Honor Essay

April 14, 2011

 

THI XUAN HIEU NGO

Vesalius College – Vrije Universiteit Brussel

Honor Essay HON393E

9,330 words

Adviser Luc Hens

25 January 2010

 

TRADE LIBERALIZATION AND ENVIRONMENT IN VIETNAM

Abstract

Vietnam’s integration with the international economy through trade openness has increased real GDP growth rates, reduced poverty rate significantly, and had important implications for the environment and use of natural resources. This study aims at examining the degree to which the composition of Vietnam’s manufacturing, export, and import output has shifted towards clean or dirty sectors. The analysis is carried out by aggregating toxic releases per unit of output by media for overall manufacturing output in 1990-2008 and exports and imports in 2004-2008. The results suggest increasing manufacturing and export activity in the toxic land and air pollution intensive sectors compared to the less pollution-intensive sectors. In contrast, imports have been relatively cleaner, especially in water and land clean intensive sectors. The story is, on the surface, consistent with the changing composition of Vietnamese production, exports, and imports. The paper also highlights the need to find the best way to strengthen environmental policies while boosting trade liberalization further for Vietnam if practical, or the optimal trade-related and environmental policies separately which weight benefits and costs associated with them. (EconLit F180)

 

I. Introduction

Vietnam’s economic growth in the past decade has been fueled by trade openness, to a large extent, by bilateral and multilateral trade agreements such as the ASEAN Free Trade Agreement, the United States-Vietnam Bilateral Trade Agreement, and the World Trade Organisation. This has increased real GDP growth rates and reduced poverty rate significantly. However, there are some concerns about the environmental effects as whether trade has deteriorated or improved the environmental quality because trade can lead to changes in a country’s natural resources and industrial structure either towards cleaner or dirtier sectors through various mechanisms. In fact, debates among trade supporters and environmentalists have never been as intense as now, especially about fast developing world, because of the possible trade-off between development and environment. Supporting arguments from two sides cannot be solid without evidence from empirical results. As Vietnam is one of the most fast growing economies in the world, it is impossible to exclude empirical studies for Vietnam when it comes to studying issues pertaining to trade and environment for developing countries. The primary objective of this study is to examine the degree to which the composition of Vietnam’s manufacturing, export, and import output has shifted towards clean or dirty sectors. The results suggest increasing manufacturing and export activity in the toxic land and air pollution intensive sectors compared to the less pollution-intensive sectors. In contrast, imports have been relatively cleaner, especially in water and land clean intensive sectors. The story is, on the surface, consistent the changing composition of Vietnamese production and exports away from traditional sectors and towards pollution-intensive manufacturing (especially chemicals, leather, and textiles) while imports towards meat, beverages, spirits, works of art, and antiques. The paper also highlights the need to find the best way to strengthening environmental policies while boosting trade liberalization further if possible, or the optimal trade-related and environmental policies separately which weight benefits and cost associated with them.

The methodology used in this paper is to aggregate toxic releases per unit of output by media for overall manufacturing output in 1990-2008 and exports and imports in 2004-2008; then compare evolution of toxic releases over the timelines with those of manufacturing output, exports and imports. Although this approach lacks theoretical rigor and mathematical intricacy like in other modeling methods, it is straightforward, transparent, and appropriate for undergraduate level.

The next section of this paper briefly presents an overview of trade and environment theory. Section III reviews relevant literature, followed by an overview of Vietnam’s trade policies and trade patterns in Section IV and environmental policies and the current environmental state in Section V. I present my analysis of Vietnam’s trade effects on environment in Section V, and give recommendation in Section VI. In Section VII, I conclude the paper, discuss some limitations of the paper and give suggestion for further researches.

II. Overview of Trade and Environment Theory

Interest in the links between trade and environment has increased greatly in the past decades due to increasing concerns over global warming, species extinction, and industrial pollution. There have been many heated debates among environmentalists and the trade policy community, for instance between the industrial North American Free Trade and developing South over the effects of trade liberalization on environmental quality. The debates have intensified with the creation of the World Trade Organization and that of the Doha Development Round. According to Copeland and Taylor (2004), these debates have often been unproductive due to significant differences in both parties’ trust of market forces and perception of environmental values (p. 7). Environmentalists fear a race-to-bottom whereby a government lowers environmental standards to compete in the world market, which will lead to environmental degradation (Esty, 1996, p. 36). The race-to-bottom story corresponds to pollution havens hypothesis, that is, lower environmental standards will promote pollution-intensive industry from countries with stringent environmental regulations to migrate to countries with weaker regulations (Esty, 1996, p. 34). In contrast, proponents of free trade fear that environmental tariffs are disguised protection for domestic firms. There have been cases where environmental regulations were used as non-tariff barriers, such as lobster case between Canada and the US or the tuna/dolphin case between Mexico and the US (Trebilcock and Howse, 1999, p. 388 & 393).

Both parties seem to agree that trade openness will lead to economic growth and rising income through gains from trade, that is, comparative advantage whereby two nations can trade to their mutual advantage even when one of these two nations is more efficient than the other at producing everything, and specialization and economies of scale through intra-industry trade whereby nations trade differentiated products in the same industry (Batabyal & Beladi, 2007, p. 1). However, they disagree about the effect on environmental quality. For example, environmentalists fear that if the nature of an economic activity is unchanged, increasing domestic production and consumption, due to rising foreign demand and domestic income as a result of trade openness and gains from trade, will lead to larger inputs of energy, natural resources, and materials. Increasing production and consumption will also result in more waste by-products, accumulation of waste, and concentration of pollutants which will degrade environmental quality and reduce human welfare, despite rising incomes (Panayotou, 2003, p. 1). In contrast, trade supporters argue that rising income due to the gains from trade can lead to higher demand for cleaner goods and thus stricter environmental regulations (Kellenberg, 2008, p. 1). This is shown in a comparison between the richer industrial North which has cleaner environment versus the developing South which as dirtier environment (Pearson, 2000, p. 5).

