Cooperation between Vietnam and the Eurasian Economic Union members -- and the impact of the free trade agreement

by Dmitriy Belyanin

Introduction

On May 29, 2015, the Eurasian Economic Union and Vietnam signed a free trade agreement. According to the media, the pact strengthens Russia-Vietnam relations and illustrates the popularity of Eurasian integration among some non-members. In reality, benefits of the free trade zone vary from country to country. Russia and Belarus will be the largest beneficiaries; Kazakhstan, Kyrgyzstan and Armenia stand to gain much less.  Also unclear is how long Vietnam’s economy will continue to grow, since part of the growth is due to investors substituting Vietnam for China.

Structure of Vietnam’s economy

With a dense population of 90.73 million, Vietnam is turning rapidly to markets and industry. The agricultural share of output fell from about 25% in 2000 to 18% in 2014; the share of industry rose from 36% to 38%, according to the US Central Intelligence Agency.  Though still under authoritarian rule by the Communist Party, Vietnam has had a mixed economy since the late 1980s. State-owned enterprises constitute only 40% of output (measured as gross domestic product, which was $186.2 billion in 2014).

Vietnam’s economy is growing more rapidly than it is developing. In 2011-2014, Vietnamese output grew 5-6% annually. For comparison, Chinese output growth slowed from 9.5% in 2011 to 7.3% in 2014. But while its poverty is declining, Vietnam suffers from undercapitalized banks and bad loans.

By some regional standards, Vietnam is a laggard. The World Bank classifies Vietnam as a “lower middle income” country -- unlike China, Belarus and Kazakhstan, which are “upper middle income.” In the Eurasian Economic Union, Armenia and Kyrgyzstan are “lower middle income,” and Russia is “high income, non-OECD.” (The Organization for Economic Co-operation and Development consists of rich Western nations.)  On the other hand, Vietnamese inflation and unemployment are low by world standards and comparable to other countries in the region. Table 1 shows key macroeconomic indicators of major developing Asian countries for 2013-2016.

Country	Subject Descriptor, Percent Change	2013	2014	2015P	2016F
China	Gross domestic product, constant prices	7.7	7.3	6.8	6.3
China	Inflation, average consumer prices	2.6	2.0	1.5	1.8
China	Volume of Imports of goods	9.7	4.6	2.5	3.5
China	Volume of exports of goods	9.6	5.1	3.0	3.5
China	Unemployment rate	4.1	4.1	4.1	4.1
Malaysia	Gross domestic product, constant prices	4.7	6.0	4.7	4.5
Malaysia	Inflation, average consumer prices	2.1	3.1	2.4	3.8
Malaysia	Volume of Imports of goods	5.9	4.3	-0.4	5.2
Malaysia	Volume of exports of goods	1.9	5.8	-2.2	7.5
Malaysia	Unemployment rate	3.1	2.9	3.0	3.0
Vietnam	Gross domestic product, constant prices	5.4	6.0	6.5	6.4
Vietnam	Inflation, average consumer prices	6.6	4.1	2.2	3.1
Vietnam	Volume of Imports of goods	18.4	14.8	22.2	11.6
Vietnam	Volume of exports of goods	13.3	16.2	16.2	10.6
Vietnam	Unemployment rate	2.8	2.5	2.5	2.5
Thailand	Gross domestic product, constant prices	2.8	0.9	2.5	3.2
Thailand	Inflation, average consumer prices	2.2	1.9	-0.9	1.5
Thailand	Volume of Imports of goods	1.6	-6.8	4.8	4.4
Thailand	Volume of exports of goods	0.2	0.7	2.2	3.8
Thailand	Unemployment rate	0.7	0.8	0.8	0.8

Source: October 2015 IMF World Economic Outlook Database

Table 1: Key macroeconomic parameters of major developing Asian countries, 2013-2016

  

Vietnam’s economy is rapidly opening. The country’s accession to the World Trade Organization in 2007 has stimulated exports. So will the 5% depreciation last year of the managed currency, the dong. Vietnam also belongs to the Trans-Pacific Partnership, a new US-led free trade agreement of 12 Pacific Rim countries.

 

Vietnam’s trade is modernizing. In 2012, key exports included crude oil, rice and other farm products, garments, footwear, electronics and computers, telephones and parts, transportation, and machinery and parts, said the Vietnam Trade Promotion Agency.  The country is moving away from primary and low-tech exports. Garments and footwear were only 20% of exports, as compared with 27% in 2002. During that decade, the share of crude oil decreased from 20% to 7%, and the share of agricultural products decreased from 24% to 12%. Major trade partners include the United States, China, Japan, South Korea, Malaysia, Germany, the United Arab Emirates, the United Kingdom, Hong Kong and Thailand.

