Vietnam s Upgrading in the Process of Economic Integration

Transcription

1 Vietnam s Upgrading in the Process of Economic Integration Summary Report of ERIA Hanoi Seminar and Workshop 2012 at Melia Hanoi Hotel, Hanoi, Vietnam 20 September 2012 September, 2012 Economic Research Institute for ASEAN and East Asia

2 CONTENTS 1. Agenda 2. Summary of the Seminar 1 st 3. Material for the Seminar 4. Material for the Workshop 5. Documentation 6. Press Release day Appendix 1. Participant List for the Seminar 2. Participant List for the Workshop

3 ERIA HANOI SEMINAR AND WORKSHOP 2012 Economic Research Institute for ASEAN and East Asia ERIA CAPACITY BUILDING PROGRAM HANOI SEMINAR AND WORKSHOP 2012: Vietnam s Upgrading in the Process of Economic Integration CO-ORGANIZER: Ministry of Industry and Trade (MOIT) Central Institute for Economic Management (CIEM) SUPPORTED BY: Bangkok Research Center (BRC-JETRO Bangkok) DATE: September 20, 2012 VENUE: MELIA Hanoi Hotel AGENDA 8:30-9:00 Registration Morning Session (9:00-12:10) Session: Open Seminar at Ball Room at 1 st Floor Moderator: Dr. Le Huong Linh, Researcher, CIEM 9:00-9:10 Opening Remarks Ministry of Industry and Trade. 9:10-9:30 Introductory Speech Dr. Vo Tri Thanh, Vice President, CIEM 9:30-10:10 New Division of Labor between Thailand and Vietnam: the Case of Automotive Parts Industry Dr. Kriengkrai Techakanont, Associate Professor, Thammasat University, Thailand 10:10-10:40 Photo Session followed by Coffee Break 10:40-11:30 The Impact of FTA Utilization and Firm s Performance in East Dr. Kazunobu Hayakawa, Research Fellow, BRC-JETRO Bangkok Mr. Kohei Shiino (Deputy Managing Director, JETRO Singapore) 11:30-11:50 Question and Answer 1

4 ERIA HANOI SEMINAR AND WORKSHOP :50-12:00 Interim Closing Remarks Prof. Yasuhiro Yamada, President, BRC-JETRO Bangkok 12:00-13:10 Lunch at El Patio at Ground Floor Afternoon Session (13:10-17:20) Session: Closed Working Session at Function Room 4, 6 at 2nd Floor The topics for the Working Group and Group Moderators (1) Role of industrial clusters and SME Linkages in firms upgrading: international experiences and challenges for Viet Nam Dr. Sothea Oum, Economist, ERIA Dr. Nguyen Dinh Chuc, Deputy Director, Dept. of Investment Policies, CIEM (2) Potential Industry in Vietnam in More Integrated East Asia Ms. Mai Fujita, Deputy Director, Area Studies Dept., IDE-JETRO Ms. Nguyen Thi Xuan Thuy, Director, Industrial Strategy and Integration Policy Division (ISIP), Institute for Industrial Policy and Strategy (IPS) * Each working sessions will be around 20 participants composed of government officers, researchers and etc. Each participant is requested to make presentation according to the assignment given by group moderators of the working sessions. 2

5 ERIA HANOI SEMINAR AND WORKSHOP 2012 Time Schedule of the Working Session 13:10-13:30 Registration in front of Function Rooms at 2 nd Floor 13:30-14:10 Lecture and Guidance by the Moderators (resource persons) in each Working Group 14:10-14:30 Question and Answer 14:30-16:00 Discussion on the topics in each sub-working Group* 16:00-16:20 Coffee Break 16:20-16:40 Presentation (1) in Working Group 16:40-17:00 Presentation (2) in Working Group 17:00-17:20 Evaluation and Conclusion by the Moderators in each Working Group Awarding of the Certificate * The group will be divided into 2 sub-working groups (around 10 participants) 17:30-18:40 Meeting among Dr. Vo Tri Thanh, moderators, and secretariat at the Board Room in the Executive Lounge at 19:00 Registration at Golden Lotus (inside OASIS SPA) at 3rd Floor 19:30-21:30 Dinner Reception at Golden Lotus at 3rd Floor * Invitation Only 3

6 SUMMARY OF THE SEMINAR

7 ERIA CAPACITY BUILDING PROGRAM HANOI SEMINAR AND WORKSHOP 2012: Viet Nam s Upgrading in the Process of Economic Integration 20 September 2012 At Melia Hotel, Ha Noi Opening remarks by: Mrs Pham Quynh Mai, Deputy Director General, Multilateral Trade Policy Department, Ministry of Industry and Trade Mrs Pham Quynh Mai thanks ERIA, BRC, and CIEM for their joint organization of the Seminar. The Seminar is the chance for businesses to update information about Viet Nam s international integration and to exchange views between businesses, associations, researchers, and policymakers on market access and expansion, especially in the industrial sector. In the context of globalization and integration, Viet Nam has the policy of proactive integration by joining into the WTO and other free trade areas such as ASEAN+ FTA with China, Korea, Japan, India, and Australia and New Zealand. Viet Nam and ASEAN are in the process of establishing the ASEAN Economic Community by 2015 with five fundamental components: (i) free flow of goods, (ii) free flow of services, (iii) free flow of investment, (iv) free flow of capital, and (v) free flow of skilled labor. Integration, however, does not stop at negotiating and signing agreements or joining global or regional institutions. What s more important is how to utilize the benefits from such agreements or institutions to bring about opportunities for growth for Viet Nam s economy. Such benefits include: (i) integration helps to attract FDI, boost export, create a conducive and transparent investment environment, (ii) integration contributes greatly to institutional reforms, governance, and regulatory reforms, (iii) integration speeds up economic restructuring, emphasizing service and industrial development by way of open market, tariff reduction commitments, (iv) integration has direct impact on local businesses such as the establishment of many high-tech businesses such as telecommunications, electronic parts production, banking services, etc. after WTO accession. Integration also presents challenges such as building a suitable economic mechanism, increasing competition between foreign and domestic businesses. Therefore, the success of international economic integration depends greatly on the competitiveness of businesses; their ability to utilize the benefits of the integration. This is the reason MOIT, ERIA, BRC, and CIEM organize the seminar for businesses to exchange information with concerned agencies.

8 Introductory Speech by Dr. Vo Tri Thanh, Vice President of Central Institute for Economic Management. Dr. Vo Tri Thanh said that the world had been changing fast and Asia is also in this trend. Over the past years, East Asia has become a production base and experienced a rapid development. The regional production networks and intra-trade have increased significantly. By the year 2015, ASEAN Economic Community will be established, facilitating the free flow of goods, services, investment and labour in the region. It is also witnessed the wave of FTA such as ASEAN, ASEAN+1, ASEAN+3 and other new FTAs to be negotiated. All the above activities continue to encourage and promote international and regional integration. For Vietnam, Dr. Thanh viewed that FTAs between ASEAN-China, ASEAN-Japan and others have benefited Vietnam in various ways, including the enhancement of regional connectivity, developing soft and hard infrastructure. The good partnership between Viet Nam and Japan also helps to develop Vietnamese industries. Recently, Vietnam is also participating in TPP negotiations and going to start FTA negotiations with the EU, the Customs Union Russia- Kazakhstan-Belarus and South Korea. These FTAs will certainly bring some affect to Vietnam s economy in general and industry in particular. Especially, Vietnamese Government has set the target to basically become the industrialized economy by Therefore, the question posed is how Vietnam can utilize the above FTAs benefits to achieve its goals. Dr. Thanh hoped that through the intensive and interesting presentations in this seminar, the participants could learn more about production network, labour division in automobile industry, understand about FTAs in Asia, how to utilize FTAs and the relation between FTAs and firms perfornance. He believed that discussions in the afternoon on industrial clusters, SMEs linkages and potential industry in Vietnam would be useful and informative. He also provided updated information that the Committee for Competitiveness and Sustainable Development of Vietnam was just established last week. He also appreciated ERIA s close relations with ASEAN for promoting integration, development and gap narrowing in ASEAN and expressed his support for the award for business to be established by the end of this year by ERIA, ASEAN and Naga (a city of Japan). Presentation on New Division of Labour between Thailand and CLMV countries: the Case of Automotive Parts Industry : Dr. Kriengkrai Techakanont, Associate Professor, Thammasat University of Thailand. The presentation contains the following elements: - Expansion of intra-industry and intra-regional trade: + Due to expansion of international production fragmentation

