By the end of August, 2008, Vietnam’s trade deficit hit more than US$15.965 billion, a two-fold increase over the same period last year and equivalent to 36.85 percent of August’s total export turnover.

About 85 percent of Vietnam’s imported products such as materials, fuels, machinery and production equipment mostly come from Asian and ASEAN countries. Meanwhile, its main export items are raw minerals and export manufacturing products.

The current trade deficit has now affected negatively rather than positively national economic development. Therefore, the focus of the export policy in the following years will be on reducing trade deficit to keep trade balance, said Dr Vu Dinh Anh, Deputy Head of the Research Institute for Science, Market and Price under the Ministry of Finance.

Weak competition among domestic businesses

According to domestic and foreign economic experts, Vietnam should have an import surplus from developed countries such as the US and the Europe to have access to more knowledge, advanced technology and high quality products but it has a trade deficit in such major markets. Meanwhile, Vietnam faces an import surplus for years with ASEAN nations and it even helps them consume their products in stock.

Domestic businesses’ low production has failed to meet consumer needs and tastes, resulting in a foreign oriented trend in Vietnam’s investment and spending, said Mr Anh.

In addition, domestic businesses little attention to the domestic market has given room for foreign importers.

“Japan produces the best products for both consumer demands and exports while Vietnamese businesses export their best products to other countries and they sell poor quality products on  the domestic market.”

The domestic economic sector is always in trade deficit while the foreign-invested economic sector faces an export surplus. This shows that domestic businesses’ efficiency and competitive capacity remain low a result of a low-standard technology and a lack of long-term investment.

According to the Department for Small and Medium-sized Enterprise Development, 88 percent of Vietnamese small and medium-sized enterprises use outdated technologies or those of average standard.

Mr Anh has attributed the increase trade deficit to the large proportion of import taxes in Vietnam’s total budget collection. On the other hand, the more goods that are imported, the higher the total budget collection will be, Mr Anh said.

A paradoxical result of management

Tax policy plays a decisive role in managing the State policies particularly for exports.

Pham Chi Cuong, president of the Vietnam Steel Association, gave an example that while the price of steel on the global market was rising high and domestic material reserves were huge but due to inaccurate forecasting, the country raised the export tax rates of ingot steel so that businesses found it difficult to export. Currently, the price of ingot steel has gone down quickly and a large volume of ingot steel is in stock, however, export businesses will suffer from the losses.

Mr Cuong pointed out another example of granting automatic export licenses for the steel sector in July. He said that the regulation aims to limit the export of ingot steel in order to avoid a shortage of materials for steel production. However, the Ministry of Industry and Trade applied the regulation in all other steel products such as construction steel, steel pipes and plated steel, making exports of these products fall by one third compared to usual. Therefore, export companies has asked the ministry to remove the regulation after two months.

Vietnamese export companies are seriously in need of US dollars. Ngo Tri Long said that the Vietnamese foreign currency situation still retains some contradictions. Vietnam often faces a trade deficit but since early 2007 foreign currency supply has risen. Furthermore, while US dollar interest rates in the Federal Reserve System (FED) and Sibor interest rate reduced lending interest rate of US dollars increased. Therefore export prices are higher or in other words profit are  lower.

Mr Long said that Vietnam will maintain the VND/US$ interest rate for a long time, which is not in line with changes in the international foreign exchange market. Meanwhile a strong reduction in US dollars over the past two years is an big cause of the high inflation rate.

Is VND likely to depreciate?

To promote exports and limit the trade deficit, it is necessary to control foreign exchange rates. Many people have said that Vietnam does not apply the Chinese lesson of devaluating its currency to 30 percent compared to the US dollar in 1994.

Phi Dang Minh, deputy head of the Foreign Currency Department of the State Bank of Vietnam affirmed that Vietnam cannot apply the Chinese lesson because of the following reasons. First as a member of WTO Vietnam must follow WTO commitments so the country cannot adjust its taxes. Second it is not a good time for Vietnam to implement a drastic strategy like China because the country’s target is both to limit imports and promote exports. Third, FDI in Vietnam just focuses on volume, instead of quality.

Mr Minh added that in the current situation devaluating the Vietnam Dong will make the trade deficit more serious and the inflation rate higher. When the economy depends on imports, if Vietnam raises its exchange rate, domestic prices will go up and the competitiveness of domestic products will fall.

The adjustment of exchange rates for the VND is based on foreign currency supply and demand under the regulation of the State, thus Vietnam cannot devaluate the VND like China did.