However, many empirical studies have concluded that there is no fixed relationship, whether it is positive or negative, between economic growth and environmental quality along a country’s development path. The relationship depends on what level of income at which people demand and afford more efficient infrastructure and a cleaner environment. These results correspond to the implied inverted-U relationship between environmental degradation and economic growth known as the environmental Kuznets curve. According to the environmental Kuznets curve (figure 1), at low levels of development, the degree of environmental degradation is quite low, mainly due to limited quantities of biodegradable wastes as a result of subsistence resources-based economic activities. During the economic boom at the middle-stage of development, intensive extraction of resources and industrializing process will accelerate resource depletion and waste generation. At higher levels of development, the economy’s structure will change towards information-based industries and services, more efficient technologies, and thus increased demand for environmental quality. As a result, the degree of environmental degradation starts to level-off and declines (Panayotou, 2003, p. 1-2). According to empirical studies cited by Esty (2001, p. 3), the middle-income levels at which nations’ environmental degradation starts to decline are approximately at of $5000-8000 GDP per capita. Since Vietnam’s real GDP per capita in 2008 is $2,800 according to Central Intelligence Agency (2008), we may expect that trade may have negative effects on the country’s environment.

Figure 1. The environmental Kuznets curve: a development-environment relationship. Note. The graph is Panayotou (2003, p. 1).

Industrialization resulting from trade openness is thought to affect environmental pollution via three mechanisms: a scale effect, a technology/ process effect, and a composition effect. The scale effect means that as an economy grows, there will be higher volume of industrial production and increasing use of inputs of energy and materials; one may expect more pollution as a result. The technology/ process effect refers to whether machines with high pollution abatement ability, environmental practices, and clean technologies are used in production within firms and industries. Clearly, more fuel-efficient equipment and cleaner technologies, along with a focus on environmental practices tend to lead to less pollution. Finally, the composition effect refers to how the weight of various industries within the industrial sector in a country impacts the level of pollution. Clearly, a country that has a heavy share of industrial chemicals or plastics and man-made fibers tends to have more pollution than one that has a heavy share of wearing apparel or bakery products (Adger, 2001, p. 197).

The composition effect can be explained by trade theories, more precisely the Ricardian and Heckscher-Ohlin models. The Ricardian model says that countries tend to specialize in the production and exports of goods they produce relatively efficiently. In the Heckscher-Ohlin model, countries tend to specialize in the production and exports of goods that use intensively the factor of production with which they are relatively well endowed (Krugman & Obstfeld, 2009, p. 29 & 64). Because environment provides firms with services, it can be viewed as a production factor that provides natural resources or waste absorption. In this sense, environment is an input to production function (Pearson, 2000, p. 175). Because environment has value, the use of its service has a cost. However, not all products’ selling price takes into account the environmental cost because the environmental cost is external cost. As a result, some products are priced well below social cost (the sum of private cost and pollution abatement cost) (Perloff, 2008, p. 602). This means that countries that pay less attention to environmental protection (usually developing countries) may have comparative advantage in producing products which are pollution- intensive while countries which have strict environmental regulations (usually industrialized countries) may have comparative disadvantage in producing products which are pollution- intensive, if other things are equal (Pearson, 2000, p. 188). In fact, if one views the lack of environmental regulations as a peculiar form of export subsidy, producers who obtain hidden subsidies in terms of low pollution abatement can dump their products in international markets at prices that do not reflect the true cost of production. This is the phenomenon of ecological dumping (Rauscher, 2007, p. 67).

III. Literature Overview

There has been growing literature on the effects of international trade patterns on the composition of industries in developing countries. The methodologies employed to test this relationship are widely varied; so are the results. World Bank researchers Patrick Low and Alexander Yeats (1992) used revealed comparative advantage model, defined as the share of an industry in a country’s total exports relative to the industry’s share of total world exports of manufactures, to test whether developing countries among 109 countries examined gained a comparative advantage in pollution-intensive products during the period 1965-1988. They found decreases in dirty industry in the developed world and increases in Eastern Europe, Latin America, and West Asia.

Similarly, Mani and Wheeler (1998) also found that pollution intensive output as a percentage of total manufacturing fell in the OECD and rose steadily in the developing world as a whole from 1960 to 1995. However, the reason for increasing pollution intensive output in the developing was not due to lax environmental regulations but the low-income (Mani and Wheeler, 1998, p. 244).

Like Low and Yeats (1992), Abimanyu (1996) used revealed comparative advantage model on trade between the United States, Japan, Australia, and the Association of Southeast Asian Nations. Like Mani and Wheeler (1998), Abimanyu also found that dirty industry expansion was faster in developing countries, but differences in environmental standards between developing and developed countries were not a significant cause of the movement of dirty industries into developing countries.

Another World Bank team, Lucas, Wheeler, and Hettige (1992), analyzed aggregate toxic releases per unit of output for 80 countries between 1960 and 1988 and found that the toxic-intensive industries grew faster in the developing countries as a whole, but this growth mainly took place in relatively closed, fast growing economies, rather than in the countries that were most open to trade. However, this result was criticized by Michael Rock (1996) for their classification of dirty industries and their narrow definition of openness. Unlike the result found by Lucas at al., Rock found that the more open the trade policy, the greater the pollution intensity.

The effects of trade and environmental policies on trade growth and environmental quality also have attracted strong interest from many scholars. Tobey (1990) tested whether environmental policy affected the patterns of trade in commodities produced by dirty industries for 23 nations in 1977. Tobey regressed net exports of each country’s dirty industries on their factor inputs (land, labor, capital, and natural resources) and on environmental stringency. The result showed that environmental stringency was not a statistically significant determinant of net exports.