9 + Japan s FDI played an important role in the region (Thailand received Japan s FDI since 1960 and such FDI has been stimulating Thailand s car industry) + MNEs are the key players in the process of division of labour. - Trade data were shown and analized through some slides: + World trade in automotive industry during : for ASEAN, export increased from 1% to 2,8% while import remained at 4%; for Thailand, its export increased from $1 billion to $24 billion; for ASEAN+3, export increase 20% and import increased 12%. + Trade structure between Thailand and Vietnam during : differrent pattern of growtt. Thailand s structure changed from exporting parts to automobile and parts, imported few vehicles but lots of parts. Vietnam s export of parts has been increasing parts export is important for Vietnam s industry. + Trade balance: Vehicles: Parts: Thailand: export $12 billion, import $1,3 billion big surplus ~ $11 billion Vietnam: export $0.19 billion, import $1.4 billion decifit ~ $1 billion Thailand: export $12 billion, import $17billion deficit ~ $5billion Vietnam: export $1.3 billion, import $6.7 billion deficit $5.4 billion There are different comparative advantage and different patterns in trade structure between Thailand and Vietnam: Thailand specialized in automobile and automotive parts, Vietnam specialized in motorcycles and parts. + Degree of intra-trade between Thailand and ASEAN, ASEAN+3, ASEAN+6 during : In general: trade increased with Vietnam, Indonesia, India, used to have a strong link with Japan, China, Malaysia, Philippines but now trade is reducing. Vehicle: a lot of trade with China, Indonesia, low trade with Vietnam Motorcycle: increasing trade with Vietnam, low trade with other countries Parts: increasing trade with Vietnam, Indonesia, India, Philippines, decreasing trade with Japan, China. - 3 case studies about companies in various fields: automotive industry, harness and gasket, whose strategies are having plants in CLMV countries, especially Vietnam so that labor division is made. - Conclusion and Implications: + So far, Thailand has advantage in automobile and automotive parts, Vietnam has advantage in motocycle parts. + Vision of Thailand is to focus on supporting and developing industries, human capital.

10 + For Vietnam, low labor cost is not sustainable. Vietnam should focus on R&D, green products, etc to make your own competitive advantage. Q1: In your presentation, it is clear that Thailand has advantage in automobile and automotive parts while Vietnam has advantage in motorcyle. In the future, if the demand of motorcycle in Vietnam is saturated and Vietnam government wants to change to policy to manufacture automotive parts, Vietnam may not be able to compete with Thailand. What s the solution to this issue? Q2: The role of government and private sector to stimulate growth? Q3: Thailand has a successful story of automotive development and are clear about certain plan for automotive industry. However, Thailand does not have its own brand for automotive industry and depends a lot on FDI. How Thailand will solve this issue in the future? A (1 answer for 3 questions) : 40 years ago, Thailand pursued the market-protection policy. FDI from Japan was the incentive for the country to follow liberalization trend. Currently, the industrial policy of Thailand is no discriminatory for investment, which means the FDI investors are treated the same as local firms. Therefore, firms make decision to invest and Thailand s firms always try to gain the most benefits from investment. No own car is a weakpoint for TL but important for FDI because TL will not discriminate investors => attract FDI. At the moment, the Government of Thailand is not ready to build their own car brand. Instead, its policy is not to focus on end products but automotive parts, supporting industries, SME and labor supportive programmes Presentation on The impact of FTA utilization and firms Performance in East Asia: Dr. Kazunobu Hayakawa, Research Fellow, BRC-JETRO Bangkok General Overview What s FTA? Free Trade Agreement in Goods Can use FTA preferential tariff rates in trading with FTA members in addition to general tariff rates (e.g. Most-favoured-nation rates) Current Situation of FTAs in East Asia ASEAN + 1 FTA: ASEAN with Japan, Korea, India, China, Australia and New Zealand Bilateral FTAs in East Asia as of 2011: Japan-Viet Nam, Japan-Thailand, Japan-Malaysia, Japan-India, Japan-Brunei, Japan-Philippines, Japan-Sing, Japan-Indonesia, India-Thailand, India-Malaysia, India-Singapore, India- Korea, Korea-Singapore, Singapore-China Notable Differences across FTAs in East Asia

11 Household/laundry-type washing machines (HS845011) Share of Liberalized Products: Number of Tariff-Line Basis Determinants of Liberalized Products in ASEAN+1 FTAs Benefits of FTA Use for Firms Reduction of Tariff Payment (Example) Japanese affiliate in Indonesia (Transport equipment): Reduce tariff payment of one billion USD by using FTA schemes in importing from Thailand, China, Malaysia, and Viet Nam in 2010 Improvement of FTA Users Performance: Evidence from Econometric Analysis for Japanese affiliates in ASEAN FTA Utilization in East Asia Firm-level Issues FTA Utilization in Thai Export (2011, Mil. USD): highest in TAFTA, TIFTA, lowest in AJCEP Mechanisms of Firms FTA Use Benefits from FTA use (reduction of tariff: margin, scale effect) > Cost for FTA use (administrative costs, procurement adjustment costs: ROO effect) Other Elements Duty-drawback System Investment Incentive Schemes Effective Policy for Raising FTA Utilization Scale effect is most quantitatively important: Evidence from Korean imports from ASEAN countries. Twice and three times larger than ROO and Margin effects, respectively. Policy options for scale effect Making products with international competitiveness liberalize in partners Support for small- and medium-sized enterprises (SMEs) Increasing the magnitude of trade values per firm: Buyer-seller matching seminars Reducing costs for FTA use in SMEs: Seminars on the general information on FTAs

12 Scale effect is also qualitatively different. Magnitude of Margin and ROO effects is fixed before FTAs entry into force. Possible to stimulate Scale effect even after the FTA negotiation Supporting SMEs FTA Use Region-wide Issues Exporting SMEs!: Evidence from Japanese affiliates in ASEAN FTA Use in Importing No significant effect of firm size Importers just need to submit certificates of origin provided by exporters The past experience in FTA use in importing does not encourage to use FTA schemes in exporting FTA Use in Exporting 1% larger exporters have around 10% higher probability of FTA use 1% larger firms have around 7% higher probability of just exporting So much work for FTA use in exporting Input lists, production flow chart, production instruction, invoices, contract document Tariff equivalent = Around 4% (World Estimates) Firms with the past experience in FTA use in exporting have around 42% higher probability of using FTA schemes in exporting to other countries Around 80% higher export probability in the case of the past export experience Two Concerns: Many Different FTA Schemes Expanding Gap between SMEs and Large Enterprises The larger firms use a larger number of FTA schemes. Japanese affiliates: Firms with 10% larger size use around 3% larger number of FTA schemes. Firms FTA use increases their exports. Spaghetti/Noodle bowl phenomena Raising the local input share for the use of Multiple FTA schemes

13 Appendix Local input meets ROOs in any FTAs. Resulting in offsetting some amount of FTA benefits due to the change of procurement sources from its original (optimal) sources Japanese affiliates using more than six FTA schemes in Asia-Pacific region have 20%-30% higher share of local inputs than the other affiliates. Region-wide FTAs with Diagonal Cumulation Common ROOs May not need to change inputs according to FTA schemes (i.e. customers) Easier use of FTA schemes in exporting to multiple countries even for SMEs Diagonal cumulation Allowing accumulation of inputs from the other members in complying with ROOs May not need to raise local input share Around 4% additional trade creation effect Estimates from the case of exports from Thailand to Japan under AJCEP - 1% larger exporters have around 10% higher probability of FTA use? - Rules of origin (ROOs) - ROOs in AJCEP and JTEPA - Example of AJCEP Use in 2010 Presentation on The rules of origin maximizing benefits from FTAs : Mr. Kohei Shiino, Deputy Managing Director, JETRO Singapore The presentation focuses on a practical matter: how to minimize costs to meet the ROO requirements or cost for FTA use, which contains the following elements: - General introduction about FTAs: + Brief about trade partners of Vietnam and FTAs that Vietnam has signed, including ASEAN, ASEAN-Japan, ASEAN-China, ASEAN-South Korea, ASEAN-India, ASEAN-Australia-New Zealand, Vietnam-Chile, Vietnam-Japan. + In the region, there are about 30 FTAs in effect. Since 2008, an increasing number of FTA entered into force. + Trade between FTAs parties reached 55.4% of the total intra-regional trade

