Bilateralism and Agricultural Development in Vietnam: Opportunities for Negotiation with Japan and Korea David UC Berkeley MARD Workshop on GLOBALIZATION AND AGRICULTURAL DEVELOPMENT IN VIETNAM 13-14 December 2005 Nha Trang Viet Nam
Contents 1. Introduction 2. Japan BTA Assessment 3. Korea BTA Assessment and Comparison 4. Special Topics 5. Conclusions Slide 2
Introduction Japan and Korea are the only Asian OECD economies. As such, they represent technology and consumption leadership in the region. Viet Nam s trade linkages with these economies can provide both growth leverage and essential modernization benefits. To capture these benefits fully will require active and targeted negotiation. Slide 3
Japan-Vietnam BTA Scenarios 1. Baseline: calibrated macro trends without reform or WTO. 2. Reform-WTO: Coordinated external and domestic reform. 3. USBTA: Bilateral trade liberalization with respect to the United States. 4. JBTA1: Bilateral trade liberalization with respect to Japan (tariffs only). 5. JBTA2: JBTA1with negotiated market access (5% annual import growth in all categories) 6. JBTA3: JBTA2 with Japanese direct investment. 7. JBTA4: JBTA3 with technology transfer to agriculture and food processing (2% productivity growth). Slide 4
JBTA Real GDP Growth (indexed to year 2000=100) 600 550 500 450 400 350 300 250 200 150 100 2005 2010 2015 2020 Baseline ReformWTO USBTA JBTA1 JBTA2 JBTA3 JBTA4 NB: Results indexed to year 2000 = 100. Slide 5
JBTA Macro Results Percent changes with respect to Baseline in 2020 RefWTO USBTA JBTA1 JBTA2 JBTA3 JBTA4 GDP 81 124 125 154 167 216 Consumption 43 139 142 199 225 318 Investment 76 184 186 254 297 316 Exports 111 137 137 169 179 227 Imports 72 178 181 257 293 359 Note: All results are percentage changes in real magnitudes. Note the negligible change for bilateral tariff liberalization alone (JBTA1). Clearly, this approach will have a negligible effect on the overall economy. Bilateral flows will change more dramatically, but asymmetrically. Slide 6
Vietnam Imports from Japan (percent change from Baseline) Scenario 2005 2010 2015 2020 ReformWTO 19 37 57 81 USBTA 23 55 108 187 JBTA1 31 66 122 207 JBTA2 40 92 168 291 JBTA3 42 99 184 334 JBTA4 45 108 206 378 Tariff liberalization (JBTA1) will double Japan s Baseline exports to Vietnam by 2020, while Vietnam exports to Japan increase only 53%. Slide 7
Vietnam Exports to Japan (percent change from Baseline) Scenario 2005 2010 2015 2020 ReformWTO 20 41 67 99 USBTA 16 19 25 53 JBTA1 16 19 25 53 JBTA2 96 211 311 464 JBTA3 95 214 321 491 JBTA4 103 237 372 598 Tariff liberalization alone will achieve little. Negotiated market access and technology transfer are needed. With these, Vietnam s net trade with Japan will be strongly positive. Technology transfer will also improve its competitiveness in other international markets. Slide 8
Sectoral Output, Agriculture (percent change from Baseline in 2020) 500 450 400 350 300 250 200 150 100 50 0 ReformWTO USBTA JBTA1 JBTA2 JBTA3 JBTA4 C01Rice C02RawRub C03CoffTea C04SugCane C05OthCrp C06Pig C07Cattle C08Poultry C09OtLvstk C10IrrServ C11OtAgSrv C12Forest C13Fish There is enormous potential for output expansion, particularly in fishery products. Slide 9
Sectoral Output, Processed Food (percent change from Baseline in 2020) 1000 900 800 700 600 500 400 300 200 100 0 ReformWTO USBTA JBTA1 JBTA2 JBTA3 JBTA4 C16Meat C17Dairy C18FrtVeg C19Sugar C20CofTBv C21OtBvTob C22SeaFood C23Feed C24OthPrFd Technology transfer is essential to realizing this potential. Slide 10
JBTA Summary This agreement may hold great potential for Vietnam generally and Vietnamese agriculture in particular: 1. Japan has a large economy and a high level of external food dependence. 2. Japan is also a rich source of investment capital and technology, particularly in food processing. 3. Vietnam s real GDP, consumption, and total trade could increase by more than fivefold by 2020. Income benefits are more likely to reach the majority of Vietnamese households who derive income from food production. Some conditions: 1. Tariff liberalization alone will achieve little. 2. Negotiated market access is essential to stimulate Vietnamese exports to Japan. 3. Direct Japanese investment and technology transfer would sharply accelerate Vietnamese exports by improving marketability and price competitiveness. Slide 11
