Analysis of Bilateral Input-Output Trading between Vietnam and China

Abstract

This study attempts to analyze trade flows between Vietnam and China in order to understand the mutual influence of bilateral trade relations. China is a country with the world's leading economic potential. China and Vietnam are neighboring countries sharing a border of 1,281 km. Trade relations between the two countries are a necessity and, with a right policy, are beneficial to both. Vietnam has a trade deficit with China. This situation is exacerbated by the continuing rise in the gap. Vietnam trade deficit from China was USD12.5 billion in 2010, increasing to USD24 billion in 2018. Data are extracted from the 2015 national input-output tables of Vietnam and China as well as Vietnam Household Living Standard Survey statistics. The research identified 36 sectors of bilateral input-output trade between Vietnam and China. A bilateral output-input model is applied to analyze how final demand and use of input in the production of this country induces output and value added of the other country. The results show that China benefits more from Vietnam's production and consumption than Vietnam does. Vietnam's inter-sector structure does not stimulate domestic production due to the absence of supporting products as inputs in the production process.

1. Introduction

China is a country with the world’s leading economic potential. China and Vietnam are two neighboring countries sharing a border of 1,281 km. Trade relations between the two countries are a necessity, and if there is a right policy,it is beneficial for the development of both Vietnam and China in their trade relationship. Vietnam has always a trade balance deficit with China. This situation is exacerbated by the fact that Vietnam trade deficit with China increases –from USD12.5 billion in 2010 to USD24 billion in 2018, and during the first nine months of 2019, the trade deficit was already USD24 billion (Figure 1).

Figure 1: Export, import and net export of Vietnam from China (billion)

Source: General Statistics Office (2019)

This study attempts to analyze trade flows between Viietnam and China in order to examine the mutual influence in bilateral trade relations. The study uses a bilateral outputinput model to analyze how final demand and use of input in the production of this country induce output and value added of other country.

National input-output table in the most basic way of understanding output and value added, sees imports induced by inter-industry relations and final demand. The intercountry input-output system aims to measure the fluctuation in production and final demand of one country in respect of production and income of another country. Production effects on a State include:

Multiplier effects; it includes direct and indirect effectson output induced by domestic final demand.

International feedback effects: there are output requirements of country A induced by production of countryB that used products of country A for intermediate input.

Spillover effects: the import demand of country A for the products of country B. This means domestic final demandis not only induced by it own outputs, but also induced by outputs of other countries

In general, the output and value added of one nation canbe created by the final use of another country. According to Noguera (2012), the value added purchased abroad was called VAX-C. Los & Timmer (2018) proposed measuring the added value of country A when exporting to country Bfor production needs called VAX-P. Gross value added in bilateral trade flows (VAX-D) was mentioned by Los et al. (2016). Other studies were related to commercial flows such as Bems et al. (2011, 2013), Bui et al. (2008), Nguyen &Lam (2017), Muchdie & Sugema (2017), Oosterhaven &Stelder (2007), Muchdie & Narmaditya (2019), He & Wang(2019), and Tran & Nguyen (2018)

This study examines the output and the value added ofa nation created by the ultimate domestic final demand andthe production requirements of another country. This spread isunderstood when country A uses country B products for final demand that will eventually lead to country B’s production stimulation. Due to national manufacturing process, countryB uses country A’s products as an intermediary cost, resulting in a backward stimulus to country A’s output; country B uses country A’s products for final needs and as soon as country Buses its own domestic production, it will lead to a change in country B’s own production. When country B uses products of country A as input costs, it will spread to country A’s output(see Figure 2).

Figure 2: Relationship in bilateral input – output model

Note; (1) Multiplier effects; (2) Spillover effects; (3) inter_national feedback effects

The inter-country input-output table has the same structure as the inter-regional input-output table, while the inter-regional input-output table in one country describesintra-trade flows with other regions, the inter-country input-output table describes foreign trade flows between one country and another. The Leontief input-output system has been developed into an inter-regional (or inter-country) input-output model by Isard (1951); the idea of interregional input-output model was developed by Richardson(1972) and Miyazawa (1976). The inter-regional inputoutput model not only describes inter-sectorial relations, but also describes inter-regional relations through trade flows between one region and another (outside). The inter-regional model was perfected by Chenery-Moses (also known as theChenery-Moses model). Recent contributions come from Miller-Blair (1985), Hewings & Jensen (1986), Ihara (1999),and Bui (2017).