14 + Tariff commitments under some AFTA, ACFTA, AIFTA as an example - Cost tructure of ROO + Minimum requirement: value exemption > cost to meet ROO + Cost incurred from ROO = fees to the third parties + cost for lead time + cost of commercial flow - Criteria to determine origins, advantages and disadvantages for each criterion: + Dual Criterion + Regional Value Added content (VA) + Change in Tariff classification (CTC) + Co-equal (CTC or VA) - Introduction of De minimis. Some FTA lacks the De minimis clause - Procedures to certify origin of goods, advantages and disadvantages for each item: + Third-party certification + Approved exporter system + Self-certification - Distinguish between re-invoicing and back-to-back certificate - Using cummulation under Regional Comprehensive Economic Partnership (RCEP) may contribute to increase export, taking clothing export from Vietnam as an example. RCEP will contribute to streamlining and harmonizing rules, including ROO which facilitate FTA utilization. - Other issues: + Description of FOB price on C/O + Different interpretation of HS code between exporting countries and importing countries + Different interpretation of HS code by officer + Other issues on customs procedures - Conclusion: Trade costs can be reduced by applying co-equal criterion, the approved exporter system and acceptance of intermediary trade. Description of FOB, advance ruling system, etc may also be considered. Q1: The presentation mentioned RCEP. Under such framework, China s competitiveness can be the ostacle for CLMV countries to increase export to other parties. What s your view on this issue?

15 A: It can t be denied that China is a big competitor for CLMV countries. However, the situation has been gradually changing. For instance, China s share in Japan s import of clothing is reducing from 85% to 80% and less. The labor cost in China is also increasing. In long run, under RCEP framework, CLMV may have chance to improve their competitivenss against China s products. Dr. Vo Tri Thanh also provided explanation for this issue. He said one of the reasons why products of CLMV in particular and ASEAN in general are not competitive is that the rate of utilizing preferential C/O is not high. Taking Vietnam as an example, he also said that among the margin, scale and ROO effect, which had been mentioned in the presentation, the ROO effect is not large while scale and margin effect are large. Q2: the presentor was asked to explain more about the statistics on petrochemical he made in his slide. A: The statistics showed that Vietnam s competitiveness in petrochemical industry had been decreasing. Q3: In the previous presentation, it is clear that Thailand s automotive industry is developed. Analyzing advantages and disadvantages of Vietnam, is there opportunity for Vietnam to develop automotive part industry and export to other countries under FTAs? A: There s has been a wage of relocating the automotive plants to ASEAN countries by Japan. The presentors thought Vietnam may have the chance to develop automotive part industry since Vietnam has some advantages, including low labor cost. Q4: Could you please explain the criteria to determine Value Added and De Minimis. A: The De minimis clause only apply to CTC while Value Added criteria prequire a certain content of ASEAN-originating components. When applying CTC, if your product does not meet 40% required of RVC, you still can enjoy preferential treatment if the HS classification is changed. Interim Closing Remarks: Professor Yasuhiro Yamada, BRC-JETRO Bangkok Pro. Yasuhiro Yamada hopes that through the discussion at the Seminar, participants could get new findings for work. The seminar focuses on the importance of supply chain and economic integration. He stresses that economic integration is an on-going process; it does not stop at only AEC but also TPP, RCEP etc. Joining supply chains and production networks in region is important to Viet Nam also and FTA utilization is very important. A country s participation in regional economic integration makes it easier for economies, industries, and manufacturers to make use of cheap raw materials. Therefore, businesses have to produce more value added products and export the products to more open markets in the process ofinternational and regional economic integration. He mentions the presentation on Thailand auto industry and asked why Thai auto industry is developed? The answer is because of the supporting industry.

16 In order to increase value in those industries, supporting industries are needed. Why are other industriesin Thailand such as shoes industry and supporting industry developed? He thinks two factors are important, i.e, market mechanism and economy of scale. Having worked in Viet Nam as ManagingDirector of Jetro in 2003, Prof. Yamada observed that Viet Nam had discussed a lot about developing supporting industries to attract foreign investment. However, 10 years later he still sees Viet Nam discussing the same topic. So he hopes that through the discussion in the Seminar and through acknowledging the importance of supply chains, Viet Nam can develop supporting industries. He informs that in the afternoon, the participants will be divided into 2 groups for discussion of two important topics: SME linkage and potential industry in Viet Nam in more integrated East Asia. These are important topics for Viet Nam. Prof. Yamada hopes the participants continue discussion in afternoon using the knowledge and information in the morning session.he believes that the findings will be useful for policy makers and businesses to realize the objective of industrialization by 2020 and developed like Thailand. He thinks that this is a challenging issue for Viet Nam, but he believes that Viet Nam can do it.

17 MATERIAL FOR THE SEMINAR

18 12/6/2012 NEW DIVISION OF LABOUR BETWEEN THAILAND AND CLMV COUNTRIES: THE CASE OF AUTOMOTIVE PARTS INDUSTRY Kriengkrai Techakanont Faculty of Economics, Thammasat University 1 In this paper 1) Examining trade integration of Thailand s autoparts with the region. 2) Analyzing the pattern of intra-industry industry trade in automotive industry and focuses on Thailand and Vietnam. (utilise data from the UN Comtrade database, based on Revision 3 of the Standard International Trade Classification (SITV Rev.3) 3) Offer 3 case studies about the production and division of labour in the automotive industry 4) Conclusion and policy implication 2 1

19 12/6/2012 Expansion of intra-industry industry trade In the past two decades, intra-regional regional trade among developing countries has been growing g rapidly due to the expansion of international production fragmentation, i.e., cross-border dispersion of production of parts and components within vertically integrated production chains. Japanese FDI in the region has long played an important role in the agglomeration or industrial clusters in several countries. MNEs are lead firms and in this process of division of labour, they chose to locate their manufacturing activities according to comparative advantage. 3 World Trade in Automotive Industry ( ) Exports ($ billion) Imports ($ billion) Country/region GDP 2002 share ASEAN Thailand Indonesia Malaysia Philippines Vietnam ASEAN Japan China Rep. of Korea ASEAN $ billion , , , , Country/region Exports (%) Imports (%) ASEAN Thailand Export share Indonesia Malaysia Philippines Vietnam ASEAN Japan China Rep. of Korea ASEAN World $ billion , , , ,

20 12/6/2012 Trade Structure in Automotive Industry of Thailand and Vietnam ( ) Export of Thailand's Automotive Industry Import of Thailand's Automotive Industry Share (%) Value ($ billion) Share (%) Value ($ billion) Vehicles (%) Parts (%) Automotive Industry ($ billion) Vehicles (%) Parts (%) Automotive Industry ($ billion) Export of Vietnam's Automotive Industry Import of Vietnam's Automotive Industry Share (%) Value ($ billion) Share (%) Value ($ billion) Vehicles (%) Parts (%) Automotive Industry ($ billion) Vehicles (%) Parts (%) Automotive Industry ($ billion)5 Value of Thailand and Vietnam Automotive Products Trade ( ) Exports Exports: Automotive product ($ billion) ASEAN Thailand Vietnam ASEAN+3 Japan China Rep. of Korea ASEAN+6 World ASEAN Thailand Vietnam World Imports Imports: Automotive products [vehicles] [$ billion] ASEAN Thailand Vietnam ASEAN+3 Japan China Rep. of Korea ASEAN+6 World ASEAN Thailand Vietnam World

21 12/6/2012 Value of Thailand and Vietnam Automotive Products Trade ( ) Exports Exports: Automotive parts [$ billion] ASEAN Thailand Vietnam ASEAN+3 Japan China Rep. of Korea ASEAN+6 World ASEAN Thailand Vietnam World , Imports Imports: Automotive parts [$ billion] ASEAN Thailand Vietnam ASEAN+3 Japan China Rep. of Korea ASEAN+6 World ASEAN Thailand Vietnam World , Thailand and Vietnam Different pattern in trade structure in the automotive industry (both products and parts) of Vietnam and Thailand. We found evidence of intra-industry industry trade in ASEAN and the link with ASEAN+3. The trade pattern suggests each country s comparative advantage in different products. Thailand is specialized in automobile and automotive parts. Vietnam in motorcycles and parts. 8 4