Lee and Roland-Holst (2007, p. 289) examined the effects of coordinated trade and environmental policies for Indonesia by using a two-country computable general equilibrium model of Indonesia and Japan. They found that unilateral liberalization by Indonesia will increase virtually all industrial pollutants. They also found that uniform combining with trade liberalization could reduce industrial pollution and maintain or even increase welfare. The study suggested that there needs not be a trade off between welfare enhancement and environmental quality.

IV. Overview of Vietnam’s trade policies and trade patterns

Before going to the analysis of examine the degree to which the composition of Vietnam’s manufacturing, export, and import output has shifted towards clean or dirty sectors, it is important to overview Vietnam’s trade policies and trade patterns for the past decades. The trade policy regime in Vietnam has undergone significant changes since the Doi Moi (reform) policy in 1986. The purpose of Doi Moi was to gradually replace the centrally-planned economy with a socialist-oriented market economy, and to replace import-substituting policy in a long-standing protectionist, state-led trade regime with economic openness and international integration. However, trade policies under the reforms were still ambiguous as they attempted to promote export-oriented industries while preserving the protective trade regime at the same time. The year 1992 witnessed some important changes in trade policies: a detailed, consolidated schedule based on the Harmonised System of tariff nomenclature replaced the Law on Import and Export Duties introduced on 1 January 1988. The tariff structure based on the Harmonised System was designed to protect selective consumer goods (cosmetics and some categories of food products), upstream activities related to textiles and garments (silk, cotton, and certain fibres) and some intermediate goods (metal products, cements and glass) (Athukorala, 2006, p. 1, 3, & 4). The tariff structure was further modified due to Vietnam’s trade agreements and trade memberships: an economic and trade cooperation agreement with the European Union (EU) in 1992, membership of the Association of South East Asian Nations (ASEAN) in 1995, the ASEAN Free Trade Area (AFTA) in 1996, the Asia-Pacific Economic Cooperation in 1998, a bilateral trade agreement with the United States in 2000, and membership of the World Trade Organization (WTO) in January 2007 (Harris, Robertson, & Wong, 2007, p. 14).

Under the AFTA agreement, Vietnam would reduce its tariff to 0-5 percent by 2003. In addition, Vietnam committed to reduce tariff rates for sensitive and high sensitive agricultural products to 0-5 percent by 2013 according to the Protocol on a special agreement signed in 1999 (mainly poultry and swine products, coffee, tea, copra, manioc and rice). Concerning goods excluded from the tariff reduction agreements which are of key industries, Vietnam will have to introduce the 5 percent tariff cap on them only in 2010 (United Nations Conference on Trade and Development, 2003, p. 3).

Effective rate of protection decreased substantially between 1997 and 2003 (table 1). In all traded sectors, effective rate of protection reduced by 19 percent from 72 percent in 1997 to 58 percent in 2001, and then by more than 50 percent to 25 percent in 2003. While effective rate of protection in agriculture increased by 62 percent from 7.74 percent in 1997 to 12.52 percent in 2003, it dropped by a similar amount from 121 percent to 44 percent in the same years in manufacturing. This implies that there was an increase in the output tariff in agriculture but an increase in the input tariff in manufacturing. Because effective rate of protection in manufacturing was much higher than in agriculture, we can say that the tariff structure in Vietnam had a clear bias against agriculture and in favor of manufacturing.

1997 2001 2003
Agriculture 7.74 7.43 12.52
Mining 6.05 16.39 -0.03
Manufacturing 121.47 95.97 43.94
Total tradables 72.22 58.46 24.87
Simple Average 59.54 54.1 26.23

Table 1. Effective rate of protection (percent) in Vietnam, 1997-2003. Note. The data are from General Office Statistics, Hanoi cited in Athukorala (2006, p. 39).

Under WTO membership, Vietnam is committed to reduce its overall 2006 most-favoured-nation rates of 17.3 percent to the WTO final bound rate (applied in 2019) of 13.4 percent on simple average (table 2). The bound rate is the maximum rate of tariff which is allowed to a member state for imports from another member state (“bound tariff rate”). Non-agricultural products face higher rate cuts than agricultural products (by 25 percent versus 16 percent). Among non-agricultural products, textiles and clothing sector faces the most significant rate cut by 63 percent from 36.4 percent to 13.5 percent upon accession. Footwear also experiences a huge rate cut by 38 percent upon accession (table 1). These two sectors also face the removal of subsidies. However, their import duties on textile raw materials are reduced from 40−50 percent to 10−15 percent (International Monetary Fund, 2007a, p. 4). The number of most-favored-nation tariff lines also fell by 6 percent from 11,088 in 2006 to 10,444 in 2007 and in expected to remain at least constant by 2019. Most-favored-nation tariffs refer to a level of tariffs given to one country by another and enforced by the World Trade Organization. In addition, Vietnam was asked to abolish quotas, bans, and other restrictions upon accession, including import bans on cigarettes, cigars, and used vehicles (International Monetary Fund, 2007a, p. 8).

  2006 MFN rates WTO 2007 Bound rates WTO final bound rate WTO implement-ation
Simple average 17.3 17.2 13.4 up to 12 years
Agricultural products 25.7 27.3 21.7 up to 5 years
Nonagricultural products 16.3 15.8 12.2 up to 12 years
Steel 7.7 17.7 13 up to 7 years
Textiles and clothing 36.4 13.6 13.5 upon accession
Footwear 43.9 35.8 27.2 upon accession
Cars and other motor vehicles 55.5 84.8 58.7 up to 12 years
Most new cars 90 100 70 up to 7 years
Motorbikes 90 100 74.3 up to 12 years
Machinery/Electrical 8.2 10.8 8.1 up to 5 years
Agricultural products 100 100–150 85–135 NA
Nonagricultural products 90–100 100 75–100 NA
Number of lines 11,088 10,444 10,444 NA


Table 2. Most-Favored-Nation Rates and Bound-Rates (percent) in Vietnam, 2006-2007. Note. The data are from International Monetary Fund (2007a, p. 4).

