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On shaky ground

Released at: 03:41, 08/10/2014

On shaky ground

Mr Pham Sy Thanh, Director of the Chinese Economic Studies Program under the Vietnam Centre for Economic and Policy Research, spoke with VET's Minh Tien about the commercial relationship between Vietnam and China amid the tensions in the East Sea.

by Minh Tien

Mr Pham Sy Thanh, Director of the Chinese Economic Studies Program under the Vietnam Centre for Economic and Policy Research

The commercial relationship between Vietnam and China is not just an economic relationship between two neighbouring countries but also a link for Vietnam to the world’s second largest economy, so what advantages and disadvantages does it hold for Vietnam?

Being next door to a giant market Vietnam has a great commercial opportunity as its exports are welcomed in the market and China’s exports are affordable for most Vietnamese. While the two countries did not even have official trading relations in 1991 and bilateral trade turnover was just $37.5 million at the time, in 2013 it had reached $50 billion and is expected to be more than $60 billion in 2015.

Two-way trade with China now account for 20 per cent of Vietnam’s total two-way trade, so Vietnam clearly gains certain benefits from its association with the Chinese economy and with its economic development. However, Vietnam’s problem is it has not taken full advantage of this association while failing to have alternatives in case of trouble. Vietnam is yet to receive the benefits from trading with China that Malaysia, Thailand, the Philippines and Singapore have gained.

Small-scale trade accounts for a considerable amount of commercial activities with China, which not only affects tax revenue and creates difficulties in the management of import quality but also impacts on Vietnamese exporters. Vietnamese goods can only reach border provinces such as Yunnan, Guangxi, and Guangdong and fail to penetrate any further into the country. This also undermines the benefits of Vietnam’s commercial activities.

That Vietnam is yet to get the best out of it trade activities with China is best evidenced by the fact that we export raw materials with low added value to the country and then import finished goods of high added value. This relates to the level of technology and the development of support industries in Vietnam. In terms of agricultural products, we export $30 million worth to China but import $300 million of the same products. This suggests that Vietnam’s market management activities and trade policies are beset by problems. The disadvantage for Vietnam’s production being dependent on material supplies from China not only impacts on industrial sectors but also on agricultural sectors. The majority of cattle feed, catfish feed, and veterinary medicine comes from Chinese enterprises, so any supply shocks will also have a major impact on Vietnam’s agriculture sector.

How will the tensions in the East Sea affect bilateral economic relations with China? Will Vietnamese exporters to China be severely impacted?

It is clear to see that trade, tourism, foreign direct investment (FDI) and various engineering, procurement and construction (EPC) contractor works with China will decline or face stagnation. This will have negative effects on Vietnam’s economy.

If Chinese contractors withdraw and cease construction, multi billion-dollar power projects will come to a standstill. Vietnam is unlikely to invite other contractors to finish the works because the machinery, equipment and technology used to build and operate the power plants are all from China. In the long run, if these projects are not completed Vietnam will severely lack power supply. Businesses can diversify input supply and even accept price rises in unusual times, but obviously will not operate for long without a stable and sufficient power supply.

In the commercial sector, not only Vietnam’s main export products to China will shrink or stop altogether (especially agricultural exports, which account for 30 per cent of all exports to China), but also its staple exports such as textiles, leather and footwear, and fisheries due to their dependence on supplies of raw materials, seeds, and antibiotics from China. Vietnam is one of China’s largest consumption markets of various export lines, especially agricultural products and products from support industries. The withdrawal of FDI capital will also affect the chance of Vietnam benefiting from joining the Trans-Pacific Partnership (TPP).

Minister of Transport Dinh La Thang said recently that Vietnam will no longer depend on Chinese contractors. But a significant number of Chinese contractors have won bids already. What should Vietnam do to address this?

Minimising the current damage to Vietnam is a difficult problem. Firstly, the country lacks a thorough legal framework relating to procurement and dealing with derogations. In many cases, foreign contractors (not only Chinese) delay or increase the cost of works for inadequate reasons, and Vietnamese authorities are virtually powerless to stop them. Secondly, many general contractor projects with China are financed by Chinese official development assistance (ODA), so Vietnam is constrained in contractor selection. Third, with the role of capital spender, Vietnam’s management agencies are only able to assess the quality of work upon completion.