22 12/6/2012 Intra-industry trade Thailand and ASEAN + 6 Automotive Industry Vehicles, Motorcycles, and auto parts (2011) India Indonesia Vietnam Japan China Philippines Malaysia Australia (2002) Intra-industry trade Thailand and ASEAN + 6 Automobile Industry Vehicles (2011) China Indonesia ASEAN AN Malaysia Japan Philippines 10.00India 0.00 (2002) Australia Vietnam

23 12/6/2012 Intra-industry trade Thailand and ASEAN + 6 Motorcycles (2011) Vietnam Indonesia 5.00 Malaysia Japan (2002) Intra-industry trade Thailand and ASEAN + 6 Automotive parts Industry (2011) Philippines India Indonesia China Japan Vietnam Malaysia Australia (2002)

24 12/6/2012 Thailand and Vietnam Different pattern in trade structure in the automotive industry (both products and parts) of Vietnam and Thailand. We found evidence of intra-industry industry trade in ASEAN and the link with ASEAN+3. The trade pattern suggests each country s comparative advantage in different products. Thailand is specialized in automobile and automotive parts. Vietnam in motorcycles and parts. 13 Case studies (Supplier A) Supplier A established in 1977, as a small enterprise. Its main business lines were plastic and metal products for motorcycle parts, auto parts, and electronics and electrical parts. It acquired the necessary technology through technical assistance agreements or by forming new businesses through joint ventures with Japanese firms that specialized in particular products. The company has grown and gone on to become one of the biggest Thai auto parts groups, the T-group business. In 2011, the group had revenue over 50 billion baht, 75% came from Thailand operation and 25% from overseas operations. 14 7

25 12/6/2012 Case studies (Supplier A) In 2009, this supplier spent more than 10 billion baht to take over a world-class Japanese independent supplier of automotive press tooling to the world s car industry. Since 2007, Supplier A had expanded to other countries, such as India, Malaysia, Indonesia, China and Vietnam. It established a motorcycle parts (wheel) in Indonesia in 2007 and has a new stamping plant to serve Nissan's new Van production line in In India, there is one automotive part factory and six motorcycle parts factories. In Malaysia, there is one factory producing motorcycle seats and five metal stamping factories. In China, Supplier A has one auto part factory and currently has a plan to establish a new one to serve growing demand. 15 Case studies (Supplier A) For CLMV countries, Supplier A anticipated the potential of Vietnam, especially the big market for motorcycle. It established the first factory in Vietnam (Noi Bai Industrial Park) in 2007 to supply motorcycle parts to local producers. The products produced are the same as in Thailand. With its own R&D unit, all engineering tasks have been done in Thailand and operations were carried out in Vietnam. Additional investment (about one billion baht) will be made to expand its operation during 2010 and

26 12/6/2012 Case studies (Supplier B) Supplier B is a Japanese wire harness producer. It invested extensively in Asia in order to supply parts to customers in each location. This firm invested in Thailand in 1960s and later on expanded business to have four factories and one office in Thailand. Its main products are wire harness for automotives. It supplies to almost all carmakers in Thailand. In Vietnam, there are two plants in Binh Duong and Haiphong. 17 Case studies (Supplier B) Sales structure reveals that a majority was for export to two main customers, i.e., Toyota Japan (48.3%) and Nissan (47.9%). Only 4% is supplying to local assemblers. Investment strategy is to utilize Vietnam's comparative advantage. Vietnam plants were chosen to be key export bases for wire harnesses by many Japanese firms. Most of them import materials from other plants, especially from Japan, Thailand, and China, and do assembly processes in Vietnam. 18 9

27 12/6/2012 Case studies (Supplier B) Wire harnesses manufacturing is labour- intensive and does not require 'strict just-in- time' on the production line of customers. As regards potential locations in other CLMV countries, Cambodia may be appropriate because of cheap labour costs and its location between Vietnam and Thailand. Laos still has a limitation in manpower and infrastructure (outside Vientiane). 19 Case studies (Supplier C) Supplier C is a Japanese firm and its main products are gasket, FFA joining sheet and industrial packing. It has many plants overseas, including China, India, Indonesia, Malaysia, Thailand, Pakistan, Brazil and the United States. In Thailand, the factory is located in Songkhla and its main customers are Thai Honda Manufacturing, Thai Suzuki Motors, Thai Yamaha Motors, and Honda Automobile

28 12/6/2012 Case studies (Supplier C) The factory in Vietnam has the equity investment from Japan (Headquarter) 50% and Thai (Company in Thailand) 50%. It started t production in They purchase raw material from Thailand, India and Japan. Each location will supply to domestic producers, indicating horizontal division of labour. Main customers are Honda (40%), Yamaha (40%), Suzuki (1.4%), VMEP (5%) and export to customers in China. the plant in Thailand is specialized in both motorcycle and automotive ti parts, while Vietnam is in motorcycle parts. 21 Conclusion and Implications Intra-industry trade in automotive industry tended to increase in past decades, shown by the expansion of trade in parts and components. Division of labour in automotive is determined by the regional strategy of MNEs. Thailand is a production and export base in automobiles, which uses locally produced auto parts. Parts were exported in the form of CKD to other plants in the global production network of assemblers. They go to both intra- and extra-asean. For Vietnam, the motorcycle industry seems to have high potential for future growth

29 12/6/2012 Conclusion and Implications New division of labour in automotive parts industry between Thailand and CLMV is currently carried out in Vietnam. In the future, the division of labour may expand to Cambodia and Laos. Possible products would be labour-intensive and mature technology (or equipment). For CLMV, as regards the possibility of participating in the global production network, the countries need to specify their key industries to promote, depending on their competitive advantage, the readiness of infrastructure, human capital and clear industrial policies. 23 Next Step of Development Source: NESDB,

30 12/6/

31 2012/12/6 FTAs in East Asia Kazunobu HAYAKAWA Bangkok Research Center, IDE JETRO, Thailand 1 Contents General Overview What s FTA? CurrentSituation of FTAs in East Asia Notable Differences across FTAs in East Asia Benefits of FTA Use for Firms FTA Utilization in East Asia Firm level Issues Mechanisms of Firms FTA Use Effective Policy for Raising FTA Utilization Supporting SMEs FTA Use Region wide Issues Two Concerns: Many Different FTA Schemes Region wide FTAs with Diagonal Cumulation Appendix 2 1

32 2012/12/6 General loverview What s FTA? Current Situation of FTAs in East Asia Notable Differences across FTAs in East Asia Benefits of FTA Use for Firms FTA Utilization in East Asia 3 What s FTA? Free Trade Agreement in Goods Can use FTA preferential tariff rates in trading with FTA members in addition to general tariff rates (e.g. Most favoured nation rates) Bilateral Tariff Reduction in the World World Trade Organization Membership 2.9% FTA under Enabling Clause 3.8% FTA under GATT Article XXIV 3.4% 4 2

33 2012/12/6 Completing ASEAN plus One 2007/ / / / /01 5 Bilateral FTAs in East Asia as of

34 2012/12/6 Household/laundry type washing machines (HS845011) Importer MFN Exporter Thailand 30 ASEAN JTEPA AJCEP ACFTA AKFTA AIFTA Malaysia 25 ASEAN JMEPA AJCEP ACFTA AKFTA AIFTA Source: Calculation by Mr. Seiya Sukegawa (JETRO Bangkok) 7 Share of Liberalized Products: Number of Tariff Line Basis AKFTA ACFTA AIFTA AJCEP Singapore Brunei Malaysia Thailand Indonesia Philippines Viet Nam 84.3 n.a Cambodia Laos, PDR Myanmar Korea 92.2 China 94.6 India 74.3 Japan 86.3 Source: ERIA FTA Stocktaking Study Team 8 4

