Impact of exchange rate changes on export-import dynamics in Vietnam

Nga, Nguyen Hong; An, Pham Hoang; Loan, Vo Thi Kim; Cuong, Tran Quoc Khanh Article Impact of exchange rate changes on export-import dynamics in Vietnam Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Nga, Nguyen Hong; An, Pham Hoang; Loan, Vo Thi Kim; Cuong, Tran Quoc Khanh (2024) : Impact of exchange rate changes on export-import dynamics in Vietnam, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 12, Iss. 1, pp. 1-19, https://doi.org/10.1080/23322039.2024.2409415 This Version is available at: https://hdl.handle.net/10419/321614 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: 2332-2039 (Online) Journal homepage: www.tandfonline.com/journals/oaef20 Impact of exchange rate changes on exportimport dynamics in Vietnam Nguyen Hong Nga, Pham Hoang An, Vo Thi Kim Loan & Tran Quoc Khanh Cuong To cite this article: Nguyen Hong Nga, Pham Hoang An, Vo Thi Kim Loan & Tran Quoc Khanh Cuong (2024) Impact of exchange rate changes on export-import dynamics in Vietnam, Cogent Economics & Finance, 12:1, 2409415, DOI: 10.1080/23322039.2024.2409415 To link to this article: https://doi.org/10.1080/23322039.2024.2409415 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 03 Oct 2024. Submit your article to this journal Article views: 3684 View related articles View Crossmark data Citing articles: 2 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE Impact of exchange rate changes on export-import dynamics in Vietnam Nguyen Hong Nga a,b , Pham Hoang An c , Vo Thi Kim Loan d and Tran Quoc Khanh Cuong e a Faculty of Economics, University of Economics and Law, Ho Chi Minh City, Vietnam; b Faculty of Economics, Vietnam National University, Ho Chi Minh City, Vietnam; c Faculty of Accounting and Finance, Van Hien University, Ho Chi Minh City, Vietnam; d Faculty of Basic Science, Van Lang University, Ho Chi Minh City, Vietnam; e Faculty of Business Administration, Van Lang University, Ho Chi Minh City, Vietnam ABSTRACT This study examines the impact of exchange rate changes on Vietnam’s export-import dynamics during a transitioning exchange rate regime. Utilizing the Autoregressive Distributed Lag (ARDL) model, our findings indicate that global income and import levels are crucial in bolstering exports, assuming other variables remain constant. Additionally, we uncover that the real effective exchange rate (REER) and money supply significantly influence import patterns, with a central exchange rate mechanism enhancing export volumes by approximately 0.14% compared to a fixed peg system. The Nonlinear ARDL (NARDL) analysis further reveals the long-term asymmetric impacts of REER on trade. By applying a threshold model, we also explore the effects of global income and import volumes on export structural changes, as well as the influence of money supply and REER on import adjustments. The research concludes with policy suggestions to aid Vietnam’s economic growth and trade sustainability within its exchange rate framework. IMPACT STATEMENT This study employs advanced econometric methods, incorporating the import variable to better explain changes in Vietnam’s exports. The findings underscore the crucial role of imports and global income in shaping Vietnam’s export performance, while the exchange rate has an insignificant impact. These findings provide useful advice for policymakers to improve trade balance strategies and support economic growth, especially in a fast-changing global economy. ARTICLE HISTORY Received 16 April 2024 Revised 18 July 2024 Accepted 20 September 2024 KEYWORDS Exchange rate regime; export; import; threshold; NARDL JEL CLASSIFICATIONS C22; C24; F10; F41 SUBJECTS Economics and Development; Economics; Finance 1. Introduction As a small and open economy, Vietnam has heavily relied on exports and imports. The dynamics of its economic growth play a critical role in shaping the trade balance, as they are influenced by not only domestic factors but also the economic growth of its trading partners and, significantly, the exchange rate of the Vietnamese currency (VND). Empirical exchange rate and trade balance studies have yielded divergent outcomes, revealing a complex relationship. While Rose and Yellen (1989) fail to establish a significant link between the exchange rate and the trade balance, Bahmani-Oskooee and Fariditavana (2016) discover a connection between them when studying the US and its major trading partners. Omer et al. (2023) present evidence that the devaluation of the local currency promotes Pakistan’s exports. However, Bostan et al. (2018) indicate a decrease in Romanian exports following the local currency devaluation. On the other hand, currency devaluation can also lead to inflation (Cooper, 2019). This study is motivated by analyzing how changes in exchange rates impact exports and imports in Vietnam. By examining different exchange rate regimes—crawling bands, fixed peg, and central rate CONTACT Tran Quoc Khanh Cuong [email protected] Faculty of Business Administration, Van Lang University, Ho Chi Minh City, Vietnam ß2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2409415 https://doi.org/10.1080/23322039.2024.2409415 mechanisms—this paper offers a unique perspective on their effects on trade. Previous empirical studies show mixed results on the exchange rate-trade balance