Great opportunities, enormous challenges
With a total population of more than 600 million people and the total GDP expected at US$4.7 trillion by 2020, the AEC has the potential to become the world's fourth largest economy by 2030.
According to the Vietnam Chamber of Commerce and Industry (VCCI), the AEC currently has the highest tariff cuts compared to other Free Trade Agreements (FTAs), including the Trans-Pacific Partnership (TPP) agreement. The establishment of the AEC will open more markets for enterprises with a wider and more favourable business environment. Enterprises will also have opportunities to enhance their competitiveness and reduce production costs, as well as having favourable conditions to invest in other ASEAN countries.
However, enterprises with lower levels of development will face fiercer competition, labour movement and challenges in managing capital flows.
The ASEAN Department under Vietnam's Ministry of Foreign Affairs said the AEC is basically a single market and a unified production market with no tariffs which allows the free movement of goods, services, investment, capital and skilled labour.
The AEC is the result of the ASEAN Community based on the mutual interests of member countries, with higher levels of connection compared to an agreement but not as strict as the European Union (EU), and not a supranational organisation. The AEC is a community that is 'united in diversity' as there is large difference between member countries, particularly in political systems and level of development.
The formation of the AEC and the implementation of the ASEAN Community Vision to 2025 create both opportunities and challenges for Vietnam.
Vice Chairman and General Secretary of the Vietnam Textile & Apparel Association (VTAA) Truong Van Cam said joining the AEC would create some favourable conditions for Vietnamese textile enterprises, including the movement of capital and skilled labour to Vietnam, but it also forces higher costs on enterprises and higher wages to pay for skilled labour.
On the other hand, other AEC member countries also attract workers from Vietnam, leading to the flow of Vietnamese labour to other ASEAN countries with higher levels of development than Vietnam. Vietnam has a strong garment and textile sector among ASEAN countries, so it is not a significant problem. However, Vietnam imports only a small proportion of textile materials from AEC countries with the rest coming from China, Taiwan (China), and the Republic of Korea (RoK).
There are also few opportunities for Vietnam to boost garment and textile exports to the AEC as Vietnam mainly exports to established markets including the US, Europe, Japan, and RoK. Thus, there will not be much competition between Vietnamese and AEC garment and textile enterprises.
Joining in the AEC, the Vietnamese footwear sector will also see little impact as the AEC is not the main exporting market of Vietnam. General Director of Gia Dinh Shoes Co. Ltd Nguyen Chi Trung said that Vietnamese footwear exports to the AEC are minimal and the import of raw materials from the AEC is also small as Vietnam mainly imports materials from China, RoK, and Taiwan (China). However, domestic enterprises will have to compete with footwear products imported from AEC countries, particularly from Thailand and Malaysia.
The AEC will also affect Vietnam's aquatic sector as it is one among seven sectors given priority for economic integration. According to General Director of Soc Trang Seafood JSC (Stapimex) Tran Van Pham, the large AEC market will have diversified demands for food, creating opportunities for the export of Vietnamese aquatic products in addition to many incentives in tariffs for exporting enterprises.
However, the participation in the AEC presents many challenges to seafood exporters because while Vietnam’s products can gain easier access to regional markets, the same is also true for goods of countries within the community. Since seafood products of ASEAN countries are roughly similar in terms of offerings, Vietnamese enterprises will certainly face more intense competition in both domestic and foreign markets. For this reason, Vietnamese producers will have to compete with more affordable prices and better quality. But for Vietnam’s seafood sector, which has weaknesses in food safety, origin and environmental issues, failure is inevitable if enterprises make no change in strategy.
In addition, if borrowing and transport costs remain higher than regional peers, the price of Vietnam’s products will also be higher and become less competitive. As such, opportunities are overshadowed by challenges in this case. Nguyen Chi Mai, chief representative of the Association of Chartered Certified Accountants (ACCA) in Hanoi said the AEC could bring about positive institutional changes, making Vietnam’s legal framework and practices in sync with international standards so that it will be easier for foreign companies to do business in Vietnam as well Vietnamese businesses seeking opportunities abroad.
Efforts to gain success in integration
According to the Ministry of Industry and Trade’s Agency for Foreign Trade, there is much concern over the ability of domestic enterprises to seize opportunities given the rapid pace of integration. The government will play the role of trailblazer by negotiating and signing free trade agreements to open up new opportunities for enterprises. The AEC will facilitate Vietnamese enterprises’ participation in the global value chain as each member in the community has their own free trade agreements with economies outside the group, which is expected to further expand the market and increase pressure at the same time.
In order to overcome these challenges, Vietnam should not get occupied with determining comparative advantages, and should focus on building internal strengths instead. The government will take a supportive role by creating a fair business environment and a transparent legal framework. Only transparency can protect genuine enterprises and only genuine enterprises can fare well on the road to international integration. Meanwhile the VCCI emphasises the role of trade associations in supporting enterprises, especially small and medium ones during AEC integration.
General Director of Gia Dinh Shoes Co. Ltd Nguyen Chi Trung said in order to control quality and the market, Vietnam should consider using technical barriers to restrict imports and stimulate domestic enterprises. He said when the tariff barriers are removed, countries will employ technical barriers to protect domestic manufacturing and the market. Currently, most countries in the AEC have set up technical barriers to imported footwear. Foreign enterprises or those specialising in exports will not find any trouble with these obstacles, but for domestic enterprises, this is a formidable challenge because they are struggling to meet quality standards. In addition, when the tariffs are eliminated, stiffer competition between countries within the community is unavoidable.
According to the ACCA representative, Nguyen Mai Chi, Vietnam needs to be proactively prepared in terms of human resources and professional capability to minimise losses and negative impacts on the economy from AEC integration. Currently the number of Vietnam’s internationally certified accountants and auditors is rather small in relation to its economic potential, making up just 2% of the ASEAN total. Therefore in the future, Vietnam needs to plan to raise the number of auditors with international certificates to meet the need of enterprises and AEC integration.
Stapimex’s General Director Tran Van Pham said whether the seafood export market becomes more open or closed to Vietnamese enterprises entirely depends on its competitiveness, and that competition is a motive for the industry to change for the better.
At a recent meeting with the business community, Prime Minister Nguyen Tan Dung stressed that Vietnam has no way but to deepen integration in order to stimulate growth and accelerate modernisation and industrialisation towards a strong and wealthy country. He noted that integration would surely lead to competition, in which enterprises would be the main force, while the government would create all favourable conditions to help enterprises enhance their competitiveness. The government leader’s message also affirmed that the government would always accompany the business community in international economic integration and AEC integration in particular.
