FOREIGN TRADE UNIVERSITY

***

GROUP ASSIGNMENT

INTERNATIONAL FINANCE

Nontariff Barriers in Vietnam

T Quang H ngạ ư 1001030157D ng Qu c Anhươ ố 1001030023Đ Quy t Th ngỗ ế ắ 1001010860Tr n Bích H ngầ ườ 1001010425

Nguy n Văn D ngễ ươVũ Thanh Lân

1001010192 1001020194

ContentsFOREWORD............................................................................................3

PART I.................................................................................................4

Overview of non-tariff barriers in Vietnam..........................................4

1. Nontariff barriers being applied in Vietnam...................................4

2. Expected targets of the nontariff barriers:.....................................8

3. Conflicts between NTBs and other regulations............................10

PART II.................................................................................................11

DISADVANTAGES OF NONTARIFF BARRIERS IN VIETNAM.....................11

1. Price fluctuation...........................................................................11

2. Importing waste...........................................................................11

3. Diminishing productivity and quality...........................................12

4. Increasing cost............................................................................12

5. The small private businesses suffers...........................................12

PART III................................................................................................15

Tariffication-a solution to demolish tariff barriers................................15

1. Advantages of tariffi....................................................................15

2. Why does Vietnam still apply NTBs..............................................16

3. How to move from NTBs to tariffs.................................................17

4. TPP – the trap of nontariff barriers...............................................20

References...........................................................................................21

FOREWORD

Since 1986, Vietnam has been altering its centralized planning economy into a new one which is open to trade and regulated by market rules. Liberalization of trade is a major component of this process.

Since then, by integrating into the globalization of economics and trade liberalization, Vietnam has set up trade relationship with more than 165 countries all over the world and signed 72 bilateral trade agreements. We have been a member of the IMF, WB, ADB, ASEAN, APEC, AFTA, WTO, etc and are to sign the TPP.

During that process of integration, the prolonged existence of non-tariff barriers (NTBs) would be one of the biggest obstacles for Vietnam, since the cutting of them is a crucial condition to liberalize trade. This is, as unofficial as its nature, no matter that have long been concerned, but might be of urgent need since we are speeding up in our globalization.

That is why we have chosen the topic “Non-tariff barriers in Vietnam” for our assignment. In this assignment, we would discuss the root, the disadvantages of NTBs in Vietnam, and how to take them down.

The assignments includes of three parts:

Part I: Overview of non-tariff barriers in Vietnam

Part II: Disadvantages of non-tariff barriers in Vietnam

Part III: Tariffication-a solution to demolish tariff barriers

PART I

Overview of non-tariff barriers in Vietnam

Nontariff barriers (NTBs) remain a major point in trade policies of Vietnam. Quantity restriction, target allocation of foreign currency and differential administrative measures are applied to monitor, manage and restrict the import of specific types of goods. Their prolonged existence is against the measures the Government has taken to improve the trade system.

Quantity restriction is among the low-level trade barriers. Its impact is implicit, which just leads to the benefits for the holder of preferential quotas and a dime degree of protection. Because the degree of protection is blurred, it is difficult to conduct any trade liberalization. Protection based on tariff would then be the starting point of the route to change. Although the advantages of tariffs are clear, NTBs are still in use in Vietnam, which might be the result of a seemingly false old-fashioned knowledge that they can things that are out of any tariff system’s scope.

A visible feature of NTBs in Vietnam is that they are often applied to pursue multiple targets. The first step to dismantle them is thence to define the methods being applied and their basic purposes.

1. Nontariff barriers being applied in VietnamMany types of nontariff barriers are being applied in Vietnam, which creates the trade conflict between Vietnam and other countries. In our opinion, the biggest and most common barriers would be Quantity Restrictions (QRs) on imported goods and methods of allocation of foreign currency.

