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Chapter
One: introduction International economics nowadays plays an essential
role in the researches of the economic growth and development. The performance
of international economic activities in general and trade activities in
particular of a country can have a significant impact on the whole economy's
performance. There have been many studies of the trade
performance and trade balance. The imbalance of trade, i.e. the surplus (excess
of export over import) and deficit (excess of import over export) is often seen
as a problem. In general, persistent trade deficit may do harm to the economy,
since trade deficit leads to foreign exchange gap and foreign exchange
scarcity. This will lower the country's position in international payment.
Therefore, improving trade balance or reducing its deficit is raised as a big
matter to the policy-making for a sound economy. Economic studies show many approaches to improving
trade balance. Among the variables having effect on trade balance such as
domestic GDP, foreign income, commodity prices and exchange rate, exchange rate
is regarded as an important factor, since it significantly affects exports and
imports of a country. In theory, depreciation of real exchange rate will
increase export and decrease import, thus improving trade balance. As a result,
in policy terms, devaluation is often used as a good instrument
suggested by IMF stabilization program for improving trade balance for
countries suffered from trade deficits. However, in practice, the result is
still ambiguous and mixed. Some countries succeeded in improving trade balance
by devaluation, but some not. In Vietnam, the exchange
rate regime has been really a problem. Since 1993, Vietnam has continuously
suffered from large trade deficits, after the only surplus in 1992. During
1993-1996, the nominal exchange rate was relatively stable while the real
exchange rate is seen appreciated[1].
The competitiveness of exports may reduce in line with the increase in real
exchange rate. Especially since 1997,
Vietnam has suffered from appreciation of its exchange rate in comparison with
those of its major trade partners. The reason is that the financial crisis in
East Asia forced affected countries to float their exchange rates with sharp
depreciation of exchange rate (from 20
per cent to 80 per cent in terms of US dollar). As a result, trade balances in
these countries in 1998 were improved Since 1994, debate on
whether Vietnam should take devaluation is still in question and some
economists have asked for devaluation. Vu Ngoc Nhung (1994) and another author
in Vietnam Banking Review (1998) called devaluation an effective instrument to
improve trade balance. Besides, Le Viet Duc (1995), Nguyen Thi Hien (1995) and
Truong Xuan Le (1995) argued that devaluation is not a solution for exports
promotion and trade improvement. Recently, some quantitative analysis in trade
balance and devaluation tried to determine a clearer relationship between trade
balance and exchange rate. However, the answers are still mixed. In addition,
the significance of coefficients is low. In some regressions, there are
problems in econometrics specification. This thesis attempts to
analyze Vietnam's trade balance and the impact of exchange rate changes to
Vietnam's competitiveness and trade (exports and imports), including
quantitative analysis. The thesis will give answers to the following questions: ·
How is the performance of trade (exports, imports and balances) in
Vietnam during 1989-1998? ·
Whether the real exchange rate in Vietnam has been overvalued and how
did the real exchange rate affect trade balance, and the structure of trade? ·
What are policy implications for improving trade balance? The remainder of the thesis
is as follows: Chapter Two is about the theoretical framework on trade balance,
exchange rate and the relationship between exchange rate and trade (exports and
imports), including theories and empirical evidences from some countries.