How has trade policy affected Vietnam’s economy openness over time? Figure 2 shows trade openness (total trade in percent of nominal GDP) in Vietnam from 1990 to 2008. Overall, trade doubled from 80 percent in 1990 to almost 160 percent of GDP in 2008. Trade experienced a huge decline from 80 percent in 1990 to just above 50 percent of GDP in 1993 probably due to the ambivalence of trade policies before the Harmonised System introduced in 1992. However, trade picked up remarkably afterward to reach just below 160 percent in 2008 mainly due to trade agreements signed with other parties.

Figure 2. Trade openness in Vietnam, 1990-2008. Note. Trade openness is exports plus imports in percent of nominal GDP. The data are from International Monetary Fund’s Directions of Trade Statistics and World Economic Outlook database cited in Integration Indicators Database of Asia Regional Integration Center (2008).

Figure 3 shows Vietnam’s export market share in the world (Vietnam’s exports as percentage of the world’s imports) from 1990 to 2008. Along with doubling trade openness, Vietnam’s export market share increased almost nine fold from 0.04 percent in 1990 to 0.38 percent in 2008. This suggests that Vietnam’s export is competitive in world markets.

Figure 3. Export market share in Vietnam, 1990-2008. Note. Export market share is Vietnam’s exports as percentage of the world’s imports. The data are from International Monetary Fund’s Directions of Trade Statistics and World Economic Outlook database cited in Integration Indicators Database of Asia Regional Integration Center (2008).

Figure 4 shows foreign direct investment (FDI) openness (total FDI in percent of nominal GDP) in Vietnam from 1994 to 2005. Overall, FDI more than doubled from 25.4 percent in 1990 to 58.9 percent in 2005. In the period of 1990-1993, when trade experienced a huge decline, FDI openness remained stable at approximately 25 percent. This reinforces the ambivalence of trade policies before the Harmonised System. However, FDI soared almost threefold to 74.3 percent in 2002 and declined again to 59 percent in 2005, possibly due to increasing competition for FDI inflows from other developing countries such as China and India or worldwide FDI flows dropped.

Figure 4. Foreign direct investment openness in Vietnam, 1990-2005. Note. FDI openness is the inward FDI stock of a country expressed as a percentage of nominal GDP in dollars. The data are from United Nations Conference on Trade and Development FDI Online cited in Integration Indicators Database of Asia Regional Integration Center (2008).

Along with increasing openness is the relatively high real GDP growth rate of 7.5 percent on average from 1992 to 2006 as shown in figure 5. Although growth declined by more than half to 3.5 percent in 1997-1998 due to the Asian economic crisis, it quickly recovered afterwards to reach 8.2 percent in 2006.

Figure 5. Real GDP growth rates in Vietnam, 1992-2006. Note. The data are from General Statistics Office (Hanoi) and International Monetary Fund staff estimates cited in I International Monetary Fund ‘s Vietnam: Statistical Appendix (1999, 2003, 2006, & 2007b).

Poverty has also reduced substantially. The poverty rate is defined as the percentage of population living under the poverty line, defined as the cost of a basket allowing a daily intake of 2,100 calories per person per day. According to the World Bank (2008), the poverty rate declined by 42 percent from 58 percent in 1993 to 16 percent in 2006 (The World Bank, 2008, p. 4).

The composition of Vietnam’s exports and imports has changed significantly during the trade liberalization period of 1995-2006. Figure 6 shows that Vietnam exported more both light and heavy industrial products and less agricultural, forest, and aquatic products. The biggest increase was in light industrial and handicraft products (by 57 percent from 28 percent in 1995 to 45 percent in 2007).  Exports of heavy industrial products and minerals also increased remarkably despite more moderately (by 30 percent from 25 percent to 33 percent in the same period). In contrast, exports of forest products experienced the biggest decline by 71 percent from 2.8 percent in 1995 to 0.8 percent in 2006. In the same token, agricultural and aquatic exports contracted by 58 percent and 26 percent from 32 percent and 11 percent in 1995 to 13 percent and 8 percent in 2006.

Figure 6. Exports of goods by commodity group in Vietnam (percent), 1995-2006. Note. The data are from General Statistics Office (2007a).

The export structure by commodities in 2006 in figure 7 showed that crude oils, garments, and footwear were Vietnam’s most important export commodities, accounting for half of total exports in 2006 (22 percent for crude oils, 15 percent for garments, and 13 percent for footwear).  Furniture, marine products, and electrical equipment held the same export share of 6 percent. Boilers (machinery) and coffee (tea and spices) were also important; each accounted for 4 percent. Cereals, rubber, and handicraft each held 2 percent.

Figure 7. Export Structure in Vietnam (percent), 2006. Note. The data are from International Trade Center (2008).

As shown in figure 8, Vietnam’s main imports were fuels, raw material, machinery, instrument, and accessories from 1995 to 2007, accounting for approximately 80 percent of all imports on average. These imports increased by 13 percent from 75 percent in 1995 to 85 percent in 2007. Imports of pharmaceutical, medicinal products were smaller, accounting for roughly 10 percent on average.

Figure 8. Imports of goods by commodity group in Vietnam (percent), 1995-2007. Note. The data are from General Statistics Office Hanoi (2007b).

