Development Of Vietnam - India Economic- Trade Relations: The Barriers And Outlook
Do Thang Hai*
II. ASEAN - INDIA TRADE IN GOODS AGREEMENTS
1. Introduction to AITIG
At ASEAN-India Economic Ministerial Meeting in August 2009, Vietnam and India signed ASEAN-India Trade in Goods (AITIG). The agreement has 24 articles focusing on the establishment of tariff reduction roadmap agreed between ASEAN and India. In addition, AITIG also contains rules of origin, dispute resolution mechanisms, non-tariff measures, policy transparency, reviewing and amending commitments, the trade defense instruments and exception. Under the Agreement, the tariff reduction roadmap is divided into five categories with the different level of progress and tariff reduction, including Normal Track (NT), Sensitive List (SL), Highly Sensitive List (HSL), the list of Special Products and Exclusion List (EL). As a new member of ASEAN countries (CLMV), Vietnam can reduce tariffs on the itinerary for more than five years compared to other ASEAN countries and India. Despite a longer route, Vietnam still enjoys full privileges from tariff reduction commitments of India and other ASEAN countries.
India pledged to reduce tariffs on Vietnam’s exports such as garments, footwear, wood and wood products, seafood, coal, rubber, iron steel, etc. In addition, at the request of Vietnam, India agreed to reduce tariffs on coffee and black tea to 45%, and pepper to 50% by 2018. These products are considered very sensitive by India, but they bring benefits to Vietnam’s exports.
2. The impact of AITIG on Vietnam - India trade relations
One of the most important factors promoting trade between the two countries in recent years is the implementation of tariff reduction schedules according to the Trade Agreement trading goods (AITIG) 2010 under the Framework Agreement on comprehensive economic Cooperation ASEAN - India. This is an important legal basis, paving the way for the process of trade facilitation between the two countries and contributes significantly to the promotion of Vietnam’s exports in Indian market. There has been an increase in the use of rules of origin in order to take advantage of preferential tariff reduction commitments from the Government of India under the Agreement for facilitating export to the Indian market.
Once the FTA takes effect, more and more goods from Vietnam with high added value are exported to the Indian market such as mobile phones, computers, electronic products and components, chemicals products, plastic materials and plastic products, billets ...
AITIG also help stabilize imported sources and lower prices on imported inputs. Stable sources of imports and lower prices on imported inputs are very important for maintaining economic growth in general and export growth in particular. Imported goods from India are mainly raw materials for Vietnam domestic production, including animal feed and raw materials, corn, cotton, pharmaceuticals, plastic materials, machinery and spare parts, textile materials, footwear ... Many of these products enjoy preferential tax rates from 0 to 9.4% in Vietnam according to commitments in the Agreement. Therefore, most imports from India have competitive prices, high quality and fast shipping advantages due to geographical distance, and this contributes to the boosting of domestic production of Vietnam.
ASEAN-India Trade in Goods Agreement also have positive impact on attracting FDI from India and the world to Vietnam. When considering investment in Vietnam, foreign and Indian investors see FTA signed by Vietnam as a great advantage to expand the market for their products.
III. THE OBSTACLES AND PROSPECTS OF ECONOMIC AND TRADE RELATIONS BETWEEN VIETNAM AND INDIA
1. Barriers in trade and economic relations between Vietnam and India
Bilateral trade and economic relations has developed recently and India became one of the biggest trade partners of Vietnam. Moreover, Vietnam play an increasing role in India’s Look East policy. However, there are still many barriers and big challenges in deepening Vietnam – India strategic partnership.
a. Legislation and trade policy
Firstly, the ASEAN - India Trade in Goods Agreement came into effect, but India’s import taxes on some of Vietnam’s major exports - namely agricultural products (pepper, cashew nuts, coffee, tea) - remain high and some products are in exclusion list. During negotiation process, despite certain concessions, India only agreed to reduce import taxes on coffee and black tea to 45%, and pepper to 50% by 2018. This is because they are considered as sensitive products by India.
According to the commitments in the Agreement, many of Vietnam’s major export such as textiles, footwear, plastic products, machinery, equipments and spare parts are on the sensitive list of India, thus it takes longer time for these products to enjoy lower import taxes. Some items such as seafood, fruits and vegetables, processed food, textiles, vehicles... are in the exclusion list, and India did not commit to lower import taxes on these products.
According to the WTO, India’s average tariff rate is 34.9%, higher than the average tax rate of 16.4%. The tariff rates of India on imported products from WTO members are among the highest in the world.
Apart from tariff barriers, there are many other trade barriers in India such as poor infrastructure, weak governance, weak dispute resolution mechanisms, high production costs and widespread corruption ... There are also some problems related to the adoption and implementation of technical regulations, food safety, product quality assessment procedures and the high cost of export inspection.
Secondly, due to policy of protection of domestic industries, India is among some countries conducting anti-dumping investigations and applying trade defense measures against exports related to the Vietnam (5 anti-dumping cases and 4 cases related to safeguard investigation). Products under investigation are relatively diverse, from the DVD, the fluorescent lamp to fiber - one of Vietnam’s important export products to the Indian market. Recently, India has made it difficult for import products from Vietnam such as increasing import duties on cashew nut and safeguard investigations on cold rolled steel and plastic processing machines and laminate products.
Thirdly, because the legal system of India is relatively complex, it is difficult for the Vietnam businesses to understand adequately. Procedures required to open representative offices, branches and companies is complex with many documents, high consulting costs and time-consuming.
