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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 Partner