5.1. Empirical Results
, Table 4
and Table 5
summarise estimation results of the gravity model on bilateral trade, exports and imports of Vietnam using Generalized Least Squares (GLS) method to obtain unbiased estimation due to the problem of heteroskedasticity in the data.
A glance at the result tables reveals the regression coefficients of the fundamental variables of the trade gravity model, incorporating the economic capacity of Vietnam and partner countries (Yi and Yj), the market size of partner countries (Nj) and the multilateral resistance are statistically significant at 1%. Aside from that, the impact direction of those augmented factors encompassing the real exchange rate (Reri/j), the border effect (Border) and the landlocked country (Landlocked) endorse most previous studies. Specifically, a rise in:
the per capita incomes of Vietnam and its partners.
the population of the partner countries.
the downfall of VND, could foster the bilateral trade of Vietnam. Such positive tendency is also reflected through the effect of both sharing a common border and signing a double taxation treaty.
As regards the role of regional trade agreements, while trade turnover of Vietnam with ASEAN member states as well as the ‘plus three’ partner countries under ASEAN+3 is well above average in the sample, the trade results with the EU member states remain below the average (except for exports). On the other hand, based on the coefficient of the interaction term (Bloc × Dttij), we find that the signing of double taxation treaties tends to: (i) promote Vietnam’s trade development with ASEAN and EU member countries; (ii) stimulate the import turnover from ASEAN and the ‘plus three’ partners under ASEAN+3 into Vietnam; (iii) have little or no effect on export promotion programs of Vietnam. Finally, geographical distance and the landlocked characteristic of trading partners are recognized as major multilateral resistance indicators to the development of Vietnam’s trade activities.
From the empirical analysis of the impact of double taxation treaties on Vietnam’s bilateral trade in general, exports and imports in particular with ASEAN over 16 years, notable conclusions can be drawn as follows.
First, the growth in the per capita incomes of either Vietnam or its trading partners could contribute to bilateral trade expansion (including both exports and imports); however, the effect from Vietnam’s side still plays a decisive role. Likewise, market size (as characterised by the population) of the trading partner is found to have a significant positive impact on the two-way merchandise trade. These findings are entirely compatible with those of Bergstrand
); Nho et al.
), accordingly, bilateral economic capacities and market size are deemed key drivers of external trade development. Developed countries with massive industrial production could boost exports of goods to emerging markets without difficulty, and at the same time, their high-income levels could also fuel demand for imports of goods from developing countries.
Second, in line with previous studies (Bergstrand 1985
), the geographical distance (a “multilateral resistance” component) is found to have a significant and negative impact on bilateral trade flows, whereby a 1% increase in the distance from Hanoi (the capital city of Vietnam) to a trading partner’s economic centre would lead, on average, to a 1.15% fall if this partner belongs to the ASEAN or a 1.45% fall if this partner belongs to the EU.
Third, exchange rates play a critical part in regulating trade flows. Empirical results reveal that an increase in the real exchange rate, otherwise a depreciation in the value of VND, tends to promote Vietnam’s trade growth. According to Miles
); Warner and Kreinin
), the downfall of the domestic currency would have a significant impact on both export and import prices, thus affecting the competitiveness of exports. In order to boost exports, since 2001, Vietnam has constantly strived to maintain a competitive exchange rate of VND against foreign currencies under the fixed regime (within a low bandwidth, from ±1% to ±3%). Although depreciated by nearly 20% during the Asian currency crisis, the value of VND has gradually improved with a far slighter decline since then (Figure 4
). In order to enhance trade competitiveness in the context of an ever-growing number of regional trade agreements and burgeoning trade wars, since 2016, Vietnam has decided to move to a managed floating regime with the introduction of the ‘reference central rate’ of VND per USD2
. It is strongly believed that this move to currency basket peg could help maintain monetary stability and the flexibility in monetary policy management, under which, the objective of VND devaluation could be reached in sequence, with negative external shocks being avoided.
Fourth, the border effect contributes enormously to the development of Vietnam’s bilateral commercial activities. Accordingly, sharing a border allows partner countries to benefit from trade with Vietnam, approximately 1–2% greater than countries with no border. Notably, during recent years, China has been emerging as Vietnam’s largest export and import markets thanks to distinguishing advantages in terms of geographical closeness and cultural identity between the two countries.
Fifth, the landlocked characteristic of trading partner turns out to be a multilateral resistance term in the trade gravity specification. This finding coincides with Carrère’s
) study, whereby being entirely enclosed by land might hinder the trading countries from approaching the global market by sea, which could be seriously detrimental to their economic development.
