Group assignment:

International trade between

Vietnam and ASEAN through
ASEAN Free Trade area
(AFTA)

Instructor: PhD. Dao Thi Bich Thuy

Students: Mai Thanh Hien
Kieu Phuong Dung
Nguyen Thi Thuy Trinh
Nguyen Thi Tung Mai
Bui Hoang Linh
Course name: International Trade
Code: ECO 4451
Term: Fall 2010

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 Abstract
ASEAN Free Trade Area (AFTA) is an economic organization which Vietnam has been
participating. This regional organization has brought to Vietnam new positive changes in
economy. This report will summarize the establishment of AFTA and the development of
its agreement related to Vietnam. Next, we will point out the opportunities and
challenges Vietnam faces when participating and some achievements. Last but not least,
we propose several recommendations to promote international trade between Vietnam
and region.

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 I. Background
1. The formation of AFTA
ASEAN is one of the fastest economic growth regions in the world. However, before
AFTA was launched, the efforts of ASEAN economic cooperation have not achieved
desired objectives. ASEAN already has plans for economic cooperation such as:
Preferential trade agreement (PAT)
ASEAN Industrial Projects (AIP)
The ASEAN Industrial Complementation (AIC) and plans to support industrial
production with other labels (BBC)
ASEAN Industrial Joint Venture (AIJV)
These economic cooperation plans only affects a small part of ASEAN and internal
trade and they are not enough to affect investment in block.
2. The establishment of AFTA
In the early ‘90s, when the cold war ended, the changes in the political environment,
international economics and economic sector has put ASEAN countries facing with many
big challenges that were not easy to overcome without closer connections and joint
efforts of the entire Association. These challenges were:
- Firstly, the process of the world economic globalization was quite fast and strong,
especially in the field of trade so the protection ism in the traditional ASEAN no longer
had the support of policy planners in the country as well as international one.
- Secondly, the formation and development of cooperative organizations, particularly
new areas such as EU, NAFTA will become closed trade bloc, hindering the ASEAN
goods when penetrating into these markets.
- Moreover, changes in policies such as opening doors, and encourage widespread
preference for foreign investors, along with a comparative advantage in natural resources
and human resources of China, Viet Nam, Pakistan, Russia and other Eastern European
countries have become attractive investment market more than ASEAN, requires ASEAN
not only a moderate expansion of membership, but also a moderate further enhance
regional cooperation.

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 To cope with these challenges, in 1992, initiated by Thailand, ASEAN summit
meeting in Singapore has decided to establish a free trade area (AFTA). AFTA would
represent the efforts of ASEAN in transforming the region into a center of trade and the
world's major investment in the next 15 years. AFTA Council consisting of all member
states and a representative of ASEAN Secretary General is tasked to monitor, coordinate
and review the implementation of the agreement and assist ASEAN economic ministers
in all matters related. The AFTA agreement was signed on 28 January. When the AFTA
agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia,
Malaysia, Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and
Myanmar in 1997 and Cambodia in 1999. AFTA now comprises ten countries of
ASEAN. All the four latecomers were required to sign the AFTA agreement in order to
join ASEAN, but were given longer time frames in which to meet AFTA's tariff
reduction obligations. This is really a milestone in ASEAN economic cooperation to a
new level.
The main mechanism for AFTA tariff agreement is the Common Effective
Preferential (Common Effective Preferential tariff - CEPT). In essence, CEPT is an
agreement among ASEAN member countries to reduce tariffs within the 0-5% volume
through the various tax reduction plans. Within 5 years after reaching the final tax
treatment, the member states will process to remove the import quotas and other non-
tariff barriers.
Duration of CEPT implementation of the countries is different. Specifically:
Brunei, Indonesia, Philippines, Singapore, Thailand, from 1993 to 2003.
Vietnam: 1996 to 2006
Laos, Myanmar and Cambodia from 1998 to 2008.
To implement tariff reductions gradually, each country will have to classify all their
goods into one of the following lists:
Inclusion list (IL): Includes the items that will be cut or reduced tax until the completion
of CEPT will have the tax rate about 0-5%. After CEPT agreement, ASEAN countries
have to give their own IL to begin reducing their tax office since 1993. However, not all
items in IL is reduced tax because there are some items before included in IL have the tax
rate below 5%, even 0%.

