An influx of cheap, imported goods would widen the trade deficit, hit local production and cause unemployment to rise, economists say
A man polishes steel beams at a steel factory in Que Vo District, outside Hanoi on May 20. Vietnam's steel industry could be affected by a strong flow of cheap imports when import taxes are removed in 2014, economists warned.
From January 1 next year, a laptop sold in Vietnam will cost the same as those bought in Singapore.
This will happen because import tariffs on computers and computer components will be cut from 2 percent to zero percent to comply with Vietnam's commitments to the World Trade Organization (WTO), which it joined in 2007. Next year, Vietnam will also slash import taxes on more than 1,700 other product categories, from home appliances to several food items.
Consumers will be happy about being able to buy imported products at cheaper prices, but not for long as the country's economy will take a hit, experts say. The flood of imported goods would widen the trade deficit and threaten the local production sector, causing the loss of many jobs, they say.
They note that with tariffs on consumer electronics gradually falling and the local retail market opening up since 2009, many foreign-invested companies have switched from manufacturing in Vietnam to importing products made by their factories elsewhere.
Sony led the trend, closing down its assembly facility in Vietnam in 2008 after 14 years of operation. Two years later, Toshiba followed suit by stopping the assembly of LCD television sets in the country. At the beginning of this year, JVC Vietnam temporarily stopped its production.
"The story that firms quit production and shift to imports has happened for the past few years and its consequences can be seen easily. It leads to the loss of jobs and contributes to the trade deficit," said economist Tran Du Lich.
For the first five months of this year, the deficit was US$6.59 billion, according to the General Statistics Office. The country imported $2.3 billion worth of electronic products, computers and spare parts during that period, up 27.1 percent from a year earlier.
Survive or perish
Though the deadline for imported steel to be subject to a zero tax rate is 2014, two years later than the timeframe for many other products, local steel producers are already anxious about the future.
Vietnam is home to around 31 steel plants that can produce nine million tons of steel a year. With local demand at six million tons, many producers are struggling to secure a firm foothold in the market. The situation is expected to get tougher by 2014, as the zero percent tax may lead to an influx of cheap imported steel products.
Nguyen Tien Nghi, deputy chairman of the Vietnam Steel Association, said due to high production costs, locally-made steel now costs VND500,000-VND1 million per ton higher than imported steel.
"When the zero tax rate comes into effect, Chinese steel will easily dominate the domestic market," he said.
For years, whenever steel producers have struggled against cheaper imports, the association has asked the government to hike import tariffs. In a few years, they have to find other ways to survive in a do or die situation.
Huynh Van Minh, chairman of the Ho Chi Minh City Business Association, fears that local businesses will be "exhausted" by the competition against imported products, many of which are already cheaper than local ones. The tax cuts will make them much more competitive, he said.
"The reductions in import tariffs will benefit consumers. However, the hidden negative part that we cannot see is the strong impact on the local production sector. Enterprises will scale back their business activities, leading to job losses," said Minh.
Cheaper imports are also set to hurt industries in the agriculture sector, which has been Vietnam's strength.
From 2012, import tax on beef will be reduced from 20 percent to 14 percent, while that on frozen pork will be halved to 15 percent.
Nguyen Xuan Duong, deputy head of the Department of Husbandry, said, "If we don't control food safety well and fail to lower prices, we will lose in the domestic market."
He said the local husbandry industry was underdeveloped. Its output was low compared to other countries and its production costs were higher.
"Our husbandry sector is of medium quality but products are relatively more expensive than in regional countries," said Duong. "Prices of Vietnamese meat products are 20 percent higher due to high animal feed and transport costs, high interest rates and low productivity."
Nguyen Van Nam, former head of the Trade Research Institute of the Ministry of Industry and Trade, said small-scale livestock farming, which is popular in Vietnam, carries many risks and makes it difficult for the local husbandry sector to compete with imports.
He said a series of epidemics like bird flu, blue ear, and foot and mouth diseases are a major risk when livestock is bred on a small scale, because most of the animals are allowed to roam freely.
Of around 8.5 million households engaged in livestock farming, 30 percent let their animals wander freely, according to the Department of Husbandry.
Le Dang Doanh, an economist and former government adviser, said that after Vietnam joined the WTO in 2007, local car and electronic industries have had four years to prepare to compete with foreign goods, but they have failed to do so.
"Better late than never," said economist Lich, adding the government should "promptly" come up with a plan to restructure the economy to have it switch "from doing assembly work to manufacturing." He said it was essential to build and develop supporting industries.
Another expert, Pham Van Chat, said four years after the country became a WTO member, local trade associations had failed to properly apply trade barriers like anti-dumping tariffs and anti-subsidy duties to restrict imports.
So far, Vietnam is not a plaintiff in a single lawsuit relating to dumping or unfair subsidies, he said.
Lawyer Tran Huu Huynh, head of the Legal Department at the Vietnam Chamber of Commerce and Industry, said WTO rules allow the deployment of self-defense measures like anti-dumping tariffs, standards, or food safety regulations.
"The point is that businesses need to have knowledge of these measures and legal issues so that they can ask relevant authorities to intervene in necessary cases to protect themselves," he said.