The impact of free trade agreement on trade flow of goods in Vietnam

Abstract

This study devotes to analyze the effect of free trade agreement on Vietnam’s trade flow of goods by establishing gravity model for 184 trading partners between 1990 and 2012. Basing on the theoretical foundation and previous empirical papers, the FTA is expected to have positive relationship with trade flow of member countries. In details, two countries being in a same FTA will trade much more than those without in a same FTA. The results from the current study also find out that FTA’s estimated coefficients are consistently positive. Relating to the methodology, two main problems discussed in gravity model are endogeneity of FTA and zero-value in trade. Firstly, the thesis points out that FTA is exogenous variable in the gravity model. Secondly, sample selection model, Poisson Pseudo Maximum Likelihood, and Fixed-effect model are used to solve the zero problems in model. The empirical results from all estimation models are consistent with each other in term of sign of FTA’s coefficient. For policy implication, the thesis proposes that FTA is a good trade policy for Vietnam because it can help to improve the total bilateral trade value among FTA members. However, FTA does not impact on trade flow only, but it also has effect on other aspects of Vietnam economy such as wage structural, investment. Those issues are beyond the objective of this study.