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 Temporary Exclusion List (TEL): Includes items haven’t been listed to reduce tariffs
immediately because the ASEAN members must spend more
time to adjust domestic production to adapt to environmental edge
increasing international competition.
After three years from participating in the CEPT, ASEAN countries have started gradual
transfer of goods from TEL to IL, which is to start reducing tariffs with this item. The
process moved from TEL to IL permitted to drag
term of 5 years, each year they have to move 20% amount of goods. That
means to the end of the eighth year, the IL has expanded cover the whole TEL, and TEL
no longer exists.
When putting each item on the IL, countries also show the schedule indicated reduction
of that goods until completion of CEPT.
General exclusion list (GEL): includes items do not have tariff reduction obligations.
ASEAN member countries have the right to give a list of these goods to protect national
security, public morals, human health, fauna, cultural values conservation, historical,
archaeological ...
GEL is not the list of import banned goods of the Government. Some items in GEL still
have been import normally, but they cannot enjoy preferential tax rates as those found in
the list of tax cuts.
Besides, the ASEAN countries also signed series of agreements on uniform and
recognized standards of goods between the member states, recognition of certification of
origin of each other, strengthen cooperation in the field of customs, protection of rights
intellectual property, industrial development and construction of the ASEAN Investment
Area (ASEAN Investment Area – AIA)
3. The objective of AFTA
- Free trade area by removing tariff barriers within the region and ultimately non-
tariff barriers. This makes production of the ASEAN business have to be more efficient
and more competitive on world markets. Also, consumers will have chances to buy the
goods from the manufacturer quality effective in ASEAN, leading to an increase in intra-
trade.

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 - To attract foreign investors into the region by creating a larger united market
volume.
- Make ASEAN to adapt to international economic conditions are changing,
especially with the development of regional trade agreements (RTA) in the world.
The objective of AFTA is trade liberalization among countries through the reduction
to the minimum level of tariffs in the region and eliminate non-tariff barriers and attract
foreign investment into areas, also encourage economic ASEAN has a broader orientation
and more marketable than the regional economies in the field of production and market.
4. The participation of Vietnam
On July 28, 1995, Vietnam officially became the 7th member of ASEAN and AFTA
commitments involved. Time for AFTA complement of Vietnam is 2006. And Vietnam
began to implement the tariff reduction schedule from joining AFTA on January 1, 1996
by giving the first 875 items in the implementation of the CEPT. All these items were
located in the 0-5% tax bracket.
In short, joining AFTA is the first approved for the Vietnamese economy and
businesses to prepare for joining the world market.

II. Development of international trade between Vietnam and ASEAN after

joining AFTA
1. Trade structure
Vietnam joined the Association of ASEAN from June 7 / 1995 and began
implementation of the Common effective preferential tariff (CEPT) from 1/1/1996, this
program ended 01/01/2006. Due to the economic development level of Vietnam is still
low compared with some countries in the region, competitiveness of enterprises, many of
the manufacturing industry and service ... and import duties but is still a source of budget
revenues, the tariff reduction program of Vietnam was built on the following main
principles:
1. Not cause a major impact the revenue budget.
2. Should be reasonable protection for domestic production.
3. Encourage to facilitate the transfer of technology, technological innovation, for
domestic production.

