Chapter 1

INTRODUCTION

Background and relevance of the topic

In the literature, overwhelming academic research has shown that more open trade also leads to a higher rate of growth in the long run, and that countries with a higher level of trade distortions have lower productivity growth than those with fewer trade distortions. So more openness and freer trade is clearly good for productivity growth and for strengthening competitiveness.

The renovation policy that Vietnam adopted in the late 1980s has led to high growth and more openness in the economy. However, for further sustainable development of the country, Vietnam should accelerate the pace of integration into the world economy, and becoming a member of WTO is an important step in this integration process.

The competitiveness of Vietnamese commodities in both foreign market and domestic markets is low compared with other competitors. Vietnam is also a late-participating country in these processes. So the needed condition to integration is not complete. When the tariffs are reduced and quotas are removed, Vietnam-produced goods will be competed more fiercely in the domestic market. Beside the gains from the lower prices of commodities, the domestic economy has to suffer from many losses such as the reduction in the domestic production, and decreases in the tax revenue.

Institute of international economics (IIE) has done the same researches by the same method used in this thesis on four countries, including the United States, Japan, South Korea, and China. In 1994, the protection of 25 goods in China created the consumers' loss by US$35 billion, and the figure for all goods was US$ 78 billion (Shuguang, 1998). Similarly, if all the trade barriers in the United States were eliminated, the consumers' gain would increase by around US$ 70 billion in 1990 (Hufbauer, 1994).

About the effects of trade protection in Vietnam there are many studies on the cost of protection in Vietnam such as researches done by IMF, World Bank, CIE, and individuals. Most of them are qualitatively analyzed. These ones that are quantitative only pointed out some general figures of changes.

Elena et al. (2001) found that Vietnam’s exports to the United States increase 1.2 percent due to the USBTA. Another impact of the agreement is that higher export earnings can increase imports, increase the tariff revenues by $27million, if the tariff system is unchanged. Vietnam’s welfare rises by $164 million per year. Out of which $105 million is from terms of trade gains, the remaining is from improved efficiency of resource allocation.

IMF (1999) illustrated that the protection in Vietnam was selective and mainly focused on import substitution. The protection had resulted in an inefficient small-scale manufacturing sector. For example, all car manufacturers were losing money even though the price is about three times the duty free price. Protection also doubled the price of motorcycles. The prices of fertilizer, cement, steel, and sugar were also higher than the duty free price by at least 20 percent. The report also showed that the rice quotas’ remove would increase the national income by $225 million (or 1 percent of GDP). Trade liberalization in sugar would reduce the price of sugar by 22 percent; increase the real income by $92 million without affecting the level of domestic production. The direct cost of protection of fertilizer was $38 million because of higher price. Trade protection also had indirect effects such as bias allocation of resources, higher prices, and employment inefficiency.

Analyzing the effects of the USBTA on Vietnam, IMF (2002) showed that the agreement would increase the export revenues to the United States. The agreement results in increases of commodity exports and exports of labor-intensive manufacturing. Clothing exports and marine export were expected to be the most beneficial.

 Warner (2001) found that protection creates inefficient import substitution, misallocation of FDI and domestic investment toward sectors with high levels of protection, higher price in agricultural inputs, and corruption and high costs of conducting trade.

World Bank (2002) indicated removing tariffs lowers import prices, which leads to decrease in consumers’ price, therefore lowers costs in the economy. Liberalization also leads to higher exports and sector output, reflecting the expansion of economic activities. It expands the aggregate employment by around 4.7 percent, especially in service sector. As nominal income of household increases following trade reform, the poverty level decreases with all aspects.

Information at the commodity level is scarce.  Since these costs have never been measured, the comparison between these costs and gains of protection are only qualitative. Measuring these costs quantitatively becomes an urgent mission since it will be helpful in making decisions relating to trade policies, in deciding which industries need protection, in deciding the policies to compensate for losers in the trade liberalization process, and so on.

Objective, scope and focus of the thesis

This thesis aims to calculate the costs of protection in automobile, steel, and fertilizer industries. After showing how much money did the protection cause to these industries, some policies are proposed to reduce these costs.

Three products selected are automobiles, steel and fertilizer. The costs are calculated for 2000. Only static partial costs are calculated. The dynamic effects are still referred to qualitatively.

Research question

Central question:

How much money was the cost of protection in Vietnam in 2000?

Sub-questions:

What were the changes in domestic and import price after liberalization?

How much consumers’ loss, tariff revenues, producers’ gains, and deadweight loss had the protection created?