Vietnam’s export destinations changed between 1995 and 2005. As shown in table 3, Japan had the highest Vietnam’s export share of 27 percent whereas exports to ASEAN and EU were smaller (18 percent and 12 percent) in 1995. Exports to China and the USA were relatively low (7 percent and 3 percent). However, in 2005, export share to the USA increased almost fivefold; the USA received 18 percent of Vietnam’s total merchandise exports and became Vietnam’s biggest export destination. This was mainly due to the Vietnam and US bilateral trade agreement signed in 2000. Exports to China and EU also increased significantly by 50 percent and 40 percent to 10 percent and 17 percent respectively in 2005. This was most likely due to ASEAN-China free trade agreement signed in 2002 and the EU-Vietnam bilateral agreement on WTO accession in 2004. ASEAN and Japan remain important destinations for Vietnam’s exports despite declining export shares (Thoburn, 2009, p. 6).

V. Overview of Environmental Policies and the Current Environmental State

Another important impact of trade openness is increasing pressure placed on the environment such as external pollution from imports of refused equipment, backward technology, and low quality products, depletion of natural resources due to exports of natural resource-based products, and development of services associated with potential environmental pollution such as fresh markets, restaurant system, and transportation services (Vietnam Environment Protection Agency, 2005, p. 12). Recognizing potential threats created by the trade liberalization and industrialization on the environment, the government of Vietnam has placed greater emphasis on environment management by imposing some important environmental management instruments. For example, the National Plan for Environment and Sustainable Development was approved in 1991, providing the gradual development of a comprehensive framework for environmental planning and management and proposing specific actions to address priority areas. In 1994, the Law on Environmental Protection was enacted, giving the general provision and measures to prevent and remedy environmental pollution and degradation, calling for international collaboration, and making provisions for implementing and dealing with violation of the law. In 1995, the National Plan for Environment and Sustainable Development was replaced by the more specific National Environmental Action Plan, addressing the growing industrial development and urbanization in Vietnam in 1995 (Phuong, 1996). The government has also increased spending on the environment from domestic resources to 1% of the State annual expenditure total as from 2007, equivalent to USD 193 million a year (Bass et al., 2009, p. 10). On the international side, Vietnam ratified the Convention on Biological Diversity in 1993 and approved the Biodiversity Action Plan in 1995 (Phuong, 1996). However, due to unclear and overlapping institutional jurisdictions, weak interagency cooperation, and capacity limitations among government institutions, implementation of legislations is usually limited (The World Bank, 2005, p. 50).

Vietnam has also paid attention to promoting environment-oriented taxation measures such as tax reduction for imports and installation of clean technology, extraction taxes on forest and mineral resources, subsidy removal for chemical fertilizers. The government has also created environmental funds such as funds for reforestation, funds for coal mining and oil spill contingency, and a National Environmental (Reserve) Fund. Penalties for violations against environmental law and regulations have also been imposed; but their implementation has still been limited due to the problem of defining property rights for long-term and sustainable use of the environment and natural resources (The Greater Mekong Subregion Environment Operations Center, 2009, p. 47).

The current state of the environment in Vietnam under the government’s environmental policies can be assessed by biodiversity, water, air, and land environment in urban, industrial, and rural areas. In general, environmental degradation and pollution have been increasing mainly due to economic activities and the lack of controls. Although forest cover is increasing due to Vietnam’s establishment of protected areas system, natural forests are increasingly fragmented and degraded. According to the World Bank (2005, p. 3), over two-thirds of Vietnam’s natural forests are considered poor or regenerating. This has resulted in growing desertification and land impoverishment, rapid conversion of wetlands, and coral reef degradation.

Pollution of surface and inland water, particularly in river basins, small rivers, and canals in urban areas, has been increasingly serious due to overexploitation from rapid population growth, industrialization, and urbanization, and lack of waste water treatment. According to Vietnam Environment Protection Agency (2005), industrial waste water accounted for approximately a third of total waste water; and more than 95 percent of total industrial waster water was discharged to environment without prior treatment. As a result, high levels of BOD5, NNH4+, total suspended solid, heavy metal, coliforms, pesticide chemicals in polluted surface water doubled or tripled permitted national standards (p. 15-17). Marine water in concentrated residential areas, industrial factories and sea port exits is also highly polluted by suspended solids, NO2, NO3, coliforms, oil and zinc due to increasing fishery, aquaculture, water transportation, oil spill accidents, mineral resource exploitation, and tourism in coastal resorts (p. 21-22).

Air pollution in urban areas and focal economic regions has also been increasing mainly due to industrial and handicraft activities, transportation, and urban infrastructure development. The air quality is mainly polluted by dust, CO, SO2, NO2, and lead. Dust pollution was the highest element in air pollution in 2001-2004, far exceeding permitted standards. It was highly concentrated in construction sites in urban areas (from 10 to 20 times higher than permitted standards), road junctions and big cities such as Ho Chi Minh and Ha Noi (from 2 to 3 times higher than permitted standards). Unlike dust pollution, the levels of SO2, CO, NO2, and lead pollution in urban and industrial air in general remained below permitted standards, mainly generated by industrial and handicraft activities, and transport vehicles. Air quality in rural areas in general also remained below permitted standards, except in some craft villages (Vietnam Environment Protection Agency, 2005, p. 26-27). Along with growing water and air pollution, land and soil environment has also been increasingly polluted, mainly by chemical fertilizers and repellents such as insecticides, fungicides, and herbicides for agricultural cultivation. Although the amount of chemical fertilizers in use was relatively much lower than other countries (5 times lower) (table 3), the lack of technical proper use and imbalanced use biasing toward nitrogenous fertilizers posed pressure on agricultural and rural environment. It was estimated that 50 percent of nitrogenous, 50 percent of potassium, and 80 percent of phosphate fertilizers remained in the soil. This pressure was even further elevated due to fast growing chemical fertilizers and repellents used throughout Vietnam. For example, the amount of total chemical fertilizers (N, P2O5, and K2O) increased by almost twelve times from approximately 211,000 tons in 2000 to 2,530,000 tons in 2003, mainly used for rice, vegetables, long term industrial trees, and fruit trees (Vietnam Environment Protection Agency, 2005, p. 28-29).