Quantity Restrictions (QRs)

Goods under this barrier might be categorized into 3 groups:

- Conditioned imported goods:o Goods listed in Decree 57/1998/NDCP, including goods that

needs to have import license and is conditionally imported.o Goods under Decision 254/1998/QD-TTg

- Goods under regulation of sector ministries- Goods that are banned from import and export

The scope of QRs’ effects

QRs are defined specific by types of goods. Figures regarding import and export of Vietnam are often reported in compounding mode, which discourages the calculation of nontariff products (NTPs) effect. However, we used the newest national figures of import and inter-industry balance sheet to enable the work.

Sales

Products under Decree 57 - 19%Products under Decision 254 - 5%Banned products - 3%Special monitored products - 13%Other non-monitored products - 60%

The Impact of Quantity Restrictions on Imported Goods

(Source: IEDB, CIE’s calculation)

As it might be seen above, approximately 40% of imported goods is under QRs. Most of the imported goods are in the list of Decree 57 and under conditional imported goods standards (or are banned from import in case of cigarettes)

The specialist control has affection over 13% of the import, although the figure is subjected to high standard deviation.

QRs have caused distortions in trade when importing some types of goods. Hence, the approximation of NTBs’ impact is often lower than reality. Moreover, the above number did not include the impact of other NTBs such as foreign currency control and credit control. Those NTBs have unpredictable and unequal impacts on goods, thence leads to difficulties in estimating their total impact. Meanwhile, we may conclude that the number of 60% would be much higher if these barriers are taken into account.

Allocation of foreign currency

Decision 254 states that commodities and imported materials (alloy steel, raw material PVC, aluminum, etc) would be regulated by taxation, additional charges and other costing methods. In reality, this means that banks are not permitted to use deferred L/C to import these goods. The importers are thence required to pay for them at sight, which leads to major obstacles for companies with low net working capital. In addition to those is the conditions regarding selling foreign currencies to banks, which results in even further difficulties for firms to import commodities as well as other types of goods.

Apart from the deferred L/C, SBV also encouraged banks to put specific restrictions on approaching the foreign currencies used to import goods which are producible in the domestic market. This leads to a major lack of manifestation in allocation of foreign currencies and an un-patent NTB in turn. The final result is that only big firms have the access to foreign currencies to import those types of goods. This does not only increase the protection over domestic production but also causes difficulties for small private enterprises whose impacts on the banking system are minor.

There are contradictory signals about the controlling process. Some firms consider them as mere monitoring or the circulation of foreign currencies which does not form any barrier. Others, at the same time,

who have to weigh between buying in the domestic market and importing paper, alloy steel, cement and other types of goods, are being too concerned by the barriers and forced to sort to domestic supply.

Other NTBs

An important group of NTBs includes methods that are similar to tariff in UNCTAD’s classification. In Vietnam, they are mainly: custom collection, excise tax and value added tax (there are special exemptions for foreign-tradable goods). Although the excise tax is theoretically applied on luxury goods regardless of place of origin, special exemptions for domestic goods means that the rule is only applicable to export goods.

A solution that has been in use is to apply the method of minimum price. The method would be applied on goods on the list, of which number reduced from 37 in 1997 to 11 in 1999 and 5 in 2010. The goods are drawn out of the list if the scopes of commercial frauds over them are small and if their market price is stable, which enables the custom agencies to identify the precision in their import quotes. However, the custom has admitted that the minimum price method is not an appropriate method to decide import tax and are proposing a change in custom law, which would involve standards complying GATT’s standards of price.

Prolix customary procedures are also among the causes of barriers toward imported goods. The acceleration of them would be a crucial move in going against trends to lay on NTBs.

2. Expected targets of the nontariff barriers:Protection of the domestic industries would be the ultimate and thorough purpose of NTBs. However, in specific cases, NTBs is aimed at multiple targets. For example, the excise tax is basically a tool for Government budget inflow, but in fact it is added to import tax to strengthen the protection over domestic producers. The restrictions on deferred L/C was initially applied to solve the matter of short term foreign debts, but are currently used to limit the import of consumer goods and other types.