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 4. Cooperation with ASEAN countries on the basis of the CEPT Agreement to take
advantage of incentives, to expand export markets and attract foreign investment.
Under the CEPT Agreement, ASEAN member states give each other preferential
tariff rates of 0-5%. This helps Vietnamese products to access a regional market that
incorporates many substantial advantages: a population of more than 500 million,
convenient transportation systems and relatively moderate requirements on product
quality. Moreover, the reduction in import tariffs or duties lowers investment costs,
thereby enhancing the competitiveness of Vietnamese products in the regional market.
Nevertheless, influences of free trade often are two-sided. On the one hand, free
trade helps to create large markets and encourage production and exports. On the
other hand, if the domestic economy as a whole is not strong and competitive
enough, many economic sectors may forfeit even in the home market. Put simply, the
home market will shrink and lots of enterprises that are rather weak and uncompetitive
will be in danger of bankruptcy.
Besides, throughout the realization of CEPT, changes in trade structure will also
arise and originate trade losses. The reason is that the regional trade liberalization
allows intra-regional trade at lower prices due to lower tariff rates. Meanwhile,
the same products produced by a non-ASEAN country at lower or equal production costs
may become more expensive. This blocks inflows of goods from non-ASEAN countries
into Vietnam, thereby inducing a loss in taxation revenue (import duties) and raising
import prices instead of lowering these.
According to many economic researchers, compliance to CEPT will enhance
Vietnam’s ASEAN import and export value with lower increases in exports than in
imports. As to Vietnam’s extra-ASEAN trade, exports will expand at the same time
that imports will contract due to the changing trade structure. Generally
speaking, overall increases in export value stem mainly from increases in the
quantity of exports.
2. Trade policy
In spite of many challenges ahead, Vietnam has been undertaking two key policies,
in attempting to achieve a trade balance with ASEAN. On the one hand, it endeavors to
deepen its export volume, especially of manufactured and semi-manufactured goods,

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and to concentrate on directly commercialized goods instead of goods for re-
export, in order to strengthen export efficiency. On the other hand, Vietnam
effectively sets out requirements on exports to ASEAN in exchange for imports
from ASEAN. Most of the imported goods from ASEAN are now motorbike parts and
fertilizers. For example, Vietnam would ask exporting countries to import Vietnamese
goods, such as rice, peanut core, and cashew, etc. Importantly, these two policies should
be accompanied by a further continuing enhancement in product quality so that
Vietnamese products can be firmly traded in the entire ASEAN market and
the severe competition of imported goods from ASEAN does not impede domestic
sectors.
3. Trade volume
The Vietnam-ASEAN trading relations have considerably improved.
ASEAN member countries have become increasingly important business partners of
Vietnam. The average growth rate of Vietnam-ASEAN trade is at 20-25% per year. In
total Vietnam's export turnover to ASEAN, exports to Singapore contribute some 60-
70%. Singapore is a typical market for re-exports. It is therefore too soon to
conclude that ASEAN is the dominant market for the Vietnamese products.
Shares of major products exported to ASEAN are 16%, 18% and 6.6% for crude oil, rice
and sea food respectively; garments are exported to Singapore for re-exportation.
The ASEAN market represented about 13% of Vietnam exports in 2000.
This figure was 11% and 10% in 2001 and 2002, respectively. Major products are rice,
peanut core, cashew, seafood, manufactured goods and household goods. This deficit
amounted to US$ 1.34 billion, representing 60% of Vietnam’s total trade
deficit and more than 50% of total exports to ASEAN. Therefore, accelerating exports to
ASEAN and establishing a trade balance are considered as a one of most critical issues of
Vietnam for years to come.
According to the Vietnam Customs, in the first two quarters of 2010, the trade
volume between Vietnam and other ASEAN members grew by 23.9% against the same
period last year and accounted for 18% of the national total trade turnover.

