MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY HO CHI MINH CITY

--------***--------

ECONOMETRICS REPORT
DETERMINANTS OF VIETNAM’S TRADE
BALANCE IN THE PERIOD 1997 - 2019

List of members:
1. Nguyễn Mai Anh Thư (1701025830)
2. Phạm Nguyễn Thang Ngọc (1912215324)
3. Phan Nguyễn Thảo Phương (1912215410)
4. Ngô Trần Bảo Anh (1912215019)
5. Đào Phương Anh (1912255402)

Class: K58CLC1
Instructor: Lê Hằng Mỹ Hạnh

HCM City, June 4th, 2021

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 CONTENTS
CHAPTER 1: INTRODUCTION ............................................................................................................................ 5
1.1. Importance of study ........................................................................................................................................ 5
1.2. Subject for study ............................................................................................................................................. 5
1.3. Objectives of the study.................................................................................................................................... 6
1.4. Range of study ................................................................................................................................................ 6
1.5. Research methodology .................................................................................................................................... 6
1.6. Structure of study ............................................................................................................................................ 6
CHAPTER 2: LITERATURE REVIEW ................................................................................................................ 7
2.1. Overview of related empirical studies in Viet Nam ........................................................................................ 7
2.2. Overview of related empirical studies in the world ........................................................................................ 8
CHAPTER 3: RESEARCH METHODOLOGY .................................................................................................... 9
3.1. Type of research design .................................................................................................................................. 9
3.2. Model construction ......................................................................................................................................... 9
3.2.1. Dependent Variables (XM)..................................................................................................................... 9
3.2.2. Independent Variables ............................................................................................................................ 9
3.2.3. Description of variables ........................................................................................................................ 11
3.2.4 The model .............................................................................................................................................. 11
3.3 Research method ............................................................................................................................................ 12
3.4 Data collection ............................................................................................................................................... 12
CHAPTER 4: RESEARCH RESULTS ................................................................................................................. 13
4.1. Parameter Estimate - Original Regression Model ........................................................................................ 13
4.2. Regression Model Analyst ............................................................................................................................ 13
4.2.1. Testing the consistency of the model .................................................................................................... 13
4.2.2. Estimation in the presence of multi-collinearity. .................................................................................. 14
4.2.3. Auto-correlation testing ........................................................................................................................ 15
4.2.4. Heteroscedasticity testing ..................................................................................................................... 15
CHAPTER 5: OPPORTUNITIES, CHALLENGES AND RECOMMENDATIONS ...................................... 17
5.1. Opportunities................................................................................................................................................. 17
5.2. Challenges..................................................................................................................................................... 17
5.3. Recommendation .......................................................................................................................................... 18
5.4. Conclusion .................................................................................................................................................... 19
APPENDIX .............................................................................................................................................................. 20
REFERENCES ........................................................................................................................................................ 25

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 ABBREVIATIONS
Word Meaning

FDI Foreign Direct Investerment

GDP Gross Domestic Product

CPI Consumer Price Index

REER Real Effective Exchange Rate

LIST OF FIGURES
Figure 1: Original model regression results .....................................................................................................21
Figure 2: Matrix of correlation coefficients .....................................................................................................21
Figure 3: Regression results of the model without GDP ..................................................................................21
Figure 4: Regression results of the model without REER ................................................................................22
Figure 5: Regression results of the model without CPI ....................................................................................22
Figure 6: Regression results of the model without FDI....................................................................................22
Figure 7: Breusch – Godfrey (BG) test at lagged value 1 ................................................................................23
Figure 8: Breusch – Godfrey (BG) test at lagged value 2 ................................................................................23
Figure 9: Breusch – Godfrey (BG) test at lagged value 3 ................................................................................23
Figure 10: Breusch – Godfrey (BG) test at lagged value 4 ..............................................................................23
Figure 11: Breusch – Godfrey (BG) test at lagged value 5 ..............................................................................24
Figure 12: Park test result .................................................................................................................................24
Figure 13: Regression model using Robust standard errors .............................................................................24

LIST OF TABLES
Table 1: Description of variables ......................................................................................................................11
Table 2: Parameter Estimate - Original Regression Model ..............................................................................13
Table 3: Regression model without GDP/REER/CPI/FDI ...............................................................................14
Table 4: Regression model after excluding GDP .............................................................................................14
Table 5: Auto-correlation testing ......................................................................................................................15
Table 6: Park test ..............................................................................................................................................15
Table 7: Regression model with robust standard errors ...................................................................................16
Table 8: Data used ............................................................................................................................................20

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 ABSTRACT

Balance of trade data shows the imports and exports of goods and how a country competes in a global
marketplace. However, Vietnam has faced trade deficits for a long time since opening the economy
in 1986 until 2012, and the last few years since 2012 with small surpluses. Improving trade balance
is one of the main objectives of Vietnam’s Government. This study’s objective is to analyse main
factors that affect trade balance in Vietnam from 1997 to 2019. The examined factors are Gross
domestic product (GDP), Foreign direct investment (FDI), Real effective exchange rate (REER),
Consumer price index (CPI).

