Vietnam seems to be overwhelmed Free Trade Agreements

Vietnam seems to be overwhelmed Free Trade Agreements (FTA) and does not utilize economic benefits from existing FTAs at an optimal rate.

FTA is a term mentioned so frequently in Vietnam’s national news or magazines that it has recently become a “buzz” word. In almost all high-level visits with a foreign country, it is reported that the Government of Vietnam is considering negotiating a FTA with him or her. Many economists once question whether Vietnamese Government now employs FTA just as a political tool to deepen the diplomatic relations with its partners rather than an economic driven policy. The fact is that there is a weak policy dialogue on FTA’s commitments and changes between the Government and the community of Vietnamese enterprises and those Vietnamese businesses do not participate in the process of formulating trade policies or advocating the Governments’ position in the negotiation.

By the end of 2013, Vietnam, together with other ASEAN countries, has participated in 6 regional FTAs and two bilateral FTAs with different levels of liberalization.

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Positive impacts on the import-export market size and trends

According to statistics from General Department of Vietnam Customs, bilateral trade turnover between Vietnam and FTA partners has increased dramatically, after the agreements came into effect. The trade turnover accounts for nearly 60% of the total import-export value of Vietnam, and specifically 50% of the total exported value and 70% of total imported value. In other words, joining these signed FTAs has helped Vietnam to expand international markets and boost foreign trade activities. For instance, the ASEAN – Korea FTA increased the trade volume between Vietnam and South Korea at an average annual rate of 14.9% throughout 2001-2006 and 29.1% during 2007-2012. With higher export growth than import growth, Vietnam has constantly achieved a trade surplus with South Korea.

Low utilization of tariff reduction due to complicated C/O issuance and big trade deficit with China

However, Vietnam businesses have not taken full advantage of preferential tariff reduction offered in the signed FTAs. Statistics on Certificate of Origins (C/O) for signed FTAs show that Vietnamese enterprises take advantage of preferential tax at a very low rate. For example, just between 30% and 40% of the total export turnover in the AFTA reap the benefits of preferential tariff level while only18% of that in the ACFTA. Many Vietnamese businesses, particularly the small and medium –sized enterprises do not actively seek information on those preferential offers and other benefits in the FTAs that the Government of Vietnam has signed. Many exporters do not understand criteria to switch the HS Code or particular processing requirements stipulated in the FTAs. Besides, the high application fees and complicated administration process for C/O issuance discourage enterprises. Especially if the level of preferential tariff is not significant enough, enterprises are not motivated to apply for C/O. Also, a number of key export commodities of Vietnam such as raw materials and agricultural products already enjoy low tariffs from the NFN agreement.

Meanwhile, Vietnam is subject to various adverse impacts on the import trend. Like other FTAs, the ASEAN –China FTA has turned Vietnam to very potential exporting markets for China and some ASEAN countries such as Singapore and Thailand. Vietnam has continuously run a trade deficit with China for the last decade. In 2001, Vietnam’s trade deficit with China was only $210 million USD while the figure grew to $16 billion USD in 2012.

The signed FTAs are also considered to change the FDI structure in Vietnam. One significant switch is that many FDI enterprises operating in manufacturing sectors transition to purely commercial services (That means they stop manufacturing and just import products and distribute in Vietnam market). By doing so, they can take advantages of some eliminated taxes in the signed FTAs and avoid adverse effects of abolished protectionism tariff.

Whether Vietnam should negotiate more bilateral FTAs?

Currently, Vietnam is negotiating two major regional FTAs, including the Transpacific Partnership (TPP) with 11 Pacific Ocean countries, and VN-European FTA. It is also in the process of concluding the multilateral tariff agreement with Russia, Belarus and Kazakhstan and bilateral FTA with South Korea. One of the major concerns is how Vietnamese enterprises can be well-informed about the opportunities and challenges brought by the prospective FTAs and how they can utilize both existing and future FTAs.

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Given the fact that Vietnam’s main exported products in the labor-intensive sectors such as textile, apparel, footwear and seafood already reap significant tariff reduction from main exporting markets through existing and on-going FTA negotiation, it is not so beneficial to allocate more time and human capital in negotiating more FTAs with small trading partners. Besides, Vietnam has low technological and scientific capacity, the country can barely gain benefits from economic of scales, technological transfer or constitutional changes in the short-run. Therefore, I personally agree with a public opinion that the Government of Vietnam should just focus on concluding the TPP and EU-VN FTA successfully and do not need to negotiate any other bilateral FTAs.

Sources of Reference:

  1. WTO Center: http://wtocenter.vn/fta
  2. General Department of Vietnam Customs:

http://www.customs.gov.vn/home.aspx?language=en-US

  1. VCCI C/O Centre: http://covcci.com.vn/bizcenter/index.html
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