Source: The author’s computation based on COMTRADE of UNSD and IMF Direction of Trade Statistics.
Figures 1 and 2 provide overall picture of Vietnam and Singapore’s trading relations with ASEAN and with the rest of the world.
Figure 1 shows that after joining AFTA in 1996, Vietnam’s trade with ASEAN countries has increased. However, its trade with the rest of the world has increased much faster. This leads to the situation where the ratio of Vietnam’s trade with ASEAN to its total trade has declined overtime.
In the case of Singapore, the picture is different. Singapore’s trades with ASEAN and the rest of the world have increased overtime. However, Singapore’s trade with ASEAN countries has increased faster than its trade with the rest of the world. Therefore, the share of Singapore’s trade with ASEAN in its total has increased.
Obviously, the share of Vietnam-ASEAN trade/Vietnam-world trade has declined, whereas the share of Singapore-ASEAN trade/Singapore-world trade has increased moderately. This means that, compared with Singapore, Vietnam is more dependent on the world market. In other words, after joining AFTA, Singapore has been able to trade with ASEAN countries more than has Vietnam. Several factors are believed to contribute to this phenomenon.
Patterns of trade: The trade pattern between Vietnam and ASEAN as well as between Singapore and ASEAN is given in Appendix 1. As data reveal, most of the products for which Vietnam have comparative advantage are the ones that other ASEAN countries also have comparative advantage. This indicates that Vietnam and other ASEAN countries export and import similar products. There are only four product categories (codes 42, 50, 63 and 65) that Vietnam exclusively has comparative advantage. However, the share of Vietnam’s exports in total ASEAN-6’s exports of these products to ASEAN market is minimal, equal or less than 7.1 percent. In short, the pattern of trade between Vietnam and other ASEAN countries are competing.
Because of the competing pattern of trade, Vietnam’s exports have to compete with other ASEAN countries’ exports for ASEAN markets. In addition, the ASEAN market is relatively small. Therefore, Vietnam remains more dependent on the world market. In contrast, the structure of trade between Singapore and ASEAN countries is rather complementary. For the products that Singapore has comparative advantage, the share of Singapore’s exports in ASEAN-6’s exports of those products to ASEAN is relatively high.
It is obvious that countries with similar RCA profiles are unlikely to have high bilateral trade intensities unless intra-industry trade is involved12. Therefore, it is important to evaluate the intra-industry trade between Vietnam and ASEAN, and between Singapore and ASEAN. Vietnam’s and Singapore’s intra-industry trade with ASEAN is reported in the Appendix 2.
According to the Appendix 2, Vietnam has relatively high level of intra-industry trade with ASEAN for some product categories. However, the share of Vietnam’s trade in total ASEAN’s trade for these products with ASEAN is small.
Different tariff rates: Tariff rates applied by Vietnam and Singapore according to the AFTA/CEPT scheme are summarized in Table 4. It is clear that Singapore’s economy was already open to ASEAN countries’ exports even before the establishment of AFTA. However, ASEAN countries’ economies were not as open to Singapore as was Singapore’s economy to ASEAN countries. So tariff reduction under the framework of AFTA means that ASEAN economies are slowly becoming more open to Singapore. Hence, Singapore is able to trade more with ASEAN countries. The picture for Vietnam is quite different. Vietnam’s economy was not as open to ASEAN economies as was Singapore’s economy. Hence, tariff reduction under AFTA enables Vietnam to import more from ASEAN countries. But, as indicated above, Vietnam’s export and import compositions are similar to those of ASEAN countries in its revealed comparative advantage. In addition, the major trading partners (ROW) seem to be more open to Vietnam than to Singapore in terms of tariff preference (Appendix 3). All these factors make Vietnam more dependent on the world market.
Low level of per capita income: most of ASEAN countries are relatively poor. According to the World Bank, Vietnam, Laos, Cambodia, and Myanmar are classified as low-income countries; Indonesia, Thailand and Philippines as low middle-income countries; Malaysia as middle-income economies; and Singapore and Brunei as high-income countries13. As indicated above, ASEAN countries export and import similar products, so intra-ASEAN trade could not be intensified unless intra-industry trade is involved. However, intra-industry trade is found to be related to market size and income because countries with large market size and high and similar levels of income per capita often have high demands for and are able to produce similar but differentiated goods.