relationship, pushing the need for a nuanced approach to understanding this complex dynamic. Additionally, identifying factors that change the structure of imports and exports is crucial for a deeper understanding of what influences Vietnam’s trade patterns. Therefore, a comprehensive study of the impact of exchange rate fluctuations on imports and exports is crucial for a country like Vietnam, which aims to improve exports while controlling inflation. The outcomes will assist policymakers in determining the most appropriate exchange rate policy. Aligned with its pursuit of economic development, the State Bank of Vietnam (SBV) has accorded importance to maintaining monetary stability. This commitment manifested in implementing the crawling band’s mechanism in 2008. Subsequently, in 2012, the SBV decided a transition to the conventional fixed peg arrangement mechanism. Nonetheless, the end of 2015 was marked by fluctuations in the exchange rate, urging Vietnam to switch to the central exchange rate mechanism in 2016. This transition was motivated by the twin objectives of curtailing speculative activities within the foreign exchange market and fostering stability in inflation. Between 2017 and 2022, the Vietnamese Dong (VND) exchange rate showed minor fluctuations. There were slight increases in 2017 (1.6%) and 2020 (0.073%) relative to the end of the previous year, while 2021 saw a surprising rise of 1.3% despite a stronger US Dollar trend. However, due to a change in the Federal Reserve’s interest rate policy, the VND depreciated by about 3.5% against the US Dollar by the end of 2022. Despite these changes, the VND’s value remains relatively lower than other strong global currencies. Therefore, adopting the central exchange rate mechanism has stabilized the VND exchange rate as depicted in Figure 1. Figure 1 illustrates Vietnam’s export and import values spanning from 2009:1 to 2022:12. Both exports and imports have a consistently upward trend, with exports growing faster than imports. Export values increased at an average monthly rate of 1.21%, while imports grew by 1.18% monthly. These trends led Vietnam to shift from a trade deficit in 2009 to a trade surplus by 2016. Despite a stable VND exchange rate, the steady growth of exports and imports indicates that exchange rate fluctuations might have a limited impact on the country’s trade patterns. Furthermore, it is noteworthy that both import and export patterns in Vietnam exhibit a striking similarity, mirroring the prevailing economic circumstances. It is important to note the significant overlap between the imported goods used as inputs for export production (Hoang, 2016), highlighting the intertwined nature of Vietnam’s import and export activities. Moreover, there was a notable instance when both exports and imports experienced a substantial increase, deviating significantly from the previous period’s metrics. Consequently, we employed the BaiPerron method to allow the data itself to determine the specific date of structural change. The findings indicate that import structural changes took place in February 2012 and August 2016, while export Figure 1. The VND/USD exchange rate and Vietnam’s exports and imports from January 2009 to December 2022. Source: Global Economic Monitor –GEM. 2 N. HONG NGA ET AL. structural changes occurred in February 2014 and September 2017. This approach, confirmed by the Wald test, emphasizes the evolving nature of Vietnam’s trade balance 1 . This study addresses a notable research gap: the overlooked causes behind the change in Vietnam’s import-export structure due to exchange rate fluctuations. Failing to address this problem can lead to ineffective policy decisions, hindering Vietnam’s economic growth and trade sustainability. To tackle this issue, the study utilizes the threshold method. Furthermore, it applies the Autoregressive Distributed Lag (ARDL) approach to investigate the impact of exchange rate fluctuations on Vietnam’s trade, specifically its imports and exports. It also uses the Nonlinear ARDL (NARDL) technique to determine if changes in the REER have a symmetrical or asymmetrical effect on trade flows. After reviewing the existing literature, we recognized the need for further research. To address this, we developed and tested the following hypotheses: For exports, we hypothesize that the REER is insignificant for export volumes (H1a), the Industrial Production Index of the World (IIPW) positively influences export volumes (H1b), and import volumes (M) are crucial in boosting exports (H1c) due to Vietnam’srelianceon imported inputs for production. On the import side, we hypothesize that the REER negatively affects import volumes (H2a), an increase in the money supply (M2) leads to higher import volumes (H2b), and the Industrial Production of Vietnam (IIPVN) positively influences import volumes (H2c). The empirical outcomes of this study yield noteworthy insights: primarily, the global GDP emerges as the determinant exerting a substantial influence on the exports from Vietnam. At the same time, Vietnam’s money supply is a prominent factor shaping the import dynamics. Moreover, the exchange rate is solely significant in the import model and insignificant in the export model. Notably, the study reveals that transitioning to a central exchange rate mechanism results in a considerable enhancement of export volumes, exceeding the impact of the conventional fixed peg arrangement mechanism by more than 0.14%. The findings of this research make a significant contribution to the understanding of the literature. The organization of the study is as follows: Section 2 provides an overview of the theoretical framework and empirical studies, Section 3 outlines the methodologies and the dataset, Section 4 presents the obtained results, and Section 5 offers concluding remarks along with policy implications. 