Regarding the QRs, they are partly stagnant reminders of the old centralized planning system, where trade was managed to reach balance of finance and real objects of the economy. A typical example is the QRs over petrol and fertilizers, which is more of a quota for importing goods to ensure the supply of the economy than upper limit applicable only to import.

QRs on fertilizer in particular are applied as a method to ensure the stability of fertilizer’s price rather than a protection. This is true for cases of ure, which is a type of low capacity fertilizer, while untrue regarding some recent restrictions on the import of NPK fertilizers, which created a considerable protection over domestic producers.

QRs on motorbikes are another interesting case. On one hand, Vietnam aims to develop the production of domestic motorbikes and protect it from foreign pressures. On the other hand, they try to restrict the amount of motorbikes in the country due to the low quality of infrastructure. The two purposes, when put together, form an impossible duet.

The following chart would give a closer look to the NTBs and their aims.

Restricted goods PurposeConditionally restricted importFertilizers Ensure the stability of price

Protect domestic industryPetrol Ensure supply

Protect domestic industry Protect the environment

Motor vehicles Protect domestic industry Protect the environment

Goods listed in Decision 154

Balance of payment Protect domestic industry

Specialist management restriction

Chemicals SafetyWild animals, seeds, pesticides, animal food

Public health Protect the environment Isolative monitoring

Pharmaceuticals People’s healthArticles, photos, audio and video works

Protect the culture

Explosive materials SafetyBanking facilities Technical standardsBanned goodsWeapons Safety

National securityDrugs People’s health

International missionPoisonous chemicals Safety and environmentFireworks and toys SafetyCigarettes People’s health

Protect domestic industrySecond-hand consumer goods and motor vehicles

Protect the environment National image Protect domestic industry

3. Conflicts between NTBs and other regulationsIn Vietnam, the Government is using various tools for any specific purpose. Hence, the demolishment of NTBs is only effective when accompanied with the dismantlement of other regulations. This is to state that, if we take down NTBs, we need to ensure that no other regulating tool would be born.

Alloy steel is a typical example of the interaction between policies. The Pricing Committee has proposed the minimum price monitoring for some types of alloy steel, since the competitiveness is becoming fierce and the demand is going down. The repeal of the import ban on construction alloy steel might not increase the effectiveness of the domestic alloy steel production if the minimum price reduced their competitiveness in the domestic market. Similarly, investing in other newly opened fields might not be encouraged if the maximum price restricts the producers’ profit.

In some cases, the elimination of NTBs might make some rules become void. A good example in this case is fertilizer, as the import of NTK was banned in 1999 for the domestic capacity had met the demand. The restriction was an important for domestic producers. However, Decree 250/1998/ND-CP dated December 24, 1998 stated that domestic fertilizers must not be sold at any price higher than similar imported ones. This regulation would have become unnecessary if free trade was allowed, since competition would not allow any producer to raise their price to a higher extent of the same type of product.

In the case of cement, restrictions on the import of cement also allows higher pricing in some big cities to cross-subsidize for the countryside, with the purpose to develop rural areas. Competition from imported goods would, otherwise, restrain the differentiation of price levels.

PART II

DISADVANTAGES OF NONTARIFF BARRIERS IN VIETNAM

Predictability and transparency are two important characteristics of a good policy. The use of tariffs as a tool to implement trade policy and industrial policy does not meet the two requirements. Therefore, this chapter focuses on the impact of the widespread tariff use as a tool of protection in Vietnam , and explain why the elimination of such barriers is important for economic development in the medium term and long term .

1. Price fluctuationTrade management mechanism in Vietnam always follows the general way of controlling imports with the aim to keep domestic prices up with world price. But almost inevitable mistakes in evaluating and implementing have caused sharp price fluctuations in the domestic market. Price volatility, scarcity of commodities such as cement, steel , paper and pesticide took place in many years is a clear evidence .

Economic costs of these policies are often very large. Price volatility creates mixed signals to producers and consumers, limiting their ability to plan their investments as well.

