Free trade agreements: Opportunities and challenges for vietnamese enterprises

Nội dung text: Free trade agreements: Opportunities and challenges for vietnamese enterprises

1. FREE TRADE AGREEMENTS: OPPORTUNITIES AND CHALLENGES FOR VIETNAMESE ENTERPRISES Dr. Ngo Tuan Anh National Economics University Abstract Free Trade Agreements (FTAs) have proved to be one of the best ways to open up foreign markets to Vietnamese Enterprises. However, the opportunities brought by the FTAs can be transformed into the enormous challenge if the enterprise does not have business competitiveness, lead tothe loss of domestic markets to foreign firms. Therefore, the assessment of the opportunities for business challenges Vietnam at the moment and after 2015, the pressure to compete with foreign businesses Vietnam signed the FTAs and recommendations to government, businesses to enhance the competitiveness of enterprises is extremely essential to time. Keywords: competitive pressure, free trade agreements, Vietnamese enterprises. 1. INTRODUCTION After joining the ASEAN Free Trade Area (AFTA) in 1995, Vietnam increasingly participation in the free trade agreements. By the end of 2015, ASEAN have been launching the ASEAN Economic Community, which is expected to enhance its member’ GDP growth, enhance competitiveness. The Trans-Pacific Partnership (TPP) signed in 4/2/2016, twelve countries have signed up to one of the biggest-ever trade deals .; TPP has many new features compared to the previously signed agreement as broader scale, including the areas of non-commercial environment, state-owned enterprises, intellectual property and government procurement. TPP will provide much better access for goods and services to more than 800 million people across the TPP countries, which make up 36 per cent of global GDP. The commitments on goods at a deeper level with the requirement to remove 90% to 100% of import tax; particularly with the Trans-Pacific Partnership (TPP) agreement requires the elimination of all tax steamed. Vietnam is currently involved inseveral FTA with Australia- New Zealand, China, India, Japan and South Korea, Chile and EAEU(The Eurasian Economic Union). Table 1: List of Vietnam’ FTAs No. FTAs Current Circumstance 1. ASEAN-Australia and New Zealand Free Trade Agreement Signed and In Effect 2. ASEAN-India Comprehensive Economic Cooperation Agreement Signed and In Effect 3. ASEAN-Japan Comprehensive Economic Partnership Signed and In Effect 4. ASEAN-People's Republic of China Comprehensive Economic Signed and In Effect Cooperation Agreement 5. ASEAN-Republic of Korea Comprehensive Economic Cooperation Signed and In Effect Agreement 6. Chile-Viet Nam Free Trade Agreement Signed and In Effect 509
2. 7. Japan-Viet Nam Economic Partnership Agreement Signed and In Effect 8. Republic of Korea-Viet Nam Free Trade Agreement Signed and In Effect 9. ASEAN-Hong Kong, China Free Trade Agreement Negotiations launched 10. Regional Comprehensive Economic Partnership Negotiations launched 11. Viet Nam-European Free Trade Association Free Trade Agreement Negotiations launched 12. Viet Nam-European Union Free Trade Agreement Negotiations launched 13. Viet Nam-Israel Free Trade Agreement Negotiations launched 14. Trans-Pacific Partnership (TPP) Signed but not yet In Effect 15. Viet Nam-Customs Union of Russia, Belarus, and Kazakhstan Free Signed but not yet In Effect Trade Agreement (Source: Ministry of Industry and Trade, 2015) A free-trade area is the region encompassing a trade bloc whose member countries have signed a free trade agreement (FTA). Such agreements involve cooperation between at least two countries to reduce trade barriers – import quotas and tariffs – and to increase trade of goods and services with each other. If people are also free to move between the countries, in addition to FTA, it would also be considered an open border. It can be considered the second stage of economic integration. This study points out the negotiation and signing of the FTA will bring many opportunities for businesses but also create enormous pressure when domestic firms compete with foreign businesses and enhance the competitiveness of enterprises can survive and thrive after 2015, the context of integration into a comprehensive and extensive world economy. Especially at the last period, Vietnamese economy seriously affected from the global economic crisis, Vietnam also failed to put their faith in the state sector, many corporations losses, bankruptcy, caused much damage in economic development efforts. 2. OPPORTUNITIES FOR VIETNAMESE ENTERPRISES 2.1 Expand markets and attract more investments Firstly, Vietnamese enterprises have a great opportunity to expand the market. In addition, Viet Nam can access to the wider market with the partner countries and regions through separated FTA that Viet Nam has signed. Since then, Vietnamese enterprises can deeply involve in the production and supply chain in many areas and over the worldwide. Moreover, the broader market will help businesses reduce pressure due to the life cycle of the product cannot be extended. Vietnamese enterprises are mostly small and a medium enterprise with investment capital is not too large; with technological innovation, enterprises can quickly adapt to modern technology. Vietnam market is a dynamic market due to the potential of our human resources at a high level, the approach of the modern scientific and technological - advanced signs to be easy. This is a great advantage if promoted well become an important factor in creating a successful business in Vietnam. Moreover, it allows businesses the opportunity to grow faster due to enhanced collaboration capabilities to attract investment, innovation and technology equipment 510
