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Likely dead trans pacific partnership agreement and vietnams apparel

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY

ERASMUS UNVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES

VIETNAM – THE NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

LIKELY-DEAD TRANS-PACIFIC PARTNERSHIP AGREEMENT
AND VIETNAM’S APPAREL

By
NGUYEN THI TUONG VY

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, December 2016


UNIVERSITY OF ECONOMICS

HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

LIKELY-DEAD TRANS-PACIFIC PARTNERSHIP AGREEMENT
AND VIETNAM’S APPAREL

A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By
NGUYEN THI TUONG VY

Academic Supervisor:
Dr. LE THANH LOAN

HO CHI MINH CITY, December 2016



DECLARATION
I hereby certify that the thesis “Likely-dead Trans-Pacific Partnership Agreement and
Vietnam’s apparel” is my original work and have not been being submitted for any other
degrees. This thesis was fulfilled under the instruction and supervision of Dr. Le Thanh
Loan.
To the best of my knowledge, all the contents that are not my own work have been
acknowledged and cited in the thesis.
Signature

Nguyen Thi Tuong Vy
Ho Chi Minh City, 2016

i



ACKNOWLEDGEMENT
First, I would like to express my great appreciation to my supervisor Dr. Le Thanh
Loan for her patient and helpful instruction, discussion and support during the period I
wrote this dissertation.
I would also like to express my gratitude to Dr. Pham Khanh Nam and Dr. Truong
Dang Thuy. They have shown the most willingness and enthusiasm to help when I had
trouble with the research.
Furthermore, I am sincerely grateful to the VNP lecturers and office staff for having
provided so useful knowledge, inspiring lessons and great support during the course.
Finally, I would like to show my deep thankfulness to my family, my colleagues and
my friends for always accompanying and encouraging me to confront the difficulties and
achieve the target.

ii


ABSTRACT
The thesis aims to investigate the impact of the proposed Trans-Pacific Partnership
(TPP) agreement on Vietnam’s apparel industry. The TPP is a not-yet-in-force agreement
and is stiffly opposed by the new president of the United States (US), however it has still
received supports from remaining members. Hence, the research first constructs four
possible scenarios that the TPP may result in; it then analyzes the impact of the agreement
on Vietnam’s apparel in each scenario through two main policies, namely tariff elimination
and rule of origin.
The main methodology of this study is the ex-ante partial equilibrium analysis with
the global simulation model “Global Simulation Analysis of Industry-Level Trade Policy”
(GISM). The research uses the 2014 trade and tariff database of Vietnam and other ten key
partners in the backward and forward linkages of Vietnam’s apparel industry. The data is
accessed through the World Integrated Trade Solutions (WITS).
The research result shows that Vietnam apparel industry seems to benefit most from
the fully implemented TPP with tariff elimination by increasing exports to the other
members; yet, the origin regulation would be a huge restriction for Vietnam’s benefit
optimization from the agreement. Furthermore, if the US withdraws from the TPP, export
value and trade welfare of Vietnam’s apparel would also reduce as the US is the main
importer of Vietnam’s apparel product. However, if the TPP is totally failed and Vietnam
shifts to join in a new free trade area namely Regional Comprehensive Economic
Partnership (RCEP) with such leading apparel’s input suppliers, for example China, Korea,
India, the ability for Vietnam to comply this regulation of yarn-forward is quite feasible,
which in turn can promote Vietnam garment export into the new free trade area.

Keywords: TPP, Vietnam apparel, partial equilibrium model, GISM.

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Contents
DECLARATION ....................................................................................................... i
ACKNOWLEDGEMENT ....................................................................................... ii
ABSTRACT ............................................................................................................. iii
LIST OF TABLES................................................................................................... vi
LIST OF FIGURES................................................................................................ vii

CHAPTER 1_INTRODUCTION ............................................................................1
1.1. Problem statement .................................................................................................................. 1
1.2. Research objective and research questions .......................................................................... 2
1.3. Research scope and methodology .......................................................................................... 3
1.4. Expected contribution of the thesis ....................................................................................... 3
1.5. Organization of the thesis....................................................................................................... 4