Methodology:

Data sources, collection and limitations

The needed data are different elasticities. They include: price elasticity of demand for domestic good, cross-price elasticity of demand for the domestic good with respect to the price of imported goods, own-price elasticity of domestic supply, the cross-price elasticity of demand for the imported good with respect to the price of the domestic good and own-price elasticity of demand for the imported good. Other data needed are domestic demand, domestic supply, import supply, the landed price of imported goods and the world market CIF price, t and n are tariff rate and the tariff equivalent of NTBs.

Data were collected mainly in General Custom. Other data is collected from different publications of Worldbank, IMF, CIE, and CIEM.... and from different kinds of reports and newspapers. Some other are collected in Internet.

Method of analysis: Using static partial equilibrium model to show all kinds of effects of protection in Vietnam

Limitations include the inconsistence of statistics, the lack of time, the partial model itself, and the access to needed materials (see chapter 5 for detail).

Findings

In 2000, protection in the three selected industries, including steel, fertilizer, and automobile reduced the consumers' surplus by US$ 669 million. The remove of quotas would restore more gains than tariff reduction. The last is the trade regulation system in Vietnam need more transparent and improvement.

Structure of the thesis

The thesis consists of five chapters. Chapter one is introduction chapter. The second chapter is Theoretical chapter. This chapter is about some concepts, and the method used to analyze in the thesis. Chapter three is “The Vietnam trade administration system”. In this chapter, I talk about the trade reforms in Vietnam since 1986, the current trade system as well as some facts about trade performance in Vietnam in 1990s. In chapter "The cost of protection in Vietnam in 2000", the partial static equilibrium is used to analyze three selected industries, including automobile, steel, and fertilizer. At the end of this chapter, some dynamic effects of protection are referred. The last chapter is devoted to policy recommendations. This chapter assesses the current trade regime and proposes some policy for further trade liberalization. Another part is the Appendix.

Chapter 2

THEORETICAL CHAPTER

2.1. Protection

Protection is a theory, or a policy, of protecting the producers in a country from foreign competition in the home market by the imposition of such discriminatory duties on goods of foreign production as will restrict or prevent their importation. This definition shows that the nature of trade protection is the use of different trade restrictions by the home government to help the home industries to compete with foreign competitors. There are two main kinds of protection, quantitative restrictions (such as tariff) and qualitative restrictions (some kinds of NTBs).

2.2. The static partial equilibrium model

2.2.1. The model

The model was founded on four key assumptions including all markets are perfectly competitive, the domestic good and the imported good are imperfect substitutes, the supply schedule for imported good is flat (perfectly elastic), and the supply schedule for the domestic goods is upwardly slopped (less than perfectly elastic).

Note: With the trade barrier in place, the price of the import in the protected market is Pm, and the quantity imported is Qm. Following liberalization, the price of falls of Pm', the world price. Then responding to a lower price in the domestic market (see figure 2) the demand schedule for the import shifts from Dm to Dm', and the quantity imported settled at Qm'.

The effects of removing a trade barrier are shown in figures 1 and 2. Eliminating a tariff or a quantitative restriction lowers the import’s price in the domestic market from Pm to Pm’. In the figure 1 the supply curve for import (Sm) is flat, of perfectly elastic, corresponding to a small open country assumption. Pm’ corresponds to the CIF price and Pm is equivalent to this retail price (after-tax price) of imported good.

Because the domestic goods and imported goods are imperfect substitutes, the decrease in the landed price of imported good results in a downward shift in the demand curve for domestic goods from Dd to Dd’. Since the demand curve is inward shifted the price of domestic goods falls from Pd to Pd’. In turn the decrease in domestic goods’ price causes the domestic demand curve for imported goods to shift downward from Dm to Dm’. At new equilibrium the domestic output is lower, the import volume is higher, and the prices of both domestically produced and imported commodities are lower.

Note: With the trade barrier in place, the price of the import-competing domestic product is Pd, and the quantity demanded is Qd. Following liberalization and the decline in the import price (see figure 1) demand for the domestic substitute falls, shifting the demand curve from Dd to Dd', the quantity consumed falls to Qd', and the price drops to Pd'.

2.2.2. Calculating the Welfare effects of Trade barrier

The changes in the prices and quantities due to trade liberalization result in a gain of consumer surplus, both in the import market and the domestic market. Part of the gain arises because consumers now pay less for a good than they paid when supply was restricted. In addition, some consumers, who previously were priced out of the market entirely, will now enter the market as the market prices fall. The consumer surplus gain due to liberalization, however, is partially offset by a loss in producer surplus in the market for the domestic substitute, where price and output both fall.

