of trade

11. Terms of Trade (ToT) • ToT indicate changes in relative buying power of a country’s exports; • Refer to a export basket compared to import basket; • If export prices rises relative to import prices the ToT have improved; i.e. more import can be acquired for each export unit • Sectoral ToT show how the ratio of a sectoral type of exports (e.g. agricultural exports) develops compared to a sectoral type of imports (e.g. manufacturing imports)

12. Examples of ToT developments UNCTAD Report p. 11

13. Vietnam – Trade in Goods (in million USD) Source: ADB Key Indicators for Asia and the Pacific 2015.

16. Vietnam – Trade in Services Balance (USD million) Source: WTO Trade Policy Review, 2013

17. Trade patterns • Strong outward-oriented (export-dependent) economywithtrade in goods and servicesaccountingformorethan 170% of GDP. • Main exports: labour-intensive manufactures (clothing, shoes, electronics), seafood, crudeoil, rice, coffee, woodenproducts, machiner • Main imports: Machineryand equipment, petroleumproducts, steel, rawmaterialsforclothing/shoeindustry, electronics, plastic, automotives • Services remainthestrongestsector, accountingforabout 43% of GDP (but only 30% ofemployment) • Major servicessectors: trade, finance, real estate, tourism

18. Supportive trade factors Competitive exporter of labour-intensive manufacturing products, agriculture and fishery products Increased levels of intra-regional trade (ASEAN) and relatively well-diversified exports Average level of MFN tariff declined by more than 8% within 5 years to about 10% in 2013 (but tariff peaks remain) Large levels of FDI inflows (ca. U$ 11 billion p.a.) Large market size and improving ‚Doing Business Indicators‘ Well developed special economic zones (ca. 300), which generate more than 30% of total industrial output and employ more than 2 mio. workers Great potential for renewable energy sources (geothermal, solar, wind, waste…)

19. Challenging trade factors Labour-intensive and low value added exports dominate (textiles/clothing, machinery, food items) Labour productivity behind Thailand, Philippines and Indonesia but labour costs above Indonesia Inadequately educated labour force and access to trade finance are most problematic doing business factors Infrastructure, labour market efficiency, trading across borders (time/complexity/costs) and business sophistication are also behind major ASEAN economies Rising costs and limited capacities of trade-related infrastructure (transport, energy, roads etc.) State-owned sector still accounts for more than 35% of GDP (incl. energy, telecommunication, aviation and banking)

20. Links between trade and development The high concentration of exports increases countries’ vulnerability to “trade shocks” such as declining commodity prices or lower demand. “Buyer-driven’ value chains” (Gereffi, 2005) which have low barriers to entry in production and where (global) competition between producers is high (e.g. garments, toys but also many agricultural products) increase risk of “immiserizing growth” Countries therefore aim to enter into “Demand driven value chains” which implies engagement in value-added activities and niche products (e.g. high-tech products, development of brands/labels) What are the implications of these theoretical considerations for Vietnam…?

21. Discussion Round • In what goods and services do you think Vietnam has a comparative advantage? • Note: every country has a comparative advantage in something by definition − its disadvantage is greater in some goods than others. • In what goods and services does it have a competitive advantage? • what accounts for any difference from the answer to Q1? • Are these the right goods and services to be in – do they support a dynamic economy? • If not – what can be done by: • the government; and • the private sector?

22. Movie, Group work and questions for discussion • What are the chances and challenges for Vietnam to move into demand driven value chains? • Which products would be best suited to do so and into which markets?

23. What is Economic Integration ? • Economic integration, also referred to as regional integration, describes different ways how economies can integrate. The degree of economic integration can be classified into six stages: • Preferential Trade Agreement (PTA) • Free Trade Agreement (FTA) • Customs Union (CU) • Common Market • Economic Union • Political Union

24. WTO Rules on RTAs • Art. XXIV, GATT: formation FTAs and CU is allowed if “substantially all trade” is removed within a “reasonable length of time” and tariff setting does not exceed MFN tariffs • Interpretation: 90% within 10 years remains disputed (particularly for North-South Agreements) • Enabling Clause:Designed in 1979 (Tokio Round) to allow lower thresholds for liberalisation in agreements between “lesser developed countries” and to legalise preference systems of Developed Countries • Term “lesser developed country” not specified, remains disputed • Unilateral preferences challenged in 1993 (“Banana Dispute”) resulting in the end of EU unilateral preferences towards ACP

25. Static Effects of Economic Integration • Trade creation: Domestic products are replaced by more competitive regional products. • Effects: a) displacement of non-competitive domestic producers by regional competitors; b) positive consumer effects. • Trade diversion: Products which were formerly imported from the RoW are now imported from regional producers as their production costs are lower than those of the rest of the world plus customs duty. • Effects: a) increased producer surplus of the regional suppliers; b) negative consumer effects. • Trade creation shifts production towards the more competitive regional producers, resulting in an optimal factor allocation within the region; • Trade diversion is ‘welfare decreasing’ as it promotes inefficient production.

