Thursday, October 27 2016


Trade deficit won't stop growth

Update: December, 31/2015 - 08:31

In 2015, Viet Nam had a trade deficit of US$3.2 billion after three consecutive years of posting trade surpluses. In 2016, the trade deficit could continue and even increase because many of the free trade agreements (FTAs) coming into effect.

Nguyen Bich Lam, head of the General Statistics Office (GSO), spoke to the dautuonline about those issues.

Nguyen Bich Lam

Viet Nam has already signed many FTAs with its partners over the past years. The FTAs are part of the final years of the roadmap on commercialisation. In 2015, Viet Nam continued signing new FTAs to open its markets further in the future. How will the new FTAs affect the domestic economy?

Together with other ASEAN countries, Viet Nam has signed FTAs with China, South Korea, Japan, Australia, New Zealand and India. These FTAs were to become effective during the final years of the schedule on cutting tariffs.

After the FTAs came into effect, the local economy saw many benefits, including a strong increase in import and export values and foreign investment, leading the local economy to have fast and sustainable development and more jobs. The FTAs have also contributed to ensuring social security and increases in the State budget.

The FTAs are expected to come into effect in the coming years, including the Viet Nam -South Korea FTA, Viet Nam –EU FTA, Viet Nam-Japan FTA, Viet Nam-Chile FTA and Viet Nam-Eurasian Economic Union (EEU). In addition, the ASEAN Economic Community will begin operating in 2016.

Those agreements were designed to encourage the local markets to open further and more quickly abolish tariffs, creating positive impacts on local economic development in the future.

But, Viet Nam will have higher trade deficits from large markets when it further opens its market. Is that a disadvantage for the local economy?

The US, the European Union (EU), China, South Korea, Japan and ASEAN are the largest import and export markets of Viet Nam. Of these, Viet Nam has had a trade surplus with the US, the EU and Japan, along with a trade deficit with China, South Korea and ASEAN.

It does not benefit the economy if goods are imported for local consumption. But 80 per cent of the nation's imports are material and fuel for producing goods serving local and foreign markets, machines, components for production, processing and assembling products in the home market. These imports have brought benefits for the local economy because they have promoted production and business, created jobs, increased State budgets and promoted exports.

If the nation does not promote imports, it can not increase production and exports to lead to double digit export values. If the nation does not increase imports of material, fuel, equipment, machines and components, it can not export goods worth tens of billions of US dollars to the US and the EU, and can not gain strong growth in its gross domestic product (GDP) next year.

If the State uses a measure calculating GDP according to consumption, what does the GDP growth rate look like when the trade deficit returns?

GDP can be determined in three ways, including the production (or output or value added) approach, the income approach, or the expenditure approach.

The expenditure approach is the method of determining GDP that adds up the market value of all domestic expenditures made on final goods and services in a single year, including consumption expenditures, investment expenditures, government expenditures, and net exports. Add all of these expenditures together and you can determine GDP.

If Viet Nam uses the expenditure approach, its GDP will be affected by net exports when the nation has a trade deficit, while other factors remain unchanged.

However, 80 per cent of Viet Nam's imports are material, fuel, equipment and machines for production of consumption goods at home and abroad, so we should not be worried about the trade deficit. That is a good signal because it shows that the local economy has entered a new period of development.

Higher imports are aimed at making goods for meeting increased demand on consumption in households. The trade deficit means organisations and individuals must put more of their investments into production and business, contributing to increases in the total investment.

In conclusion, the trade deficit will promote production and business, contributing to local economic development.

Will the local economy still continue depending on imported material and fuel?

Viet Nam, as well as all other economies in the world, do not want to depend on imports, especially from a few foreign markets.

Therefore, in 2011, the Prime Minister issued Decision 12/2011/QD-TTg on policies of developing some support industries, and Decision 1483/QD-TTg on issuing lists of support products that need priority in development.

I think that to meet the demand on development of the local economy, trade deficits should increase by under 5 per cent of the total export value in the coming years.

Meanwhile, the support industry will see strong development in the future to reduce imports of material and equipment for local production.

Under Decree 111/2015/ND-CP, since January 1, 2016, ministries, sectors and the people's committees of provinces and cities must have several solutions, policies and mechanisms on offering priorities and support for developing support industries for textile, garment, leather, footwear, electronics, auto assembly, manufacturing and high-tech sectors. — VNS

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