The TransPacific agreement A good thing for VietNam?

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1 The TransPacific agreement A good thing for VietNam? Jean Louis Brillet, France For presentation at the LINK 2014 Conference New York, 22nd 24th October, 2014

2 Advertisement!!! The model uses EViews The author is specialized in EViews Free material You can download a textbook with practical material from the Eviews site. A one week course on econometric structural modelling using EViews In the EcoMod Summer School

3

4 4

5 In growth rates The supply demand equilibrium Gross domestic product Exports Imports Local final demand

6 In growth rates Gross domestic product Household consumption Wage rate Exchange rate The prices

7 The 5 - product decomposition Five products Agriculture, forestry and fishing Manufacturing (including energy) Construction Market services Financial services

8

9 The ratio of exports to production Agriculture Manufacturing Construction Non financial services Financial services

10 .6 The ratio of imports to total demand Agriculture Manufacturing Construction Non financial services Financial services

11 The partners VietNam The National Center for Socio Economic Studies and Forecasting Belongs to the Ministry of Planning and Investment France Jean Louis Brillet, consultant, economist, expert in modelling

12 The reasons for decomposition: structural differences Factor productivity and wage rate Shares in each demand item (consumption, investment ) Intermediate consumption Role of external trade (imports and exports) Role of firms and households Tax rates

13 The reasons for decomposition : behaviors Production Processes are different Agriculture : output is maximized Manufacturing : choice between processes Services : limited role of capital External trade Role of capacity Role of price competitiveness

14 The economic theory Accepted standard for economic models Short term Keynesian Supply demand supply loop Long term more neo-classical More margins oriented

15 The trade equations At constant prices Total local or world demand Price competitiveness : exporter / price on the targetted market Available capacity of production The trade deflators cost of the exporter, price (cost) of competitors Exchange rate : exogenous

16 The difficulties Limited data Yearly for the most Large fluctuations Changes in the structure of production Convergence to market economy Some behaviors gradually appear Maximizing margins Impact of unemployment on wages

17 A specific feature : FDI Foreign Direct Investment Depends on : Demand to the country (both local and foreign) Profitability (supposed to be compared to an exogenous foreign average) Affects Global factor productivity in manufacturing Exports potential Through the share of FDI capital in the total

18 The estimated equations Small number of periods Changes in the behaviors of Vietnamese agents Changes in the structure of the Vietnamese economy Works only in some cases, like external trade The situation should improve with the new data

19 A forecast Real equlibrium GDP Final demand Productive Investment Total Investment Household Consumption Imports Exports Export-import ratio Productive capacity Rate of use (*) Deflators GDP Exports Imports Consumer price index Wage rate Export competitiveness Import competitiveness Employment Firms employment Total employment Unemployment rate (*) Others Margins rate (*) Profits rate (*) GDP decomposition GDP agriculture GDP manufacturing GDP construction GDP non-fin services GDP financial services Growth rates except (*) levels

20 The teachings of the model The Trans Pacific Partnership agreement is still in discussion We cannot apply the actual decisions (nature, levels, timetable) We will present the consequences of individual shocks Tariffs in both directions Quotas in both directions The four decisions together

21 First shock : Quotas applied to VietNam A 1% shock on world demand starting in 2014 Exports increase almost by 1% FDI balances negative effects But imports increase more than exports Local demand : intermediate consumption (manufacturing), investment (too), consumption Capacity problems Inflation But higher GDP and demand (main impact) Trade balance at current prices : loss then gain Positive (limited) effect on Government budget

22 in percentage plus one percent World demand in all products Graph no 1 : The supply - demand equilibrium Final demand Exports Consumer price index Market GDP Imports

23 in percentage plus one percent World demand in all products Graph no 2 : The production elements Value added Capital Rate of use Capacity Employment

24 in percentage plus one percent World demand in all products Graph no 5 : The prices Wage rate Value added Imports Consumption Exports

25 in percentage plus one percent World demand in all products Graph no 4 : The exports - import ratios At constant prices Terms of trade At current prices

