Vietnam prepares for integration into ASEAN Economic Community

Vietnam has been a member of the ASEAN since 1995, when it joined as part of its ongoing process of integrating into the global economy and opening to the world. In recent years, it has taken an increasingly active stance in the organisation, while its economy has closed the gap on the more affluent founding members.

The bloc’s combined GDP of $2.6trn and market of more than 600m people is enticing for many Vietnamese companies. However, others fear that intensifying regional competition will squeeze domestic players.

Trade Volumes

Given the geographical proximity and attempts to increase economic integration, Vietnam’s trade with the rest of the bloc is relatively small. According to Vietnam Customs, in the first 11 months of 2016 Vietnam’s exports to ASEAN totalled $15.65bn, just 9.8% of its total and down 6.4% on the same period of 2015. ASEAN imports totalled $21.4bn, down 1.1%, and 13.6% of Vietnam’s total. The low proportions are partly indicative of just how global Vietnam’s trade relations are, but they are also a factor of ASEAN’s historically slow economic integration. In 2015 intraASEAN trade accounted for 24% of the bloc’s total trade volumes, 25.9% of its exports and 21.9% of its imports.

Aec

Regional economic integration is due to accelerate in the coming years thanks to the ASEAN Economic Community (AEC), formally launched in December 2015. The aim of the AEC is to create a single market, with minimal barriers to movement of goods, services, capital, investment and skilled labour. The member states have signed deals to lower barriers to trade, investment, service provision and freedom of movement. Vietnam, with Cambodia, Laos and Myanmar, will be expected to eliminate almost all tariffs to imports from elsewhere in the AEC by 2018. The other six, more affluent, ASEAN members have already virtually eliminated these. “Reducing trade barriers and improving market access between ASEAN countries will raise regional competitiveness as companies in ASEAN operate more effectively,” Lim Hng Kiang, Singapore minister for trade and industry (trade), told OBG. “This in turn brings sustained economic growth to the region.”

One reason for Vietnam’s growing trade deficit with ASEAN in 2016 is the incremental implementation of one AEC pact, the ASEAN Trade in Goods Agreement (ATIGA), which has opened the Vietnamese market to regional competition. Automobile imports from Thailand have surged, overtaking those from Korea and China in the first quarter of 2016, thanks in part to ATIGA rules that taper down the maximum import tariff on vehicles to 40% in 2016, 30% in 2017 and zero by 2018. “One of the objectives of ATIGA is to remove non-trade barriers,” Lim said. “This will complement our work on eliminating tariffs, for truly seamless flows of goods traded among the ASEAN countries.”

Vietnamese banks will also face the liberalisation of the financial sector, with institutions from other AEC member states able to freely set up in Vietnam from 2018. “Regional banks are going to play a massive role, as they have an aggressive plan to expand, and they are not yet required to adhere to very high standards which global banks have to follow,” Pham Hong Hai, CEO of HSBC Vietnam, told OBG.

Policy Response

Competition is likely to increase once the AEC is in place, which has raised concerns that Vietnamese businesses will come under pressure from new entrants. Therefore, the government is planning to strengthen competitiveness with a multi-faceted approach. Measures include improving businesses’ access to loans, enhancing cooperation between the government and private enterprises to address non-tariff barriers and avoid trade disputes, and supporting them in approaching the regional market.

To prepare the administration for the AEC, the government is looking to increase the use of IT in tax and Customs management, and improve the system of business registration. A one-stop shop for Customs clearance will also be integrated within the ASEAN Single Window to ease cross-border trade processes.