CHAPTER 2_LITERATURE REVIEW ................................................................5
2.1. Theoretical literature .............................................................................................................. 5
2.1.1. Theoretical analysis of the free trade agreement’s impact .............................................. 5
2.1.1.1 Ex-post and ex-ante analyses ............................................................................................ 6
2.1.1.2. Aggregated and disaggregated analyses ......................................................................... 7
2.1.2. Partial equilibrium and the impact of free trade agreement ......................................... 10
2.1.2.1. Theoretical framework development ............................................................................ 10
2.1.2.2. Analysis models ............................................................................................................... 12
2.1.3. Rule of Origin’s impact on apparel industry................................................................... 14
2.2. Empirical reviews ................................................................................................................. 14
2.2.1. Impact of the TPP agreement ........................................................................................... 15
2.2.3. Application of GISM model .............................................................................................. 18
2.3. Logical framework ................................................................................................................ 20

CHAPTER 3_TPP AGREEMENT AND VIETNAM’S APPAREL INDUSTRY
...................................................................................................................................21
3.1. TPP agreement and the “yarn-forward” rule .................................................................... 21

iv


3.1.1. TPP agreement ................................................................................................................... 21
3.1.2. TPP regulation on apparel industry - yarn-forward” rule ............................................ 22
3.2. Vietnam’s apparel industry ................................................................................................. 22
3.2.1. Vietnam’s main export apparel products and markets .................................................. 23
3.2.2. Vietnam’s apparel main export competitors ................................................................... 23
3.2.1. Vietnam’s main import textile and apparel products and suppliers ............................. 23

CHAPTER 4_METHODOLOGY AND DATA ...................................................30
4.1. Methodology .......................................................................................................................... 30
4.2. Scenarios ................................................................................................................................ 33
4.3. Data ........................................................................................................................................ 34

CHAPTER 5_SIMULATION RESULTS .............................................................36
5.1. Impact of TPP agreement on trade value of Vietnam's apparel industry ....................... 36
5. 2. Impact of TPP agreement on trade value of Vietnam's apparel products ..................... 39
5.3. Impact of TPP agreement on trade welfare of Vietnam's apparel industry .................. 40
5. 4. Impact of TPP agreement on trade welfare of Vietnam's apparel products .................. 43
5. 5. Main competitors and export market of Vietnam's apparel products............................ 43

CHAPTER 6_CONCLUSION, POLICY IMPLICATION AND THESIS’S
LIMITATION ..........................................................................................................46
6.1. Conclusion ........................................................................................................................... 466
6.2. Policy implication.................................................................................................................. 49
6.1. Thesis’s limitaion .................................................................................................................. 50

REFERENCE ..........................................................................................................51
APPENDIX ..............................................................................................................55

v


LIST OF TABLES
Table 3.1. Details of some main export apparel of Vietnam in 2014 .............................. 24
Table 3.1. Export shares in three leading apparel importing countries in 2014 .............. 28
Table 5.1. Change in export value of Vietnam’s apparel in different scenarios ............. 38
Table 5.2. Change in the apparel prices ........................................................................... 38
Table 5.3. Export value of Vietnam’s apparel products at HS digit 4-level.................... 39
Table 5.4. Total net welfare components of Vietnam’s apparel ...................................... 41
Table 5.5. Total net welfare components of other countries ........................................... 42
Table 5.6. Total net welfare components of Vietnam’s apparel products ....................... 43
Table 5.7. Main competitors and export markets of Vietnam apparel ............................ 44

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LIST OF FIGURES
Figure 2.1. Tariff elimination in a small country............................................................. 11
Figure 2.2. Conceptual framework ................................................................................... 20

Figure 3.1. Vietnam's export apparel in 2014 .................................................................. 23
Figure 3.2. Vietnam's main export apparel products group HS 61 and HS62 in 2014.... 24
Figure 3.3. Main apparel’s importing countries in 2014 ................................................. 25
Figure 3.4. Vietnam's main export apparel products HS61 in 2014 ................................ 26
Figure 3.5. Vietnam's main export apparel products HS62 in 2014 ................................ 26
Figure 3.6. Main apparel’s exporting countries in 2014 .................................................. 27
Figure 3.7. Vietnam main import textile and apparel in 2014 ......................................... 29
Figure 3.8. Vietnam textile’s main import markets in 2014 ............................................ 29
Figure 4.1: Producer and Consumer surplus.................................................................... 33
Figure 5.1. Change in apparel export value of countries in scenario 1 ........................... 37
Figure 5.2. Producer surplus of countries in different scenarios ..................................... 41

