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Vietnam - Japan economic relations in the early years of the 21st century

(LLCT) - In the early years of the 21st century, the economic relationship between Vietnam and Japan has achieved important results in terms of trade, foreign direct investment (FDI), and official development assistance (ODA), helping creating employment and boosting Vietnam’s economic growth. However, this relationship is still modest compared to the potential of each party.

Therefore, the two countries should continue to concretize a "Bilateral strategic partnership for peace and prosperity in Asia" in the economic field: combining Vietnam's great potential of labor and natural resources with Japan's advantages in modern equipment, technology, and capital. We need to continue promoting cooperation, especially in high-tech, manufacturing, and supporting industries.

Key words: Vietnam - Japan economic and trade relations; foreign direct investment; official development assistance.

 

1.  In terms of trade

Export-import turnover and trade balance

The import and export turnover between Vietnam and Japan has achieved significant progress since 2001. In 2005, the total import-export turnover between the two countries reached nearly 8.16 billion USD, of which Vietnam’s export turnover was 4.56 billion USD (up 18% compared to 2004 and accounting for 15% of the total export turnover). The import turnover amounted to 3.6 billion USD (increasing by 15.3% compared to 2004). Thus, in 2005, Vietnam had a surplus export to Japan of 956 million USD (43% higher than one in 2004). Excluding crude oil, Vietnam still had an export surplus of 370 million USD (1).

In 2007, Vietnam’s export turnover to Japan was about 6.5 billion USD, and the trade surplus reached 500 million USD. Besides that, Vietnam’s import turnover from Japan also increased rapidly by 28% compared to 2016, reaching more than 6 billion USD. The main reason behind this was that Vietnam attracted Japanese investors, leading to an increase in technology and machinery transfer from Japan to Vietnam. In 2010, the total bilateral trade turnover reached more than 16.29 billion USD, an increase of about 20% compared to 2009, of which Vietnam’s export turnover to Japan was 8.14 billion USD, increasing by over 25% compared to the same period last year.

In 2012, the trade between the two countries reached 24.7 billion USD, equivalent to a growth rate of 16%, which was 1% lower than the average growth rate of the 2005-2011 period(2). In 2013, the total import-export turnover between Vietnam and Japan reached 22.94 billion USD, increasing by 1.7% compared to 2012. In which, the export of Vietnamese goods to Japan reached 12.37 billion USD, up 3.5% and Vietnam’s import of goods from Japan reached 10.57 billion USD, a slight decrease by 0.3%.

Japan is currently the fourth largest trading partner of Vietnam, with a bilateral trade turnover of over 28 billion USD in 2015 and 29.7 billion USD in 2016. In which, Vietnam’s exports to Japan in 2016 were valued at 14.6 billion USD, imports reached 15 billion USD. By 2017, Japan continued to be an important trading partner of Vietnam with a total bilateral trade turnover of more than 33.4 billion USD (3) (Table 1).

According to the statistics of the Vietnam General Department of Customs, in the first 8 months of 2018, the total trade value of the two countries reached 24.5 billion USD, up 13.75% compared to the same period in 2017. In which, the export from Vietnam to Japan reached 12.22 billion USD, an increase by 11.5% over the same period in 2017, and imports from Japan were 12.31 billion USD, up 16%(4). According to a signed agreement, the two countries are working to bring more than 92% of imports and exports into tax-free areas within the next 10 years. About 94.53% of Vietnam’s export turnover to Japan will enjoy tax reduction and 87.66% of export turnover from Japan to Vietnam will enjoy tax reduction as well (5).

The structure of export products

The export turnover of Vietnam to Japan not only keeps increasing in absolute value but also the structure of export products is more diversified. The proportion of processed products has been improved, particularly seafood, mechanical engineering, and electronic products, information technology, etc. Some other export products of Vietnam have also gained a high reputation in dominating the Japanese market, such as processed foods, meat, canned fish, canned fruits, and vegetables, etc.

Although there has been more progress, the structure of Vietnam’s exports to Japan is still monotonous, with up to 50% being raw materials and preliminarily-processed products. Additionally, Vietnamese products also face many difficulties in meeting quality requirements. Recently, Vietnamese seafood products have been subjected to strict examination in Japan, and almost 100% of shipments are now checked.

