Viet Nam Agriculture and Bilateral Trade with the United States and European Union David UC Berkeley MARD Workshop on GLOBALIZATION AND AGRICULTURAL DEVELOPMENT IN VIETNAM 13-14 December 2005 NhaTrang Viet Nam
Contents 1. Introduction 2. Overview of Initial Conditions 3. US Assessment 4. EU Assessment and Comparison 5. Topics of Special Policy Interest Slide 2
Direction of Trade: Exports by Destination (2000 SAM Data) 100% 80% vnm ASEAN China 60% 40% Japan REA EU 20% USA 0% vnm ASEAN China Japan REA ASEAN trade is more diversified. ROW Slide 3
Direction of Trade: Imports by Origin (2000 SAM Data) 100% 80% vnm ASEAN China 60% 40% Japan REA EU 20% USA 0% vnm ASEAN China Japan REA ROW Slide 4
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. USBTAg: USBTA with 2% annual growth of total factor productivity in Vietnamese agriculture. 5. EUBTA: Bilateral trade liberalization with respect to the European Union. 6. EUBTAg: EUBTA with 2% annual growth of total factor productivity in Vietnamese agriculture. Slide 5
USBTA Real GDP Growth (indexed to year 2000=100) Annual GDP growth rates will rise from 5-6% to 8-9%. 500 450 400 350 300 250 200 Baseline ReformWTO USBTA USBTAg 150 100 2005 2010 2015 2020 NB: Results indexed to year 2000 = 100. Slide 6
Vietnam s Past Trade with the US (trillions of 2000 Vietnam Dong) Exports will continue to be a primary driver. 120 100 80 60 40 Exports Imports 20 0 1995 1996 1997 1998 1999 2000 2001 2002 Slide 7
USBTA Sectoral Export Growth (indexed to year 2000=100) 900 800 700 600 500 400 300 200 Agriculture EnergyMin Proc Food Manufactures TextApparel Oth Industry Services 100 0 2005 2010 2015 2020 Slide 8
USBTAg Sectoral Export Growth (indexed to year 2000=100) 900 800 700 600 500 400 300 Agriculture EnergyMin Proc Food Manufactures TextApparel Oth Industry Services 200 100 0 2005 2010 2015 2020 Slide 9
USBTA Conclusions This agreement holds great potential for Vietnamese growth: 1. The trading partner in question is large enough to drive significant economywide expansion. 2. GDP, consumption, and total trade will more than double. 3. Investment will triple, and the potential for modernization in most sectors is enormous. Some conditions: 1. The principles of open bilateralism must be respected. 2. Agriculture needs capacity development to fulfill its potential. 3. Some trade diversion will occur unless other trade negotiations advance in parallel. Slide 10
EU Trade Agreement This scenario (EUTA) is based on implementation from 2005, assuming that the USBTA remains in place and Vietnam s WTO accession goes forward. We also assume that no additional sectoral market access negotiations take place, although in agriculture this could be significant. Slide 11
Real GDP Growth (indexed to year 2000=100) 550 500 450 400 350 300 250 200 150 100 2005 2010 2015 2020 Baseline ReformWTO USBTAg EUBTAg Slide 12
EU Agreement Conclusions This agreement will increase aggregate growth over the USBTA and WTO accession: 1. The EU is already a significant trading partner, but removing more protection will expand trade and growth substantially. 2. Growth has a greater urban bias, with rising agricultural terms-of-trade. Some conditions: 1. Agriculture benefits less from the EUTA, because demand shifts more strongly toward manufactures. 2. Greater market access for food products should be negotiated. Slide 13
Topics of Special Policy Interest 1. 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 14
1. Negotiating Strategies 1 Agriculture, including Fishery, can be one of the most important export activities for Vietnam. Because of current capital and technology limitations, the country has enormous unrealized agricultural potential. While the urban and non-agricultural sector is modernizing and developing capacity for more diversified production, trade, and employment, new market opportunities in agriculture are essential to improve the quality growth. Vietnam s trade negotiators should exploit Doha emphasis on OECD agricultural market access. Because of Doha s uneven momentum, however, this will require more bilateral negotiation. Slide 15
Negotiating Strategies 2 OECD countries represent 80% of global trade, so negotiations should begin with them. The potential agricultural demand from the US, EU, and Japan could lead to rapid and sustained increases in Vietnamese exports. Also, on current growth trends, there is strong evidence that China will become a large and sustained food importer, and this will represent a new and very significant export opportunity for Vietnam. Slide 16
