TRADE DEFICIT
WITH CHINA
OF VIETNAM IN
THE LATE
2000S
LECTURER: DR. TU THUY ANH
FO R E IGN TR A D E UN IV E RS IT Y - H A NO I – S U M M ER 2 0 1 1
TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
Abstract
Trade deficit in general and trade deficit with China is one of the highly concerned
problems of Vietnam macro-economy because long-term trade deficit leads to the
situation of being dependent on foreign economies, the imbalance of BOP, hence, the
whole economy. Examining the severity of the situation and finding the solutions to the
problem is necessary for our sustained economic development. In our research, firstly, we
will analyze the real situation of trade deficit with China with related facts and figures.
Secondly, we explained the reasons for the huge trade deficit with China. Finally, we will
suggest some short-term and long-term solutions to the trade deficit problem. We do this
research in order to give readers the insights, to some extent, into the trade deficit with
China of Vietnam.
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
TABLE OF CONTENTS
1
2
The situation of Vietnam’s trade deficit with China ............................................... 4
1.1
Trade deficit in Vietnam in general ....................................................................... 4
1.2
trade deficit with China ............................................................................................... 7
Reasons for the situation of trade deficit with China in Vietnam .................. 11
2.1
Exporting low-added value goods, importing high –value goods .......... 11
2.2 The inefficiency and ineffectiveness of domestic productions and
investments............................................................................................................................... 13
3
4
2.3
Chinese various in kinds and low in price goods .......................................... 14
2.4
The appreciation of Chinese currency ............................................................... 15
2.5
WTO and commitments ........................................................................................... 17
Solutions for the problem of trade deficit with China of Vietnam ................ 18
3.1
Exchange Rate Tool.................................................................................................... 18
3.2
Capital in-flow and out-flow control .................................................................. 19
3.3
Exporting Spurs ........................................................................................................... 20
3.4
Some other solutions ................................................................................................ 21
Conclusion ............................................................................................................................. 22
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
TRADE DEFICIT WITH CHINA OF
VIETNAM IN THE LATE 2000S
Student
Phạm Thanh Hải
Nguyễn Thị Quỳnh Mai
Phan Thị Diệu Linh
ID
0851050064
0851050049
0851050046
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
1 THE SITUATION OF VIETNAM’S TRADE DEFICIT WITH CHINA
1.1 TRADE DEFICIT IN VIETNAM IN GENERAL
Since opening the economy, Vietnam’s trade has increased rapidly. From 1995 to 2008,
in average, the amount of export increased by 18.7%/year while import increased by
20.1% /year. Total amount of import from only 39.3% of GDP in 1995 increased to
99.31% of GDP in 2008. Along with that, the trade deficit increased from 0.27 billion
USD in 1990 to 18.03 billion USD in 2008.
The increase in the export-import turnover make Vietnam’s economy more and more
widen. However, there are many potential risks. The sum of trade deficit in Vietnam from
1990 to 2009 was 84 billion USD, which was larger than GDP in 2008. The ratio trade
deficit over GDP is much larger than other countries in the world.
Year
Export (mill USD)
Import (mill USD)
GDP (mill USD)
1995
5448.9
8155.4
20736.2
1996
7255.9
11143.6
24657.5
1997
9185.0
11592.3
26843.7
1998
9360.3
11499.6
27209.6
1999
11541.4
11742.1
28683.7
4
TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2000
14482.7
15636.5
31172.5
2001
15029.2
16218.0
32685.2
2002
16706.1
19745.6
35058.2
2003
20149.3
25255.8
38867.1
2004
26485.0
31968.8
45404.4
2005
32447.1
36761.1
52426.9
2006
39826.2
44891.1
59716.0
2007
48561.4
62764.7
68435.2
2008
62685.1
80713.8
81269.6
2011
Sources: World Bank data, GSO Vietnam
Trade deficit in Vietnam (million USD)
20000
18000
16000
14000
12000
10000
Trade deficit
8000
6000
4000
2000
0
19951996199719981999200020012002200320042005200620072008
5
TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
Trade deficit in other countries in 2008 (million USD)
Vietnam
Japan
USA
China
Australia
Singapore
Taiwan
Germany
Thai
Korea
Malaysia
UK
France
-15000
France
Trade deficit
-56
-10000
-5000
0
5000
10000
15000
Malaysi
Germa
Singap Australi
Korea Thai
Taiwan
China USA
a
ny
ore
a
934
-823 -4912 -3248 298 -5132 -2172 1227 -11532 8346
UK
Vietna
m
-1176 18028
Japan
Source : World Bank
Import structure: Most of the imported goods of Vietnam are machinery and raw
materials; consumer goods make up less than 10%. Since 2000, imported consumer
goods make up 6-8%, while the number of raw materials is 60-67%. At the moment,
because of being a developing country, the need of raw material as well as machinery is
increasing year by year along with the raise of GDP.