The structure of import products

Japan is Vietnam’s third largest import market, accounting for 10.2% of Vietnam’s total import value in 2018. Compared to 2017, the import value is 12.2% higher, equivalent to 1.7 times higher than the export turnover growth rate. Among the products imported from Japan, there are 13 items with a total value of over 100 million USD, of which 3 items have a turnover of over 1 billion USD (machines, equipment, spare parts and tools; electronic products and components; iron and steel). Some imported Japanese products account for a large proportion of the total import value of similar products into Vietnam, such as plastic products 30.6%; iron and steel 25.7%; machinery, equipment, utilities and spare parts 21.4%; auto parts 20.5%; computers, electronic products, and components 13%; chemical products 11.4%; and so on. As Japan is a direct investor and the largest development capital donor in Vietnam, high-tech machinery and equipment products from this country have a large import value(6).

The position of each country in the bilateral trade relations

For many years, Japan has always been an important trading partner of Vietnam. Japan is among the four largest trading partners of more than 200 countries and territories that import and export goods from and to Vietnam. In 2013, with a turnover of 13.7 billion USD, Japan was the second largest export market for Vietnam. In 2017, the export value increased to 16.86 billion USD, and Japan was the third largest export market, coming only after the US and China. In recent years, due to more intense global trade competition, Vietnam’s import turnover from the Japanese market experienced a slight decrease in rating. In 2006, Japan was the second largest import market after the US, while it fell to third in 2011 behind China and US. By 2016, the import value from Japan reached 15.03 billion USD (accounting for 8.6%), continuing to be in the 3rd position behind China and South Korea(7).

In contrast, Vietnam’s position in trade relations with Japan is still modest. The value of the imports from Vietnam accounts for only 1.3% of Japan’s imports; similarly, the value of exported goods to our country accounts for only 1.16% of Japan’s export turnover. Compared to other countries in the region, the bilateral trade turnover between Vietnam and Japan is always lower than that of Thailand, Indonesia, and Malaysia(8). Generally, the trade relations between Vietnam and Japan are still quite modest compared to the potential and development needs, of which the reasons are as follows:

First, until now, Japan has not given Vietnam preferential trade regimes and policies for many export products. Some Vietnamese products are subject to higher import tariffs than those applied by China and many other ASEAN countries. This has significantly limited the export growth of Vietnamese products to the Japanese market.

Second, the quality of Vietnam’s exported goods to Japan is not high, although there have been many improvements. Using a 100-point scale, Vietnam has a few quality goods such as garments (over 80 points), seafood (ranked 20 out of 120 countries), salted ginger (ranked 4th), salted cucumber (ranked 2nd), etc, (all from 70 to 80 points). However, it must be acknowledged that the quality of Vietnamese goods in general is low, not uniform, has limited information and advertising on packaging, is based on a monotonous export structure, and has weak competitive advantage.

Third, Vietnam’s measures to penetrate the Japanese market are simple and monotonous due to the high cost of market surveys and the fact that most Vietnamese enterprises are still small, therefore direct surveys are not possible even if sufficient capital is available. Up to now, most Vietnamese enterprises have not opened representative offices in Japan, leading to their inability to timely and accurately capture demands for goods, consumer tastes, and regulations on imports and exports in Japan.

Fourth, because of the small scale of Vietnamese enterprises and their lack of connection in working methods, it is often difficult to sign big contracts or contracts outside the initial plan, causing in many cases an inability to supply or fulfill the contracts, and causing a loss of credibility for export activities of Vietnam.

2. Foreign direct investment (FDI) from Japan to Vietnam

More than 1 year after Vietnam promulgated the Law on Foreign Investment (December 29th 1987), the amount of FDI from Japan to Vietnam reached nearly 1 million USD, and by 2008 it reached over 17 billion USD. By October 2012, the total value of the registered FDI capital from Japan (accumulated valid projects until October 20th 2012) reached more than 28.8 billion USD(9), and Japan became the leading partner in terms of registered FDI in Vietnam. The value of annual FDI from Japan flowing into Vietnam also achieved remarkable growth. During the 1992 - 2009 period, with the exception of 2008, this figure was below 500 million USD, since 2010, it has reached over 1.85 billion USD annually. Japanese FDI projects in Vietnam are concentrated in the fields of industry and services. Many large Japanese corporations, such as Sumitomo, Toyota, Mitsubishi, Hitachi, and Toshiba, have been present in Vietnam and are focused on the areas of infrastructure construction, supporting industries, and training high-quality human resources.