26. Basic Conditions for a Trade-Creative Customs Union • The CU should include a large economic area comprising many countries • The common external tariff should be lower than the average tariffs of member states before • The member states should stand in direct competition to each other, i.e. intra-industrial trade (trade in one industry) should dominate However, also a trade-creative CU can have negative implications for at least one member since domestic producer losses might be higher than domestic consumption benefits.

27. Regionalism vs. multilateralism There is fierce debate over whether regionalism is (un)supportive of multilateralism. • One arena is economic: • does an RTA create or divert trade. • Another arena is political: Are RTAs: • building blocks for multilateral policy: providing a more effective catalyst for liberalisation than WTO; or • stumbling blocks: creating new vested interests opposing multilateral reform. These debates are relevant to Vietnam because: • it is a member of a regional integration scheme (ASEAN); • It has entered into FTAs (e.g. with the EU) and is in the process of negotiating FTAs. • it might enter into FTA negotiations with developing or developed countries.

28. Dynamic effects of economic integration Economic effects: • Increased specialisation due to concentration on comparative advantages; • Economies of scale due to enlarged market; • Enhanced efficiency of resource allocation due to increased competition; consumer benefits; • Technology transfer, innovation and learning effects; • Option to reap higher levels of FDI. • Political motivations: Advanced relevance in bi- and multilateral trade negotiations, increased economic and political reputation since trade reforms are “locked-in”; increased security and stability in the region

29. Launch of NAFTA negotiations NAFTA put into force Dynamic effects of regional integration schemes (cont.) Lock-in reforms: use of an RTA to send a signal to private and public agents that there will be no recidivism (=helps to lock in reforms as in the case of WTO accession). This MAY  uncertainty and  investment, in particular foreign direct investment, as in the case of Mexico:

30. Distribution of gains and losses in regional integration schemes • A country’s cost structure of production is the decisive factor; • However, does not automatically imply that more developed countries always gain at the expense of the less developed in a regional integration scheme; • Distribution of gains and losses also depends on the economic structure of the member countries and what type of countries integrate: • RI among developed countries: Tendency to converge • RI among developing countries: Tendency to diverge

31. France Hungary world average capital/labor ratio Armenia Azerbaidjan Divergence and convergence in regional integration schemes Real Income N-N RIA: Hungary steps in between France and ROW for agricultural products = France (the richest) suffers trade diversion  income convergence S-S RIA: Armenia steps in between Azerbaïdjan and ROW for manufactured products = Azerbaïdjan (the poorest) suffers trade diversion  income divergence

32. Flanking Measures in RTAs • Imposition of quantitative restrictions Applied for certain products that are regarded as sensitive (e.g. agricultural products in specific time spans). • Imposition of non-tariff barriers (NTBs) Non-tariff barriers, such as different technical standards for industrial products and imports, different taxation for local production/import, labelling requirements, etc. • The imposition of quantitative restrictions and NTBs are in contradiction to WTO provisions for RTA schemes and have negative implications for trade creation. • An alternative is the compensation of weaker members by fiscal or transfer measures.

33. Different Types of Regional Integration Schemes • One can divide three types of regional integration frameworks: • North-North integration (e.g. EU, EFTA); • South-South integration (e.g. MERCOSUR, COMESA); • North-South integration (e.g. NAFTA, APEC, EPA) • Countries might have both offensive and/or defensive interests to join RI schemes, e.g.: • Enhanced market access and protection of economic interests (USA in NAFTA); • Maintenance of market access (ACP countries in EPA);

34. COMESA

35. Main characteristics of COMESA • South-South integration scheme following donors‘ attempts to trade facilitation (PTA); • 19 member states from North (Egypt) over Central (DRC) to Southern Africa (Swaziland) – most are classified as least developed countries (LDCs); • Political construct with very little intra-regional trade (figures range from 5-12%); comparatively high tariffs and NTBs; • Constraining factors: poor infrastructure/transport, limited trading potential, political unrest/war in and between countries, sub-regions and overlapping memberships, bilateral/regional trade deals with EU. • Integration objectives follow EU (“common market“) – however, to date not even FTA is implemented.