Chapter Three will review Vietnam's economy in the period 1989-1998 and its
major economic reforms, especially in trade. From the economic and trade
performance and the analysis of factors of exports and imports, there will be
some derivations about the relationship between trade and exchange rate. And
then, in chapter Four, the quantitative analysis will check whether or not
trade and exchange rate (both nominal exchange rate and real exchange rate)
have any relationship. From the findings in chapter Three and chapter Four,
some policy recommendations will be withdrawn in chapter Five, which will be
the conclusion for the thesis. Further explanations for the research will be
seen in the Appendix. Chapter
Two: theoretical framework I- Definitions and
theoretical framework I.1. Definitions Trade balance[3]
shows a summary of a country's trading activities, including exports (sales of
domestically produced goods and services to the rest of the world) and imports
(expenditure of goods and services bought from the rest of the world). Trade
balance is the difference between the country's value of exports and value of
imports. Trade balance may be surplus or deficit. A surplus of trade balance is
the excess of exports over imports of goods. A deficit of trade balance is the
excess of imports over exports of goods. Exchange rate is the price
of one country's currency in terms of another’s. In this thesis, exchange rate
is defined as the units of domestic currency per unit of foreign currency (e.g
VND/1 USD). The effects and
implications of exchange rate are measured by nominal, real and
effective exchange rate. The nominal exchange rate is
merely the price of one currency in terms of another’s with no reference made
to what this means in terms of purchasing power of goods/services. The real exchange rate is
the nominal exchange rate adjusted for relative prices between the countries
under consideration. RER = NER x Pf/Pd
(where: RER is the real
exchange rate, NER is nominal exchange rate, Pd is the domestic
price, and Pf is the foreign price). When RER rises, there is real
depreciation of domestic currency relatively to foreign currency. When the RER
falls, there is real appreciation of domestic currency. Real effective exchange rate
is the real exchange rate adjusted by a basket of exchange rate: REER = å WiRERI .(Where REER
is the real effective exchange rate adjusted by the basket of real exchange
rate RERi of the traded countries weighted with its share in trade Wi). REER is often considered as a more useful
measure for a country's competitiveness in the trade with the whole world but
not a single country, because it measures the competitiveness of a country in
the world of many countries. In reality, there are
several types of exchange rate regime which define how exchange rate works. The
two typical ones are fixed exchange-rate system and floating exchange rate
system. Under a float exchange rate
system, the exchange rate is free to fluctuate day by day and will fall or rise
in line with changing market conditions, serving to keep a country's balance of
payments more or less in equilibrium on a continuing basis. When exchange rate
increases or decreases, export and import will change accordingly, and so the
trade balance changes. Under a fixed exchange rate
system, the exchange rates once established will remain unchanged for
relatively long period. If the exchange rate gets too far out of line with
underlying market, the exchange rate can be refixed at a new value, which makes
imports and exports changes accordingly. When exchange rate is
refixed, it is the case of devaluation or revaluation policies. Devaluation and
revaluation refer to adjustments in fixed exchange rate regime. If the exchange
rate peg[4]
is increased, the price of foreign currency in terms of domestic currency is
increased and the domestic currency is said to be devalued. If the exchange
rate peg is decreased, the domestic currency price of foreign currency is
decreased, and is said to be revalued. In the real world, nominal
exchange rate is often used as an instrument in economic management or as an
economic policy. Exchange rate policy is regarded to be important when economic
policies are aimed both at stabilizing the volume of transactions and at
avoiding inflation. The changes in volume of transactions are resulted from the
changes in competitiveness, which is defined as the relative prices of
domestically produced commodities in the world market. The competitiveness is
then seen as an intermediate target of exchange rate policy aimed to changes in
the international transactions. I.2. Conventional
theoretical approaches
I.2.1. The Elasticity
approach: Trade balance[5]
changes including exports changes and imports changes are influenced by the
price elasticity of demand for exports and imports. The price elasticity of
demand for exports is the percentage change in exports over the percentage
change in price as represented by the percentage change in the exchange rate
(foreign elasticity of demand for exports). The price elasticity of demand for
imports is the percentage change in imports over the percentage change in their
price as represented by the percentage change in the exchange rate (home
currency elasticity of demand for imports). A devaluation policy will be
effective when the Marshall-Lerner condition holds, that is when the sum of the
price elasticity of demand for exports and the price elasticity of demand for
imports is greater than unity. If the sum of these two elasticities is less
than unity, devaluation will lead to a deterioration of the trade balance. I.2.2. The Keynesian
approach: Keynesian models of an open
economy can be integrated with the elasticity approach to investigate the
effectiveness of devaluation as a policy instrument. This means that with the
demand determined output, devaluation will be expansionary as long as the
Marshall-Lerner condition holds; it will increase net exports, aggregate output
and employment. From the study of aggregate demand, we can see that the effects
of the devaluation depend on both the Keynesian income multiplier and the
demand elasticities for domestic exports and imports. The reason is that
devaluation affects income by means of an expenditure-switching effect,
shifting the expenditures of foreign and local residents toward domestic goods.