Main imports include motor vehicles, machinery and equipment, oil products, agricultural materials, metals, chemicals, plastics, textile materials and hi-tech intermediate goods.  China remains Vietnam’s largest import partner, providing 25% of its imports. China is followed by other East Asian countries (excluding Japan), accounting for 22% of imports. Members of ASEAN (Association of Southeast Asian Nations, a political and economic organization of 10 countries), produce 18%.

Despite these encouraging trends, Vietnam ranks low (90^th) on the World Bank’s 2015 Ease of Doing Business Index. This is more likely to be due to national characteristics rather than regional ones, since efficiency rankings in Asia vary considerably. China ranks 84^th, the Philippines 103^rd, Indonesia 109^th, Malaysia 18^th, Cambodia 127^th, Thailand 49^th, and Singapore 1^st. On the other hand, in the Eurasian Economic Union, rankings are uniformly mediocre – not very good and not very bad. Kazakhstan ranks 41^st, Russia 51^st, Kyrgyzstan 67^th, Armenia 35^th, and Belarus 44^th. Perhaps regional factors affect the Union. 

As for efficiency within the region, relative strengths for Vietnam include dealing with construction permits and getting credit. Among its relative weaknesses are paying taxes, protecting minority investors, and resolving insolvency. In comparison, China does exceptionally well at enforcing contracts, and very well in registering property and resolving insolvency. This success may reflect China’s longer experience with property rights. China’s relative weaknesses include dealing with construction permits and starting a business, as well as protecting minority investors and paying taxes. Table 2 lists components of the Ease of Doing Business index for major developing countries of East and Southeast Asia and for members of the Eurasian Economic Union.

Nation	Rank	Start a Business	Deal with Construction Permits	Get Electricity	Register Property	Get Credit	Protect Minority Investors	Pay Taxes	Trade Across Borders	Enforce Contracts	Resolve Insolvency
Vietnam	90	119	12	108	58	28	122	168	99	74	123
China	84	136	176	92	43	79	134	132	96	7	55
Thailand	49	96	39	11	57	97	36	70	56	57	49
Malaysia	18	14	15	13	38	28	4	31	49	44	45
Kyrgyz.	67	35	20	160	6	28	36	138	83	137	126
Russia	51	41	119	29	8	42	66	47	170	5	51
Belarus	44	12	34	89	7	109	57	63	25	29	69
Kazakh.	41	21	92	71	19	70	25	18	122	9	47
Armenia	35	5	62	99	14	42	49	41	29	28	71

Source: The World Bank Group

Table 2: Components of the 2015 Ease of Doing Business Index for the Eurasian Economic Union and for selected developing Asian economies

Given the weakness of Vietnam’s legal sector, one is not surprised that corruption remains severe and is comparable to that of Central Asia. Vietnam ranks 112^th in Transparency International’s Corruption Perceptions Index for 2015; lower rankings indicate more corruption. In the Eurasian Economic Union, Russia ranks 119^th, Kazakhstan and Kyrgyzstan share the 123^rd place, Belarus ranks 107^th and Armenia 95^th.

History and general implications of the agreement

According to the Eurasian Commission, trade among members of the Eurasian Economic Union increased from $2.6 billion in 2010 to $4.2 billion in 2014. So they considered trade integration. Creating a free trade zone between the Customs Union members and Vietnam was first discussed in 2009 when Vietnam’s Minister of Industry and Trade visited Russia. In 2010, a joint research group of representatives of Russia, Belarus, Kazakhstan and Vietnam was formed to discuss a zone. It finished in 2012, when Andrey Slepnev, Minister of Trade of the Eurasian Economic Commission, began talks with Vietnam to prepare the pact.

The agreement is somewhat weak. For trade in goods, it shall apply to all members of the Eurasian Economic Union. But for trade in services and investments, each member can decide whether to abide by it; in 2015, it detailed only relations between Russia and Vietnam. As before, conditions on non-tariff barriers are the same for all members. Vietnam accepted some technical and sanitary regulation that are not in the basic WTO accession agreements but that the Eurasian Economic Union complies with.

The signatories expect trade between the Eurasian Economic Union and Vietnam to increase from $4 billion to $8-10 billion in the next few years. Under the pact, Vietnam will have to cancel import tariffs for 59% of the products immediately, and for another 30% gradually.

