India-Vietnam ties set to benefit from latter’s rise as FTA hub
- EU Investment
- December 24, 2022
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NEW DELHI: Amidst a growing opinion in favour of a free trade agreement between India and Vietnam, a boom in bilateral trade, rising FDI, value chains linkages and services trade are quietly underscoring the deepening economic cooperation between the two partners, with a deal being seen as a natural corollary to the South-East Asian nation’s increasingly strategic importance for India. Though the idea has yet to crystallise into action, early indicators suggest the likelihood of a Comprehensive Economic Partnership Agreement that Vietnam is interested in, sources aware of the development told The Sunday Guardian.
With India-Vietnam bilateral trade surging from USD 3.48 billion to USD 11 billion in 2021 and likely to exceed USD 15 billion by 2022, it serves India’s interests in Vietnam’s progression to a world FTA hub after signing a slew of several “quality” regional and bilateral agreements. Vietnam has many common FTA partners with India within the framework of the ASEAN-India FTA since the year 2010. With over 25 regional trade agreements including partnership with RCEP, CPTPP, IPEF, ASEAN as well as FTA with Korea, Japan, China, an India-Vietnam deal can strengthen the partnership to become a building block in the Indo-Pacific. The latest FTA with the European Union also makes Vietnam the only other country in ASEAN apart from Singapore to have an FTA with EU.
“One of the reasons why Vietnam is very important for India is the presence of value chains which is a thrust area for the government,” said Prabir De, Professor at Research and Information System for Developing Countries (RIS), who also heads the think tank’s ASEAN-India Centre. De said that Korean giant Samsung with headquarters in Seoul, has one of its largest production facilities in Noida in India and another equally large unit in Hanoi in Vietnam. “There was a time when Vietnam used to import all the mobile phones but now all the phones manufactured by Samsung are exported by Vietnam. Samsung units in Noida and Hanoi have very strong production links,” De said. In a free trade between India and Vietnam, those dynamics are expected to generate such high-end items and that’s why India needs Vietnam on its side to enhance the production linkages in automobile, consumer durables, De added.
While prospects of stronger economic cooperation between New Delhi and Hanoi are on an upswing, it is also a fact that Vietnam has effectively positioned itself as an attractive foreign investment destination, luring global businesses and companies and outpacing many including India in the race to wean away investors looking for alternatives to China. A key advantage for Vietnam is its geo-strategic location, which has allowed it to develop a very skilled labour force, according to Prabir De. As Vietnam and China share a border, workers go and train in Guangdong, China, picking up skills and discipline and adding value to the human capital.
Amidst expanding trade ties with India, Vietnam has also gained higher market access in India and a trade surplus with changing trade composition between 2010 and 2020. India’s top three exports to Vietnam in 2010 were oil-cake and other solid residues, light-vessels, fire-floats, dredger and meat of bovine animals and frozen. In 2020, the composition of the top three changed to flat-rolled products of iron or non, meat of bovine animals and frozen, followed by parts and accessories of motor vehicles. On the other hand, Vietnam scaled up its exports to India with the top three items in 2010 comprising transmission apparatus for radio-telephony, natural rubber, balata, gutta-perch followed by coal, briquettes, ovoids and similar goods. In 2020, while India’s imports of transmission apparatus for radio-telephony grew significantly from Vietnam, the second and third places were taken by electrical apparatus for line telephone and reception apparatus for television.
These successes in FTAs, investments and trade are a result of Vietnam’s well thought out agenda of economic growth and efforts since 1986 to liberalise their economy. According to Pankaj Jha, Professor & Dean (Research) at Jindal School of International Affairs, what makes Vietnam attractive for an FTA with the EU is the absence of strictures with the bloc and conscious adoption of the position that if they open up their market they will have access to a bigger market in EU. “Vietnam believes that instead of looking for low hanging fruits, let’s look for the complete tree,” Jha said. Moreover, Vietnam’s anti-corruption measures undertaken by the party leadership has been extensive. “Their main criterion is to be in the league of upper middle income countries by 2045 and a middle power in Asia. That is their purpose and they are driving themselves towards that,” Jha said.
A combination of strategic moves is winning the game for Vietnam like focus on select sectors which can be positioned strongly coupled with extra efforts with regard to their policies and regulations for a few countries like Japan, Thailand and Indonesia to facilitate more investments for Vietnam. Though their currency is not fully convertible and Vietnam still does not have capital account convertibility and financial institutions are not up to the international standards, the amount of investments Vietnam has been drawing from across the world in the last five odd years is to the tune of USD 18-19 billion, especially in the iron steel and cement, according to Jha.
Going ahead, an India-Vietnam bilateral FTA will help India at a time when it is looking to scale up market access for its exports, improve the trade facilitation, encourage investment, improve the rules affecting issues such as intellectual property, e-commerce and government procurement and bring down barriers to trade. India’s exporters face several barriers in Vietnam, says De, since Indian processing units are not listed with government, which hinders India’s exports. Whenever Indian exporters of marine products face trouble in exporting to ASEAN countries, Vietnam buys from Indian exporters and then exports to China, since it imposes a zero tariff on these imports from Vietnam. Moreover, while India offers a single market (after introduction of GST) to all trade partners, including ASEAN, India has to face 10 different economies in ASEAN and 10 different trade regimes as ASEAN is yet to be a single market.
In the run-up to a potential FTA, India and Vietnam can work on strengthening digital linkages, fintech, digital payments, inter-operability and financial cooperation between central banks and other EXIM banks. Improving maritime trade and connectivity with direct shipping links between India and Vietnam, trade facilitation through customs cooperation, single window, standards accreditation and setting up an India-Vietnam B2B portal on trade and investment are among other groundworks being recommended to set in motion the FTA process.