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A high trade surplus is not necessarily good

A high trade surplus is not necessarily good

Friday 10, 01 2020
Data that the General Statistics Office has just released shows that Vietnam's trade balance in the first nine months of the year had a surplus of US $ 5.9 billion. The trade surplus this year will likely exceed the US $ 6.8 billion of 2018. This is a good thing, but it also raises many concerns.

The trade balance recorded a record surplus in August

For the first time, Vietnam recorded a trade surplus of US $ 3.4 billion in just one month. This is the month with the highest surplus ever in Vietnam. This resulted in a trade surplus of Vietnam from the beginning of the year to September 15, 2019, of 5.4 billion USD, according to the General Department of Customs statistics, much higher than the figure of 4.7 billion USD in the same period in 2018.
A high trade surplus is not necessarily good

This movement is quite unexpected compared to the predictions made earlier this year when the global economy showed signs of declining growth momentum due to the negative impact of the trade war between the US and China.

Before 2018, Vietnam's trade balance often tended to run a deficit in the fourth quarter. The reason was that the demand for the economy in both consumption and investment often increased very high at the end of the year.

However, this trend has not been repeated in 2018. Accordingly, except for December, Vietnam's trade balance maintained a surplus in September, October and November.

The reason may be that the production capacity of domestic enterprises has been improved, so the demand for importing consumer goods at the end of the year decreases; or because businesses have been actively importing in advance to avoid negative cyclical effects such as rising commodity prices, unfavorable exchange rates at the end of the year, etc.

With such comments, Vietnam's trade balance will likely be favorable in the remaining months of 2019. If so, Vietnam will likely record a record high surplus in 2019, surpassing 6.8 billion US dollars for the whole of 2018.

Export increased sharply while imports tended to decrease

Movements of the trade balance in August recorded many favorable factors. The main reason comes from the high export of Samsung phones when in August the company usually launches new high-end phones. Therefore, not only in August of 2019 but also in August of previous years the trade balance often recorded a high surplus.

The US is the export market with the highest growth rate in August, up 28% compared to the same period in 2018. In which, phones and timber are the two main export products to this market, respectively increased by 74% and 34% over the same period last year. Besides the reason for the launch of the new version, likely, these two items are heavily imported by the US to replace similar products manufactured from China due to higher prices.

Besides, exports to the Japanese market also recorded impressive growth. In the first eight months of the year, Vietnam recorded a surplus of nearly US $ 1 billion. While this figure for the same period in 2018 was only US $ 23 million. In particular, wood and seafood products are the main driving force to boost export growth to Japan when reaching respectively 20% and 9% increase over the same period last year.

The reason may be that the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) officially came into effect on January 14, 1919, resulting in a strong increase in demand for these two items from Vietnam.

While exports grew strongly, imports tended to decrease in August. In particular, the demand for imports from the Chinese market dropped the most. There are three main possible explanations for this trend.

Firstly, there was a sharp increase in demand for imported products from China in the previous months when Vietnam's trade balance was in deficit of US $ 1.3 billion in May.

Second, domestic consumer demand may have tended to shift to more advanced markets such as Japan, South Korea, even from Europe and the US.

Thirdly, it is also possible that Vietnam's economy has been forming value chains. In particular, the added value is being created more and more in Vietnam.

A high trade surplus is not necessarily good

The above problem sounds unreasonable because a trade surplus means that it will bring back foreign currency to the country. However, in a comprehensive view, the high surplus is posing for us many issues that need to be noted in the near future.

Firstly, strong growth in exports was mainly in the category of goods belonging to foreign direct investment (FDI) enterprises. In particular, phones and components still play a leading role. These are the items that perhaps Vietnamese businesses contribute the least to the value chain of this product.

Currently, domestic enterprises are only involved in the production of packaging and providing some services but not in the production of components as expected.

Secondly, exports of some items to the US spiked in the first eight months of 2019. Notably, these are all items that China also has the strength to export such as wood products, textiles and leather shoes. It is possible that the phenomenon of temporary import and re-export to the US is still taking place.

If this problem is real and Vietnam cannot control it, it is likely that Vietnam will face the risk of US anti-dumping duties such as those that shrimp and steel products have faced in recent years, etc.

Thirdly, the most worrying concern is that the import demand is tending to decrease. For a developing economy like Vietnam, this is not a good sign. Because, in the development process, we will need a lot of machines and equipment to build factories, production facilities for the economy.

Therefore, the decline in the demand for imports means the decrease in capital flows of the whole society. If this occurs, it will negatively impact the jobs of the people as well as the growth of the economy in the medium and long term

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