by Nguyen Huyen My, Dezan Shira & Associates

(Biz Hub) Over the past 10 years, more than 300 free trade agreements (FTAs) have been negotiated and/or implemented across the globe. FTAs are not new to Viet Nam, as the country has been a part of the ASEAN Free Trade Area since 1996 and has completed other regional FTAs and a number of bilateral FTAs.

This article will provide an overview of Viet Nam's membership in the ASEAN-China Free Trade Area and the Viet Nam-Japan Economic Partnership Agreement.

ASEAN-China Free Trade Area

If Viet Nam just focuses on the production of cheap consumer goods, it can be vulnerable when competing with similar goods from China, experts warn. Photo Doanhnhan Saigon

The ASEAN-China Free Trade Area (ACFTA) is now the world's largest free trade area. It brings together ASEAN's Free Trade Area with China's mammoth economy, affecting nearly 2 billion people. In terms of trade turnover, this FTA stands behind just the European Economic Area (EEA) and North American Free Trade Agreement (NAFTA).

Over the past decade, trade between China and the ASEAN nations has boomed from US$59.6 billion in 2003 to US$400.9 billion by 2012. The combined nominal gross domestic product (GDP) of ASEAN and China reached approximately US$9.5 trillion in 2012.

According to the ACFTA, a 0 percent tariff will be applied to 90 percent of traded goods, which would enhance and promote bilateral trade relations. This also helps to promote exports of ASEAN countries, especially for those commodities that an energy-hungry country like China needs.

Since 2010, Vietnam has established an advantage over China and the ASEAN-6 by extending its reduction roadmap by five years. According to 2001 data (the basis for the negotiations of ACFTA), 90 percent of the tariff lines to which Viet Nam has committed to eliminate taxes constitute only 53 percent of imports from China.

Ten percent of remaining tariff lines in the sensitive list (with slow tax reduction schedule or no tariff removal) account for 47 percent of turnover of Viet Nam's imports from China. 90 percent of tariff lines committed to be eliminated by Viet Nam only account for 37 percent of imports from China, and 10 percent are sensitive items imported from China (accounting for 63 percent). This can efficiently help Vietnam develop the economic sectors that are competing with Chinese imported goods under the impact of ACFTA.

Since 2010, Viet Nam has had a chance to make its exports with China the most preferential thanks to 90 percent of the tax lines being just 0.5 percent. This process will positively help speed up the restructuring of Viet Nam's exports mechanism, increase exports of processed products and reduce the exports of mineral products and raw processing.

However, if Viet Nam just focuses on the production of cheap consumer goods, it can be vulnerable when competing with similar goods from China. This can be seen if one looks at the trade deficit figures between Viet Nam and China in recent years. The deficit has increased gradually from US$9.2 billion in 2007 to US$16.4 billion in 2012.

Viet Nam-Japan Economic Partnership Agreement

Viet Nam's agricultural products will gain tax exemptions when entering the Japanese market. Photo Hanoimoi

The Viet Nam-Japan Economic Partnership Agreement (VJEPA), which entered into force on October 1, 2009, is a comprehensive bilateral agreement which affects domains such as commercial trade, service industries and investment. The agreement seeks to improve various issues such as business environment, labor mobility and cooperation on technical standards.

Most of the FTAs that Japan pursues are not typical FTAs. Rather, the Economic Partnership Agreements (EPA) between Japan and various states are more comprehensive than standard FTAs. VJEPA is the first bilateral free trade agreement Vietnam has signed since the World Trade Organization's accession as the previous FTAs were concluded within the ASEAN framework.

According to this agreement, within ten years of its implementation, around 92 percent of commodities will be exempt from tariffs in each member state's market. Vietnam's agricultural, garment, and aquatic products will gain tax exemptions when entering the Japanese market, and Japanese industrial products, including car components and electronic products, will gain tax exemptions or see a decrease to the corresponding import taxes.

VJEPA has positive economic consequences for both Vietnam and Japan. Japan is presently the largest importer of many of the products in which Vietnam holds an absolute advantage in producing, such as agricultural products, consumer textiles, footwear, processed food products, etc. In contrast, Vietnam imports machinery and technology from Japan. Partly due to their FTA, Vietnam's exports to Japan have increased in recent years, particularly in seafood, tropical fruits and vegetables, honey, coffee and wood products.

Under the established commitments, Japan has pledged to liberalize 94.53 percent of trade revenue within ten years. Therefore, the VJEPA will improve the growth of Vietnam's exports while also insulating said exports from the downturns and fluctuations currently seen in the American and European markets. - ASIA BRIEFING

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This article was first published on Vietnam Briefing by Dezan Shira & Associates.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia.

For further details or to contact the firm, please visit www.dezshira.com.