Fourthly, projects won by Chinese contractors are all large scale. Almost 100 per cent of sub-contractors are Chinese, so stopping these projects and inviting other contractors is difficult not only legally but also in design and technical terms. To alleviate the negative effects in the future, Vietnam needs to complete a legal framework on procurement, enact specific regulations on localisation ratios in implemented works, and firmly address corruption and bribery in ODA and general contractor-related works. One criterion that is being considered for change when inviting bids is the matter of cost. Vietnam’s bidding process has become increasingly more interested in technical life cycles than simply low cost. This means that Vietnam now prefers technology that may be more expensive than that from China but the total use time of the works and technology is longer.

Inviting bids for essential power or mining projects should be considered ‘prohibited’ for some foreign contractors. Other countries do likewise when executing security (both traditional and non-traditional security) and national defence-related works. Australia, the US and Canada have not only banned certain Chinese telecoms and oil companies from bidding in their key projects but also rejected merger and acquisition (M&A) deals with local companies involving these corporations because of security reasons.

FDI is an important driver of economic development in Vietnam. What is your assessment of the benefits and limitations of receiving FDI from China?

Among investment destinations, Asia accounts for approximately 60 per cent of total Chinese FDI but ASEAN receives only 7 to 9 per cent of this amount. Our calculations show that 60 per cent of these projects and 70 per cent of total Chinese FDI is used for seeking strategic assets with large-scale, influential projects and in natural resources extraction. According to figures from the Ministry of Industry and Trade, the accumulated total of valid Chinese projects as at December 15,,2013 was 891 directly-invested projects with total registered capital of over $4.68 billion, ranking it 14th out of 96 countries and territories investing in Vietnam. Most of these projects focus on the industrial sector and on exploiting local natural resources.

China’s total FDI accounts for only 2.5 to 3 per cent of the total FDI Vietnam attracts annually. However, as Vietnam increases its efforts in the TPP negotiations, China is increasing its FDI to Vietnam in the fields of textiles, leather and footwear to take advantage of the opportunities the agreement will present. Wholly Chinese-owned factories in Nam Dinh, Ha Tinh, and elsewhere are part of this move.

What must Vietnam do for its economy to be less dependent on China and/or to improve the quality of trade with China?

Vietnam needs to access and exploit the Chinese economy better. Whether bilateral relations become better or worse, Vietnam must change and not simply become a unit of the world’s largest workshop - China.

Vietnam’s economic strength has been improving too little over a long period of time. Data indicates that the level of industrial labour productivity improvement in China in the 2001 - 2009 period was approximately 8 per cent, while that in ASEAN countries ranges from 1 to 3 per cent. In particular, the levels of improvement recorded in Indonesia and Vietnam are the lowest, at less than 1 per cent. Improving productivity is a key problem for enterprises and workers, but institutional support must come from the State, starting with improving the investment environment such as streamlining administrative procedures to reduce time and costs for enterprises.

In the matter of strengthening and improving the regulatory environment for commercial activities (not just with China), Vietnam can (1) strengthen regulatory procedures in its border trade with China, and (2) set up technical barriers. These barriers include regulations on quarantine measures for animal and plants, regulations on food hygiene and safety, such as tests on residue, packaging, labelling, chemicals, additives, etc., regulations on the origin of products, and regulations on environmental and resources protection.

Support industries have not taken responsibility in ensuring the supply of inputs for domestic and foreign-invested enterprises (FIEs). To reduce the dependence on intermediate goods from China in particular and from the world in general, measures to assist support industries and substitute imported goods must be implemented in a more determined manner and be based on improved labour productivity and increased competitiveness at domestic enterprises, not on short-term incentives.

To be able to develop support industries Vietnam may need to continue to depreciate the Vietnam dong against the US dollar, not have it continue to rise as now. With the existing exchange rate, importing parts for assembly then exporting finished products is more profitable than investing in developing local support industries. Furthermore, attention should be paid to the participation rate of local businesses. Economists have recently warned of the risk of Vietnam’s economy being broken into two separate blocks: FIEs and local enterprises, instead of local enterprises linking tightly with FIEs and learning and growing from such cooperation.

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