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RCEP: The trade deficit associated with foreign investment is a big challenge

The RCEP agreement is expected to come into effect soon and improve market access for Vietnamese exports. However, the reality of Vietnam’s trade deficit with the RCEP region in recent years and consequences of supply chain disruption due to the Covid-19 pandemic in 2020 also make some Vietnamese experts concerned about the benefits Vietnam can derive from the RCEP, especially in a more recent dimension of the degree of economic autonomy.

Expanding export markets

Vietnam participates in RCEP with a more “progressive” approach, set in the context of debates about the impact of international economic integration – especially trade and foreign investment has become more “multi-dimensional”, the view of the RCEP has mixed both positive and negative aspects.

For Vietnamese trade, RCEP can present several opportunities and challenges. Covering countries with populations up to 2.2 billion, equivalent to 30% of global population, the RCEP agreement creates a large and potential market for exports. The quantitative assessments show RCEP has trade-creating effects and not just trade diversions. Along with increasing trade in intermediate goods, Vietnamese firms can also participate more deeply in value chain and production in the region. Even with imports, Vietnam can also benefit from increased quality imported for consumption. Along with increasing trade in intermediate goods, Vietnamese companies also have the opportunity to participate more deeply in the value chain and production in the region.

According to Dr. Tran Thi Hong Minh, Director of the Central Institute for Economic Management (CIEM), for Vietnam’s trade, RCEP can present several opportunities and challenges. Covering territories with 30% of the global population, RCEP is expected to expand markets for Vietnam’s exports through trade facilitation and supply chain completion via investment in supporting industries.

In addition, joining a large market like the RCEP, Vietnamese enterprises have the opportunity to participate more deeply in the value chain and regional production, contributing to strengthening their position in the global production chain. The commercialisation in RCEP can bring many significant benefits to Vietnam such as higher GDP growth, boosting private consumption and exports. Although there is still overlap in the structure of comparative advantage between Vietnam and its member countries, this overlap is on a downward trend. Meanwhile, the trade complementarity is increasing between Vietnam and the RCEP partners.

Worries about trade deficit

According to Nguyen Anh Duong, Head of the CIEM’s Integrated Research Department, joining RCEP will help businesses reduce difficulties and challenges of rules of origin. Because in fact, many commodity production chains in Vietnam depend on the supply of raw materials (such as electronics, textiles, footwear, processed foods) from many RCEP countries (for example, term China, South Korea). For example, in the textile and garment production chain, 80% of raw materials must be imported from abroad, most of which are from China, Taiwan, and South Korea. Meanwhile, according to the contents of the trade agreements (FTAs) commitments between ASEAN and Japan, if fabric products are manufactured by Japan and ASEAN countries are sewn in Vietnam, tax will be exempted when exporting to Japan. If fabric is manufactured outside the region and sewn in Vietnam, the finished product exported to Japan will be subject to a tax rate of 9-10%. In other words, it is difficult for the textile and apparel industry to take advantage of tax incentives. Therefore, joining RCEP will help reduce the difficulties and challenges of rules of origin, contributing to creating new regional value chains and help businesses make better use of important tax incentives.

“Higher complementarity and less competition provide greater prospects for trade expansion when tariffs and non-tariff barriers are removed,” Nguyen Anh Duong said.

On the import side, RCEP also opens opportunities for Vietnam to access more easily to diverse commodity export markets in both types and prices of partner countries. Regulations on tariff elimination and reduction will help Vietnamese firms have the opportunity to import raw materials and machinery from countries with high science and technology, with lower prices. As a result, companies can increase productivity, improve product quality and reduce production costs, contributing to increasing competitiveness of Vietnamese exports in international markets.

“However, recognising and effectively handling the trade deficit associated with foreign investment in the RCEP market is a big challenge and even more complicated. The quality screening of FDI projects is the right policy, but not easy to implement after the RCEP comes into effect. In addition, the control of foreign investment flows from RCEP and its consequences for the macro-economy remains a complex and difficult issue in the balance between attracting and protecting investors and the right to build policies of Vietnam. These challenges more or less affect the degree of autonomy of the Vietnamese economy, but can still be addressed. However, dealing with institutional challenges depends on the degree of comprehensiveness of Vietnam’s approach, and it is difficult to be effective if we look at foreign trade and investment in a discrete manner when implementing RCEP,”, said the CIEM Institute Director.

To increase the autonomy of the economy in the implementation of RCEP, the factor of reform is of particular importance. In particular, the harmonisation of the institutional reform process when implementing FTAs ​​is important. First of all, Vietnam must continue to implement reforms to the general macroeconomic base, including competition policy, business environment and product markets. These reforms must be based on a policy foundation to maintain stability and enhance the resilience of the economy.

The second is that investment policy must be at the centre, associated with orientation on sectors that need priority to develop and industries that need to promote free competition, the level of participation in the value chain in the RCEP region, the degree of self in attracting and using FDI projects from the RCEP region. The trade policy should be consistent with investment policy, contributing to more effective and harmonious handling of trade deficit and intermediate imports, and at the same time consistent with the participation of businesses in water into the value chain. In addition, Vietnam must address bottlenecks in infrastructure and human resources, including the participation of foreign investors and partners at an appropriate level.