Korea-Vietnam BTA Scenarios 1. Baseline: calibrated macro trends without reform or WTO. 2. Reform-WTO: Coordinated external and domestic reform. 3. USBTA: Bilateral trade liberalization with respect to the United States. 4. KBTA1: Bilateral trade liberalization with respect to Japan (tariffs only). 5. KBTA2: KBTA1with negotiated market access (5% annual import growth in all categories) 6. KBTA3: KBTA2 with Japanese direct investment. 7. KBTA4: KBTA3 with technology transfer to agriculture and food processing (2% productivity growth). 8. JBTA4: Japan BTA3 with technology transfer to agriculture and food processing (2% productivity growth). Slide 12
KBTA Real GDP Growth (indexed to year 2000=100) 600 550 500 450 400 350 300 250 200 150 100 2005 2010 2015 2020 Baseline ReformWTO USBTA KBTA1 KBTA2 KBTA3 KBTA4 JBTA4 NB: Results indexed to year 2000 = 100. Slide 13
KBTA Macro Results Percent changes with respect to Baseline in 2020 RefWTO USBTA KBTA1 KBTA2 KBTA3 KBTA4 JBTA4 GDP 81 124 125 130 139 179 216 Consumption 43 139 142 151 162 257 318 Investment 76 184 186 197 226 275 316 Exports 111 137 137 143 151 224 227 Imports 72 178 180 193 212 341 359 Note: All results are percentage changes in real magnitudes. Again, trade liberalization alone will lead to limited gains, and faster growth of imports than exports. Slide 14
Vietnam Imports from Korea (percent change from Baseline) Scenario 2005 2010 2015 2020 ReformWTO 19 35 54 76 USBTA 25 62 123 209 KBTA1 35 75 142 236 KBTA2 37 83 153 253 KBTA3 38 86 163 274 KBTA4 43 108 229 443 JBTA4 42 114 222 394 Tariff liberalization (KBTA1) will more than double Korea s Baseline exports to Vietnam by 2020, while Vietnam exports to Korea increase only 62%. Slide 15
Vietnam Exports to Korea (percent change from Baseline) Scenario 2005 2010 2015 2020 ReformWTO 22 44 75 116 USBTA 19 24 30 64 KBTA1 19 23 29 62 KBTA2 116 292 405 552 KBTA3 115 293 412 574 KBTA4 130 391 670 1121 JBTA4 9 2 10 52 Tariff liberalization alone will achieve little. Negotiated market access and technology transfer are needed. Vietnam s net trade with Korea would then be strongly positive. Technology transfer will also improve its competitiveness in other international markets. Slide 16
KBTA: Sectoral Output, Agriculture (percent change from Baseline in 2020) 500 450 400 350 300 250 200 150 100 50 0 USBTA KBTA1 KBTA2 KBTA3 KBTA4 JBTA4 C01Rice C02RawRub C03CoffTea C04SugCane C05OthCrp C06Pig C07Cattle C08Poultry C09OtLvstk C10IrrServ C11OtAgSrv C12Forest C13Fish Agriculture does not respond as dynamically as it did under Japan BTA scenarios. Slide 17
KBTA: Sectoral Output, Processed Food (percent change from Baseline in 2020) 1000 900 800 700 600 500 400 300 200 100 0 USBTA KBTA1 KBTA2 KBTA3 KBTA4 JBTA4 C16Meat C17Dairy C18FrtVeg C19Sugar C20CofTBv C21OtBvTob C22SeaFood C23Feed C24OthPrFd Likewise, food processing is less affected than in the Japan BTAs. Slide 18
KBTA: Output Growth, All Sectors (percent change from Baseline in 2020) 700 600 500 400 300 200 100 0 USBTA KBTA1 KBTA2 KBTA3 KBTA4 JBTA4 Agriculture Energy ProcFood Manufacture TextApparel OthIndustry Services Korean investments are more focused on industry and Textiles & Apparel. Slide 19
KBTA Summary Korea is an attractive trade partner: 1. Korea has relatively high incomes, savings, and technological leadership, all of which can contribute to Viet Nam trade and development. 2. Korea needs to outsource substantial productive capacity. 3. Vietnam s real GDP, consumption, and total trade could increase by more than fivefold by 2020. Income benefits are more likely to reach the majority of Vietnamese households who derive income from food production. Like the Japanese BTA, however: 1. Tariff liberalization alone will achieve little. 2. Negotiated market access is essential to stimulate Vietnamese exports to Korea. 3. Direct Korean investment and technology transfer would sharply accelerate Viet Nam exports by improving marketability and price competitiveness. Unlike the Japan BTA, the main sectors stimulated would be in textiles/apparel, manufacturing, and technology. Slide 20
Topics of Special Policy Interest 1. Tariff/Quota Policies and Negotiating Strategies 2. International Competitiveness at the Sector Level 3. Projections of SPS related Market Growth 4. Export Promotion and Producer Subsidies 5. Phase-out Strategies for Import Protection and other Domestic Producer Assistance 6. Rural Adjustment Assistance Policies 7. Rural Poverty Impacts and Alleviation 8. Negotiated Market Access 9. NTBs and other Agriculture Related Price Distortion 10. Economic Growth and Domestic Agriculture Demand Patterns Slide 21