26 The government budget Expenditures Total expenditures Demand Wages Social contributions Social benefits Subsidies Interest paid Revenue Total revenue Value added tax Other taxes on production Tariffs Social contributions employer Social contributions workers Income tax Tax on profits Government balance In GDP points

27 Second shock : a decrease in foreign tariffs Similar to an increase of quotas We dismiss the impact on foreign inflation Lower impact for a 1 point decrease Elasticity lower than 1 Different short term dynamics Proportional long term effects

28 An increase in local imports Negative demand shock Imports do not really increase, exports do Local demand (multiplier) Available capacity, Competitiveness from deflation Trade does not change too much Demand for manufacturing goes down the most Investment, consumption, intermediary consumption It is also the most imported good Trade balance improves in the short run

29 in percentage plus one percent ex ante Imports quotas on all products Graph no 1 : The supply - demand equilibrium Final demand Exports GDP deflator Market GDP Imports

30 in percentage plus one percent ex ante Imports quotas on all products Graph no 4 : The exports - import ratios At constant prices Terms of trade At current prices

31 A decrease in local tariffs More complex and interesting Ex ante : negative demand shock But growing impact on prices Not present in the RoW shock Gains in competitiveness Increase in GDP Loss on trade (demand) And of course on the Budget (only case) Limited by growth

32 in percentage minus one point of the rate Imports tariffs on all products Graph no 1 : The supply - demand equilibrium Final demand Exports GDP deflator Market GDP Imports

33 in percentage minus one point of the rate Imports tariffs on all products Graph no 3 : External trade at current prices Exports Imports Exports-Imports ratio

34 in percentage minus one point of the rate Imports tariffs on all products Graph no 4 : The exports - import ratios At constant prices Terms of trade At current prices

35 in percentage minus one point of the rate Imports tariffs on all products Graph no 5 : The prices Wage rate Value added Imports Consumption Exports

36 Expenditures Total expenditures Demand Wages Social contributions Social benefits Subsidies Interest paid Revenue Total revenue Value added tax Other taxes on production Tariffs Social contributions employer Social contributions workers Income tax Tax on profits Government balance In GDP points

37 Measures combined First, a summary of the four shocks

38 in percentage in percentage in percentage plus one percent ex ante minus one point of the rate minus one pointof the rate Imports quotas on all products Graph no 1 : The supply - demand equilibrium Exports tariffs on all products Graph no 1 : The supply - demand equilibrium Final demand Exports GDP deflator Market GDP Imports Imports tariffs on all products Graph no 1 : The supply - demand equilibrium Final demand Exports GDP deflator Market GDP Imports Final demand Exports GDP deflator Market GDP Imports

39 in percentage minus one point of the rate plus one point of the quantity Bilateral quotas and tariffs on all products Graph no 1 : The supply - demand equilibrium Final demand Exports GDP deflator Market GDP Imports

40 in percentage minus one point of the rate plus one point of the quantity Bilateral quotas and tariffs on all products Graph no 4 : The exports - import ratios At constant prices Terms of trade At current prices

41 in percentage minus one point of the rate plus one point of the quantity Bilateral quotas and tariffs on all products Graph no 9 : GDP by product Total Agriculture Manufacturing Construction Non fin. services Financial services

42 Expenditures Total expenditures Demand Wages Social contributions Social benefits Subsidies Interest paid Revenue Total revenue Value added tax Other taxes on production Tariffs Social contributions employer Social contributions workers Income tax Tax on profits Government balance In GDP points

43 Conclusion GDP and local demand increase Trade balance decreases in real terms Deflators decrease Export price more than import Terms of trade decreases Which improves the balance in current terms after a while Government budget decreases

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BRITISH VIRGIN ISLANDS SECTORAL GROSS DOMESTIC PRODUCT MARKET PRICES (current prices) (US$M) SECTORAL GROSS DOMESTIC PRODUCT MARKET PRICES (current prices) Sector 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000r 2001r 2002r 2003r 2004r 2005e Agriculture, Hunting & Forestry 1.36 1.50 1.63 1.77

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