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Vietnam Today

Crucial next step

Released at: 02:21, 05/02/2015 2015 - Year Of FTAs

Crucial next step

Amid the praise and euphoria surrounding the signing of FTAs between Vietnam and other countries comes a degree of concern over implementation.

by Thong Dat

When VET contacted the Minh Dien Company, who makes shoes, to ask about the prospects afforded by upcoming free trade agreements (FTA), a representative of the company said it was largely unaware of what those prospects might be. He had little knowledge at hand about the negotiations relating to the agreements. And Minh Dien, worryingly, is far from alone in this regard, as many other local companies appear to be unaware about the potential benefits and losses FTAs may bring. While the government has launched a series of negotiations over FTAs and the Trans-Pacific Partnership (TPP), its efforts seem to have slipped under the radar of too many companies.

Meanwhile, three months prior to Vietnam finalizing discussions over a draft agreement on free trade with the Customs Union, whose members include Russia, Belarus, and Kazakhstan, a Russian businessman approached VET seeking information on the negotiation process. These two cases clearly highlight the differences in the way foreign and local companies are preparing for upcoming FTAs.

Last year observers witnessed a more aggressive FTA strategy being adopted by the Vietnamese Government, in a bid to boost its export-oriented economy. This view was echoed by Minister of Industry and Trade Vu Huy Hoang, who said that the signing of FTAs aims at seeking new markets for Vietnamese businesses, accelerating exports, and reeling in investments to underdeveloped fields in the country. Despite this more aggressive approach, local companies are struggling to ready themselves amid a high level of ignorance and lack of understanding on what changes the FTAs will present.

Ongoing process

Among the FTAs Vietnam focused on last year, the one with South Korea was the first to be wrapped up, with economic factors playing a major part in the success. Analysts said that the FTA was concluded relatively quickly thanks to the complementing aspects of the two countries. While Vietnam’s exports to South Korea are mainly agricultural and handicraft products, South Korea returns industrial products such as motor vehicles, automobile parts, and household electrical goods. Negotiations, which spanned two years, brought impressive results. While Vietnam agreed to liberalize 96.48 per cent of its import tariff regime, South Korea agreed to liberalizing 92.75 per cent. The FTA is expected to help raise bilateral trade to $70 billion by 2020. 

Negotiations with the Customs Union also concluded late last year. The 8th round of negotiations between Vietnam and Russia took place in December, in which both negotiating teams agreed to quickly resolve the remaining technical issues in order for the agreement to be signed early this year.

The FTA between Vietnam and the Russia-led Customs Union covers trade, customs facilitation, intellectual property investment, legal issues, military industries, rules of origin, animal and plant quarantine, and the lifting of legal and technical barriers to trade. As a result, Vietnamese exports will benefit from preferential tariffs that will help facilitate shipments of agricultural products, seafood, textiles and garments, and wooden furniture. Goods imported from the Customs Union will also receive preferential tariffs and include machinery, motor vehicles, and livestock products.

Meanwhile, negotiations between Vietnam and the EU have reached a turning point thanks to Prime Minister Nguyen Tan Dung’s visit to the EU last September. The visit, analysts observed, helped to bolster high level commitments from both sides to sign the FTA sometime this year. 

As noted by Mr. Claudio Dordi, the EU-Mutrap Team Leader in a European trade policy and investment support project, reductions in tariff barriers alone would see Vietnam’s exports to the EU increase by 30-40 per cent. “The FTA would enable Vietnam to have annual gains of about $1.5 billion in 2020, when most of the tariff reductions will have been implemented,” he said. The estimated increase in GDP is about 2-2.5 per cent and real wages are expected to rise by around 5 per cent. Imports from the EU, he added, will increase by 25-35 per cent, reflecting the greater tariff reductions.

When asked for comment on the FTA strategy adopted by Vietnam last year, a local independent analyst told VET that the strategy is likely to have been triggered by the unexpected delay to the conclusion of the TPP. “This is why authorities decided to fast track other alternatives already underway, including FTA talks with the EU, South Korea, and the Customs Union,” he said.

Vietnam, which already has two FTAs to sign in 2015, sees the TPP as the major prize. But negotiations slowing down have created a challenge for the country, as its economy has long needed more drivers to escape from lower-than-capacity growth. 

Costs & benefits

There are a lot of good things about the prospects FTAs present to Vietnam’s economy. Any FTA will, of course, bring certain benefits via enhanced trade and exporters will gain from the enlargement of export markets and fewer tariff and non-tariff barriers. In addition, through FTAs among ASEAN and its partners, Vietnam has been recognized as a full market economy by several of its partners and these agreements have enabled it to take part in broader regional economic integration.

But the costs may well outweigh the benefits given that competition under free trade can be unfair and unhealthy at times. There are concerns that Vietnam may find itself among the less-developed countries that struggle to compete with economically-advanced countries. For example, Mr. Tran Huu Huynh, Chairman of the International Trade Policy Advisory Committee (INTAC), believes that the key issue yet to be resolved is that local companies cannot take full advantage of tariff benefits from FTAs. More importantly, he worries about the formation of barriers set by member countries signing FTAs with Vietnam, which may be at the expense of the country’s vulnerable industries. “New FTAs often set excessive standards, particularly on certain vulnerable groups such as small and medium-sized enterprises and farmers,” he believes. 

To prepare for FTAs, Mr. Huynh suggested, not only local companies but also authorities need to draw lessons from FTAs undertaken by other countries, in particular regarding the protection of vulnerable groups, fair and stable competition, and institutional reform. It is quite clear that certain industries in Vietnam lack the means to compete with their counterparts in other countries and for this reason certain competition policies and measures should be adopted. 

Minister Hoang said that Vietnam will fight for the continuous application of quota constraints on sensitive goods, like products sourced from agriculture and animal husbandry and other locally-produced consumer commodities whose competitiveness is still not strong. “This constitutes protective measures only and domestic businesses need to gradually work to stand on their own two feet so that the country can fully participate in the global playground,” he said.

FTAs will undoubtedly provide the opportunity for Vietnam to attract more investment and improve its growth prospects. However perfect this may sound, it will only be true if particular industries in Vietnam have comparative advantages, which is not the case at the moment. Such industries, whenever FTAs are applied, will be left largely alone to compete without any assistance or protection from the government and they will find a difficult future ahead of them. 

Minister Hoang said that it’s imperative that local companies begin to fully prepare for future integration. “Vietnamese companies should be proactive in being ready for the difficulties and the challenges, so that they can attempt to set foot into demanding markets,” he said. 

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