2. Theoretical framework and empirical studies 2.1. Theories on the exchange rate and trade volumes Exports and imports are crucial elements of a nation’s trade balance, making the study of trade balance changes essential for understanding these components. The concept of the Price–specie flow mechanism, introduced by the Scottish economist David Hume, serves as a foundational theoretical model for analyzing trade balance dynamics. Historically, research has developed along three primary methodologies to evaluate the influence of different factors on the trade balance: the Elasticity Approach, the Absorption Approach, and the Monetary Approach. These approaches offer diverse perspectives on how trade balances respond to various economic conditions and policies. The Elasticity approach, alternatively known as the Bickerdike-Robinson-Metzler model (BRM), centers around the notion that alterations in relative price levels induce substitution effects in both production and consumption due to changes in exchange rates. Consequently, the BRM model postulates that shifts in the exchange rate yield varying effects on the trade balance contingent upon the elasticity of goods’ supply and demand as well as the value of imported and exported goods. Within this framework, the elasticity approach underscores the potential enhancement of a nation’s trade balance by devaluing its domestic currency. In such a scenario, the influence of the exchange rate increases the price of imported commodities, subsequently reducing the volume of imports. Conversely, the lowered price of exported goods stimulates heightened domestic production and export activities, consequently improving the trade balance. Nonetheless, it is essential to acknowledge that there exist instances where currency depreciation may adversely impact the trade balance. The Marshall–Lerner (ML) condition, a subset of the BRM framework, is prominent in assessing trade elasticity. This condition critically addresses the circumstances under which a real domestic currency depreciation improves the trade balance. Conclusively, the ML condition posits that a real depreciation COGENT ECONOMICS & FINANCE 3 of the local currency will enhance the trade balance if the cumulative value of the absolute elasticities of both exports and imports surpass unity. Notably, the Marshall-Lerner theorem has undergone extensive investigation, supported by numerous scholarly publications. Nonetheless, the study of Magee (1973) observed a deterioration in the United States trade balance after the devaluation of the USD in 1971 and an improvement in the long run, known as the J curve. Therefore, the Marshall–Lerner condition encounters a limitation in its failure to elucidate the phenomenon wherein the trade balance experiences a short-term deficit following the devaluation of the domestic currency. Akbostanci (2004) clarifies the rationale behind the short-term deterioration of the trade balance. His explanation indicates the prevalent contractual agreements between exporters and importers that precede currency depreciation. Consequently, in the aftermath of devaluation, there is minimal alteration in the volume of exports and imports. However, the currency’s depreciation makes imported goods more expensive in terms of domestic currency. Furthermore, due to the challenge of changing consumption behavior in the short run, the price elasticity of consumer demand remains low or perpetuates a steady demand for goods. In essence, the price effect takes precedence over the quantity effect in the short term, leading to an increase in import volume while export volume remains relatively constant. Consequently, the trade balance witnesses a deficit in the short run. In the long run, consumers adapt their purchasing behavior, and importers renegotiate prices, thereby facilitating a shift wherein the quantity effect is more significant than the price effect, culminating in an improved trade balance. The absorption approach, an outgrowth of the Keynesian 2 model introduced by Alexander (1952), emphasizes the pivotal role of the national output in the context of the trade balance. This perspective posits that the trade balance is the disparity between goods production and goods consumption by domestic residents. If the real Gross Domestic Product (GDP) surpasses the domestic consumption or absorption (A), the surplus in remaining products will be exported, thereby yielding a trade surplus. Conversely, when absorption exceeds the real GDP, the outcome will be a trade deficit (Malimi, 2013). Furthermore, the absorption approach establishes a noteworthy connection with domestic currency devaluation. For instance, if the real GDP is less than the potential GDP, a domestic currency depreciation can augment exports (provided that the elasticity conditions are fulfilled) because