As a consequence, the larger the demand elasticities for imports and exports,
the stronger the impact of the devaluation on income. I.2.3. The absorption
approach: The absorption approach was
developed by Alexander (1952). In this approach, the trade balance surplus
equals to the excess of income over domestic expenditure: CA = X - M = Y - A Where CA = X - M is the
current account[6], Y is national
income, A = C + I + G is the domestic absorption (expenditure), X is exports
and M is imports. The most important insight
of this approach is the distinction of the two basic ways in which domestic
policies can affect the current account. First, expenditure reducing requires
expenditure to fall in relation to real income. Second, expenditure switching
requires the composition of expenditure to move from foreign to domestic goods.
In this case, if there are unutilized resources, the switching of expenditures
will generate an increase in real income as a result of an increase in output,
and thus in an improvement of the current account. I.2.4. Dynamic model Faik Koray (1990) focused on
the relationship between trade balance and exchange rate in an equilibrium
business cycle model. Two-country equilibrium model of the world economy
analyzes the co-movements in the exchange rate and trade balance in response to
exogenous disturbances: the confusion between monetary and supply shocks, and
the confusion between shocks to permanent and transitory government purchases. If there is a positive shock
to domestic money supply, two effects will occur. The direct effect is the
proportional exchange rate depreciation. The indirect effect is exchange rate
appreciation with less than proportional level. However, the net effect is
depreciation in exchange rate. Besides, the perceived shock does not lead to
change in trade balance, but the misperceived shock will lead to increase in
aggregate demand, increase in domestic production, then lead to deterioration
of trade balance. If there is a transitory
shock to government expenditure, the indirect effect is appreciation of
exchange rate and higher aggregate demand accompanied with decline in domestic
production. In the end, trade balance deteriorates. In contrast, if there is
permanent shock to government spending, exchange rate will appreciate but trade
balance is intact. In conclusion, Faik shows
that policies directed at reducing trade balance deficits via a depreciation of
the exchange rate either by Central Bank intervention or by excessive domestic
money growth are counterproductive. Negative shocks to domestic transitory
government purchases or positive shocks to foreign transitory government
purchase which depreciate the exchange rate, on the other hand, improve the
trade balance deficits. Besides, the relationship
between exchange rate and trade balance is also analysed by monetary approach
and Dutch Disease. However, in these two cases, the impact is adverse, that is
the exchange rate is influenced by the changes of trade balance, and trade
balance in turn will change with the changes of competitiveness. II- Empirical Evidences II.1. Arguments in
the impact of devaluation on trade balance
II.1.1. Structuralist’s point
of view: Structuralists argued that a
devaluation could worsen rather than improve the balance of payment.
Devaluation may work better for industrial countries than for less developed
countries. Many LDCs are heavily dependent on imports of production inputs, so
that their price elasticity of demand for imports was likely to be very low.