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CHAPTER 1
INTRODUCTION
1.1. Problem statement
Trans-Pacific Partnership (TPP) Agreement is a free trade agreement among the 12
countries1 with the aim of increasing economic integration in Asia – Pacific region. Stemmed
from a tripartite agreement called Closer Economic Partnership Pacific Three (P3-CEP), the
agreement quickly attracted attention and participation of the other nine countries. On the
date of February 4th 2016, the TPP was officially signed and most member countries are
looking forwards the parliament’s ratification with the expected enforcement by 2018.
However, the TPP enforcement is a controversial issue recently. On the one hand, the
agreement has faced with stiff opposition from the future incumbent president and his party
of the Unites State as the most developed member in the agreement. On the other hand, many
other countries have shown efforts in promoting the validation of the agreement, such as
Japan, Australia, New Zealand and Peru. These events have aroused many predictions about
the future of TPP.
Regarding to the apparel industry, for years, it has always been one of the major trading
sectors of Vietnam. Vietnam's garment exports in 2015 reached 22.81 billion US dollars, a
growth rate of 8.91% higher compared to 2014. The United States is the major importer,
accounting for over 48% of the total export value of the country's garment, with 10.96 billion
US dollars, following by Japanese market, accounting for 12.21%. This sector also creates
more than 2.5 million jobs annually. However, Vietnam's apparel sector has not be able to
produce high-quality raw materials to conform with the requirements of export production,
but heavily depending on imports inputs, including yarns and fibers, cottons and fabrics.
Vietnam is reported of 54 per cent self-sufficiency in clothing production, according to
GTAP data which is derived from the national account (Vanzetti and Pham, 2014), and the
rest is imported mainly from China, Korea and Japan (for yarns and fabrics), and the U.S.,
India, Brazil and Australia (for cotton and fiber). Except for the U.S., Japan and Australia,
most of these countries are not the members of TPP. This problem will lead to major
constraints in maximizing TPP’s potential benefits due to restrictive rule of origin
requirements: ‘yarn-forward’.
1

12 TPP members: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, The
United State and Vietnam (https://ustr.gov/tpp/)

