Economic Sector

Last updated: Thursday, April 18, 2019


FTAs - A Boost to Private Businesses

Posted: Wednesday, March 27, 2019

Vietnamese goods exported to CPTPP member countries started to enjoy tax cuts from January 14, 2019. In response, Vietnam will also offer many tax preferences to other CPTPP member countries, as committed. Vietnamese companies should take advantage of this to boost business development.

Recent trade agreements to which Vietnam is a signatory have opened up extremely favorable opportunities for businesses to increase import and export value, attract investment capital flows and strengthen labor resources, said domestic and foreign economists.

CPTPP - Positive effects across many industries

Quantitative assessment reports on the impacts of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) show that the pact has many positive effects on the economy, with the GDP expanding by 1.32%. This impact is likely to be greater if Vietnam simultaneously reduces tariffs and liberalizes services under the service opening scenario (then, GDP will rise by 2.01%). Similarly, exports may increase by 4% and imports will climb by 3.8-4.6%.

According to analysis from the National Center for Socioeconomic Information and Forecast (NCIF), companies from some industries will enjoy more from CPTPP. Most light industries and labor-intensive industries will benefit from CPTPP. The agreement can result in an added growth of 4 - 5% and an added export growth of 8.7 - 9.6%.

Its impacts on heavy industries are lighter, ranging from 0.8% to 1.2%, primarily because Vietnam does not have competitive advantages in capital-intensive heavy industrial products. CPTPP partners cannot be main partners with Vietnam in heavy industrial development. CPTPP may cause the import of heavy industrials to rise by 2.7 - 3.4%.

CPTPP will add export growth by 8.3 - 10.8% for the industry because garment and textile, leather and footwear products are more competitive in price in CPTPP while still maintaining key markets, the US and EU.

CPTPP also entails an extra import growth by 7 - 8%. Some recent reports show that the textile and apparel industry mainly imports raw materials: 90% of raw cotton, 100% of synthetic fibers, 50% of cotton fibers and 80% of wide fabrics from China, Taiwan and South Korea. These are countries and territories that are not present in CPTPP to enjoy preferences under the “yarn forward” principle in TPP. Businesses may not benefit much from tariff reductions.

However, capital intensive industries will have insignificant output growth (output expands rises by 0.8%, exports rise by 1.67%).
CPTPP slows down the growth of food processing industry by 0.37 - 0.52% but its exports may increase by 2.18 - 2.35%. Notably, the food processing industry has a relatively slow tariff reduction schedule compared to other sectors. Specifically, the duty is brought to zero after 15 years. Therefore, CPTPP impacts are not really heavy over years as well as in the first stage of CPTPP enforcement.

The livestock industry will also be affected because this industry’s advantages are weaker to some partners such as Australia and New Zealand and tariff reductions relative to the current MFN are not much. Output may decline by 0.3% and exports will decrease by around 8%.

Opening up the service sector, especially the financial services sector, may cause slowing growth but because of strong spillover effects. But, its impacts still have general stimulating effects on the whole economy. The insurance service industry will see a decrease in growth, but not much. Especially, it can expand by 0.15%.

CPTPP also drives other business services to grow slightly. Overall, NCIF said that service commitments and tariff reductions are quite fast. Therefore, the Government needs to have solutions to improve competitiveness of affected sectors and deal with declining service import tax revenue.

EVFTA - Complementary potential

After six years, EVFTA negotiations wrapped up and opened up great opportunities for Vietnamese businesses to penetrate a potential market with 508 million people and a gross domestic product (GDP) of about US$18,000 billion.

The European Union (EU) is the third largest trading partner and one of the two largest export markets of Vietnam. Specially, the import and export structure between Vietnam and the EU is the hugely supplementary and not competitive to each other.

According to trade experts, committed to abolishing up to more than 99% of tariffs and commercial values ​​that the two sides agreed on, the opportunity to increase exports for Vietnamese producers of garment and textile, footwear, agricultural and aquatic products (including rice, sugar, honey, vegetables and fruits) and furniture are very significant.

In particular, for products that Vietnam have not been able to export in the past time because of high tariff barriers, they will be able to access the EU market with more competitive prices. This can be considered the highest commitment level that Vietnam has achieved in the FTAs ​​that have been negotiated so far.

According to a study, if the EU - Vietnam Free Trade Agreement (EVFTA) comes into effect in 2019, Vietnam's exports to the EU will increase by US$16 billion in the first 1-2 years compared to the absence of this FTA. By 2028, it will add up to US$75-76 billion compared to the absence of the FTA.

As for the garment and textile industry, the agreement could help increase exports by US$1.54 billion by 2023 and US$5.82 billion by 2028 compared to the absence of the EVFTA.

Specific and complete information source needed

However, Vietnamese enterprises are also facing numerous difficulties in the course of opening and international integration. If they do not know how to adapt in time, these difficulties may become barriers to development.

Particularly, we lack an agency where businesses can look for detailed information relating to their industries. General information may come from many sources but what businesses need is detailed information and this is not yet available. For their parts, businesses seem to be indifferent to macro or integration policies. In some information dissemination conferences, not many enterprises asked questions or actively sought information.

Changing the ratio of import origin as Vietnam's imports are mainly from non-CPTPP countries will continue to be a bottleneck. This matter can only be solved if we change the FDI attraction strategy in the coming time to direct priority to FDI flows seeking to make components and supporting materials for manufacturing. In addition, we need to see a breakthrough in encouraging domestic companies to invest in these fields. However, we have not clearly seen such movements in 2019.

Quynh Anh

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