Vietnam is facing some tough challenges, including in terms of rule of origin, in taking advantage of incentives from a regional free trade deal, with a continued trade deficit being recorded.

According to a report assessing how the Regional Comprehensive Economic Partnership (RCEP) has impacted on the Vietnamese economy, released this month by the Central Institute for Economic Management (CIEM), while some Vietnamese businesses have taken advantage of incentives in free trade agreements (FTA) and the RCEP in particular, it is not that significant, and some progress has even reversed in the 2019-2022 period.

“Businesses will eventually have to face numerous issues in making the most of incentives from the RCEP,” the report stated.

Inked in November 2020 by 15 countries, the RCEP began taking effect in January 2022. According to the CIEM, the RCEP may increase Vietnam’s trade deficit.

“There may be an increase in pressure for the domestic manufacturing industries as goods from regional markets enter Vietnam at lower import tariff rates. […] In fact, pre-2020 trade deficit figures with RCEP economies reflected this concern (see box),” the CIEM noted.

Figures from the General Department of Vietnam Customs showed that Vietnam’s total export and import turnover with RCEP markets has been on a downward trend. Its total export and import value from and to these markets in its total trade value increased from 45.7 per cent in 2012 to 44.2 per cent in 2018, before declining to 39.5 per cent in 2022. Figures for 2023 are not yet available.

Vietnam recorded a trade deficit of $13.6 billion in 2022 and $8.3 billion last year with ASEAN member states. In 2022, it did so with RCEP partners at $118.9 billion.

Under the RCEP, member countries committed to providing duty-free access to goods that represent 92 per cent of tariff lines.

The United Nations Conference on Trade and Development’s (UNCTAD) analysis indicates that Japan would benefit the most from RCEP tariff concessions, largely because of trade diversion effects. The country’s exports are expected to rise by about $20 billion, an increase equivalent to about 5.5 per cent relative to its exports to RCEP members in 2019.

The UNCTAD report also finds substantial positive effects for the exports of most other economies, including Australia, China, South Korea, and New Zealand. On the other hand, calculations show RCEP tariff concessions may end up lowering exports for Cambodia, Indonesia, the Philippines, and Vietnam.

This would stem primarily from the negative trade diversion effects, as some exports of these economies are expected to be diverted to the advantage of other RCEP members because of differences in the magnitude of tariff concessions.

“For example, some of the imports of China from Vietnam will be replaced by imports from Japan because of the stronger tariff liberalisation between China and Japan,” the UNCTAD said.

According to experts, a big challenge for ASEAN businesses in general and for Vietnam’s in particular is that the RCEP could create a risk of trade diversion.

Meanwhile, the export structure of these industries in Vietnam is similar to ASEAN countries and China, and Vietnam’s export similarity with South Korea is also increasing.

“Thus, the competitive pressure between Vietnam and RCEP countries may increase. Additionally, these countries, including China, also issue new, strict regulations with higher standards, affecting the penetration of imported goods including those from Vietnam,” the CIEM said.

According to Vietnam’s Ministry of Industry and Trade, studies have revealed that the main cause behind Vietnam’s trade deficit with RCEP markets is that Vietnamese businesses fail to clearly understand the criteria and conditions for their exported goods to receive incentives.

At present, so as to enjoy incentives under FTAs, exports must ensure rules of origin through dedicated certificates.

“However, many businesses encounter difficulties proving the origin rate according to regulations due to not having collected enough certificates when purchasing input materials for production and business, and therefore they do not enjoy preferential tax rates,” the CIEM stated.

In fact, many Vietnamese production chains of many goods still depend on it raw material supply - such as electronic products, textiles, footwear, and processed foods - from many RCEP countries such as China and South Korea.

For example, in the textile and garment production chain, 80 per cent of raw materials must be imported from abroad, mostly from China, Taiwan, and South Korea.

Even though Vietnam currently can produce yarn, it still has to export raw yarn to China and then import from this market finished yarn and fabric for domestic production.

For instance in 2019, Vietnam exported $4.2 billion of yarn and $2.1 billion of assorted fabric, but must import up to $13.2 billion of fabric. Of which, $1.3 billion of fibre and $7.7 billion of fabric were imported from China.

Meanwhile, under the ASEAN-Japan FTA commitments, if the product contains fabric made by Japan and ASEAN countries and sewn in Vietnam, it will be tax exempt when exported to Japan. If the fabric is produced outside the RCEP bloc and sewn in Vietnam, the finished product exported to Japan will be subject to a tax rate of 9-10 per cent.

“In other words, the textile industry can hardly take advantage of these tax preferences,” the CIEM said. “Therefore, joining the RCEP will help reduce problems regarding origin, thereby contributing to the creation of new value chains and helping businesses take advantage of important tax incentives.”

Under the RCEP’s commitments, member states pledged to remove 87.8-98.3 per cent of tariff lines for Vietnam, and ASEAN nations vowed to do that with 85.9-100 per cent of tariff lines. The longest roadmap for tariff elimination is 15-20 years as from the RCEP became valid.

Vietnam Investment Review