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Is trade deficit worrying?
04 | 12 | 2007
The Ministry of Industry and Trade’s (MOIT) estimate of Vietnam’s trade deficit at nearly $10bil this year stressed the figure was not of concern. Analysts’ views differ.

The Ministry of Trade’s (now MOIT) 2005 import-export 2006-2010 strategy included the perception that the export growth rate would be higher than the import growth rate. Based on this optimistic assumption, MOIT thought there would be no more trade deficit after 2010.

 MOIT’s forecast increasingly appears unlikely. After three consecutive years of trade deficit decreases, imports are now overtaking exports, even optimists do not foresee MOIT”s 2010 target coming to fruition.

Trade deficit reveals economic weaknesses

In the first 11 months of the year, Vietnam saw imports increase by 33.1% and exports decrease by 20%, leaving a trade deficit of $10.47bil, equal to half the total 2001-2005 trade deficit.

MOIT Minister Vu Huy Hoang has reassured the public that the trade deficit is nothing to be concerned about since 97% of imports were equipment and machinery serving local production and investments.

However, Tran Xuan Gia, former Minister of Planning and Investment, warned that the Government should find a way to reduce the deficit, else Vietnam will incur the consequences.

“Currently, Vietnam has many sources of foreign currency earnings to offset the import-export imbalance. But one day, if the sources of foreign currencies begin to run dry (foreign direct investment, overseas remittance or ODA capital decrease), we will be unable to offset the deficit and will suffer,” said Mr Gia.

It is true that most imports were machinery and equipment that served local production and investment. However, this uncovers the deadly weak points of a national economy whose industrial production relies on assembly and processing.

Meanwhile, many imported items, though listed as used for local production, were nearly finished products, which would not bring high added production value. Car parts are a typical example. Automobile manufacturers import car parts and simply do the final assembly in Vietnam, which does not add nearly enough value to the finished product. In reality, local assembly only accounts for 3-5% of a car’s value.

Analysts believe that Vietnam will not be able to thwart the trade gap anytime soon. Currently, the purchasing power on the domestic market increases by 20% per annum, which means materials and equipment imports for local production will only keep rising. Meanwhile, primary export items, including crude oil, seafood and agricultural goods, are not expected to bring high export turnover as their markets depend on output and global demand.

Deficit not only about imports and exports

According to the Deputy Minister of MOIT Nguyen Cam Tu, in order to reduce its trade gap, Vietnam needs to export more products with high added value. However, this can prove to be a difficult task.

Experts and Government agencies have repeatedly said that Vietnam should focus on developing supporting industries. However, no detailed plan on doing so has been drawn up and Mr Gia says opinions still vary as to which supporting industries should be chosen.

Some experts think Vietnam should not invest in making products other countries can produce at lower cost. “No need to make products that we can buy at low prices”, they say.

Mr Gia does not share the same view. He thinks Vietnam should make appropriate investments in products using local natural resources, which are now being exported as raw materials, and thereby create more jobs.

“If we don’t have anything to sell, we will not have the money to import cheap products from other countries,” Mr Gia said.

As such, reducing the trade deficit is not simply a story of imports and exports.

According to the Ministry of Planning and Investment, between 1995 and 2000, Vietnam spent VND3.5 to get one VND of GDP, that figure has now risen to VND4.5.

MOIT forecast earlier this year that the trade gap may reach $10bil this year, unfortunately the $10bil threshold was exceeded within the last 11 months.

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