Trade Diversion as Firm Adjustment to Trade Policy: Evidence from EU Anti‐dumping Duties on Vietnamese Footwear

• Author: Nguyen Truong Toan,Pham Hoang Van,Nguyen Trong Hoai
• Published date: 01 June 2017
• Date: 01 June 2017
• DOI: http://doi.org/10.1111/twec.12421

Trade Diversion as Firm Adjustment to

Trade Policy: Evidence from EU Anti-

dumping Duties on Vietnamese Footwear

Nguyen Trong Hoai

1

, Nguyen Truong Toan

2,3

and Pham Hoang Van

4

1

University of Economics Ho Chi Minh City, Vietnam,

2

Bankwest Curtin Economics Centre, School of

Economics & Finance, Curtin University, Bentley, WA, Australia,

3

Vietnam Netherlands Program,

University of Economics, Ho Chi Minh City, Vietnam and

4

Baylor University, Waco, TX,USA

1. INTRODUCTION

THE increasing integration of rich and poor countries has contributed to much of the sig-

nificant growth in world trade over the past few decades. For example, Figure 1 shows

imports to the United States over the 1990s and the first half of the new century. Imports have

increased by over 300 per cent from 1996 to 2007. Most of this growth has come from the

expansion of trade with less-developed countries (LDCs). Non-oil imports from LDCs sur-

passed those from rich countries in 1995, and the gap between the two groups has continued

to diverge ever since. The growing imports from LDCs have, however, precipitated protec-

tionist reactions in many developed countries.

In this paper, we evaluate the effects of the European Union (EU) anti-dumping duties in

2006 on footwear imports from Vietnam. As expected, the duties reduced the quantity and

value of imports to the EU. Interestingly, however, we also find evidence that Vietnamese

firms responded to the EU tariffs by diverting footwear exports to the US market. Our point

estimates range from 69 to 72 per cent increase in Vietnamese footwear exports to the United

States from the period 2004 to 2007 as a result of the trade diversion due to the EU tariffs.

These results suggest that anti-dumping measures have unintended spillover effects into other

export markets which could exert pressure for further protectionist policies.

Anti-dumping duties (AD) were not common in the 1960s –about ten cases per year on

average (Schott, 1994). This number increased rapidly in the 1970s and 1980s as more coun-

tries joined the GATT/WTO agreements. Accession to the WTO took away a member coun-

try’s ability to impose discretionary tariffs in general but allowed a country to impose duties

if it could show evidence that a partner country is dumping in its market (see Hansen and

Prusa, 1995; Blonigen and Prusa, 2001 for discussions on the rise of AD as an instrument of

protection). Over 1,600 AD petitions were filed in the 1980s (Finger and Artis, 1993), and the

use of AD measures by WTO members tripled from the beginning of the 1980s to the end of

the 1990s (Prusa, 2005). Since the world financial crisis in 2008, developed countries have

continued to increase the use of AD as protection for domestic producers (Kee et al., 2013).

To understand the effects of the EU duties on Vietnamese footwear producers, we measure

the impact in three markets. First, we evaluate the direct effect of the duties on the volume of

footwear imports to the EU. Using Eurostat data, we compare Vietnamese import volumes in

the affected industry categories to those of comparable countries before and after the

We thank Nguyen Hoang Bao, Pham Thi Bich Ngoc, Dinh Cong Khai, Pham Khanh Nam, James Riedel,

and Le Cong Tru for helpful suggestions and comments. All errors are our own.

©2016 John Wiley & Sons Ltd

1128

The World Economy (2017)

doi: 10.1111/twec.12421

The World Economy

imposition of the duties. Second, we used data from the Enterprise Surveys collected by Viet-

nam’s General Statistical Office in 2003, 2004 and 2006, 2007 to evaluate the effects on firm

revenue, payroll and employment. These survey years spanned before and after the investiga-

tion period and imposition of the tax. We compare affected footwear firms to firms in other

sectors. Third, we consider the trade diversion effects of the EU duties by comparing imports

of Vietnamese footwear to the United States to other countries’ imports to the United States

using data from the International Trade Commision (USITC). In each of these exercises, we

apply a difference-in-difference methodology to the panel data structure to estimate the effects

of the EU duties. We discuss the identification strategy, the choice of control groups and the

robustness exercises in subsequent sections.

A number of studies have focused on the impact of AD in target countries. Prusa (1994)

finds that AD action pressures foreign firms to increase their prices in the first stage of the

process. Cuyvers and Dumont (2005) find that Asian exports to the EU are significantly lower

in both quantity and value after the petition is filed. Brambilla et al. (2012) find that US

duties on Vietnamese catfish had significant negative effects on incomes of Vietnamese catfish

farmers. Our study extends this literature but unlike these other papers, we evaluate the

impact of this AD policy on three markets: imports to the EU, footwear producers in Viet-

nam, and imports to the United States. The first two sets of results are important for a small

country like Vietnam because the EU accounts for 65 per cent of Vietnam’s footwear exports

and footwear is one of the most important industries in Vietnam. Finally, the third result

documents the non-trivial trade diversionary effects of trade policy, which is often overlooked

5.0E+11

China Rich Wor ld

Non-richnonoil

Consumer Goods Imports (Nominal US$)

4.5E+11

4.0E+11

3.5E+11

3.0E+11

2.5E+11

2.0E+11

1.5E+11

1.0E+11

5.0E+10

0.0E+00

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

FIGURE 1

US Consumer Goods Imports by Select Country Groups [Colour figure can be viewed at

wileyonlinelibrary.com]

Source: World Development Indicators.

©2016 John Wiley & Sons Ltd

TRADE DIVERSION IN VIETNAMESE FOOTWARE 1129