Authorsconduct this paper to examine the impact of removing the industrial tariff onthe Vietnam economy by constructing a Social Accounting Matrix (SAM) based onVietnam Input-Output table for the year 2012 and then utilizing the ComputableGeneral Equilibrium (CGE) model which is a powerful tool for evaluating theimpact of tax reform. Jean (2014), Khorana (2017), Mohamed (2016), Shaikh(2009), and Winchester (2009) utilize CGE model to evaluate the impact ofreducing the tariff on the economy of Chile, India, Algeria, Pakistan, and NewZealand respectively. They reveal that the tariff reduction will benefit thesocial welfare and strengthen GDP growth, labor force, and the factors ofproduction (e.g.
, capital and labor).Since1986, Vietnam, a developing country located in South East of Asia, has beensuccessfully transformed into the market economy. During three decades, theeconomic growth rate is upholding more than 5% each year (except the year 1999)and reach around 6.81% in 2017. In the structure of the economy, industrialsector, which accounts for 33.25%, plays an important role not only inindustrializing and modernizing Vietnam’s economy until 2020 but also inboosting other sectors such as agriculture, commerce and service develop fasterand more sustainable.
Currently,Vietnam is an active member and playing a crucial role in some internationalorganizations such as Association of Southeast Asian Nations (ASEAN),Asian-Pacific Economic Cooperation (APEC), ASEAN Economic Community (AEC),ASEAN-Europe Meeting (ASEM), and World Trade Organization (WTO). Furthermore,to be more integrated into the world economy, Vietnam joined many Free TradeAgreement (FTA), some of them are effectively active such as Vietnam-Japan(2009), Vietnam-Korea (2015), and Vietnam-Eurasian Economic Union (2015).Besides, there are two FTAs ended negotiation round and prepared for signing,one of them is Europe-Vietnam Free Trade Agreement (EVFTA) which will beongoing into force in 2018. The aims of EVFTA are to stimulate internationaltrade transactions, reallocate resources and strengthen relationships betweenVietnam and EU nations by eliminating tariffs barriers.
European is consideredas one of the most powerful and dynamic areas in the world with a tightconnection among 28 countries (by the time 2017) in which the population sizeis approximately 742 million people, the total GDP is $18.06 trillion(International Monetary Fund, 2017), constituted approximately 15% of theworld’s trade in goods (Eurostat, 2017).Giventhese background, participating in EVFTA will obviously bring a variety oftremendous benefits for both parties, this agreement will eliminate virtuallyall tariffs on goods between Vietnam and EU; specifically, Vietnam willeliminate 65% of nonzero tariff flow immediately, and 99% of the tariff flowwill keep being eliminated in 2028 and the rest of tariff flow will be appliedat 0% level with the case of tariff quota. As a result, products made inVietnam such as textiles, footwear, wooden, have broadly appeared in all EUcountries. EVFTA will certainly create precious chances for extending business,investments and increasing labor forces as well as boosting commercial andeconomic growth in Vietnam and EU. According to Vietnam General StatisticsOffice (2015), the exports value to EU market were $31 billion, accounted for19.1% of Vietnam’s total export value.
In addition, the imports value from EU’s members were approximately$10.5 billion, which took 6.3% of Vietnam’ total imports value.
Hence, when theEVFTA enters into force, it will positively promote the trade among Vietnam andEU members, as well as make significant impacts on various aspects of Vietnameconomy including household consumption, production, and government income. However,most of the EU members are high- or upper-middle- income countries whileVietnam is low- income country, economic health imbalance might causetremendous challenges for Vietnam as long as the import tariffs of almostcommodities from EU countries substantially reduce at 0% level includingindustrial products from 2018. In fact, commodities in the industrial sectoraccounted for 96% in total imports value of Vietnam from EU in 2015 (GeneralStatistics Office, 2015), such as cars, motorbikes, wine, canned food.Consequently, this causes a fierce competition between domestic industrialproducts and foreign industrial products, uncompetitive firms might suffer fromgoing bankrupt, or external shocks (Doanh and Heo, 2014). From theopportunities and threats mentioned above, the authors conduct this study toevaluate the tariff reduction of industrial sector on the Vietnam economy whenEVFTA is effective in 2018. Theremaining of this study is structured as follows.
The next section summarizesliterature which involves CGE model and explores the impact of tariffelimination on the economy. The third section describes data and researchmethodology, including CGE model, benchmark calibration process and simulatesthe scenario reducing industrial sector tariff at 0% level and adjustingproduction tax rate. Then, section 4 presents the empirical results of ouranalysis. The final section provides the conclusion with policy implications.