1


Yarn-forward rule of origin requires the TPP nations to use a TPP members-produced
yarn in textiles in order to receive duty-free access. For example, under the TPP “yarn
forward” rule, the yarn, fabric, sewing thread and the garment itself must be made in the
region, rather than outside players such as China. At present, about 80 or 90 per cent of
Vietnam’s textiles come from other countries, mostly from China, Korea and Japan.
Hence, in order to benefit the tariff elimination from the TPP agreement, Vietnam may have
to shift the raw material import from traditional partners to TPP members like the U.S. and
Australia, or enhance the self-sufficiency capacity.
Overall, if the TPP agreement enters into force, this agreement is expected to have
significant impact on the apparel industry of Vietnam. First, the tariff preferences in the TPP
(reducing to 0%) may create more opportunities for market access and export promotion of
Vietnam’s apparel product, which results in the increase in trade value and net welfare.
Vietnam garment can also occupy more market shares in the United States and Japan from
the non-TPP competitors such as: China, India and Bangladesh. Next, the origin regulation
‘yarn-forward’ of the agreement on the apparel sector would be a huge restriction for
Vietnam’s benefit optimization from the tariff elimination, since Vietnam's garment industry
depends heavily on raw material inputs from the non-TPP countries. On the other aspect, if
the TPP agreement can not take effect, or the US unilaterally withdraw from the agreement,
the scenarios may also have remarkable impact on Vietnam’s apparel industry.
Despite numerous studies about the impact of the TPP on its member countries, there
are not many researches focus on the Vietnam’s apparel sector, especially on more specific
apparel products and under different scenarios including the probability of the likely-dead
TPP. Therefore, the analysis of an ex-ante partial equilibrium models to predict the impact of
the TPP on Vietnam’s apparel is necessary and contributable for the economic development
strategy and general policy of Vietnam under integration conditions. The analysis would
provide quantitative data about the development trend of the industry, which helps the policy
makers to adjust the plans and strategies for the technology and human resources
development as well as the input supplier, export markets and product categories.
1.2. Research objective and research questions
The thesis aims to investigate the impacts of the proposed TPP agreement on the
Vietnam’s apparel industry.
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The following questions will be answered to clarify the research objective:
(i) How much are the impacts of the TPP agreement on the trade value of Vietnam’s
apparel export products?
(ii) How much are the impacts of the TPP agreement on the consumer and producer
surplus and the tariff revenue from the industry?
(iii) How does the TPP agreement change the export markets and competitors of
Vietnam’s apparel products?
1.3. Research scope and methodology
The ex-ante partial equilibrium analysis for the apparel industry is applied in the study
with the available Global Simulation Analysis of Industry-Level Trade Policy (GISM)
model. The analysis focused on the impacts on trade value, trade welfare, export markets and
main competitors of Vietnam’s apparel products.
The research uses the bilateral trade and tariff data in 2014 of eight sub-apparel
products at HS 4-digit code of Vietnam and ten main partners in the backward and forward
linkages of Vietnam’s apparel industry, including: Australia, Bangladesh, Canada, China,
EU, India, Japan, Korea, Mexico, the US. The data is collected from the United Nation
Comtrade and the Trade Analysis Information System (TRAINS) through the access to the
World Integrated Trade Solutions (WITS).
1.4. Expected contribution of the thesis
First, not stopping at the simulating the impact of the TPP’s fully implementation, the
thesis takes into account two further scenarios: (i) a without-US TPP and (ii) a likely-killed
TPP with a new FTA driven by China, namely RCEP. These scenarios are inspired by the
fact that the TPP has been stiffly opposed during the recent US presidential election period,
especially from the new US president Donald Trump.
Second, with the application of the partial equilibrium GISM model, the study can
evaluate at disaggregated level of the TPP’s effect on Vietnam's garment industry and with
more update data in compared with the popular general equilibrium. Particularly, the subsectors will include the main 8 groups of apparel products with the classification up to HS
digit-4 level. As the tariff elimination schedule is different among products, the

3


disaggregated analysis will help to estimate which group of products may benefit or lost
most due to the agreement’s impact.
Third, the thesis analyzes the impact on Vietnam's garment industry in the relationship
with the other direct competitors like China and India, who are also the leading apparel
exporters in the world. As these countries are not the TPP members, taking them into account
would consider the change in the international market share Vietnam’s apparel products.
1.5. Organization of the thesis
This thesis consists of five chapters.
 Chapter 1 introduces the motivation and objective of the research.
 Chapter 2 presents a review of theoretical and empirical studies.
 Chapter 3 overviews the TPP agreement and the Vietnam’s textile and apparel
industry.
 Chapter 4 develops the methodology and data collection for the research.
 Chapter 5 simulates the model, analyses, and discusses the simulation results.
 Chapter 6 summarizes main findings, suggests policy implications and present
several limitation of the study.

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CHAPTER 2
LITERATURE REVIEW
2.1. Theoretical literature
Trans-Pacific Partnership (TPP) agreement is a new-generation free trade agreement
(FTA) with wider-range commitments including both trading and non-trading issues. The
agreement, if enforced in 2018, would be considered as the highest level commitment FTA
so far in Vietnam and most of other TPP members. Therefore, researchers have used familiar
theoretical frameworks of studying an FTA for the analysis of the TPP agreement’s impacts.
The following sections provide an theoretical overview of:
 Theoretical review of the FTA’s impact analysis,
 The partial equilibrium model for the ex-ante and industrial analysis of the
FTA’s impact (such as the TPP) on a specific sector, particularly the apparel
sector of Vietnam in this study,
 The impact of the rule of origin, which is one of the most challenges to an FTA
implementation on apparel industry.
Details about specific terms of the TPP relating to apparel and the argument whether or
not it may come into force as well as Vietnam’s apparel industry will be discussed in Chapter
3.
2.1.1. Theoretical analysis of the free trade agreement’s impact
A multilateral FTA like TPP is a form of trade liberalization, in which trade barriers are
first reduced and then eliminated among nation members (Snorrason, 2012). The most
visible manifestation of this kind of trade liberalization is the mutual granting of tariff
elimination among members. Among different types of regional economic integration, an
FTA achieves greater integration level than a preferential trade agreement, but still has not
reached such a complicated level of integration like a custom union, a common market or a
monetary union (Balassa, 2013 ). Also, the FTA is one of the most popular agreements being
negotiated and/or come into force (with the total of 226 agreements accumulated by February
2016)2. Therefore, it is understandable that many of international trade experts have both

