Vietnam may see little gains from Russian FTA

Vietnam may see little gains from Russian FTA

The final negotiation between Vietnam and the Customs Union of Russia, Belarus and Kazakhstan on their free trade agreement (FTA) concluded last month right around the time that Russia’s economy took a nose dive.

The agreement is expected to be signed early this year granting Vietnam preferential export tariffs on agricultural produce, seafood, textiles and garments, footwear and furniture. Many of those products are expected to enjoy zero-percent tariffs just after the FTA goes into effect.

Meanwhile, Vietnam has opened its market to the union’s animal husbandry products, machinery, equipment and vehicles.

However, few local enterprises are interested in the tariff relief.

Truong Dinh Hoe, general secretary of the Vietnam Association of Seafood Exporters and Producers, said many local enterprises have been applying for licenses to export to Russia for a few years.

But few have jumped through all of the hoops required to obtain one.

Uneven playing field

Local seafood enterprises say they’re allowed to ship seafood to Russia and the Customs Union only when they have signed contracts for Russian imports.

Seafood production at a Vietnamese exporter. Photo: Chi Nhan.

As many as 102 local firms meet food safety requirements for exports to Russia, according to findings the Customs Union inspectorate completed last year.

However, only 64 firms are allowed to do so, while 38 others are not since they have yet to secure export contracts with Russian partners. Enterprises say the requirement is a big barrier for them to infiltrate the markets.

Another difficulty for local seafood enterprises is tight regulations on food safety, sanitation, and disease quarantines that Russia imposes on Vietnamese agricultural products.

“Many of Russia’s standards are even higher than those imposed by the EU,” said Nguyen Binh Giang of the Export-Import Department of the Ministry of Industry and Trade.

Russia banned imports of a wide range of US and European foods last year in response to Western economic sanctions, creating a buzz among local exporters hoping to expand into the market.

However, many other importers, including China and Brazil, stepped in first. Meanwhile, supermarkets in Russia aren’t particularly keen for Vietnamese imports, said industry insiders.

The export of footwear, which could enjoy zero-percent import tax under the FTA, has so far been very low–only about $200 million in 2014.

As such, the sector is expected to benefit very little from the agreement.

Footwear production is mainly conducted under outsourcing contracts, said vice chairman of the Vietnam Leather and Footwear Association Diep Thanh Kiet.

The moderate potential benefits became even less potentially significant after Russia’s economy slid into crisis.

The devaluation of the ruble against the dollar and euro is becoming a challenge for local exporters, since it raised the price of Vietnamese products shipped to Russia. The country will likely reduce imports from foreign countries to decrease spending. Vietnam’s key exports to the market, including seafood, rice and coffee, are at risk of declining in the near future, said local economists.

Pummeled by slumping oil prices and geopolitical pressure, the ruble was trading at about 69 rubles to the dollar late Monday, compared with about 35 rubles a year ago, according to the Wall Street Journal.

Difficulties ahead

Future FTAs are unlikely to be of much benefit due to non-tariff barriers that Vietnamese enteprises find it hard to overcome, said economists.

Technical barriers, including criteria on product quality, food safety, and intellectual property protection, could limit our exports” — Nguyen Van Nam, economist

Late last year, Vietnam and South Korea signed a statement that concluded their negotiations of an FTA. Vietnam also expects to finalize negotiations for the EU-Vietnam Free Trade Agreement and the Trans-Pacific Partnership (TPP) this year.

Economist Nguyen Van Nam remains skeptical about the benefits the agreements will bring, describing the situation as something of a stacked deck.

“Enteprises can see benefits from tariff reduction under the future FTAs. However, technical barriers, including criteria on product quality, food safety, and intellectual property protection imposed by foreign partners could limit our exports.”

If enterprises do not meet the requirements, Vietnam will fail to increase exports to the market despite the tax cuts.

However, it is very difficult for local firms, given their limited financial capacity and poor production technology, to overcome the barriers, he said.

He expects this same problem will arise in relation to the TPP.

The garment sector, Vietnam’s key exporter, hopes to enjoy great benefits from the country’s participation in the TPP as tariffs on local garment exports to the United States could be reduced to zero percent from the current average of 17.2 percent after the agreement comes into effect.

To penetrate the US market further under the TPP’s preferential tariffs, local products would also need to meet requirements on material origins. Most of the materials used in Vietnam’s garment production are imported from non-TPP members, mainly China, so it would be very difficult for local garment exporters to meet the requirements for tariff cuts, said Le Tien Truong, vice chairman of the Vietnam Garment and Textile Group.

Vietnam has the capacity to produce some 500,000-600,000 tons of textiles annually, but much of that output is of such poor quality that it falls short of export requirements, he said.

Meanwhile, the agreements place huge pressure on local enterprises to reform.

If they don’t speed up their restructuring to become more competitive, they will not be able to make use of the opportunities, and even fail to compete with foreign competitors pouring into the local market, said Nam.

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