Nations Average amount of pesticides used per ha (kg/ha)
Vietnam 85
Japan 430
Korea 467
China 390

Table 3. Average amount of pesticides used per ha by countries. Note. The data are from Agriculture Publishing House (2001) quoted by Vietnam Environment Protection Agency (2005, p. 29).

VI. Analysis of Trade Effects on Environment

Of the three effects of trade openness on environmental pollution mentioned above in part II, the scale effect is a straightforward consequence of economic growth while the technique effect is related to technology transfer. However, due to the limited scope of this paper, these two effects will not be pursued here. The paper will focus on the effect of trade on the composition of industries. Given Vietnam’s comparative advantage in labor-intensive goods and relatively laxer environmental regulations compared to its main trading partners (such as Japan and EU), one may suspect that as Vietnam may be specializing in pollution- intensive industries, thus leading to dirtier environments as it continues to expand its international trade.

One difficulty I encountered is that there is no data on Vietnam’s industrial pollution. Fortunately, the World Bank’s Industrial Pollution Projection System has been designed to help interested parties address this problem. The IPPS has been designed to convert available information on employment, value added, or output to a profile of associated pollutant output for countries and operates through sectoral estimates of pollution intensity or pollution per unit of activity (The World Bank, 1995, p. E-1). Although the prototype system has been developed from a US environmental and economic database, it can be applied to other countries to some extent because the pattern of sectoral intensity rankings may be similar. For example, wood pulping will be more water pollution intensive than apparel manufacture in every country. Therefore, the present version of Industrial Pollution Projection System can be useful as a guide to probable pollution problems, even if exact estimates are not possible (The World Bank, 1995, p. 2).

There are different Industrial Pollution Projection System parameters depending on the types of complementary data which are available. Because Upper Bound estimates were calculated only from data on firms which were significant polluters, they provide an upward-biased estimate of general sectoral pollution. In contrast, because the Lower Bound intensities were calculated from data on all firms and took pollution from all non-recorded firms as zero, they provide downward-biased estimate (The World Bank, 1995, p. E-10). Although developing-country factories like those in Vietnam may pollute more than factories in the US, I choose to be conservative by using Lower Bound estimates in my calculations to avoid overestimating the degree of pollution.

The methodology I use is that I multiply manufacturing output, exports, and imports by the industry’s Lower Bound coefficient for each industry, then summing across industries to get total predicted pollution for each year for each and all media. By using Industrial Pollution Projection System coefficients, I assume that global technological constraints make some industries more polluting than others.

Industrial Pollution Projection System pollution intensity is defined as a ratio of pollution per unit of manufacturing activity:

Pollutant output intensity = pollutant output/total manufacturing activity

Pollution output intensities can be classified by medium such as air, land or water if pollutant output is calculated in terms of air, land, or water pollution. Total manufacturing activity can be physical volume of output, shipment value, value added, or employment, among which physical volume of output is the most immediately appealing choice (The World Bank, 1995, p. 11-12 & 15).

Because Industrial Pollution Projection System pollution intensity is in pounds per million USD in 1987 while the overall manufacturing output value is at 1994 constant VND billion and export and import values are in USD million constant prices, I convert them to equivalent unit before processing them. The procedure of my calculation is presented in Annex 1.

Industrial Pollution Projection System pollution intensity data show that the most highly toxic pollution intensive in all three media are industrial chemicals except fertilizer, plastics and man-made fibers, tanneries and leather finishing, and non-ferrous metals are the most highly toxic pollution intensive with respect to air, water and land. Food-processing industries such as bakery products, grain mill products, fish products; and other industries such as wearing apparel are the least toxic pollution intensive manufacturing sectors in all three media. Some others are only highly toxic pollution intensive in certain media. For example, iron and steel is relatively intensive in water and air pollution; pulp, paper, and paperboard is prominent in land and water; and textiles is mostly air pollution intensive (The World Bank, 1995, p. 47-49).

Figure 9 shows overall manufacturing output value (1994 VND billion) and its toxic pollution (tones) between 1995 and 2008. I find that manufacturing output took off after the gradual liberalization under the Association of South East Asian Nations Free Trade Area in 1996 and a bilateral trade agreement with the United States in 2000, increasing by 40 percent annually in 1995-2008 (right y-axis). Total pollution associated with the manufacturing output increased by 49 percent over this time period, suggesting that there was a slight shift in the composition of manufacturing towards dirty sectors. If I break down the pollution by media, I find that water, air, and land pollution grew by 47 percent, 48 percent, and 49 percent annually. This suggests that production became slightly more land and air pollution intensive than water pollution intensive during this time, indicating a slight biased shift in the composition of industries towards those that are responsible for air and land.

Figure 9. Overall manufacturing output (1994 VND billion), its total toxic pollution (tones), and pollution breakdown by medium (tones), Vietnam, 1995-2008. Note. The data are from General Statistics Office Hanoi (2007) and the World Bank’s Industrial Pollution Projection System (1995).

Figure 10 shows export values (2005 USD million) and its toxic pollution (kilogram) between 2004 and 2008. I find that exports increased by 108 percent from 27,366 USD million in 2004 to 56,897 USD million in 2008 (right y-axis). Total pollution associated with exports increased by 147 percent from almost 15,000,000 kilograms to almost 38,000,000 kilograms over this time period, suggesting that there was a profound shift in the composition of manufacturing exports towards dirty sectors (left y-axis). The pollution breakdown by media shows that I air, water, and land pollution grew by 126 percent, 146 percent, and 185 percent. This suggests that production became much more land and air pollution intensive than water pollution intensive during this time, indicating a strong biased shift in the composition of exports towards those that are responsible for land.

