아세안

I. VIETNAM’S TRADE REFORMS SINCE 1989

Before 1986, Vietnam adopted the central planning system, which imposed state monopoly, rigid quantity targets and tight regulations over foreign trade. Vietnam was largely inward looking economy and traded mainly with the Soviet bloc. In 1986 Vietnam began the reform program to transform the economy towards market orientation. As part of this program, significant policy changes have been implemented since 1989 to liberalize foreign trade and open up the economy.
Decentralization of foreign trade. Private firms are allowed to take part in exports and imports.
Tariff reduction and lowering of NTBs.  The number of import tariffs and export duties dropped dramatically. Quotas were removed from almost all export and import goods, except only a few.
Exchange rate. Different exchange rates, applied to trade transactions within and outside the central plan, were unified. The domestic currency was devalued to establish a more realistic exchange rate.
Removal of licensing control. The licensing system was effectively abolished since 1998.
International integration efforts. Vietnam joined AFTA in 1995, APEC in 1998 and WTO in 2007. The country signed trade agreement with many trading partners, such as agreement on economic cooperation with the EU in 1995, BTA with US in 2000 and with Japan in 2008, and has duly implemented its commitments under these agreements.

II. IMPORTANT ACHIEVEMENTS

During 1989-2008, despite being suffered from several external shocks (the collapse of the Soviet bloc in 1989-91, the Asian economic crisis in 1997-98 and the current global crisis), Vietnam’s foreign trade has expanded colossally, thanks to trade reforms and international integration efforts.
Rapid surge in trade volume. In 1989 Vietnam’s exports were $US970 million. In 1999, export value surpassed the $US10 billion level. In 2008, despite severe impacts of the global economic crisis, Vietnam’s exports amounted to $US63 billion, almost 65 times the 1989 level (see Graph 1).
Rising number of trade partners. Before 1991, Vietnam traded mainly with the Soviet bloc. With the collapse of the Soviet bloc, since 1991 Vietnam has switched its trade to other partners. The number of Vietnam’s trade partners in 1991 was 81. By 2008, this number increases to almost 200.
High growth rate of trade. For almost entire period 1989-2008, except the years Vietnam was affected by external crises, Vietnam’s trade growth generally exceeds 20%. Average growth rate of both exports and imports for this period is around 28%, almost four times the country’s average GDP growth for the same period (see Table 1).
 

Graph 1: Vietnam’s foreign trade, 1989-2008 ($US billion)

Source: GSO, various years.

Table 1: Growth rate of exports, imports and GDP (%), 1989-2008

Source: Author’s calculation from GSO, various years.

Increased exports/GDP ratio. Exports of goods/GDP ratio rose from 30.8% in 1990 to 69.2% in 2008 (Table 2). If exports include both goods and services, in 1991 Vietnam’s exports/GDP ratio of 45% (Table 3) was lower than that of Korea (46%), Thailand (59%) and Philippines (52%). In 2007, Vietnam, with this ratio of 77%, surpasses Korea (46%), Thailand (73%) and Philippines (43%).

Table 2: Selected indicators of Vietnam’s export performance

Source: Author’s calculation from GSO, various years.

Exports/GDP ratio is often used as a measure of economic openness. High value of this indicator for Vietnam indicates relatively high degree of Vietnam’s economic openness.

Table 3: Exports of goods and services/GDP ratio of selected Asian countries, 1998-2007

Source: WB (2008)

Table 4: Vietnam’s top exports items at 3-digit of SITC3, 1991-2005 (% in total exports)

Source: Source: Author’s calculation from IEDB and UN COMTRADE databases

Rising exports per capita. In 1990 Vietnam’s exports per capita were $US36. In 2000, this amount rose to $US187, moving Vietnam to the group of countries with “normal foreign trade” (exports per capita of $US180 or higher). In 2008, this figure rose to $US724, a twenty-fold increase over the period of 18 years (see Table 2).
Increasingly diverse commodity composition of trade. In 1991 Vietnam exported 180 items (at 3-digit level of the Standard International Trade Classification Revision 3 -SITC3). In 2008, the number of exported items rose to 249, covering almost full range of world trade (269 commodities).
The shift of export structure from resource-based commodities towards manufacturing. In 1991, 17 out of 20 major exports of Vietnam were resource-based products (such as agricultural, fishery, forestry and mining) and only 3 are manufactured goods (clothes and travel goods). In 1996, the number of resource-based products in the list of top export items reduced to 10, while the number of manufactures increased to 10. In 2005, the number of resource-based products among top export items reduced further to 9, while the number of manufactures increased to 11 (Table 4).