2

FTAs by Status (cumulative) https://aric.adb.org/fta-trends-by-status

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theoretically and empirically raised concerns about the impact of this kind of agreement on
each member, the whole union, as well as the global economy.
It would be too ambitious for the discussion of the FTA’s impact in general. Hence,
within the scope of the thesis, the author will address the theoretical framework of an FTA’s
effect in two aspects: (i) ex-post or ex-ante analysis and (ii) aggregated or disaggregated
analysis. Accordingly, the TPP is a not-yet-in-force agreement; also, the author's research
aims to analyze the impact on Vietnam's garment sector in terms of sub-sectors. Hence, the
theoretical review will focus mostly on ex-ante and disaggregated analysis.
2.1.1.1 Ex-post and ex-ante analyses
The major consideration that researchers may often take into account is which
methodological approach is the more suitable one to assess the effects of a given policy
measure, especially under given existing restraints. One of the factors affecting the selection
of alternatives is the validity of agreement, by that, we have the choice between ex-post and
ex-ante analysis (Bacchetta et al., 2012). The ex-post approach bases on the database of the
existing agreement, while ex-ante procedure uses the simulation methods to evaluate the
potential economic effects of a new or not-yet-come-into-force trade agreement.
Ex-post analysis can be used when the FTA have had effects for an adequate period of
time and historical data can be collected. A well-know representation for this approach is the
gravity model. First introduced in 1962 by Tinbergen, the traditional gravity model has been
used popularly in various studies on identifying the determinants of bilateral trade. The basic
gravity equation explains the bilateral trade capacity of two countries directly relating to the
economic size and the distance between them (Tinbergen, 1962). Following, a large numbers
of experts have developed the theoretical background for the model. Among them, Anderson
and Wincoop (2003) have estimated a theoretical gravity equation and calculates the
comparative statics of trade frictions at the bilateral level (Bilateral Resistance) and
Multilateral level (Multilateral Resistance).
Ex-ant analysis, as mentioned above, is a more appropriate approach when we
challenge a new or proposed free trade agreement with the unavailability of database. The
overall process to implement this analysis is doing the simulation over a range of different
scenarios with alternative input values so as to evaluate the sensitivity of the outcomes. Basic

6


assumptions to note in the model is that many of parameter values are usually obtained from
prior researches, and the demand and supply functions are designed with constant elasticities.
General equilibrium and partial equilibrium are the two famous demand-supply
equilibrium models that are frequently applied for this kind of ex-ante analysis (Snorrason,
2012; Bacchetta M. et al., 2012; Francois and Reinert, 1997). As these two approaches are
also the representatives of the aggregated and disaggregated analyses, detailed review of
them will be mentioned in the next section.
2.1.1.2. Aggregated and disaggregated analyses
Aggregated analysis – the general equilibrium
The general equilibrium model is popular used to analyze the effects of a free trade
agreement at aggregated level. The general equilibrium analysis accounts for interactions
among firms, households, and governments in multiple product markets among a lot of
regions of the world economy. In the Negishi format, the general equilibrium is represented
through a welfare optimum subjecting to production technologies and commodity balances
with nonzero welfare weights for the regions such that the consumer’s budget constraint
holds (Ginsburgh and Keyzer, 2002). .
Inspired from the Viner’s theory, Meade (1955), Lipsey and Lancaster (1956), Lipsey
(1970) have taken into account the interaction with other markets and the change in the terms
of trade of a country to further investigate the benefits gained from forming an FTA. Lipsey
and Lancaster (1956) introduce the general theorem of second best 3 and state that under a
general equilibrium of multiple goods, the elimination of a constraint (e.g. tariffs, subsidies,
taxes, monopolies, etc.) may not lead to the overall economic welfare increase if other
economic distortions remain unchanged.
Also, Meade (1955) and Lipsey (1970) develop the general equilibrium theory to
estimate the effects of an FTA of two countries in which each country will export one good
and import the other from another country. Assuming that the two countries’ trading quantity
cannot affect the world price and the FTA eliminates the intra-trade tariffs, this regional
agreement is seemed to increase imports and exports volume of the members at any given
terms of trade. However, when considering the change in the terms of trade, the

3

According to A. Smith and D. Ricardo, free trade with no constraints is regarded as the first best choice (Snorrason, 2012).