While for industrial countries that had to face competitive exports markets,
the price elasticity of demand for their exports may be quite high. So
Marshall-Lerner does not hold for the case of LDCs. The analysis of exchange
rate policy become more complicated in this case as it affects at the same time
aggregate domestic demand as well as supply. There are, in other words, aspects
of supply-side, structural policy as well as demand side, absorptive effects,
inherent in the use of this instrument. The Marshall-Lerner condition does not
hold for the case of SSA. With regard to imports, demand elasticities tend to
be low due to the heavy dependence on imported inputs, which must be paid for
in scare foreign currency. In addition, even if exports demand is assumed to be
rather elastic, many SSA countries produce goods for which the supply
elasticity is not infinite due to the underlying structural characteristics of
the economies. Thus, a devaluation may, particularly in the short run, cause
results, which are unexpected from an orthodox perspective. Concerning with the
devaluation, some structuralist economists argued that short-, medium- and
long-term effects must be distinguished, and that devaluation may lead to
increases in unemployment and stagflation in the short run. The short-term
impact of devaluation on output hinges on whether the negative effects on
aggregate demand are outweighed by the positive impact on supply. This in turn
depends on whether output is close to full capacity output or not, and on
possible short-term supply constraints. Devaluation will at least in the short
run tend to be inflationary, through the increase in imports costs, and this
impact may be substantial in the very open imports dependent economies such as
those of developing countries, for example sub-Saharan African countries. II.1.2. A study of real
effective exchange rate From the study of Agnes
Csermely (1993) in exchange rate policy in former socialist countries, it is
clear that the impacts of exchange rate are often on both price level
(inflation) and current account deficit. Almost former socialist countries
suffered from current account deficit widening after an adjustment in exchange rate.
In the study, he introduced a measure of real effective exchange rate (REER). Through a study of Hungary
in 1990-1992, with the question that how can competitiveness be improved, Agnes
said that trade surplus may be achieved through the artificial dampening of the
exchange rate, but not as a strategy for improving competitiveness if in the
long run, there is no increase in living standard. The competitiveness of
Hungarian production could be improved by devaluing of forint and by lowering
the cost in terms of dollars and unit cost. It is obvious that a single
devaluation may only be successful if it is supported by an economic policy
restricting demand. Real devaluation is regarded as the most efficient method
of bringing the economy into external equilibrium. I.1.3. Case of J-curve Empirical experiences of
many countries show[7] that right
after the devaluation time, the country faces deterioration in trade balance.
After a longer time, the trade balance would improve. This situation is explained
by the J-curve effect analysis. Over the short run, the value of these
elasticities is rather small because both exports and imports are less
responsive to changes in relative prices. However, over the longer periods of
time, the volume of exports and imports would respond to relative price changes
and the effects on the trade balance would tend to be positive, so that would
lead to improvement in trade balance. I.1.4. Other studies In a study of how trade
flows respond to relative prices, Carmen (1994) showed an examination about the
relationship between relative prices and imports and exports in a sample of 12
developing countries[8].
In general, the countries in
the sample appear to meet the static Marshall-Lerner condition for stability,
as changes in relative prices do produce long-run reallocation of trade flows.
However, the sign of the relation between the terms of trade and the trade
balance will depend on the elasticity of substitution between the imported and
home goods rather than in the fulfillment of the static Marshall-Lerner
condition In a conclusion, several
empirical regularities emerge. First, the analysis suggests that income and
relative prices are both necessary and sufficient to pin down steady-state
trade flows. However, the traditional specification appears to fare better when
modelling developing country demand for imports than when being applied to
industrial-country demand for exports from developing countries. The latter may
suggest that a fruitful area to investigate is intra-developing country trade.