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 Among the ASEAN member states, Singapore is always the biggest trade partner of
Việt Nam, boasting for a two-way trade volume of US $3.25 billion, followed by
Thailand US $3.12 billion and Malaysia US $2.43 billion.
In the first half of 2010, Vietnam exported US $5.24 billion of goods to other
ASEAN countries, up 18% against the same period in 2009 and making of 16.1% of the
total trade volume.
In the reviewed period, Vietnamese enterprises imported over US $7.58 billion of
goods from other ASEAN countries, making up 19.6% of the national import turnover.
Essential goods, input materials, equipment, computers, and electronic spare parts
dominate Vietnam’s imports.
During the first six months, Vietnam suffered a trade gap of US $2.34 billion with
ASEAN, which accounts for around 45% of the national export turnover to this market
and 37% of the total trade deficit of the country. ASEAN, according to the Vietnam
Customs, is a potential market for made-in-Vietnam goods. Hence commercial experts
recommended Vietnam raise competitiveness of its commodities and make use of close
geographic distance, similarities, high growth rate, and low-cost advertisements to boost
export.

III. Opportunities and Challenges

1. The Opportunities for Viet Nam.
When joining AFTA, Viet Nam has opportunity for market expansion. Vietnam
goods will enjoy preferential; tax rates lower than MFN tariffs, which the ASEAN
countries for WTO members, thereby Vietnam goods has more favorable conditions to
enter the ASEAN market. In the long term, AFTA has an indirect effect on increasing the
export turnover of Vietnam to foreign markets due to import inputs for export production
more cheaply from the ASEAN countries.
Furthermore, as a member of AFTA, Vietnam has the conditions to exploit new
advantages in trade relations with major countries. For example, Vietnam will enjoy
preferential tariff system of universal American (General System of Preferences -
GSP). By GSP provisions, “the value of a product is produced in a member country of an
economic association, free trade area (such as AFTA) are considered product of a

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country” and a product GSP exports to the U.S. if the "value of imported raw materials to
produce it accounts for less than 65% of the products after completion of customs
procedures in the United States." That means that ASEAN countries can import raw
materials from other member countries to produce goods for export to America, and
export goods will enjoy GSP if the value of materials under 65% of the product. And so,
AFTA help Vietnam to improve access and penetrate the U.S. market - the country has
import turnover exceeding U.S. $ 1000 billion per year.
In addition, participating in AFTA, Viet Nam can increase economic efficiency.
AFTA is a strong motivation that promotes Vietnam to remove the outdated decisions
about institutional regulation. If Vietnam applies a homogeneous trade rule with
reasonable tax levels for some products that be suitable to AFTA, this will bring great
benefits in tax administration, and tax structure will help the government does not have to
change the tax rate regularly. Large market will allow companies to exploit the increasing
benefits of scale, speed up the process of specialization between domestic industries,
thereby increasing the trade activities between sectors. Tax reduction leads to domestic
competition, increases labor productivity, and promotes the information and
technological innovation between firms. Consequently, economic efficiency of the whole
economy is promoted.
In theory, a free trade area will increase investment from the outside regions. That's
because investors are able to produce goods in one or several countries and offers
consumers in all member countries with low tariffs and tariff barriers were gradually
lifted. When foreign investors invest in a country, they will have a large potential market
than many countries. Applying the theory to the AFTA and Vietnam, the foreign
investors investing in Vietnam, they will not just think of a market with 80 million
inhabitants, but also to include the ASEAN market with over 500 million.
Lastly, when joining AFTA, Viet Nam can import variety of goods from ASEAN
member countries with lower price than from other countries on the world. This results in
enterprises get benefits from increasing the price competition with foreign coutries and
customers have more choices about products and price.

