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Impact of FTAs in 2018

20:13 | 19/12/2017

VCN- According to calculations by the General Department of Customs, with the tariff reduction schedule, the reduction of taxes as the implementation of commitments under the FTA in 2018 will reduce VND30,150 billion of the State budget revenue compared to 2017.

impact of ftas in 2018
Professional activities at border gate Customs Sub-Department II of Hai Phong. Photo: T.Bình.

Reduce budget revenues

By 2018, the FTA will continue to have a profound effect on the State budget revenues of the Customs. In particular, in the implementation of the ASEAN Trade in Goods Agreement (ATIGA), there is about 7% of flexible tariff lines, equivalent to 687 items that are considered sensitive under the agreement with ASEAN, will be abolished (except for petroleum products). The most notableareitems with high revenuereturns and high tax rates,such ascars, reduced from 30% to 0%, spare parts from 5%, 20% to 0%, iron and steel from 5% to 0%,as well as agricultural products, tobacco, andalcohol.

In addition, some FTAs have continued to implement the deep reduction schedule, such as the ASEAN-China FTA (ACFTA). As of January 1st 2018, 588 tariff lines have been cut to 0%. This increases the 0%tariff lines to 8,571, accounting for 90.3% of the total, including; some processed meat and vegetable products, cereals, electric motors, household goods, chemicals, construction materials, plastics, rubber, and paper.

In addition, in the AKFTA, Vietnam committed to remove tariffs on 86% of total tariff lines by 2018 (8,184 tariff lines).

The ASEAN-Japan Comprehensive Economic Partnership (AJCEP) Agreement will also greatly affect the state budget revenue of the Customs. In 2018, Vietnam committed to eliminate tariffs on 62.2% of tariff lines, focusing on commodities such as; plastics, chemicals, machinery, equipment, appliances, electronic products, components, fibers, raw materials for textiles, leather and footwear, and pharmaceutical products.

Create positive effects

It can be seen that the implementation of tariff commitments has affected the annual growth rate of state budget revenues of the Customs. From 2007 to 2014, the average annual rate of collection increased by over 10% per year. By 2015, this rate increased only by 3.6% and by 3.8% in 2016.

In general, cutting tariffs will also lead to a boost in trade. The import tax reduction will increase the number of imports. Import turnover has increased year by year, particularly in 2007 - the first year that Vietnam took part in the WTO. Back then,the import turnover was US $62.7 billion.This figure increased gradually over the years and fluctuated with a strong margin from 7% to nearly 29% in 10 years after entering the world economy in 2009, (due to the impact of high inflation and world economic recession).The import turnover for this year did not increase but decreased, compared to 2008. By 2016, import turnover reached $US 174 billion in 11 months of 2017, and the import turnover reached US $191.3 billion, 3 times higher than the import turnover in 2007. Comparing the economic growth of Vietnamfor this period, the growth rate of import turnover is much higher.

Considering the State budget revenues of the customs sector in the period 2007 -2017, the revenue from import-export activities increased, but the import tax revenue decreased gradually. In 2007, the import tax accounted to 31% of total customs revenue, while import VAT revenues increased with the proportion from 54.8% in 2007 to 67.8% in 2017 in total state budget revenues of Customs.

For imports, tariff reductions from FTAs are more positive for import, creating a shift in trade for many commodities. In addition, cutting tariffs from FTAs also created a shift in the import turnover of Vietnam from partner countries, in which Korea, Japan and China were the countries benefiting from the tariff reduction. For export, joining FTAs helps Vietnam expand its export market to ASEAN countries. However, Vietnam’s exports have not really changed in terms of quality, andexport products have not really created much value for the economy. Most of the Vietnam’sexport products stop at the assembly level, the main input materials are imported.

The implementation of international integration commitments on tariffs is to attract and contribute to increase foreign investment, reduce input costs for enterprises, promote production and business activities. Thereby increasingimports and exports, and creating a spillover effect throughout the economy in increasing State budget revenue from other domestic taxes such as Corporate Income Tax, and Personal Income. However, the implementation of FTA commitments also makes the revenue from import tax decrease, affecting the overall State budget revenue. FTAs have had a direct impact on the volume and value of imports from the signatory countries. In addition, FTAs also cause indirect reductions from "trade redirection", i.e importers move to import from countries that have FTA commitments to enjoy special preferential rates instead of importing from foreign countries which are out of the FTA.

Therefore, according to calculations by the General Department of Customs, with the tariff reduction schedule, the reduction of revenue in the implementation of FTA commitments in 2018 will reduce about VND30,150 billion of the state budget revenue compared to 2017.

Increase measures to limit revenue impact

Due to the effect of the implementation of international tariff commitments, the average tariff rate of all imports is also decreasing year by year: by 2015 it will be 4.75% and by 2016 will decrease to 3.74%, and by 2018 is expected to fall to 2.98%.

On that basis, in order to make good commitments without effecting significantly the state budget revenues, the General Department of Customs made some recommendations related to this issue. Some items that are entitled to import tax incentives under the FTA can be imported in great quantities into the domestic market, creating a fierce competition with domestic production. Therefore, it recommended functional agencies to research, develop and promulgatetechnical barriers in line with international practices for items that directly affect the health of consumers such as, food and cosmetics, pharmaceutical products (regulations on expiry date at the time of import must be more than 1 year), and goods that have the advantage of foreign, potential for dumping, and unfair competition with the same products in the country.

By Tran Kim Ha/ Kieu Oanh