3. manufacturing. During operation of the market, with each stage will have a new competitor entry and weak competitors exit the market, Vietnamese enterprises have access to strategies such as discrimination products, improve quality, add new points of products and continuously improve product improvements made products but distinctive characteristics or predominant market. Secondly, Through participation in free trade agreements that contribute to attract foreign investment into Vietnam by open, transparency and safety investment environment. Moreover, in the form of joint venture with foreign investors, businesses can expand Vietnam market; enhance technology absorption, knowledge, increase labour productivity and product quality. Vietnam has attracted more funding from investors come from countries that have FTAs with Vietnam. Up to seven out of ten highest investing countries investing are the one that have FTAs with Vietnam as Japan, South Korea, China, Thailand with amount of investment is approximately 115 million USD out of total 183 million USD, account for 62 per cent. In addition, the owner’s equity from countries that have FTA with Vietnam is 42 million compare to the other with only 13 million USD. The amount of investment can be depicted in the following chart. Chart 1: Foreign Direct Investment in Vietnam as partners Unit: Million USD TOTAL INVESTMENT China 6,991.77Thailand 6,468.58 Malaysia Japan 34,583.43 10,331.15 Japan USA 10,619.85 Singapore Hong Kong Korea 12,594.55 Taiwan Singapore 29,312.17 British British Virginial 15,638.24 Hong Kong United State of American Taiwan,27,914.86 Korea 29,041.49 Malaysia (Source: Vietnam General Statistics Office, 2014) Vietnam has attracted more funding from investors come from countries that have FTAs with Vietnam. Up to seven out of ten highest investing countries investing are the one that have FTAs with Vietnam as Japan, South Korea, China, Thailand with amount of investment is approximately 115 million USDout of total 183 million USD, account for 62 per cent.In addition, the owner’s equity from countries that have FTA with Vietnam is 42 million compare to the other with only 13 million USD. Moreover, by approaching more foreign 511
4. investment will narrow the development gap between countries and attract more foreign direct investment (FDI) is the important objective of the FTA. It provides a chance for Vietnam to promote faster economic growth, create more jobs, better resource allocation, enhance production capacity, competitiveness, improve infrastructure. This is an opportunity for Vietnam to take advantage of attracting foreign investment due to the fact that foreign investors see Vietnam's FTA partners is the chance for them to expand their markets and will increase investment and dominate the market. The foreign investment projects in Vietnam will contribute to technology transfer, capacity and management skills through the study of enterprise systems in other countries, paving the expanding of the world market. 2.2 Enterprise will have more conditions as well as pressures to enhance competitiveness Vietnam businesses will have access to efficient, transparent and predictable trade environment, along with the simplification of customs procedures and reduce transaction costs for international trade will help to create a business environment of fair competition and promoting businesses to improve competitive ability, as the main target when the country signed the FTA is going to remove non-tariff barriers between countries; this greatly facilitates the export. For example, the ASEAN agreement (AFTA), countries and customs build a door means the product of a manufacturing company in Vietnam can be sold in Singapore, Thailand, which is not taxable. In this process, the role of the agency policy’s orientation is very important to encourage and create favorable conditions for all Vietnamese enterprises to locate their position in the production chain of the region. The private sector is the most dynamic sector of the economy, this area is an important factor in supply chain and global areas, should receive adequate support from the government to improve capacity competition, expanding markets and access to credit, encourage reform and perfect the policy environment to facilitate private sector. Tariff reduction is an advantage to enhance the competitiveness of Vietnamese enterprises. Tax interest in agreement like the ASEAN agreement, tariffs will go from 0% - 5% until 2018; Production for export will not be subject to tax or low-tax, for example, TPP agreement aiming to bring tariffs to 0%. At the same time, imports of machinery is not subject to tax, this will facilitate lower costs and increase the quality of products as well as enhance the competitiveness of the goods WhenVietnam reduced tariffs, Vietnam may increase export many other items that are our advantage and core interests such as textiles and footwear in major markets, especially the U.S. market (currently contribute 20% of the total export of Vietnam) but not to compete with products of other countries. In 2014, export staples of Vietnam's textile and garment reached more than $ 30 billion, of which 50% is exported to the U.S. market. Similarly, leather goods, in 2014 Vietnam exported over $ 8 billion, of which exports to the U.S. accounted for 31%, if successfully concluded TPP, this item will be exempt from tax. 3. CHALLENGES FOR VIETNAMESE ENTERPRISES 3.1. Weak competitiveness of the enterprises Especially the last period, Vietnam's economy seriously affected from the global economic crisis, Vietnam also failed to put their faith in the state sector, many corporations losses, bankruptcy, causing damage in economic development efforts. Meanwhile, the private 512