If the form of the trade restraint is a tariff, the revenue lost by the government will also partially offset the consumer gain. If a quantitative restraint were used instead of a tariff, elimination of this restraint would eliminate the quota rents that previously went either to domestic importers or foreign exporters, or some combination of the two, depending both on how the quantitative restraint was allocated and on the economic power of the market participants. Finally, an efficiency gain will be recovered because the trade restraint resulted in a misallocation of resources. Before liberalization, the wedge created between the domestic price of the import and the world price caused a transfer of resources toward production of the import substitute and away from other sectors where those resources could have been used more efficiently, which is the resources are not used in the most efficient way.

The methodology used here to quantify these welfare effects is based on Morkre and Tarr (1980). Because the imported and domestic goods are imperfect substitutes, the total consumers' gain must be calculated by adding up the consumer surplus gain in the two separate markets. Returning to figure 1, the consumer surplus gain from liberalization in the import market is estimated by the area bounded by points aceg. This method of estimating the consumer gain in the import market follows from the analysis of Burns (1973) on the measurement of consumer surplus and gives an average of the consumer gains calculated separately from these two demand curves. Using the old demand schedule (Dm) gives the area marked acdg as the change in consumer surplus, while the new demand schedule (Dm’) gives the area marked abeg. The difference between the two areas is shown by the parallelogram marked bcde. Line ce divides the area in half and give the compromise consumer surplus change, area aceg. Area aceg can be estimated by adding rectangle acfg to triangle cef.

If the commodity is protected by a tariff, the rectangle area acfg represents a transfer from the government to consumers in the form of lost tariff revenues, and may be estimated as:

(Pm-Pm’) x (Qm)                                                                                     (1)

The recovery of deadweight efficiency loss is represented by the area of the triangle cef, which may be estimated as:

(1/2) x (Pm-Pm’) x (Qm’-Qm)                                                                 (2)

If protection takes the form of quantitative restraints, and if foreign exporters previously have captured all the quota rents, then the area acfg is recovered by the domestic economy from foreign interests. In that case, the consumer gain in the import market, the sum of rectangle acfg and triangle cef, will also equal the net national welfare gain. If both tariffs and quotas are imposed, the tariff equivalent of the quota is assumed to be the difference between the total decline in the import price (Pm-Pm’) and the price effect of the tariff.

Turning next to the domestic effects in figure 2. The consumer welfare gain from lower domestic prices may be approximated by the area marked swyz. Area swyz can be estimated as a sum of rectangle wvyz and triangle vwy. This amounts to:

(Pd-Pd’) x (Qd’)  +  (1/2) x (Pd-Pd’) x (Qd-Qd’)                                                           (3)

In the domestic market, the producer surplus loss is just offset by the consumer surplus gain.

2.2.3. Applying the model

In order to apply the analysis to particular cases, a simple computable equilibrium model was devised corresponding to the graphical analysis above. The form of the model chosen assumes that demand and supply relationships are rather linear in terms of their logarithms than linear in absolute terms. Therefore the parameters associated with the price terms to be interpreted as elasticities.

In order to achieve this result, it is necessary to specify the underlying domestic demand and supply functions according to the following forms:

              Domestic demand:                 Qd= a*Pd^Edd*Pm^Edm                                                                       (4)    

              Domestic supply:                   Qs= b*Pd^Es                                                                                         (5)

       In the domestic demand function E_dd is the own-price elasticity of demand for domestic good, while E_dm is the cross-price elasticity of demand for the domestic good with respect to the price of imported good. In the supply function, E_s is the own-price elasticity of domestic supply. Since the domestic commodities and the import are imperfect substitutes in this model, equilibrium in the domestic market requires that domestic demand equals domestic supply- that is, that Qd equals Qs.

Turning to the import market, because the supply of the import is assumed to be perfectly elastic, the supply and demand functions in the import market are:

                          Qm= c*Pd^Emd*Pm^Emm                                                                                                             (6)

                          Pm=Pm’*(1 + t)                                                                                           (7)

Where: Qd, Qs, Qm are domestic demand, domestic supply, and import supply, respectively; Pm and Pm’ are the landed price of imported goods and the world market CIF price, respectively; t is tariff rate or the tariff equivalent of NTBs; E_md, E_mm are the cross-price elasticity of demand for the imported good with respect to the price of the domestic good, and own-price elasticity of demand for the imported good, respectively.

Equation (7) represents the assumption that the supply of the imported commodity is perfectly elastic, and therefore, the world price, Pm', which equals Pm/(1+t), is the same no matter what the level of imports.