the untapped resources can be used to boost the GDP to a level equivalent to the potential GDP. However, when real GDP equals potential GDP, a devaluation of the domestic currency to enhance the trade balance may not yield the intended outcomes. In such a scenario, the consequence of such trade balance improvement efforts could be inflation (Ali et al., 2014). In the late 1950s, a novel monetary policy approach emerged, underscoring the vital role of the discrepancy between money demand and money supply in shaping exchange rates and trade balances (Duasa, 2007). The impact of money supply on exchange rates depends on the exchange rate mechanism that the country applies. Under a fixed exchange rate mechanism, changes in the domestic money supply do not affect the exchange rate. When the demand for money outpaces the quantity the central bank supplies. The shortage of money is compensated by foreign currency inflows, facilitated by the export of commodities, thereby improving the trade balance. Conversely, if the central bank’s money supply surpasses the existing money demand, the surplus money will find its way out of the country, causing a decline in the trade balance. In a floating exchange rate mechanism, increasing the money supply by the central bank leads to a depreciation of the domestic currency. This depreciation boosts exports, reduces imports, and enhances the trade balance. For a managed floating exchange rate mechanism, exchange rate changes are influenced by both market forces (as in a floating exchange rate mechanism) and central bank interventions (as in a fixed exchange rate mechanism). This flexible combination allows for a range of options in exchange rate management based on the country’s economic objectives and policies. 2.2. Empirical studies on the exchange rate and trade volume The impact of the exchange rate on the trade balance is an exciting subject within the realm of international trade. Research endeavors span from developing to developed nations. Findings exhibit 4 N. HONG NGA ET AL. diversity owing to factors like the country under study, the analysis period, research methodologies employed, etc. Empirical studies have led to the emergence of four primary categories. Firstly, investigations employing panel data, such as Wang et al. (2012) observe that while the real appreciation of RMB decreases China’s trade balance in only three of the eighteen trading partners, it increases the trade balance in five of those partners. Hunegnaw and Kim (2017) reveal a positive correlation between the exchange rate and the trade balance in West African nations. Aslan et al. (2021) employ a panel Structural Vector Autoregression (SVAR) model to investigate the influence of real exchange rate fluctuations on the exports of 21 emerging markets. Their findings suggest that there is no definitive evidence to support that shocks to the real exchange rate have a significant impact on the volume of exports. Similarly, the empirical research by Felipe et al. (2024) finds no relationship between the real exchange rate and the trade balance in European countries from 1995 to 2019. However, Poon and Hooy (2013) present a contrasting perspective. They reveal a negative impact of exchange rate volatility on trade, particularly with a time lag. Notably, an observation highlighted in the work of Poon and Hooy (2013) pertains to the positive impact of exchange rate volatility on the trade balance of Organization of Islamic Cooperation (OIC) countries governed by floating exchange rate regimes. On the other hand, Wu et al. (2013) indicate that China’s trade balance experiences an increasing surplus condition due to the stable exchange rate mechanism of the Yuan. Hence, it is evident that the trade balance is not solely on the exchange rate but is also on different nations’distinct exchange rate mechanisms. Secondly, studies employ time series data to explore the interplay between exchange rates and trade balance across nations with substantial trading relationships. The studies by Rose and Yellen (1989), alongside Ho et al. (2023), suggest that a depreciation of the local currency fails to bolster the trade balance. However, the research of Dong (2017) utilizes the Vector Error Correction Model (VECM) to discern the Marshall-Lerner condition between the United States and the G7 countries. With the threshold model, Hsu and Chiang (2011) discover how exchange rate volatility affects United States exports. The empirical results indicate that volatility diminishes export activity to comparatively affluent partner nations, while conversely, it bolsters exportation to relatively less wealthy partner countries. Further exploration by Doudou et al. (2022) unveils a threshold associated with the Dinar exchange rate that significantly influenced Tunisia’s trade balance with 17 principal trading partners from 1986 to 2016. In essence, the studies above underline the role of research methodologies in shaping conclusions regarding the impact of exchange rates on trade balance. Pesaran et al. (2001) introduce the advanced methodology Autoregressive Distributed Lag (ARDL), numerous investigations have employed this technique to establish the connection between exchange rates and trade balance. Arora et al. (2003) examine the bilateral trade dynamics between India and its trading partners from 1977 