2. Importing wasteIf the product can be interchangeable and the importation of replacement products is permitted, consumers and manufacturers will use them . For example, with high-quality steel and import tariff to zero, this will encourage excessive design requirements and use of high quality steel when they are not necessary. There are two reasons to explain , first the price of high quality steel which is not taxable is cheaper and secondly , when importing steel is prohibited and

domestic steel construction does not meet quality then it is the better to use high quality steel .

Such alternative means the economy will suffer a waste in foreign currency prices since imported high quality steel will be higher than the price of imported steel to have the same function.

3. Diminishing productivity and qualityWhen the domestic goods quality themselves was lower than imported goods, and the replacement ability is limited then the quality of products manufactured in the stages will be affected. This leads to the quality of goods produced in the later stages is reduced and may adversely affect the profitability of manufacturers.

4. Increasing costCommercial management system is now somewhat influenced by the want to balance the demand for domestically produced goods and the ones to be protected. If estimated production capacity of domestic goods can meet local demand then the government will immediately decide to ban import of such items. Entire protective measures like this increases the cost of domestic production. Thus, a self-balancing product in the country will require continuous protection and people in subsequent stages will have to bear higher costs.

5. The small private businesses suffersNowadays situation only benefit large business, operating for long years - the ones who have the ability to put pressure on the policy makers or have close ties with the deciding authorities. The small private enterprises generally cannot influence policy or do not enjoy preferential treatment in the public system. The plastics industry is a very clear example showing that small businesses can expand their operations efficiently and produce viable without great protection. Benefits of this business have been affected by the decision of protecting state-owned enterprises or joint ventures with state to the production of inputs.

When the restrictions are removed, the cost of agricultural production will decrease by 3 % , mainly due to reduced fertilizer prices . The construction sector is also beneficial to the direct costs decreasing by 4

% of cement prices as well as other products. Due to the cost savings the industry thus can gain competitiveness at home and abroad, thus increasing the output and employment expansion.

Another feature should be viewed. Although mechanisms have direct benefits for exporters because it allows them to use imported inputs at world prices but this mechanism will not affect the price of domestically produced inputs because they been raised by the applied protection. Moreover, this mechanism also creates disadvantages for domestic production inputs for the same reason (the industry must also use the higher input prices due to protection ) and although more sophisticated tax-exempt can be designed , more practical solution is to reduce the protection of equal status for all items.

Second, the analysis does not take into account the various substitutes for the inputs that businesses can fully use them if the cost of the inputs change. Businesses can change the combinations of inputs towards reducing the cost so allow the chance of cost-cutting to occur. It is necessary to use a general equilibrium model which can calculate the entire impact of indirect effects by cost and ability of substitute inputs.

The third point related to factors which are difficult to quantify of the tariff barrier. The above calculation never mention the additional cost component due to waste of time by not accessing necessary inputs or additional labor cost , on the other hand reaching the low input only is not taken into account.

And the last limitation of this analysis is the assumption of completely clearing restrictions on quantity. If they are replaced by the new relatively high tariffs (ie maintaining protection) , then the is estimated cost savings will not happen . Only way to get the full benefit is reduce protection. This does not mean that the tax shall be a futile exercise, but would be more beneficial if we tax on quantity restrictions at a lower rate than the equivalent estimated tariff .

The case of agriculture can prove that the cost savings reflects the entire cost of the use restriction on the quantity rather than the use of tax. Part I identified the target of quantity restrictions is to ensure price

stability but for protection. However, some other studies showed that domestic fertilizer prices are higher than the world price by 30% . The duty to fix the level of expected protection result on fertilizer applied tax as low as zero. Thus, agriculture can enjoy the full cost savings as calculated above.

The above analysis has shown that although non-tariff barriers can protect certain industries, but they increase costs for other industries. Especially with the economic structure of Vietnam, the industries which is considered needed for rural development (industry) exports ( food processing ) and investment (construction) has always been badly affected by protection . If this industry is such important that needs maintaining protection, the protection needs to be conducted at the most effective way.

