Import Competition from Neighbors: Impacts on Performances of Enterprises in Vietnam

Type Working Paper
Title Import Competition from Neighbors: Impacts on Performances of Enterprises in Vietnam
Vietnam’s exports have registered a growth of over 20%1 year over year during the past
decade, especially since it joined the World Trade Organization (WTO) in 2007. The drastic
increase in Chinese exports preceded this, starting with a great surge in 2000. What made the
development in Vietnam possible was the liberalization process of the Vietnamese market which
started in the mid-1980s when Vietnam decided to switch from its centralized economy.
Figure 1 depicts how Chinese manufacturing imports are expanding as a share of total
manufacturing imports in Vietnam. The significance is clear when compared to the declining
shares of imports from high-income countries and the low, stagnant shares of imports from other
low-wage countries.2 It is also important to note that this increase in Chinese imports has been led
especially by intermediate inputs, as opposed to final products during the past decade. According
to Ha (2011), imports of intermediates from China have “increased 83-fold over 10 years, with an
average growth rate of 63.65%.” In 2008, intermediate goods trade accounted for 65.2% while
final goods trade amounted merely to 5.7% of total goods trade value. These statistics depict the
growing trend in intermediate goods trade as a share of total imported goods, in contrast with the
share of imported final goods.
In 2011, China became the second biggest economy in the world. Given its increasing
prominence in international trade during the past two decades, a growing number of studies have
focused on Chinese competition and estimated its impact on other countries. For example, Jenkins,
Peters and Moreira (2008) explore the effects based on sectoral analysis, and finds asymmetrical
results, shedding light on the countries and sectors that would gain and lose from this competition.
Using detailed plant-level data, Alvarez and Claro (2009) and Iacovone, Rauch and Winters (2013)
estimate the impact of Chinese import competition on Chile and Mexico, respectively. Alvarez
and Claro (2009) find that Chinese imports have a negative effect on firm survival and the
surviving firms’ employment growth. In addition to plant-level data, Iacovone, Rauch and Winters
(2013) utilize plant-product-level data, enabling them to also analyze the impact across products
within a plant. Their findings are that the increase in import competition from China does indeed
lead to plant and product exit, as well as decrease in sales, especially for smaller plants. Bloom,
Draca and Reenen (2011) match dataset on firms in 12 European countries with industry-level
trade data, and find that imports from China decrease the chances of firms’ survival and
employment. By IT intensity, low-tech firms suffered from market exit and job losses, as opposed
to high-tech firms, which were shielded from the import competition, and whose employment
actually grew in all sectors. Autor, Dorn and Hanson (2013) and Acemoglu et al. (2014) investigate
the impact of the rise in Chinese imports on the local labor markets in the U.S. Using U.S.
employment data, their estimates show that Chinese import competition caused higher
unemployment and reduced wages in exposed industries.
Moreover, by dividing countries into two big groups based on their income, others have
analyzed the effects of increasing import competition from low-wage countries on other countries.
For example, Bernard, Jensen and Schott (2006), Mayda et al. (2012) and Federico (2014) examine
the impact on U.S., Japan, and Italian manufacturing plants, respectively. Bernard, Jensen and
Schott (2006) finds that import competition from low-wage countries to the U.S. negatively affects
plant survival, growth and employment, especially those in industries with higher exposure to
competition. Estimation results from Mayda et al. (2012) show that increase in import penetration
from low-wage countries is associated with a decrease in both the probability of survival and
employment growth, and that these negative effects are driven mainly by imports from China.
Federico (2014) also finds that the rise in import penetration decreases the number of firms, output,
employment and wages in Italy. In this paper, we take into account the effects of import
competition from both China and other low-wage countries, along with high-wage countries.
In previous empirical research, economists have typically assumed the traditional trade
theories, in which countries with different opportunity costs of production engage in trade. This
comparative advantage can arise from differences in productivities or technology (Ricardo, 1817),
or from differences in relative factor endowments (Heckscher, 1919; Ohlin, 1924; translated,
edited and published in Heckscher and Ohlin, 1991) between countries. This brings us to the
question: what does this rise in Chinese import competition in Vietnam tell us about the case where
two labor-abundant and technologically similar 3 countries trade? It is important to note that
Vietnam is also geographically proximate to China. Hence, the possible impact from Chinese
competition should be different compared to aforementioned studies.
These traditional theories have their focus on ‘inter-industry trade.’ In order to explain
trade within industries, however, we need to take into consideration ‘new’ trade models developed
by Krugman (1980). This model incorporates economies of scale and consumer preferences of
variety, allowing us to explore the case of ‘intra-industry trade.’4 According to this theory, trade
will cause firms to exit in each country (selection effect) and surviving firms to expand their output
(scale effect).
Seeking to quantify the effects of Chinese import competition on production activities of
firms in Vietnam, enterprise type, firm size, capital intensity levels and key economic regions, as
well as competition from low-wage countries and high-wage countries are taken into account. The
remainder of this paper is organized as follows. In the next section, the dataset and estimation
techniques will be explained, followed by the econometric regression results in section 3. The final
section concludes.

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