With the implementation of the Vietnam-United States bilateral trade agreement
and accession to the World Trade Organization (WTO), Vietnam's economy is now
integrated into the global trading system. Trade in goods now represents over
150% of gross domestic product (GDP).
Between 2001 and 2008, Vietnam's exports of goods more than tripled, reaching
nearly US$63 billion in 2008. The global recession pushed Vietnamese exports
down to less than $57 billion last year, but they are forecast to bounce back
this year as demand in the US and other key markets improves.
Even so, that is not easing concerns over Vietnam's rising trade deficit, which
in 2008 reached 12.8% of GDP. While steady trade deficits are not necessarily
bad, particularly when they entail the
import of growth-enhancing machinery and technology, Vietnam's case is
problematic for several reasons.
Vietnam imports large quantities of raw materials and parts to fuel its export
machine, notably the garment and footwear industries. This demonstrates that
the country lacks essential supporting industries that would help it reap
bigger economic benefits from exports and further the process of
industrialization. Heavy reliance on imported inputs also makes it more
vulnerable to external market forces, including fast fluctuating commodity
prices.
Vietnam's rising trade deficits with China since 2001 are a particular cause
for concern. In 2009, the deficit with China was greater than $11 billion,
accounting for over 91% of Vietnam's overall trade deficit.
The challenge of Chinese imports, already threatening the development of
homegrown industries, may increase as Vietnam engages in further trade
liberalization through the Association of Southeast Asian Nations-China Free
Trade Area, which will allow an even greater percentage of Chinese goods into
its market duty free by 2015.
The trade deficit also reduces the scope for macroeconomic maneuvering. Last
year, when key sources of foreign exchange inflows - including foreign direct
investment (FDI) and overseas remittances - declined sharply, the government
was forced to run down foreign exchange reserves to cover still high import
bills. In an attempt to preserve dwindling reserves and rein in the trade
deficit, the government engineered two currency devaluations - of 5.4% in
November 2009 and 3.4% in February this year.
These interventions have failed to narrow the trade gap. For the first quarter
of 2010, imports increased almost 38% in value while exports decreased 1.6%
compared with the same period last year. The Economist Intelligence Unit
forecasts that Vietnam will run a trade deficit of $13.3 billion this year,
equivalent to around 13.4% of a forecast GDP of $99.3 billion.
The devaluations have complicated Vietnam's efforts to contain inflation.
Expansionary monetary and fiscal policies, countercyclical measures taken at
the height of the global economic downturn to boost growth and maintain
employment, resulted in 5.3% GDP growth last year, but led to new inflationary
pressures.
As the dong has weakened, the price of imported inputs and products has
increased and driven inflation higher. The government has targeted an inflation
rate of no greater than 7% for this year. Few analysts believe it can achieve
this, in spite of some measures to curb price increases and plans to rein in
previous expansionary policies.
The absence of easy solutions for curbing the trade deficit is rooted in the
economy's main growth drivers. Vietnam's exports are still heavily concentrated
in labor-intensive and commodity-based products. In general, these are
relatively low value-added goods, making it difficult to boost overall export
values in order to shrink the trade deficit.
Nor does the government have a readily apparent plan to build up supporting
industries to foster the production of higher value-added goods. Efforts to
promote some import-substituting products have not gained traction due to
deep-seated economic inefficiencies and competitive pressure from low-cost
producers in China.
Vietnam's increasingly affluent middle class also tends to prefer imported
products over domestic ones when they can afford them. Thus strong demand for
imported consumer goods has contributed to the country's stubbornly high trade
deficit. Economists say the only way to close the import gap is faster
restructuring of the economy in ways that improve competitiveness.
Deeper reform of the state-owned sector, which currently accounts for nearly
35% of GDP, would help. State-owned enterprises have wide range of privileges,
such as favorable access to credit and subsidies, but are overall highly
inefficient. Forcing state-owned enterprises to become more efficient and play
by market rules would lift a significant drag on the economy.
Vietnamese economic policymakers also need to come up with a meaningful action
plan to promote supporting industries in line with broader development needs.
Japan has shown a willingness to help. With the implementation of the
Vietnam-Japan Economic Partnership Agreement there will be opportunities to
engage in joint production of high value-added products for export to the
Japanese market.
Without a deeper commitment by the country's leaders to reform and
restructuring, imports will continue to outpace exports and contribute to
instability and risk in Vietnam's still transitional market economy.
Anh Le Tran teaches economics and management at Lasell College in
Massachusetts in the United States.
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