Vietnam – Japan Trade Relation: So far so close

Vietnam and Japan have been enjoying a fruitful trade relation. Two countries began bartering back from the end of XVI century. Then 1973 was an important year when Vietnam formally established its trade relation with Japan. After Vietnam started liberalizing trade as part of Doi Moi (Vietnam’s notable economic reforms policy during 1986 – 1990), Japan has become Vietnam’s best supporter. The relation has been especially improved after two major pacts AJCP (ASEAN – Japan Comprehensive Economic Partnership Agreement) and VJEPA (Vietnam – Japan Economic Partnership Agreement) came into forces.

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Japanese Bridge at night, built in XVII century (Hoi An, Vietnam)

Until now, Japan maintains its status as the most generous donor of Vietnam in terms of ODA (Official Development Aid). This is a long-term, low interest, and non-refundable type of loan. Japan has pledged up to 30% total ODA received by Vietnam. This source of loans plays a key role in hunger elimination and poverty alleviation in rural areas of Vietnam. In 2012, Vietnam made achievements as to reduce the poverty rate to 10%, which means 30 millions Vietnamese making their way out of poverty.

Japan also reveals itself as the most active provider of FDI to Vietnam. The amount of FDI flow from this country has accumulated to 5.7 million USD (reported by JETRO – Japan External Trade Relation). Vietnam’s infrastructures and auxiliary industries are main areas that most benefit from Japan’s FDI. By June 2013, Japan has over 1990 ongoing investment projects with Vietnam, which equal 32.6 billion USD in sum.

Trade value between Vietnam and Japan shows continuous increase (even in times of disasters!), reaching 25.3 billion USD in 2013. With this record, Japan stands only second to China as the major trading partner of Vietnam. Interestingly, Japan is the only Asian country that Vietnam has surplus trade balance. Two countries expect to expand their trade value to 50 billion USD by 2020.

With huge population (Vietnam ranks #13 worldwide in terms of population), Vietnam appears attractive to Japan as a potential market and source of cheap labor. In 2013, the monthly wage of Vietnamese labor working for Japan firms is 250 USD/month. This rate exceeds Laos, Cambodia, Myanmar yet equals to only one-eighth of workers in Singapore and half of workers in Thailand. Plus stably political environment, Vietnam has won over Indonesia, Thailand, Philippines to become the top recipient of Japan’s investment.

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Can Tho Bridge, built from Japan’s FDI (Can Tho city, Vietnam)

The bilateral trade pattern between Japan and Vietnam can be a good example for Heckscher-Olin theory. Vietnam is adorned with labor forces, while Japan is abundant in capital. Vietnam exports to Japan mostly garment and textile, wooden and leather and shoes products, seafood and fruit. On the other hand, Japan exports machinery and equipment for Vietnam’s domestic production.

 The relation between two countries is regarded to be optimistic in the future. It is reported that over 70% of Japan enterprises plan to expand their business in Vietnam. Most importantly, in order to exploit these opportunities, Vietnam needs to solve some current problems.

 First of all, Vietnam needs to accelerate the disbursement process of ODA loans. In 2013, 5.1 billion of ODA was disbursed, increasing by 23% over the last year. However, the amount of ODA waiting for disbursement is much higher at 20.9 billion USD, which can incur an opportunity cost of 100 million USD per year to Vietnam (according to Asian Development Bank).

 Secondly, Vietnam must improve the efficacy of ODA usage. Normally, building one kilometer of subway from ODA resource costs Vietnam 2.5 times higher than the United States. ODA, by its simplest meaning, is a loan. If Vietnam really thinks of the debt burden bore by its future generation, then this is the right puzzle to tackle.

Finally, Vietnamese labors need to be equipped with languages, understanding of Japanese cultures as well as their fastidious tastes. These skills are vital as they enhance the competence of Vietnam’s human resources.    

 The trade relation of two countries is further induced by political relation. Japan has been a good friend to Vietnam ever since. Two countries have no territorial disputes, unlike Vietnam – China (conflicts regarding Paracels Islands) or China – Japan (Senkaku Islands). And unlike the United States or other Western countries, Japan never criticizes Vietnam for human rights violation. It is not that there were no dark days among Vietnam and Japan. Seventy years ago, Japan invaded Vietnam and caused the most devastated famine in Vietnam’s history (Famine of 1945). However, two countries seem to forget about that, which is in contrast to the fact that Nanjing Massacre still engraves in the memory of the Chinese.

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 According to an informal survey, Japan wins most favor from people in Southeast Asian countries rather than from China. There are not many countries like Japan which is respected by both Vietnamese top leaders and ordinary people. Therefore, it is unsurprising that Japan orients its future investment towards Vietnam and other Southeast Asian neighbors. This notion has been confirmed when Shinzo Abe chose Vietnam as the first country to visit after he returned as the Prime Minister of Japan in December, 2012.

 Sources: Vietnam Chamber of Commerce and Industry, BBC Vietnamese, Wikipedia, Jetro website, Asia Regional Integration Center – Asian Development Bank.

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