International trade in the new context: Opportunities and challenges for Vietnam
Communist Review - The COVID-19 pandemic has imposed grave consequences on countries worldwide, particularly in the field of economy. In response, significant changes have been introduced to international trade, with the development of e-commerce, digital agreements, the shifting and restructuring of supply chains, and more. Effectively capitalizing on these trends will help Vietnam enhance its rapid adaptability and boost sustainable economic development in the new context.
Cargo piles up at Cat Lai port in Ho Chi Minh city _Photo: nhiepanhdoisong.vn
The global and local impacts of COVID-19
First, slow growth
COVID-19 has profoundly affected all aspects of economic and social life around the world. Global economic growth has been reduced significantly due to disruptions in global supply chains and travel restrictions imposed by many countries. According to the World Bank, in 2020, global GDP growth dropped to 3.6%, the lowest in 50 years. Countries had to adopt unprecedented measures to minimize the impact and consequences of the pandemic, such as restricting international travel, imposing social distancing, and temporarily suspending business and production activities. Most countries closed their borders and suspended visa approval for foreigners. In 2021, the global economy rebounded with a growth rate of 5.8%(1). As a result of vaccination campaigns, disease prevention efforts, and various support programs by regional alliances and international organizations, COVID-19 was gradually contained. In 2022, the global economy experienced further disruption due to the Russia-Ukraine conflict, triggering a severe shortage of resources and energy, a hike in energy and food prices, slowed global growth, and rising inflation.
COVID-19 adversely affected Vietnam's macroeconomic indicators. The country’s GDP expanded 2.91% in 2020, a 4.1% drop from 2019. In 2021, its growth shrank to 2.58%, much lower than the set target of 6.5%, and the lowest in many years.
Second, declining trade
In 2019, global trade fell 22% and global exports decreased 1.4 trillion USD due to COVID-19. In 2020, global trade rebounded to reach 28.5 trillion USD, up 13% from the pre-COVID-19 period(2). According to the World Trade Organization (WTO), trade in goods grew 4.8% in the first quarter of 2022 and 4.7% in the second quarter against the respective periods of 2021, but the projected growth rate of trade in goods was as low as 3.5% for the whole 2022 and 1% for 2023 due to the Russia-Ukraine conflict and the tight monetary policies of the major economies.
Like other economies worldwide, the pandemic disrupted the supply chain in Vietnam. Import demand of major trading partners such as the United States, the European Union (EU), Japan, and France plummeted. Vietnam’s exports in 2020 decreased more than 31% from 2019. Total import and export turnover reached 545.36 billion USD, with exports accounting for 282.66 billion USD. Given the overall global economic slowdown due to COVID-19, this was a positive sign for the Vietnamese economy. In 2021, total trade in goods hit 668.54 billion USD, up 22.6% from 2020. Export turnover and import turnover increased 19% and 26.5%, respectively. According to the General Department of Vietnam Customs, Vietnam earned 312.9 billion USD from exports in the first 10 months of 2022, a 16% increase against the same period in 2021. Domestic economic sectors and the foreign direct investment (FDI) sector grew steadily while a trade surplus of 9.6 billion USD was recorded. This result was attributed to the consistent, flexible, and astute management of the Vietnamese Government in line with the goal of "Safe and flexible adaptation to and effective control of COVID-19." This is a prerequisite for Vietnam's import and export activities to improve further amid global economic uncertainty.
The COVID-19 pandemic has necessitated the restructuring of international trade as the disrupted global supply chains made it difficult for businesses to work on modeling and risk assessment. In this context, Vietnam’s structure of trade in goods underwent significant changes, with a noticeable decline in demand for certain items such as fuel, machinery, mechanics, and steel, and a surge in demand for medicines, protective gear, and food, among others. Tourism service trade declined sharply. In 2020, the number of foreign visitors to Vietnam fell 78.7% compared to the same period in 2019, resulting in a sharp drop in tourism revenue. Productivity and production shrank as control measures were in place. Additionally, COVID-19 directly affected the health of workers, causing labor shortages in manufacturing facilities. Supplies of essential goods failed to meet the minimum needs of the people. Measures to cope with the epidemic brought many agricultural and industrial production systems to a halt, causing a disruption in the supply chain.
Transformational trends in Vietnam's trade
First, in the context of the COVID-19 pandemic, e-commerce continued to grow strongly and became a priority.