PART III

Tariffication-a solution to demolish tariff barriers

1. Advantages of tariffiA tariff is a tax or duty placed on an imported good by a domestic government. Tariffs are usually levied as a percentage of the declared value of the good, similar to a sales tax. Unlike a sales tax, tariff rates are often different for every good and tariffs do not apply to domestically produced goods.The following ones give three situations in which governments often impose tariffs:

To protect fledgling domestic industries from foreign competition. To protect aging and inefficient domestic industries from foreign

competition. To protect domestic producers from dumping by foreign companies

or governments. Dumping occurs when a foreign company charges a price in the domestic market which is "too low". In most instances "too low" is generally understood to be a price which is lower in a foreign market than the price in the domestic market. In other instances "too low" means a price which is below cost, so the producer is losing money.

The cost of tariffs to the economy is not trivial. The World Bank estimates that if all barriers to trade such as tariffs were eliminated, the global economy would expand by 830 billion dollars by 2015. The economic effect of tariffs can be broken down into two components:

The impact to the country which has a tariff imposed on it. The impact to the country imposing the tariff.In almost all instances the tariff causes a net loss to the economies of both the country imposing the tariff and the country the tariff is imposed on.

Impact to the economy of a country with the tariff imposed on it

It is easy to see why a foreign tariff hurts the economy of a country. A foreign tariff raises the costs of domestic producers which causes them to sell less in those foreign markets. In the case of the softwood lumber dispute, it is estimated that recent American tariffs have cost Canadian lumber producers 1.5 billion Canadian dollars. Producers cut production due to this reduction in demand which causes jobs to be lost. These job losses impact other industries as the demand for consumer products decreases because of the reduced employment level. Foreign tariffs, along with other forms of market restrictions, cause a decline in the economic health of a nation.

2. Why does Vietnam still apply NTBsThere is a practical reason is that in some case, we have to control import to ensure public safety. For example, we need to control the import of petroleum, only let the businesses and individuals who are trained and equipped appropriately involve in buying and selling this dangerous goods.

Another reason is that the income from export or import will be income of the province. Therefore, tax barrier is one of the incomes of every province. Although this is not a fair way to gain income, but we do not have enough basic for calculating then NTBs could be a good alternative.

To perform the function of managing the buying and selling some specific products, the Governments can use NTBs. In some case, only Government can negotiate and reach the agreement which benefits the multinational companies.

The final reason for using NTBs is that the Government wants to stabilize the domestic market. However, using NTBs in Vietnam only increase the price of many goods in the market, for example: cement, paper and steel.

In Vietnam, the usage of NTBs is the source of planned economics. Until 1989, Vietnam still cannot aware the importance of tax as a way of controlling import or export. Currently, the process of building a tax procedure is still new. The sharing of income between provinces and other levels is not clear. We still need time to complete this process because there are many arguments and we do not have enough experience in this.

3. How to move from NTBs to tariffs3.1. How to determine the tax rate?

To determine the tax rate is quite abstract. There is no specific rule to specify the tax rate for each goods. The best way to determine is to base on the case of other tax law of other countries and choose the most appropriate ones. The Government can also ask for advice from the economics to have the best tax rate.

3.2. Consider the difference in price

The quota process or import management usually limit import and allow the price of the same domestic goods to be higher compare with no control procedure. Although the price difference was created by control is not the only reason affected to the decision of consumption, it can point out the opportunity cost that a country can bear because this procedure.

The price of domestic goods and import goods can be different because of many reasons, not only because of import control. However, the difference between domestic goods and tax free import goods of the same products is totally understandable. There is some noticeable point in this price comparison:

First of all, import control allows suppliers to set higher price than the case of no control. The benefit of this can belong to either importer or exporter in supplying countries. Therefore, the comparison between the tax-free import goods and wholesale price of import goods cannot evaluate fully the increase of import goods cause by import control.