This system of equations is converted into a system of linear relationship, that are then used to analyse the effect of protection by taking the natural logarithms of these equations:

lnQd = lna + E_dd*lnPd + E_dm*lnPm                                                                               (8)

lnQs  = lnb + E_s*lnPd                                                                                                   (9)

lnQm = lnc+ E_md*lnPd +E_mm*lnPm                                                                               (10)

lnPm  = ln[Pm'*(1 + t + n)]                                                                                           (11)

Estimating the effects of a change in trade protection using this system requires two basic steps. First, price and quantity date are used, together with estimates of elastic parameters, to solve these above equations for unobservable constant terms, namely lna, lnb, and lnc. These terms represent the effects of other (unobserved) nonprice variables on the demand and supply functions. This crucial assumption in this step is that the base period for which the price and quantity data are collected may be considered an equilibrium period (i.e., a period in which it is reasonable to suppose that Qd is equal to Qs).

The second step is to use the estimates of the intercepts and the elasticity parameters, together with a separately estimated change in either the price or the quantity of the import due to a change in protection, to calculate a new equilibrium and, hence, the comparative-static welfare effects of change.

2.2.4. Incorporating the terms-of-trade effects

The basic model described above assumes that the country imposing the trade barriers cannot affect the prices in the world market, which is the small-country assumption. If the country accounts for a large enough share of the world market for particular products, however, the reduction in demand resulting from the imposition of a tariff or quota may be large enough to force foreign exporters to lower prices thus forcing foreign producers to share some of the cost of the tariff. This large-country assumption is represented in figure 3 by an upwardly sloping supply curve. Previously the supply curve for imports was flat, reflecting the assumption of perfectly elastic foreign supply.

2.2.5. Qualifications to the model

Estimation or calculation of the elasticities and other parameters needed to calculate the post-liberalization equilibrium quantities and prices is the most difficult task in this model. In addition, the model relies on simplifying assumptions, the effects of which are not easy to quantify. The base case model assumes that domestic and import markets are perfectly competitive. In reality market may be imperfect competitive.

Second, in order to facilitate calculations and to make the empirical work tractable, we consider only the static partial equilibrium effects of protection, that is, the effects within a given sector, with assumption that there are no changes in the structure of domestic supply. This method misses the dynamic effects that may arise from greater competition between imports and domestic products within the sector after liberalization. The general equilibrium effects of the process in one sector on other sectors are also ignored. To be specific, the method does not try to calculate the size of any downward shift in the domestic supply schedule as a result of greater import competition. Greater technical efficiency in the domestic industries could significantly diminish the magnitude of losses incurred by domestic firms and increase the amount of national welfare gains resulting from trade liberalization. The efficiency gains resulted from changes in prices such as the benefits of lower input prices for some downstream industries or increased demand for the products of other industries.

Given these simplifications, there are some empirical problems accompanied with the model. First, it is the availability of elasticities in the literature. In the model, elasticities of supply and demand, and cross-elasticities of demand in the import and domestic markets are the foundation. These elasticities are often not available, moreover if available, they are often not reliable. The basic relationships used in calculating the missing parameters from available ones are in above section.

The second problem is the lack of data and the inconsistency of data from different sources. This is because the problems in statistics, and in management of data. Other thing is that smuggling.

Chapter 3

VIETNAMESE TRADE ADMINISTRATION SYSTEM

3.1. The evolution of the Vietnam's Trade-Administration system, 1986-2002

Before the reform, foreign trade in Vietnam was subject to central decisions by the planning authorities and could be carried out only by a small number of state trading monopolies. Domestic prices were isolated from the influence of international prices through a complex system of multiple exchange rates and trade subsidies. Exports were discouraged due to overvalued exchange rates and low procurement prices, while imports were impeded by an extensive system of quotas and licenses. Isolated from the world market, Vietnam relied heavily on its former CMEA partners to obtain basic commodities, such as petroleum products and fertilizers, while exporters were obliged to fulfill CMEA quotas (arranged through a system of government-to-government protocols) before exporting to the convertible currency area. (IMF 1996)

Key trade policies reform since Doi Moi

From 1986 to 1997: The period of rapid trade liberalization.

Vietnam set about liberalizing its trade regime in 1988-89, which consisted at that time of many types of controls, including a comprehensive system of export and import quotas, permits, and tariffs as well as licenses.