Total
2005
2006
2007
2008
Mill.USD %
Mill.USD %
Mill.USD %
Mill.USD %
25.3
11040.8
24.6
17966.2
28.6
22566.7
29.3
64.4
28463.3
63.4
38822.4
61.9
49149.2
60.9
Machinery, 9285.3
instrument,
accessory
Fuels, raw 23663.9
20000
material
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2992.5
Consumer
8.2
3508.4
7.8
4660.1
7.4
2011
6269.9
7.8
goods
Source: gso.gov.vn
1.2 TRADE DEFICIT WITH CHINA
In recent years, the amount of imported goods has increased sharply from 329 million
USD in 1995 to 15973 million USD in 2008. It made up more than 90% of the total
amount of trade deficit of Vietnam. However, it is only official figure. If the amount of
goods smuggled cross borders and goods imported by way of quota are counted, the
number will be higher. The problem here is that the rate of the increase in imported goods
from China is faster and faster while the amount of exported goods stays the same.
China Import and Export from 1995 to 2008
18000
Amount of goods (mill USD)
16000
14000
12000
10000
8000
6000
4000
2000
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Export 361.9 340.2 474.1 440.1 746.4 1536.4 1417.4 1518.3 1883.1 2899.1 3228.1 3242.8 3646.1 4850.1
Import 329.7
329
404.4
515
673.1 1401.1 1606.2 2158.8 3138.6 4595.1 5899.7 7391.3 12710 15974
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
Imports of goods by country and group
Amount of goods (mill USD)
80000
70000
60000
50000
40000
30000
20000
10000
0
China
USA
Japan
Germany
ASEAN
APEC
EU
2006
7391.3
987
4702.1
914.5
12546.6
37467.7
3129.2
2007
12710
1700.5
6188.9
1308.5
15908.2
52637.9
5142.4
2008
15973.6
2646.6
8240.3
1479.9
19567.7
67232.2
5581.5
In 2007, the trade deficit with China of Vietnam is 9.145 billion USD, making up 64% of
the total amount of trade deficit. In 2008, the figure is 11.16 billion USD and 61%
respectively. In 2010, trade deficit with China was raise to red alert: 12.6 billion USD,
which was equal 105% of the total amount of trade deficit in 2009. Therefore, Vietnam
has failed to decrease the unbalance in trade balance between Vietnam and China.
In 1991, Vietnam mainly traded with Soviet and the socialist countries of Eastern Europe,
through SEV. After the socialist countries collapsed, Vietnam has diverted trade to other
countries such as EU, USA, Australia, Canada, ASEAN, Japan, Korea, etc. A series of
commitments such as FTA, WTO, and AFTA were signed. After the diversion, trade
deficit has been increasing significantly. In 2000, trade surplus from China of Vietnam is
135 million USD. But in 2001, the trade balance switched to deficit of 200 million USD.
From then on, the imports from China have increased sharply. Chinese goods flood
Vietnamese market. Although Vietnam has trade relations with more than 200 countries
and territories, China supplies ¼ raw materials for Vietnam economy.
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
In the late of 2009, according to the statistics of Ministry of Industry and Trade, Vietnam
exported mineral materials such as coal, rubber and crude oil to China; making up 55% of
the overall exports. However, the export of this commodity group has to be reduced to
ensure the energy security. In 2009, crude oil was decreased 24% and in 2010 coal was
decreased 50% compared to 2009.
