Vietnam balance or trade the situation and solutions,

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty  GRADUATION THESIS VIETNAM BALANCE OF TRADE: THE SITUATIONS AND SOLUTIONS Student Lecturer Class Student ID : : Nguyen Huong Giang : : Nguyen Hong Mai (M.A) : ATCA – K14 : 14A7510043 DECLARATION I declare that this thesis entitled “Vietnam balance of trade: The situations and solutions” is the results of my own research except as cited in the references The thesis has not been applied for any degree and it is not concurrently submitted in candidature of any other degree ACKNOWLEDGEMENT To complete this thesis, I have received significant support from many sources and I would like to say some words of appreciation With profound gratitude, I acknowledge the support and help of my supervisor M.A Nguyen Thi Hong Mai to my thesis Her dedicated instructions, guidance and orientations for me to accomplish this thesis has been invaluable both on academic and personal level My thesis would be impossible without her I also would like to give thanks for my lectures at Foreign Language Faculty – Banking Academy of Vietnam when sparing their priceless time and dedication to assist me during the completion of this thesis, for which I am deeply grateful TABLE OF CONTENTS CHAPTER I: INTRODUCTION 1/ The necessity of the research 2/ Objectives of study 3/ Research questions 4/ Research Methodologies 5/ Scope and Focus 6/ Structure of the thesis CHAPTER II: LITERATURE REVIEW 1/ The concept of balance of trade 2/ Positions of BOT 3/ Factors affecting the balance of trade 3.1 Exports and imports 3.2 Foreign exchange rate movements 3.3 Inflation 3.4 Government trade policies 3.5 Political and economic situation in the country and in the world 10 CHAPTER III: THE SITUATION OF VIETNAM TRADE BALANCE 11 1/ Review of the period 1986 - 2006 11 2/ The situation of the period 2007 - 2011 15 3/ The reality of the period 2012 - 2014 23 4/ Forecast for the trends of the coming years 31 CHAPTER 4: SOLUTIONS FOR VIETNAM SUSTAINABLE SURPLUS TRADE BALANCE 37 1/ Solutions for government 37 1.1 Perfect trade policies 37 1.1.1 Trade promotion policies 37 1.1.2 Improvement of the quality and the efficiency of export 38 1.1.3 Imports reduction 39 1.2 Improvement of BOT with China 39 1.2.1 Restrictions on importing from China 39 1.2.2 Boost in exporting to China 40 2/ Solutions for enterprises 41 2.1 Produce under national and global quality standards 41 2.2 Build market strategies towards economic integration 41 2.3 Enhance the application of modern technologies 42 CONCLUSION 43 REFERENCES 44 ABSTRACT In the world, balance of trade (BOT) has always played an important role in all economies as a part of balance of payment Every change in BOT has a great impact on many other economic variables Therefore, this thesis would like to draw attention to the reality of Vietnam BOT In Vietnam, during the recent years, BOT has experienced dramatic changes from one extreme to another opposite In order to provide the readers a brief view of the situation of Vietnam BOT, I have studied the past and the present trend of it This study also investigates the underlying reasons for the changes in Vietnam BOT to give forecasts on the future trend in the coming years with the vision to the year 2030 From analyzing the reality and utilizing secondary data collected from several previous studies, the paper aims to offer solutions for Vietnam to achieve a sustainable BOT in the long – term period LIST OF ABBREVIATIONS BOT Balance Of Trade GDP Gross Domestic Products BOP Balance Of Payment USD United State Dollar VND Vietnamese Dong WTO World Trade Organization GSO General Statistics Office FDI Foreign Direct Investment LIST OF TABLES AND FIGURES Chart - The trend of Vietnam trade balance in 2007-2011 Chart - The trend of Vietnam trade balance in 2012-2014 Chart - Exports and imports growth in sectors in 2011-2012 Chart - Annual export growth rate in 2011-2014 Chart - Growth of major imports Chart - Vietnam’s projected sector contribution increase in merchandise exports Table - Development indicators of exporting and importing through periods Table - Imports by commodity composition in State Plan (%) Table - Trade deficit in sectors in 2006 - 2011 Table - Export value of key export items of Vietnam in 2014 CHAPTER I: INTRODUCTION 1/ The necessity of the research Nowadays, economic integration has become the popular and unavoidable trend in all sectors Vietnamese developing economy has opened its doors and achieved remarkable accomplishments It is said that integration is the right orientation and extremely significant for creating a position for Vietnam in the global environment However, the economic development resulted from integration also raises a problem of trade interdependence since the growth of export and import