Second, it is found that, for the majority of cases, the relative prices are a
significant determinant of the demand for imports and exports. Third, while
relative prices have a predictable and systematic impact on trade, price
elasticities tend to be low, in most cases are well below unity. Finally, while
industrial-country income elasticities are well above those of their
developing-country Asian and Latin American counterparts, this is not the case
for Africa. The high primary commodity content of African exports probably
accounts for this result. II.3. Studies of Vietnamese
economists By considering the
fluctuations of monthly exchange rate in 1993 compared to 1992, Vu Ngoc Nhung
(1994) favored devaluation for promoting exports. The reason is that with the
inflation of about 6-7 per cent and a devaluation by 8-9 per cent in December
1993, the loss of reduction of exports value is traded off by the cheaper
imports price and reduction of imports value, and therefore trade surplus[10]
was achieved. Also in the paper, he said that those authors opposing
devaluation have mistakes in some problems. These problems are that the current
exchange rate could promote Vietnam’s production. He concluded that in Vietnam
devaluation is a good instrument for a better economic performance. However, in
this case, export will be more expensive so that export value is not
necessarily higher. From the analysis of current
situation of Vietnam's economy, Le Viet Duc and Tran Thi Thu Hang (1995)
pointed out that the loss from devaluation is more than gains. At that time, it
was not suitable to carry out a devaluation. Even though Vietnam suffered from
serious deficits in current account and balance of payment, this is
indispensable for a developing country being in the process of attracting
foreign investment and foreign aids. This process is often accompanied by
reduction of domestic interest rate, inflation and appreciation of domestic currency.
But this is only the negative impact in the short run. In the medium and the
long run, loans with low ICOR would be more efficient and profitable; therefore
economic growth rate would increase. At the same time, this would automatically
lead to real devaluation without any nominal devaluation, and so increase
competitiveness. Considering the deficits of
trade balance and balance of payment, they showed that the low exports growth
rate is not due to exchange rate changes. Data from 1988-1994 shows that
devaluation is not accompanied with improving trade balance deficit. By a
quantitative analysis checking Marshall-Lerner condition, the result is that
the sum of elasticities of demand for imports and exports is much lower than
unity. So that Marshall-Lerner does not hold for the case of Vietnam during
1988-1995. Nguyen Thi Hien (1995) and
Truong Xuan Le (1995) are among those opposing devaluation as a
solution for improving trade balance. They considered that devaluation is not a
unique solution for exports promotion.
In case of Vietnam, exports and imports are rather irresponsive to
exchange rate, there are many other variables that have more effects on trade.
In addition, the impact of devaluation is stronger and negative on many
economic fields and variables like inflation, purchasing power of domestic
currency... Other experiences of
devaluation are from the context of East Asian Crisis. The affected-countries’
economies turned down with the collapse of financial markets and banking
system. Empirical evidences for the consequences of crisis are the reduction of
economic growth to nearly zero in 1997 and the loss of confidence of local
currencies, which can be seen from the below table. The
crisis left many serious consequences to the regional countries. The
worst-affected countries are Thailand, Indonesia, Korea, and Malaysia. During
the crisis, these countries were facing series of collapse in financial and
monetary system, and then the loss of local currencies’ confidence. All these
countries took devaluation in 1997. As a result, the changes in the GDP growth
rates and trade activities are rather positive. In general, both exports and
imports decrease sharply but balances of trade are improved. However, there are other reasons for the
changes in trade rather than devaluation. Firstly, lower GDP growths decreased
domestic demands for imported goods. Secondly, crisis-affected economies need
recovering by concentrating domestic resources on restructuring the economies.
Both exports and imports reduce by about 30-40 per cent. The more reduced
imports may be the reason for improving these countries’ competitiveness in
dollar terms, so that increases exports and lowers imports to some extent. In
general, devaluation is one of the factors leading to the improvements in trade
balance of crisis-affected countries. It is still not agreed whether
devaluation is an important factor. Recently in Vietnam, there
have still been debates of the impact of exchange rate on trade balance. An
article in 1998[11] discussed
about the improvement of trade balance by devaluation as the financial crisis
happened in East Asia and devaluation were taken place in many regional
countries. The article showed that a devaluation of VND brought good conditions
to exports and reduced the country’s trade deficit. The decision to adjust the
exchange rate in August 1998 improved competitiveness of Vietnam’s exports. The
adjustment reduced the imports and improved the trade balance. According to the
article, Vietnam’s trade deficit was expected to reach USD 1.91 billion as
compared to the figure of USD 2.35 billion lower than 1997’s figure. The recent
adjustment in exchange rate seems to have no pressure on inflation. Pham Chi Quang (1999) showed
a negative impact of devaluation on trade balance by checking Marshall-Lerner
condition for the case of Vietnam. Using exchange rates recorded (including
official exchange rate, buying exchange rate, and selling exchange rate in
HoChiMinh city), he received a strict relationship between income and trade
balance but not between exchange rate and trade balance. Therefore, he argued
that devaluation could not be a unique instrument in improving trade balance.