Table 4: Average AFTA/CEPT Tariff Rates (roadmap and applied tariff)
Temporary Exclusion List
2. Applied Tariff
Source: ASEAN Secretariat; Vietnam’s Ministry of Finance.
4. Policy implication
Efforts to narrow the GDP gap: Given that the coefficient on per capita GDP difference is negative and statistically significant, countries with similar income levels tend to trade more with each other. Taegi and Oh (2001) and Zhang (2005) pointed out that intra-industry trade is found to be positively related to market size and levels of development and incomes. The possible policy implication for AFTA is to strive to narrow the income gap between its members in an attempt to take full advantage of the benefits of AFTA integration. This implication is derived from theories of demand similarity, economies of scale, and monopolistic competition, which hold that countries with similar demand patterns and income levels are likely to trade more with each other. Reversely, as Ben-David (1993, 1996), Ben-David and Kimhi (2004), Cyrus (2004), and Sachs and Warner (1995) pointed out, we expect that increased intra-ASEAN trade will help converge per capita incomes among ASEAN countries.
Improvement of social infrastructure: Given the statistical significance of the coefficient on log DISTij in the estimated models, it is expected that trade between AFTA members will increase following a comprehensive development of transport infrastructure, especially among the least developed ASEAN countries. This infrastructural development will lead to a reduction in the economic distance between the integrating countries. Thus the improved infrastructure would increase intra-AFTA trade. This estimated trade creation should not have consequential effects on the global trading system.
Lock-in domestic reforms:The coefficient on AFTAij for Vietnam is negative, while for Singapore it is positive. It seems that a membership in AFTA is more important to Singapore than to Vietnam. This could be due to the fact that Singapore moved quickly to establish itself as a trade and investment partner of these countries once it was included in the AFTA. For Vietnam, to fully exploit the preferential treatment among AFTA member countries, a firm commitment to locking-in domestic reforms including privatization, deregulation, transparent bureaucracies, efficient education system, and a systematic legal system are required.
AFTA as a building bloc: On the effect of AFTA on the multilateral trading flows, the model revealed no effect of trade diversion from AFTA. Overall, it is estimated that AFTA is likely be a building bloc for a global FTA. Even though the coefficient for AFTAij is positive and statistically significant for Singapore, it does not mean potential trade diversion. Instead, in absolute terms, Singapore’s trade with the rest of the world is increasing faster than its trade with AFTA countries. Similarly, Vietnam’s trade with AFTA countries has increased, but its trade with the rest of the world has increased more rapidly.
Using the gravity model, this paper analyzed the effects of AFTA on the trade flows of Vietnam and Singapore. The empirical results of the regression model showed a number of robust findings:
First, the model revealed no trade diversion following integration. The non-discriminatory nature of ASEAN is reflected in the fact that both Vietnam’s and Singapore’s trade with the rest of the world after joining AFTA has increased faster than their trade with ASEAN countries. Thus AFTA are likely to be a non-discriminatory trade bloc, moving faster toward a more integrated world economy. In fact, while efforts to enhance intra-Asian integration may be desirable, regional integration cannot be a substitute for multilateral and unilateral liberalization.
Second, trade has not increased immediately as fast as it should because of dissimilarities in income levels, demand patterns, infrastructures and trade policies (e.g. tariffs). AFTA economies will have to map out policies and strategies to bring about convergence in their income levels in order to obtain the maximum benefits of AFTA.
Third, trade distance remains a hindrance to trade flows. Integration and globalization have enhanced communication, broken down cultural barriers, and facilitated transactions. However, they have not reduced the importance of physical distance. Distance remains a barrier to trade even though technological innovations continue to spark reductions in transport costs.
Fourth, countries speaking common languages tend to trade more since they can facilitate easier transactions and reduce the cost of doing business (e.g. translations and disputes). Countries also tend to trade more with their ex-colonizers since they are more familiar with the cultural backgrounds and modes of doing business.
Finally, differences in per capita income among trading partners continue to have negative impact on bilateral trade. Efforts to narrow the GDP gaps among members, improving social infrastructure, and continued domestic reforms are suggested as remedies for the obstacles to freer flows of trade in the region.
Appendix 1: Revealed Comparative Advantage (2001-2005 Average) and the Share of Individual Country’s Exports in ASEAN’s Total Exports to ASEAN
Revealed Comparative Advantage for ASEAN-6
Share of Individual Country’s Exports in ASEAN’s Exports to ASEAN