A study comparing the economic structure between Vietnam and China was also investigated by Bui and Pham(2014). However, this study only compares the economic structure between the two countries and does not expand the analysis of reciprocal effects of trade flows between the two countries. Previously, the inter-national input-output model of Vietnam and Thailand was also studied by Kwangmoon etal. (2011) and presented at a workshop of the International Input-Output Association (IIOA)

2. Data Collection 

The national input-output tables of Vietnam and Chinain 2015 were used for compiling data within bilateral inputoutput framework. The 2015 national input-output table of China was issued by the National Bureau of Statistics of China. The last input-output table of Vietnam dates from 2012. The Vietnam development research institute compiled the country’s national input-output table in 2015. The approach for compiling these data are based on Vietnam’snational input-output of 2012 and vectors of intermediate input and gross output from firm survey and data from Vietnam Household Living Standard Survey (VHLSS) aswell as data on gross capital formation, export and import of goods and services collected from Vietnam’s General Statistics Office. The RAS method was, then, employed for balancing gross input and gross output of input-output table(Lahr and de Mesnard, 2004; Miller & Blair, 2009; Bui &Nguyen, 2013, Bui et al., 2018).

There are 36 sectors of bilateral input-output between Vietnam and China, presented in Appendix 1. The general framework of bilateral input-output system between Vietnam and China is described in Table 1:

Table 1: The bilateral input – output system between Vietnam and China

Where:

Xvv: Intermediate input of Vietnam used Vietnam’s products;

Xvc: Intermediate input of China used Vietnam’s products;

Xcv: Intermediate input of Vietnam used China’s products;

Xcc: Intermediate input of China used China’s products;

Yvv: Final demand of Vietnam used themselves products;

Yvc: Final demand of China used Vietnam’s products;

Ycv: Products of China for final demand of Vietnam;

Ycc: Final demand of Vietnam used themselves’ products;

MPv: Import from rest of the world (ROW) for intermediate input of Vietnam;

MPc: Import from rest of the world (ROW) for intermediate input of China;

MYv: Import from rest of the world (ROW) for final demand of Vietnam;

MYc: Import from rest of the world (ROW) for final demand of China;

VAv, VAc, Xv và Xc are vectors of value added and gross output of Vietnam and China corresponding.

The unit of bilateral input-output table between Vietnam and China is in USD million. The exchange rate was the2015 average rate: 1 USD = 6.3597 YUAN; 1 USD = 21,673VND.

3. Research Methodology 

The basic relationship of Leontief is as follows:

\(\mathrm{X}=(\mathrm{I}-\mathrm{A})^{-1} . \mathrm{Y}\)       (1)

Where: X is a vector of output, I is an identity matrix,A is a direct input coefficient matrix, Y is a matrix of final demand.

In bilateral input-output system, the matrix A includes sub-matrices as follows:

\(A=\left[\begin{array}{ll} A_{V V} & A_{V C} \\ A_{C V} & A_{C C} \end{array}\right]\)       (2)

Where:

Avv is a coefficient matrix of intermediate input of Vietnam using Vietnam’s products;

Avc is a coefficient matrix of intermediate input of China using Vietnam’s products;

Acv is a coefficient matrix of intermediate input of Vietnam using China’s products;

Acc is a coefficient matrix of intermediate input of China using China’s products;

Gross output vector (X) was divided gross output vector of Vietnam (Xv) and China (Xc)

\(\mathrm{X}=\left[\begin{array}{l} X_{V} \\ X_{C} \end{array}\right]\)       (3)

Final demand matrix is expressed:

\(\mathrm{Y}=\left[\begin{array}{ll} Y_{V V} & Y_{V C} \\ Y_{C V} & Y_{C C} \end{array}\right]\)        (4)

Where:

Yvv being the last demand matrix of Vietnam using domestic products;

Yvc is the last demand matrix of China using Vietnameseproducts;

Ycv is the last demand matrix of Vietnam using Chineseproducts;

Ycc is China’s last demand matrix using domestic products.

Put

\(\mathrm{B}=(\mathrm{I}-\mathrm{A})-1=\left[\begin{array}{ll} B_{\mathrm{v}} & B_{v e} \\ B_{c v} & B_{c c} \end{array}\right]\)       (5)

Leontief basic relationship has the form:

\(\mathrm{X}=\mathrm{B} \cdot \mathrm{Y}\)       (6)

Bij is sub-matrix of Leontief inverse matrix that showsone unit of change in the production of a certain sector can lead to a combination of both direct and indirect changes inother industrial sectors.

\(\mathrm{X}=\left[\begin{array}{c} X_{V} \\ X_{C} \end{array}\right]=\left[\begin{array}{ll} B_{v v} \cdot Y_{v v}+B_{v c} \cdot Y_{c v} & B_{v c} Y_{c c}+B_{w} \cdot Y_{v c} \\ B_{c v} \cdot Y_{w}+B_{c c} \cdot Y v c & B_{c c} Y_{c c}+B_{c v} \cdot Y_{v c} \end{array}\right]\)       (7) 

From the relationship (7), it can be seen that the production value of Vietnam and China is spread by:

\(\mathrm{Xv}=\mathrm{Bvv} . \mathrm{Yvv}+\mathrm{Bvc.Ycv}+\mathrm{BvcYcc}+\mathrm{BvvYvc}\)       (8)

\(\mathrm{Xc}=\mathrm{Bcv} . \mathrm{Yvv}+\mathrm{Bcc.Ycv}+\mathrm{Bcc.Ycc}+\mathrm{Bcv} . \mathrm{Yvc}\)       (9)

The above relation shows that the production value of a country is created by (i) the final domestic demand;(ii) production needs of another country. This spread isunderstood when country A consumes country B’s products for a demand that will eventually lead to country B’sproduction stimulation. In the national production process,country B using national products creates a mediated stimulation leading to reversing the nation’s output A; (iii) country B uses country A products for its final needs; and(iv) as soon as country B uses its own domestic production, itwill lead to a change in country B’s own production. Where country B uses products of country A as input costs, it will spread to country A’s output.

The matrix offspring should be interpreted as a measure of the value of production caused by the influence of one unit of final demand and production of water for other countries.

Multiplier effects:

Measures the change in production caused by a unit offinal domestic demand:

(I – Avv)-1, (I – Acc)-1.

International Feedback effects:

Measure change in production from one country to another country:

Bvv - (I – Avv)-1 or Bcc - (I – Acc)-1

Spillover effects:

Measure the demand for a country’s output when thereis a change in the final demand of another country: Bcv andBvc.

The added value of each country is measured:

\(\begin{array}{l} (\mathrm{VR}, \mathrm{VS})=(\mathrm{Vr}, \mathrm{Vs}) \cdot \mathrm{X}=(\mathrm{Vr}, \mathrm{VS}) \\ {\left[\begin{array}{ll} X_{w} & X_{v c} \\ X_{c v} & X_{c c} \end{array}\right]} \end{array}\)

With:

\(\mathrm{Xvv}=\mathrm{Bvv}_{.} \mathrm{Yvv}+\mathrm{Bvc} . \mathrm{Ycv}\)       (10)

\(\begin{array}{l} \mathrm{Xvc}=\mathrm{BvcYcc}+\mathrm{BvvYvc} \\ \mathrm{Xvv}+\mathrm{Xvc}=\mathrm{Xv} \end{array}\)       (11)

\(\mathrm{Xcv}=\mathrm{Bcv} . \mathrm{Yvv}+\mathrm{Bcc.Ycv}\)       (12)

\(\begin{array}{l} \mathrm{Xcc}=\mathrm{Bcc} . \mathrm{Ycc}+\mathrm{Bcv.Yvc} \\ \mathrm{Xc}=\mathrm{Xcv}+\mathrm{Xcc} \end{array}\)       (13)

At that time the added value of each nation was measured:

\(\mathrm{Vv}=\mathrm{Vv} \cdot \mathrm{Xvv}+\mathrm{Vv} . \mathrm{Xvc}\)       (14)

\(\mathrm{Vc}=\mathrm{Vc} \cdot \mathrm{Xcc}+\mathrm{Vc} . \mathrm{Xcv}\)       (15)

Relations (14) and (15) allow analysis of bilateral trade flows spread to the added value of each country.

4. Results and Discussion

Comparison of economic indicators between Vietnam and China on board I/O 2015 of two countries (Table 2) showed that when China produces USD1 million in output,it generates USD32,000 in value added, whereas when Vietnam produced USD1 million in output, it only generates USD29,000 in value added. This ratio shows Vietnam’sproduction in China is not effective or is an economy deeply outsourcing China.

Table 2: Comparison through some general indicators (times)

Rate input products are imported intermediate costs of Vietnam that are far greater than the proportion of China(0.29 versus 0.08). It shows that China produces a lot of supporting products that participates in intermediate costsin the production process, while Vietnam, in addition to input products, produces services, electricity and water that participate to intermediate costs. They are still very few supporting products involved in intermediate costs in the manufacturing process. This shows that the spread from the final demand to the supply side of Vietnam is lower than the spread to imports.

Table 2 also shows that the trade relations between the two countries in production are also very clear and quite large. In the intermediate costs of Vietnam, 8% of inputs are imported from China, while in the intermediate cost of China only 0.1% uses input products imported from Vietnam. This partly shows that the relative importance of imported products from China to Vietnamese production is much larger than the opposite. This dependence is worth paying attention.

The coefficient of elasticity between labor and capital of two countries through inter-sectorial balance sheets showed that Vietnam needs a higher amount of capital than China to create new growth, But the paradox is that the ratio of investment to gross value added (GVA) of Vietnam is much lower than China (22% compared to 44%), however, the growth is still high, not much less than China’s average growth period 2010-2015. Vietnam’s average growth rate is about 6.1% while the average growth of China during this period is estimated at 7%. This can only explain Vietnam’stotal factor productivity (TFP) is higher than China. Does this seem a paradox? So, which factors affect total factor productivity (TFP)? Does this suggest that Vietnam’s growthis based heavily on the FDI sector?

The factor of the final demand shows that the final consumption of households in Vietnam accounted for aproportion of gross value added (GVA) higher than that of China by 20 percentage points (56% compared to 36%);Government’s final consumption expenditure of Chinais higher than Vietnam by eight percentage points (14% and 6%). However, China’s final consumption in gross added value (GVA) is still quite low compared to Vietnam(50% compared to 62%), while the share of net exports inVietnam’s GVA is even higher than China. Thus, in order to achieve China’s growth based largely on investment, China’sinvestment in GVA is very high at around 44% of GVA, whileVietnam’s ratio is only 22% of GVA. This situation, if taking place for a long time, can lead to a vulnerable economy if the revenue from ownership is in trouble, and savings are always smaller than investment.

The calculation of scenarios when there is trade vulnerability between the two countries (see Table 3) shows that Vietnam is much more affected than China. In Table 3, the assumptions are made as regards how the sudden reduction of trade with China under the current conditionswill affect economic growth in the worst case, GVA/GDP of Vietnam may decrease by 5.9%

Table 3: Trade effects on GDP of Vietnam and China

This shows that Vietnam has deepened its dependence on trade relations with China for many years. Up to this point,the idea of “escaping from China” seems to be unrealistic. Thus, the trade deficit between Vietnam and China is basically due to the fact that Vietnam has hardly changed inmany years; production has always depended on imports as input costs, inputs are products, and Vietnam is the basis for electricity, water, packaging and service costs only.

In general, the influence from the final demand ofChinese’s gross output is higher than Vietnam. Especially, the final demand of Vietnam-induced output of China is higher in final demand than China-induces production of Vietnam. An increase of USD1 million in Vietnam’s final demand generates USD318,000 of Chinese output, while an increase of USD1million in China’s final demand generates only USD3,000 worth of Vietnamese production (see Table 4)

Table 4: Dividing effects from final demand on output of two countries (times)

Table 5 shows that the value added of each country is induced by the final demand and production other countries. Specifically as:

(i) China’s final demand induced China’s value added 48% higher than Vietnam’s final demand to Vietnam’s value added 48%;

(ii) Vietnam’s production induces China’s value added 115 times higher than China’s production induces Vietnam’svalue added.

Table 5: The value added of each country induced by the final demand and production other countries (times)

Source: Authors calculated from bilateral input – output table, 2015

The economic structure of Vietnam is a problem worth thinking about as the country’s GDP growth is a virtual achievement that is very misleading. The study shows that GDP growth only benefits other countries, not only with Chinese partners, but also with almost all countries having trade relations with Vietnam because Vietnam does not have enough supporting products, Even Vietnamese production uses very little of the input which is domestically produced except electricity, water and service costs.

Appendix 2 shows the breakdown of the total effect of how much the increase in the final demand unit of a region spreads to the input of each country. How much the final demand of country A stimulates internal output of that country (Multiplier effects)? How much is due to country B’sproduction stimulating the output of country A (International feedback effects)? And how much of the country A’s final demand stimulated the national output of county B? In this section, there are 36 sectors, which show the influence on output of industries due to the impact of the final demand.

Vietnam’s domestic sectors stimulated (benefiting) from Chinese manufacturing include: Textile (sector 4), Textile clothing, shoes and hats, leather and its products (sector 5), Printing paper and paper products (Sector 7), Transport equipment (13), Communications equipment, computersand other electronic devices (14), Specialized machinery and equipment (18), Other manufactured products (19),Information transfer, software and information technology services (27). The final demand for some Vietnamese products spread very strongly to Chinese production such as Textile (sector 4), Textile clothing, shoes and hats, leather and its products (sector 5), Printing of paper and paper products (7), Petroleum, coking products and products of processing nuclear fuel (9), Metal products (12), Transport equipment (13), Equipment communication equipment, computers and other electronic devices (14), Repair of metal products, machinery and equipment (15), Instrumentation(16), Specialized machinery and equipment (17), Other manufactured products (18), Construction (23), Transport,warehousing and postal services (25). Although some sectors entertain mutual stimulation, the weight of the spillover from Chinese manufacturing to Vietnam’s output is too low compared to the needs of Vietnam finally spreading to the output of China. Strangely, the final demand of waste materials spread so highly to the output of this product group,what does this mean? Is Vietnam stimulating import of waste from partner countries? Many people think that Vietnam is adump area for another country

Vietnam’s production stimulates China’s output much more than Chinese production stimulates Vietnam’s output(0.0004 compared to 0.001-88%) (Appendix 3). In addition,Vietnam’s final demand induces China’s output in a bigger way than China’s final demand induces Vietnam’s output.Vietnam’s final aggregate demand increased by USD1 million,stimulating China’s output to increase by USD323,000, whileChina’s final aggregate demand increased by USD million,stimulating Vietnam’s production of only about USD3,000. In the inter-regional or inter-country input-output model, acountry’s products are divided for domestic final needs (final consumption, asset accumulation and exports to countries other than foreign countries partners) and the final demand of the partner country.

Table 6 illustrates that 85% of Vietnam’s gross output was generated by domestic final demand and 15% was generated by the partner country’s final demand, meanwhile 99% of Chinese output was created through domestic final demand of only 0.1% due to Vietnam’s final demand. This suggests that the perception that Chinese tourists do not spend muchin Vietnam is not objective.

Table 6: Demand factors finally spread to production value (%)

However, due to the size of the Chinese economy, even 0.3% of the total production value that is spread by the final demand of Vietnam is about USD111 billion, while Vietnam’sproduction value is spread by China’s final demand of 8% ofthe total production value, but only about USD53 billion ofthe USD 667 billion output of Vietnam is the elements offinal demand (see Table 7)

Table 7: Production value is spread by the final demand and its components

The value added of Vietnam and China generated by the factors of final demand and production of other countries are very different (Appendix 4). The total value of China’svalue added generated by an additional unit of final demandand Vietnam’s production is about 54% higher than what Vietnam received from these factors (0.943 versus 0.612). Itis noteworthy that Vietnam’s production spread to the value added of China is nearly 100 times higher than the production China induces In Vietnam’s value added. Especially, amanufacturing group such as Textile (Sector 4), Textile apparel, shoes and hats, leather and articles thereof (Sector 5), Petroleum, coke products and products of processing nuclear fuel (Sector 8), Metal products (Sector 11), Electrical machinery (Sector 12), Transport equipment (Sector 13),Communications equipment, computers and other electronic devices (Sector 14), Machinery and specialized equipment(Sector 17), Other manufacturing products (Sector 18) and information technology transfer, software and IT services(Sector 27). This fact shows that Vietnam’s production is highly priced and the input is mostly made in China. This canonly be blamed on more than 20 years of industrialization, but almost no production of auxiliary products. This also partly proves that the more labor is involved in the manufacturing and manufacturing group, the more the trade deficit between Vietnam and China widens.

In short, trade relation is not only a question of trade deficit, but is also closely related to the structure of the economy. The inter-country input-output table shows that China benefits more from Vietnam’s production and consumption than vice versa. Vietnam’s inter-sector structure does not stimulate domestic production due to the absence of supporting products as inputs in the production process. With such a structure, if Vietnam were not dependent on Chinese inputs, it would be dependent on other countries. Thus, looking only at the GDP growth figures and not at the structure of the economy can lead to a turbulent future.

Appendix

Appendix 1: Sectors in bilateral input output table

Appendix 2: Analyzing output requirement induced by a unit increase of final demand of Vietnam

Source: Authors calculated from bilateral input-output table, 2015

Appendix 3: Analyzing output requirement induced by a unit increase of final demand of China​​​​​​​

Source: Authors calculated from bilateral input – output table, 2015

Appendix 4: Value added creation​​​​​​​

Source: Authors’ calculations via intercountry input – output table between Vietnam and China, 2015​​​​​​​