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Challenges in taking advantage of opportunities from the FTAs


Challenges in taking advantage of opportunities from the FTAs

Part 1: FTA: Not all "pink"!

Over time, Vietnam has joined a series of FTAs. While businesses are facing severe competition in the domestic market, the export results are still limited. Besides, a remarkable point is that the FTA tariff reductions under the schedule of commitments have strongly affected the amount of state budget revenues from import-export activities.

Export is not as expected

Currently, Vietnam is one of the countries participating in many FTAs, with 16 FTAs. Among them, 10 FTAs have been signed and in effect. Relating to taking advantage of the opportunities from FTAs, especially the using rate of preference certificates of origin (C/O) for export goods, data of the Import-Export Department and the Department of E-commerce and Digital Economy (Ministry of Industry and Trade) shows that, in the first half of this year the C/O issuers granted 458,285 preferential C/Os worth 22.7 billion USD, up 36% in value and 33% in the number of applications over the same period last year. The total value of export commodities under preferential C/Os in the first 6 months reached 20.4 billion USD, accounting for 38% of the total export turnover to the markets that signed FTAs. While in the first years of the FTAs, the preferential C/O rate was only 10%.

Participation in FTAs is the right policy because in the global integration economy, in order to develop, Vietnam cannot stand outside the "game". However, seeing through the process of joining the FTAs, it is easy to see that Vietnam has not really made good use of the opening incentives and opportunities from them.

Talking to a reporter from Customs News, Mr. Tran Huu Huynh - President of Vietnam International Arbitration Center said: Firstly, it should be affirmed that the FTAs have brought many opportunities for export, but Vietnam has not fully exploited the trade preferences. The traditional products for exports such as textiles, leather and footwear have been promoted. However, Vietnam is mainly engaged in processing with high labor costs. The other traditional commodities such as rice, pepper, cashew nuts, coffee..., with the tariff preferences offered by the FTAs, it has created opportunities for further processing in the commodity sector, but Vietnam has not yet made full use of them.

"Opening the market for export products is the biggest benefit of the FTAs. However, up to now, Vietnam's export has only increased in quantity, but has not changed the structure and nature of commodities to participate more deeply and sustainably in the global value chain. The export growth is in the type of one plus one, not exponential growth," said Mr. Huynh.

In the second aspect, Mr. Huynh stated that, Vietnam has not exploited the export markets. Expectations to expand the market with FTAs are huge. However, while exports to new markets have not been done, in traditional export markets, Vietnam has not yet shown its advantage to promote the export of some potential products, including, for example, chili, garlic, onions exports,.... “With the familiar export markets, Vietnam has only the advantage of "staying ahead" by quickly signing the FTAs, but Vietnam has not found the niche markets in the traditional markets. For example, Vietnam has not been able to take advantage of overseas Vietnamese to exploit the market. Such things are small but I think it will help a lot, and if we make good use of it, Vietnam can develop our big production," Mr. Huynh said.

Regarding the story of promoting exports thanks to the FTAs, Dr. Le Quoc Phuong, former deputy director of the Vietnam Industry and Trade Information Center (Ministry of Industry and Trade) analyzed: In terms of total value, over the past time, the FTAs helped Vietnam's exports increase sharply, but mainly increased in FDI enterprises. FDI enterprises trades surplus, then Vietnam trades surplus, and vice versa. Thus, for Vietnam, the goal of participating in the FTAs to increase export has been achieved, but the main beneficiaries are FDI enterprises, and domestic enterprises have not met the FTAs’ requirements, so their ability to take advantage of them is still low. "About 10 years ago, FDI enterprises only accounted for 40% of export proportion, now this number is over 70%. Since the beginning of Vietnam's accession to the World Trade Organization (WTO), the trend is that the export proportion of domestic enterprises has been down and of FDI enterprises has been constantly going up. I think that with the FTAs, the State makes a lot of effort to participate in negotiation with a lot of money, but the benefits we get are not as expected," Dr. Le Quoc Phuong emphasized.

Fierce competition in the "home court"

For export, Vietnam has not taken full advantage of the opportunities. Even in the domestic market, fully opening the market in accordance with the commitments in the FTAs has put the Vietnamese enterprises and Vietnamese goods in a difficult situation.