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 Ministry of Finance has issued a circular on the issuance of import tariffs special
preferential import of Vietnam to implement the Free Trade Area ASEAN- Korea period
2010 to 2011. From July 3rd, some of import goods from Korea is reduced tax.
According to the circular No. 77/2010/TT-BTC, multiple tax rates on import goods
from Korea to Vietnam such as lamb, buffalo, beef, and pork… reduced to only 7-10%.
All kinds of Milk have a common tariff from 10-15%. Some items such as fish and fruit
have typical rate of 15-20%...
In order to join preferential tariffs, goods must be imported directly to Vietnam from
9 ASEAN countries, including Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar,
Philippines, Singapore, Thailand and South Korea.
The Circular takes effect from the date of July 3rd, replacing the Decision
112/2008/QD-BTC dated 01/12/2008 of the Minister of Finance Committee the
preferential import tariff of Vietnam in particular to implement ASEAN Free Trade Area-
Korean period from 2009 to 2011. Implementation of tariff reduction in the ASEAN
region: 99% of tariff lines are applied from 0-5% in 2010.
The Finance Ministry said that if the implement of commitments Free Trade Area
ASEAN (hereinafter referred to as the CEPT/AFTA) by 2015, Vietnam will basically
remove tariffs on import goods from ASEAN (a flexible of tariff lines in 2018).
Particularly in 2010, Vietnam applied tariff rates to around 0-5% for 99% of tariff lines,
of which 57% tariff lines have CEPT rates are 0%. (Tariff CEPT/ AFTA Agreement,
issued together with Decision No. 36/QD-BTC dated 12/6/2008 of the Ministry of
Finance).
The implementation of the commitment shows that Vietnam always fulfill enough
tax obligations and tax cut according to the committed road. Vietnam started the tax cuts
since 1996, and 2006 reduced down to 0-5%. In 2008 Vietnam has also taken cars and
motorbike into the implementation of tax reduction. (Current tax rate is 83%/90%).
Ministry of Finance affirms that “All goods imported to Vietnam from the ASEAN
countries, if they satisfied the conditions specified in Article 2 of decision No. 36/QD-
BTC dated 12/6/2008 of the Ministry of Finance the preferential; import tariff to
implements special tariff incentive program have the common effective tariff for the
AFTA are entitled to the CEPT/AFTA

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 2. The Challenges for Viet Nam.
Revenues of state budget are revenues from export and import tax is reduced. The
participation led to the elimination of tariff barriers and non-tax means removing the
protection of Government for enterprises, force enterprises to participate in the really
paralysis game in market area. Competition push up production growth up, but also can
make enterprises bankrupt, lead to changes in economic structure. Besides, Vietnam has
to face some specific following challenges:
The first is the impact from strategic restructuring or manufacturing operations of
multinational companies. Under the current industry, there are many goods produced by
companies have the capital form foreign countries are protected by import duties. When
the fence tax cuts, the multinational company will concentrate on producing in the
ASEAN countries have the lowest costs. Therefore, the challenge of Vietnam is how to
keep facilities Appearance of multinational companies, also creating opportunities for
companies to invest or transfer production bases in other countries to Vietnam.
Secondly, many domestic companies in Vietnam have been operating and existing
mainly by government subsidy policy, after 2006, they are likely to be pushed out of
market. These companies need to rapidly increase their competitiveness to deal with this
problem in time. The vertical and horizontal links with multinational firms is one way to
quickly increase their competitiveness. According to Dr Tran Du Lich, Director of
Economic Institute of Ho Chi Minh City, though the import tax falls below 5% since
mid-2003, at least until early 2005, domestic production of industrial goods such as
plastics, stationery, toilet paper, handicrafts, wood processing, etc. continues to increase,
because of maintaining competitiveness with foreign goods. However, these are small
commodity production, containing a high amount of unskilled labor and product markets
tend to disperse in many localities, so the foreign firm can not compete with domestic
firms in this case. In the field with modern technology, modern product organization and
circulation, the challenges to imported goods under pressure from tax cuts will be much
larger.
Thirdly, joining AFTA primarily to expand export markets, speed up the process of
industrialization, but currently capability of Vietnam’s industrial goods to penetrate the
ASEAN market is so weak. In addition, there has been much competitive pressure from