Japanese businesses are considered “the first-mover” in investment in the processing and manufacturing sector, which are encouraged by the Vietnamese government. Specifically, in total there are more than 1,700 Japanese FDI projects in Vietnam today, and there are more than 990 projects in the field of processing-manufacturing, with a total estimated capital of 23.3 billion USD (equivalent to more than 81%)(10). In 2013, Japanese FDI was at the top of 54 countries and territories investing in Vietnam, with a total new registered and additional investment of 5.747 billion USD(11). On April 20th 2016, Japan became the second largest investor out of 114 countries and territories investing in Vietnam with more than 3,000 direct investment projects, total registered capital of over 39 billion USD. By 2017, Japan became Vietnam’s largest investor, with 9.11 billion USD, accounting for 25.4% of total investment capital(12).

Regarding investment structure by industry: Among the 18 sectors where Japan has invested, the manufacturing and processing industry is the most invested in, with Japanese enterprises totaling 1,404 projects and a total registered capital of 31.79 billion USD (accounting for 82.1% of total investment capital). The second is real estate businesses, with a total capital of 1.74 billion USD (4.5% of total investment capital). The third is construction, with total investment of 1.52 billion USD (3.9% of total investment capital), and the rest belongs to other sectors and industries(13).

Regarding investment structure by location: Japan has invested in 49 of the 63 provinces (and special urban areas) nationwide. Among these, Thanh Hoa has attracted the most investment capital with 10 projects, and total newly registered and increased capital is 9.68 billion USD (accounting for 25% of total investment capital). The second highest location is Hanoi, with 693 projects and total investment capital of 4.16 billion USD (accounting for 10.7% of total investment capital). Binh Duong ranks 3rd, with 255 projects and a capital of 3.95 billion USD (accounting for 10.2% of total investment capital). The rest is spread out in other cities and provinces.

Regarding investment scale: most Japanese FDI projects in Vietnam are small-scale investment projects, due to the fact that Japan still considers Vietnam a high-risk market.

Regarding investment form: Japanese projects in Vietnam mainly take two forms: 100% foreign capital ventures and joint ventures. The former total 2,299 projects, with a total capital of 22.21 billion USD, accounting for 82.4% of projects and 57.3% of total investment capital. The latter total 450 projects with a total registered capital of 15.19 billion USD, accounting for 39.2% of the total investment capital, the remaining are joint stock companies and business cooperation contracts; BOT, BT and BTO contracts with a total capital of 842.5 million USD, 115.1 million USD and 34.3 million USD respectively(14).

Regarding investment efficiency: In general, Japanese businesses activities in Vietnam are relatively positive. Many businesses make products that are imported-substitutes and even actively participate in export. Implemented capital on the registered capital accounts for a high proportion of the total, reaching 73%, whereas the average figure for FDI is about 60%; The rate of the dissolution of projects before expiration is low; the revenue of investment projects according to the implemented capital reached 2.2 times, while the average level was only 1.7 times.

According to a recently published survey by JETRO (Japan External Trade Organization) on over 1,745 Japanese businesses operating in Asia, Vietnam is highly praised for the investment in both medium and long-term prospects. In the medium term, 92.6% of manufacturing enterprises and 88% of service enterprises intend to expand their businesses in the next 1-2 years. In the long term, within the next 5-10 years, Vietnam is assessed by Japanese investors to be the best production location in Asia.

Until now, Japan is one of the important strategic foreign investors of our country. Japan always keeps a high and stable investment rate and is one of the two leading countries in foreign investment in Vietnam. Japanese businesses operate effectively, seriously, comply with Vietnam’s legal regulations, and contribute to job creation and economic growth. Especially, the working method and skills of Japanese enterprises are always highly commended for their diligence, creativity, and responsibility.

3. Official development assistance (ODA) from Japan to Vietnam

45 years after the establishment of the diplomatic relation, Japan is considered the largest ODA donor to Vietnam. From 1992 to 2009, Japan’s official development assistance (ODA) for Vietnam reached about 14 billion USD(15), accounting for nearly 50% of the international community’s ODA committed to Vietnam. In recent years, the committed ODA capital from Japan has been continuously increasing. In fiscal year 2009, Japanese ODA for Vietnam reached a very high level of 1.6 billion USD, exceeding 1.1 billion USD of 2007. The Vietnam - Japan Economic Partnership Agreement (VJEPA) - effective from October 1st 2009 - is also one of the important factors for creating a legal basis to attract investment capital from Japan.