Firms of the members of the Eurasian Economic Union are to save $40 million by avoiding customs duties during the first year of the agreement and $55-60 million per year after completing the transition. Vietnamese companies are to save up to $10 million per year.  The Union will cancel import tariffs for 59% of the products immediately and for 29% over five to 10 years. The Union will preserve tariffs for meat, milk, coffee, tea, sugar, pipers, airplanes, cars, and other goods considered sensitive. Vietnam will preserve duties for final products from meat, confectioneries, salt, industrial waste, items from precious metals, and many other goods that the Eurasian Economic Union does not export.    

       

Relations with Russia    

Economically, Russia and Vietnam cooperate most in oil extraction, energy, rubber, and sea food processing.  About 300 Vietnamese companies operate in Russia, mainly in trade, food, and construction materials.  Over a thousand Vietnamese study in Russia, according to Vietnam News.

In 2015, mutual trade turnover amounted to $4 billion -- about 1% of total Vietnamese trade and 0.5% of Russian trade. In contrast, Vietnamese trade with the US is $36 billion and with China $58 billion. In nuclear energy, Russia must compete with South Korea, Japan and the US for the Vietnamese market.  In oil extraction, India is Russia’s rival, according to Anton Tsvetov, an expert of the Russian Council on International Affairs.

Mineral fuels, crude oil and oil products, bituminous substances and mineral wax	8.6
Fertilizers	7.4
Electronic machines and equipment, including sound recording, televisions and related equipment	4.9
Nuclear reactors and related equipment and parts	3.5
Optic equipment, photo and video cameras, measuring and medical (including surgical) equipment	1.7
Ferrous metals	1.7
Items out of ferrous metals	1.6
Salts, sulfur, lime, cement, plaster, soil and rocks	1.2
Land transportation, apart from railroad and trams	0.8
Books, newspapers, manuscripts, typed writings, and artwork copies	0.8
Miscellaneous	62.3

Table 3: The share of various exports from Russia to Vietnam, % (2014)

Source: ITC Trade Map, as reported by Rusexporter.ru.

Table 3 shows the share of various goods in total exports from Russia to Vietnam in 2014.  In 2014, exports of land transportation increased 2.9 times, fertilizer 2.3 times, oil and mineral fuels 51.2%, and items from ferrous metals 34.8%.  But Russian exports of instruments and equipment plummeted 78%, printed products 75.3%, ferrous metals 61%, electric equipment 46.6%, and mechanical equipment 28.6%.

Electronic machines and equipment, including sound recording, televisions and related equipment	32.9
Nuclear reactors and related equipment and parts	14.1
Shoes, gaiters, and analogous items	12.2
Garments, apart from knitted wear	9.2
Tea, coffee, and yerba mate	7.1
Fish and other seafoods	4
Knitted (by machine or manually) garments	3.5
Edible fruits and nuts	2.9
Food products that emerge from processing fruits, vegetables, nuts, or other parts of plants	1.6
Other food products	1.6
Leather items, road items, ladies’ bags and related goods, and items from animal intestines	1.5

Table 4: The share of exports from Vietnam to Russia, % (2014)

Source: ITC Trade Map, as reported by Rusexporter.ru.

In 2014, Russian imports of some Vietnamese food products increased 49.6%, edible fruits and nuts 26.1%, leather items 25%, products from processing fruits and vegetables 22.8%, tea and coffee 20.6%, fish 10.9%, and clothing items 9.8%.  Imports of equipment and mechanical items decreased 31.9% and electric equipment 25.8%, according to the ITC Trade Map.

       

Relations with Belarus

Vietnam is an important trading partner of Belarus, which exports potassium fertilizers, tires, tractors, metal products and food products to the Asian country.  In 2011, the two nations agreed on $275 million of Belarussian exports, and on joint projects in manufacturing and extraction.

Vietnamese exports to Belarus communication technology, office equipment, sea food, rice, nuts, shoes, clothing, rubber, processed tropical fruits, tea, coffee and spices. The two nations might create an enterprise in Belarus to process and package coffee from Vietnam.

A Vietnamese complex, owned by the company BEAM-Motor, assembles Belarussian-designed MAZ automobiles. The two nations are considering assembly of MMZ engines.  A Belarussian-Vietnamese intergovernmental commission, in the areas of trade, economic, scientific and technological cooperation, has been functioning, said the Belarussian embassy in Vietnam.  Table 5 shows Belarussian exports to Vietnam and imports from Vietnam, correspondingly.  Belarus exports much more to Vietnam than it imports.

