Bilateral Trade Agreements Enhance External Debt Markets Accessibility–Empirical Evidence of Vietnam with Synthetic Control Analysis

Abstract

International trade integration plays a crucial role in economic growth and governments’ solvency, in the context of emerging markets and developing countries. This paper empirically examines the impacts of joining a free trade agreement with a more developed partner on fiscal capability. Using plausibly causal estimates based on a Synthetic Control Method, the paper finds the Vietnam–Korea Free Trade Agreement helps Vietnam to borrow more from the Republic of Korea. The agreement also helps Vietnam to be less reliant on external borrowing from other international lenders. These results are robust to changing the pool of control countries. The findings echo the literature on the positive role of free trade agreements in enhancing low- and middle-income countries’ capability of external borrowing, especially the lending role of direct partners, which is essential for low- and middle-income countries to necessarily finance growth targets and enhance resilience against global economy’s volatilities.