The project will cover Theoretical Framework, Literature Review, Research Methodology (through
data collection, run and model testing), then choose the variables and factors that really affect
Vietnam's Trade Balance and propose feasible measures to improve this balance.

The research was conducted using the ordinary least squares method - OLS with data cited from the
General Statistical Office of Vietnam; ADB; IMF country report 2017, World Bank's World
Development Indicators, UNCTAD and other sources (to be mentioned in detail).

Key words: Trade balance, Gross domestic product (GDP), Foreign direct investment (FDI), Real
effective exchange rate (REER), Consumer price index (CPI).

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 CHAPTER 1: INTRODUCTION

1.1. Importance of study

Balance of trade data is a very important piece of understanding the global puzzle of international
trade, and thus, forex. International trade which is part of an open economy related to exports and
imports is an important matter and influences the improvement of welfare and development in a
country. Much like an income statement, balance of trade data clearly defines whether a trade deficit
or trade surplus is in play. Balance of trade data shows the imports and exports of goods and how a
country competes in a global marketplace. Balance of trade numbers can run a trade deficit, showing
that a country imported more than it exported, or they can reflect a trade surplus, exporting more than
was imported in a specific time period. The government should try to increase exports by seeking
opportunities for foreign market expansion aimed at increasing the country's income (foreign
exchange) and suppressing imports from other countries which are state expenditures, so that the trade
balance surplus is expected to occur.

It is notable that the trade balance of Vietnam has been persistently in deficit since 1990, except 1992
and the last few years since 2012 with small surpluses. The difference rose to its highest level in 2008,
deficit USD 13 billion, due to the impact of the world economic crisis came from the U.S. The trade
balance deficit increased despite the increase in exports, with an average annual growth rate of 15.6%
during 2000-2009. Since 2009, trade deficit has reduced as the economy has slowly recovered thanks
to the improvement policy of the Government and experienced a small surplus in 2012 until now. One
of the reasons for the trade surplus of Vietnam recently is due to the difficult period, many enterprises
downsized production, leading to lower import demand. A more significant contribution to the trade
surplus is the multinational corporations leading the global value chains recently withdrew from China
and Thailand to redirect investment into Vietnam. Foreign Information Technology Group,
Electronics and Telecommunications in Vietnam such as Canon, Sony, Nokia and Samsung recently
increased investment in Vietnam.

The fact that trade balance in Vietnam has been in a long-lasting deficit for 20 years (1993- 2011) is
obvious to be able to bring a negative impact to the economy. A long-lasting trade deficit can lead to
foreign debt, on which a country has to pay interests. If this debt is judged by market agents as
unsustainable, a currency crisis can erupt. Therefore, it is necessary to examine the situation of trade
balance in Vietnam. What are the main factors affecting trade balance and how to improve trade
balance in Vietnam.

There are many studies that have examined determinants of trade balance in other developing
countries. However, there are not many studies analyzing the main factors affecting trade balance in
Vietnam. This is the reason why our team decided to implement the research project. "Determinants
of Balance Trade in Vietnam"

1.2. Subject for study

The factors affecting the Trade Balance of Vietnam in the period 1997-2019.
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1.3. Objectives of the study
- Give logical and commonsense contentions to foresee the components impacting Trade Balance in
Vietnam.
- Select the appropriate variable factors from which to create a show of components affecting Trade
Balancein Vietnam.
- Determine the model and make necessary adjustments to conclude the factors that have a real impact
on the Trade Balance of Vietnam.
- Based on the investigation, propose arrangements to make strides in the effectiveness of Trade
Balance in Vietnam.

1.4. Range of study

- Space: the results of factors influencing Vietnam Trade Balance were studied within Vietnam.
- Time:
+ A study model with observations compiled over the period 1997-2019.
+ Solutions and recommendations are set for application in.

1.5. Research methodology

- Method of data collection: from statistical reports of state agencies and international organizations
such as the General Statistics Office of Vietnam, World Banks World Development Indicators, Site
Statistics Population...
- Data processing: The data is processed and extracted from STATA.
- Regression Method: Ordinary Least Square (OLS) Regression

1.6. Structure of study

The research will be split up into five chapters: Introduction, Literature Review, Research
Methodology, Conclusions and Policy Implications.

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 CHAPTER 2: LITERATURE REVIEW

2.1. Overview of related empirical studies in Viet Nam

It is observed from the study “Impact of different factors on Vietnam's trade balance” by Ngo Tuan
Anh et al., (2020) that Vietnam's bilateral trade balance mainly depends on three variables, distance,
exchange rate, and trade agreements. All three variables have a statistically significant and positive
impact on Vietnam's bilateral trade balance.

