Wednesday, 23 May 2018
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ECONOMYTRADE - SERVICE

Vietnam's positive long-term outlook for trade

Updated at Wednesday, 16 May 2018, 15:30
The Hanoitimes - Surging manufacturing-related foreign direct investments have turned Vietnam into a `near-shore` production base for East Asian manufacturers, assessed HSBC Navigator report.
Low wages and an improving business climate should ensure continuation of this trend in the near-term, said the report, while the implementation of trade deals such as the CPTPP would give an additional boost to Vietnam's buoyant exports and support diversification into new markets.
 
Illustration photo.
Illustration photo.
Vietnam's economy remains among the fastest-growing in Southeast Asia. The surge in manufacturing activity in the second half of 2017, helped mostly by FDI-related merchandise exports, looks to have helped Vietnam's economy to grow in excess of 6% for the third year in a row. 
While goods exports jumped an estimated 20% in 2017, the report predicted services exports grew slightly faster (8%) last year. Looking ahead, Vietnam's low-wage workforce, a rising number of trade agreements, and its improved business climate will likely continue to attract substantial FDI inflows.
Buoyant demand among major global economies such as China, the US and the Eurozone are driving the positive near-term outlook for global trade. Thanks to its high openness to trade and continued attractiveness to foreign manufacturers as a production base, Vietnam is ideally-placed to benefit from this trend, the report concluded.
According to the report baseline projection, which assumes the status quo in trade policy is maintained, Vietnamese merchandise exports (in US$ terms) will grow at an average 10% per year from 2021-30, while services exports will increase at 7% per annum over the same period. 
As a result, total exports will stand US$750 billion in 2030 - four times higher than in 2016. In terms of structural developments, the report expected FDI-related ICT exports to retaining its top position among goods flows, and tourism to continue dominating services exports. New trade policy initiatives within ASEAN, as well as RCEP and CPTPP, could provide an additional boost to trade. However, the high exposure to regional demand and reliance on the ICT sector also mean there are downside risks associated with potential disruption to these flows.
Vietnam's industry has been boosted by foreign investments in recent years, enabling a structural shift toward higher-value manufacturing such as electronics and machinery. With its abundant and low-wage labour force and high openness to trade, it continues to be attractive to foreign investors, predominantly from East Asia, who use it as a regional base for production and final assembly. 
The report expected electronics-related goods, which account for 27% of goods exports, to remain the key driver over the long-term, contributing almost a third to the overall increase in merchandise exports to 2030, followed by clothing and apparel (20%). 
Additionally,  investment inflows are forecasted to help Vietnam become more competitive in the region - it is projected to outperform Bangladesh and India in key sectors such as textiles and ICT. In addition, high-tech goods such as industrial machinery and precision instruments will slowly gain share, reflecting a gradual move up the value chain and spill-over of technology and skills from foreign direct investments.
Demand from the US and China will likely remain crucial in the future. Between 2017 and 2030, these two economies combined are projected to contribute 35% of the overall increase in goods exports.
The US will retain its top spot as the single most important export destination over the forecast period to 2030. However, while the US is by far the most important market for the Vietnamese textiles industry, sucking in almost 50% of all clothing exports, demand from Asian economies is more balanced across sectors, with 30% of ICT-related goods and 25% of clothing exports going to regional peers - offering more diverse growth potential in higher-value sectors.
Much like exports, the composition of imports reflects Vietnam's structural shift to providing a regional base for industrial production and final assembly. Industrial machinery, which is required both for development of production capacity as well as trade infrastructure, accounted for 24% of goods imports in 2016, up from 18% in 2010. 
Assuming continued foreign investments into Vietnamese production plants, the report forecasted machinery to contribute around a quarter of the increase in imports from 2017-30. Other inputs for assembly, such as parts for ICT equipment and wood & textile manufactures, will also remain important drivers of trade, accounting for a further 20% of the projected increase in merchandise imports until 2030.
Overall, manufactured goods will account for over half of all imported products through to 2020 and beyond, but final goods will likely become more important in this mix, as domestic demand increasingly benefits from foreign investments and buoyant trade. 
Ngoc Thuy
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