Does free trade between developing countries guarantee a “win-win” situation? an application of the Heckscher-Ohlin model on Sino-Vietnamese trade in a post-ACFTA economy

Abstract

This investigation examines the applicability of the Heckscher-Ohlin in showing the benefits of trade between developing countries, due to the persistent use of trade between developed and developing (or high and middle/low-income) countries as the dominant example found throughout various forms of media such as news articles and textbooks, despite the model mainly dealing with specific factors of production.

As the People’s Republic of China (referred throughout this paper as “China”) and the Socialist Republic of Vietnam (referred throughout this paper as “Vietnam”) are both developing countries with export-oriented economies within the middle-income spectrum, but have distinct specific factors, this appears to serve as an ideal pair to examine the model with. The investigation focuses on two labour intensive economies, and uses the theoretical framework of the Heckscher - Ohlin Model to analyse the impact of the ASEAN-China Free Trade, on the economic performance of Vietnam’s industry. The investigation then runs three hypotheses derived from the H-O model and validates them against existing data. Thus the investigation serves as a method of analysing the predictive capacity of the H-O model, the impact of Free Trade and Free Trade Agreements on developing economies across the two ends of the “development” spectrum, and the overall importance of free trade to the development of these economies. The Heckscher-Ohlin finds partial validation through empirical evidence as the free trade agreement between China and Vietnam does yield most of the results predicted by the model: relative prices change in order to accommodate changes in consumer demand after the trade agreement; real wages of the abundant-factor goods increase in both countries, though convergence is not verified; trade flows and consumption possibilities increase in both countries.