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The two sides of a bigger trade deficit
A widening trade deficit is an indicator of a recovering economy. However, too big a trade deficit will put hard pressure on the balance of payments, foreign currency reserves and exchange rate. Dau Tu, an investment newspaper, looks at both sides of the issue.
Vietnam’s export revenues reached an estimated $20.517 billion in the first four months of the year, nearly nine percent more that in the same period of 2009, which should be seen as an encouraging result. However, the expense of imports increased even more sharply, by 35.6 percent, to $24.807 billion. Thus the the trade deficit was relatively large, $4.65 billion, a worrying figure.
However, Economist Nguyen Mai, former Deputy Chairman of the State Committee on Cooperation and Investment still can see the positive aspect of the trade deficit. He said that it is necessary not only to consider the absolute trade deficit, but also to consider the ‘trade deficit structure’.
“A deficit should be seen as a good thing if it is caused by the import of machines, equipments and materials that are used for production,” he said. “Vietnam is importing materials in large quantity means that its production has been recovering well.”
“Garment factories are running at full capacity because they have many orders,” Mai added by way of illustration. “Therefore, it is understandable that they have to import more fabric and other inputs to the manufacturing process,” he added.
Mai’s words are borne out by General Statistics Office (GSO) data. In the first four months of the year, enterprises spent $2.73 billion to import cotton, fibre, fabric and input materials to make garments and footwear, a figure that is much greater than for the same period of the last year. Meanwhile, more than four billion dollars have been spent on importing machines and equipment. Imports of plastic and plastic products were approximately $1.5 billion. As such, these three categories of products alone accounted for imports of over $8 billion, or 1/3 of the total imports in the first four months of the year
Mai stresses that the high imports of materials and equipment always lead to higher production. GSO has also reported that just in the first four months of the year, Vietnamese enterprises exported $3 billion worth of garments and $1.35 billion worth of footwear. Meanwhile, the sharp increase in imports of machines and equipments is seen as a result of the increase in the spending by foreign invested projects.
However, according to Nguyen Thanh Hoa, Deputy Director of the Planning Department under the Ministry of Industry and Trade, there are always two sides of a coin. Trade deficit increases are an indicator of recovery of the national economy. Even so, a high trade deficit puts considerable pressure on the balance of payments, foreign currency reserves and exchange rate. That explains why many economists have voiced concern that the trade deficit has exceeded the safety line, defined as 20 percent of the value of exports.
That also explains why the measures to curb the trade deficit are being discussed. Most recently, government agencies have decided that iPhone should be added into the list of items subject to import restrictions.
Despite a lot of measures to hold down the trade deficit, Vietnam has not succeeded in narrowing the gap between imports and exports.
A radical solution is needed, says Phan Dang Tuat of the Industrial Policies Institute (Ministry of Industry and Trade), and that is encouragement of supporting industries.
“Developing supporting industries can play a decisive role in reducing trade deficit,” Tuat said. By this, he means that smaller Vietnamese firms can be assisted to supply many of the intermediate goods that are now imported, in close relationships with large (And often foreign-invested) exporters.
Tuat added that until Vietnam develops supporting industries, it will continue to have a larger than necessary import bill. “If we do not pay attention to developing supporting industries, we will continue to have to import materials to export finished products.”
vietnamnet, Dau tu
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