Unlocking the Trade Potential in China-ASEAN Relations: The China-Vietnam Context.

AuthorDevadason, Evelyn S.
  1. Introduction

    China and Vietnam have a checkered past. Bilateral trade was restored when both countries normalized their relations in 1991 (Nguyen 2015). The two economies have also signed a bilateral agreement and are members of the China-ASEAN Free Trade Area (or CAFTA). Since then, the China-Vietnam trade ties gained momentum and posted impressive growth over the past few decades. At present, Vietnam is China's eighth largest trading partner and biggest trading partner in the ASEAN region (Oh 2017), while China is the largest trading partner of Vietnam. Trade balances in this partnership have, however, remained consistently in favour of China, though recent evidence points to a narrowing of deficits from the Vietnamese standpoint.

    China's trade patterns with the newer ASEAN member countries (Cambodia, Laos, Myanmar and Vietnam; known as CLMV) have long been recognized to be different--or less optimized--as compared to those with the ASEAN-6, which have then increased the disadvantages of CLMV relative to the ASEAN-6. CLMV countries have become more reliant on China (Hao 2008), and the process of asymmetric trade interdependence (1) between China and CLMV is considered to be even more radical at the country level (Qin, Xu, and Zhang 2016). In the CLMV group, Vietnam presents a special case in terms of its economic cooperation and asymmetric relationship (Womack 2010), given China's growing strength and regional presence. China is a distinct import source for Vietnam (ADB online database) because of the latter's heavy dependence on intermediate products (Ngoc 2016), resulting in a burgeoning deficit. Recent evidence, however, points to some shifts in the trade structure of Vietnam, including: the narrowing of trade deficits with China as exports to that country gained momentum; and increase in export market share as a global value chain (GVC) partner by Vietnam (ADB 2016).

    Although trade deficit per se should not be perceived as being bad for a country, in the case of the Vietnam-China partnership, the deficits can indeed signal a risky problem for Vietnam given its high concentration of trade on a single market like China (Nga 2018). There are also concerns that those trade imbalances with China have not been well managed to date, since Vietnam has only been able to export low value-added goods to the country (Nguyen 2015). In fact, Vietnam has recently called upon China to import more of its agriculture products, given the vast untapped consumer market in China, in efforts to balance bilateral trade and ensure a sustainable and healthy trading partnership (Retail Asia, 6 November 2018).

    With the dramatic rise in the China-Vietnam bilateral trade volume to US$122 billion in 2017, compared to just US$4 billion each for China-Cambodia and China-Myanmar (calculated from UN Comtrade), an important question is whether the full potential has been unleashed in the China-Vietnam partnership. For this, Vietnam's current (disadvantaged) position in terms of its trade with China needs to be reassessed and contextualized within the region. The paper therefore compares the trade potential of China-Vietnam, within the broader framework of the China-ASEAN trade, (2) to inform the debate on the dichotomous trade outcomes of China's partnership with the older and newer ASEAN member states. For this purpose, the paper applies a stochastic frontier approach to the gravity model to identify the efficiency of trade integration relative to the maximum potential levels, based on a three-dimensional panel data set of two-way bilateral exports from China to the ten ASEAN members over the 1992-2016 period. The findings of the study provide the broader implications for (asymmetrical) economic interdependence or disparities in two-way trade potential in the China-ASEAN partnership.

  2. China-ASEAN Trade: Framing the China-Vietnam Partnership

    2.1 Trade Patterns and Intensity of Integration

    Although waves of tension prevail as China and Vietnam contest sovereignty over the South China Sea, trade between the two nations has transcended these disputes (Nguyen 2015). China's exports to Vietnam grew from US$106 million in 1992 to US$71 billion in 2017 (see Figure 1). Conversely, Vietnam's exports to China consistently lagged behind inflows of merchandise goods from China for the entire period of review. Vietnam's exports to China recorded a mere US$35 billion in 2017. The observed patterns for two-way exports of manufactures mirror that of total exports in this trading relationship. Consequently, total trade balances and, more specifically, trade balances in manufactures were constantly in favour of China (see Figure 2). China's total trade surplus with Vietnam widened from US$34 million in 1992 to US$21 billion in 2017, which is considered large relative to surpluses of US$4 billion each in trade with Cambodia and Myanmar. China's deficits in agriculture trade with Vietnam were noted for specific years, namely in 1992, 1995, 2001, 2006-7 and 2012. Overall, trade surpluses in manufactures are found to be much higher than those for agriculture in the China-Vietnam trading relationship.