Types
2009
Amount (Tons)
2010
Price
(1000 Amount (Tons)
USD)
Price
(1000
USD)
Crude oil
1,032,921
462,623.331
593,997
367,631.9
Coal
20,453,501
935,843.407
14,644,571
961,855.12
Rubber
510,245
856,712.92
464,372
1,420,788.726
Mineral
1,670,233
103,632.823
1,399,846
101,915.301
124,857.336
Aquatic
162,557.6
products
Coffee
17,396
Total
24,885.623
4,909,025.328
26,499
39,361.779
7,308,800.253
Main products exported to China
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
Types
2009
2011
2010
Amount
Price
(Tons)
USD)
Petroleum
2,431,836
1,290,162.315 1,523,028
1,060,887.897
Gas
348,938
201,283.937
318,375
246,794.803
Fertilizer
1,951,305
596,025.776
1,712,004
603,399.522
(Tons)
1,309,888
Iron and steel
Computers, electronic
815,662.347
Price
(1000
USD)
2,218,368.109
1,565,975.737
Textile
products and
(1000 Amount
2,188,545
1,519,043.538
1,463,551.047
1,682,616.402
4,155,283.341
4,477,616.444
16,440,951.8
20,018,827.001
spare
parts
Machinery,
equipment,
tools, spare parts
Total
Main products imported from China
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
Compensating for this decline, Vietnam has only agricultural, aquatic and industrial
product. Nevertheless, agricultural and aquatic product made up only 15% of exports to
China. Most Vietnamese exported product to China is raw materials and primary
processing such as fruits, rubber, coffee, pepper, which do not bring great value.
Meanwhile, Chinese imported products are essential goods such as machinery,
components, spare parts and home consuming goods. Therefore, Chinese imported
products have increased overtime. The list of Chinese goods that Vietnam has been
dependent is becoming more sensitive and has close ties to the deep veins of the
economy. For example, Vietnam has intention to increase the purchasing of electricity
from China, with the ratio of 4% of total demand.
Overall, Chinese imported goods has been increasing year by year. Vietnam is now more
dependent on China than ever.
2 REASONS FOR THE SITUATION OF TRADE DEFICIT WITH
CHINA IN VIETNAM
2.1 EXPORTING LOW-ADDED VALUE GOODS, IMPORTING HIGH –VALUE GOODS
The main exported goods of Vietnam such as shoes, pepper, coffee bean, cashew, rice
have low value added in the value chain; therefore, their contributions to the export value
are comparatively low. Moreover, the export of these goods has to depend on the
equivalent input materials imported from China.
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
Source: www.gso.gov.vn
From the figures of main import and export goods in 2010 of the GSO of Vietnam, it can
be inferred that most of the main exported goods into China have relatively low value in
comparison with the necessary equivalents inputs imported from China. For example, we
export crude oil for more than 350 million USD but at the same time import refined oil
for more than 1 billion USD. Similarly, we export shoes for more than 3 million but
import shoes and shoes’ materials for 671 million. Worse still, in garment and textile, we
export for about 93 million USD but import for 2,218 million USD.
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
2.2 THE INEFFICIENCY AND INEFFECTIVENESS OF DOMESTIC PRODUCTIONS
AND INVESTMENTS
Firstly, basing on the Incremental Capital Output Ratio (ICOR), Vietnam has a rather
high ratio.
ICOR =
The higher the ratio is, the less efficient the investment becomes.
ANNUAL AVERAGE ICOR 2000-2008
6
5
4
3
2
ANNUAL AVERAGE ICOR 20002008
1
0
Source: CEIC Data Company Ltd: and IMF staff calculations
It can be inferred from the chart above that Vietnam had a relatively high annual average
Incremental Capital-Output ratios in the period 2000-2008 in comparison with some
Asian countries. It means that our investment was not comparably effective. This is one
of the core reasons leading to the inadequate domestic supply of goods and services. The
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
situation becomes worse when the domestic demand for goods is increasing sharply
ranging from necessary goods such as daily foods, vegetable, clothes to durable and
luxurious goods such as cars, cosmetics. However, the domestic production is not enough
to supply all needed goods and services. The domestic insufficient supply ranges from
iron and steels, input material for garment and textiles, fertilizers to motor and
automobile spare parts.