Since then, NTBs were lowered. Before 1989 all exports and imports were subject to quotas, but in January 1989, 81 quotas were removed leaving only 10 exported and 14 imported goods subject to quotas. At the same time, all budgetary export subsidies were eliminated. Later in May, the numbers of export and import quotas were further reduced to 7 and 12, respectively, and state enterprises were no longer obliged to fulfill their minimum export targets vis-à-vis the CMEA partners before being authorized to export to the convertible currency area. The remaining quotas had gradually been removed. In April 1995 the number of imported goods requiring permits was also reduced from 15 to 7 (leaving petroleum products excluding lubricants, steel, cement, fertilizers, sugar, vehicles with less than 12 seats and components, and motorcycles and components). The steps needed to obtain a permit were also reduced in later 1994 from 3 to 2 (companies at that time needed only business license and trading license). The requirement for licenses for each shipment of exports and imports was also reduced in this period.

Tariffs were also rationalized. Along with lowering of NTBs, duties on exports and imports of goods were lowered and rationalized in later 1980s. In the export side, both the number of goods subject to duties and the average level of duties fell significantly. In the import side, the number of goods subject to tariffs also dropped from 124 to 80.  In addition, in April 1994, the export duties on rice were reduced from 10 to 1 percent and the import duties on inputs used for producing export were exempted.

Foreign trade was also decentralized in this period. Nearly all foreign-trade transactions in Vietnam before 1988 were carried out by a few special foreign trade organizations that have monopoly over trade in certain commodities. These organizations were in most cases placed directly under the supervision of the line ministry corresponding to their activities, the rest under the supervision of provincial authorities. In 1988, the restrictions on the establishment of foreign trade companies were eliminated and many new ones were subsequently created. This enabled a large number of exporter and importers to establish direct contacts with foreign trading partners and thus reduced the administrative inefficiencies of the trading monopolies. Since 1991, private as well as state enterprises have been allowed to engage directly in trade.

Although implementation was slow because of opposition from interest groups lobbying for continued protection, it is clear that some progress was made during the period 1995-1997. For instance, most domestic firms were given export rights in January 1997, at the same time as import licensing requirements for a large number of consumer goods were eliminated. This period, which lasted from the beginning of the Vietnamese renovation to the Asian crisis, remarked a high growth rate of trade activities. Key trade reforms are in the Appendix.

From 1997 up to now

However, it is clear that the pace of reform slowed after 1997. As the CIE’s report on non-tariff barriers pointed out (CIE 1999), a much wider range of products has come under the reach of quantitative restriction on imports again, and access to foreign exchange has become subject to a range of direct and indirect rationing regulation. These policies had tended to erode the effects of changes in the foreign investment regime and liberalization of entry into international trade (under Decree 57 of 1998).

The Asian financial crisis resulted in a backlash, as further reforms were put on hold. In fact, many trade restrictions were tightened between 1997 and 1999. The reason was that the crisis led to a fall in the export growth rate and the inflow of FDI, forcing authorities to restrict imports of “non-essential” goods in order to allocate the scarce foreign exchange to the import-dependent industrial sector. This way, Vietnam succeeded in maintaining macroeconomic stability, although the stagnation in export and import growth quickly led to a fall in the GDP growth rate.

However, concerns about the detrimental long-term effects of trade restrictions on the competitiveness of domestic industry grew over time. Another relevant concern was the need to meet the trade liberalization targets set up by AFTA. Until about 1999, Vietnam had been able to fulfill its formal annual tariff reduction commitments by listing goods that were either exported or that already met the 5 percent maximum tariff requirement. Real tariff reductions would definitely be required from 2000. Trade reform has therefore reappeared on the policy agenda, and advanced faster than what was perhaps expected a couple of years ago. 

Trade policy has become more transparent and trade reform in some areas has been undertaken faster than the planned schedule (for example the extension of trading rights to all economic sectors; the removal of some quantitative restrictions and export focal points; etc.). In spite of this, export and import management remains passive and confusing, reflecting the lack of harmony and consistency in combining the realization of integration commitments with that of economic, social and environmental policies. See Appendix for key trade reforms.

In 1996, the quotas on automobile were 20000 pieces, of which 5000 were automobile with less than 12 seats. In 1998, the import of automobile with less than 12 seats were banned, enterprises that had the business license in automobile industry could import other kinds of automobile according to the market demands. Imports of automobile with less than 15 seats were banned. In 2001, the imports of automobile were carefully controlled to promote domestic production. Some changes were that on May 1, 2001 QRs on passenger vans with 10-16 seats were eliminated and replaced with tariff, QRs on passenger vehicles with up to 9 seats were now scheduled for removal by the end of December 2002.

The quotas of fertilizer in 1997 were 1.5 million tons; each provinces or central-run cities had to choose an enterprise to import fertilizer. The Direction board of Rice export and Fertilizer import was established in 1998 to control the activities in these two commodities. The quotas of fertilizer in 1999 were 2.53 million tons. The list of goods that were encouraged to export to ASEAN and SNG to import fertilizer was issued. The conditions for enterprise to import fertilizer were defined in detail in 2000. Fertilizer-importing enterprises had to submit monthly report on their activities to the Direction Board. By beginning of 2003, the QRs on fertilizer will be removed. The QRs on remaining steel products has been advanced to the end of December 2001. By beginning of 2003, the QRs on steel will also be removed.