Figure 10. Exports (2005 USD million), its total toxic pollution (kilograms), and pollution breakdown by medium (kilograms), Vietnam, 2004-2008. Note. The data are from International Trade Center (2008) and the World Bank’s Industrial Pollution Projection System (1995).

Analysis of Vietnamese exports shows that the sectors have shown highest annual increase in exports in 2008 were fertilizers (267 percent), iron and steel (104 percent), textile (65 percent), and dying and leather finishing (60 percent) (International Trade Center, 2008). The textile industry is also large consumer for industrial chemicals. Therefore, growing textiles exports seem to have also fueled a simultaneous increase in industrial chemicals. These are major sources of toxic land pollution listed in Industrial Pollution Projection System pollution intensity. It is thus not surprising to note that Vietnam’s exports are getting dirtier over time since its export specialization has moved away from more tradition oil and other primary commodities towards manufacturing especially chemicals, iron and steel, and leather industries. This indicates that Vietnam has comparative advantage in manufacturing sectors.

Figure 11 shows import values (2005 USD million) and its toxic pollution (kilogram) between 2004 and 2008. In general, imports increased by 85 percent from 32,927 USD million in 2004 to 60,885 USD million in 2008 (right y-axis). Total pollution associated with imports increased by 53 percent from just above 59,000,000 kilograms to just above 91,000,000 kilograms over this time period, suggesting that there was a profound shift in the composition of manufacturing imports towards clean sectors (left y-axis). The pollution breakdown by media shows that I air, water, and land pollution grew by 51 percent, 55 percent, and 56 percent. This suggests that imports have slightly shifted towards water and land clean intensive sectors. This profound shift was the most remarkable in 2008, particularly towards air-clean and land-clean sectors. While imports grew by 3 percent from 58998 USD million in 2007 to 60885 USD million in 2008, total pollution and pollution breakdown by air, land, and water dropped by 8 percent, 9 percent, 8 percent, and 2 percent. It is again not surprising because Vietnam’s highest annual increase in imports in 2008 were meats (117 percent), works of art (103 percent), and beverages and spirits (55 percent) (International Trade Center, 2008). This makes sense to me because as Vietnamese people get richer, they consume more tender meat, branded alcohol, and enjoy arts imported from other countries which they did not have before.

Figure 11. Imports (2005 USD million), its total toxic pollution (kilograms), and pollution breakdown by medium (kilograms), Vietnam, 2004-2008. Note. The data are from International Trade Center (2008) and the World Bank’s Industrial Pollution Projection System (1995).

VII. Recommendations

Although Vietnam’s imports have been relatively cleaner, exports and overall production have not. This means that while trade liberalization measures have been pursued to promote economic growth in Vietnam, they have led to some potentially adverse environmental consequences. This calls for coordination between trade and environmental policies to avoid a trade-off between the economic gains from trade liberalization and its environmental consequences. An empirical study on Vietnam made by Obeid, Mensbrugghe, & Dessus (2002, p. 221) concluded that coordinated reforms could reduce industrial pollution and maintain or even increase growth and trade. In addition, increasing effluent taxes while decreasing border taxes increases real income without deterioration of tax revenues (p. 209). However, some scholars such as Crane (1993, p. 384) argue that this cooperation may not be forthcoming because of different priorities and decision-making procedures. As a result, countries may have to choose to adopt either trade-related process standards and tariff-based approaches or direct environmental policy instruments, such as general process standards. According to Perroni and Wigle (1999, p. 1), both trade-related policies are rather ineffective at reducing global emissions when compared with direct environmental policy instruments. However, the adoption of command and control policies might be exceedingly costly to developing countries, especially because cleaner technologies require use of inputs that are comparatively more abundant in richer countries. By contrast, the adoption of tighter environmental policies is likely to be relatively effective at reducing emissions, and dramatically less costly. This paper highlights the need to find out the best way to coordinate trade and environmental policies for Vietnam if it is practical or the optimal trade-related policies and environmental policies separately weighing benefits and cost associated with them.

VIII. Conclusion and Limitations of this paper and Suggestions for further research

Vietnam’s trade openness, fueled by bilateral and multilateral trade agreements such as the ASEAN Free Trade Agreement, the United States-Vietnam Bilateral Trade Agreement, and the World Trade Organisation, has increased real GDP growth rates and reduced poverty rate significantly in recent years. Real GDP growth rate grew by 7.5 percent, and the poverty rate declined by 42 percent in 1992-2006. However, trade liberalization has resulted in a biased shift of composition of manufacturing and export output towards the toxic land and air pollution intensive sectors although imports have shifted towards water and land clean intensive sectors. This story is, on the surface, is consistent with what one would expect looking at the trend of Vietnamese production, exports, and imports which show that Vietnamese people have comparative advantage in producing manufacturing pollution-intensive sectors and enjoy things which they did not have before such as meat, spirits, and works of art as income rises.

There are several caveats with this study. Firstly, in the absence of data on Vietnam’s industrial pollution, I used pollution measures from the U.S. as proxies from the World Bank’s Industrial Pollution Projection System. Should pollution measures from developing countries such as India and China or Vietnam itself be available, it would be useful to re-examine the issue using them. Although the ranking of polluted industries in the U.S. may be different from that in Vietnam, many empirical studies prove that the pattern is quite similar in most countries. In addition, Industrial Pollution Projection System requires me to pick either over-estimating or under-estimating parameters for my calculations. My decision of choosing downward-biased estimates is subjective; others may wish to pick upward-biased estimates instead. Moreover, the World Bank’s Industrial Pollution Projection System is quite old because parameters are based on 1987 prices. This leads to another problem with retrieving other data of the same year such as CPI index or GDP deflator for Vietnam back to 1987. As a result, I have to use GDP deflator for 1990 as the second best solution to convert prices from 1987 to another base year.