5. sector has not received adequate support from the state, bankruptcy, loss-making, low competitiveness of enterprises increasingly exposed. ASEAN economies remain considerably diverse and increasingly realize the importance of shaping common economic growth strategies as they feel competitive pressures arising from China. In terms of the competitive criteria of the product such as price, quality, consumer organizations and the business reputation and competitiveness of Vietnam are lower than other countries, even inside of ASEAN; quality merchandise from Vietnam is still limited. Many items are now considered to be highly competitive as rice, coffee, textiles; shoes are in danger of decline in competitiveness (Institute of Economic Management Central Referral, 2014). Among the major export items of Vietnam does not have many items have high technology content as well as higher value added. The agricultural, forestry and fishery are the strengths of Vietnam but are having difficulties acreage shrinking due to urbanization trends, the ability to exploit, fishing, technology absorption advanced, modern quality to meet the requirements of the world is very limited in nature. The competitive advantage of the Vietnam such as high employers’ rate, cheap labour still faces stiff competition from other countries in the region. The development of new products faces many difficulties in capital, technology and markets. If not quickly improve competitiveness could make Vietnam now rapidly excreted competition world, the agreements that Vietnam signed can bring major benefits for domestic enterprises external rather than domestic firms. When Vietnam signed a free trade agreement means that Vietnam will now be entering the market of large scale commercial, many privileges and much potential. However, if not well exploited, Vietnamese enterprises not only lose the opportunity to dominate the market area but also the local market is difficult to maintain., For example, for many years, goods derived from ASEAN countries have flooded the market in Vietnam, such as fruit cutter products, or energy drinks in Thailand ,and will overflow into Vietnam market more in the future. Electronics manufacturing businesses in Vietnam faces risks being pushed out by imported goods from Thailand and Singapore. Import turnover of the entire ASEAN (excluding Myanmar) each year about 1,612 billion dollars (in 2014) and exports reached U.S. $1460.8 billion. In particular, Vietnam accounted for approximately 7.36% of export turnover; and imports by 8.5%. Rice and oil is still two groups of Vietnam's exports to this market, worth approximately 30% of the total export turnover of Vietnam to ASEAN. In contrast, Vietnam mainly imports from ASEAN machinery, crude oil, vehicles, and tools. In addition, Vietnam businesses will face more technical barriers and strict requirements of origin. Under the terms of the origin of goods proposed in TPP, the product in the exporting Member State of origin must be from countries inside TPP. This is a disadvantage for Vietnam due to the fact that Vietnam mainly imported from outside the TPP countries such as China, South Korea for processing exports; if the conversion is not material, Vietnam's exports will not be entitled to tax incentives. Moreover, the technical regulation of inside like packaging, labeling, maximum chemical residues in exported products is also a barrier for Vietnam exports, Vietnam's agricultural products in TPP gets stuck in the barriers 513
6. of sanitary measures. These regulations are in the hands of the importing country and can absolutely be abused to become barriers for Vietnamese goods cannot invade. 3.2 Weak international integration of business Vietnam does not have many first rate businesses and regions. Integration and capacity expansion to foreign markets is weak, still passive in production and business activities, not meet the demands of economic integration, which would be detrimental largely in the context of globalization today when many large corporations around the world invest in Vietnam. Without strategic business development system from both the government and business, and strategies to exploit and expand the overseas market, Vietnamese enterprises only work for the foreign enterprises and dependent on fluctuations in the world economy. 3.3 Incomplete market institution obstructs the growth of domestic enterprises Vietnam’s integration come later than other countries and still a transformation economy,low levels of development, the low capacity. Therefore, Vietnam should attempt to complete economic institutions, legal framework, enforcement of sanctions to be able to meet the commitments under the FTA; this is also the challenge to Vietnam when ability to plan and law enforcement is limited. The opportunities and challenges are transformed to each other, so if Vietnam is not strongly reform party in state and enterprise integration, Vietnam’s economy can suffer huge risks. This is evident after eight years of joining the WTO; the trade deficit increased sharply, exports mainly focused on the business of foreign investment (FDI) and domestic enterprises increasingly vulnerable at domestic market at the moment. 