DEFINITION OF TERMS

This section provides some important terms used in this research. The definition of terms will be helpful to understand the main contents within the analysis framework of the research.

Firstly, it presents the definition of terms relating to foreign trade. Secondly, it offers definition of terms relating to foreign direct investment (FDI). Finally, the possible economic effects of a free trade agreement (FTA) on its memberships are also given at the end of this section.

Definition of Terms Relating to Foreign Trade

Foreign Trade:Foreign trade is the exchange of goods and services between the domestic sector of a given nation and its foreign sector (other nations or the rest of the world).¹²

Export:Goods and services produced by the domestic sector of a nation are purchased by the foreign sector/nation.

Import: Goods and services produced by the foreign sector/nation are purchased by the domestic sector.

Net Exports:Net exports are the differences between exports and imports.

The Balance of Trade (Trade Balance):The balance of trade is the difference between the value of goods exported out of a country and the value of goods imported into the country.¹³

11 In case there are differences between many data sources, I respect the figures published by Vietnam’s authorities. This is because, sometime, international organizations take the original statistics figures from Vietnam’s authorities.

12Also termed international trade when viewed from the perspective of the global economy, in which the nations of the world are players in the exchange game. Foreign trade is usually viewed from the perspective of the domestic sector of a given economy.

13The balance of trade is actually one component of a more extensive set of international current account termed the Balance of Payments. The balance of payments is the difference between all payments coming into a country and all payments going out of the country. Many of these payments are for exports and imports, but other payments are for capital assets or simply gifts between foreign and domestic citizens.

Balance of Trade Surplus (Trade Surplus):A surplus in the balance of trade arises if the value of exports exceeds the value of imports.

Balance of Trade Deficit (Trade Deficit): A deficit in the balance of trade arises if the value of imports exceeds the value of exports.

Closed Economy:Closed Economy is an economy with no foreign trade, meaning that the economy is totally self-sufficient. All goods consumed are produced by domestic economy and all goods produced within the domestic economy are consumed domestically as well.

Open Economy:Open economy is an economy with that engages in foreign trade, meaning that some goods produced by the domestic economy are purchased by other nations and some goods purchased in the domestic economy are produced by other nations.

Domestic: “Domestic” is activity that takes place within the political boundaries of a given nation. Usually, not always but usually, this activity is undertaken by resources owned by citizens of the nation. The domestic sector, or domestic economy, includes producers, consumers, and even government residing in the given nation.

Foreign:“Foreign” is, in contrast, any activity that takes beyond the political boundaries of a given nation, that is, activity in other nations. The foreign sector includes producers, consumers, and even governments of other nations.¹⁴

The Law of Comparative Advantage: This law states that every nation has a production activity that incurs a lower opportunity cost compared with that of in another nation. This means that any given nation is bound to find some products that it can export as well as other products that it can import.¹⁵

Opportunity Cost: The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits one could have received by taking an alternative action.

Absolute Advantage:A country is said to have an absolute advantage if it can, in general, produce more goods using fewer resources. An absolute advantage arises when a country is technically efficient or technologically superior.

14While the domestic view distinguishes between imports and exports, the global view sees both as essentially two sides of the same coin. The import of one nation is the export of another. All imports are exports and all exports are imports. And while one nation might have more exports than imports (trade surplus), or more imports than exports (trade deficit), the global economy always has a balance between exports and imports. Short of trading with another planet, net exports for the global economy are always zero.

15The law of comparative advantage works because every nation has at least one good that it can produce at a relative lower opportunity cost than that incurred by another nation. This is the key to foreign trade, because it also means that other nations can benefit by importing that good rather than producing it domestically. It’s a win-win for exporters and importers.

Comparative Advantage: A country is said to have a comparative advantage if it can produce one good at a relatively lower opportunity cost than other goods, compared with the production in another country.

Foreign Trade Policies: Most nations around the globe are inclined to implement trade protectionist policies. Because all nations prefer a balance of trade surplus with exports exceeding imports, they are inclined to implement policies that restrict imports and promote exports. These measures are basically divided into three areas: tariffs, quotas, and subsidies.

Tariffs:One common trade policy is the imposition of tariffs on imports. Tariffs are simply taxes placed on imports (or customs duties levied on imports). Tariffs work like any other taxes.

Quotas:An alternative to tariffs is to simply restrict the quantity of imports coming in a country. The technical term for this is an import quota. Quota is restriction on the quantity of commodity imported.

Subsidies:A third policy is for the domestic government to subsidize a domestic industry facing competition from imports. That is, the government pays domestic producers for each good produced. In the export side, that is, the government pays exporters for each good exported or for a given value earned from exports.¹⁶

Definition of Terms Relating to Foreign Direct Investment (FDI)

International Investment includes two main types: Foreign Direct Investment (FDI) and Portfolio Investment or Foreign Indirect Investment (FII). The International Monetary Fund (IMF) defines Foreign Direct Investment as “cross border investment” in which an investor that is

“resident in one country has control or a significant degree of influence on the management of an enterprise that is resident in another economy”.¹⁷

Definition and Explanation of Terms Relating to the Economic Impacts of a Free Trade Agreement (FTA) on its Memberships¹⁸

One can classify the economic impacts of a FTA into two groups: “Static Effects” and

“Dynamic Effects”.

The “Static Effects” include the “Trade Creation” and “Trade Diversion”. “Trade creation is defined as the replacement of higher cost domestic production by lower cost sources of supply

16 The definition of terms are acquired/adopted from FOREIGN TRADE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2013, accessed April 17, 2013.

17IMF, Balance of Payments and International Investment Position Manual 100 (6^th edition 2009); see also:

http://www.law.cornell.edu/wex/foreign_direct_investment, accessed April 7, 2013.

18A Free Trade Agreement here refers to a Bilateral Free Trade agreement (signed by two parties like the United States-Vietnam Bilateral Trade Agreement (USBTA), JVEPA, etc.) or regional/multilateral Free Trade Agreement/Area (signed by at least three parties such as the AFTA, ACFTA, AKFTA, AJCEP and AANZFTA, etc.).

within the new union”. “Trade diversion means that trade has been diverted by discriminatory tariffs from a low-cost external source to higher cost source within the new union”.

The “Dynamic Effects” consist of three main effects in the long-term. First, the increased size of the domestic market, now including other member countries, will enable producers to exploit economy of large-scale production, leading to an expansion into the international market.

Second, there will be increase in competitive pressure on stagnant industries.¹⁹ Third, it will stimulate investment.²⁰