7


improvement is just witnessed for one country, while terms of trade of the other under the
FTA is worse than when it simply reduces the constraint (e.g. tariffs) and does not enter the
FTA. Wonnacott and Wonnacott (1982) improve the model by taking into account the
external tariffs or high transport cost to outsiders. Under this circumstance, they find out that
joining into the FTA may be a prior solution for the countries, instead of trading with the
outsiders due to the trade distortions.
On the other aspect, Grinols and Wong (1991), Baldwin and Venables (1995), Lloyd
and Maclaren (2004) have tried to quantify the magnitude of welfare change under the FTA
by developing the theoretical models with commodities and trading partners and a general
equilibrium framework. With a range of assumptions and the availability of data, the models
can measure the impact of the FTA relating to the change in some main indicators: trade
volumes, terms of trade, production, consumption, labor force, etc. (Plummer, 2007).
Furthermore, an FTA is known to have a long term impact rather than just in a short
term period. Hence, Plummer et al (2010) believe that it is necessary to study the effect of
the agreement under dynamics context, including: economies of scale; technological transfer;
the pattern of foreign direct investment; policy adjustment and restructuring; and
competitiveness and long-run growth effects.
On one hand, this general equilibrium model, as being set up at aggregated level,
dominants in capturing the inter-market relationship and the production factors’ constraints;
furthermore, it can simulate the impact over a long period. The results are given both in
macroeconomic and microeconomic aspects; with the industrial aspects just stopping at
finding the linkage of production and consumption among different sectors.
Hence, it can be seen that the main disadvantage of this general equilibrium approach is
not being able to evaluate the disaggregated impact, by that, it is not suitable applied for subsectoral analysis. Furthermore, it is not easy to implement this model under a restraint of
time and data collection. The database in need is remarkably enormous, taking the GTAP
database as example, which contains 57 sectors of 140 different countries and regions
(Aguiar et al, 2016). This seems to consume a lot of time and require a complicated technical
tool to handle the data for the research objectives.

8


Disaggregated analysis - the partial equilibrium
Disaggregated analysis is used to analyze the effects of a free trade agreement at
disaggregate level, such as sub-sectors of agricultures, manufactures. The most well-known
approach to implementing this ex-ant analysis for trade agreements is partial equilibrium.
Partial equilibrium is part of the general equilibrium, where the market clearance is
considered only in some specific sectors or industries. This model mainly focuses on the
policies’ impact in directly affected market, particularly when the sectors or groups of
products play important role in the trade balance, remarkably contributing to the GDP’s
growth, or creating many jobs for unskilled workers. Also, the policy makers may want to
find the answers about the impact of a trade agreement on these industries for the change in
trade flows, tariff revenue, consumer and producer surplus (Cheong, 2010; Bacchetta M. et
al., 2012).
The partial equilibrium model, on its own, also have both benefits and drawbacks. The
ones that are considered as the dominance of the general equilibrium may be seen as
weaknesses in the partial equilibrium model, and vice versa. The key advantage of this
equilibrium is that the analysis is implemented at disaggregated level, thus it can focus on a
very specific group of products. Furthermore, just a rather limited database are in need,
mainly including trade flows and trade interventions, together with several specific
parameters. However, the main limitation of this approach is the lack of mutual interaction
with other market as can be achieved by general equilibrium.
Tariff elimination is the most prominent policy of an FTA , and the best way to analyze
the impact of a fore-coming trade liberalization policy like an TPP agreement is combining
both general equilibrium and partial equilibrium analysis (Bacchetta M. et al., 2012; Ciuriak
and Xiao, 2014; Nguyen et al., 2015). However, as the main focus of the thesis are about
tariff elimination’s impact on prices, trade flows, tariff revenues and welfare analysis within
a single sector (in this case: the apparel industry) and under the constraint of data collection,
the suitable approach to be chosen is partial equilibrium model. The partial equilibrium
analysis of an FTA’s impact (through tariff elimination) on a single industry is shown in the
following section.

