Closing The Trade Gap: Mission Impossible?
By Nguyen Dinh Bich
The combined trade deficit over the past three years has reached US$45 billion, hampering both the international balance of payments and other macroeconomic balances. It is necessary to restrict the deficit to 20% of the export turnover.
The authorities have adopted a two-pronged approach, which consists of boosting export and cutting import. The Ministry of Industry and Trade estimates that exports will increase by 7% rather than 6% (the target set by the National Assembly), which gives rise to an export turnover of US$60.777 billion (the figure for 2009 was US$56.801 billion). To keep the trade deficit at 20% of the export revenue, the import bill for 2010 should be US$72.932 billion and the deficit US$12.155 billion, down US$719 million year-on-year.
The General Statistics Office says that the trade deficit in January 2010 fell drastically from that in the last four months of 2009 but still exceeded the target as import soared far more rapidly than export.
In particular, the export revenue was estimated at US$4.9 billion, up 28.1% year-on-year, but import expenditure reached US$6.2 billion, up 86.6%. Therefore the trade deficit equaled 26.53% of the export earnings, higher than the target of 20%.
Granted, there is still ample time for adjustment. However, it is possible to argue that import will continue to surge while export will rise more slowly. The trade deficit will therefore balloon.
To begin with, import commodities are more likely to see their prices and volumes soaring than export goods.
In particular, an assessment of the items with complete figures on both value and volumes (nine exports and 11 imports) shows that import expenditure rose by 95.82% in January. Price increases accounted for 41.1% of the rise and quantities for the remaining 54.5%. While export prices jumped by as much as 45.24%, export earnings only climbed up by 37.43% as export volumes shrank by 7.81% following the Government’s decision to channel crude oil into the local petrochemical industry.
While made-in-Vietnam petrochemical products will replace their foreign counterparts and curb imports, input costs will continue to increase more rapidly than output prices since the global prices of Vietnam’s exports and those of its imports are influenced by different factors.
In reality, the prices of processed and manufactured goods are less volatile than those of materials. At present, the International Monetary Fund predicts that instead of falling by approximately 31% as they did in 2009, material prices will leap by about 16%. The figures for processed and manufactured goods are -9.1% and 3.1% respectively.
Over the past three years, Vietnam’s basket of imports are almost 22.5% bigger than that of exports. Materials account for about 65% of the basket of imports while primary goods take a share of merely 46% in exports. In other words, the proportion held by imports with volatile prices is 1.7 times as much as that by exports with drastically fluctuating prices.
Consequently, when global prices varied drastically in 2009, imports shrank more swiftly than exports (13.68% compared with 9.39%). Apparently, when market trends reverse this year, imports will swell more rapidly than exports.
Therefore, instead of dwindling as it did in 2009, the trade deficit will expand in 2010 when global commodity prices heat up again.
A decade ago, Vietnamese policymakers aimed to start running trade surpluses in 2009. That goal was not materialized, mainly because Vietnam remains extremely reliant on both materials and intermediate products, which are considered necessary and account for over 83% of the total import bill. There is little scope for import reduction, so it is indeed difficult to slash the trade deficit. As import volumes and prices both rise, Vietnam is unlikely to run a lower trade deficit.
Economic restructuring is vital for narrowing the trade deficit. Unfortunately, this is a time-consuming and challenging task.