37. Main characteristicsof MERCOSUR • Members: Argentina, Brazil, Paraguay and Uruguay (1991) • Brazil is the economic giant, accounting for around two third of GDP and four fifth of its population; Uruguay and Paraguay account for only 2.2% and 0.8% of reg. GDP; • Integration : aims to establish common market but is to date neither fully implemented FTA nor CU. Around 80% of intra-regional trade liberalised; common external tariff established – but with ca. 800 exemptions. • NTBs (particularly for agricultural products); trade in service not yet liberalised. • Outlook: covers 60% of LA territory and ca. 45% of its population; visions: to become economic counterweight to USA. However, RI interest among MERCOSUR members hamper deeper integration.

38. Main characteristicsof NAFTA • North American Free Trade Agreement (NAFTA - 1994): USA, Canada, Mexico • No objective for deeper integration (CU, common market…) but integration covers not only trade in goods but also services, investment, protection of IPR, labour/environmental standards… • USA is economic giant, accounts for around 85% of total NAFTA trade; • Limited trade diversion due to low external tariff; but complex RoO protect sensitive industries in US/Canada (e.g. textiles) • Significant intra-regional trade growth, mainly for Mexico

39. Source: US Census Bureau: https://www.census.gov/foreign-trade/balance/c2010.html.

40. Comparison of regional integration: % of intraregional trade to total trade UNCTAD (2008): Trade and Development Report

41. Facilitateddiscussion • What arecommonalities and differencesbetween NAFTA and MERCOSUR integrationschemes?

42. ASEAN

43. ASEAN Economic Integration 1992: Establishment of ASEAN FTA (AFTA) with Common Effective Preferential Tariff (CEPT) to enter into force 2003:DecisiontoestablishASEAN Community by31 December 2015: • ASEAN Political-Security Community • ASEAN Economic Community (AEC) • ASEAN Socio-Cultural Community 2007: Adoption of Economic Blueprint; defining four pillars of AEC and 176 priority actions to serve as a guide towards AEC implementation 2009: Asean Trade in GoodsAgreement (ATIGA): consolidatedall exiting ASEAN initiatives and agreemenstowards an effective ASEAN FTA; incl. removalof non-tariffbarriers (NTBs), customsprocedures, rulesoforigin, and transparent traderules and regulations. 2009: ASEAN Framework Agreement on Services (AFTAS): graduallyliberalises intra-regional trade in services 2012: ASEAN Comprehensive Investment Agreement (ACIA): aimstograduallyestablish an integrated ASEAN investment framework

44. Implementation of ASEAN Economic Community (AEC) AEC Scorecard monitors progress with respect to four pillars of AEC: Pillar 1: Single Market and Production Base • Freedom of goods: FTA established, customs blueprint introduced but non-tariff barriers (NTBs) and trade facilitation remain a challenge • Freedom of services: Aims to eliminate restrictoins on cross-border services in four modes of supply. However, to date only limited liberalisation of priority sectors achieved. • Freedom of investment: primarily on investment protection and liberalisation, with much less to show in facilitation or co-operation. • Freedom of capital: Aims for ‘freer’ (not free) flow of capital. Slow progress with respect to financial integration. • Freedom of labour: Mutual Recognition Agreements (MRAs) have been agreed for eight professions: physicians, dentists, nurses, architects, engineers, accountants, surveyors, and tourism professionals

45. Implementation of ASEAN Economic Community (AEC) Pillar 2: Competitive Economic Environment Competition policy, consumer policy, taxation, IPR, E-commerce Pillar 3: EquitableEconomic Development Socio-economicintegration, SME development Pillar 4: Integration intothe Global Economy Coherentapproachtowardsexternaleconomicrelations, enhancedparticipation in global supplynetworks • Progress: Last publicly available AEC Scorecard was 2011, no later information on progress available. • Problematic: No sanctions for member countries when integration objectives are missed.

46. ASEAN Economic Size (in billion USD) Source: IMFas quoted in Charting Vietnam 1 H 2016 Report.

47. Major indicators of ASEAN economies

48. ASEAN Economies’ Development Indexes:Global Ranks’ Comparison

49. Merchandise ASEAN goods by major product groups (in billion USD), 2012 Source: WTO International Trade Statistics, 2013

50. Vietnam and ASEAN • Joined ASEAN in 1995 as 7th member in order to boost exports for goods and services and is today the region‘s sixth largest economy • Most trade dependent economy in ASEAN after Singapore • Classified as one of ASEAN‘s ‚lesser developed countries‘: full intra-regional tariff liberalisation postponed to 2018 • Full partipant of ASEAN‘s FTA negotiations, such as the FTAs with NZ, Japan and the Trans-Pacific Partnership Agreement. • Vietnam’s Intra-ASEAN trade reached US$39.53 billion in 2013, accounting for 15% of Vietnam’s total trade. • Vietnam‘s intra-ASEAN trade has grown significantly slower than its trade with the rest of the world (RoW)