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2.1.2. Partial equilibrium and the impact of free trade agreement
2.1.2.1. Theoretical framework development
Marshall (1890) can be acknowledged as one of the pioneers studying about partial
equilibrium, aiming to achieve the equilibrium price under a key assumption of other things
remaining unchanged (ceteris paribus). Other researchers who have contributed to the
development of this equilibrium theory are: Stigler (1942); Viner (1950); Francois and
Reinert (1997); Francois and Hall (2003); Cheong (2010); Bacchetta M. et al., (2012),…
Notably, by introducing the theory of trade creation and trade diversion impact of an
agreement, Viner (1950) has used the partial equilibrium analysis to prove that FTAs do not
always create advantages to the members as researched by most of previous studies. In
particular, trade creation is found to bring the positive effects on welfare while trade
diversion causes the negative ones, and the relative strength of these two effects will
determine the change in welfare of a trade agreement.
Following the studies of Francois and Reinert (1997), Cheong (2010), Bacchetta M. et
al., (2012), the analysis framework focusing on the FTA’s impact on trading welfare is
shown as follow:
Impact on prices and trade flows and tariff revenues
We denote:
 P* as world price
 D0 as domestic demand
 S0 as domestic supply
 M0 as imports
 t as the amount of tariff elimination
We assume that the FTA comes into force and thus, the tariff decreases by an amount
of t. Within a small country which applies the tariff elimination policy, this would lead to a
decreases in domestic price: P1 = P* – t. Consequently, domestic demand increases to D1 and
supply decreases to S1 respectively; imports, then, increases from M0 to M1 (with M1= D1 –
S1). This means, by contrast, there is an increase in the exports of countries exporting
products into this market.

10


These effects result in a gain in the consumer surplus of (a + b + c + d), yet a loss in the
producer surplus of (a), and a loss in tariff revenue of (c) for the import country. Hence, the
total welfare from the tariff elimination is (b + d), or the triangle under the import demand
curve (Figure 2.1). For the export country, there would be a rise in producer surplus as it can
increase the amount of exporting products.
Measuring net welfare gains using the Harberger triangle
Considering the country’s representative individual has quasi-linear preferences over
two goods: Y0 and Y, with Y is the import-competing one. We set the consumer’s utility
function of the country as follow:
U = D0 + u(D)

(2.1)

where


D0 and D are respectively the quantities of good Y0 and Y consumed demand.



u(.) is an increasing, concave sub-utility function.
Domestic market

P

Import market

PX

SX

X

P*
a
P*- t

b

c

d

c
b+d

X-t

D
M

0
S1

S0

D0

D1

Q 0

M0

M1

D1

Q

Figure 2.1. Tariff elimination in a small country
Souce: Cheong 2010; Bacchetta M. et al., (2012)
As the individual preferences are quasi linear, the indirect utility function equals
income (I) plus consumer surplus [u(D) – PD]. When he/she gets the optimal choices, we
have the function of welfare:
W(t) = I + u(D) – PD

(2.2)

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Substituting I = π + tM [4] into (2.2), we have:
W(t) = π + tM+ u(D) – PD

(2.3)

Deriving equation (2.3) with the respect to t, using Hotelling’s lemma and the QL
preferences’ second property , we have:
W

= u’ D’ – ( D + PD’) + π + M + tM’
= (u’ – P) D’ – D + S + M + tM’
= S + M – D + tM’

= tM’ 5

(2.4)

Taking the second-order Taylor approximation of (2.4) around t = 0:
W( t )

1

≅ W(0) + tW’( t) + = t2 W”( t)
2

(2.5)

While at t = 0, W’(t) = 0 and W”( t) = M, and tM’ = dM then (2.5) becomes:
W( t )= W( t ) - W(0)

1

= tM
2

(2.6)

As one of the key assumption in the simulation models is constant-elasticity, M’ can be
rewritten:
M′ =

M
P

(

P dM
M dP

)=

M
P

ε

(2.7)

with ε is the price elasticity of import demand.
Substituting (2.7) into (2.6), we have the change in welfare depending on only ε and t:
W =

1M
2P

εt 2 ≤ 0

(2.8)