contributes largely to GDP A persistent trade deficit with high value can harm the national financial security Nevertheless, a trade surplus not resulted from the real effort of domestic economy is also a worrying sign That is the two opposite positions of Vietnam trade balance from 1986 till now Therefore, I strongly believe that this issue should be given more concern As a result, I spared my time and enthusiasm in studying the reality of Vietnam balance of trade Additionally, I would like to propose some suggestions that, as I hope, could contribute to the sustainability of Vietnam trade surplus 2/ Objectives of study This paper aims to give assessment of Vietnam balance trade from 1986 until now and thoroughly analyze the real situation of the period from 2007 to 2014, as well as the prospect in the future Besides, it also provides sound suggestions for Vietnam sustainable surplus trade balance 3/ Research questions Three significant questions were drawn to answer in this writing They include How is the situation of Vietnam balance of trade at the present? What is the future of Vietnam trade balance? Which are solutions for a sustainable trade balance of Vietnam 4/ Research Methodologies I have collected both primary and secondary information for my study from personal knowledge and evaluation Moreover, I have used the data, statistics and theoretical frameworks from many various reliable sources to draw the results of this thesis From all these references, a qualitative and quantitative analysis was applied 5/ Scope and Focus The research focuses on the current real situation of Vietnam trade balance and historical trend Based on that, the writing projects the prospect of Vietnam trade balance in the future and proposes solutions for sustainability of it 6/ Structure of the thesis The main content of the paper is organized as following: Chapter II, “Literature review”, mentions the concepts related to balance of trade and factors influencing it to provide general knowledge of this issue Chapter III, “The situation of Vietnam trade balance”, is to provide detailed data and analysis of the current situation of Vietnam balance of trade, then forecast the future trend Chapter IV, “Solutions for Vietnam sustainable surplus trade balance” suggests solutions for the improvement of Vietnam trade surplus reasons below this positive BOT are more crucial to decide whether this situation is positive or not Those include: - In this period, Vietnam did not import materials sufficiently Vietnam has been a developing economy whose the manufacturing industry did not grow completely Thus, it is essential for it to import machines, tools, equipment, and materials to produce Meanwhile during 2007 – 2011, annual growth rate in imported and mechanical equipment was about 22%, the span of time from 2012 to 2014 saw this figure of only 13%, nearly half of the previous figure The reduction in the machine and material import did not reflect the economy’s ability to produce itself, but simply meant that our production has become stagnant As a result, it has been no use in importing machines and materials when there is no manufacture This is definitely not a positive trend for the domestic industries - The second factor contributing to Vietnam surplus BOT was FDI enterprises The number of plants of FDI sectors in our country have risen after the joining of one of the world’s leading group, SAMSUNG and its great success due to Vietnam’s abundant workforce with average wages lower than China Unlike the previous period, when Vietnam merely started to integrate with international economy, this years was the time we fully opened the economy, with many supports for foreign investments, causing the shift of SAMSUNG and many other multi – national conglomerates from China to Vietnam Consequently, the export turnover of this sector has added an enormous value to our BOT At the same time, the share of domestic business in export value has continuously been quite small and most of time, this sector mainly had trade deficit of billions of dollar because the major part of its exports are goods with low value added or crude minerals and crude processing products 4/ Forecast for the trends of the coming years In a regular session in November 2014, Vietnam Assembly set a target of the growth in export and import in 2015 In particular, the year’s total export turnover 31 would rose by 10%, and the negative BOT would be 5% of total GDP Positive BOT after successive years will cease in 2015 and that trade deficit returned is unavoidable It means that, 2015’s export value will be USD 166 billion and the trade deficit will be from USD billion to USD billion However, the first quarter of 2015 has seen overall export turnover was only USD 36.3 billion with an increase of 8.8% in comparison with the previous period