Negotiating Strategies 3 The main issue for the present bilateral studies is agricultural market access. USBTA Here the main issue is consistent and reciprocal adherence to principles of market openness. Vietnam should improve its defense against contingent protection and strengthen ties to U.S. food processing and retail interests. EUBTA - After the US, this is probably the most important BTA to be negotiated. A classic North-South arrangement with significant economic diversity and large potential gains from specialization, this BTA can save enormous effort over negotiating with EU members individually. The main risks here are with EU agricultural protection, especially seasonal exceptions. Slide 17
2. International Competitiveness at the Sector Level In agriculture, Vietnam s primary sources of competitiveness are labor and land cost. This must be extended to: 1. Improved quality - both in average level and consistency. 2. Lower transactions costs (Market access) distribution margins are too high for most of the country s small holders. 3. Diversification within and between agricultural products. Slide 18
3. Projections of SPS related Market Growth Rapid growth of Fishery, Meat, and specialty agriculture require significant SPS support Two types of policies should be followed in parallel: Direct domestic support (standards, research, and extension) Facilitation of joint venture development (a high priority). Slide 19
4. Export Promotion and Producer Subsidies Direct agricultural subsidies are not appropriate for a country at Vietnam s stage of development. Scarce public funds are better used for indirect support such as infrastructural investment, research, and regulatory reform, e.g. reducing state competition in this sector. Trade negotiation can be focused on market access and FDI facilitation. Slide 20
5. Phase-out Strategies for Import Protection and other Domestic Producer Assistance Import protection should and will be removed in the process of WTO and BTA accession. Phase outs are more of a political than an economic decision. The most important forms of assistance for domestic agricultural producers are indirect, those that improve: Productivity research and extension Market access infrastructure, communication Financial intermediation domestic credit and foreign investment facilitation Slide 21
6. Rural Adjustment Assistance Policies The biggest challenge in this context is smallholders in remote regions. Poverty in the mountainous regions is a severe and very persistent phenomenon, and will not be overcome unless market access and crop diversification can be increased. Export-oriented research and extension will benefit the higher income farmers, while investments to reduce trade and transport margins will benefit all farmers more equally. For export development, let private (esp. foreign) capital do more of the work. Slide 22
7. Poverty Impacts Real Household Incomes (percent changes from Baseline in 2020) USBTA USBTAg EUBTA EUBTAg Rural Farmers 118 106 244 227 Rural Self-Employed 116 128 229 247 Rural Wage Earners 51 46 138 130 Urban Farmers 26 32 91 101 Urban Self-Employed 167 201 295 350 Urban Wage Earners 19 33 76 99 Combining the two BTAs has a very significant effect on real living standards, with more rapid income growth for rural households. This results because of improved agricultural prices, but of course the starting point for this group is far below urban household incomes. Slide 23
8. Negotiated Market Access Agriculture will need considerable support in this area, particularly with respect to: EU agricultural imports US fishery imports One of the most effective ways to promote this is by forming downstream joint ventures with food processing companies in importing countries. US, EU, Japan, and Korea all have large candidates for partnership in this area. Slide 24
9. NTBs and other Agriculture Related Price Distortions Vietnamese import protection agriculture and food products does not appear to confer any significant advantages on the economy. It does, however, reduce domestic purchasing power, 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. Distribution costs can be reduced substantially with greater infrastructure investment. Slide 25
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. Under US and EU agreements the urban sector grows much faster than the rural sector, increasing domestic food prices. This can significantly improve rural living standards. Slide 26
Discussion Slide 27