AFTA's impact on Vietnam

Table of Contents

List of Tables

List of Figure

1. Introduction

2. Vietnam’s position in ASEAN

3. Vietnam’s Trade Liberalisation Schedule under CEPT

4. AFTA’s impact on ASEAN Economies

5. AFTA’s impact on Vietnam
5.1 Impacts of AFTA on Vietnam’s Trade
5.1.1 Direction of Trade
5.1.2 The Composition of Trade: ASEAN vs. Non-ASEAN
5.2 AFTA’s impact on Vietnams Trade

6. Effects of AFTA on the Foreign Direct Investment (FDI) in Vietnam

7. Impact on government revenues

8. Conclusion
i) Appendices
ii) References

- LIST OF TABLES -

Table 1 Key Economic Indicators of ASEAN 10 countries

Table 2 CEPT Road Map: Average tariff rate 1996 to 2006

Table 3 Progress of Vietnam’s CEPT in 1996-1999

Table 4 Newer ASEAN members 2000 CEPT packages

Table 5 Vietnam’s Imports and Exports from and to ASEAN 1994-1996

Table 6 Vietnam – ASEAN trading relations (million USD)

Table 7 Flow of foreign direct investment in Vietnam, 1988-2001

Table 8 FDI commitments, by source, province of destination, and sector, 2001

Table 9 FDI flow in Asian countries (US$ million)

- LIST OF FIGURE -

Figure 1: The Sources of Vietnam’s Imports in 1996

Figure 2: The Destination of Vietnam’s Exports in 1996

Figure 3: Vietnam’s Imports ASEAN vs. Non-ASEAN

Figure 4: Vietnam’s Exports ASEAN vs. non-ASEAN

Figure 5 Foreign Direct Investment in Vietnam

1. Introduction

This project analyses and evaluates the question, in how far the creation of the Asian Free Trade Area (AFTA) brought economic benefits to the ASEAN country Vietnam. To evaluate this question the impacts of AFTA on Vietnam’s trade and their foreign direct investment are evaluated and in a further step the question ananlysed in how far AFTA can affect the government income revenues of Vietnam.

For the analysis of AFTA’s impact on Vietnams’ trade, the trade structure of Vietnam will be analysed.

In general it can be said that for Vietnam the accession to AFTA is a very important step in their transition process to a more market economy. Furthermore it is a major step in Vietnams’ integration in the world economy.

Especially the access of Vietnamese firms to a huge market such as ASEAN seems to be very advantageous.

In the case of foreign direct investments, the question is if AFTA is seen by foreign firms and investors as a positive factor which would lead to investments in Vietnam or if it does not change the situation or if it has even a negative impact on the FDI due to the reason that the industries are not protected anymore by the tariffs and quotas.

A further question to analyse is the origin of the FDI, this means if the major part comes from the ASEAN countries or if it has also any effects on other countries.

2. Vietnam’s position in ASEAN

According to Trung (2002) ASEAN is a diverse group with a combined GDP of $4,589 billion and about 502.4 million people.

After Indonesia, Vietnam is with its 77 million people, the second most populous ASEAN country member (Fukase and Martin 2001).

However, Trung (2002) points out that Vietnam accounts with its low-income level per capita, its shares of GDP and trade only for 5.9 percent and 3.4 percent in ASEAN respectively.

Nevertheless according to Trung (2002) Vietnam was one of the fastest growing economies during the period 1990 to 1998, registering an annual average growth rate of 8.6 percent.

In 1998, imports plus exports relative to GDP reached 74.82 percent of GDP, which is a relatively high number for a country of the size of Vietnam. (Trung 2002)

Table 1 presents some key economic indicators for the ASEAN countries.

Table 1: Key Economic Indicators of ASEAN 10 countries

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Source: Centre for ASEAN Studies, Trung (2002)

3. Vietnam’s Trade Liberalisation Schedule under CEPT

According to the Common Effective Preferential Tariff (CEPT), ASEAN members give each other preferential tariff rates of 0-5 percent. (Loc 2001)

Trung (2002) points out that Vietnam as a late joining member (see Appendix 1), has been granted slightly different treatment under the CEPT agreement than the other members. Examples are for example that Vietnam is allowed to phase down tariffs on ASEAN imports over a longer period, and is only required to eliminate quantitative restrictions on receipt of concessions applicable to each product.

Table 2 summarizes the planned tariff reduction for the classes of goods for the years 1996 to 2006.

Table 2: CEPT Road Map: Average tariff rate 1996 to 2006

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Source: Centre for ASEAN Studies, Trung (2002)

According to Trung (2002) Vietnam’s General Exclusion List appears not to fulfil the principle of CEPT, which specified that such a list should only have products that comply with Article XX of the GATT. This states that measures are allowed to protect national security, public morals, human, animal or plant life and health, and the protection of articles of artistic, historic and archaeological value. Vietnam’s List, however, includes items such as: fuels, vehicles with less than 16 seats, scraps and used consumer goods, where they have strong protection and revenue objectives (MOT 2000).

