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How to control trade deficit
In the short term, an increase in the trade deficit is an indication of economic recovery but this will affect the balance of payment, foreign currency reserves and exchange rates, and destabilise macro finances.
Trade deficit control proven ineffective
According to the General Statistics Office (GSO), export turnover in April was estimated to reach US$5.7 billion, up 1.9 percent over March while imports were likely to hit US$6.95 billion, up 3 percent. The trade deficit in April jumped to approximately US$1.25 billion compared to US$ 1.16 billion in March, US$1.33 billion in February and US$ 945 million in January. The total trade deficit in the past four months was US$4.65 billion, accounting for 23 percent of export turnover, and surpassing the National Assembly’s set target of keeping the trade deficit below 20 percent.
Trade deficit control has proved ineffective as imports rose 32.6 percent but products subject to import controls such as seafood, fruits and vegetables, steel, gems and precious metal increased 59 percent. Products subject to import limits (Consumer goods, fully-assembled cars seating under nine people and motorbikes rose 41 percent.
Mr. Phi Dang Minh from the Foreign Currency Management Department says that the exchange rate policy is not a main cause of the trade deficit in Vietnam as the State Bank of Vietnam (SBV) has adjusted the exchange rates in line with the Government’s monetary policy and economic growth.
Mr. Minh attributes the recent increased trade deficit to a trade imbalance which has led to exports increasing faster than imports.
In addition, Vietnam has to reduce its import tax rates under international commitments while price hikes for materials in the global market has sent import values soaring. The global economic downturn has also limited Vietnam’s import capacity.
China, Vietnam’s largest trade partner, has seen a year-on-year increase of 40 percent in two-way trade turnover. The figure reached more than US$21.65 billion in 2008, US$20.751 billion in 2009 and US$5.37 billion at the end of the first quarter of this year, up 37.8 percent over the same period last year.
It is worth noting that Vietnam’s import surplus from China is increasing in value and accounts for the majority of Vietnam’s total trade deficit (73.7 percent in 2007, 69.8 percent in 2008, 97.1 percent in 2009 and an estimated at 94.9 percent in 2010).
While Vietnam’s exports exceed imports from the US, UK, Germany, and Australia, its imports from China increasingly surpass exports. Vietnam needs more effective measures to deal with its trade deficit with China.
In addition, the recent devaluation of the US dollar against the VN dong has caused a fall in the price of imported goods which is considered a competitive advantage in the domestic market.
On the other hand, FDI disbursement has seen a significant increase over the past few months, reaching US$3.4 billion in April, according to the Foreign Investment Agency. FDI sector imports have also risen sharply since the beginning of 2010.
The export and import of gold is another factor that affects Vietnam’s international trade relations and the mass importation of gold in 2010 has led to a trade imbalance.
Trade deficit and solution to the problem
Dr. Nguyen Mai, Vice-Chairman of the State Committee for Cooperation and Investment (SCCI), says the trade deficit should be viewed not only in terms of figures but also its structure.
“It is a positive sign if we import more machinery, equipment and materials because it shows a recovery in production,” says Dr. Mai.
In fact, businesses have spent US$2.73 billion to import cotton and other materials for textiles and garments and footwear, much more than last year. Meanwhile, US$4 billion has been spent on machinery and equipment and US$1.5 billion on plastic and plastic products, bringing the import value of these three groups to US$8 billion, accounting for one third of the country’s imports.
According to Mai, the increase in imports also means an increase in production and business activities. In the first four months of 2010, Vietnamese businesses earned more than US$3 billion from garment and textile exports and US$1.35 billion from footwear exports.
One solution for reducing the trade gap is to develop support industries to encourage domestic production instead of importing. This would also to help the country deal with other problems like inflation.
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