to 1998. Within India’s seven significant trading partners, four nations (Australia, Germany, Italy, and Japan) exhibit a long-term influence when the Rupee is undervalued. Conversely, in the context of the United States, a depreciation of the Rupee deteriorates the trade balance deficit. A 1% devaluation of the Rupee culminates in a trade balance deficit of 2.98%. Other studies also demonstrate the existence of Marshall-Lerner conditions such as Narayan (2006), and Thanh et al. (2020). Shin et al. (2014) introduce the non-linear autoregressive distribution lag (NARDL) approach, which extends the ARDL method. Afterward, Bahmani-Oskooee and Fariditavana (2016) investigate the J-cure between the United States and its six main trading partners. The results support that the ARDL reveals evidence of J-curve in 3 partner nations, while the NARDL approach uncovers J-curve effects in 5 countries. Further empirical research, such as those conducted by Bahmani-Oskooee et al. (2016), and Nusair (2017), prove the superiority of the NARDL method, exhibiting a broader scope of trading partners influenced by exchange rate fluctuations in comparison to the ARDL method. Consequently, the assumption of a linear relationship between exchange rates and trade balances causes the concept of the J curve to be inconclusive within the realm of research. Thirdly, several researchers delve into a nation’s exchange rate’s influence on its global counterparts. Matesanz and Fugarolas (2009) comprehensively examine the correlation between the trade balance and exchange rate in the context of Argentina, spanning from 1962 to 2005. They adopt a cointegration approach in conjunction with a VECM to explore this dynamic. Their findings support a robust COGENT ECONOMICS & FINANCE 5 connection between the depreciation of the domestic currency and the enhancement of Argentina’s trade balance, manifesting the presence of the Marshall-Lerner condition in the Argentine context. Further research also affirmative this positive impact of local currency devaluation on the trade balance. For instance, Hsing (2015) observes the J-curve phenomenon in Japan, Doojav (2018) uncovers a similar trend in Mongolia, and G€ urtler (2019) observes analogous patterns in the Czech Republic. On the contrary, Shahbaz et al. (2012) present empirical evidence establishing a negative correlation between the exchange rate and Pakistan’s trade balance over the long term. Specifically, their findings suggest that a 1% devaluation of the local currency leads to a reduction of 0.7677% in Pakistan’s trade balance. Lastly, a notable trend is examining the distinct effects of exchange rates on exports and imports. Thorbecke and Kato (2012) illustrate that a 1% Yen depreciation heightens Japan’s exports to 17 key trading partners by 0.9%. Similarly, Omer et al. (2023) depict that local currency devaluation has the potential to stimulate Pakistan’s exports. However, a contrasting perspective is put forth by Upadhyaya et al. (2020), who demonstrate that exchange rate volatility negatively correlates with the exports of ASEAN 5 countries. Furthermore, Iossifov and Fei (2019) support that the lira devaluation fails to have any impact on Turkish exports. Additionally, K€ ose and Aslan (2020) establish that Turkish exports hinge more significantly on the partner country’s income than the exchange rate. This finding aligns with Sohrabji’s(2024) study on India, which shows that exports depend more on foreign income than on changes in exchange rates. This assertion aligns with research by Asteriou et al. (2016), Sweidan (2013), and Iossifov and Fei (2019). Furthermore, investigations by Khachatryan and Grigoryan (2020), and Sweidan (2013) emphasize that the influence of exchange rate on exports in developing countries is limited, owing to the so-called "Dutch disease." This phenomenon emerges when developing countries experience inflows of remittances, strengthening their domestic currency and raising the cost of living and the expenses associated with exporting goods. In parallel to its impact on exports, Sweidan (2013) provides empirical evidence that the exchange rate holds statistical significance in the short term, yet loses its statistical significance in the long term concerning imports to Jordan. This result is similar to the findings of Andohol et al. (2024) for three East Asian countries. Sohrabji (2024), Omer et al. (2023), and Bostan et al. (2018) support the decrease in import volume following a devaluation of the domestic currency. Contrarily, Iossifov and Fei (2019) posit a divergent narrative, asserting that Lira devaluation increases imports for Turkey. Noteworthy in this context is the role played by the Turkish GDP in shaping import patterns. Specifically, a 1% elevation in GDP precipitates a corresponding 1.15% expansion in imports, thereby emphasizing the complicated interdependence between economic growth and import activities. In the Vietnamese context, Trinh (2014) employs the ARDL methodology to investigate the influence of exchange rates on the trade balance between Vietnam and its 17 significant trading partners. The empirical findings suggest that when the local currency’s value (VND) decreases, the trade balance becomes more damaging in the first four quarters. However, by the fifth quarter, there is an improvement in the trade