Nguyen Huu Tuan (2011) analyzed the impact of macroeconomic variables on Vietnam's trade
balance from 1999 to 2010. The results show that in the long run, the trade balance is positive with
real GDP and CPI of trading partners and negative with REER and FDI. Le Hoang Phong and Dang
Thi Bach Van (2016) also studied the impact of macroeconomic factors on Vietnam's trade balance
in the period 1986-2014 and found that in both the short run and the long run, GDP and exchange rate
have a positive impact on Vietnam's trade balance.

Do Thi Man (2017) concludes that the Real Effective Exchange Rate has an impact on Vietnam's trade
balance in the long run (with the lag of 5 periods). This conclusion is based on a study with a database
of bilateral nominal rates and CPI of 20 major trading partners of Vietnam Trade balance. Nguyen
Thi My Linh and Nguyen Thi Kim Lien (2020) also found that the volatility of the real effective
exchange rate with the lag of 2 reduced the trade balance in Vietnam. This is the particularity of
Vietnam – a country pursuing a floating exchange rate policy under the control of the government.
Besides, there are many studies on the impact of exchange rate on the trade balance. Pham Thi Nga
(2017) studied the impact of exchange rate on Vietnam's trade balance from 2000 to 2016 and found
that devaluation of the domestic currency does not contribute to the improvement of the national trade
balance. Nguyen Hung Dieu (2019) examined the impact of exchange rate on Vietnam's trade balance
in the period 2000 - 2018 and concluded there exists a long-term relationship between the exchange
rate and the trade balance in Vietnam. Huynh Thi Be Tu (2019) stated that there is an impact of the
real exchange rate on the trade balance of each commodity, but this effect is different for each
commodity.

Diep Gia Luat and Tran Trung Kien (2013) study the impact of foreign direct investment on Vietnam's
trade balance in the 1992-2012 period and the results show that FDI inflows have an impact on the
trade balance, especially export value but have not found the relationship between the value of
imported goods and the variables FDI. Dang Ngoc Huyen Trang and Duong Thi Thuy Linh (2017) by
using Johansen test to consolidate and then using the corrected error line, from some characteristics
of FDI, export and import values, they have found evidence that the trade balance is part of the reason
for the success in attracting FDI even in the short and long term.

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2.2. Overview of related empirical studies in the world
Hasanov and Senhadji (2008) included REER and TOT in the current account model for Middle-East
economies and found that the regressions are only statistically significant for non-oil economies.
Accordingly, shocks that increase REER are associated with higher trade and current deficits. R.
Roosaleh Laksono and Mohd Haizam Mohd Saudi (2020) found in the study that “Analysis of the
factors affecting trade balance in Indonesia” that in the long term of 1980-2015, referring to all
independent variables (export value, import value, exchange rate and GDP) are inversely proportional
to trade balance. Selena Begović and Sead Kreso (2017) found that there is an adverse effect of the
REER on trade balance in European transition countries over the period 2000-2015. Mehmet E. Yaya
and Xiaoxia Lu (2012) analyzed the short-run relationship between the REER and the balance of trade
in China. The test suggests that in the short run balance of trade causes a change in effective exchange
rate but not vice versa.

Duasa (2007) studied the factors affecting the trade balance of Malaysia in the period 1974-2003.
Using the ARDL model, the study shows that there exists a long-run relationship between income,
money supply and trade balance and there is no relationship between exchange rate and trade balance.
Ray (2012) examined the long-run and short-run relationships of macroeconomic factors affecting the
trade balance. Research results indicate that FDI has a positive impact on the trade balance, domestic
consumption, and the real exchange rate has a negative impact on the trade balance. Osoro (2013)
studied the factors affecting the trade balance of Kenya in the period 1963-2012. The results show
that FDI, exchange rate, and government budget deficit have an impact on trade equity. Alhanom
(2016) studies on the factors of Jordan's trade balance. The study uses the ARDL model to estimate
the impact of factors affecting Jordan's trade balance in the period 1970-2010. The results show that
the real exchange rate has no impact on the trade balance in both the short run and the long run. Ali
(2017) studies on the factors affecting the trade balance of Sudan in the period 1970-2014. In the long
run, the exchange rate, inflation, and real GDP per capita have a negative impact on the trade balance.
Rahman (2008) shows that FDI has a negative effect on the trade balance, while the rebound pattern
has a positive effect in the new member countries of the European Union.

