Vietnam continues to see robust inflows of FDI, which at US$11bn in the first nine months of 2016 was a 12.4% increase on the year. Continued investment inflows will boost GDP growth and export prospects and thereby improve the country’s external balance, driving strong export growth (despite generally sluggish global demand) and helping it gain traction in terms of export market share.
In terms of structure of trade, given China’s rising labour costs and its shift towards higher-value products, plus a shrinking working age population in some neighbouring countries, Vietnam is well positioned to increase its market share in labour-intensive goods and services with its young workforce and relatively low wages. It is already a major player in the export of garments and, more recently, electronics.
Furthermore, Vietnam stands to benefit from several trade deals in the pipeline should they be finalised, with proposed reductions in barriers to trade making its exports even more competitive. However, Vietnam has delayed ratifying the TPP, excluding it from its parliament session beginning in October. This means that the earliest possibility of ratification will now be in 2017, which comes at a time when uncertainty in other countries is threatening the deal, particularly in the US where the President-elect has expressed opposition to the pact. Nevertheless, trade prospects should benefit from the negotiation of other trade-enhancing deals such as the Regional Comprehensive Economic Partnership (RCEP) and the ASEAN Economic Community (AEC).
Services exports are expected to maintain a modest share in Vietnamese trade despite the dominance of merchandise trade. Services trade is primarily driven by the tourism industry and the ongoing development of this sector will require further investment. Expansion in other sectors will depend on the competitiveness of domestic firms, which will face increasing competition from multinationals as barriers are reduced by trade agreements.
Export corridors to watch - goods
Exports of labour-intensive manufactured goods have strengthened - both the ICT sector and clothing & apparel have performed consistently well, ranking first and second among main exports sectors in 2015. Vietnam continues to benefit from China’s rising labour costs, and has been increasing its share in low-end manufactures. Export of clothing & apparel is expected to grow 16% in 2016-20, and is expected to maintain a significant share of total exports (at 28%). Furthermore, it will also be the top contributor to export growth in 2016-20, accounting for 25% of the increase in total exports and then contributing 21% of growth in 2021-30.
Vietnam is slowly diversifying from low-end manufacturing, with more sophisticated products such as ICT equipment. This sector was the highest-ranking export sector in 2015, and is expected to retain its lead over the forecast period to 2030. It is also expected to contribute 23% of the rise in total exports in 2016-30. While exports of ICT equipment generally falls within the scope of electronic assembly, a gradual move towards high-end manufacturing becomes more possible as capacity is enhanced.
Vietnam’s strategic location and ties to China, India, and ASEAN leave it well-placed to take advantage of nearby markets. Lower barriers to trade negotiated through trade deals will make Vietnam even more attractive for investors to use it as an export production base.
The US was Vietnam’s primary export destination in 2015, with China in second place, followed by Japan and Korea. These rankings are expected to remain over the period to 2030. China and India are forecast to be Vietnam’s fastest-growing markets for exports in 2021-30, with shipments to both these countries rising by some 14% a year over the period, while other regional market such as Bangladesh, Malaysia and Indonesia will also be increasingly important markets, all posting double-digit rises in 2021-30.
Import corridors to watch - goods
As well as helping to drive faster export growth, continued strong FDI will also lead to high import growth of equipment to expand the manufacturing sector, with industrial machinery having been the leading import sector in 2015 and expected to remain so over the period to 2030. As well as investment by firms in manufacturing capacity, further investment in infrastructure is also expected to drive imports of industrial machinery. Indeed, imports of industrial machinery are expected to be the top contributor to import growth in both the near and long term, accounting for 26% of the rise in total imports in 2016-20 and 23% of the rise in 2021-30.
Next in the list of the top-ranked import sectors are textiles, wood manufactures and ICT equipment, which create components for exported goods as Vietnam is used as a location for final assembly. Textile and wood manufacturers are forecast to account for around 10% of the rise in total imports in 2016-30, well behind industrial machinery, while ICT equipment imports are expected to contribute around 8% a year to total import growth.
Recent trends in services trade: 2000-15
Services trade comprises a relatively small share of Vietnam’s total trade. Indeed, although services trade has been rising over the past few years, its share of total trade has been shrinking due to the acceleration of growth in merchandise trade. Vietnam runs a deficit on services, with imports of services rising faster than exports. Vietnam’s largest services import is transportation, which accounts for roughly half of total services imports, attributable to lack of capacity of Vietnam’s fleet which cannot meet the strong rise in trade and has led to the proliferation of foreign ships to deliver goods. Imports of transportation services is distantly followed by tourism as more people from Vietnam start to travel abroad.
Currently, tourism accounts for about two-thirds of services exports. Despite declines in international arrivals in 2014 and 2015, improvements have been seen in 2016 as efforts to boost tourism, such as relaxing visa restrictions for particular countries, were implemented. Vietnam’s geographic advantage, its natural wonders and sites and relatively low costs continue to attract tourists from around the world. Indeed, Vietnam’s relatively low cost of living, coupled with rising incomes and costs in neighbouring countries, make it very attractive to tourists.
The next most important services export after tourism is transportation, which is closely linked to tourism and goods trade. The export of certain services like logistics, freight, and insurance etc. has benefited from the strengthening manufacturing trade.
Outlook for services trade: 2016-30
The outlook of services trade is expected to continue to improve, yet remain concentrated in these already prominent sectors. Tourism and travel is expected to contribute the most to the growth in services trade, contributing 65% to total import growth in 2016-20 and 66% in 2021-30. This is followed by transportation and distribution, which is expected to contribute almost 20% to growth over the same period. But while tourism and travel is expected to remain the top service export in 2030, a lack of marketing and development will limit its potential to be an even bigger driver of services export growth.
Several trade deals are being negotiated upon that would benefit Vietnam’s trade in services. These include the Trans-Pacific Partnership (TPP), the Regional Comprehensive Economic Partnership (RCEP), the ASEAN Economic Community (AEC) and the bilateral free trade agreement between Vietnam and the EU. However, in order to maximize the benefits from such deals, Vietnam will need to develop its services sector in order to compete against more developed counterparts otherwise domestic firms may lose out. Already, finance, insurance and postal and telecommunication services have been declining in terms of services export share, with finance and insurance posting negative growth in 2014.
Source: Vietnam trade report. HSBC