Meanwhile, there was a sharp rise of 20.1%, to USD 38.7 billion, in total import value Consequently, within only three first months of 2015, Vietnam had a trade deficit of USD 2.4 billion The reasons for this year’s trade deficit are mentioned by the Minister of Industry and Trade One of them is the big climb of imports In details, Vietnam’s negotiation of trade deals, including the Trans – Pacific Trade pact will continuously encourage the world’s leading multi – national enterprises to shift machines and equipment for investment in the country Moreover, the falling crude oil price during the previous time has the negative impacts on both export and import since we are a crude oil exporter and finished petroleum products importer Although in three first months, Vietnam’s exported crude oil volume was 2.2 million of ton, rising by 24.7%, the turnover was only USD 944 million, declining 38.8% compared to the first quarter of 2014 Secondly, the falling oil prices leading to the falling prices of the world’s materials and products With Vietnamese enterprises, which have heavily dependent on purchasing foreign supplied materials, it is a good opportunity to increase imports for domestic production Besides, luxury imports, namely built in cars, also tend to rocket due to the gradual reduction of import trade tariff on this product from 50% to 35% In details, in the first quarter, the import value of this product climbed by 180%, equal to the rise of 136% in import volume “The foreign investment increase as well as the crude oil fall and the higher demand for imports will lead to a trade deficit” cited by Dr Vo Tri Thanh, deputy head of the Central Institute of Economic Management Nevertheless, according to ANZ Bank’s analysts, returning to trade deficit is not a completely unfavorable sign for Vietnam economy That is because Vietnam 32 production industries have no relative advantages of producing machines, materials, and oil products Hence, importing those to expand business and improve productiveness, in contrast, is good for the economy It is proved by the figures of General Statistics Office, which showed that overall, there was an increase in value of almost all traditional export groups, especially textiles with the rise of 10.1% and footwear with the rise of 21.7% The situation will worsen in case imports mainly serve for consuming, which means that national enterprises producing domestic consumer goods are losing in competition against imports both in terms of price and quality Currently, the import situation is still positive when considering the statistics from General Statistics Office Chart - Growth of major imports in Q1/2015 The graph describes the growth of the six items having largest import value in the first quarter of 2015 Although there was an increase in the value of almost all groups, excluding gas and oil products, it is noticed that nearly all groups were capital goods mainly required for production, not for consuming, especially machines, equipment and tools with the rise of 34% 33 In the period from 2015 to 2020, it is projected by Vietnamese government that the country’s BOT will continuously be deficit However, the trade deficit will gradually decrease during this time and by 2021, Vietnam BOT will be balanced, and move towards sustainable trade surplus In details, within years, annual export growth rate will be managed to reach 11% while annual import growth rate must be lower than export’s The trade deficit from 2015 will be under 10% of total export turnover Regarding import portfolio, because imports often serve for domestic consumption and production to export, import portfolio is reliant on export portfolio In medium and long terms, the government intends to focus on developing industries of footwear and textile as well as agricultural processing, mechanical engineering in order to adjust the export items, shifting from raw mineral resources and preliminarily processed agricultural products to finished and processed products to boost the added value of export This is also HSBC Bank’s forecast about Vietnam’s export situation in long - term period In its outlook released in September 2014 about Vietnam trade future, analysts of this bank forecasted that the near future will see a dramatic decline in share of exported food and animals as well as mineral fuels in overall value By 2020, two groups are estimated to make up only 15%, compared to about 30% currently Raw materials’ proportion will also drop as the government planned but at a rather slow rate It is considerably projected that by 2030, the country’s key export items will be machinery and transport, constituting 35% and manufactures, occupying 20% Both two commodities groups have great added value when trading, bringing enormous export value for the economy 34 Chart - Vietnam’s projected