4. RECOMMENDATIONS 4.1 Recommendations for the government - Complete the institutions of market economy The government should continue perfecting the market economy and the legal system governing the operation of the economy in accordance with the principles of market economy. To enhance the effectiveness and efficiency of law enforcement, with the target to avoid the phenomenon of the gap from issue to implement in legal documents as well as weak compliance with the law (as in special sectors protection of intellectual property rights, to protect the interests of consumers, in many sectors of the economy is dominated by proprietary form, social harm, hinder innovation and resource allocation capacity of the economy). The law enforcement will enhance the sustainable competitiveness of the economy and creating a healthy business environment, attract foreign investment and to allocate resources effectively. Improving the business environment, and reduce the transparency of administrative procedures, to redress the discrimination between economic sectors, support for enterprises to improve the quality of human resources, acquire new technologies, products and systems to adjust the rules which are not effective and still have a conflict. 514
7. - Support for private sector development In the process of economic integration of Vietnam, the role of the agency-oriented policy is very important to encourage and create favorable conditions for all enterprises Vietnam to locate its position in the chain of general manufacturing sector. The private sector is the most dynamic sector of the economy, this area is an important factor in supply chain and global areas, should receive adequate support from the government to improve capacity competition, expanding markets and access to credit, encourage reform and perfect the policy environment to facilitate private sector. Currently the private sector is faced with many challenges as the business environment has not improved with the private sector, there are many barriers to the legal system in Vietnam, the difficulty in accessing the necessary resources such as land use, medium-and long-term credit, technology and human resources training, incentive programs of the government as well as mechanisms of state policy for this area has not the proper care and procedures are too complicated in many areas. Therefore, government should enact policies to support private sector development, particularly the area of small and medium enterprises (SMEs), enabling these businesses access to information, finance, public technology, human resource, create the most favorable conditions for business operations (procurement, land, tax, investment ). Revise and determine which economic sectors strongly affected when implementing trade commitments to support this sector following to international rules and practices. For example, some products that Vietnam have the advantage may be limited by the rules of origin applied new regulations on technical barriers to trade (TBT) and quarantine is more rigorous; some areas affected by open market as banks, stock market, manufactured goods should be taken into account production capabilities in developing countries to take maximum advantage of joining and adjusted accordingly. - Development of e-commerce and e-government From reality shows to develop information and communication technology (ICT) is one factor that influences the decision to perfecting operations, human resources development, infrastructure construction associated with the re-synchronization economic structure, transforming the growth pattern of the country. ICT applications in government agencies is rated as one of the positive measures aimed at building administrative agencies at all levels of modern, effective, efficient, democratic, open and transparent. ICT will help the government serve the people better now. For businesses, ICT helps businesses competing on low cost labour and natural resources to compete on comparative advantages of goods and services based on the value of knowledge and value increases. Information technology and communication are the foundation for the formation and development of the Internet and electronic commerce. E- commerce has increased the competitiveness of enterprises. E- government, e-customs, e- commerce aretheones of the priority developments. The case that Vietnam ranks in the low position of deployment in terms of the application of information technology and communications in the region requires putting in the necessary attention to the importance next time. Promote the application of information technology and communications will help 515