Secondly, the time period of my analysis for the change in composition of exports and imports from 2004 to 2008 is quite short to observe long-term changes in the composition of industries. Thirdly, because there is no direct converting table for all possible classification systems, the converting process is very lengthy, giving higher chance for errors. For example, to convert 4-digit ISIC Rev.2 to 3-digit SITC Rev.3, one has to convert 4-digit ISIC Rev.2 to 3-digit ISIC Rev.3 then to 3-digit SITC Rev.3. Moreover, because it is not always possible to find a procedure to convert one classification system to another such as from 4-digit ISIC Rev.2 to 2 digit HS, I have to convert them subjectively. However, limitation may be overcome by other researchers by using assisting WITS (World Integrated Trade Solution) software, developed by the World Bank, in close collaboration with the United Nations Conference on Trade and Development, providing access to the United Nations Statistics Division’s COMTRADE, United Nations Conference on Trade and Development’s TRAINS, and World Trade Organization’s IDB and CTS databases if one wishes to convert different classification systems reliably (The World Bank, 2004).

In addition, the approach used for the analysis in this paper is quite simple. One may wish to improve the depth of the empirical analysis of this paper by using a partial equilibrium model and regressing approach for more precise results. One can also use other comprehensive methodologies such as computable general equilibrium models derived from economic theory and presented with great mathematical sophistication to see the interactions between all sectors of an economy because they capture all direct and indirect effects of changes in trade policy or environmental policy that ripple throughout the rest of the economic system.

Due to the limited scope of the paper, only composition effect on environment quality from trade liberalization is addressed. One may wish to broaden the scope to examine others such as scale effect (or economic growth) and process effect (or technology spillovers) of trade on environment. One may also wish to examine the issue of coordination between trade and environmental policies or optimal trade-related or environmental policies to supplement the analysis of this paper.

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Annex 1: Steps to Calculate Pollution Intensity and Pollution for Vietnam

  1. For overall manufacturing output values and its pollution
  1. Merge manufacturing output values (1994 VND billion) with Industrial Pollution Projection System pollution intensity (pound per 1987 USD million) for each category.
  2. Convert pollution intensity (pound per 1987 USD million) into pollution intensity (kg per 1994 VND million):
    1. I multiply pollution intensities (pound per 1987 USD million) by 0.454 to obtain pollution intensities (kg per 1987 USD million).
    2. I divide pollution intensities (kg per 1987 USD million) by 78.3 to obtain pollution intensities (kg per 1987 VND million) (1 USD = 78.3 VND according to IMF International Financial Statistic Database)
    3. I inflate pollution intensities to 1994 prices to match the output values at constant 1994 prices. I use GDP deflator (2005=100) for the entire Vietnam. Because GDP deflator for 1987 is not available, I use the next possible deflator, which is for 1990, as the second best. According to IMF International Financial Statistic Database:

1990 GDP Deflator (2005=100) = 14.9

1994 GDP Deflator (2005=100) = 46.8

Therefore, the inflation factor to obtain pollution intensities in 1994 is:

46.8 / 14.9 = 3.1

As a result:

Pollution intensities (kg per 1994 VND million) = [Pollution intensities (pound per 1987 USD million) × 0.454 × 3.1] / 78.3

    1. Pollution from manufacturing output:

Pollution (kgs) = Manufacturing output values (1994 VND billion) × 1000 × Pollution intensities (kg per 1994 VND million)

Or:

Pollution (tonnes) = Manufacturing output values (1994 VND billion) × Pollution intensities (kg per 1994 VND

  1. For import and export values and its pollution
  1. Merge import and export values (current USD million) with Industrial Pollution Projection System pollution intensity (pound per 1987 USD million) for each category.
  2. Convert import and export values (current USD million) to imports and exports (2005 USD million). According to IMF International Financial Statistic Database:

2004 GDP Deflator (2005=100) = 96.78

2005 GDP Deflator (2005=100) =100

2006 GDP Deflator (2005=100) = 103.3

2007 GDP Deflator (2005=100) = 106.2

2008 GDP Deflator (2005=100) = 108.5

Therefore, inflation or Deflation factor for 2004-2008:

GDP Deflator for 2004= 100/96.78 = 1.03

GDP Deflator for 2005= 100/100    = 1

GDP Deflator for 2006= 100/103.3 = 0.97

GDP Deflator for 2007= 100/106.2 = 0.94

GDP Deflator for 2008= 100/108.5 = 0.92

As a result:

Export or Import Values (2005 USD Million) = exports or imports at current price * inflation or deflation factor

  1. Convert pollution intensity (pound per 1987 USD million) into pollution intensity (kg per 2005 USD million):
    1. I multiply pollution intensities (pound per 1987 USD million) by 0.454 to obtain pollution intensities (kg per 1987 USD million).
    2. I inflate pollution intensities to 2005 prices to match the imports and exports at constant 2005 prices. I use GDP deflator (2005=100) for the entire US. According to IMF International Financial Statistic Database:

1987 GDP deflator (2005=100) = 64.8

Therefore, inflation factor to obtain pollution intensities (kg per 2005 USD million) is:

100 / 64.8=1.54

As a result:

Pollution intensities (kg per 2005 USD million) = [Pollution intensities (pound per 1987 USD million) × 0.454 × 1.54]

    1. Pollution from imports or exports:

Pollution (kgs) = import or export values (2005 USD million) × Pollution intensities (kg per 2005 USD million)

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