Graduate School of International Studies Ajou University
Vietnam has experienced a long-lasting trade deficit in nearly 20 years (1993-2012) which brings a lot of negative effect to the economy. There are many researches about the determinants of the trade balance, however, there is no consensus about the key factors affecting it across countries. This study employs an unrestricted VAR model to examine determinants of trade balance in Vietnam. Quarterly data set of three endogenous variables and one exogenous variable from January 1995 to December 2012 is used in this paper. Overall, we find that trade balance in Vietnam is significantly negatively related to real domestic GDP per capita. A real depreciation of the real effective exchange rate index leads to an improvement of the trade balance. Particularly, the empirical result shows that a real foreign GDP per capita has a negative effect on the trade balance. About FDI, the model shows that FDI inflow has no impact to trade balance in Vietnam. The finding from this study suggests that to improve trade balance, exchange rate management should take into account real exchange rate for the benefit of trade balance. In addition, Vietnam should focus on enhancing export capacity. The export sectors need to improve capacity, and be able to actively manage the production so as to quickly adjust to take advantage of real depreciation of the domestic currency.
Key words: Trade balance, VAR, Vietnam, Real effective exchange rate.