3.2. Descriptions of the Trade-Administration System in 2002

3.2.1 The trade regime

The trade liberalization in Vietnam is in progress. The membership in Free Trade Agreements has significantly affected current trade regime in Vietnam. The tariff will be reduced and quotas will be removed and replaced by tariff.

3.2.2. Tariff rates and other taxes on imports

A newly amended Law on Import and Export Tariffs Law was adopted by the National Assembly of Vietnam in late 1998. Under this law, which was drawn up in accordance with the Harmonized Tariff System (1996 Version), the country's global integration is facilitated. The tariff code, effective on 1 January 1999, contains around than 6,400 tariff lines.

Three tariff rates have been applied for imported goods, including ordinary tariffs, preferential tariffs (NTR), and special preferential tariffs. Ordinary tariffs in the list apply to goods imported from countries that have not exchanged Normal Trade Relations (NTR) agreements with Vietnam. The preferential tariffs are imposed on goods originating from countries or regions, which have NTR status with Vietnam. The special tariffs apply to goods imported from countries that have exchanged special preferential tariffs agreements with Vietnam. For instance, ASEAN members have preferred such special preferential tariffs. Ordinary tariffs are 50 percent higher than preferential tariffs and can be increased or reduced as long as the margin does not exceed 70 percent of the preferential tariffs.

In addition to the above-mentioned tariff rates, Vietnam also reserves the right to impose surtaxes such as antidumping and countervailing duties, but no regulations on surtaxes are available at present.

Other taxes include the special consumption taxes, "luxury tax", and  Value Added Tax (VAT) Imposing these taxes increase the “real” tariff. That means that the retail price of import is much higher. That is why the effective rates of protection is very high while the highest bands of nominal rates are 120 percent in 2001 (IMF, 2002).

3.2.3. Import quotas

The Ministry of Trade (MOT), in consultation with the Ministry of Planning and Investment and other relevant ministries and ministerial-level agencies, requested the Government's approval to set formal import quotas on several commodities. As Vietnam is on track to fully implement its international commitments to liberalize trade, the list of import quotas is now limited to certain imports that have great impact on the economy such as petrol. Also, the Government, from time to time, decides to suspend the import of some commodities. In the past, those commodities included automobiles (under twelve seats), some types of steel, paper and other items. Import quotas are often administered through the import licensing system managed by MOT and are mainly granted to state-owned enterprises. Information about the allocation procedures for import quotas and how the process is enforced is not made publicly available. The use of quotas and unclear quotas allocation procedures are harmful to the economy.

3.2.4. Import licensing requirements

Authorized importer's roles in the past few years have been reduced. All legally formed business entities are allowed to engage directly in the importing and exporting goods specified in their registered business licenses. This decree still provides businesses in Vietnam with the option to authorize other companies that are eligible for importing some products to import based upon the valued-added and experience that these authorized importers can provide.

Business entities, including foreign invested enterprises with a legally registered business license, can be engaged in direct import and export activities. However, foreign invested enterprises can import materials, equipment and machinery only when these imports are for the purpose of establishing production lines and producing goods in accordance with their investment licenses. They are not allowed to import goods for trading purposes. Until now foreign invested companies have only been permitted to distribute products made by them and not products of their partners offshore.

Certain goods to be exported or imported must be inspected before being cleared at Customs stations. The inspection covers quality, quantity, specifications and volume.

The list of goods to be banned from export and import as well as the list of imported goods requiring the Trade Ministry's official permits are specified. Management of rice export and fertilizer import in 2001 is subject to Decision No. 46/2001/QD-Ttg and circular No. 11/2001/TT-BTM.

Import licensing requirements, often used in industries with quotas at very low level (IMF, 1999, p: 61), supports domestic products to compete. However, this requirement prevents trade liberalization. The requirements with consistency between business registration also limit trade activities. Beside these requirements there are still many products subject to special management such as medicines.

3.2.5. Labeling and dating requirements

Vietnam's regulation concerning labeling requirements for domestically circulated and for import-export products is issued by the Prime Minister. According to this regulation, new labels must be affixed displaying the name of the product, name and address of the manufacturer or trader liable for the product, quantity, detailed composition, master quality inspection, and manufacturing and expiration date. New labels must also include usage and storage instructions and country of origin of the imported or exported products. Labels of domestically distributed products must be in Vietnamese, except the trademark. However, applying this regulation makes trade activities a little more difficult. If the label of imported commodities is different from this regulation, it will take time to adjust.