In 2010, Japanese ODA for Vietnam was 100.2 billion yen. In particular, the ODA loan agreement signed on March 30th 2012 with a value of 136,447 billion yen and made the total value of Japanese committed loans in fiscal year 2011 to Vietnam reach a record of 270,038 billion JPY(16). From 1992 to the end of fiscal year 2015 (March 31st 2016), Japan committed about 29.5 billion USD of ODA loans to Vietnam. During the visit of Prime Minister Abe to Vietnam (in January 2016), the two countries signed 2 exchange notes and 2 loan agreements on ODA non-refundable capital. Japan committed to provide about 120 billion additional yen to Vietnam (nearly 1.05 billion USD) of ODA loans for the 2016 fiscal year for 4 projects(17).

Japanese ODA policy focuses on the following 5 areas: (1) Supporting the development of infrastructure and human resources. (2) Supporting the development of transportation and electricity. (3) Supporting agricultural development and rural infrastructure. (4) Prioritizing education, health, and health services to improve people’s lives and facilitate future development. (5) Environmental improvement, which emphasizes the protection of natural resources.

Although there are some issues with a few specific projects and the aid process implementation, Japanese ODA has a significant and enormous impact on building and developing Vietnam.

4. Prospects and recommendations

The relation between Vietnam and Japan in the field of economy in the early years of the 21st century is the basis for Vietnam to have priority directions to strengthen this relationship in the coming time. The Governments of the two countries need to innovate, build development plans, improve cooperation mechanisms, and promote strategies towards 2030 in each field of cooperation in order to have a deep economic relation between the two sides commensurate with the potential of their strategic partnership.

Regarding FDI, Vietnam needs to have consistent mechanisms, policies, and measures (in accordance with international commitments within the framework of WTO and IMF) to build itself into a favorable investment and production environment, and even a high-quality human resources training and technology transfer center in Southeast Asia. The “Japan-Vietnam initiatives to improve the business environment with the goal of strengthening Vietnam’s competitiveness” need to be implemented efficiently. Accordingly, Japan committed to contribute experts and capital to this project to improve the investment environment in Vietnam. We also need to clearly identify the direction of growth in order to attract investment from Japan, building Vietnam into one of the regional centers of electronics, information technology, and mechanical engineering production. To do so we need to quickly develop supporting industries and train skilled workers and achieve the goal of increasing Japanese FDI to 40 billion USD by 2020. Additionally, the two countries should have specific strategies to actively implement the Vietnam-Japan Economic Partnership Agreement and strengthen the efficiency of Vietnam-Japan Business Forum. Vietnam needs to actively mobilize Japan to recognize our country with a full market economy, create conditions for encouraging and attracting Japanese investment capital into Vietnam. The immediate task of Vietnam is to concentrate ODA and FDI from Japan on key infrastructure and high technology projects, such as railways, the North-South express, and the Hoa Lac hi-tech park, etc.

Regarding trade, taking the target of bilateral trade turnover reaching 40 billion USD in 2020 as the basis, improving the competitiveness of Vietnamese products, expand the market research and marketing activities, diversifying export products, increasing sophisticated processed products, reducing raw materials and preliminarily-processed goods.

Regarding ODA, we need to continue to take advantage and effectively use Japanese ODA while developing measures to control and prevent corruption and loss of preferred capital. At the same time, it is necessary to implement a consistent policy, improving the investment environment in Vietnam while convincing major Japanese corporations to build infrastructure in Vietnam,

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Endnotes:

(1) Tran Phuong Anh: Vietnam-Japan in the process of developing trade relations between the two countries, National Political Publishing House, 2007, p.69.

(2) Characteristics of import and export products between Vietnam and Japan in 11 months from the beginning of 2013, http://www.customs.gov.vn.

(3), (12) Japanese enterprises highly appreciate business prospects in Vietnam, http://vov.vn.

(4) Vietnam Trade Office in Japan, http://vietnamexport.com.

(5) Vietnam Ministry of Planning and Investment, http://www.mpi.gov.vn.

(6) Vietnam Economic Times, http://www.agtex.com.vn.

(7), (10) Vu Van Trung: Vietnam-Japan economy and trade: Unprecedented development, http://www.baocongthuong.com.vn.

(8), (15) Develop Vietnam-Japan trade relations, http://www.vietrade.gov.vn.

(9) Foreign direct investment situation in 10 months of 2012, http://fia.mpi.gov.vn.

(11) Source: Foreign Investment Agency.

(13), (14) Hoang Long - According to Tri Thuc Tre.

(16) Japan ODA loan agreement for Vietnam reached a record level, http://ven.vn.

(17) Vietnam-Japan relations are at the best stage in history, http://dantri.com.vn.

Dr. Nguyen Thi Thuy

Institute of World Economics and Politics,

Vietnam Academy of Social Science

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