Table 3 shows the change of Vietnams’ tariffs under the CEPT agreement from 1996-1999.

Table 3 Progress of Vietnam’s CEPT in 1996-1999

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Source: Centre for ASEAN Studies, Trung (2002)

According to Davis, McKibbin and Stoeckel (2000) the fact that countries are able to nominate which tariff lines are included on which list shows that AFTA membership does not necessarily ensure free trade and large benefits.

Davis, McKibbin and Stoeckel (2000) point out that due to the reason that the pace and scope of tariff liberalisation under the CEPT scheme is determined by the tariff lines placed by ASEAN members on the Inclusion, Temporary Exclusion, Sensitive and General Exclusion Lists, gains from participation in AFTA depend on the scope of products included on the Inclusion List.

Concerning the case of Vietnam, Fukase and Martin (2001) state that the exclusion of a range of products from AFTA commitments appears to limit the scope for trade creation. Nevertheless Davis, McKibbin and Stoeckel (2000) also point out that Vietnam tried to maximise the number of tariff lines in the 0-5 percent range and expand the number of tariff lines in the zero percent category by 2006.

Table 4 shows the number of tariff lines that the newer ASEAN members have allocated to the various CEPT scheme lists.

Table 4 Newer ASEAN members 2000 CEPT packages

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Source: Centre for International Economics, Davis, McKibbin and Stroeckel (2000)

4. AFTA’s impact on ASEAN Economies

According to Fukase and Winters (2003), the existing literature shows little evidence that dynamic gains always occur with regional integration. The existence of such gains depends heavily on the characteristics of the regional integration and the members’ economic policy.

According to an empirical study by Low (2003) she concluded that the ASEAN regionalism has only a minor economic impact on the ASEAN member countries. Jayanthakumaran and Sanidas (2005), point out that it is in the measurement problem that empirical studies differ from each other. Nevertheless Jayanthakumaran and Sanidas (2005) state that various studies showed a positive correlation between a countries performance and its integration in ASEAN. Moreover they point out that the overall result shows the importance of intra-ASEAN investment in promoting the region’s export sector in both vertically and horizontally differentiated goods has been remarkable.

Elliot and Ikemoto (2004) used a gravity equation to evaluate the ASEAN intra- and extra-regional trade flows during the period of 1982 to 1999, and concluded that trade flows were not significantly affected in the years immediately after the implementation of the AFTA agreement and also that the traditional stand of ASEAN countries to outward-oriented economic activity has not significantly changed.

Jayanthakumaran and Sanidas (2005) further state that the results of the disaggregated industry level analysis indicated that the intra-ASEAN trade would expand if intraregional trade is liberalised, partially or completely.

5. AFTA’s impact on Vietnam

According to Loc (2001) the impact of AFTA on Vietnam's economy is substantial.

He points out that with completion of Vietnams’ AFTA commitments in 2006, intra-ASEAN traded goods will flood the domestic market and complicate the development of domestic sectors unless Vietnam's economy is sufficiently strong.

Loc (2001) states, that currently the Vietnamese companies are not competitive enough.

Although the challenges are according to Loc (2001) enormous; the integration process will accelerate the industrialisation and modernisation process in Vietnam with long-term benefits.

Nguyen and Grote (2004) point out that AFTA has various advantages for Vietnam. They point out that the first positive result of the reform process became visible in the early 1990s when poverty declined to a large extent. Furthermore they point out that since then, the Vietnamese agricultural sector has also experienced high growth and impressive export achievements. This resulted in the fact that the country transformed from a food importer to one of the major exporters worldwide.

This deepening integration into world markets has major implications for Vietnam’s economy and policies. Tariffs and non-tariff trade barriers for international trade have been reduced and more sectors opened to foreign investors, subsidies to state owned enterprises have been cut and export quotas have been lifted. (Loc 2001)

This part of the project evaluates in a great detail the effects of AFTA on Vietnam. For that reason the two major factors trade and foreign direct investment will be evaluated and possible impacts of AFTA on Vietnam’s government revenue will be analysed.

5.1 Impacts of AFTA on Vietnam’s Trade

This section of this project analyses Vietnam’s trade patterns and AFTA’s impact on their imports and exports.

5.1.1 Direction of Trade

Figure 1 shows that in 1996 approximately 27 percent of Vietnam’s imports were from other ASEAN member countries.

According to Fukase and Martin (2001) Singapore was the leading supplier, accounting for 19 percent of Vietnam’s total imports followed by Thailand, Malaysia, Indonesia and the Philippines.

Figure 1: The Sources of Vietnam’s Imports in 1996

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Source: Development Research Group World Bank, Fukase and Martin (2001)

Figure 2 shows that about 24 percent of Vietnam’s exports were shipped to ASEAN countries, where Singapore took with about 18 percent of Vietnam’s exports followed by the Philippines the largest part.

Figure 2: The Destination of Vietnam’s Exports in 1996

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Source: Development Research Group World Bank, Fukase and Martin (2001)

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