Year	Exports	Imports	Net Exports
2010	105.5	40.4	65.1
2011	164.3	23.8	140.5
2012	156.1	28.5	127.6
2013	145.2	49.6	95.6
2014	108.5	60.8	47.7

Source: Embassy of the Republic of Belarus in the Socialist Republic of Vietnam

Table 5: Dynamics of bilateral trade between Belarus and Vietnam, millions of U.S. Dollars (2010-2014)

The trade pact cancels customs duties in Vietnam on potassium fertilizer, tires, trucks, molasses, milk products and alcohol. Duties had varied from 6% (fertilizer) to 30% (tires), reports Chesnok magazine.

Relations with Kazakhstan

In 2014, trade between Kazakhstan and Vietnam totaled $271.9 million, among which exports of Kazakhstan to Vietnam amounted to $1.7 million and imports from Vietnam to Kazakhstan amounted to $270.2 million, according to the KAZNEX INVEST national agency on exports and investment.  Exports to major trading partners of Kazakhstan, such as Russia, China and Germany, provide the funds that enable Kazakhstan to import from Vietnam much more than it exports, according to Kazdata. Kazakhstan could export to Vietnam 50 goods, including metallurgical products, machinery, food products, chemical products, and construction materials. Vietnam is a net importer of these products, and its pact with Kazakhstan has decimated its tariffs, which had been as high as 40% for poultry, 35% for candy and preserved meat, and 30% for soft drinks. But Kazakhstani exporters face high transportation costs. 

The free trade agreement benefits the Eurasian Economic Union in general more than it does Kazakhstan in particular, said Aidarkhan Kussainov, director of the Almagest consulting company. But since the Chinese yuan has become more expensive over the last five years and the Chinese economy has slowed, many multinational enterprises are setting up their factories in Vietnam. Businesses of Kazakhstan may also take part in this, reports Venera Gaifutdinova, of Forbes.kz.

Relations with Armenia

In 1992, Armenia and Vietnam established diplomatic relations and agreed to trade. Twenty years later, they expanded that cooperation to science and technology. From 2012 to 2014, Armenian exports to Vietnam increased from $33,900 to $61,900.  Imports decreased from $16.9 million in 2012 to $14.5 million in 2013 and then increased again to $19.9 million in 2014, according to the Ministry of Foreign Affairs of Armenia. Vietnam’s trade surplus with Armenia leaves it with a pile of drams, the Armenian currency, that is worthless everywhere except in Armenia. So Vietnam spends the drams on Armenian assets. However, in November 2015, Vietnam removed tariffs on Armenian brandy and wine, reports Armenpress, so Armenia’s trade deficit may lessen.  .Overall, Armenia earns most of its export revenue from Russia, Сhina and Germany, according to Russia’s Ministry of Economic Development.

 

Relations with Kyrgyzstan

In the 2000s, Kyrgyzstan and Vietnam traded little. Only in 2014 did the leaders begin discussing stronger economic ties. The talks continued in 2015 and concerned textiles, energy, and agriculture, according to Kabar.kg. During a May meeting of Temir Sariyev, Prime Minister of Kyrgyzstan, and Nguyen Tan Dung, Prime Minister of Vietnam, the Kyrgyz side encouraged investments of Vietnamese entrepreneurs in Kyrgyzstan's textile industry, reports Marat Uraliyev, of the Vecherniy Bishkek newspaper. Sariyev quit this week over corruption charges, reports Reuters. But his successor, Sooronbai Zheenbekov, an ally of President Almazbek Atambayev, is unlikely to change the country’s foreign policy much.  Kyrgyzstan will still develop relations with Vietnam.

Relations with Other Key Players

Despite the Vietnam War of the Sixties and Seventies, the government of Vietnam since 1988 has strengthened its relations with the US and with ASEAN countries, at least in comparison with its ties to Russia. By 2015, US-Vietnam trade exceeded Russia-Vietnam trade 15-fold. Nevertheless, Russia remains a key military partner of Vietnam.  Russian-made weapons are 90% of Vietnam’s arms purchases.

The Spratly and Paracel Islands have been bones of contention between Vietnam and four other East Asian countries. China, Malaysia, the Philippines, Taiwan, and Vietnam claim the Spratly Islands; and China, Vietnam and Taiwan claim the Paracels. China and Vietnam clashed in arms over the Paracels in 1974 and over the Sprawls in 1988; Vietnam lost 70 and 60 troops, respectively. In 2012, China created Sansha city as its headquarters in the Paracels, angering Vietnam and the Philippines. A year later, the Philippines said it would challenge Chinese claims before a UN tribunal, reports BBC.com. Vietnam and the Philippines may seek US support in any more serious conflict.