Date should follow the Vietnamese pattern (day/month/year) to avoid confusion. Dating like that are also a problem. Since the international dating is month/date/year, this difference can create confusion between domestic and foreign businessmen.

3.2.6. Standards

Vietnamese standards system consists of over 5,000 standards. Specific information by product or by standard may be provided by the importing organization. Otherwise it may be sought from the relevant ministry or the government's management body with overall standards responsibility, the Directorate for Standards and Quality (STAMEQ) of Ministry of Science, Technology, and Environment (MOSTE). Vietnam is currently adopting over 1,000 international standards into national standards. Vietnam's weight and measurement standard is based on the metric system. The electric current is AC 50 cycles, 220/380. The electric utility system of Vietnam is being standardized at three phases, 220/330 volts, and 4 wires. Using international standards as national standards enables the same framework for foreign and domestic products to compete. It is an efforts in trade liberalization of Vietnam.

3.2.7. Export controls

As of 2001 the Government implemented a new import and export policy under which lists of imports and exports subject to restrictions and licenses would be in effect for a period of five years (2001-2005) rather than just one year as previously provided. This is a positive step to make the country's import and export regulations more stable and predictable to importers and exporters.

Permits and licenses are now required for exports of a certain number of goods under supervision of the Ministry of Trade, the General Department of Post and Telecom and other ministries. Prohibited exports include antiques, precious or rare plants and animals, logs and sawn timber from domestic natural forests, weapons, drugs, toxic materials and special used coding machines, and coded software programs used to protect state secrets. Export of rice and wood products (except for those exploited from natural forests) is no longer subject to government quantitative restrictions.

3.3. United States Bilateral Trade Agreement (USBTA)

Normalization of Vietnam's trade relations with the United States began with the lifting of the trade embargo in 1994. This move was followed a year later by the restoration of diplomatic relations in 1995, and the first waiver of the Jackson-Vanik emigration provisions in 1998. Under the USBTA, which is expected to be ratified by the National Assembly in November, the US will extend temporary most-favored nation status (MFN, also known as normal trade relations or NTR status) to Vietnam, so that imports from Vietnam will enjoy significantly lower tariffs when entering the United States. The USBTA also provides for reciprocal nondiscriminatory treatment of US exports to Vietnam. The key features of the USBTA are: Trading rights liberalization for US firms in three or six years; tariff reduction and quotas removal in three to seven years (backloaded for steel and cement and petroleum products); Applying WTO-consistent protection of intellectual rights in 12-18 months; and allowing US firms to take part in banking services, financial and leasing, insurance and other services; phrasing out all WTO-inconsistent measuring in five years; and law transparency.

4.4. The Drive toward Liberalization: Obstacles

The first obstacle is the conflict between different groups. An inevitable offshoot of the liberalization is a redistribution of income. Groups that have more benefit under the state-controlled trade system naturally want to preserve their positions and they pressure the government to slow sown or even stop the process. Meanwhile, other groups that benefit from the liberalization will try to quicken the pace. Satisfying the conflict between two groups requires gradually trade liberalization.

Secondly, Vietnam still maintains several types of non-tariff barriers such as trading rights, quotas, and licenses. Each protective measure creates a certain amount of administrative power and economic rent, which inevitably lead to rent seeking.

3.5. Vietnam trade performance in 1990s

3.5.1. Export and import progresses, openness, trade balance

3.5.2. Composition of exports and imports

Chapter 4

COSTS OF PROTECTION IN VIETNAM IN 2000

4.1. Key findings

In 2000, protection in the three selected industries, including steel, fertilizer, and automobile reduced the consumers' surplus by US$ 669 million. The quota rents (in steel and fertilizer) were US$ 378 million, and the tariff revenue in automobile industry is US$ 107 million. The deadweight loss was about US$ 35 million. The producers' gains due to protection are about US$ 149 million.

4.2. Selection of goods

I used following criteria to select products for the thesis: import volume, tariff rate, data availability and the purpose of protection of that good.

4.3. Sources of Data

For steel, fertilizer and automobile, I used data collected in General Department of Custom. Quarterly data were collected and used to estimate elasticities and calculate the costs of protection. For detailed calculation, see Appendix 1.  The base year is 2000.

Table 5: The elasticities of selected goods in the thesis

Source: Author estimation (See Appendix)

Note:  * From Hoang T.X. (1996)

4.4. Changes in quantities and prices of domestic and imported goods

Table 7: The changes in quantities and prices due to protection reduction

Source: GSO, 2000, and author calculation. Also see Appendix.