If this comparison was taken between domestic goods and import goods then we have to compare the price at comparable period of

time. It is best to compare the factory price (after deducting indirect taxes) with the price of free-duty import goods at the harbor.

Secondly, the prices of good are different because of quality, after-sale services and other characteristics. Although we have to compare the price of the same product, this cannot always be done. We have to notice the quality of products when calculating the price differences. If the competitive products are not seen by the consumers as substitute products then the tax rate between domestic goods and import good will be less precise.

We have to consider another characteristic of NBTs: it give is the protection on changing of foreign price and worldwide price. In reality, there should be an unchanged protection system created by Government. This is one of the main explanations that we should change to tax barrier system in every country.

Cement can be used to illustrate for the changing of tax rate. In 1998, the difference between free-tax import cement and domestic cement is about $33, with the price of domestic cement is $75/ton. However, in 1999, the price of domestic cement decreased to $55/ton, therefore, the price difference is smaller. Some producers think that their products can compete with the import products at the tax rate of 50%.

The task of monitoring price difference can supply useful information not only with the taxed good but also good under special supervision. In case of goods under special supervision, information is a solution for Government to monitor and check whether it will create the over-protection for the domestic industry or not.

3.3 Consider other information

The list of current tax rate also provides useful information for tariffication. Until now, the producers of the goods on Decision 254 are only be protected by tax. Because the market has changed so the Decision 254 became obsolete. The reason is that Vietnam do not levy tax on goods which are not produced domestically.

The application of the same tax rate on the same products can make positive impact on consumers because they will choose the products with low tax rate instead of high tax rate. And the Government and use tax impose to redirect the trend of consumption. Using high quality steel instead of normal one in construction industry is a typical example.

Auction

In some cases, the auction of the import right might be used as a middle procedure to estimate the quantity restriction on price. However, there needs to be a specific maximum price or restriction of quantity. NTBs of Vietnam are not designed in this way, by which the use of it might lead to misunderstandings.

As we have mentioned before, tax barrier can be applied to gain the comparative difference between tax-free import price and import products with quota.

We can divide the reform process of NTBs into 2 periods. The first period is the period of moving to the protection system based on tariff, while all the Vietnam producers have to operate depending on the difference between the price of foreign market and domestic market of import goods. Because this is an important change in the way of approaching to protection procedure, it is acceptable if the high tax rate will create a good environment for the changing process.

The second period of time includes the improvement of tax rate list and applying these tax rates to the imports goods which was previously protected.

4. TPP – the trap of nontariff barriersThis is rather out of the scope of what the report has been discussing since the beginning. However, we find it necessary to put in some linkage to this rising issue, since a recent case has shown high relevance to the matter of nontariff barriers.

The main event was that in the 19th round of TPP negotiation in Brunei, no concurrent voice was met in opening the agriculture product market, since many of the nations are determined on protecting that of their domestic market. The event showed us a high competitiveness in the field which is a major advantage of Vietnam.

What we may have been expecting when negotiating for the TPP is the advantages in tariffs, especially in the US market. TPP seems to be a best route for export products of Vietnam, which have long been under a lot of pressures from tariff policies of foreign countries.

But the fact might lie beyond the paper sheet. It is true that exemptions and tax reductions are to be applied to our export products, but what our exporters are to face is the nontariff barriers “traps”. They are technical standards (TBT), which are subjected to be even stricter after the signing of TPP. Every component, ranging from packing, labeling, origin of materials, etc, are looming barriers that would resist our goods to invade foreign markets. Overall, it is such a natural reaction that when taxation is no more the spearhead, the domestic players are going to sort to NTBs.

What we suggest is that Vietnamese firms try to do what many big players are doing in our own playground: interaction and interlink. Typical examples are the partnership of Donataba and Bretagne in 2009 for development of the breeding industry, or the purchase of Viet Phap corporation by Massan in 2012. We are not walking alone in the globalization, and it is high time that we propose better solutions towards trade barriers that are avoiding outsiders to penetrate in a should-be-world-wide market.

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