E-commerce has expanded extensively with new methods catering to consumer behavior. In 2022, e-commerce in Vietnam grew 20%. During the 2020-2021 period, the circulation of cash increased but the proportion of cash in total payment means decreased (11.66% in 2020 and 11.48% in 2021). Non-cash transactions surged (online payment jumped 48.8% in quantity and 32.6% in value while mobile payment went up 76.2% in quantity and 87.5% in value). The proportion of cash withdrawals through ATMs in total transactions processed through the National Payment Corporation of Vietnam (NAPAS) dropped from 26% in 2020 to 12% in 2021. In the future, consumers are expected to prioritize e-commerce and the use of cash will gradually be replaced by online payment methods, contributing to the strong development of financial technology (Fintech). Meanwhile, digital commerce and cross-border commerce are encouraging the acceleration of digital transformation, information technology infrastructure development, and internet connectivity. In 2022, Vietnam's digital economy grew 28%, the highest in Southeast Asia. The COVID-19 pandemic, along with social distancing measures, has prompted businesses to proactively renew their operations and improve the quality of their products and services for customers using online platforms.
Second, international trade promotes cooperation in digital technology.
In addition to free trade agreements (FTAs), digital agreements on goods and telecommunications services will be developed. After three years of implementing the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Vietnamese businesses have effectively utilized opportunities created by the pact and recorded positive results. According to the Ministry of Industry and Trade, Vietnam earned 45.7 billion USD from exports to CPTPP member countries in 2021, an 18.1% increase compared to 2020. Imports from CPTPP member countries were 45.5 billion USD, up 37.6% from 2020. In the first 10 months of 2022, total trade between Vietnam and other CPTPP member countries reached 88.1 billion USD, a 19.2% increase against the same period in 2021. In this period, exports to CPTPP member countries surged 22.1% to 45.1 billion USD. Digital services trade is expanding and CPTPP is emerging as a policy benchmark for digital economic agreements. Expanding these standards and promoting their application can pave the way for the widespread and effective application of digital standards.
Third, trade gravitates towards sustainable development
New-generation FTAs cover not only trade and services but also include the environment and sustainable development, which have become a separate topic in many conferences. Two years since implementation of the Vietnam-EU Free Trade Agreement (EVFTA), bilateral trade has grown significantly but has still failed to meet the potential and the needs of both sides. Some Vietnamese businesses have proactively built their brands and improved production to meet environmental standards as they participate extensively in the EU’s supply chain. Europe encourages the development of green and renewable energy in Vietnam. European enterprises also want to share their experiences and technology and invest in areas that promote Vietnam's economic sustainability. Vietnamese businesses have proactively improved their capacity and adjusted production and business strategies to quickly adapt to green and sustainable development. To help businesses adapt to FTA standards, the Ministry of Industry and Trade initiated a program with various activities including communication on FTAs’ commitments and rules of origin, export promotion on digital platforms, support for trade connections, and raising exporters’ awareness of potential trade remedies in foreign markets. Businesses have been advised to use standard raw materials to secure sustainable exports to markets with strict regulations on the origin of raw materials. This is also an irreversible global trend and a mandate for Vietnamese businesses as they become involved further in the new value chain.
Fourth, the restructuring of supply chains towards reliability, safety, and sustainability
Disruptions in the global value chain (especially in logistics) caused by COVID-19 posed grave challenges for supply chains. Semiconductor shortages, high energy prices, and soaring transportation costs prompted the need for a more flexible production network. In Vietnam, sustainable consumption has captured the growing interest of both consumers and businesses. During COVID-19, food and medical products were prioritized items. Although the pandemic brought many disadvantages and challenges to businesses, it also presented an opportunity for them to develop in a more sustainable and community-oriented manner. Many Vietnamese enterprises have changed their business models, including in the areas of production, distribution, transportation, and sale.
Fifth, priority given to bilateral, regional, and group cooperation
COVID-19 has exposed the disadvantages of globalization and fueled trade protectionism, although globalization and international connectivity remain trendy. Vietnam has maintained and promoted international economic connectivity despite global economic instability, with many varied factors and multiple impacts. Trade regionalization is also on the rise. Vietnam has continued to negotiate and sign new-generation FTAs, such as the European Union-Vietnam Free Trade Agreement (EVFTA) and the Regional Comprehensive Economic Partnership (RCEP). The Vietnamese government has identified potential areas and cooperation prospects to promote bilateral relations, especially in the process of socio-economic recovery and development post-COVID-19. Strengthening regional economic connectivity also attracts trade from outside economies and encourages trade regionalization, contributing to economic recovery in the new context.