sector contribution increase in merchandise exports In details, the prospects of some commodities groups can be described below: - Textiles continue to be the key sector of Vietnamese economy and export portfolio In the period from 2016 to 2020, the sector’s export value is estimated to maintain the annual growth rate of 15% and reach USD 25 billion in 2020 It is the responsibility of domestic market to meet the demand of textile materials, namely thread and button and gradually reduce the import of those materials from China - Footwear will move towards increasingly using domestic materials from 48% in 2014 to 80% in 2020 - Mechanical engineering will develop in the way of concentrating on car manufacture Besides, this sector also aims at raising the share of national mechanical components up to 85% in finished truck and passenger car models 35 Moreover, the ultimate target of the industry in 2020 is to develop our own domestic car manufacture, instead of our current car assembly industry, for the purposes of exporting vehicles and components thereof It will be extremely difficult for this sector to achieve this in the next period when Vietnam aims to decrease the built car unit import tariff 36 CHAPTER 4: SOLUTIONS FOR VIETNAM SUSTAINABLE SURPLUS TRADE BALANCE 1/ Solutions for government 1.1 Perfect trade policies 1.1.1 Trade promotion policies It is advised that Vietnam have a proactive and intensive integration into the world economy in order to expand export markets, shifting from major markets currently in crisis and having conditions of strict import controls to new markets Besides, the signing of bilateral as well as multilateral trade agreements should be promoted to increasingly establish free trade zones such as Economic Partnership Agreement between Vietnam and Japan, Free Trade Agreement between ASEAN and India, ASEAN and Australia, and so on Moreover, as an official member of WTO, Vietnam has the right to demand for trade balance with other members by negotiating with members to which we are a net importer For instance, we can discuss with China, the ASEAN, and Korea, seeking for solutions to reduce import and boost export It is also crucial for Vietnam to attempt to diversify its markets, not only by maintaining the major traditional partners and expanding our market share but also by approaching new markets In American and European markets, our market share of some items, namely seafood, is unstable due to their trade protectionism and requirements of high quality Therefore, it is necessary for us to strengthen Vietnam position in potential markets, such as ASEAN, China, and Japan, and exploit new environments for export in the Africa, Latin America and Middle East 37 1.1.2 Improvement of the quality and the efficiency of export The last period experienced that export was mainly dependent of making use of the available comparative advantages, but not having the competitive advantages due to the lack of connection between industries to form a great chain of export added value Therefore, it is suggested that Vietnam should make attempts to promote the economic restructuring in the way of developing services and industries, resulting in increasing the value of exports Accompanied by the change in export portfolio are the policies to enhance the production of goods with competitive advantages and gradually replace imported materials with it so that a stable supply source of materials and ancillary products for exports can be established First and foremost, Vietnam needs to increasingly invest in those domestic manufactures or call for foreign investments In details, ancillary products of textiles, footwear, and electronics industries are especially needed to develop in the near future It is recommended that the government should invite foreign experts to provide sound advice in order to change the technology and management in enterprises of those sectors Moreover, private companies ought to be encouraged to invest in through specific supports in terms of capital and taxes Secondly, import items that have increasing value and volume but can be produced domestically should be controlled strictly At the same time, it is necessary for the authority to make further research on reducing the dependence of import turnover on global price levels and dealing with new trade barriers, especially anti – dumping cases The dearth of experience and activeness in tackling those issues leads to unstable growth in export For example, our seafood sector has continued to face anti – dumping cases in the US nearly every year Last but not least, policies, such as E - customs procedures, should be applied to innovate and simplify customs clearance in order to benefit exporters Those measures can help to reduce the amount of time needed to equal or lower than the ASEAN’s average