A big problem for exporters in the Indian market is the complexity of tax structure and custom fees. Due to the complexity of tax calculation and tax exemptions, Indian Customs require additional papers that results into cumbersome and time-consuming paperwork. Indian government’s policies are not clear, transparent and predictable and this has negative effects on exports to Indian market.
b. Culture and business practices
Cultural differences are considered as a substantial problem. India and many other countries in South Asia have civilization, customs, religion and consumer habits which are very different from the East and Southeast Asian countries. In order to boost exports to this market and increase market share of Vietnam goods, Vietnamese businesses need to do research about the history, customs, consumption habits, income and the purchasing power of different type of customers. Therefore, enterprises should avoid marketing and advertising products considered unsuitable according to the habits, religion and beliefs of the people in the region. This is the region of the Hindu, Muslim, Buddhist, Sikh, thus Vietnamese businesses should neither promote beef and beef related products in the Indian market because people worship cows and do not eat beef, nor pork products in areas where Muslims live ... Differences in business practices are also a significant obstacle. India is a former British colony and India’s legal system is derived from a British colonial model. Indian companies have extensive experience in trade, and many of them have sophisticated tricks in transaction and contract implementation. Vietnam enterprises are often at disadvantage when disputes occur because they easily accept unfavorable terms, inequality in terms of payment, inspections, sanctions…
c. Capabilities of Vietnamese enterprises
The Vietnam Business enterprises have not really paid much attention to the Indian market. Vietnam enterprises rarely do market research and participate in trade fairs to find customers, thus their products are imported to Indian market through intermediaries. Vietnamese enterprises’ limited knowledge of the markets, product competitiveness, consumer tastes, business practices, international trade contracts are barriers to market access and development. In addition, managers of Vietnam enterprises, especially private ones, are inexperienced in international trade so they are usually at disadvantage when doing business with Indian counterparts who are experienced and well trained at home and abroad.
While Vietnam businesses lack initiatives, the Indian ones actively penetrate Vietnam market. In Vietnam, Indian enterprises currently have over 100 representative offices to promote export and investment.
2. Prospects of developing Vietnam – India economic and trade ties
Located in the centre of ASEAN and the Greater Mekong Sub-region, Vietnam is an important partner of India and Vietnam plays a significant role in the relation between India and ASEAN. With a population of over 1.2 billion people and great purchasing power, India is a potential market for Vietnam’s exports. The economies of the two countries complement each other. Currently, India has become one of the ten largest trade partners of Vietnam.
Thanks to ASEAN - India Trade in Goods Agreement, the two countries will have more chances to cooperate not only in trade but also in other fields such as industry, oil and gas exploration, mining, investment, science and technology, human resource development, infrastructure development, agro-processing, information technology, tourism, aviation, health care, education ... These positive factors will help both sides continue strengthening the cooperative and comprehensive relationship between the two countries and in the region.
In the future, the import and export taxes between Vietnam and India will be further lowered according to the schedule, and both countries will have many advantages in terms of tax according to the Agreement. Many products of Vietnam will enjoy tariffs of 0-7% in Indian market and thanks to India’s tax treatment, Vietnam’s products exported to Indian market will have many benefits.
Apart from the Agreement, another positive factor is that India has officially recognized Vietnam as a country with fully market economy. This makes legal environment more favorable for business activities of both sides and contributes to Vietnam exports to the Indian market where there are many protectionist barriers and frequent use of trade defense instruments.
Besides AITIG, Vietnam and India also signed Agreement on Investment and Trade in Services under the Framework Agreement on Comprehensive Economic Cooperation Between ASEAN and India. These agreements expected to take effect from 1st of July 2015 will bring more market access opportunities for Vietnam enterprises in many fields. In the field of insurance services and banking, India is one of the largest trade partners of Vietnam. Large trade turnover between the two countries will facilitate Vietnamese banks and financial enterprises in terms of providing international payment services, cargo insurance, transport insurance and fire insurance. Vietnam can benefit from information technology and communication services – one of India's leading industries, such as network security, space technologies and establishment of joint venture for information – communication enterprises. In addition, Vietnam can strengthen cooperation with India in the field of health services as India has developed health sector with advanced technology and high quality services which are comparable with those of developed countries but have much lower prices. This is of particular significance as demand for healthcare services is increasing in Vietnam.
Currently, both Vietnam and India are joining the negotiation of Regional Comprehensive Economic Partnership (RCEP) between ASEAN countries and 6 FTA partners of ASEAN (including India). RCEP negotiations were formally launched at the 21th ASEAN Summit in November 11/2012. Through the negotiations, ASEAN and its partners have reached some consensus such as establishing three working groups on trade in goods, services and investment under the Negotiation Commission, documents about the scope of negotiations for these groups, initial discussions about the structure of agreement chapters and the data exchange between the parties, as well as determining the negotiation roadmap aiming to complete negotiations by late 2015. One notable point is that each country will have only one schedule (taxes/services/investment) for other countries in the fields of trade in goods, services and investment. However, parties may separately negotiate about some commitments with limited scope.
To make Vietnam - India strategic partnerships develop more effectively, in which economic-trade relations is a key pillar, requires regular attention from leaders of the two countries, implementation of research programs and specific cooperation, strengthening exchange activities between enterprises and relevant authorities of the two countries in order to enhance mutual understanding. Vietnam should carry out programs that provide information about opportunities brought by the Agreement between the ASEAN and India, and improve market understanding of Vietnamese enterprises as well as develop projects enhancing business-building capacity, especially small and medium-sized enterprises - the backbone of the economies of the two countries.
Despite many obstacles, it can be said that the economic-trade relation between Vietnam and India keeps progressing and has achieved great success. With such momentum, the bilateral economic-trade relation will certainly have a breakthrough, and help strengthen Vietnam-India strategic partnership as well as meet expectations of the governments and people of the two countries./.
* Deputy Minister of Industry and Trade of Vietnam