Opportunities and challenges for Vietnam's trade in the new period
Opportunities
First, emerging trends around the world have confirmed the correctness of Vietnam's foreign policy. Vietnam is a member of various regional initiatives and partnerships including the Asia-Pacific Economic Cooperation (APEC), the Association of Southeast Asian Nations (ASEAN), the Asian Development Bank (ADB), CPTPP, EVFTA, RCEP, and more. Vietnam also participates in the negotiation of several initiatives and agreements, such as the Indo-Pacific Economic Framework for Prosperity (IPEF), the Free Trade Agreement between Vietnam and European Free Trade Association states (VN-EFTA FTA)(3), and the Vietnam-Israel Free Trade Agreement (VIFTA). As a result, Vietnam's international integration has become more extensive, diverse, and multi-layered. Small-scale partnerships have helped Vietnam raise its status, making bilateral and minilateral relations deeper, more substantive and more effective.
Second, the role and significance of the Asia-Pacific region are increasingly consolidated through new bilateral, minilateral, and regional FTAs. In this context, Vietnam plays a crucial role in regional and global supply chains and economic-trade systems. Macroeconomic and political stability, a dynamic economy, an expanding consumer market, and improvements in the business environment and competitiveness are the substantial advantages for Vietnam to attract global giants including high-tech groups, who are looking to relocate their production and supply chains. The COVID-19 pandemic has adversely affected the global economy, leading to a sharp decline in global FDI. FDI in Vietnam in 2020 dropped 25% from 2019 but surged 9.1% to more than 31 billion USD in 2021.
Third, digital trade and the digital economy have become the driving forces for economic recovery and development. In 2021, the digital economy contributed 6% to Vietnam’s GDP. Total trade grew over 50%, fetching a record revenue of 668.5 billion USD. Many domestic and foreign enterprises took timely actions to cope with the COVID-19 pandemic and to improve their performance by applying advanced technology to management, production, and business processes. Digital trade has helped maintain and develop the linkages among enterprises and between businesses and customers, contributing significantly to minimizing the negative impact of supply chain disruptions.
Challenges
First, in the post-pandemic period, Vietnam needs to implement rational policies to revive the economy and build capabilities to cope with potential future epidemics. Public investment remains the mainstay for economic growth, but accelerating public investment should not only focus on diversifying projects. It must also involve careful monitoring and supervision to ensure long-term effectiveness.
Second, Vietnam is facing several internal obstacles to implementing international commitments, especially those related to environmental protection. For instance, the country still lacks a comprehensive legal framework with international standards to fulfill its climate change response commitments.
Third, the COVID-19 pandemic has revealed the fragility and vulnerability of the global supply chain. Although the supply chain has gradually been restructured, the majority of Vietnam's industrial enterprises are small-sized and unable to deeply engage in the value chain. For example, according to the Ministry of Industry and Trade, only 300 of 2,000 spare part and component producers in Vietnam participate in the supply chain. Limited application of science and technology, especially e-commerce, has hindered Vietnamese exporters’ access to foreign markets. Businesses should be fully aware and more willing to accept risks, in order to invest more effectively in research and development.
The COVID-19 pandemic has profoundly affected every aspect of the global economy. International trade plummeted due to supply chain disruptions and the service sector dwindled remarkably. Businesses, especially small and medium-sized enterprises, encountered grave challenges, including bankruptcy and suspended production. Consumer behavior and trade shifted toward sustainability and efficiency (green consumption, circular consumption, and emission reduction), forming a global trend. The pandemic has led to restructuring and to new trends in global trade, which have had a significant impact on Vietnam's economic and trade activities. Major emerging trends in trade include the strong development of e-commerce which has become a priority; digital technology collaboration in international trade; sustainable development; the restructuring of supply chains towards reliability, safety, and sustainability; and bilateral, regional, and group cooperation amid slowing globalization. These trends bring both opportunities and challenges for Vietnam. Seizing opportunities and addressing challenges will help the economy adapt quickly, engage more extensively in global supply chains, and develop in a sustainable, green, and environmentally-friendly fashion.
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(1) Thuy Hien: “Challenges in achieving GDP growth of 6.5-7% in the 2021-2025 period,” October 14, 2022., https://www.vietnamplus.vn/thach-thuc-khi-dat-tang-truong-gdp-tu-657-giai-doan-20212025/823685.vnp
(2) Pham Hanh: “Global trade reaches a record high of 28.5 trillion USD in 2021 but may decline in 2022”, February 24, 2022, https://vienthongke.vn/thuong-mai-toan-cau-dat-muc-cao-ky-luc-285-nghin-ty-do-la-vao-nam-2021-nhung-co-the-giam-xuong-vao-nam-2022/
(3) The EFTA bloc consists of four countries: Switzerland, Norway, Iceland, and Liechtenstein.
This article was published in the Communist Review No. 1011 (April 2023)