Other policy variables might seem to be much more efficient. III- Approach for analyzing
the case of Vietnam For the case of Vietnam, the
answer for whether devaluation improves trade balance is still in
consideration. In this thesis, I’d like make an analysis in Vietnam's
performance of trade and the impact of exchange rate on trade. In addition, I'd
like to use the elasticities approach to check if exchange rate has a positive
or negative relationship with trade. The approach to checking Marshall-Lerner
condition is as follows: TB = X (GDPf, E)
- M(GDPd, E) Where TB is the trade
balance, X is exports, GDPf is the foreign income, M is imports, GDPd
is the domestic income, E foreign exchange rate (NER, RER or REER) - E increase
implying depreciation and E reduce implying appreciation. The responsiveness of the demand
for exports and imports to a devaluation is measured by the price elasticities
of demand for exports and imports (for exports: hX, for imports: hM ), which measures the
percentage change in exports or imports due to 1% change in the relative prices
of foreign or domestic goods. That is hX = %DX / %DE and hM = - %DM / %DE The Marshall-Lerner states
that the direct effect of a devaluation on the trade balance will be positive
(i.e. improvement in trade balance) when the sum of the price elasticities of
demand for domestic exports and imports exceeds 1 (hX + hM > 1)[12].
Using the elasticities
approach in combination with the examination of the structure of Vietnam’s
imports and exports and the traditional exports and imports functions during
1989-1998, I hope that devaluation may bring about some positive results. By
the way this could suggest the way to improve trade balance, and to reaffirm
the government’s decision to devalue VND. Chapter
three: Vietnam's trade performance and
the exchange rate policy I. Overview of Vietnam's
economic reforms in 1989-1998 period I.1. Review of the main
reform policies and economic performance before and after 1989 The period of 1976-1979 was
of unifying and turning the economy into an integrated whole in accordance with
central planning principles. The state and collectives constituted the
foundation of the economy from the production to distribution of factors and
income, including foreign trade and foreign exchange management activities.
Market and its forces did not have any function in the economy at that moment. Changes in economic policies
had been made from early 1980s. In agriculture, the contractual quota was
widely applied in farming household in 1979 and early 1980s. In industry, the
state authorized state owned enterprises to operate freely beyond the
assignment of state plan. However, the state continued to maintain monopolistic
power in controlling production and distribution by the two-price mechanism. In
general, these changes in economic policies did not function in promoting the
economic growth, stabilization and development. The Sixth Party Congress in
December 1986 marked the transition period in the Vietnam's economy. An overall
transformation really took place with macroeconomic reforms. The multi-sectoral
economy was recognized, the outward-oriented program replace the closed
imports-substituting production. Structure of the economy changed in favor with
light industries and services, especially goods and services for exports. The culmination of the
reform came in March 1989 with a series of radical changes which formally swept
away most of the remains of the command economy and ushered in a new era of
market economy. The main features of the economic reforms included tightened
control over credit expansion, an increase in interest rate to positive level
in real term, devaluation and unification of exchange rate and liberalizing all
prices. These measures in banking and financial sectors pushed back the rampant
inflation in the previous 1986-1988 period. Table 3.1: Selected
macroeconomic indicators for the period 1989-1998
The 1989 reform programs
were more comprehensive and thus made a watershed for the Vietnamese economy,
as a fundamental transformation in economic management was begun. The results
can be seen from the below macroeconomic indicators from 1989 up to now. I.2. Trade reform Vietnam had for years
pursued an inward-looking development strategy, characterized by the
orientation of agricultural and industrial activities toward the domestic
market. Trading activities in the period before reforms were limited in trade
agreements with the CMEA. Exports and imports were not promoted but only implemented by SOEs. Price and
volume of exports and imports were planned by government authorities. With the introduction of
“doi moi” in 1986, Vietnam started to take the process of economic structuring
and creating institutional and policy environment for economic development.