On the other hand, domestic producers cannot self-supply some kinds of high-tech inputs,
primary materials for our goods and services because of the complex skills, knowledge
and know-hows required. For example, in the case of production of automobile and
motors, the main value added is from the assembly of spare parts imported from China,
which add up relatively low value. In this sector, import takes up two-thirds of exported
value.
Worse still, some kinds of products those can be domestically supplied do not meet
requirement or tastes of consumers. At that time, the domestic products which meet the
quantitative demand only cannot be consumed. All in all, our domestic production cannot
meet domestic demand in both quantitative and qualitative aspects of the goods and
services.
2.3 CHINESE VARIOUS IN KINDS AND LOW IN PRICE GOODS
Chinese is said to be the workshop of the world which offer the equivalent goods at very
low price in comparison with most countries in the world, Vietnam included. The lowprice is one of the most important competitiveness of Chinese goods. For example,
Chinese steels are 10% cheaper than domestic steels; Made-in-Vietnam clothes are up to
50% more expensive than those in China. In the case of fresh fruits, vegetables, one of
the main imported goods from China, imported value has amounted to 156.13 million
USD, taking up 53.1% of imported value from foreign countries of Vietnam. Even the
exclusively special fruits of Vietnam such as citrus fruits, water-melon, etc. are now
imported from China. Some other goods such as garlic, ginger, carrots are half the price
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
of those from Vietnam’s origin. In addition, these fruits, additives, vegetables can be
preserved longer than those of Vietnam.
One of the main reasons of the cheap goods in China in comparison with Vietnam is that
in China, the input materials are available, labor is cheap. At that time, we cannot supply
input materials ourselves. We have to import, instead. Therefore, it is difficult for the
equivalent or similar goods made in Vietnam to regain the domestic market, not to
mention entering the Chinese market.
Another obstacle to Vietnam goods is the distribution channels. Chinese producers with
the advantage of low price can offer a high discount for agents in Vietnam, thus, they
easily dominate our market.
Moreover, Chinese goods are various in kinds, fitting most kinds of ages, tastes,
purposes. For example, clothes from China are saturated in Vietnam market with various
kinds, size, attractive designs and reasonable price, targeted at and dominated the market
for low and middle – in come consumers.
2.4 THE APPRECIATION OF CHINESE CURRENCY
On June, 2010, People’s Bank of China (PBC) formally revalued its official exchange
rate against USD about 0.45%, from 6.827 to 6.7980, marking the first revaluation from
July, 2008. 3 weeks after the coming into force of the decision, CNY appreciated by
0.8% at 6.7746 CNY/USD and are expected to be at 6.5 CNY/USD at the end of the year
2011.
According to the Government of China, domestic investment decreased, limited import
and promoted export. Considering the table below, it can be referred that the revaluation
increased trade deficit with China dramatically.
15
TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
Source: extracted from figures of www.gso.gov.vn
From the table above, trade deficit with China rose three months continuously by 1.5%
from June, 2010 to September, 2010 and the trade deficit of the first 9 months of 2010
increased by 46.17% in comparison with trade deficit of the same periods in 2009.
Source: extracted from figures of www.gso.gov.vn
Chinese official currency (CNY) was adjusted to increase 279 basis points during the
year 2010, or 0.45% against the U.S. dollar. The adjustment often imply the more
balanced BOP but in case of Vietnam, the modest increase in export turnover is eaten up
by the huge increase in import turnover caused by the appreciation of CNY against VND.
The appreciation of CNY, to some extent, discourages the trade flow into Vietnam but
most of the imported goods from China cannot be substituted by domestic productions.
For example, input materials for our main exported goods such as garment and textiles,
shoes, steels, spare parts, machines cannot be cut off because the domestic market is
unable to supply them.
One more impact of the appreciation of the CNY is the increased foreign direct
investment from China into Vietnam. With this scenario, the flow of machines, tools,
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
input from China rises sharply, which obviously alleviates the huge trade deficit between
two countries.