2.1.2.2. Analysis models
The WITS has provided a range of four available models for analysis of this partial
equilibrium, including:
 Software for Market Analysis and Restrictions on Trade (SMART)
 Global Simulation Analysis of Industry-Level Trade Policy (GSIM)
 Tariff Reform Impact Simulation Tool (TRIST)
4

π and tM denote for profits and tariff revenue respectively)

5

for the import-competing good: D = S+M

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 Agricultural Trade Policy Simulation Model (ATPSM).
‘SMART’ model is a partial equilibrium analysis tool, evaluating the effects of
different tariff reduction scenarios. The model is based on Armington’s assumption of
imperfect substitutions of import goods from different sources, and developed by Jammes
and Olarreaga (2005). One crucial assumption of SMART is that trading is in terms of
bilateral interaction, in which the model mainly focuses on the export supply of different
partners into one imports market only (e.g. home country), ignoring the global markets.
‘GSIM’, developed by Francois and Hall (2003), can be considered as an enhancement
of SMART model. GSIM is also set up basing on the partial equilibrium framework with
imperfect substitute assumption, but has taken into account the global clearing condition.
The simulation of the model can provide useful results of an trade agreement impact at
industrial level through the change in trade value, tariff revenue, consumer (importer) and
producer (exporter) surplus.
‘TRIST’, developed by World Bank specialists, Brenton et al (2009), pays more
attention to the actual trade returns, including both tariff and other forms of tax issue. TRIST
can give access to more detailed outcome of the impact. Among them are trading production,
employment and household income. However, in order to successfully implement this
model, there is a must in the requirements of comprehensive data on import flows, eight-digit
HS products, rule of origin and the customs procedure codes, together the with detailed of a
variety of tariff and tax types.
‘ATPSM’, developed by UNCTAD, is the partial model focusing on agricultural trade
policy analysis like quotas and subsidies. In the main model equation, domestic prices are
shown to have the relationship with global market prices as well as trade restrictions (tariffs,
quotas) and other support measures (e.g. subsidies).
Among four ready-made models above, GISM and TRIST can be seen as the most
suitable tools to simulating the impact of an FTA (like TPP) on a specific sector (such as
Vietnam’s apparel). However, with the constraints of database, it is quite hard to apply the
TRIST model for this research. Hence, GISM is the one being chosen as the model for the
analysis. Further detail about this model will be clearly presented in Chapter 4.

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2.1.3. Rule of Origin’s impact on apparel industry
Rule of origin is an frequently mentioned provision in the content of any FTA,
especially when discussing about the apparel industry. Shibata (1967) has given a more
specific explanation about the FTA, suggesting the important role of the intra trade products’
origin, that is, import products or components from a country in the integration will achieve
the tariffs preference only when they are originated or manufactured in the territory of the
FTA members. This regulation was supposed to prevent against the trade deflection as well
as to reduce unnecessarily transaction costs for partners; however, it also be considered as a
constraint for members, especially developing countries, to fully benefit from the agreement
on tariff barriers’ elimination (Elliot, 2016).
A number of theoretical studies indicate that the application of the rule of origin may
divert intermediate trading activities from low-cost but non-member countries toward the
FTA members (Ju and Krishna, 1998; Duttagupta and Panagariya, 2001;…). This is the
result of the trade barrier elimination taken place when the FTA comes into force. Viner’s
trade diversion (1950), again, can be used to explain for this situation. A country seems to
confront a trade-off when exporting products to other FTA members. On one hand, if the
exporters keep using a high proportion of components from non-FTA members, who are
supposed to supply with the most competitive price, they would not be able to fully receive
the tariff elimination. On the other hand, if the country turns into the intra partners for the
input supply, despite a higher cost of intermediate than before, it might have more
opportunity to access other partners’ markets.
However, rules of origin can also bring positive effects to welfare through attracting
investments in intermediate production (Estevadeordal and Souminen, 2005). The input
originated from foreign direct manufacturers, as an example, would legitimize the provisions
regarding the origin of the export products
2.2. Empirical reviews
Although there is a vast number of researches on the TPP agreement since its first
announcement, the empirical reviews show a lack of disaggregated studies of this agreement
on specific industries, especially the apparel sector. Most of them are in favor of the general
equilibrium, by that, just concentrating on the change in macro-economy and sectors at
aggregated level. This creates the motivation for the author to applying the partial
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