Sixth, in regard to the existence of bloc trade, whilst AFTA and ASEAN+3 comprehensive partnership framework (where Vietnam is a member) make a comprehensive contributions to Vietnam’s bilateral trade activities in general, exports and imports in particular, the influence of the EU as a political and economic union is reflected in stimulating exports of goods from Vietnam to EU member states and restricting the imports of goods from the EU into Vietnam, thereby improving the trade deficit for Vietnam. AFTA was officially established in 1992 with the primary goals of enhancing ASEAN’s competitive edge as a production base in the global market. An essential step of the AFTA agreement is to facilitate intra-regional trade by removing tariff and non-tariff barriers on a common path, taking into account varied development stages of its member states. As a result, a Common Effective Preferential Tariff (CEPT) scheme was introduced. As committed, members must bring down tariffs to 0–5% within 10 years, specifically: Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand must complete tariff reductions by 2003 (extended to 2010), for Vietnam by 2006 (extended to 2015, with flexibility until 2018). Fukase and Martin
) argue that the implementation of CEPT scheme contributes to the shift of intra-ASEAN manufacturing structure so that highly developed countries (including Singapore, Malaysia, and Thailand) would spur investment in labour-intensive sectors, concurrently benefit from AFTA’s preferential tax rates. Additionally, AFTA also boosts FDI attraction from the three strategic partners under ASEAN+3 into Vietnam in sectors that can make full use of the collective resources of ASEAN and low-cost labour of Vietnam. Such movements would facilitate Vietnam’s access to both ASEAN and ASEAN+3 markets. Compared with the EU partner countries, the improvement in bilateral trade flows of Vietnam with ASEAN and ASEAN+3 appears far more impressive since Vietnam’s foreign policy during recent years focused on promoting strategic economic and political relations within ASEAN region, in addition to the particular advantages in terms of geographical and cultural proximity or the history of trade.
Seventh, the regression results of the trade effect of tax treaties moderated by the trade blocs suggest that double taxation treaties tend to facilitate Vietnam’s two-way trade with member countries of AFTA and the EU. However, when ‘peeling off’ the story, we find that trade flows generated by the tax treaties’ effect are primarily one-way, viz., imports from developed countries into Vietnam.
Vietnam has concluded double taxation treaties with 77 countries, surpassing the number signed by Laos, Cambodia, Myanmar or the Philippines. Theoretically speaking, a tax treaty could benefit Vietnam’s economy directly from the attraction of FDI or indirectly from the facilitation of international trade. Nevertheless, according to Action Aid
), when Vietnam rolls out ‘red carpet’ for foreign investors and MNEs through the introduction of double taxation treaties and special tax incentives. This may reinforce inequalities in investment (between domestic and foreign enterprises) and commercial activities (between developed and developing countries). This can be explained as follows: Tax incentives being equal between host countries, merchandise imported from developed countries with rigorous quality standards and tax advantages from signing treaties could without difficulty approach and dominate the emerging markets. Conversely, stringent technical barriers to trade, set up by developed countries, could be useful in restricting imports from emerging countries. Besides, it is also possible to interpret the ‘imports dominance’ effect of tax treaties based on the analysis of the ‘transfer mispricing’ dynamism among foreign-invested enterprises’. Specifically:
According to Vietnam Chamber of Commerce and Industry (VCCI) statistics, the period of 2011–2016 saw a marked increase in the proportion of foreign-invested enterprises whose report losses (to relieve the tax burden), of which the net loss margin of wholly foreign-invested enterprises always outweighs that of joint venture enterprises (Figure 5
will provide an overview on shares of domestic and foreign dỉrect investment enterprises to trade volume of Vietnam, and Table 6
will give a snapshot of the business performance of FDI enterprises in Vietnam from 2001–2016 due to a limited data source and assessment). This situation arises since, in comparison to other developing economies, Vietnam’s tax treaties tend to safeguard its taxing right to a higher degree against developed countries from ASEAN or the EU3
In principle, in order to record a net loss in the income statement, foreign-invested enterprises may be in “cahoots” with their foreign affiliation under common ownership or control to increase the cost of importing materials and/or reduce the export price. Alongside the preferential treatment brought by tax treaties, some accounting adjustment of foreign-invested enterprises, for instance, to increase the input costs and/or lower export revenues, may result in (i) the ‘imports dominance’ effect and (ii) net losses in business. Under the circumstances, enterprises have benefitted from ‘double non-taxation’. A report by IMF
) showes that the MNEs can “shift their profits to lower tax jurisdiction” if the developing countries have not much experienced and effective provision to protect against. Somehow, developing with less power negotiation will accept the bilateral tax treaties—even that country cannot benefit from the agreement—due to economic reason such as increasing FDI inflow or diplomatic issues (see more detail in Zolt 2018
; IMF 2014
; OECD 2015