35 2012/12/6 Determinants of Liberalized Products in ASEAN+1 FTAs International Competitiveness MFN Tariff Rates Cambodia 17.5% 0.2% Indonesia 1.9% 2.3% Laos 0% 1.0% Malaysia 2.7% 1.0% Myanmar 2.0% 0.9% Philippines 2.4% 0.9% Thailand 0% 0.3% Viet Nam 25.5% 0.4% All 5.9% 0.5% Source: Author s estimation based on the data compiled by ERIA FTA Stocktaking Study Team Notes: This table reports that, for example, in Indonesia, products with 1 percent higher MFN tariff rates have 2.3 percent higher probability of being liberalized in ASEAN+1 FTAs. International Competitiveness is measured by Bilateral Revealed Comparative Advantage Index, which is defined for exporting product p from countries i to j as [(i s exports of product p to j) (j s exports of product p to i)] / [(i s exports of product p to j)+(j s exports of product p to i)]. 9 Benefits of FTA Use Reduction of Tariff Payment (Example) Japanese affiliate in Indonesia (Transport equipment): Reduce tariff payment of one billion USD by using FTA schemes in importing from Thailand, China, Malaysia, and Viet Nam in 2010 Improvement of FTA Users Performance: Evidence from Econometric Analysis for Japanese affiliates in ASEAN FTA Users Exports Around 3% Increase! 10 5

36 2012/12/6 FTA Utilization in Thai Export (2011, Mil. USD) Total Exports Under Products with preferential tariff preferential rates schemes Utilization Rates Total Effective ( A ) ( B ) ( C ) (C/A) (C/B) AFTA 53,769 29,248 15,182 28% 52% ACFTA 27,132 11,106 9,361 35% 84% TIFTA 5,132 1, % 75% TAFTA 7,922 5,545 5,036 64% 91% JTEPA 24,240 8,484 6,039 25% 71% AJCEP 24,240 1, % 4% AKFTA 4,531 3,762 2,215 49% 59% AIFTA 5,132 4,388 1,224 24% 28% AANZFTA 8, % 25% Sources: Thai Ministry of Commerce; Thai Customs 11 Firm level lissues Mechanisms of Firms FTA Use Effective Policy for Raising FTA Utilization Supporting SMEs FTA Use 12 6

37 2012/12/6 Mechanism of Firms FTA Use Benefits from FTA Use Reduction of Tariff Payment = (TMFN Exports) (TFTA Exports) = (TMFN TFTA ) Exports Costs for FTA Use Administrative Costs Procurement adjustment Costs Tariff Margin Firm Size Margin Scale ROO Effect Effect Effect Other Elements Duty drawback System Investment Incentive Schemes 13 Raise FTA Utilization Rates Effectively Scale effect is most quantitatively important: Evidence from Korean imports from ASEAN countries. Twice and three times larger than ROO and Margin effects, respectively. Policy options for scale effect Making products with international competitiveness liberalize in partners Support for small and medium sized enterprises (SMEs) Increasing the magnitude of trade values per firm: Buyer seller matching seminars Reducing costs for FTA use in SMEs: Seminars on the general information on FTAs Scale effect is also qualitatively different. Magnitude of Margin and ROO effects is fixed before FTAs entry into force. Possible to stimulate Scale effect even after the FTA negotiation 14 7

38 2012/12/6 Support for SMEs: Exporting or Importing? Exporting SMEs!: Evidence from Japanese affiliates in ASEAN FTA Use in Importing Nosignificant effect of firm size Importers just need to submit certificates of origin provided by exporters The past experience in FTA use in importing does not encourage to use FTA schemes in exporting FTA Use in Exporting 1% larger exporters have around 10% higher probability of FTA use 1% larger firms have around 7% higher probability of just exporting So much work for FTA use in exporting Input tlists, production flow chart, production instruction, ti invoices, i contract t document Tariff equivalent = Around 4% (World Estimates) Firms with the past experience in FTA use in exporting have around 42% higher probability of using FTA schemes in exporting to other countries Around 80% higher export probability in the case of the past export experience 15 Region wide id Issues Two Concerns: Many Different FTA Schemes Region-wide FTAs with Diagonal Cumulation 16 8

39 2012/12/6 Two Concerns: Many Different FTA Schemes Expanding Gap between SMEs and Large Enterprises The larger firms use a larger number of FTA schemes. Japanese affiliates: Firms with 10% larger size use around 3% larger number of FTA schemes. Firms FTA use increases their exports. Spaghetti/Noodle bowl phenomena Raising the local input share for the use of Multiple FTA schemes Local input meets ROOs in any FTAs. Resulting in offsetting some amount of FTA benefits due to the change of procurement sources from its original (optimal) sources Japanese affiliates using more than six FTA schemes in Asia Pacific region have 20% 30% higher share of local inputs than the other affiliates. 17 Region wide FTAs with Diagonal Cumulation Common ROOs May not need to change inputs according to FTA schemes (i.e. customers) Easier use of FTA schemes in exporting to multiple countries even for SMEs Diagonal cumulation Allowing accumulation of inputs from the other members in complying with ROOs May not need to raise local input share Around 4% additional trade creation effect Estimates from the case of exports from Thailand to Japan under AJCEP 18 9

40 2012/12/6 Appendix 1% larger exporters have around 10% higher probability of FTA use? Rules of origin (ROOs) Common ROOs ROOs in AJCEP and JTEPA Example of AJCEP Use in % larger exporters have around 10% higher probability of FTA use? 100 Exporters with 100 Workers (Example) 10 exporters are FTA users. 100 Exporters with 101 Workers 11 exporters are FTA users

41 2012/12/6 Rules of Origin (ROOs): Roundabout Exports MFN: 10% MFN: 10% FTA: 0% MFN: 10% FTA: 0% 21 Rules of Origin Change in Tariff Classification (CTC rule) Change in Chapter (i.e. HS 2 digit level) Change in Heading (i.e. HS 4 digit level) Change in Subheading (i.e. HS 6 digit level) Real Value added Content (RVC rule) 30% Rule, 40% Rule, 50% Rule, etc. Specific Manufacturing or Processing Operations Criterion 22 11

42 2012/12/6 Rules of Origin (ROOs): Change in Chapter (2) Rules of Origin (ROOs): RVC (40%) 40 USD 40 USD 100 USD 20 USD Value added = ( )/100 = 20% 24 12

43 2012/12/6 Multilateral FTA and Cumulation Rules Cumulation Rules Bilateral Cumulation Diagonal Cumulation Full Cumulation 25 Bilateral Cumulation: RVC (40) 40 USD 40 USD 100 USD 20 USD Value added = ( )/100 = 20% 26 13

44 2012/12/6 Diagonal Cumulation: RVC (40) Roll up & Japan origin 40 USD 40 USD 100 USD 60 USD Value added = ( )/100 = 60% 27 Diagonal Cumulation: Change in Chapter (2), Heading (4), or Subheading (6)

45 2012/12/6 Common ROOs AKFTA: CTC(2) ACFTA: CTH(4) AJCEP: CTSH(6) HS XXZZZZ (Finished Products) HS XXXXXX (Material) 4 digit level change! 29 Region wide FTA: CTH(4) or CTSH(6) HS XXZZZZ (Finished Products) HS XXXXXX (Material) 4 digit level change! 30 15

46 2012/12/6 Region wide FTA: CTC(2) HS XXZZZZ (Finished Products) HS XXXXXX (Material) 4 digit level change! 31 ROOs in AJCEP and JTEPA (HS digit) AJCEP ALL CC CC CC CH CH CH CH CH CH CS CS CS RVC WO /RVC &TECH /RVC /TECH /RVC &RVC &TECH /RVC /RVC JTEPA /TECH /TECH CC CC/RVC CC&TECH CH CH/RVC CH/TECH CH/RVC/TECH CH&RVC 1 1 CH&TECH CS CS/RVC CS/RVC/TECH RVC 3 3 WO ALL ,199 Source: Legal texts of AJCEP and JTEPA 32 16

47 2012/12/6 Example of AJCEP Use in 2010 HS5407 Woven fabrics of synthetic filament yarn Laos Cambodia $49,911 Myanmar $3,028 Thailand Viet Nam $20,606 ROO: CTH (AFTA: RVC40%) $6,390,259 Synthetic fiber $301,889 yarn, etc. $8,404 Japan Indonesia 33 17

48 The Rules of Origin Maximizing Benefits from FTAs September Kohei Shiino JETRO Singapore 1 Content Current FTA network in Asia Pacific Region What is the cost-efficient rules of origin? - Current rules and issues faced by FTA users <Reference> Comparative advantages by industry in major Asian countries 2 1

