AFTA & APEC : IMPLICATIONS ON VIETNAM'S TRADE & FDI

Abstract

Vietnam, a country that is opening up at a "too fast too soon" pace as some had put it, had signed a separate protocol for the accession into AFTA in the fifth Asean Summit. It joined Asean only in last July and now has fully committed itself into the program of tariff reduction since January 1996. The pace of opening up the Vietnam economy may sound too fast, especially in comparison with that of Brunei taking 6 years to be fully integrated into Asean. Vietnam has also expressed its intention to join APEC, though formal arrangement has not been made. Vietnam has a low level of development, and lacks sufficient capital, technology, infrastructure, and capable management who know international laws and trading rules of AFTA. Moreover, it produces similar commodities and manufactured goods as the other Asean countries and has a number of industries which are highly protective. Last but not least, Vietnam is experiencing the transition from a centrally planned economy to a market system. All of the above questioned the readiness and appropriateness of joining AFTA and APEC at this time. This academic exercise will attempt to uncover the reasons behind the eagerness of the Vietnamese government to join AFTA in light of the unreadiness hightlighted above. In particular, it explores the likely implications of AFTA and APEC on Vietnam's trade and foreign direct investment (FDI). This exercise generally argues that there is inherent potential trade creation for Vietnam joining AFT A, though trade creation is small in the short term. This is seen in the potential complementary trade structure between Asean and Vietnam; the future enlargement of market from Asean-seven to Asean-ten; the expected increase in Asean-five's share in Vietnam's exports; and the export promotion strategy of Vietnam. However, in the short nm, Vietnam will face heavy adjustment costs with the dismantle of intra-regional tariff barriers. It may be true to say that the short term losses are larger than the gain, since those products that Vietnam is not capable in producing and are highly protected are to have their tariff reduced, while those with high export potential are excluded or temporary excluded from the tariff reduction program. Nevertheless, in the long run, Vietnam will gain from freer regional trade, the enlarged market size and the combined competition power in the international market. This exercise has shown that AFTA will enhance FDI flow from Asean to Vietnam, even though the market conditions - cost push and market pull -had already placed Vietnam as an investment destiny for Asean. This is a form of trade-induced-FDI effect of integration. AFT A will also induce more FDI flow from non-Asean countries, which are mainly in the form of efficiency-seeking (that they can source out inputs competitively within the region) and market-seeking (that they can penetrate the regional market through Vietnam) investments. APEC which ensure the peace and stability within the region, is essential for the renovation track of Vietnam, so that Vietnam could focus its attention fully in reforming the economy. AFTA is complementing with APEC in promoting growth in trade and FDI within the region. Thus, APEC will also indirectly enhance the grow in trade and FDI of Vietnam.