However, just in 1987, the changes affecting Vietnam’s interactions with
international markets really started with the introduction of Law on Foreign
Investment, the introduction of “open door” policy. Since 1988, series of
policies and regulations on trade, exchange rate and foreign investment were
introduced to promote international activities. Firstly, the reforms were aimed
at foreign exchange control, trading organizations and customs tariff. The
Foreign Exchange Control Decree in 1988 liberalizes retention of foreign
exchange, opening of foreign currency accounts, use of transfers to pay for
imports and repay foreign loans: devaluation of exchange rates in trade and invisible
payments. Also in 1988, the restriction on establishment of trading
organizations relaxed and central government monopoly of foreign trade was
terminated. Especially, trading activities became more active thanks to the Law
on Imports and Exports Duties that introduces the custom tariff. The changes in trade brought
about by its actual factors become considerable from 1989. These factors
included opportunities to participate in trade, tariffs, non-tariff barriers,
foreign exchange control and exchange rate, and also international commitments. In January 1989, the
government decided to liberalize the establishment of foreign trade companies,
resulting in the number of trading companies increasing from 80 in 1987 to 156
in June 1989[13]. Private
companies were allowed to directly engage in international trade. The reforms of tariff system
were marked by the Law on Imports and Exports Duties 1988. Since 1993, Tariff
Law was amended to add provisions for other than normal importation, the
responsibility to initiate change in tariff was passed from Ministry to
Ministry of Trade. In 1996, maximum tariff rate reduced to 80 per cent, special
sales tax was imposed at rates up to 100 percent on imported passenger cars
following the reduction in tariff rate. In March 1989, exchange rate
was devalued to a level that virtually unified it with the parallel market
exchange rate. This devaluation replacing the early overvaluation implied an
increase of the exchange rate for trade transactions within the plan from VND
900 per USD to 4500 per USD (end-of-period official exchange rate). In 1991, foreign exchange
trading floors were opened at the State Bank of Vietnam. The period after that
saw another important reform that was the introduction of inter-bank foreign
exchange market. At the same time, other regulations in foreign exchange
transactions became more effective and closer to the world market's activities. In addition, Vietnam's
joining regional and multilateral trading arrangements has liberalized
Vietnam's trade: signing a preferential trade agreement with the EU in 1992;
joining ASEAN in 1995, it also became a member of the AFTA; in 1994, Vietnam
was granted observer status at the GATT and in 1996 it submitted a memorandum
on its foreign trade regime as part of its application for WTO. Also, Vietnam
is currently negotiating a trade agreement with the United States. In November
1998, Vietnam became a full member of the Asia-Pacific Economic Cooperation
(APEC) group, and submitted an Individual Action Plan (IAP) for meeting the
liberalization objectives associated with membership. In the "open-door"
time, the increase of foreign investments has significantly contributed to the
development of trade. The Law on Foreign Investment introduced in 1987 and its
revisions in 1990, 1992 and again in 1996 has created a more favorable
environment for foreign investment. Together with efforts such as the lifting
of the US embargo, the changes have prompted substantial inward flows of
foreign capital. And foreign investment has brought in its train a rapid
expansion of imports of capital goods - and, more recently, producer goods -
prompting requests for streamlining the trade regime and its administration. II. The trade performance II.1. Overall picture of
trade Table 3.3: Trade performance
during 1989-1998 (in million of USD)
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