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Vietnam signs FTA with EEU: What about Indonesia?

Jakarta Post, Indonesia

Vietnam signs FTA with EEU: What about Indonesia?

By Veeramalla Anjaiah,

15 June 2015

Jakarta/In its quest for new markets and more opportunities, Vietnam — the rising star of ASEAN — signed a historic free trade agreement (FTA) with the newly established Eurasian Economic Union (EEU) on May 29 in Astana, the capital of Kazakhstan.

Meanwhile, many in Indonesia, including both officials and businesspeople, have limited awareness about the EEU.

Vietnam is the first ASEAN country to sign an FTA with the EEU, a common market of 176 million people with a combined gross domestic product (GDP) of more than US$2.5 trillion. Building on a customs union in place since 2010, the EEU was established by Russia, Kazakhstan and Belarus in May 2014 and was later joined by Armenia and Kyrgyzstan. The EEU treaty became effective on Jan. 1, 2015.

The FTA signing ceremony was attended by Vietnamese Prime Minister Nguyen Tan Dung and his counterparts from Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan.

“This agreement reflects the EEU’s strategic vision toward cooperation with the Asia Pacific, a dynamic region and a motivation for global economic growth. The agreement will [...] increase the exchanges of bilateral trade, services and investment and expand bilateral cooperation in the region,” Dung said in Astana.

“[...] Vietnam will exert efforts to help the EEU expand ties with ASEAN, a dynamic unified market with more than 600 million people and GDP of $2.5 trillion.”

It took more than two years for Vietnam to negotiate and sign the FTA, which covers trade, customs facilitation, intellectual property, investments, legal matters, military industries, rules of origin and animal and plant quarantine and also lifts legal and technical barriers to trade.

The EEU is rich in oil and gas, power generation, iron, steel, fertilizers and machinery while Vietnam is a new magnet for global manufacturers. Its major exports are smartphones, computers and other electronic goods, textiles, footwear, rice, cashew nuts, rubber, pepper, coffee and tea.

The agreement will help Vietnam to market its products in faraway places without any trade barriers and import duties.

“For example, nearly 100 percent of the nation’s commodities will be allowed entry into the EEU free of any import duties. Regarding garments and textiles and value added items, we have successfully negotiated for abatement of 80 percent of import duties,” Dang Hoang Hai, head of the Vietnam technical negotiation delegation for the FTA told the Voice of Radio Vietnam.

Likewise the members of the EEU are set to reap numerous benefits from the FTA.

The EEU businesspeople will sell their products in the nearly 100-million strong Vietnamese market. They also use Vietnam, whose economy is expected to grow more than 6 percent this year despite difficult times, as a “gateway” to penetrate the promising ASEAN market.

In less than five years, trade between Vietnam and the EEU may more than double to $10 billion from the current $4 billion.

Vietnam’s big move stunned both its ASEAN peers and Asia-Pacific partners — given its image as a backward nation struggling to recover from the devastating war.

In ASEAN, only Singapore and Malaysia are well known for their aggressive moves to sign FTAs with several countries and reap the benefits.

Indonesian officials frequently say they are looking for new non-traditional markets. It looks like NATO — no action talk only. Being the region’s largest economy and a member of G20, Indonesia should have taken the initiative to explore opportunities in the EEU by negotiating a FTA as Vietnam has done. Both Vietnam and Indonesia produce similar products and compete for the same markets.

But Indonesia, a major exporter of raw materials, is allergic to FTAs as it has been unable to benefit from FTAs already signed with a number of countries. High production costs, poor infrastructure, labor problems, legal uncertainty and corruption are our current bottlenecks. Since 2011, Indonesian exports have decreased continuously, from $203.49 billion in 2011 to $176.29 billion in 2014.

In contrast, Vietnam’s exports have been surging in double digits since 2011. Its exports surged to a record high of $150.2 billion in 2014, a huge jump from $96.1 billion in 2011.

What is Vietnam’s secret?

After a series of disappointments during its first decade post-unification after 1975, the present success story began with the doi moi (renovation) initiative in 1986 that transformed its centralized socialist economy into a market economy.

Vietnam’s journey was put on a steep trajectory in 2007 when it joined the World Trade Organization (WTO) as the 150th member. This contributed to rapid economic growth, increased foreign investment and exports and an improved business climate.

Southeast Asia’s third-most populous country relaxed several rules and offered attractive tax incentives for foreign companies. Thus, foreign investors are queueing up to withdraw investments from China and move to Vietnam.

Vietnam is on the verge of becoming a “second China” with massive growth in manufacturing and exports. With cheap, young and highly skilled labor, a strategic location, low taxation and tax incentives, Vietnam has become a magnet for global manufacturers.

Though Vietnam, like Indonesia, suffered a huge trade deficit with China because of the ASEAN-China FTA, Vietnam learned its lesson quickly. Recently Vietnam signed a FTA with South Korea and is negotiating with the European Union for an FTA, to be signed this year.

Once signed, the FTA with the EU could contribute to an increase in GDP of 10 to 15 percent. Vietnam’s exports to the EU may increase by 30 to 40 percent.

But the biggest boost will come later this year when Vietnam will accede to the Trans-Pacific Partnership (TPP). The total trade value of TPP members, among them US and Japan, constitutes 25 percent of global trade.

Vietnam is thus to emerge as ASEAN’s new tiger, with their GDP poised to rise by more than 6 percent in the next five years. Once the FTAs with EEU and EU become effective and if Vietnam joins the TPP, exports could easily reach $200 billion in less than two years, surpassing Indonesia. With more than $30 billion in exports to the US, Vietnam was already the biggest exporter from ASEAN to that country in 2014.

Until recently, Indonesia has been reluctant to speed up FTAs with South Korea, India and other countries. President Joko “Jokowi” Widodo’s administration recently said that it planned to join the TPP and finish negotiations on several other FTAs.

Indonesia needs a strategic plan regarding how best to benefit from FTAs. At least 30 countries, including some from Southeast Asia, are considering following Vietnam’s lead with the EEU. Is Indonesia ready to sign a free trade agreement with the EEU?