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The Impact of the EAEU-Vietnam FTA on Bilateral Trade

18/03/2019

The outcomes of the Free Trade Agreement between the EAEU and Vietnam over the first two years are mixed. They are quite noticeable when it comes to trade in goods, but elusive in other areas. The reasons why the Socialist Republic of Vietnam and, to a lesser extent, Russia turned out to be the main beneficiaries are explained by Vladimir Mazyrin, Doctor of Economics, Head of the Center for the Study of Vietnam and ASEAN at IFES RAS, Professor at the Institute of Asian and African Studies of Moscow State University, and Editor-in-Chief of the Vietnamese Studies e-journal published by IFES RAS.

The Free Trade Agreement (FTA) between the Eurasian Economic Union (EAEU) and the Socialist Republic of Vietnam, which came into force in October 2016, is based on the participants’ commitment to simplify access to their respective markets for suppliers of goods and services. The provisions on mutual liberalization of trade in services, investment activities and movement of individuals have so far applied only to Russia and Vietnam and remain in a frozen state.

There was stagnation in trade in goods between the EAEU and Vietnam until 2017, with trade treading water at about $4.2-4.3 billion. The breakthrough came in 2017 when trade rose sharply by 36.5% to $5.9 billion from $4.3 billion. An already large surplus in favor of Vietnam ($1.1 billion) grew to $1.4 billion. The accuracy of these data is relative, since the official Vietnamese statistics are much lower. The breakthrough was due to resetting to zero import customs duties for about half of all tariff lines in 2016-2017. In 2018, the liberalization continued. Within 10 years, imports of 90% of goods will be duty-free.

Analysis of EAEU trade geography confirms Russia's strong leadership, but the FTA has brought dividends to other EAEU members as well. Kazakhstan was the main beneficiary. Its trade, especially exports, increased faster than Russian, to which it was catching up in terms of this indicator.

Russia accounts for 88% of trade with Vietnam, including 84% of exports and 91% of imports. However, Russian-Vietnamese trade stagnated for three consecutive years, and Russia’s trade deficit was steadily growing. Therefore, it is impossible to reduce the imbalance through the FTA. Apparently, Russia’s export potential is not being used to its fullest, the need for imports prevails, and Vietnamese businesses are acting more persistently and with greater skill. The loss in competitiveness on Vietnam’s market also has its effect.

The emerging positive trends are expected to grow stronger. In a purely commercial sense, the prerequisites for growth have been created: the main partners of Vietnam, like itself, have become more persistent in increasing trade in goods that enjoy the greatest preferences under the agreement. In addition, the Vietnamese economy is on the rise and is rapidly increasing its supply to EAEU markets following the expansion of export production and participation in global value added chains.

In 2014-2017, Vietnamese exports to the EAEU rose by 39%, and imports by 44%, which indicates a balance of commodity flows and, given the large surplus, the benefits enjoyed by Vietnam. It gained the most among the FTA partners due to a better use of its export potential and experience in implementing such agreements. Imports of manufacturing products, including home appliances and microelectronics (computers, mobile phones, parts) in the EAEU countries are increasing. Footwear, clothing, textiles and food products remain on the list of imported items.

Vietnamese exports are more varied and have higher prices for key product groups, as well as a greater degree of processing and manufacturability of goods. These supplies are differentiated and distributed more evenly across the EAEU member countries depending on capabilities of the partners’ economies. Vietnamese exports differ from counter-flows in that the latter do not sufficiently reflect the interests and the potential of the EAEU participants, except Russia.

Sharp increases in exports from the EAEU were due to agricultural produce, which was previously bought by our partner in limited quantities. However, exports to Vietnam continue to include mainly petroleum products, coal, steel, and industrial equipment, with the commodity sector and level-one industrial processing items dominating the supply structure.

The shortcomings and objective difficulties involved in liberalizing mutual trade were revealed. In particular, there were overlapping export profiles of certain goods that were previously uncharacteristic for mutual trade and clashing interests of the FTA participants. This phenomenon may stop being an exception and become a trend in the coming years. Vietnam can continue to expand its industrial product line into the future whereas the EAEU countries can continue to restore their agricultural production which, with the exception of tropical fruits, enters into competition with similar Vietnamese produce.

The implementation of the EAEU-Vietnam FTA revealed a number of issues relating to Vietnam’s other FTA agreements. Russia needs to understand how to take advantage of the earlier start of our FTA to gain competitive positions on the Vietnamese market before its agreements with the EU and Asia-Pacific countries (TPP) come into force. The trade rules under these FTAs should also be made compliant with the WTO standards in order to avoid inconsistencies and losses.

Finally, it became clear that economic sanctions imposed on Russia by the United States and its Western allies are causing inevitable difficulties in mutual trade and the implementation of the agreement.

Thus, the picture is mixed. In general, the agreement is being successfully implemented in the sphere of trade, but has not yet been deployed in other spheres. The trade effects have run their course during the first two years, and new differences have arisen. Protectionist mechanisms hinder the liberalization process and the growth of trade.

Source: Valdai Club