Whilst searching the web on issues in which Vietnam is currently enrolled in, I found an article concerning Vietnam’s exports to other ASEAN member states. The article showed some pretty disturbing figures about Vietnam’s exports decreasing rather rapidly to other ASEAN members. I decided to dig a little deeper in order to find out how this was possible.

Rice terraces in Mu Cang Chai, North Vietnam

The Association of Southeast Asian Nations, or ASEAN is the group of ten Southeast Asian countries which cooperate in numerous field such as economic, social, cultural, technical, scientific and administrative. It was initially created by 5 countries in 1967.¹ In 1992 the ASEAN felt the need to implement a free trade area between the ASEAN member states this agreement is called the ASEAN Free Trade Area or AFTA. The objective of the AFTA is to increase the competitive advantage of the ASEAN members within the world market by eliminating or reducing trade barriers between the ASEAN members.² Vietnam, who was not one of the original members, joined in July 1995. Since Vietnam joined later than the initial five members it had until 2006 to meet with the implications as set in the AFTA. From 1995 onwards, Vietnam worked very hard in bringing the tariffs on trade down and remove all non-tariff trade barriers.³ These efforts resulted in profitable outcomes over the years. The table below shows the trade statistics of ASEAN members in 2012.

Table 1: The 10 ASEAN members and their import and export figures both within ASEAN, as well as outside of ASEAN.

Vietnam’s main export products are rice, crude oil, computer and machines. If you pay close attention to the Intra-ASEAN trade statistics, Vietnam exports less products to other ASEAN members and at the same time they import more. These figures are the latest data provided by ASEAN and although they are from 2012, they give the impression that Vietnam’s trade balance is a bit off. Fortunately they could still compensate this with the Extra-ASEAN exports meaning that they were at that point not in the danger zone yet.

The Vietnam Custom’s statistics show a bitter reality. Initially when Vietnam started working on reducing their tariffs and abide the free trade characteristics of the AFTA, the exports to ASEAN members grew to 18.9 percent. Even in 2011 the growth rate of exports to ASEAN members was 32.8%. Last year tough the growth crashed back to a measly 4.4%. In the same time the revenues from Vietnam’s largest trade partners Thailand, Cambodia and Malaysia decreased with 16,7%. The reasons for these drops in trade are various, for starters the initial drop in tax rates following the acceptance of the AFTA regulations caused for a boost in the growth of exports for Vietnam. Secondly, Vietnam has a lot of difficulty in expanding its businesses abroad, because of the very hard competition in the world market. The competition causes companies to only partake in cross-border activities or to completely renounce from fairing business abroad. Companies who do take the leap and set up across the border are still working hard on gaining customer recognition. They experience fierce competition from China, which offers products from a lower quality but at 10-15% of the price Vietnamese products.⁴

The final argument gives reason to believe that AFTA has not been able to get away from under the yoke of Chinese mass production. The reason for China being able to sell its products for such cheap prices in ASEAN member countries has to do with the fact that in November 2001, ASEAN agreed to a free trade agreement. The first six ASEAN members will have a zero-tariff market with China as of 2010. This means that two of Vietnam’s major export countries: Thailand and Malaysia will have similar tariffs with China as they do with Vietnam. Since the agreement with China will come into force in 2015 for the other ASEAN members including Vietnam it results in a drop in export growth. ⁵

One could argue that by creating the free trade agreement with China they cleared the path for China to flood the ASEAN market with cheap products. This could have devastating consequences for local ASEAN companies, but also allows for the import on a very wide array of Chinese manufactured products. The reason for not immediately rendering Vietnam’s position impossible to get out of is the fact that with the wide export market of electronics they can still gain a lot of market share if they chose to innovate in that field. Although the free-trade agreement between Vietnam and China will be completed in 2015 it will bring Vietnam on the same level with the first six ASEAN members as well as creating an equal base for trade with them and China.

*The table considers goods exports between the 25 countries in the sample. ⁶

Looking at the table we can also conclude that China will play an increasingly important role for the Vietnamese economy. The problem I think is that ASEAN was created partly on the basis of forming a unity which can have a stronger economic position within the world market. It is strange to see then that ASEAN enters into a free trade agreement with China primary reason being the fact that due to China’s mass production it is difficult for similar companies within ASEAN to compete with these cheap products. Fortress Europe was a term often used when talking about Europe’s strict borders for migrant workers as well as the tariffs which were put on products from outside of Europe. This was considered unfair for poor countries. With ASEAN entering into a trade agreement with China the barriers are being lifted for China to flood the ASEAN market with cheap products affecting the industries of poor countries, who can’t produce as cheap as China due to their relatively small size compared to Chinese industries.

Whilst we are seeing a contrasting short-term trade outlook, the longer-term trend for emerging markets remains one of growth and businesses need to consider now how best to capitalise on long-term trade opportunities. An important element of this is investing in research and development, which will allow emerging markets to scale the global value chain. Importantly, developed economies need to enhance their research and development spend to remain competitive. James Emmett, HSBC Global Head of Trade and Receivables Finance

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I am not saying that ASEAN is doing the wrong thing, because after all fortress Europe is not the humane solution either. In my opinion ASEAN should re-evaluate the free trade agreement it has with China in such a way that none of the ASEAN members is affected by the agreement. Gradual implementation is not beneficial for the four ASEAN members who joined at a later moment. If the agreement is implemented for all memberstates at once it will not create a negative influence for one or more members of ASEAN, thus decreasing reduction in econmic growth. With this I mean that it will not cause substantial economic damage as it cannot be said that initiating such a free trade agreement will be prosperous to all the nations who agree on them right of the bat. Secondly, the ASEAN members are more and more recognized as emerging markets and in order for them to sustain this status innovation should be prioritized in order to sustain this developement. It forces Vietnam to invest in its growing telecommunications and electronics market in order to sustain the growth. It remains to be seen how the members of ASEAN will cope with the free trade agreement since a lot of them are currently involved in disputes with China, but I think it will turn out to be a good thing for most of them.