49 Current FTA network in Asia Pacific Region 3 Trade partners of Vietnam and status of FTAs Export Import (Unit:US$million %) Countries/regions Value Share FTA Countries/regions Value Share FTA 1 USA 14, under negotiation(tpp) 1 China 20, ASEAN-China 2 EU27 11, under negotiation 2 South Korea 9, ASEAN-South Korea 3 China 7, ASEAN-China 3 Japan 9, AJCEP, JVEPA 4 Japan 7, AJCEP, JVEPA 4 EU27 6, under negotiation 5 South Korea 3, ASEAN-South Korea 5 Thailand 5, AFTA 6 Australia 2, ASEAN-Australia-NZ 6 Singapore 4, AFTA 7 Switzerland 2, USA 3, under negotiation(tpp) 8 Singapore 2, AFTA 8 Malaysia 3, AFTA 9 Malaysia 2, AFTA 9 Indonesia 1, AFTA 10 Philippines 1, AFTA 10 India 1, ASEAN-India 11 Cambodia 1, AFTA 11 Australia 1, ASEAN-Australia-NZ 12 Hong Kong 1, negotiation under ACFTA 12 Switzerland 1, Indonesia 1, AFTA 13 Russia Thailand 1, AFTA 14 Hong Kong India ASEAN-India 15 Argentina Russia Philippines AFTA 17 Canada Saudi Arabia Turkey Brazil Chile Signed - NZ NZ ASEAN-Australia-NZ - Chile Signed - ASEAN 10, AFTA - ASEAN 16, AFTA World 72, World 84, FTA coverage ratio 32, FTA coverage ratio 58, Note: The FTA coverage ratiois the ratio of trade with counrties/regions with which FTAs are in force to the total trade. Source : Trade statistics of Vietnam 4 Copyright (C) 2012 JETRO. All rights reserved. 2

50 Major FTAs in effect in the Asia-Pacific region About 30 FTAs effectuated in the region. An increasing number of FTAs have successively gone into effect since The ASEAN+1 FTA networks are almost complete and ASEAN emerged as the hub of Asia s FTA network. Major FTAs in effect in the Asia-Pacific region FTA FTA Date in effect/ Date in effect/ Status Status Australia-New Zealand January, 1983 Japan-Thailand November, 2007 Laos-Thailand June, 1991 Japan-Indonesia July, 2008 AFTA January, 1992 Japan-Brunei July, 2008 Singapore-New Zealand January, 2001 China-New Zealand October, 2008 Japan-Singapore November, 2002 ASEAN-Japan December, 2008 Singapore-Australia July, 2003 Japan-Philippines December, 2008 ASEAN-China January, 2004 Singapore-China January, 2009 China-HongKong January, 2004 Japan-Vietnam October, 2009 Thailand-India (83items) September, 2004 ASEAN-Australia-New Zealand January, 2010 Thailand-Australia January, 2005 ASEAN-India January, 2010 Thailand-New Zealand July, 2005 South Korea-India January, 2010 Singapore-India August, 2005 Malaysia-New Zealand August, 2010 Singapore-South Korea March, 2006 Hong Kong-NZ January, 2011 Trans-Pacific Strategic Economic Partnership Agreement (P4) May, 2006 Malaysia-India July, 2011 Japan-Malaysia July, 2006 Japan-India August, 2011 ASEAN-South Korea June, 2007 Malaysia-Australia May 2012 (Signed) Note : P4 includes Singapore, Brunei, NZ and Chile. Source:Relevant governments Copyright (C) 2012 JETRO. All rights reserved. Status of AFTA and ASEAN+1 FTAs FTA Status/Tariff reduction and elimination schedule ASEAN(AFTA) China South Korea ASEAN Japan Lowering of tariffs began from January Average tariff rates among the original ASEAN members (Thailand, Malaysia, Indonesia, The Philippines, Brunei and Singapore) have dropped from 12.8% in 1993 to 0.9% in Starting January 2010, the original ASEAN members eliminated tariffs on 99% of items. CLMV(Cambodia, Laos, Myanmar, Vietnam) will eliminate tariffs on almost all items from Early harvest scheme covering agricultural and fisheries product(hs01-08) started from January Tariff reduction has began on non-agricultural/fisheries since July China and the original ASEAN members eliminated tariffs on about 90% of items. Revised OCP become effective in January All of signatories have ratified it as of now. CLMV will eliminate tariffs on nearly all items from South Korea and the original ASEAN member states eliminated tariffs on about 90% of items from Vietnam will eliminate tariffs on most items from Cambodia, Laos and Myanmar will eliminate tariffs on nearly all iitems from In force for all signatories except for Indonesia which is under ratification process. Japan has separate bilateral FTAs in effect with Singapore, Malaysia, Thailand, Indonesia, Brunei, the Philippines and Vietnam. In force for all signatories. Upon enterting into force, Australia and New Zealand eliminated tariffs Australia on 96.4% of items for Australia and 84.7% of items for New Zealand. The NZ original ASEAN member states will eliminate tariffs on approximately 90% of items beginning in 2013 and CLMV will eliminate on approximately 90% of items from In force for all signatories. India and the original ASEAN member states excluding the Philippines will eliminate tariffs on items listed on normal track 1 from the end of 2013 and on items listed on normal track 2 from the end of Tariffs India between India and the Philippines will be eliminated on normal track 1 items from the end of 2018, and items listed on normal track 2 from the end of CLMV will eliminate tariffs on normal track 1 items from the end of 2018 and on normal track2 items from the end of Source: Relevant govements 5 Trade between FTA signatories of intra-regional trade Trade between FTA signatories in effect reached 55.4% of the total intra-regional trade. Exporting country Importing country Japan China, P.R.: South Thailan Indone Malaysi Philippi Singap Vietna Cambo Brunei Mainlan Korea d sia a nes ore m dia d Laos Myanm ar India Austral ia New Zealan d (Unit:%) Export with Export with the region/ countries Intra with FTAs in regional effect/ trade Intra regional d Japan China, P.R.: Mainland South Korea Thailand Indonesia Malaysia Philippines Singapore Brunei Vietnam Cambodia Laos Myanmar India Australia New Zealand Import with the region/ Intra regional trade Import with countries with FTAs in effect/ I i l d Note: (1) The orange-colored shading indicates trade between countries with FTAs in effect, the yellow-colored shading indicates trade between countries with FTAs that are signed (not in effect), the gradation shading indicates trade between countries with FTAs under negotiation. (2) The share represents each country's trade as a share of total intraregional trade. (3) Includes the trade value between India and Thailand, which only covers items under the Early Harvest Scheme (82 items). (4) The Singapore-New Zealand FTA is part of the Trans-Pacific FTA (Brunei, New Zealand, Chile and Singapore). 6 Source: Respective FTAs, documents of the governments of countries involved, "Direction of Trade"(IMF) Copyright (C) 2012 JETRO. All rights reserved. 3