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 CHAPTER 3: RESEARCH METHODOLOGY

3.1. Type of research design

Quantitative method will be used in this study. This study will collect and gather the yearly data for
all the dependent variables and independent variables during the period 1997-2019

3.2. Model construction

3.2.1. Dependent Variables (XM)
The dependent variable selected for the study was trade balance in Vietnam, denoted as XM. In this
study, we had collected the XM data for the period 1997-2019

3.2.2. Independent Variables

According to previous chapters, there are many factors affecting trade balance (XM) in Vietnam. This
analysis chose to use the following criteria:

3.2.2.1. Cross Domestic Product (GDP)

Domestic income is considered a factor affecting the balance of trade. The balance of trade
reflects the changes in a country's exports and imports over a given period (perhaps a quarter
or a year) as well as the difference between them (exports minus imports). Imports tend to
increase as gross domestic product - GDP increases and even faster. The increase in imports
as GDP increases depends on the marginal propensity to import (MPZ). MPZ is the fraction
of extra GDP that people want to spend on imports. For example, MPZ is 0.2, which means
that for every 1 dong of GDP, people tend to spend 0.2 dong on imports. However, according
to another approach, when real income increases, the country increases domestic production
of goods to replace imports, increase exports, so the trade balance is in surplus. In developing
countries, a number of empirical studies have shown that real domestic income has a negative
impact on the balance of trade. Therefore, in this paper, GDP is said to have a negative impact
or positive impact on the trade balance

3.2.2.2. Consumer Price Index (CPI)

Consumer Price Index is abbreviated as CPI, which means consumer price index, this is an
index calculated as a percentage to reflect the relative change in prices of consumer goods over
time. The consumer index CPI reflects the consumption, purchasing power of an economy and
is calculated as a percentage. When the consumer price index rises, the purchasing power of
the currency decreases (inflation falls) leading to a surplus in the trade balance. In this paper,
CPI is expected to have positive impact on the trade balance.
3.2.2.3. Real effective exchange rate (REER)
REER is the real multilateral exchange rate. The real multilateral REER rate I of a country
depends on the nominal multilateral rate (that is, on the share of foreign currencies in the
national currency basket, the bilateral nominal exchange rate of foreign currencies). basket of
currencies) and consumer price index (CPI), gross domestic product (GDP) of countries whose
currencies are in the basket of foreign currencies of that country. An increase in REER
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indicates a decrease in purchasing power relative to other currencies, whereas a decrease in
REER indicates a rise in the value of the domestic currency.
According to the Marshall-Lerner Condition, where currency devaluation has a positive effect
on the trade balance, the absolute value of the sum of the two price elasticities of exports and
the price elasticity of imports is must be greater than 1. Devaluation leads to a decrease in the
price of exports denominated in foreign currencies, thus increasing demand for exports. At the
same time, the price of imports denominated in local currency becomes higher, reducing
demand for imports. The net effect of dumping on the trade balance depends on price elasticity.
If exports are price elastic, the rate of increase in quantity demanded of the good will be greater
than the rate of decrease in price, so exports will increase. Similarly, if imports are price elastic,
then spending on imports will decrease. Both of these factors contribute to improving the
balance of trade. Empirical research shows that goods are often priced inelastic in the short
run because consumption habits cannot be changed easily. Therefore, the Marshall-Lerner
condition is not met, leading to currency devaluation which only worsens the trade balance in
the short run. In the long run, when consumers have adjusted their consumption habits to the
new prices, the new balance of trade will improve.

In this paper, REER is expected to have a positive or negative impact on the balance of trade.

3.2.2.4. Foreign Direct Investment (FDI)

One of the factors that could affect the trade balance is foreign direct investment. Increased
foreign investment will be a stable source of finance to finance a trade deficit, as a country's
ability to sustain a deficit is constrained by external financing. Foreign investment capital is
an important resource to increase exports and imports. Moreover, the higher the FDI, the better
the domestic production capacity. FDI is also considered as an important source of capital to
improve employment, increase income. The impact of FDI on the trade balance is also
reflected in other factors such as a higher economic growth index. For developing countries,
FDI has a positive effect, but it can also have a negative impact on the trade balance. Because,
in the initial stage of attracting FDI, FDI has not had a positive impact on the trade balance
because the internal factors of developing countries are still limited, mainly depending on
external imports. However, in the medium and long term, FDI is expected to have a positive
impact on the trade balance, improve domestic production capacity, create jobs, increase
incomes, and increase exports. Right from the early days of the open economy, Vietnam has
focused on attracting FDI. So it can be said that the time is long enough to improve the internal
factors of Vietnam, FDI has a positive impact on Vietnam's trade balance. Therefore, this study
expects FDI to have a positive effect on the trade balance.