8. to improve business competitiveness, improve the capacity of government, e-government construction and minimize bureaucracy, worsening harassment business environment of Vietnam. - Focus on supporting the development of ancillary industries At the moment, ancillary industries of Viet Nam reveal a lot of limitations. The strength of Vietnam’s commodity as footwear, apparel, seems to be a price advantage when joining TPP, Vietnam-EU but in fact the input of product such as buttons, leather imported from other countries such as China, South Korea. Caused by ancillary products support that Vietnam produced generally poor in types, styles and designs monotonously, the price is much higher than imported products of the same type. Meanwhile, the same products of Chinese, India, Thailand, Malaysia, China have the quality is not higher than the same products in Vietnam, but their goods at very cheap price, diversity in types and various designs; In addition, these countries have many preferential policies to new customers, large customers, especially the preferential price policy, for late payment and dedicated service style should be more domestic enterprises in the fields of textile, thick leather, motorcycle assembly, electronic product manufacturing orders. Therefore, the government should increase support for business investment in technology, increased take advantage of materials in the country, limiting dependence on China. Government should strengthen state promotion activities: building promotion programs specific to each industry and market, including priority markets involved in the free trade agreement (FTA); connect businesses with manufacturing businesses that supply raw materials in the country. Government should strengthen investment in ancillary industry in key areas such as the time to support the garment industry, manufacturing; investment in plantation material, developing collaborative relationships with foreign manufacturers have advanced technology. For example, joining TPP if goods produced in Vietnam in the export market need to meet the high requirements and complexity of rules of origin in order to enjoy the preferential tax rate of TPP, there must be materials produced in or imported from the TPP member countries, therefore the government should focus on the development of ancillary industries to avoid heavy dependence on imported raw materials and have policies to attract investment in this sector. 4.2 Recommendations for enterprises -Actively innovation and enhance competitiveness The business will be subject to more intense competition, if not renewed manage method in business activities, improve product quality, enhance branding, these ailing businesses will fail. In the past years, Vietnam faced cheap goods from China; most of them are poor quality compared to Vietnam. Currently, Vietnam should take the advantage of higher quality compared to China and reduce the cost of production. Businesses need to further promote the application of information and communication technology in restructuring, reforming corporate governance and provide specialized applications in production and business activities of enterprises to help strengthen transparency and enhance competitiveness, international integration. 516
9. - Actively participate more in policy-making activities of government Enterprises should be more proactive in finding out information about international economic integration, WTO commitments, Vietnam FTAs with trading partners to have the proper adjustments in business strategy of the business, particularly in markets, products and the level of competition in the next year. More interested in cooperation with government agencies in the formulation of economic policy, because it is the interests of the business and also the platform ensures interoperability in the integration process. Due to that, strong policy process should be closely participation of the business community with the objects directly benefited from the economic policies. - Improving the quality of human resources Improving the quality of human resources is the key factor for enterprise system while Vietnam is increasingly active in open markets, more competitive pressures and growing businesses operate in a global environment. One of the weakness of Vietnam now is the quality of human resources, especially the majority of business owners not meet international standards, business managers lack the knowledge and management skills, management experience and they have not been trained in a basically business knowledge, management skills in business administration in terms of international integration. Therefore, the business itself must have a strategy to increase the quality of its human resources if they do not want their business to be discarded. Human resources, especially business owners need to be enhanced to meet the requirements of integration; enterprise management staff should enhance their knowledge and management skills, management experience. REFERENCES 1. ASEANSecretariat (2012), "ASEAN Economic Community: Handbook information for business", Hanoi. 2. Institute of Economic Management Central Referral (2014), World Economic Integration: competitive pressures on the economy of Vietnam, Hanoi. 3. Ministry of Industry and Trade (2014)," Free Trade Agreement FTA participation Vietnam”, Proceedings of Workshop 9/2014 Hanoi 4. National Committee on International Economic Cooperation (2010), Research report "Assessment of the feasibility of Vietnam TPP participation, policy proposals and participate in TPP solution", Hanoi. 5. Ngo Tuan Anh and Do Duc Trung (2014), “Trans-Pacific Partnership: Opportunities and challenges for Vietnam”, Journal of economics and development, Ha Noi. 6. 517