Vietnam became the first trade partner of the Eurasian Economic Union (EEU) as a result of the ratification of the agreement on free trade zone on April, 29, 2016. The agreement was signed on May, 2015 which was the first international agreement on free trade zone between the EEU and the third party. In recent days, the volume of trade turnover between the members of the EEU and Vietnam is not high since the average of mutual trade is 4 billion dollars in a year. Nevertheless, it is estimated that the agreement on free trade zone is able to increase the trade turnover to 10 billion dollars in a year by 2020. [1]
An agreement on free trade zone affirms mutual commitments to simplify an access to market for parties of an agreement. In other words, countries of an agreement have to create favorable conditions for trade relations. Unlike customs and economic union, a free trade agreement (FTA) is a shallow type of integration since it regulates the condition for trade among countries than the establishment of common regulations on trade. According to the FTA between the EEU and Vietnam, customs duties will be reduced on 88 percent of traded commodity. While customs duties on 59 percent of goods will be reduced immediately, on the rest 29 percent will be reduced in a span of 5 to 10 years. An average level of Vietnam’s customs duties on goods from the EEU will be decreased from 10 to 1 percent by 2025. [2] Having about 90 million population, Vietnam’s market presents a significant export opportunity for the EEU members.
The trade turnover between Kazakhstan and Vietnam amounted to 205.8 million dollars in 2015, from January to December. While the export of Kazakhstan to Vietnam amounted to 10.4 million dollars, the import from Vietnam to Kazakhstan amounted to 195.4 million dollars. [3] Given the fact that Vietnam’s export to Kazakhstan is more than Kazakhstan’s export to Vietnam, obviously, the free trade zone presents a greater opportunity for Vietnam. Also, Kazakhstan is in disadvantage in the short-term as far as the reduction of customs duties on goods from Vietnam cuts Kazakhstan’s budget. As the Vice Minister of National Economy, Timyr Zhaksylykov said that if Kazakhstan keeps importing goods from Vietnam on the level of 2014, the country will lose $ 458 million in budget in a year from 2016 to 2018. [4]
Despite this, Vietnam’s market is able to bring certain advantages for Kazakhstan, for example, it provides a stimulus for Kazakhstan’s businesses to enter the new market. According to the FTA, Vietnam abolishes customs duties on dairy products, molasses and potash, on poultry meat from 20 % to 0 % during 5 years, on alcoholic beverages from 10 % to 0 % during 10 years. [5] The reduced tariffs are able to enhance the competitiveness of Kazakhstan’s goods in Vietnam’s market. Consequently, Kazakhstan gains an opportunity to diversify export to Vietnam by exporting not only non-metallic mineral such as asbestos, flat rolled products steel and different types of transport equipment, but also by exporting food.
Additionally, Kazakhstan’s businesses should take into account the fields where Vietnam faces a high demand, for example, the analysis of the foreign trade turnover of Vietnam demonstrates that currently the country needs wheat, cotton, chemical fertilizer, livestock products, leather, leather products, steel products, engineering goods and appliances, agricultural machinery, pharmaceuticals, petrochemicals and plastic products.[6] Taking everything into consideration, the new market presents an opportunity for Kazakhstan to diversify export goods and expand the trade relations with Vietnam. On the other hand, the geographical distance might create some challenges for Kazakhstan’s export to Vietnam since the transport costs can increase the price for goods, therefore, it might negatively influence the competitiveness in Vietnam’s market.
Also, Kazakhstan’s consumers are able to be in advantage from the FTA by gaining an access to the greater variety of goods and enjoying lower price. In recent days, Kazakhstan imports goods from Vietnam such as tea, medicines, cosmetics and hygiene products, products from paper, cardboard and glass, shoes, food processing machinery, computers etc. As it was mentioned before, the volume of Vietnam’s export to Kazakhstan is substantial, thus, it seems that consumers in Kazakhstan will enjoy mostly. The flip side of the coin is the possibility of Kazakhstan’s developing industries being damaged as a result of the FTA as long as Vietnamese cheap goods will fill Kazakhstan’s market and the domestic industries with comparative disadvantages would face tough competition.
The most importantly, we should not forget that the FTA with Vietnam can be considered as a positive achievement for the WTO members within the EEU. Similarly, for Kazakhstan which became a member of the World Trade Organization (WTO) in 2015, the FTA is of great significance for the country since the FTA can be viewed as vehicle for trade liberalization. Since the trade liberalization may promote economic development of the region, by increasing economic efficiency, therefore, the GATT Article XXIV allows the creation of FTAs as an exception to the Most-Favored nation (MFN) rule. In other words, the signing of the FTA allows the WTO members to avoid the WTO’s key principle such as the MFN treatment- which does not allow member-countries to discriminate between their trading partners. [7] For example, if a member-country decides to grant a lower customs duty rate for trading partner within the WTO, it should do the same for all other members of the organization. That is to say, if a member-country enters into a FTA it is able to grant more favorable treatment to the participating state than to other WTO members. While both Vietnam and Kazakhstan are the members of the WTO, the established low tariffs apply only to the participating countries of the agreement, therefore, Kazakhstan’s reduction and abolishment of tariffs within the EEU in relation to Vietnam does not apply to other WTO members. Consequently, a FTA allows young members of the WTO like Kazakhstan to promote trade liberalization.
In general, a free trade zone is controversial issue and its contribution to a country’s economy is debatable question. While some argue that it creates a lot of opportunities by presenting a new market, some sceptics criticize that unemployment rate may rise. Since Kazakhstan is a member of the WTO and the primary task of the organization is to promote trade liberalization, Kazakhstan should not avoid FTAs, but to work on efficient trade policies that would enable the country to be a winner. Recently, Israel and Egypt are leading the negotiation on signing a free trade agreement with the EEU. New markets bring new economic opportunities for the EEU countries. For now, in order to gain a considerable benefit from free trade agreements, Kazakhstan should develop its export capabilities by focusing on its efficient industries and by providing an incentive for businesses to focus on those fields where partner countries face a high demand.
References:
[1] https://www.pnp.ru/news/detail/126785
[2] http://tass.ru/ekonomika/2005555
[3] http://mfa.gov.kz/index.php/ru/vneshnyaya-politika/sotrudnichestvo-kazak…
[4] https://kapital.kz/economic/47672/kazahstan-narastit-obem-eksporta-vo-vetnam.html
[5] http://tass.ru/ekonomika/2005555
[6] [1] http://mfa.gov.kz/index.php/ru/vneshnyaya-politika/sotrudnichestvo-kazak…
[7] https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm
*Published in the June 2016 No. 6 issue of the “Asya Avrupa: Haber-Yorum” journal.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.