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3.2.3. Description of variables

Independent variables Denoted as Unit (per year) Expected mark

Gross domestic product GDP Billion USD (+/-)
Consumer price index CPI % (+)
Real effective exchange rate REER % (+/-)
Foreign direct investment FDI Billion USD (-)

Table 1: Description of variables

3.2.4 The model

Previous related studies on the factors affecting the trade balance have been studied using multiple
linear regression models of the form:
𝒏

𝒀𝒊 = 𝜶𝒊 + ∑ 𝜷𝒋 𝑿𝒊𝒋 + 𝜺𝒊
𝒋=𝟎
Where:
Yi: Dependent variable of observation i
Xij: Independent variable
𝜶𝒊 : Coefficient of freedom
𝜷𝒊 : Regression coefficient
𝜺𝒊 : Regression error

Model application
According to chosen factors, the model estimating XM’s affecting factors in Vietnam is:

XM = f(GDPt, CPIt, FDIt, REERt )

Where:
FDI: Foreign direct investment into Vietnam in year t
GDP: Total gross domestic product of Vietnam in year t
CPI: Consumer price index in year t

This study used regression with logarithmic form (ln) to determine the impact of three factors on the
trade balance.

Regression with Logarithmic: lnYi=𝜷𝟏 + 𝜷𝟐 lnX2 + 𝜷𝟑 lnX3 + 𝜷𝟒 lnX4 + 𝜷𝟓 lnX5 + ε

Where:
- Y: dependent variable
- X2, X3, X4, X5: Independent or Explanatory variables

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 - 𝜷𝟐 , 𝜷𝟑 , 𝜷𝟒 , 𝜷𝟓 : some coefficients give a change in X2, X3, X4, X5 how much the expectation
of Y to change by.

The trade balance has positive or negative or equal to zero also. According to mathematical, negative
or zero value can’t calculate to logarithmic. In the other hand, using the ratio in the logarithmic form
will make Marshall Lerner – condition more exactly than approximately (Onafowora 2003, Colton
2012). The trade balance equation is as the following:

Ln(XM)=𝜷𝟏 + 𝜷𝟐 lnGDPt + 𝜷𝟑 lnCPIt + 𝜷𝟒 lnFDIt + 𝜷𝟓 lnREERt + ε

3.3 Research method

The regression method used by the research team to estimate the model's parameters is the method of
least squares (OLS). According to this method, one of the ways to test the statistical significance of
each independent variable is to look at its p-value - the value is defined as the lowest significance
level that the hypothesis H0 can be. rejected. With a significance level of 5%, an independent variable
is statistically significant when its p-value is less than 0.05.
After determining the regression model with all the independent variables having statistical
significance, the research team will conduct a test to detect diseases and defects of the model, find
ways to overcome (if any) to extract the results. get the best regression model.

3.4 Data collection

The data used in the model is annual data for the period 1997 - 2019. These data are collected from
the following sources:
- The balance of trade (XM) is calculated as the ratio of export value and import value. Export value
and import value for years are taken from the TradeMap tool.
- Consumer price index (CPI), gross domestic product (GDP), and real effective exchange rate
(REER) years are taken from data sources of the World Bank.
- Foreign direct investment (FDI) in the years is taken from the data source of the General Statistics
Office with the indicator called Licensed Foreign Direct Investment - Total realized capital.
- In total, the sample regression model includes 1 dependent variable and 3 independent variables with
a sample size of 23 observations. The regressions were processed using Stata 14 software.

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 CHAPTER 4: RESEARCH RESULTS

4.1. Parameter Estimate - Original Regression Model

lnXM Coef P_value R-squared Adj R-squared

lnGDP 0.0895091 0.54

lnREER 0.8341102 0.009

lnCPI 0.1742276 0.499 0.7990 0.7543

lnFDI -0.2453029 0.001

_cons -2.953921 0.002

Table 2: Parameter Estimate - Original Regression Model

As a result, the two independent variables, REER, and FDI, all have a p_value less than 0.05, meaning
that the two variables are statistically significant for the model. The regression model identified the
factors influencing the trade balance in Vietnam without prior testing is a model with two independent
variables, REER and FDI, affecting the dependent variable Y with a significance level of 0.05. The
model has an R-squared coefficient of 0.799 and an adjusted R-squared value of 0.7543. Thus, the
regression model accounts for nearly 80% of the dependent variable.
The original regression equation is presented as follows:
lnXM = -2.954 + 0.0895lnGDP + 0.834lnREER + 0.174lnCPI - 0.2453lnFDI

4.2. Regression Model Analyst

4.2.1. Testing the consistency of the model
To test the consistency of the model at the significance level α = 0.05, we assume that:
H0: R2 = 0 (Model is unconsistent)
H1: R2 ≠ 0 (Model is consistent)
We need to test the hypothesis to make a conclusion about the consistency of the model. If the P-value
of the F test is smaller than the alpha, we reject hypothesis H0 and conclude the meaningful model;
otherwise, we accept the assumption that the model is not appropriate and proceed to construct the
new model.
P_value = 0.000 < α=0.05 so we reject the hypothesis H0 and conclude the model is consistent with
the 95% confidence.