balance, suggesting the presence of a J-curve phenomenon. The research by Truong and Vo (2023) using the NARDL method also confirms the existence of the J-curve phenomenon in Vietnam. Coinciding with this trend, a series of studies also emphasize the favorable correlation between exchange rates and the trade balance in Vietnam. Noteworthy among these contributions are the works of Phong and Van (2017), Ho et al. (2021), and Dong et al. (2022). Phong and Van (2017) notably include the money supply variable (M2) in the analysis. The results suggest that M2 positively influences the trade balance in the short term but negatively impacts the long term. In contrast, Phan and Jeong (2015) reveal that a 1% decrease in the value of the VND leads to a trade balance deficit of around 3.11%. Furthermore, their analysis highlights the intricate interplay of domestic and foreign GDP variations in shaping trade balance volume. Nga et al. (2024) find that exchange rate volatility positively impacts exports but does not affect imports. Exports in a country are influenced by the income levels and exchange rates of its trade partners, whereas imports depend on the country’s income and exchange rates. In the context of a developing economy like Vietnam, where exports largely consist of processed and assembled goods, there is a heavy reliance on the import of foreign goods. Previous studies have primarily focused on individual methodologies to analyze trade balance impacts, such as the elasticity approach (Shahbaz et al., 2012), a 6 N. HONG NGA ET AL. combination of elasticity and monetary approaches (Phong & Van, 2017), or elasticity alongside absorption approaches (Bahmani-Oskooee et al., 2016). This research adopts a comprehensive approach by integrating all three methodologies to assess the fluctuations in Vietnam’s imports and exports, underscoring the vital role of imports in enhancing exports in a developing country that is a recipient of foreign direct investment. Ultimately, this research contributes to the existing literature by shedding light on the underlying factors behind the structure shifts in the export-import patterns. 3. The methodologies and the dataset 3.1. The methodology The models for analyzing imports and exports between Vietnam and the international market follow the framework z. This approach recognizes that Vietnamese exports are driven by the Real Effective Exchange Rate (REER), the world’s real income, and the import of Vietnam. Consequently, the structure of the export model is designed to reflect these relationships. X¼a0þa1REER þa2Yþa3Mþet(1) Where X is the volume of exports; REER is the real effective exchange rate; Yis the real income of the rest of the world, and M stands for import volume. Both sides of the Equation (1) are log form. Import is included as an explanatory variable in Equation (1) because this is consistent with the economic structure of Vietnam. The country’s export sector relies heavily on imported raw materials and intermediate goods, making imports a crucial component in understanding export dynamics. Including imports allows us to capture the interdependency between these variables, providing a more accurate representation of the economic reality. Besides, this study also emphasizes changes in Vietnam’s exchange rate mechanism. Consequently, we introduce two dummy variables denoted as D1 and D2. D1 takes the value of 1 from January 2009 to December 2011 (representing the crawling band’s mechanism), while D2 takes the value of 1 from January 2012 to December 2015 (indicating the conventional fixed peg arrangement mechanism). The base category has a value of 0, representing the central rate mechanism. Adding two dummy variables into the Equation (1) resulting in the following equation: X¼a0þa1REER þa2Yþa3Mþa4D1þa5D2þet(2) The coefficients specified in Equation (2) are utilized to assess the long-term scenario. Consequently, the ARDL approach, introduced by Pesaran et al. (2001), examines shortand long-term changes. DXt¼aþX n j¼0 bjDXt−jþX n j¼0 pjDREERt−jþX n j¼0 djDY t−1þX n j¼0 ujDMt−1þX n j¼0 ljDD1t−j þX n j¼0 gjDD2t−jþh1Xt−1þh2REERt−1þh3Y t−1þh4Mt−1þh5D1þh6D2þet (3) Furthermore, the objective of this paper examine whether the impact of the REER on the trade balance follows a symmetrical pattern or not. To achieve this objective, two supplementary variables are introduced: "POS," which signifies the depreciation of the REER, and "NEG," denoting the appreciation of the REER. These variables are defined as follows: POSt¼X t j¼1 DREERþ j¼X t j¼1 maxðDREERj,0Þ NEGt¼X t j¼1 DREER− j¼X t j¼1 minðDREERj,0Þ (4) Subsequently, building upon the methodology established by Shin et al. (2014), the formulations for "POS" and "NEG" were inserted in place of the "REER" term within Equation (3), resulting in the following equation: COGENT ECONOMICS & FINANCE 7 Table 7 shows that the short and long-run F-statistics are statistically significant at the 10% significance level. This result implies rejecting the null hypothesis. Hence, the REER is asymmetric in the export model in both the short and long run. To sum up, REER demonstrates asymmetry in both export and import models. 