Dr. Tran Toan Thang, Head of the World Economy Department, National Center for Socio-Economic Information and Forecast (Ministry of Planning and Investment) evaluated: The competitiveness of Vietnamese enterprises, Vietnamese goods is low, easily overwhelmed in the fierce competition with foreign goods, foreign enterprises. The FTAs always have an imbalance in tax incentives, in the reduction of tariff lines for different groups. This will create groups of "hurt" objects. In Vietnam, the service industry has generally been closed for too long with low resistance. Therefore, when the economy was opened, it created a shock for the industry. The deeper economic integration is, the more the service sectors, such as retail, logistics, tourism,... will be affected.

Regarding this issue, Dr. Le Quoc Phuong added: With FTAs, Vietnam will have to fully open the market for foreign businesses to sell and invest with incentives. In the new-generation FTAs, investors are very broadly empowered, drastically reducing the power of the government, and even saying that the government is "baffled". When foreign businesses invest in Vietnam, if the law of Vietnam puts out certain restrictions that businesses think affect them, they have the right to sue in an international or regional court selected by the enterprise. If the business wins, the Government of Vietnam must compensate. It can be seen that the foreign investors investing in Vietnam were given great authority. Meanwhile, many economic sectors such as banking, finance, investment, agriculture ... are still poor, as well as the competitiveness of Vietnamese enterprises, Vietnamese goods are weak, it is very easy for Vietnam's economy to lose on their "home court".

The pace of budget revenue collection goes down

Apart from the story of taking advantage of export opportunities as well as competition in the domestic market, in view of the State budget revenues through the import and export goods carried out by the customs service, the implementation of tariff commitments has significantly affected the rate of revenue collection. In the period of 2007-2014, the average collection rate increased over 10% per year, but in 2015 this rate was expected to increase by 3.6%. This figure was 3.8% in 2016.

According to Ms. Tran Kim Ha, deputy head of the Estimation and Budget Management Division under the Import-Export Duty Department (General Department of Vietnam Customs): Considering the state budget revenue of the customs sector for the period 2007-2017, the revenues from import-export activities increased but the import tax revenue accounted for a decreasing proportion. In 2007, the import tax amounted to 31% of total customs revenue. In 2007, the import tax amounted to 31% of total customs revenue but in November 2017, it was only 21.6% of the total revenue.

Ms. Ha analyzed: The implementation of international integration commitments on tariffs is to attract and contribute to increasing foreign investment, reducing input costs for enterprises, promoting production and business activities, thereby increasing import-export turnover. It has a spillover effect in the whole economy in increasing state budget revenues from other domestic taxes such as corporate income tax, personal income... However, the implementation of FTAs’ commitments also led to a decline in revenue from import taxes, affecting the overall state budget revenue. The FTAs lead to direct reductions in the volume and value of imported goods from the signatory countries. In addition, the FTAs also cause indirect reductions in "trade redirect", meaning that importers import from countries that have FTA commitments to enjoy special preferential tariffs instead of importing from countries outside the FTA as before.

As estimated by the General Department of Customs, up to the end of July, 2018, state budget revenues from import-export activities decreased about 16,400 billion VND. In particular, it is expected to refund 5,000 billion from petroleum products because the companies produced C/O with AK and D forms. The second item is completely built-up cars, in the first 7 months of this year, it decreased by 2,970 billion VND. With the reduction of tariffs, the reduction of tariffs due to the implementation of commitments under the FTAs in 2018 will reduce the state budget's revenue of the customs sector to about 30,150 billion VND. In the coming time, the FTAs is expected to continuously impact on the state budget revenues of the Customs sector.

According to the Ministry of Industry and Trade: So far, Vietnam has signed and implemented 10 FTAs, ended negotiations on two FTAs and Vietnam is negotiating four other FTAs. Among the 10 signed and implemented FTAs, six ones have been signed as ASEAN members (including AFTA, 5 FTAs between ASEAN and its partners: China, South Korea, India, Japan, Australia and New Zealand), 4 ones signed as an independent party (Chile, Japan, Korea, Eurasian Economic Union). The two FTAs that have ended negotiations are the FTA with the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The other four FTAs being negotiated include: The Regional Comprehensive Economic Partnership (RCEP), the ASEAN-Hong Kong FTA, the FTA with Israel and with the European Free Trade Association (EFTA).

Source: Customs News


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