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China and many ASEAN countries, especially Thailand and Malaysia are aggressively
enhancing their competitiveness. Vietnam needs to consider these to change the
mechanism, strategies to quickly increase their competitiveness in the integration process.
In general, we can see the fundamental challenges of Vietnam's joining AFTA: weak
competitiveness, labor productivity of domestic product and service might be hard to
compete with foreign goods from ASEAN countries as tariff barrier and tariff is lifted.
Besides, there are about 53,000 domestic enterprises in all economic sectors, with nearly
3 million workers. Compared to other ASEAN countries, the Vietnam enterprises are
small, backward technological, low labor productivity, product quality is not enough
competitive.
IV. The Policies to recommendation to promote International trade
1. Solutions:
It is necessary to harmoniously ensure the short, medium and long terms benefits between
national enterprises and consumers while constructing the joining AFTA itinerary. Thus,
the problem here is that before making any policy related to AFTA, the state needs the
references and the opinions of entrepreneurs in order to avoid making policies ineffective
or changing policies constantly result in disrupting production plans of enterprises.
Besides, the government has an important role in regulating and shakeout national
financial mechanisms ensure to maintain the balance capital of economy. Specially, the
government also introduced some solutions to restructure the revenue budget to cover the
shortfall by cutting the import tax through tax policy reformation shift from indirect taxes
to direct taxes.
Moreover, the government should also have specific and reasonable policies to encourage
development within countries in the process of participating AFTA. For example:
- Establishing the export insurance funds, especially for costly materials product
(raw material, agricultural products…)
- Gradually moving from distribution mechanism to the Quota export and import
into free enterprise.
- Rapidly improving to satisfy working capital for the enterprises which have
special credit incentives to businesses participate in production and trade the high
levels technical of products and high competitive.

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The government should support enterprises to marketing exportation. This is an important
problem when Vietnam joining AFTA. Moreover, accelerating the process restructuring
national enterprises, implementing the process of equalization national enterprises,
combining with diversification of ownership, mergers and implementing enterprise
merger, joint-stock companies makes conditions for enterprises active in functional
integration and cooperation with trading partners of ASEAN.
The small business should focus on the design, specifications of products and practices to
be motivating the development process of AFTA. The government needs to have the
incisive reform policy with the national enterprises and small business suitable for the
requirements of the AFTA in particular and the economy in general.
In addition, government should have the appropriate protectionist policies to protect the
domestic market under the pressure of foreign firms and help national firms existing and
developing. Moreover, it is necessary to change and adjust the investment law in
domestic market to attract foreign investors. At the same time, we need to build
infrastructure such as transportation network, electricity and water system, as well as new
industrial zones.
2. Conclusion:
Becoming an official member of the ASEAN Free Trade Area (AFTA), Vietnam has
great opportunities as well as the challenges that our country needs to overcome. Joining
AFTA will make an important contribution to increase the flow of goods, capital and
labor and technology between Vietnam and countries in ASEAN, and increasing the
capability of Vietnam to shift production structure towards industrialization and
modernization. Vietnam will take advantage of new resources, supply management and
advanced business administration to penetrate domestic goods ASEAN market. Also,
Vietnam is the starting point is lower than other countries in the organization: weak
market institution, unstable legislation, the way of doing business backward, inefficient,
less capital and poor technology. It requires our country needs a positive, proactive
search for opportunities, take advantage of opportunities, to quickly overcome the
weaknesses and shortcomings in management and administration activities. To achieve
the above the State should have strong macroeconomic measures and appropriate policies
for an open market.

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Appendix
Appendix 1

Appendix 2

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 References:
http://asean2010.vn/asean_en/news/1
http://www.nciec.gov.vn/index.nciec?2208
http://www.wattpad.com/136011-viet-nam-va-afta?p=1
http://vietbao.vn/The-gioi/Tac-dong-cua-AFTA-doi-voi-nen-kinh-te-Viet-
Nam/20020350/162/
http://www.hids.hochiminhcity.gov.vn/xemtin.asp?idcha=2768&cap=4&id=2773
http://vietbao.vn/Van-hoa/Chuong-5-Thach-thuc-AFTA-va-cong-nghiep-Viet-
Nam/40166342/184/

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