Despite strong performance, Vietnam’s exports still face enormous challenges

The Vietnamese economy recovered strongly in 2017 with many bright spots, notably exports, which rose 21.7% to US$213.77 billion. But there remain a number of issues that needs addressing to ensure exports are sustainable in the years ahead.

Remarkable export growth

Vietnam’s export growth rate in 2017 was the highest in recent years. Domestic enterprises contributed US$58.53 billion, up 16.2% from the previous year while the foreign-invested sector brought in US$155.24 billion, a year-on-year rise of 23%.

Strong export growth helped drive gross domestic product, created more jobs and reflected the recovery of the manufacturing sector.

Illustrative photo (source: NDO)

At the same time, the structure of exports continued to shift towards to manufactured goods, which accounted for 80% of total revenues. Revenues of US$10 billion and above were recorded in five groups of manufactured goods, namely mobile phones, computers and electronics goods, garments, footwear and machinery, whose combined turnover hit US$128 billion.

Farming and seafood exports also generated US$25.9 billion, up 16.9%, with fruit and vegetables reaching US$3.5 billion, up 44%.

Meanwhile Vietnam imported US$211.1 billion worth of goods, helping secure a trade surplus of US$2.7 billion, of which the domestic sector registered a deficit of US$26.1 billion while the foreign-invested sector posted a surplus of US$28.8 billion.

To date, Vietnam has established trade relations with over 200 countries and territories, with 70 markets to which Vietnam's exports were over US$100 million. Among the nine markets which Vietnam registered a trade deficit of over US$1 billion, the Republic of Korea and China were the two largest at US$29 billion and US$21.59 billion respectively.

However, most of Vietnamese exports are raw mining and agricultural products and assembled goods whose inputs are dependent on foreign purchases. Vietnam's supporting industries remain underdeveloped, with products failing to meet required standards and quantities, making it difficult for local manufacturers to take part in the supply chains of export-oriented enterprises.

Looking to sustainable exports

That 2017 ended with impressive results is a favourable foundation for further growth in 2018. But there are also fresh challenges arising from tense geopolitical dispute between major powers, increased separatism, growing trade protectionism, climate change, and widespread ethnic and religious conflicts, among others.

Although such challenges do not affect Vietnam directly, they could exert significant impacts on Vietnam's major export markets. Vietnam now has more than 200 trading partners around the world, but most of the revenues come from a small number of markets including the United States, Western Europe, China, Northeast Asia and ASEAN. Meanwhile trade is currently below its potential in other markets such as Africa, Australia, South America, Eastern Europe, the Middle East and South-western Asia.

The expansion and persification of markets is feasible if Vietnam could take good advantage of signed free trade agreements, including new-generation trade pacts with key partners. The issue has become even more urgent as trade protectionism is making a strong comeback at both the national and regional levels.

The majority of importers of Vietnamese goods have a higher level of economic development so they can impose technical barriers on Vietnamese exports and the only way will be to cooperate and comply with their rules, for example, the Europe Union's regulations on illegal, unreported, and unregulated (IUU) fishing, the US's Food Safety Modernisation Act and the rules on antibiotic residues in a number of Vietnam's key seafood export markets.

In the near term, the fall in revenues of these exports may be minimal but the long-term consequences will be massive, not least major negative impacts on the Vietnamese brand if the country is fails to enforce strict quality control standards on the production process from raw materials to final products.

Illustrative photo (source: VNN)

As a number of trade agreements have come into effect, Vietnamese exports are enjoying an advantage of lower tariffs than the same goods from other countries in close proximity. But this has also given rise to the number of frauds concerning the country of origin rule and several warnings have been issued by import countries. For instance, many frozen shrimp and corrosion-resistant steel shipments from Vietnam have been accused of originating from a third country.

For years, export has been one of the main pillars of economic growth but Vietnam's the sector’s growth is heavily dependent on imports and the foreign-invested sector while Vietnamese enterprises are mainly involved in the assembly stage with little value. When domestic supporting industries remain underdeveloped, Vietnam still has to import most of its machinery, equipment and materials for manufacturing.

Mobile phones and phone parts, the highest-earning goods, belong completely to the foreign sector while other high-earning manufactured goods are also mostly manufactured by foreign enterprises. Many experts point out that compared with domestic enterprises, foreign-invested businesses outperform in terms of return on equity.

Although Vietnam has attracted investment from many multinationals, few domestic enterprises have been able to participate in their production chains and even so their level of participation is limited. Due to weak internal strength, domestic enterprises are unable to connect with foreign-invested enterprises and the economy fails to take advantage of investment capital, technology and management capacity of this sector.

More assessment criteria needed

Revenue is an important measure to assess export activity, but it alone is not sufficient. Serious consequences will follow if attention is paid only to the growth rate and value of goods. They are environmental degradation, waste of natural resources, soil depletion, and water and air pollution. Socially, the gap between rich and poor will be widening among different social classes and regions within the country.

The positive side of rapid urbanisation and establishment of industrial parks is the creation of engines that drive overall economic growth, but there also are many downsides. Farmers lose their land, peasants-turn-factory workers lack industrial manners, the traditional way of life is upset and social scourges soar as a result of dense population concentration.

In the medium and long terms, it is necessary to include more criteria in assessing the performance of export activity with the goal of bringing sustainable benefits to the country and every person. If assessment is made based on figures only, enterprises will be tempted to achieve attractive figures at all costs without any real benefits. For example, a local enterprise imports a simple product with a low level of technology and then refines it to export. This product has little added value in Vietnam although it creates jobs and impressive export data. This activity is in no way wrong, but in the long term will be a drag on Vietnam's industry.

( VNF/NDO )