When fine tuning a five-year export strategy in 2005, the former Ministry of Trade (now the Ministry of Trade and Industry) predicted that export growth would outpace imports over the period to end the country's deficit by 2010.

At the time, the ministry was optimistic after the import surplus had dropped for three straight years.

But in the last two years, that out-look has reversed and even the most optimistic experts would not bet on Vietnam leveling its trade balance by the end of the decade.

Basic shortcomings

So far this year, Vietnam's imports have risen 33.1 percent while exports increased 20 percent.

This disparity has lifted the import surplus to nearly $10.5 billion, almost a half of the combined surplus from 2001 through 2005.

Many economists and government officials have urged people not to panic as machines, equipment and other necessary materials for production made up 97 percent of the country's imports, a reasonable figure in some analysts' eyes.

But former Minister of Planning and Investment Tran Xuan Gia told Thoi bao Kinh te Saigon (Saigon Economic Times) that in the long term, the current trade deficit would only get worse as the government has not yet worked out a convincing plan to curb the problem.

“If foreign direct investment, foreign loans, and/or overseas remittances drop off at all, the economy will definitely suffer,” said Gia.

Two economists from the Vietnam Economics Institute, Pham Sy An and Phi Hong Minh, agreed with Gia in their Saigon Economic Times article on November 29.

An and Minh argued that a short-term trade deficit was not a problem, but that a long-term deficit would pose significant risks to the economy.

According to the two economists, a long-term deficit is more often than not compensated by foreign direct investment (FDI), indirect foreign investment (IFI) and foreign loans.

For them, the problem is that using these factors to balance the deficit requires microeconomic finesse in managing the capital market.

“In the case that the deficit might be balanced out by foreign loans, if the loans are not used effectively in export-oriented production, then we will have a crisis like the Philippines did in the 1980s,” their article said.

“In another scenario where indirect foreign investment is used to level the deficit, there is a very high chance that countries with poor financial management profiles would experience a financial crisis like the one that battered Asian economies in 1997,” they added.

To analyze the structure of imports reveals fundamental weaknesses of the economy, said Minh and An, pointing to the crippled industrial sector, which survives primarily by sub-contracting for the world's major producers.

An and Minh said that many imports, though categorized as raw materials for production, are not dissimilar to consumer products.

This is simply because Vietnamese sub-contractors cannot find a stable, good-quality supply of these materials and thus have to import almost all materials from their contractors.

For such contractors, the profit mainly comes from the cheap labor.

Automobile assemblers have admitted that their assembly – which generates most of their products' added value – only accounted for between 3 and 5 percent of a car's factory price.

The situation is not any brighter for other key industries such as electronics, textiles, garments, and mechanical engineering.

An and Minh observed: “The country's export structure is mainly made up of products using cheap labor. Thus, the added value of these exports is very low and decreases when production slows.”

Given the high annual growth rate (about 20 percent) of Vietnam's domestic purchasing power, economists forecast that the import of materials that are used to make domestically-consumed products would rise.

Whereas the major exports are unlikely to cover the deficit because of their low-profit margin, some economists have argued that the export of crude oil, seafood, and agricultural produce is strained by low capacity and world market demand.

An and Minh said: “The fall in the export of crude oil in November was not bad news. Rather, it made us notice that we're overexploiting natural resources. There is nothing to be proud of when we gain high export growth by depleting natural resources.”

Proposed measures

The Deputy Minister of Industry and Trade Nguyen Cam Tu said that to reduce the deficit, the country needed to export more products of high added value.

It sounds like a simple, viable remedy for the raging trade deficit, but economist Le Dang Doanh begs to differ as he believes the problem is rooted deeper than that.

Doanh commented that Vietnam did not yet know how it can be part of the world's chains of production, and any blame should be put on the government's problematic localization policy.

He said that instead of concentrating its resources to manufacture a certain part of a product, the government's localization policy encourages the industrial sector to produce all the parts.

Unfortunately, automobile and electronics are the two clear-cut examples of the failure of this policy as these two industries are nowhere near achieving localization targets despite receiving large financial support.

Source: Thanh nien.