51 CLMV will eliminate tariffs on almost all items from 2015 ASEAN6 eliminated tariffs on almost all items in 2010 under AFTA and about 90% of total tariff lines under ASEAN-China FTA. CLMV will eliminate tariffs on almost all items in 2015 under AFTA as well as ASEAN-China FTA. Schedule for elimination of tariffs under AFTA the original ASEAN member countries Vietnam Eliminate tariffs on all products, except for those phased in from the SL and HSL Reduce tariffs on Sensitive List (SL) products to 0-5%. Eliminate import duties on 80% of all IL products except for those phased in from SL and HSL Reduce the tariffs on Sugar to 0-5%. Eliminate import duties on products in the PIS. Reduce tariffs on Sensitive List (SL) products to 0-5%. Eliminate tariffs on all products, except for those phased in from the SL and HSL Laos, Eliminate import Eliminate import duties on Eliminate tariffs on all Myanmar duties on 60% of all IL 80% of all IL products except products, except for those products except for for those phased in from SL phased in from the SL and those phased in from and HSL HSL SL and HSL. Complete the tariff Eliminate import duties on Reduce tariffs on Sensitive reduction schedule to products in the PIS. List (SL) products to 0-5%. 0-5% for all IL products. Cambodia Eliminate import Eliminate import duties on Eliminate Reduce duties on 60% of all IL products in the PIS. tariffs on all tariffs on products except for products, Sensitive List those phased in from except for (SL) products SL and HSL. Complete the tariff those phased to 0-5%. reduction schedule to in from the SL 0-5% for all IL and HSL products. Note: SL=Sensitive list HSL=Highly sensitive list. Source:"Strategic Schedule for ASEAN Economic Community"(ASEAN) Copyright (C) 2012 JETRO. All rights reserved. Schedule for Tariffs elimination under ACFTA Tariff Elimination Schedule Early China, ASEAN6 Eliminate tariffs since January harvest (HS01-08) Vietnam Eliminate tariffs since January Normal Track(NT) Sensitive Track(ST) Cambodia, Laos, Myanmar Eliminate tariffs since January China, ASEAN6 Eliminate tariffs since January 2010 except for some items scheduled to eliminate from January Vietnam Eliminate tariffs since January 2015 except for some items scheduled to eliminate from January Cambodia, Laos, Myanmar China, ASEAN6 Vietnam Cambodia, Laos, Myanmar Sensitive items are to reduce to 20% in January 2012 and to 5% in January Highly sensitive items are to reduce to 50% in January Sensitive items are to reduce to 20% in January 2015 and to 5% in January Highly sensitive items are to reduce to 50% in January Note: ASEAN6 includues Thailand, Malaysia, Indonesia, Philippines, Singapore and Brunei. Source: ASEAN-China FTA 7 Schedule for elimination of tariffs under ASEAN-India FTA Schedule for elimination of tariffs under ASEAN-India FTA Schedule for the elimination of Tariffs Categories India and ASEAN5 India and Philippines CLMV Normal track Normal track 1 Reduce in stages and subsequently eliminate tariffs Reduce in stages and subsequently eliminate tariffs Reduce in stages and subsequently eliminate tariffs (NT) beginning from 2010 by the end of beginning from 2010 by the end of beginning from 2010 by the end of Normal track 2 Reduce in stages and subsequently eliminate tariffs Reduce in stages and subsequently eliminate tariffs Reduce in stages and subsequently eliminate tariffs beginning from 2010 by the end of beginning from 2010 by the end of beginning from 2010 by the end of Sensitive track MFN tariff rates above 5% Reduce tariffs to 5% in stages beginning from 2010 Reduce tariffs to 5% in stages beginning from 2010 Reduce tariffs to 5% in stages beginning from 2010 (ST) by the end of by the end of by the end of MFN tariff rates of 5% Can be maintained for up to 50 tariff lines. Can be maintained for up to 50 tariff lines. Can be maintained for up to 50 tariff lines. Reduce tariffs to 4.5% in 2010, further reduce to Reduce tariffs to 4.5% in 2010, further reduce to Reduce tariffs to 4.5% in 2015, further reduce to 4% by the end of % by the end of % by the end of % of the tariff lines placed in Eliminate tariffs by the end Eliminate tariffs by the end Eliminate tariffs by the end the Sensitive Track Special products(sp, applicable for India) India's tariffs on crude and refined palm oil, coffee, black tea and pepper shall be reduced in stages beginning from January 2010 by the end of 2019.Tariff of crude palm oil is schedule to reduce to 37.5% from 80%, that of refined palm oil to 45% from 90%, that of coffee to 45% from 100%, that of tea to 45% from 100% and that of pepper to 50% from 70%. Highly sensitive Category 1 list Thailand, Malaysia, Indonesia:reduce tariffs to 50% by the end of Philippines:reduce tariffs to 50% by the end of Vietnam, Cambodia: reduce tariffs to 50% by the end of (HSL) Category 2 Category 3 Thailand, Malaysia, Indonesia:reduce tariffs by 50% by the end of Philippines:reduce tariffs by 50% by the end of Vietnam, Cambodia: reduce tariffs by 50% by the end of Thailand, Malaysia, Indonesia:reduce tariffs by 25% by the end of Philippines:reduce tariffs by 25% by the end of Vietnam, Cambodia: reduce tariffs by 25% by the end of Exclusion list(el) Excluded from tariff concessions Tariff elimination schedule of epoxide resins under various FTAs with India (Unit:%) Date in effect 年 12 月 MFN 7.5 Thailand-India September Singapore-India August 2005 excluded ASEAN India excl.philippines January ASEAN India(Philippines) January Malaysia-India July Japan-India August Note: HS code of Epoxide resins is HS Spurce: Relevant FTAs Copyright (C) 2012 JETRO. All rights reserved. 8 4

52 What is the cost-efficient rules of origin? - Current rules and issues faced by FTA users - 9 The cost structure of rules of origin Minimum requirement Value of tariff exemption > Cost to meet rules of origin Costs incurred from rules of origin = Administrative Costs to certify origin of goods (1) + Fees to the third parties + Cost related to lead time (2) + Costs of commercial flow if it does not allow intermediary trade (3) <Administrative Costs to certify origin of goods (1)> Relevant rule ; Criteria to determine origins < Fees to the third parties + Cost related to lead time (2)> Relevant rule; Procedure to certify the origin of goods < Costs on commercial flow if it does not allow intermediary trade (3)> Relevant rule; Clauses to allow third country invoicing and back to back 10 Copyright (C) 2012 JETRO. All rights reserved. 5

53 1.Criteria to determine origins Classification Outline of criteria Example of applicable FTA Co-equal criterion (CTC or VA) Determine the country of origin of goods by whether to meet either a value added content criterion or a change in tariff classification criterion. Japan-Malaysia, Japan-Thailand, Japan-Indonesia, Japan-Brunei, Japan-Philippines, Japan-Indonesia, Japan-Vietnam, Japan-Switzerland, ASEAN- Australia-NZ, ASEAN-South Korea AFTA (transferred from VA in 2008). Change in tariff classification criterion (CTC) Determine the country of origin of goods by Japan-Singapore, Japan-Chile, Thailand-Australia, whether the tariff classification(hs code) assigned to Thailand-NZ, Australia-NZ (transferred from VAC the final goods produced in the country show a in 2007, VC is available by 2012) change from the tariff classification of the nonoriginating materials. Regional value added content criterion (VA) Dual criterion (CTC and VA) Determine the country of origin of goods by whether certain level of value are added on the product. Required 40 % or more of added value for most FTAs in Asia Pacific region. Determine the country of origin of goods by whether to meet both a value added content criterion and a change in tariff classification criterion. ASEAN-China, Singapore-NZ, Singapore-Austlaria Thailand-India, Singapore-India, ASEAN- India(VA35%+CTC) Note: The above criteria to determine origins of goods are those provided in the FTA to apply a majority of goods; there are exceptions. Source : Relevent FTAs 11 Copyright (C) 2012 JETRO. All rights reserved. Pros and Cons of each criterion Dual Criterion A dual criterion unquestionably put higher administrative costs on FTA users, simply because of meeting both criteria. Regional value added content (VA) criterion May be preferred by firms manufacturing goods with numerous number of components. Could be affected by fluctuation of exchange rate and primary good prices Change in tariff classification (CTC) criterion May be preferred by firms manufacturing goods with less number of components. Not affected by fluctuation of exchange rate and primary good prices. CTC excels in terms of predictability. Cost analysis data does not have to be disclosed. Co-equal (CTC or VA) criterion Firms are allowed to choose one of the criterion they will use. The most flexible and cost efficient criterion. Copyright (C) 2012 JETRO. All rights reserved. 12 6

