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Impact assessment

The impact of Vietnam – EU FTA on some selected importing sectors of Vietnam

Prof Claudio Dordi - Professor of International Law at Bocconi University (Milan), and MUTRAP III Team Leader

Mr Federico Lupo Pasini - Lawyer and consultant specialized in international economic law and policy. Based in Hanoi.

Vietnam’s Automotive Industry

The Vietnamese automotive industry is still at its birth stage with only 25,480 cars produced in 2009. Compared with the 13,790,994 cars produced by China in the same year, it is clear that the automotive sector is not yet playing an important role in the industrial development of Vietnam. For what concern the automotive sector, a reduction of tariff and non tariff barriers from the Vietnam side will produce an effect on the imports of components from Europe and a limited effect on the amount of FDI. For what concern the import side, due to the cost of transport and the vicinity of competing car producers, a reduction in tariff will not induce substantial increase in imports of already assembled cars from Europe, as the benefit of a preferential tariff reduction will be offset by the cost of transport. This is not true for the imports of parts and components, which under some circumstances could be imported in great number from European manufacturers. Indeed, the price elasticity of parts and components is high and a reduction of tariff would theoretically have an impact on the exports. On the other hand, without a robust domestic industry and without European investors located in Vietnam requiring components to be assembled, even a reduction in tariff will have only a limited effect on the imports. For what concerns components the real factor influencing the little demand is the limited amount of investment in the Vietnamese automotive industry. This limits drastically the effect of a reduction in tariff.  The FTA will have a little effect on FDI in the automotive industry. Indeed, European car manufacturers seem to be little attracted by Vietnam as a productive platform for the ASEAN area. By looking only at the tariff component, the high protection accorded to the Vietnamese producers, combined with the parallel reduction in custom duties by the other ASEAN members and ASEAN FTA partners, would virtually render extremely cheap to export cars from Vietnam to the Asian region. Furthermore, the cheap labour available in Vietnam would be another important factor. In reality, tariffs preferences and cheap labour are not sufficient to drive investment in the car manufacturing industry. The deficiencies mentioned above (poor infrastructures, lack of support industries, low technology) clearly inhibit foreign investors to locate the production in Vietnam. In this respect, the reduction in tariffs on machinery and components could facilitate the inflow of European investment into Vietnam, but alone would not be sufficient.

Vietnam’s Electronics Industry

In 2004-2009 Vietnam annual import turnover of electronics increased by 33.6% on average. From an import turnover of 2.6 bn. USD in 2005, after five years in 2008 it tripled reaching 7.6 bn. Conversely, in 2009 Vietnam totalized 2.6 bn. in export of computers and parts. The main export destinations in 2009 are: the European Union countries (47%), Saudi Arabia (14%), Brazil (8%), United Arab Emirates (7%), Canada (5%), Taiwan (4%) and Korea (2%). For what concern electronic sector, a simple business analysis would endorse the conclusion that a reduction in tariff would have definitely an impact on the volume and prices of electrical products and components imported from Europe. Indeed, a reduction in tariff would at least offset the costs of transport from Europe and give a great business advantage to European exporters vis-à-vis their Asian competitors from Japan, Korea and China that are already benefitting from lower distances and reduced import duties.

Vietnam’s Machineries Industry

Over the years Vietnam has been constantly increasing its demand for high quality machineries and has thus relied heavily on importations. In 2008 Vietnam has imported 11.1 bn.USD worth of machinery. In this respect, the EU has around 14% of the market with 1.5 bn. of export to Vietnam. China is the biggest import partner with 2.75 bn. of export to Vietnam. For the machinery sector, a reduction of the already low tariff applied by Vietnam on the imports of machinery will not result in a substantial increase in imports. On the other hand, Vietnam could benefit from a consistent surge of FDIs from European manufacturers that could decide to locate here the production. Indeed, the growing domestic industries coupled with the general economic growth of Vietnam could have a domino effect on all the other support industries, which are now missing. In this respect, the general high quality of the European products could have an important market in Vietnam, and potentially also in the neighboring countries, such as Laos and Cambodia.

Vietnam ‘s Banking Sector

Currently, Viet Nam's banking sector comprises 5 SOCBs (Vietcombank, VietInBank, BIDV, Agribank, and Mekong Housing Bank), 40 JSBs (11 with foreign investors), 6 100% foreign-owned banks (HSBC, Standard Chartered, ANZ, Shinhan Vietnam Bank Ltd and Hong Leong Bank Vietnam Ltd), 45 foreign bank branches, 55 foreign bank representative offices, and 5 joint venture banks. The banking sector will be one of the main targets in the context of further services liberalization required by the FTA. In this respect, there is no particular reason to foresee a huge increase of exports and FDIs in banking coming from Europe. The main reason for this resides in the fact that the Vietnam itself is not an attractive market for European banks that are not already massively present in the region. On the other hand, a further liberalization in cross border supply of banking services (MODE 1), without producing any significant impact, it could nonetheless allow Vietnamese individuals and institution to access the European banking market without the need for European banks to establish any form of presence in Vietnam. In the context of preferential liberalization in the FTA with the EU Vietnam could be required to adhere to some international financial stability standards. The upgrading of the Vietnamese regulatory framework required by the EU would be one of the most important effects coming from the FTA, as it was ten years ago with the BTA with the US, which opened the door for Vietnam to the entry into the WTO. One of the possible negative implications of a further liberalization could derive from a full opening of the capital account without the necessary prudential regulation and financial safety nets required to prevent a systemic crisis. In the context of the FTA would be wise to match an increased capital mobility with a parallel upgrading in the financial and monetary safety nets available to Vietnamese authorities.

Committee on International Trade Policies - VCCI


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