amount 38 1.1.3 Imports reduction For Vietnam, it is recommended to add restrictedly imported goods into the list of import items that need paid tax instantly before clearing At the same time, customs officers must inspect thoroughly the quality of imports, and the government has to issue strict regulations on controlling imported chemicals and additives Besides, the lawmakers ought to encourage the research on establishing quality standard systems applied for domestic industrial products in order to protect national sectors against unfair competitions in accordance with rules of WTO and international agreements Improving and issuing those standards for both domestic and imported products will have good impacts on manufactures, consuming, public health and environmental protection Furthermore, Vietnamese government needs to review tax policies on imports and better them, especially tax cuts and tax extension Raising the tariff barriers on imports higher than the committed levels is acceptable and essential according to WTO and many international agreements, in case the rising import value causes dilemma for the domestic economy Reducing taxes is only conducted when it is actually an effective tool to promote investments and consumption 1.2 Improvement of BOT with China Negative trade surplus in the case of Vietnam is inevitable and unavoidable as a developing economy Nevertheless, one of the most bothersome problems is the serious trade deficit with China, which increasingly rocket through every year In details, trade deficit with China has occupied up to 90% of overall trade deficit of Vietnam As a result, our economy is more and more heavily reliant on that country Many measures should be taken to better this situation 1.2.1 Restrictions on importing from China Prohibiting imports without origins is the first important action Currently, in Vietnamese domestic market there exist many products having no origins, most of 39 which are from China While waiting for the law to be issued, the market surveillance should be more stringent with strong measures, such as to seize and destruct all inspected products having no origins, in order to prevent Vietnamese traders from fraudulent businesses Secondly, establishing quality standards in accordance with regulations of WTO and other agreements is necessary for Chinese imports Currently, in Vietnam, there is a dearth of measures to check the quality as well as the safety of products, leading to no evidence to prove their harmfulness Consequently, those products can not be staved off in customs and be easily imported into domestic market In this case, we can learn from experiences of other countries having been in global trade for a long time or build our quality standard system based on theirs 1.2.2 Boost in exporting to China It is proposed that Vietnam focus on forming a potential export portfolio in trade with China The portfolio currently includes three key commodities group namely: raw materials and minerals, agricultural products and industrial products such as textiles, footwear and electronic components However, in the future, the country should gradually reduce the proportion of the first group in overall value, develop the processing of the second group to raise added value, and recognize the rest as the key export item Besides, at the present, the government should take part in monitoring export to China For example, exporting agricultural products at the massive volume when having bountiful harvests causes Vietnamese businesses and farmers to sell at an extremely low price Hence, although the export volume is high, the turnover is quite small In many cases, it is not excluded that the Chinese customs intentionally prolong the time for clearance leading to the cargo congestion in the borders Thus, it is the responsibility of the lawmakers to organize and control export and reduce damages for Vietnamese farmers One of many measures to be mentioned is to build an official distribution channel for exports In details, Vietnam can make use of Hong Kong market to bring goods into inland China, rather than 40 exporting directly in the border now The authority can also encourage large distribution groups to sign trade contracts with farmers to prevent the case of selling at dirt cheap prices when having bumper crops After that, these groups will sell products at their distribution system in China 2/ Solutions for enterprises 2.1 Produce under national and global quality standards Nowadays, almost all export markets of Vietnam are developed countries with the increasingly stringent requirement for products Customers focus on not only the price and the design of exports, but also the quality and even the environmental safety To meet these demands, Vietnamese manufacturers as well as farmers need to get used to the global