The government is struggling to make headway in tackling the rising trade deficit because its efforts to encourage the use of locally-made products have met with very limited success.
Experts say that the demand for imported machines and materials has increased over the last several years. This, combined with a lack of a developed supporting industry, has meant that exports have low added value and are heavily reliant on imports.
The nation's cumulative trade deficit in the first nine months of 2010 reached US$8.5 billion, or 16.5 percent of its export turnover, according to the General Statistics Office. For September alone, the gap widened to $1.05 billion from $395 million in August.
Vietnam projected a $13.5 billion trade deficit this year, up 5 percent from last year.
Cao Sy Kiem, a member of the National Financial and Monetary Policy Advisory Council, said the large gap was mainly due to imports of materials and machines for projects that are being strengthened in the post-economic downturn period, and for export-oriented production.
To help control trade deficit, Vietnam devalued the dong in August, when the reference rate for the currency was weakened by 2 percent, following similar moves in February and November 2009.
Economist Le Dang Doanh said the dong devaluation, in theory, could encourage exports, but the added value of Vietnamese goods was still low, so the devaluation does not have the expected effect, and in fact could increase the trade deficit and inflation.
Kiem said Vietnam's exports had mainly to do with outsourcing. "If we are not careful, the more we export, the more we import. We should control this well to minimize risks for the country, as big imports will reduce foreign currency reserves."
Some key export industries (such as footwear, seafood, and textile and garment) import 60-90 percent of materials for production.
The foreign currency deficit could only be dealt with in the short term, and could get more serious in the long term. Foreign investors will import materials and equipment for their production, sell products in the local market, and then send their profits in foreign currencies to their home countries, he added.
Losing at home
The government's policies to encourage Vietnamese people to use domestic products have not seen any remarkable reduction in the use of imported products in both daily life and production.
Although the Vietnamese Steel Association has said that local steel makers can meet the domestic demand for the products, the truth is that it has been difficult for domestically-produced steel to compete with Chinese imports.
Vu Trong Khoi, vice director of the Vietnam Steel Corporation, explained that the country has to import most of the materials needed for steel production. Thus, when the prices of materials rise, production costs go up as well, and firms have to raise the selling prices of products, making them less competitive than imported ones.
The demand for imported machines and equipment for projects is also increasing. Vietnam imported machines and equipment worth nearly $9.7 billion in the nine months through September, a yearon-year increase of 11.6 percent, according to the General Statistics Office.
Vu Khoa, chairman of the Vietnam Association of Construction Contractors, said foreign firms win most of the international bids due to shortcomings in procurement laws. So local firms able to implement projects by themselves end up as subcontractors for foreign bidders.
Foreign contractors will use imported products, and even foreign manual labor for the projects, many experts said, adding Vietnam could become a consumer of low-quality products originating in other countries if drastic measures aren't taken to deal with the issue.
The government should come up with clear regulations on using locally-made products for projects with state investment, they said.
Kiem from the National Financial and Monetary Policy Advisory Council said state budget overspending is also one of the reasons for the trade deficit, as the budget is used to import products like cars and air conditioners.
"The most important thing is that we need to adjust our economic mechanisms, raise the local content ratio of export items, and increase the competitiveness of local products," he said.