Afta launched without Vietnam. So what?
HANOI - On Jan. 1 when the Association of Southeast Asian Nations Free Trade Area took
effect, Vietnam watched from the sidelines.
But the country's exclusion - until early 2006, when it will
have reduced tariffs enough to warrant entry - is unlikely to
worry either policy makers or business people.
Afta's main aim - to reduce tariffs on all non-strategic goods
traded within the region - is one Vietnam shares and is
implementing as it works toward Afta entry and complies
with other international commitments.
As most of Vietnam's trade is with non-Asean countries, its
temporary exclusion from some of Afta's benefits will have
only limited impact on exports, says Carl Thayer, a
professor of politics at the Australian Defense Force
Academy and longtime Vietnam watcher.
Afta's secondary aim - of creating a market large enough to rival China's and which will entice foreign investors
away from the northern giant - is unlikely to work for some time, if at all, because few investors view the region
as a single market, other observers say.
Political stability and the creation of a conducive business environment are more likely to impact investment than
the creation of economies of scale. Such factors, Vietnam can and must influence alone.
Afta reduces tariffs on almost all goods traded between Asean member states to below 5%. Afta comprises
Singapore, Malaysia, Thailand, the Philippines, Indonesia and Brunei. Vietnam is due to join in 2006 once it has
lowered all its promised tariffs, with Asean's remaining members - Cambodia, Laos and Myanmar - joining later.
Vietnam's Trade Tariffs Already Low And Falling
Vietnam's entry into Afta, negotiated when it entered Asean in 1995, was set for 2006 to give the country time to
dismantle its highly protective trade barriers.
Except for certain sensitive areas, the government has moved faster than expected. This year, Vietnam's average
tariff rate within the region will be just over 2%, making its trade regime for non-protected goods Asean's third
most liberal after Singapore and Brunei.
Country watchers don't expect Vietnam to backtrack on its tariff cuts because of its commitments under a trade
agreement with the U.S. and desire to join the World Trade Organization by 2005.
Its reason for pursuing trade liberalization though has relatively little to do with its Asean neighbors.
Almost half of the goods traded between Vietnam and Asean (rice and other commodities, particularly) are
excluded from tariff cuts under Afta. Thus, participation in the scheme will have limited impact on Hanoi's trade
within the region.
Perhaps more importantly, Vietnam's trading focus is moving away from Southeast Asia's Asean states to other
countries in the region.
In 2001 - the most recent figures available - Vietnam's trade with Asean made up around 22% of its total, little
changed from 23% in 1995 before Vietnam joined the regional block and made its commitments to free trade
under Afta.
Trade with China, Hong Kong, Taiwan, Japan and South Korea, in contrast, made up 44% of total trade last
year, up from a much smaller 32% in 1995.
With the exception of Singapore, which does brisk business with Vietnam, the country's trade lies increasingly
with north and east Asia, not with Asean, says Thayer.
Afta Already Old News, Focus Now Elsewhere
Even within Asean, Afta - just days after its launch - is losing its appeal.
Three of its six core members - Malaysia, Indonesia and the Philippines - have taken advantage of rules that
allow them to temporarily announce higher tariffs on goods to protect key domestic sectors.
Afta has no enforcement mechanisms and the momentum for region-wide free trade in Southeast Asia appears to
be weakening as such protectionism grows, economists say.
Instead, the focus is shifting toward the creation of a much larger free trade area - between Asean and China -
which negotiators hope to have in place by 2015.
Such a plan could offer Vietnam significant advantages because of the long land border it shares with China, over
which large amounts of goods flow already, and because of the potential for access to China's domestic market.
Bilateral trade agreements between Asean countries and their global trading partners are also a la mode, and
Vietnam already has several under its belt.
As well as its upcoming obligations to Asean neighbors under Afta, Hanoi has in place trade agreements with
China, Japan, the European Union, and - most recently - the U.S., said Nguyen Van Nam, director of the Trade
Research Institute under Hanoi's Ministry of Trade.
Hanoi hopes to enter Afta in 2005 instead of 2006 in line with pledges to speed up trade liberalization, he said.
But if Vietnam really wants to liberalize trade it must do more than negotiate tariff-cutting deals. Non-tariff
barriers to trade, like import quotas and the designation of trade licenses to state-selected companies, remain a
fact of life and continue to put off investors.
In the meantime, the government must prepare its domestic industries for the increased competition they will face.
"We know we can't close the door to world trade. The government will gradually remove protection for all
domestic industries," said the trade ministry's Nam.
Indeed, state sector reform - designed to rid the country of inefficient state-run companies - is underway but must
speed up, the World Bank and other donors have said.
To attract investment, Hanoi must continue to overhaul its bureaucracy, legal system and business infrastructure,
they have added.
By Catherine McKinley - Dow Jones Newswires - January 07, 2003.
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