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4.2.2. Estimation in the presence of multi-collinearity.
From the matrix of correlation coefficients (Figure 2), we find that the correlation coefficients between
the independent variables are all greater than 0.8. So it can be concluded that all three variables have
correlated phenomena.

Eliminate multi-collinearity by removing unnecessary independent variables from the model.

⇒ Regression model without:

GDP REER CPI FDI

R-squared 0.7946 0.7028 0.7937 0.6190

Table 3: Regression model without GDP/REER/CPI/FDI

Comparing R2 in 4 sub-regression models, we see that:

𝐑𝟐𝐰𝐢𝐭𝐡𝐨𝐮𝐭 𝐅𝐃𝐈 < 𝐑𝟐𝐰𝐢𝐭𝐡𝐨𝐮𝐭 𝐑𝐄𝐄𝐑 < 𝐑𝟐𝐰𝐢𝐭𝐡𝐨𝐮𝐭 𝐂𝐏𝐈 < 𝐑𝟐𝐰𝐢𝐭𝐡𝐨𝐮𝐭 𝐆𝐃𝐏

So the authors choose to exclude the GDP variable from the original model. The model after excluding
GDP has the following regression result:

lnXM Coefficient P_value R-squared Adj R-squared

lnREER 0.736411 0.005

lnCPI 0.3159862 0.010

0.7946 0.7622
lnFDI -0.2263492 0.000

_cons -2.901236 0.002

Table 4: Regression model after excluding GDP

From the correlation coefficient matrix, we can see that the remaining three variables still have a slight
correlation with each other. This can be explained by considering that the data used is time-series data
with observations of 23 consecutive years, which are in line with the evolution of the economy.

Therefore, the phenomenon of multicollinearity between the variables together is unavoidable.

However, after exceeding GDP, all three variables are statistically significant and not contrary to the
expectation table. Therefore, we can accept multi-collinearity in the regression model.

14
4.2.3. Auto-correlation testing
At the significance level of 0.05, the Breusch – Godfrey (BG) test was used to test for auto-correlation.

Lags (𝛒) 1 2 3 4 5

Prob. Chi-square 0,6790 0,6759 0,2375 0,0888 0,0862

Table 5: Auto-correlation testing

From the above testing results, we found that all the Prob. Chi Square values in all cases of lagged
value are greater than 0.05. So we can conclude that the regression model does not occur
autocorrelation.

4.2.4. Heteroscedasticity testing

We then used the Park test to detect Heteroscedasticity, at α = 0.01, and came up with the following
results:

luihsqr Coef. Std.Err t P>|t|

lnREER -5.417438 8.074554 -0.67 0.51

lnCPI -9.768091 3.790657 -2.58 0.018

lnFDI 4.848223 1.804638 2.69 0.015

_cons 20.30816 28.46836 0.71 0.484

Table 6: Park test

As both the p-value of the variables lnCPI and lnFDI less than significant level 0.05, there is
statistically significant relationship between the variables: ln(ui^2) and lnCPI, lnFDI.

Following the Park test, we conclude that the Heteroskedasticity exists in the error variance.
Correlation of Heteroscedasticity.

15
In order to resolve the Heteroscedasticity of the model, we regress the model with robust standard
errors and gain the following result:

lnXM Coefficient P_value R-squared

lnREER 0.736411 0.015

lnCPI 0.3159862 0.002

0.7946
lnFDI -0.2263492 0.000

_cons -2.901236 0.006

Table 7: Regression model with robust standard errors

4.3. The Final Regression Function.

The OLS model explained 79,46% of the Trade Balance of Vietnam in the period 1997-2000 (R2 =
0.7946). The model of regression after completion has the following function:

lnXM= -2.901236+0.736411lnREER+0.3159862lnCPI-0.2263492lnFDI

Meaning of the regression coefficient:

- Results in the table show the REER has a positive impact on Trade Balance with a significance level
of 5%. Specifically, when the Real Effective Exchange Rate increased 1%, XM increased by
0.7364%.
- Similarly, at the 5% level of significance, if other factors are constant, when the Consumer Price
Index increases by 1%, the Trade Balance increases by 0.316%.
- In contrast, Foreign Direct Investment has the opposite effect on Trade Balance, with each
percentage increase of this independent variable decreasing by 0.226%.

