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Trade liberalizations have been shown to improve domestic firms' performance through the new varieties of imported intermediate inputs. This paper uses a unique, representative sample of Bangladeshi garment firms to highlight that local intermediate inputs may also enhance domestic firms' performance, through the shared supplier spillovers of foreign direct investment (FDI) firms. An exogenous EU trade policy shock is shown to cause some FDI firms in Bangladesh to expand, which led to better performance of the domestic firms that shared their suppliers. Overall, the shared supplier spillovers of FDI explain 1/4 of the product scope expansion and 1/3 of the productivity gains within domestic firms.

E-Business --- Economic Theory & Research --- Foreign Direct Investment --- Intermediate Inputs --- Labor Policies --- Local Suppliers --- Macroeconomics and Economic Growth --- Markets & Market Access --- Multi-Product Firms --- Private Sector Development --- Product Scope --- Productivity --- Shared Supplier Spillovers --- Social Protections and Labor --- Water & Industry --- Water Resources

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November 1999 - The static economic benefits of Vietnam's accession to the ASEAN Free Trade Area (AFTA) are likely to be relatively small. The gains from increased access to ASEAN markets would be small, and they would be offset by the costs of trade diversion on the import side. But binding commitments on protection rates under the AFTA plan could provide an important stepping stone to more beneficial broader liberalization. Vietnam's accession to the ASEAN Free Trade Area (AFTA) has been an important step in its integration into the world economy. Fukase and Martin use a multiregion, multisector computable general equilibrium model to evaluate how different trade liberalization policies of Vietnam and its main trading partners affect Vietnam's welfare, taking into account the simultaneous impacts on trade, output, and industrial structure. They conclude that: The static economywide effects of the AFTA liberalization to which Vietnam is currently committed are small. On the import side, the exclusion of a series of products from the AFTA commitments appears to limit the scope of trade creation, and the discriminatory nature of AFTA liberalization would divert Vietnam's trade from non-ASEAN members; Vietnam's small initial exports to ASEAN make the gains from improved access to partner markets relatively modest. Since Singapore dominates Vietnam's ASEAN exports and initial protection in Singapore is close to zero, there are few gains from preferred status in this market; When Vietnam extends its AFTA commitments to all of its trading partners on a most favored nation basis, its welfare increases substantially - partly because of the greater extent of liberalization, partly because the broader liberalization undoes the costly trade diversion created by the initial discriminatory liberalization, and finally because of the more efficient allocation of resources among Vietnam's industries; AFTA, APEC, and unilateral liberalizations affect Vietnam's industries in different ways. AFTA appears to benefit Vietnam's agriculture by improving its access to the ASEAN market; Broad unilateral liberalization beyond AFTA is likely to shift labor away from agriculture and certain import-competing activities toward relatively labor-intensive manufacturing. Reduced costs for intermediate inputs will benefit domestic production. These sectors conform to Vietnam's current comparative advantage, and undertaking broad unilateral liberalization now seems a promising way to facilitate the subsequent development of competitive firms in more capital- and skill-intensive sectors. By contrast, more intense import competition may lead some import substitution industries (now dependent on protection) to contract; The higher level of welfare resulting from more comprehensive liberalization implies that the sectoral protection currently given to capital-intensive and strategic industries is imposing substantial implicit taxes on the rest of the economy; All the above suggests that AFTA should be treated as an important initial step toward broader liberalization. Binding international commitments in AFTA and, in due course, at the World Trade Organization can provide a credible signal of Vietnam's commitment to open trade policies that will help stimulate the upgrading of existing firms and investment in efficient and dynamic firms. This paper - a product of Trade, Development Research Group - was prepared as part of the AFTA Expansion Project in collaboration with the East Asia and Pacific Region. The authors may be contacted at efukase@worldbank.org or wmartin1@worldbank.org.

Access --- Capital Goods --- Comparative Advantage --- Currencies and Exchange Rates --- Debt Markets --- Domestic Industries --- Domestic Production --- Economic Theory and Research --- Emerging Markets --- Exports --- Factor Endowments --- Finance and Financial Sector Development --- Free Trade --- Free Trade Area --- Import Competition --- Intermediate Inputs --- International Economics & Trade --- Law and Development --- Macroeconomics and Economic Growth --- Markets and Market Access --- Openness --- Private Sector Development --- Public Sector Development --- Tariff --- Trade Creation --- Trade Diversion --- Trade Law --- Trade Liberalization --- Trade Patterns --- Trade Policies --- Trade Policy --- Trade Regime --- Unilateral Liberalization