1. Negotiating Strategies I Tariffs are not the issue: UNCTAD data on tariff rates and NTB coverage. Japan Korea Aggregate Customs Category Tariff NTB Cover Tariff NTB Cover 1 Crops 1 97 4 76 2 Animal products 11 83 5 92 3 Food Products 19 98 24 86 4 Textiles 36 56 32 63 5 Wearing apparel 50 61 49 94 6 Leather products 23 52 15 72 7 Wood products 15 98 12 87 8 Paper products, publishing 20 72 19 85 9 Petroleum, coal products 7 94 13 93 10 Chemical, rubber, plastic produ 6 71 6 75 11 Mineral products 8 55 8 57 12 Ferrous metals 3 87 7 69 13 Metals 1 64 2 64 14 Metal products 11 92 17 73 15 Motor vehicles and parts 59 60 68 81 16 Electronic equipment 3 98 13 60 17 Machinery and equipment 7 50 12 53 18 Manufactures 26 62 29 65 Slide 22
Negotiating Strategies II Either Japan or Korea can make a big difference for Viet Nam trade. The Korean economy is one tenth the size of Japan, but still a very large potential trading partner. Japan GDP/Korea GDP 9.8 Korea GDP/Viet Nam GDP 13.1 Japan Imports/VN GDP 12.6 Korea Imports/VN GDP 4.9 Slide 23
Negotiating Strategies III The most important complements to increased merchandise trade are investment and technology transfer. To facilitate these, it is necessary to recruit private sector partners in both countries. Viet Nam can project itself as a global export platform. Slide 24
3. Projections of SPS related Market Growth Fishery and food processing have enormous potential, but this will not be realized without investment and technology partnerships. Japan and Korea are among the most advanced technologically in these areas. These play a dual role, improving Viet Nam competitiveness and joining supply chains. Slide 25
6. Rural Adjustment Assistance Policies Structural change in the agro-food sectors will probably promote consolidation and larger average scale of production. This will entail movement of human resources from farm to non-farm activities. In a growing economy context, temporary adjustment assistance can facilitate this transition. Food processing will provide new sources of offfarm employment, at higher average wages. Slide 26
8. Negotiated Market Access Partnerships with Japanese and Korean firms will offer market access. Viet Nam can use the Japan and Korea markets to bridge agro-food development until China emerges as the regions primary importer (5-10 years). Slide 27
9. NTBs and other Agriculture Related Price Distortions Viet Nam should extend market reforms in agro-food sectors. Current patterns of import protection and other intervention reduce domestic purchasing power, undermine export competitiveness, and invite retaliation. More serious are domestic price distortions arising from interventions and high distribution costs. Reducing the role of the state in agricultural processing will improve price transparency and decentralize incentives for rural investment, productivity growth, and quality control. Slide 28
10. Economic Growth and Domestic Agriculture Demand Patterns With economic growth, demand will shift strongly toward meat and specialty crops. The latter will induce rapidly increasing (indirect) cereals demand. Agricultural productivity growth is essential to keep pace with rising resource intensity of food consumption. Slide 29
Conclusion 1 The most important insight emerging from this analysis is that bilateral agreements with Japan and Korea must be broader than simple removal of nominal protection levels. The extended negotiating agenda must include at least three additional components: 1. Negotiated market access to overcome non-tariff and other administrative trade barriers. 2. Increased inbound investment from private sources in the partner countries. 3. Explicit criteria for technology transfer in both public and private inbound investment partnerships. Slide 30
Conclusion 2 Strategically, there are two perspectives, inside and outside the negotiations: Inside the negotiations, Viet Nam must recruit the private sector in both partner countries to support their negotiating agenda. Outside, these bilateral deals should be seen as an essential diversification strategy, in the direction of superior Asian growth rates. Slide 31
Conclusion 3 The sectors with greatest potential differ among the two agreements: 1. For trade with Japan, agro-food have the most potential. 2. For Korea, light and heavy industry have the greatest potential, but fishery and seafood will also respond strongly. Slide 32
Discussion Slide 33