III.  SHORTCOMINGS

Slow shift from low value-added exports to higher value-added. Although the export structure has shifted from resource-based goods towards manufactures in the early 1990s, the further shift has been slow in recent years. The list of Vietnam’s top export items in 2005 is quite similar to that in 1996 (Table 5), which is still dominated by low value-added items such as raw materials (rice, coffee, rubber, seafood, vegetables, crude oil, coal) and  labor-intensive manufactures (garment, shoes, travel bags, furniture). Most of manufactures are low value-added as they are mainly based on the outwork. This requires Vietnam to import most of materials and parts to produce final products for exports. This leads to large imports and contributes significantly to rising trade deficit.
Rising trade deficit. Since 2002 trade deficit has exceeded $US3 billion. In 2007 and 2008, the deficit amount jumped to $US14 billion and 18 billion, respectively (or almost 20% of GDP). While trade deficit is quite common for developing countries, which intensively imports capital goods for their industrialization, Vietnam’s extremely large trade deficit could cause serious concerns over how it could be financed, and whether it could create major economic instability, such as large current account deficit, devaluation of domestic currency and inflation.
Dependency on a limited number of markets. Although Vietnam now trades with some 200 economies, most of its trade is with a limited number of economies (mainly APEC and EU members). In 2008, 15 top export markets account for some 70% of Vietnam’s exports, while 15 top import sources make up 80% of the country’s imports (Table 5). The dependency on a few trading partners is risky, especially if unfavorable conditions occur on these markets. For example, due to the collapse of the Soviet bloc, Vietnam lost its major export markets. In the Asian economic crisis, Vietnam’s major Asian trade partners were severely impacted. In the current global crisis, Vietnam’s major trade partners including US, EU and Asian economies were hurt.
Vulnerability of the export-oriented economy. High value of exports/GDP ratio (around 70% in 2008) implicates that Vietnam considerably depends on its export performance, thus is vulnerable to external shocks. In the 1997-98 Asian economic crisis, Vietnam’s export growth in 1998 fell to 1.8% from around 30% in 1994-96, and GDP growth decreased from more than 8% in 1994-96 to 5,8% in 1998 and 4.8% in 1999. In the current global crisis, Vietnam’s export growth in 2009 is estimated -10% (the negative growth for the first time since the 1980s), and GDP growth plummeted from more than 8% in 2005-2007 to 6,2% in 2008 and around 5% in 2009.

Table 5 – Major export markets and import sources (2008)

Source: Source: Author’s calculation from GSO (2009)

III.  POLICY RECOMMENDATIONS

To address the above-mentioned drawbacks and further improve Vietnam's foreign trade, the relevant way at this stage is to raise the value added of its exports, not raising export volume as Vietnam has done so far. In this regard, some policy recommendations are made as follows.
Moving from exports of raw materials towards exports of processed products. Primary products (rice, coffee, tea, seafood, vegetable, rubber, etc) and mining products (crude oil, coal, metal ores, etc) are still among Vietnam’s major export items. Exports of these products as raw or unprocessed commodities do not bring much value added, despite the fast growing export volume. To increase value added of the primary sector, it is recommended to move from exports of raw materials to exports of processed products. The relevant way to implement it is to develop the food processing and mining processing industries.
Moving manufacturing sector from outwork to high level of the value-added chain. Vietnam currently holds considerable comparative advantage in a number of labor-intensive manufactures (garment, footwear, trunks and cases, furniture, assembled electrical and electronic consumer goods) thanks to its large labor force and cheap labor cost. To produce these products for exports, related industries import almost all of materials or parts, then do the outwork to complete goods in the last stage using cheap labor. While this low-technology manufacturing may be relevant in the past to create jobs and expand export volume, it does not create much value-added and measurably contributes to the country’s worsening trade deficit. It is recommended to move the manufacturing sector from outwork toward the higher level of the value-added chain. The way to do this is to develop supporting industries to produce materials and parts for exporting sector. These include textile fabrics and yarns for the garment industry, leather for the shoe and footwear industry, components for the electronic industry, and parts for the car and motorbike industry.
Shifting export structure from labor-intensive industries to technology-intensive industries. To achieve this target, relevant policy should be implemented to encourage investment (both FDI and domestic funds) into building up technology-intensive industries, such as chemicals and machinery and equipment
Further diversification of export commodity structure. Although Vietnam has considerably diversified its export structure, the country’s exports still concentrate on a limited number of major export products. This would pose a measurable level of risk to the economy and its exports, in case undesirable changes (such as falling demand for, and falling prices of these products) occur on the world market. It is recommended that Vietnam broaden the range of major exports. This can be implemented by developing new export products or moving the export sector towards products with higher technology intensity, thus higher value added earnings.
Broadening the range of main export markets and import sources. Vietnam should diversify its trading partnership structure to avoid the risk of dependency on a few trading partners.
Expanding the domestic market.  As Vietnam’s income per capita significantly rises over the last two decades, domestic market potential has expanded considerably. However, while export sector has been encouraged to expand, the domestic market has not been given due attention, both by the government  in terms of incentive policy, and by business sector in terms of development of relevant products and appropriate pricing policy. It is recommended that domestic market should be given more attention to increase its consumption capacity, especially at times of falling world demand for Vietnam’s exports such as the current global crisis.