2.5 WTO AND COMMITMENTS
The participation of Vietnam into World Trade Organization (WTO) marks an important
milestone in our economic development, which serves as a chance for spreading our
wings. However, our economy has to face with rather stiff competitions from WTO’s
members, China included. We have to liberalize trade by removing, step by step, various
tariff- and non-tariff-barriers, which have protected our infant industries from outside
competitions. The liberalization of trade barriers and commitment to reduce
protectionism exposes domestic infant industries to many threats. Many of our infant
industries such as paper industry, steels industry, clothes cannot compete with foreign
ones. Thus, the stiff competitiveness will undermine our industries. At that time, we have
to import more, which will alleviate the problem. This leads to the dramatic decreases in
imported goods and services.
One obvious example of the collapse of domestic industry is Viet Tri’s Sugar Company
and Hong Ha Beer Company in Phu Tho Province. These two companies cannot compete
with the low price Sugar from China in around the year 2000 and had to declare
bankrupt. After these collapses, the sugar price increased sharply by 100% within 1 year,
from about 280 USD/ton to 565 USD/ton.
In fact, according to Mr. Nguyen Ba Dinh, vice-director of Cat Lai Customs Department,
many Chinese agricultural products are treating at the 0%-tariff. Therefore, the import
limitations by tariff are not applicable. Moreover, technical barriers to trade (TBTs) and
Sanitary & Phyto-sanitary measures (SPs) have not been created and applied yet. Thus,
Chinese goods freely move into and out of our countries just as the domestic goods and
services.
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
3 SOLUTIONS FOR THE PROBLEM OF TRADE DEFICIT WITH
CHINA OF VIETNAM
The imbalance of trade, especially the trade deficit, which refers to the excess of import
over export, is often considered a big issue to a national economy. Generally, persistent
trade deficit is harmful to the economy while it leads to the foreign exchange gap and
foreign exchange scarcity. As a result, the country’s position in international payment
will be reduced. So, improving trade balance or reducing the trade deficit takes a lot of
concern of policy makers.
3.1 EXCHANGE RATE TOOL
There is a bund of factors that take effect on the trade balance, for constant, domestic
GDP, foreign income, commodity prices and exchange rate. Among them, exchange rate
is regarded as an important tool because of its significant impact on the exports and
imports of a country.
Theoretically, depreciation of nominal exchange rate will spurs exporting and deters
importing, thus improving trade balance. As a result, devaluation is often recommended a
good instrument in stabilization programmed for improving trade balance for countries
suffered from trade deficit.
Practically, the result may be not as expected. Some countries succeeded in improving
trade balance by devaluation but some failed.
In the case of Vietnam, The Dong/USD rate has remained broadly stable. The
continuation of this policy in the face of persistent large capital inflows would require a
return to significant foreign exchange intervention.
We would encourage the authorities to allow the Dong to be more responsive to
pressures on the exchange rate.
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TRADE DEFICIT WITH CHINA OF VIETNAM IN THE LATE 2000S
2011
In the short run, this would ease the need for foreign exchange intervention and
sterilization.
In the longer run, greater exchange rate flexibility would create an incentive to manage
exchange rate risks effectively, deepen further financial markets, and help enhance
Vietnam's resilience to external shocks
3.2 CAPITAL IN-FLOW AND OUT-FLOW CONTROL
In short-term, we can in some way depend on FDI or FII, and loan for solving the
payment balance. By that way, we should continue to promote investment, attract FDI,
especially for the large-scale projects; tighten the control and supervision over project
implementation aiming at ensuring transparency and reducing corruption. However, this
is only short-term solution while the foreign loans are always accommodated with some
special conditions, which can affect other sides of the country such as the politics, social
or environment.
It is also encouraged to push up the overseas transfer to have a stable capital resource.
However, transferring domestic currency abroad encounters some obstacles, while there
are not many of business that have a large of capital budget to take risk.
Moreover, the authorities should rein in credit growth and enhance prudential oversight
of banks, especially of the joint stock banks that have extended credit at a particularly
high pace.
The authorities could direct the central bank to increase interest rates for the loans of
foreign currency, reduce foreign currency sales or offer exporters above-market rates for
foreign currencies to ensure an adequate supply of foreign currencies in the domestic
economy. This helps to increase Foreign Currency Reserve to encourage and guarantee
for foreign investors.
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