Free trade pact could deal a crippling blow

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Vietnam woefully unprepared to fight onrush of cheaper imports

  A farmer dries cassava in the northern province of Hoa Binh. Experts say Vietnam's agriculture sector will be vulnerable when tariff barriers within the region are removed. Photo: Reuters

Experts warn that Vietnam could soon find itself at the losing end of a free trade deal with neighboring countries since its products are not strong enough to withstand the onslaught of cheaper imports when tariff barriers are removed.

Economist Pham Van Chat said the domestic market will be under massive pressure in 2015 when the 10-member Association of Southeast Asian Nations, known as ASEAN, officially launches its single market with free movement of goods and services.

He pointed out in that same year Vietnam will also join the ASEAN-China Free Trade Area, another agreement that has already seen China and six Southeast Asian markets reduce tariffs on 90 percent of imported goods to zero. Vietnam, together with Cambodia, Laos and Myanmar, has been allowed more time to lower taxes.

The most vulnerable products will be agricultural produce, machinery, toys and clothes, Chat said, adding that Chinese goods at cheaper prices will extend their already overwhelming dominance in the Vietnamese market.

Nearly five years have passed since ASEAN members signed the Economic Community blueprint to create a common market similar to the one in Europe. The ambitious plan has been supported by the 10 countries because, ostensibly, each of them will be able to tap a much larger target of over 600 million people. When China is brought into picture, this potential looks much better.

But as the deadline for tax cuts approaches, many now worry that Vietnamese producers will not have enough time to prepare for the tough fight ahead.

"So basically what Vietnam can make, other ASEAN countries and China can too," said Phan The Rue, chairman of the Vietnam Retailers Association.

"The problem is Vietnamese products are less competitive because of small-scale production, so it will not be easy for them to crack into the new common market. Products from other countries, on the other hand, will have a better chance in Vietnam because prices are reasonable and quality is even higher," he said.

It is unlikely that Vietnamese garments, for instance, can succeed in China or Indonesia, said Rue, a former deputy trade minister.

That leaves the country with only a few staples that are its strong suits, like rice, coffee and rubber, he said.

Rue said that right now, when several free trade commitments are yet to take effect, Vietnam already has trade deficits with most regional countries.

It has done really well with the US and European markets but within the region, Vietnam is like an outsider looking in, he said.

Official data showed that in the first eight months this year, the country had a trade deficit of US$10 billion with China, $3 billion with Singapore, $2.1 billion with Thailand and $700 million with Malaysia. It still had a surplus with Indonesia and the Philippines thanks to strong rice shipments. Cambodia and Laos remain rare net buyers of Vietnamese products in the region.

Economist Pham Chi Lan said Vietnam depends on its neighbors, especially China, for materials to make export products like clothing and footwear. But it hardly exports any refined or finished products to these countries that can bring it more income, she said.

"The reality is Vietnam has not been a part of the value chain in the region. So the only way to improve its trade balance with other ASEAN members and with China is to invest more in production and make local products more competitive in terms of prices and quality," she said.

Even major producers do not think it's an easy task.

Cao Tien Vi, general director of Saigon Paper Corp., said local producers cannot lower prices to fight back imports because they have to buy a large amount of materials from other countries.

Vi said Vietnamese companies need to get stronger for the coming competition, but right now they are just too weak to do anything, after high interest rates have impaired their balance sheets.

Under these circumstances, it is highly likely that local producers will not stand a chance against foreign competition after 2015, he said.

Ho Duc Lam, chairman of the Vietnam Plastics Association, said locally produced plastic products are as good as imported products, but they cannot compete with Thai or Chinese products on pricing.

Cambodia and Laos are easier markets, but they are small markets, he said.

Do Duy Thai, general director of Viet Steel, feared that many steel producers will go bankrupt after 2015, when Chinese products are only subject to a low tax rate of 0-5 percent, compared to 10-15 percent at present.

Vietnamese companies have to apply new technologies to cut costs, but that requires an investment of at least $150 million for a 500,000-ton plant, he said. It is not a practical option, considering businesses cannot take out cheap long-term loans from banks, Thai said.

Business executives also believe that on the export front, the new free-trade pact does not necessarily mean more opportunities for Vietnamese goods.

They say as the global economy remains stagnant, many countries have returned to protectionist measures to defend their own businesses.

Even now, Thailand and China have strict rules for Vietnamese products. The standards can be met by Vietnamese exporters, but the whole process to satisfy requirements is quite long, Lam of the plastics association said.

Economist Lan suggested Vietnam follow a similar path and introduce a new set of quality standards to prevent low-quality imports from flooding the market.

New standards would also force local producers to improve themselves, she said, adding that it's not tenable that weak businesses are tolerated for fear that strict rules might eliminate many companies.

Some experts, however, still think Vietnam will have its own role to play in the new ASEAN community.

"Cost-driven manufacturing is likely to move toward markets such as Cambodia, Laos, Myanmar and Vietnam as their physical infrastructure improves. Thailand and Malaysia will have to compete higher up the value chain," the research team of UK property group Knight Frank said in a report last month.

According to the report, the new deal will make tariff-less trade possible across the region, but ongoing protectionism in the form of non-tariff barriers to entry is likely to continue to be a major stumbling block towards a single market.

"Protectionism, especially in the form of non-tariff barriers, is an obstacle that will be extremely difficult to eliminate," said Nicholas Holt, Knight Frank's research director for the Asia Pacific region.

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