           * Note: The quantity unit of automobile is piece

Automobile is imposed a tariff of 90 percent on imports. Other kinds of restrictions make the price of imported automobile increase very much. Steel and fertilizer are protected by quotas. The tariff rates imposed on imports of these two goods are low. Since Vietnam is joining AFTA, the tariff rate would be 10% for automobile. The quotas on steel and fertilizer would increase to a higher level, then eliminated and replaced by tariffs. The hypothesis used in this paper based on that assumption.

4.4.1. Automobile is protected by a high tariff rate of 90%. If we reduced the tariff by 80 percent, the unit imported price would decrease by around US$6825, that is 80 percent of the average CIF price of import, or $8513 (WB, 2001a), to US$ 25775 per one. Other kinds of restrictions would make to price of imported automobile up to this high price of US$32600. Domestic quantity would fall to 11,138 pieces, 510-piece lower than the actual production. Domestically produced price of automobile would fall as well, to US$ 27685. The import of this commodity would increase to 16270 pieces, 530-piece higher than the actual import.

4.4.2. Steel is protected by quantitative restraint (Some of the sub-groups of ferrous products are banned from importing, some are not; tariff rate of steel is not very high (MPI/DSI-UNDP, 2001). If we increased the import volume in 2000 to 2.8 million tons, about 139 thousand tons higher than the actual import in 1999, the domestic price would decrease by around US$36.4, to US$235 per ton. Domestic quantity would fall to 1541853 tons, 130147-ton lower than the actual production. Imported price of automobile would fall as well, to US$228 per ton.

4.4.3. Fertilizer is also protected by quantitative restraint (Some kinds of fertilizers are banned from importing, some are not; tariff rate of steel is not very high (MPI/DSI-UNDP, 2001). If we increased the import volume in 2000 to 3 million tons, about 148 thousand tons higher than the actual import in 1999, the domestic price would decrease by around US$39.4, to US$67 per ton. Domestic quantity would fall to 868518 tons, 133996-ton lower than the actual production. Price of imported fertilizer would fall as well, to US$60 per ton. The calculations for fertilizer are the same as for steel since both these two goods are protected by quotas. The level of protection in these industries is very high, over 100%.

4.5. The costs of protection        

Using equations 1, 2, and 3, I can calculate the costs of protection in Vietnam in these industries.

4.5.1. Automobile industry

Compared with the hypothesis level of tariff rate, the actual quotas reduced the consumers' surplus by around US$ 130 million. Out of this loss, the tariff revenues amounted to US$ 107 million; producers' gain was US$ 20 million. The efficiency effect (represented by deadweight loss) would be US$ 2 million.

4.5.2. Steel industry

Assumes the quota of steel is raised to 2.7 million tons, we can calculate the costs of protection in this industry. Compared with the hypothesis level of quota of 2.7 million tons, the actual quotas reduced the consumers' surplus by around US$ 174 million. Out of this loss, the quota rents amounted to US$ 133 million; producers' gain was US$ 58 million. The efficiency effect (represented by deadweight loss) would be US$ 3 million.

4.5.3. Fertilizer industry

Using the method of analyzing the effects of quota expansion, assumes the quota of fertilizer is raised to 3 million tons, we can calculate the costs of protection in this industry. If we increased the quota to 3 million tons, the consumer’s surplus would increase by around US$ 365 million, compared with the actual quota. Out of this gain, the quota rents amounted to US$ 265 million; producers' loss was US$ 70 million. The efficiency effect (represented by deadweight loss) would be US$ 30 million.

4.6. A sensitivity analysis

I assumed that in the base case, the tariff rate imposed on automobile would be 10 percent; quotas on steel and fertilizer would be 2.8 and 3 million ton, respectively. In the low case, tariff on automobile would be 20 percent; quotas on steel and fertilizer would be 2.7 and 2.9 million ton, respectively. In the high case, tariff on automobile would be 5 percent; quotas on steel and fertilizer would be 2.9 and 3.1 million ton, respectively. Base on these assumptions, the following result are obtained, using the same methods:

Table 9 indicates that the more liberalization Vietnam had, there would be more gains to the national economy. The gains in high case were higher than in the base case, and the gains in the base were higher those in low case.  The second point is that protection by quotas created more cost than protection in form of tariff. The remove or increase of quotas would give more efficient gains than tariff reduction. In case of quotas, the changes between base case and other cases are larger than the case of tariff. That is removing quotas would give more gains.

Table 11: The results of sensitivity analysis (US$ million)