    China is a distinctive import source for Vietnam (and Myanmar) vis-a-vis the other ASEAN members, commanding 34.37 per cent of global exports of China in 2016 (see second panel of Table 1). This explains the larger share of total trade dependence of Vietnam on China relative to the other ASEAN members. From China's perspective (see panel 1 of Table 1), Vietnam has emerged as the most important ASEAN export destination for China, replacing Singapore and Malaysia, which held special positions in the China-ASEAN trade relationship as both countries were the largest trading partners of China in the region (Lean and Smyth 2016). Having said that, China's relative dependence on the ASEAN market has generally not changed much for the period of review (see also Qin, Xu, and Zhang 2016), while the opposite is observed from the ASEAN perspective. The CLMV countries have become more reliant on China (Hao 2008), both as an export destination as well as an import source. Clearly, ASEAN attaches more importance to China than vice-versa (Table 1).

    In terms of intensities in trade, the export intensity index (XII) in the Vietnam-China and ChinaVietnam bilateral relations is greater than unity for the entire period of review, suggesting that export flows between the countries are larger than expected given their importance in global trade (see Figure 3). The same holds true for the trade intensity index (TII). However, the export intensity is much lower for Vietnam's exports to China than vice versa. With lower intensities in exports relative to total trade with China, it is not surprising to note that Vietnam's bilateral trade balances have been consistently in favour of China (Figure 2). Consequently, Vietnam has expressed concerns of managing the huge trade deficits with China. The deficits are attributed to the country's heavy dependence on cheap inputs from China (Ngoc 2016), mainly in the garment and footwear industries. Additionally, the importance of border trade in the Vietnam-China relations is often not captured in official trade statistics, especially the smuggling of goods and trading of imitation goods (Ha and Do 2001; Hao 2008; Nguyen 2015). The trade gap between Vietnam and China could therefore be much higher than what the official statistics suggest.

    The bilateral trade profile further shows that manufacturing products are the type of goods traded between China and Vietnam (see also Tham and Yi 2014). In 2016, manufactures (3) constituted 95.7 per cent of China's exports to Vietnam, and 92.5 per cent of Vietnam's exports to China (calculated from UN Comtrade). The structure of trade changed in the case of China-Vietnam unidirectional exports and not vice versa (Qin, Xu, and Zhang 2016). In 1992, agriculture products constituted a sizeable proportion of China's exports to Vietnam, at 73.47 per cent. Since 2010, China has been the biggest supplier of key inputs and manufacturing resources for Vietnam's manufacturing sector. Though manufactures dominate trade flows in the China-Vietnam partnership, China is losing some of its comparative advantage in labour-intensive activities, such as garments, footwear and electronic assembly. Here, China is leveraging with countries like Vietnam, as the latter occupies the lower end of the supply chain (ADB 2016).

    The unchanged trade structure for Vietnam reflects its growing trade deficits and the dependence of Vietnam's production services on Chinese inputs. Alternatively, the shifts in trade structure for China project positive development for China to move away from labour-intensive activities. Figure 4 indicates a steep increase in the number of products exported to China from Vietnam, from 70 in 1995 to 208 in 2014, and the corresponding decline in the merchandise export concentration of Vietnam to China. Potential appears to exist for China expanding exports to Vietnam, and vice versa. Bilaterally, China's exports are more homogeneously distributed relative to that for Vietnam (see also Womack 2010).

    2.2 Integration through Production Networks

    To provide a more accurate understanding of the trade relationship between China and ASEAN, it is also important to look at: (a) the extent of processing trade; and (b) the domestic value-added (DVA) in trade flows between the two economies. This is because China's engagement with ASEAN is characterized by global production networks (Qin, Xu, and Zhang 2016; Tham and Yi 2014).

    The preceding section implies that trade balances are largely in favour of China. As trade between China and ASEAN is characterized by manufacturing parts and components, Figure 5 distinguishes trade balances between the China and ASEAN for final and intermediate goods, (4) respectively. China records consistent deficits in trade in final and intermediate goods with ASEAN. However, China has...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT