FUTURE VIETNAM-EU FREE TRADE AGREEMENT (VIETNAM-EU FTA): AN ANALYSIS OF TRADE CREATION AND TRADE DIVERSION EFFECTS

Nguyen Binh Duong, Tu Thuy Anh, Nguyen Thu Trang

Abstract

Abstract
This paper aims to analyze trade creation and trade diversion effects of future Vietnam-
EU FTA, in a framework of negotiations from 2012 to ensure an effective environment
for trade and investment. The theory of trade creation and trade diversion will be used to
evaluate impacts of an FTA on Vietnam’s welfare. By using a gravity model and a panel
data analysis, we show that the reduction of tariffs in the framework of the FTA will have
a positive impact on bilateral trade between Vietnam and the EU. In addition, Vietnam-EU
FTA will offer many new opportunities such as trade creation in automotive industry, but it
also poses challenges for Vietnam.
Key words: FTA, Trade creation, Trade diversion, Vietnam- EU, Welfare