4.5 Threshold model Finally, the threshold model elucidates the import and export structure changes. The application of the threshold regression unfolded in two steps: (i) to determine the linearity of the model, and (ii) to identify the threshold value. The assessment of the threshold regression model was guided by the following hypotheses: Ho: The regression model does not meet the existing threshold. H1: The regression model meets the existing threshold. Table 8 displays the results of the LM test conducted for both the export and import models. All of the bootstrap p-values are below the significance level of 5%. Consequently, the null hypothesis is rejected, indicating that the models establish the threshold. As all the models exhibit nonlinearity, the subsequent procedure involves determining the threshold value and investigating the specific variable responsible for inducing alterations in the import and export structures. As indicated in Table 9, concerning the export model, the REER has a value of 4.6854 in May 2012, signifying that REER cannot clarify the shifts in the export structure. Meanwhile, the IIPW manifests two thresholds. The second threshold, observed at a value of 28.1225 in July 2017, indicates that IIPW accounts for the changes in export structure occurring in September 2017. Similarly, the import volume reflects two thresholds, with the second threshold identified at a value of 9.2293 in January 2014, preceding the alteration in export structure by one month. These observations highlight the role of imports and IIPW in explaining shifts in export structure at the first and the second time. This conclusion is supported by the ARDL model, which emphasizes the statistical significance of IIPW and imports, while REER lacks statistical significance in the context of exports. Shifting the focus to the import model, the Table 8. The LM test for threshold regression. Model Variable LM test for no threshold Bootstrap p-value Export model REER 16.50 0.00 IIPW 14.83 0.00 M 30.81 0.00 Import model REER 30.32 0.00 IIPVN 17.55 0.00 M2 25.51 0.00 Table 7. Wald test for symmetric the real effective exchange rate on the export model. Test statistic Value Probability Short run F-statistic 3.31 0.07 Long run 39.04 0.00 Table 9. Threshold value and time change for the export and import models. Model Variable Order Threshold value Time occurs Export model REER 1 4.6854 05/2012 IIPW 1 27.9104 07/2010 2 28.1225 07/2017 M 1 8.8580 12/2009 2 9.2293 01/2014 Import model REER 1 4.6678 02/2012 2 4.8507 10/2019 IIPVN 1 22.1828 11/2016 M2 1 14.8031 01/2012 2 16.1909 03/2020 14 N. HONG NGA ET AL. REER has a value of 4.6678 in February 2012, while the M2 stands at 14.8031 in January 2012. These observations spotlight the influence of REER and M2 in clarifying the shifts in import structure, specifically in February 2012. In this analytical landscape, it’s important to note the absence of explanatory variables that explain the shifts within the second import structure, marking attention for further exploration. In summary, the ARDL model sheds light on long-term export volume influenced by the world’s GDP, imports, and the conventional fixed peg arrangement mechanism. Import volume, on the other hand, is affected by the REER and the money supply. The NARDL model underscores the REER’s asymmetrical impact on exports and imports. Furthermore, the threshold model demonstrates that the first structural change in exports is explained by imports, while the second change in export structure is elucidated by the IIPW. In the context of the import model, the first structural change is clarified by the REER and money supply. These findings contribute to understanding the dynamics shaping Vietnam’s export and import performance. 5. Conclusion and policy implication Being one of the world’s prominent open economies with a strong focus on exports, Vietnam heavily relies on its export activities. The exchange rate plays a pivotal role in enhancing exports and moderating imports. Nevertheless, the analysis reveals that while the REER significantly influences imports, it has an insignificant impact on exports. This asymmetry highlights the complex relationship between exchange rates and trade flows. The significant import reduction following REER devaluation indicates that exchange rate policies can effectively manage import levels. This finding suggests that controlled devaluations can help reduce imports and support domestic industries by reducing competition from imported goods. Moreover, the money supply emerges as an additional determinant exerting influence on imports in the long run; The insignificant effect of REER on exports suggests that Vietnam’s export sector is less sensitive to exchange rate fluctuations. This could be due to the heavy reliance on imported intermediate goods for export production. Policymakers should focus on enhancing the value-added components of exports and reducing the dependence on imported inputs to improve export performance sustainably. Furthermore, the export volume is shaped by factors such as the IIPW, the import volume, and the central exchange rate mechanism. Based on the findings of this study, several policy recommendations can be put forward in shaping an effective trade strategy: For Exports: Given that the REER does not exhibit a significant impact on exports, policymakers are advised to avoid considering VND devaluation as a means to bolster export performance. Instead, the focus should shift toward economic restructuring. A strategic approach