Thus, in spite of multicollinearity, after the examination of the problem, it was found that there was
no need to abandon the variable because it did not mark expectations and lost statistical significance.
It can be concluded that: The model of regression confirms the statistical significance of the following
independent variables for Trade Balance in Vietnam:

- Real Effective Exchange Rate: Positive Impact;

- Consumer Price Index: Positive Impact;
- Foreign Direct Investment: Negative Impact;

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 CHAPTER 5: OPPORTUNITIES, CHALLENGES AND RECOMMENDATIONS

5.1. Opportunities
- REER is stable, interest rates are reduced, contributing to supporting businesses, stabilizing the
macro-economy.
- The average CPI in 2020 compared to 2019 is forecasted in the range of 3.5-3.8%, adjusted down
by about 1 percentage point compared to the forecast period in March 2020. Therefore, it is necessary
to continue to pay attention to and control inflation targets, contributing to stabilizing the
macroeconomy.
- The decline in registered and disbursed FDI has led to a decrease in import turnover and an increase
in export turnover, thus contributing to reducing the deficit of the trade balance.
- Vietnam faces opportunities from the shift of production and export orders in certain industries from
China to Vietnam due to the impact of US-China trade tensions.
- Currently, the situation of controlling and controlling the Covid-19 epidemic in China and Korea
has positive results; other countries are also making efforts to control the epidemic… so, import
demand from other countries is expected to gradually increase again in the near future.
- Opportunities from free trade agreements signed by Vietnam such as CTTPP, EVFTA, etc., open
great doors for Vietnam to enter the world market.
- The business areas of Vietnam that will continue to have opportunities for development are
agriculture, industry, and import and export. There are also markets such as finance, securities, real
estate, etc.
- Vietnam has pioneered in testing new technologies and models, fundamentally and comprehensively
innovating the management and administration activities of the Government, production and business
activities of enterprises, etc. The dual goal is to both develop digital government, digital economy,
and digital society, and form digital technology businesses with global capabilities.

5.2. Challenges
- Import turnover of the whole country and import prices will increase due to many countries
devaluing their domestic currencies, lowering basic interest rates, offering stimulus packages and huge
economic stimulus up to hundreds and trillions of USD. NEER caused REER to increase and increase
more strongly, because the inflation gap between Vietnam and 08 countries in the currency basket
widened. - The movement of REER shows that Vietnam's export goods have become more expensive
relative to the goods of 08 countries in the currency basket, which will negatively affect the trade
balance in the long run.
- FDI capital is forecasted to increase again from the second half of 2020 and 2021. FDI inflows
increase quite quickly, the nominal exchange rate between USD and VND, i.e. VND is appreciated
against USD. This will encourage imports, causing a deficit in the trade balance. Imports of the
foreign-invested sector decreased more deeply than that of the domestic sector.
- Currently, China is Vietnam's largest trading partner, and China's devaluation of the currency creates
great pressure on the movement of the VND. Along with that is the pressure to administer policies of
the State Bank to protect the competitive advantages of exported goods, as well as the production
capacity of domestic enterprises against imports from China. The strong increase in trade deficit from
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China only partly stemmed from the devaluation of the CNY against the VND, the larger cause due
to the phenomenon of circumventing the origin of Chinese goods through Vietnam.
- Before the second wave of the COVID-19 epidemic may return, countries in the world in general
and especially in Asia around China in particular have applied measures to limit the spread. of the
epidemic such as canceling all domestic flights, restricting travel, and banning people from traveling
to prevent the disease. Governments and localities in the countries have conducted a review of the
origin, origin and quality of food products in the area, in which, strengthening the inspection of
documents such as quality standard certificates, certificates of origin and proof of purchase for
agricultural products used for food. Vietnam's exports to these markets will face certain difficulties.
- In order to develop, it requires changes in psychology, lifestyles of social classes, changes in
organization and management of the government system at all levels and branches.
- Vietnam's economy has not developed stably and sustainably. Public debt, long state budget deficit.
Domestic enterprises 95-96% are small enterprises with low technology level. The basic economy
also develops in breadth, relying on investment capital, natural resources, and unskilled labor.

5.3. Recommendation
Firstly, strictly control the import of non-essential consumer goods, food and food products that can
be produced domestically.
Second, in order to achieve the goal of a trade balance surplus, besides improving the quality and
design of export products, a significant devaluation of the currency is required to bring about
international trade advantages. in terms of price. Exchange rate adjustment has an influence on
domestic and international prices, so the exchange rate adjustment must be suitable for each different
stage of the economy.
Third, it is necessary to maintain an exchange rate policy in line with the economic development
strategy of each period. To do this, pay attention to the following issues:
Choose the right time to devalue the local currency. Success in currency devaluation is evident at the
time of devaluation and the level of exchange rate adjustment. For developing countries, a high growth
rate is often accompanied by a relatively large inflation rate compared to a group of developed
economies, which adversely affects the competitive advantage of exported goods. imports in terms of
price, so currency devaluation can solve this problem.
The exchange rate policy must always aim at the best support for the export policy, thereby improving
the international balance of payments and increasing foreign currency reserves, towards the goal of
sustainable economic development.
The exchange rate should be established on the basis of establishing a basket of foreign currencies
including strong foreign currencies to avoid shocks in the economy when a certain currency fluctuates.
Currently, in addition to the 4 strong foreign currencies in the IMF's foreign currency basket, which
are USD, British Pound, Euro, and Japanese Yen, China's yuan is being reserved in large quantities
by many countries.
Fourth, in order to regulate the exchange rate and control inflation, the central bank needs to be
assured of a certain independence from the Government in making decisions and operating monetary
policy. In addition, the central bank must have a system to closely monitor and supervise economic