quality standards, such as ISO 9000 about quality management, ISO 1400 about environment management, and HACCP/ISO 2000 about food hygiene Each producer in any sector should pay attention to rationally exploit resources, apply green technologies and build waste treatment systems If those procedures are documented and practised, they can benefit for both enterprises and societies since it is the sustainable development 2.2 Build market strategies towards economic integration Integration means Vietnam has to open its door to welcome all international enterprises It is a benefit for domestic customers to access to high quality imports, but a challenge for domestic enterprises to better themselves Each Vietnamese enterprise should actively review its business plan, make investments and build its own development strategies to stimulate the productiveness and improve the competitiveness of its products Each period in the era of economic integration will need a separate strategy based on the research on the market trend, competitors, and customers Therefore, it requires the producers to adjust its product portfolio, and business methods to adapt to the market changes If they can manage to this, they can succeed in both domestic markets and international markets, gaining high profit from exporting 41 2.3 Enhance the application of modern technologies Modern technologies to be mentioned are not only from developed countries They can be researched and progressed inside each enterprise It is extremely popular that in Western economies, nearly all businesses have their own research and development departments They are responsible for improving the products and technologies to reduce the cost, make better use of resources and workforce That is the long – term and efficient investments for each enterprise, instead of regularly calling for external experts to give advice Meanwhile, Vietnamese firms scarcely have this department If they can establish this, they can independently obtain technologies, hence, reducing issues related to product information leaks, raising competitiveness, and establishing a sustainable brand name 42 CONCLUSION From 1986 with the transformation from a centrally planned economy to a market economy, Vietnam has expanded international trade relations and achieved significant accomplishments However, Vietnam BOT has always been a matter of concern While the problem of the period before 2012 was prolonged trade deficit, the last years experienced a great trade surplus This surplus, nevertheless, also has raised questions of the real motivation of our economy That has been FDI sector with high export value meanwhile the domestic manufactures still face difficulties of low competitiveness, rudimentary processing technologies and low output resulted in low added value exports Therefore, this thesis offers solutions for both Vietnamese government and enterprises in order to overcome those dilemmas, approaching a sustainable trade balance in the coming years To some extent, those suggestions are not the perfect answers to all problems of Vietnam BOT Another controversial issue is how to reduce the dependence of foreign trade turnover on FDI capital flow, which still need more concern It is hopeful to receive feedbacks from readers for this 43 REFERENCES General Department of Vietnam Customs; Customs Handbook on International Merchandise Trade Statistics of Vietnam 2010; Finance Publishing House, 2010 General Department of Vietnam Customs; Customs Handbook on International Merchandise Trade Statistics of Vietnam 2011; Finance Publishing House, 2011 General Department of Vietnam Customs; Customs Handbook on International Merchandise Trade Statistics of Vietnam 2012; Finance Publishing House, 2012 General Department of Vietnam Customs; Customs Handbook on International Merchandise Trade Statistics of Vietnam 2013; Finance Publishing House, 2013 General Department of Vietnam Customs; Customs Handbook on International Merchandise Trade Statistics of Vietnam 2014; Finance Publishing House, 2014 General Statistics of Office; Vietnamese International Merchandise Trade For Twenty Years Renovation (1986-2005); Statistical Publishing House, 2006 Frederic S.Miskin; The Economics of Money, Banking, and Financial Markets; 10th Edition; Pearson Education Inc., 2010 Luong Huyen Thuong; The Reality and Solutions To Vietnam Trade Deficit, 2010 HSBC Bank Middle East Limited Company; HSBC Global Connections Trade Forecast Report, 2014 10 Ministry of Finance; Decision promulgating the action program in implementation of the goods import and export strategy for the 2011-2020 period, with orientations toward 2030; No 950/QD-TTg, 25th July, 2012 44 11 Websites: www.vietchinabusiness.vn www.customs.gov.vn www.sbv.gov.vn www.gso.gov.vn www.globalconnections.hsbc.com www.oxfordeconomics.com 45