Fearing Chinese expansion, the US may increase cooperation with Vietnam, whose relations with China were damaged by the 1979 war, report Mikhail Moshkin and Andrey Rezchikov, of the Vzglyad newspaper.  During that war, China punished Vietnam for invading Cambodia and overthrowing the Khmer Rouge as well as for allying with the Soviet Union. In the one-month war, China incurred severe losses without accomplishing any strategic objectives, reports the National Interest. Since then, relations between Russia and China have strengthened, especially in suspicion of the West. 

Russia may have trouble maintaining good relations with both countries.

The accession of Vietnam to the Trans-Pacific Partnership, a US-led free trade agreement of 12 Pacific Rim countries, is expected to raise the country’s GDP by 10%, due to cuts in tariff and non-tariff protection of large markets such as Canada, the US and Australia, according to the World Bank’s 2016 report “Prospects of the Global Economy.” Since sanctions-bound Russia is not in the Trans-Pacific Partnership, the trade accord with Vietnam may serve as a gateway for re-exports.

Analysis

Having cheap labor, stable governments and predictable relations with the West, most of East Asia will be affected by political turbulence much less than will Europe or the Middle East. The migrant crisis in Europe, as well as the Chinese and other Asian diasporas in North America, are likely to be severe enough to discourage the West from military operations or diplomatic pressures to remove Asian dictatorships. Europe, the Middle East, and the European part of the Commonwealth of Independent States will probably still play central roles in the political struggle between the West and Russia during the rest of the 2010s. For Vietnam and China, economic development will take precedence over war memories and territorial disputes. They will remain open to the West and the Eurasian Economic Union. The latter should compete for the Vietnamese market and try to attract Vietnamese suppliers and investors.

Vietnam’s large population and population density benefit its trading partners, including those in the Union. Vietnam is liberalizing its economy, playing up export industries and playing down import-competing industries. 

Russia is likely to be the main beneficiary of the trade pact, since this enables it to import Vietnam-made goods through China and via the Pacific. The Kremlin’s embargo on European-made goods increases Russia’s demand for Vietnamese products. While cooperation with Vietnam can yield political profits for Belarus, due to similarity of political regimes, food trade will be limited, being overshadowed by the purchase of raw foodstuffs from Europe and re-exporting or processing them for sale in Russia. For Kazakhstan, economic relations with China will matter much more than those with Vietnam, but it may gain from diversifying exports and suppliers.

Armenia and Kyrgyzstan will gain little from the trade agreement. Their high transportation costs hinder trade with Vietnam, and Kyrgyzstan competes with Vietnam in textiles. Attracting Vietnamese investors for start-ups will be hard, since Kyrgyzstan has a reputation of being unstable and its local market is tiny. Vietnam, too, should build its reputation in the region, since Chinese-made products dominate the market.

Since the trade agreement implies different benefits for different countries of the Eurasian Economic Union, and since all of them need industrialization, diversification and modernization, they may amend the pact someday. They may propose additions to the “sensitive products” category, and they may engender conflicts of interest. As small economies, Kyrgyzstan and Armenia may be initially ignored. Even so, other Union members have an interest in a compromise with these countries, since both, especially Kyrgyzstan, have histories of revolts against unpopular measures. Also, the preservation of non-tariff barriers implies that many members of the accord may still revert to subsidies, quotas and tax privileges, to the extent that it does not violate WTO rules, if the country is a member of the WTO. Given Vietnam’s interventionist policy, this may eventually become the case for more liberal economies, such as Kazakhstan’s.     

Conclusion

Despite authoritarian rule, Vietnam has developed a mixed economy. Corruption remains serious – but industrialization, economic reform, and the Chinese slowdown have enabled the nation to vie with China.

Vietnam trades extensively with Russia, moderately with Belarus, and scantily with other members of the Eurasian Economic Union. By eliminating tariffs, the pact encourages trade with Kazakhstan, Armenia and Kyrgyzstan. But China is likely to trade more with these countries than Vietnam will. In fact, Kyrgyz producers face tough competition from Vietnam. Though its government hopes to attract Vietnamese investments, its textile producers lack the reputation of other East Asian firms.

Vietnam’s political relations with China and the US remain uneasy, due to memories of the Vietnam War and the 1979 Sino-Vietnamese War, and, in the case of China, to territorial disputes. But both countries trade a lot with Vietnam. Strong and stable governments, stable relations with the West, and the lesson of the migrant crisis in Europe will discourage the West from eliminating or weakening authoritarian regimes in East Asia, including those of China and Vietnam. As far as the West is concerned, in East Asia, “it’s the economy, stupid.”

Dmitriy Belyanin has a Master’s degree of Business Administration in Finance and a Bachelor of Arts degree in Economics from KIMEP University.  Since 2007, he has been writing on issues in economics and finance ranging from stock markets to environmental economics. He is the associate editor of this blog.

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