Trade Deficit Decline: Sign of Relief or Worry?

According to statistics announced by the General Department of Vietnam Customs, the import and export turnover of Vietnam from January to the end of 15 July 2012 reached over US$115 billion, up 12.7 percent over the same period in 2011. In particular, exports reached US$57.5 billion, up 20.2 percent and import was US$57.9 billion, up 6 percent. 

The trade balance of goods in Vietnam in the 1^st period of July had a surplus of US$50 million. Thus, as of July 15, trade deficit of the country was US$423 million, accounting for 0.7 percent of export turnover and much lower than the US$6.8 billion trade deficit last year. This is not really a great result, because Vietnam has been a country of "trade deficit" for many years with the focus on production at the expense of export.

 

 Vietnam's imports continued to decline over the previous months. Import turnover in the first 15 days of July 2012 decreased US$402 million compared to the second half of June 2012, of which gasoline and oil declined US$147 million; vehicles and parts decreased US$ 68 million; telephones and parts decreased US$49 million; computers, electronic products and components decreased US$39 million. 

 According to the General Department of Customs, the curbing of the trade deficit is seemingly effective since Government Resolution 11 has been strongly implemented. However, looking at the economic development of Vietnam, the trade deficit in last few months is worth noting, and that the economic situation and business activities are in decline with many potential risks. 

According to the report of Dr Vu Tien Loc, President of Vietnam Chamber of Commerce and Industry (VCCI), at the recent National Assembly session on the operation of businesses, 30 percent of businesses have ceased operations or gone bankrupt. Among three types of enterprises, non-state owned enterprises face bankruptcy and dissolution with the highest proportion of 9.2 percent, followed by state-owned enterprises with 2.7 percent and the lowest is foreign-invested enterprises (FDI) with 2.6 percent. The Mekong Delta has the highest rate of bankrupt and dissolvent businesses nationwide of 13.6 percent. 

Another explanation for the trade deficit reduction, whether seen as a sign of relief or worry, many economists have said that until now, most of Vietnam's industries are dependent on raw materials and machinery imported from other countries, even accounting for 80 percent of input materials. For example, the textile sector accounts large proportion of exports, but it imports mostly cotton fabrics from other countries in the region such as India and China. Thus, deficit reduction is a signal of stoppage and stagnation of domestic production because enterprises have to stop their production so they don’t import raw materials or because of reduced power market.

 

One noticeable thing in recent times is that the trade deficit in foreign projects is high while other sectors are very low. The statistics of customs showed that imports of FDI enterprises in this period reached US$ 2.25 billion, down 10.3 percent compared to the last 15 days of June 2012, bringing the total import value of FDI enterprises from January to the end of July 2012 up to US$ 30.15 billion, up 24 percent over the same period last year and accounting for 52 percent of Vietnam’s total imports. Therefore, besides focusing on developing supporting industries to increase the availability of raw materials for export, there should be solutions to the management of goods, raw materials and equipment in FDI projects and to avoid tax fraud of FDI firms.

 

Thus, parallel to reduce the trade deficit, Vietnam needs a strategy to boost exports, especially our key commodities such as agricultural products and livestock. The failure to do so, even with reducing the trade deficit, will not promote economic development; on the contrary, it will push the economy even harder.