involves minimizing the practice of importing goods for reprocessing and subsequent export. The government could channel efforts into bolstering supporting industries and export-oriented production, utilizing domestic resources effectively. This proactive approach aligns with the imperative of sustainable and value-added export growth. For Imports: Firstly, the State Bank of Vietnam (SBV) can utilize exchange rate policies, such as the controlled devaluation of the VND, to manage imports. However, it is imperative to exercise caution due to the potential for retaliation from trading partners, including the risk of being labeled a currency manipulator. Secondly, the money supply emerges as a critical determinant of Vietnamese imports. Hence, it becomes crucial to regulate the pace of money supply growth. By doing so, not only can imports be curbed, but this approach also serves as an effective mechanism to rein in inflationary pressures. In summation, these policy implications, derived from empirical insights, offer an effective strategy for policymakers to navigate the complicated trade landscape of Vietnam. By shifting the focus towards sustainable economic restructuring for exports and employing a calibrated approach to exchange rate and COGENT ECONOMICS & FINANCE 15 monetary policy for imports, Vietnam can effectively exploit its economic potential and position itself strategically in the global trade arena. Despite the valuable insights provided, this research has limitations. The data used in this study is aggregated, not commodity-level data. This could introduce aggregate bias and obscure sector-specific trade dynamics. This limitation underscores the need for more granular data, such as commodity-level data, to capture the nuanced impacts of exchange rate changes on industries and trading relationships. Future research should incorporate more recent and detailed data sets to enhance the accuracy and relevance of the findings. Notes 1. Please see appendix 1 for more details. 2. The Absorption Approach begins with the equation: Y ¼CþIþGþX–M (1). Where Y is real GDP; C: Consumer spending; G: Government spending; I: Investment spending; X: Export; M: Import. Let A be the total domestic expenditure or absorption with A ¼CþIþG. The equation (1) is rewritten as Y ¼Aþ(X –M) Or Y – A¼X–M. 3. The data that support the findings of this study are openly available in Mendeley at http://doi.org/10.17632/ 2z9gxryd5j.1. Acknowledgments We also thank Dr. Chris Jones and 2 anonymous reviewers of Cogent Economics & Finance for their valuable feedback, which has tremendously improved the quality of this paper. Disclosure statement No potential conflict of interest was reported by the authors. Author contributions Nguyen Hong Nga: Conception, methodology, and analysis, writing draft and discussion; revising and editing the intellectual. Pham Hoang An: Literature review, writing draft and discussion, revising and editing the intellectual contents. Vo Thi Kim Loan: Literature review, writing draft and discussion, revising and editing the intellectual contents. Tran Quoc Khanh Cuong: Conception, methodology, data management, and analysis, writing draft and discussion; revising and editing the intellectual. All authors have reviewed the results and approved the final version of the manuscript. We also agree to be accountable for all aspects of the work. Funding This research is funded by the University of Economics and Law, Vietnam National University Ho Chi Minh City/ VNU-HCM. About the authors Nga Nguyen Hong is an Associate Professor in the Faculty of Economics, University of Economics and Law, Vietnam National University Ho Chi Minh City. His research interests include international economics and development economics. He has published several papers in quality domestic and international journals. Loan Vo Thi Kim is a Ph.D. at the Faculty of Basic Science, Van Lang University, Ho Chi Minh City, Vietnam. Her research interests include international economics, development economics, banking, and human resource management. She has published several papers in acclaimed domestic and international journals. An Pham Hoang is a Ph.D. at the Faculty of Accounting and Finance, Van Hien University, Ho Chi Minh City, Vietnam. His research interests include international economics, financial management, banking, and risk management. Cuong Tran Quoc Khanh Tran is a lecturer at the Faculty of Business Administration, Van Lang University. 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Similarly, changes in the structure of exports were detected in February 2014 and September 2017. To further verify these findings, we applied the Wald test, which confirmed the structural shifts in both the export and import variables. Wald test for structural break. The Wald test is based on the following pair of hypotheses: H 0 : there is no structural change H 1 : there is a structural change Because the Chi-square probability falls below 10% for both the export and import models, we reject the null hypothesis (H0), confirming that structural changes have indeed occurred in both export and import variables. Variables F statistics Break day Export 132.28 2014M02, 2017M09 Import 394.05 2012M02, 2016M08 Variables Break day Probability Export 2014M02, 2017M09 0.08 Import 2012M02, 2016M08 0.00 COGENT ECONOMICS & FINANCE 19