18
conditions in the country, major economies and countries in the region, and promptly assess risks and
risks of loss of interest. stable to make appropriate policies.
Fifth, in terms of fiscal policy, Vietnam can increase non-tariff barriers for imports such as using
import licensing measures, tariff quotas (according to WTO accession commitments, Vietnam has
reserves the right to apply tariff quotas to four groups of goods: sugar, poultry eggs, tobacco leaves
and salt), surcharges, etc. However, the application of these measures must be considered. considered
in the context that Vietnam is already a member of the WTO and must comply with the committed
tax reduction schedule. Besides, controlling government spending and improving the efficiency of
public investment are also important measures to take into account.
Sixth, there should be policies to encourage partner enterprises to participate in the production of
export goods in Vietnam and then export them back to the partner market. This is the best way to both
ensure the quality of exports and increase the proportion of Vietnamese goods in the target market's
import turnover.
Seventh, reforming and modernizing customs procedures, shortening the time to conduct customs
procedures for export goods. Organize well implement the tax refund mechanism for raw material
importers to provide export goods manufacturers.
Eighth, reforming and perfecting financial institutions in the direction of focusing on input factors for
export production, export business and trade promotion, creating favorable conditions for improving
the competitiveness of foreign countries. export products; continue to improve taxes, fees and charges;
promote the business of insurance for property and goods in production, especially in agricultural
production.

5.4. Conclusion
Understanding the factors affecting Vietnam's trade balance in the period 1997-2019 is extremely
necessary in the context of the rapidly developing macro-economy and the competition between the
regions that directly affect it. to the current import and export activities. In the process of researching
the topic "Factors affecting Vietnam's trade balance in the period 1997 - 2019", our team went from
the theoretical basis of the trade balance, the consequences of the trade deficit and the factors affecting
it to the current trade balance, building a research model of factors affecting the trade balance of
Vietnam in the period 1997-2019 along with opportunities and challenges from outside.

Through this topic, the team wishes to bring a clearer view of the factors affecting Vietnam's trade
balance in the period 1997 - 2019 through a quantitative approach. From there, it will help identify
factors that need to be improved and improved to improve Vietnam's trade balance. Due to the writer's
limited knowledge and skills and limited research time, the final model has not yet included all the
factors that are significant to Vietnam's trade balance in the period 1997-2019. The group hopes that
the topic will be a useful reference source for future research.

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 APPENDIX

Data used

Year XM GDP REER CPI FDI

1997 0,79 26,84 86,80 43,81 3277,10
1998 0,81 27,21 94,18 46,99 2372,40
1999 0,98 28,68 93,10 48,93 2528,30
2000 0,93 31,17 90,53 48,09 2398,70
2001 0,93 32,69 90,74 47,88 2225,60
2002 0,85 35,06 89,76 49,72 2884,70
2003 0,80 39,55 84,71 51,32 2723,30
2004 0,83 45,43 84,32 55,30 2708,40
2005 0,88 57,63 87,13 59,89 3300,50
2006 0,89 66,37 89,96 64,33 4100,40
2007 0,77 77,41 90,64 69,70 8034,10
2008 0,78 99,13 100,44 85,81 11500,20
2009 0,82 106,02 103,28 91,57 10000,50
2010 0,85 115,93 100,01 100,00 11000,30
2011 0,91 135,54 100,09 118,68 11000,10
2012 1,01 155,82 108,24 129,47 10046,60
2013 1,00 171,22 114,15 138,01 11500,00
2014 1,02 186,21 117,54 143,64 12500,00
2015 0,98 193,24 121,88 144,55 14500,00
2016 1,01 205,28 123,57 148,41 15800,00
2017 1,01 223,78 123,66 153,63 17500,00
2018 1,03 245,21 122,04 159,07 19100,00
2019 1,17 261,92 126,31 163,52 20380,00

Table 8: Data used

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 Stata results

Figure 1: Original model regression results

Figure 2: Matrix of correlation coefficients

Figure 3: Regression results of the model without GDP

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Figure 4: Regression results of the model without REER

Figure 5: Regression results of the model without CPI

Figure 6: Regression results of the model without FDI

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Figure 7: Breusch – Godfrey (BG) test at lagged value 1

Figure 8: Breusch – Godfrey (BG) test at lagged value 2

Figure 9: Breusch – Godfrey (BG) test at lagged value 3

Figure 10: Breusch – Godfrey (BG) test at lagged value 4

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Figure 11: Breusch – Godfrey (BG) test at lagged value 5

Figure 12: Park test result

Figure 13: Regression model using Robust standard errors

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