54 Some FTA lacks De Minimis clause What is De Minimis clause? Applying CTC rules of origin, it is the rule that nonoriginating materials can be regarded as originating materials to some extent. *ASEAN Japan p FTA regards non-originating g materials as originating materials as long as it does not exceed10% of the total FOB price depending on items. (Chapter 3 Article 28) FTA with lack of De Minimis clause ASEAN-India FTA What is the issue? In case incorporating a little non-originating originating materials into finished goods, the goods are not approved as originating goods. There is actually a case that a firm manufacturing goods in one of ASEAN country using a few key components manufactured in Japan, non-signatory under ASEAN-India FTA, was rejected its application for the certificate of origin. Taiwan Vietnam HS AFTA case Japan Final Product HS Export to Indonesia ASEAN-India FTA case HS *AFTA regards non-originating materials as originating materials unless it does not exceed 10% of the total FOB price. Taiwan HS Japan HS Vietnam Final Product HS Export to India *ASEAN-India FTA does not regard non-originating materials as originating materials even though it does not exceed 10% of the total FOB price. Copyright (C) 2012 JETRO. All rights reserved Procedures to certify origin of goods Procedures to certify origin of goods Classification Third-party certification Approved exporter system Overview of system An exporter provides a third-party organization (government or designated agency) with information to prove that its export products satisfy rules of Examples of applicable FTA Japan-Singapore, Japan-Mexico, Japan-Malaysia, Japan-Chile, Japan-Thailand, Japan-Indonesia, Japan-Brunei, Japan-Philippines, AFTA, ASEAN-Japan, ASEAN- origin and the third-party China, ASEAN-ROK, ASEANorganization, upon judgment of the Australia-New Zealand, origin of such products, issues a Singapore-India, Thailand-India, certificate of origin. Thailand-Australia etc. The self-certificatition and other more simplified methods of application are made available to exporters authorized by the government or designated authorities. Other exporters are required to apply for judgment of origin by a third-party organization. Self- All exporters certify origins of certification their products on their own responsibility. EU EFTA (excluding Switzerland), EU-Mexico, EU-Chile, EFTA- Mexico, EFTA-Chile, Japan- Switzerland NAFTA US-Australia, US- Singapore, Trans-Pacific, Singapore-New Zealand, Thailand-New Zealand, Australia- New Zealand, Mexico-Chile, US- ROK (not in effect yet), etc. Note:(1)Trans-Pacific is joined by Singapore, Brunei, New Zealand and Chile. (2)EFTA is joined by Switzerland, Liechtenstein Norway and Iceland. Source: The websites of the respective states and the "2010 Report on the WTO Inconsistency of Trade Policies by Major Trading Partners"(Minisytry of Economy, Trade and Industry, Japan). Copyright (C) 2012 JETRO. All rights reserved. Pros & Cons of both systems Third Party Certification Administrative Costs to certify origin of goods Fee to third parties Prevention of fraud declaration Verification cost Lead-time of transported goods Risks for users Self-Certification Same in administrative cost to certify origins of good Cost fee to third parties. May be more effective to prevent fraud declarations. May decrease chances for verification compared with selfceritification. Delays of CO may add costs including administative cost for tax refund and warehouse fees etc. Substantially acts as the function to provide consultation to users. Free from fee to third parties. Has more risks for fraund declarations such as circumvented imports. Verification cost might surpass cost for maintaining third party certification. Free from delays. Requires users to govern themselves in order to avoid unintentional false declaration 14 7

55 Approved Exporter System Approved exporter system involves benefits of third party certification and self certification Approved exporter system is a hybrid system involving benefits of both systems that allows an approved exporter to use the self-certification. Under the system, approved exporters are to use a self-certification, while the rest of the exporters such as SMEs utilize a third party certification/ Pilot projects under ATIGA The first ASEAN self-certification pilot project has been implemented since November This pilot has been taken place in Malaysia, Brunei, and Singapore and has been extended to Thailand in October The second ASEAN self-certification pilot projects will go into effect soon among Indonesia, Philippines and Lao PDR. ASEAN self-certification under ASEAN-unified rule in open manner will reduce trade-cost of FTA users and help expand intra-trade. Possible case to affect lead time Day 1 Day 2 Day 3 Flow of goods Goods shipped by air Goods reaches importer Certificate of Origin C/O applied to third party C/O issued/sent C/O reaches importer Copyright (C) 2012 JETRO. All rights reserved Third country invoicing and back to back Re-invoicing Re-invoicing means a way of billing that an invoice is issued not by a firm manufacturing a product in one country but by a firm in a third country. A commercial flows indirectly while a distribution of goods goes directly. Back to back certificate Both a commercial flow and a transportation of goods goes through indirectly. Back to back certificate can be issued by intermediate exporting member state. Re-invoicing in the case of AFTA Vietnam Back to back in the case of AFTA Vietnam Invoice CF:third country Direct consignment CO (Form D) Invoice CO (Form D) CF:third country Consignment : Through third county Singapore Re-invoice Indonesia Singapore Indonesia (subdivided) Re-invoice Back to back certificate of origin 16 Copyright (C) 2012 JETRO. All rights reserved. 8

56 Stock operation at Hong Kong Treatment of intermediary trade under ASEAN-China FTA Since the ASEAN-China FTA did not clearly state whether it would accept third country invoicing and back to back certificate, its acceptance used to depend on interpretations of each customs. Signatories reached an agreement in October 2010 to amend the OCP (Operational Certification Procedures) to which all signatories ratified and went into effect. ACFTA says movement certificate instead of back to back certificate. Treatment of Hong Kong under ASEAN-China FTA. Hong Kong is non-signatory under ASEAN-China FTA. Third country invoicing issued by firms in Hong Kong are acceptable under ACFTA since the OCP allows the importing party to accept a certificate of origin in cases where the sales invoice is issued either by a company located in non-signatories. However, MC (Back to back CO) is not able to be issued by Hong Kong government because they are not a signatory. MC can be used if Hong Kong joins ACFTA China requested ASEAN to start the consultations with Hong Kong on the accession to ACFTA. If Hong Kong becomes a signatory of ACFTA, firms can subdivide stock using ACFTA at Hong Kong. It would benefit Vietnam s export where is located close to Hong Kong. Vietnam Re-invoice(ASEAN-China FTA) MC (Back to Back)(ASEAN-China FTA) Vietnam Invoice goods CO (Form E) CF:third country Direct consignment CO(Form E) goods Invoice CF:third country Consignment : Through third county Hong Kong Re-Invoice Copyright (C) 2012 JETRO. All rights reserved. China Hong Kong (subdivided) Goods, Re-Invoice MC (Back to back CO) China 17 4.Accumulation under RCEP may contribute exporting clothing from Vietnam. RCEP(Regional Comprehensive Economic Partnership) RCEP comprising ASEAN+6 countries (ASEAN, Japan, China, Korea, Australia, New Zealand and India) may launch RCEP negotiations in November 2012 Accumulation under RCEP may contribute export in clothing from Vietnam Accumulation : Originating materials of a Party used in the production of a good in another Party shall be considered as originating g materials a of that Party where e the working or processing of the good has taken place. Supply chains (division of labor) expands across Asia. Some of products can not meet rules of origin under accumulation clauses of existing ASEAN+1 FTA. RCEP enlarging accumulation from ASEAN+1 to ASEAN+6 may help exports of Vietnam in particular exports in clothing. Accumulation of RCEP > Accumulation of ASEAN+1 FTAs. RCEP will contribute streamlining and harmonizing rules. FTAs came into effect one after another. Relevant rules vary from FTA to FTA. RCEP will contribute streamlining and harmonizing rules such as rules of origin and it would facilitate FTA utilization. Copyright (C) 2012 JETRO. All rights reserved. 18 9

57 RCEP may contribute export in clothing from Vietnam. Rules of origin on textile products Specific process criterion is commonly applied to textile products. It is the rule to determine the country of origin of goods by whether certain specific processes are carried out on the product. It may generally require to carry out 2 processes to meet rules of origin. Thus, clothing manufactured in Vietnam using materials imported from China may not be qualified to obtain certificate of origin for ASEAN-JAPAN FTA, ASEAN-Korea FTA etc. Once RCEP is in force, those items get qualified due to its accumulation clause. Major importing countries of textiles to Vietnam (Unit:US$ mil., %) Value Share Value Share China , , South Korea , ASEAN Japan Hong Kong United States India Source : Trade Statistics, Vietnam Copyright (C) 2012 JETRO. All rights reserved. China Import textile Japan Export Clothing (apparel) using AJCEP Vietnam sewing * In this case, if textiles are originating materials of ASEAN or Japan instead of China, the products may meet the rules of origin due to the accumulation clause of AJCEP. Export destination of clothing from Vietnam (Unit:US$mil., %) Value Share Value Share United States , , EU27 1, , Japan , South Korea Canada ASEAN ASEAN , Source : Trade Statistics, Vietnam 19 Textiles/clothing utilizes FTA with Japan FTA users (Japanese firms_) by industry in Vietnam Trading Partners Firms involved in Firms making use of FTAs % of firms using FTAs Top3 industries where FTA are used export/import Export Japan Textiles(6) Chem./Pharma.(4) Electric Machinery(4) ASEAN Chem./Pharma.(3) Electric Machinery(3) Food, Rubber (each 2) China Electirc Machinery(2) Chem., Rubber, Iron, Vehicles, Precision machinery (1each) South Korea Rubber/leather(2) Vehicles, Precision machinery (1each) Import Japan Electirc Machinery(5) Textiles, Chem./Pharma., Vehicles (each 2) ASEAN Electirc Machinery(3) Vehicles(3) Textiles, Chem./Pharma.(each 2) China Electirc Machinery(3) Textiles, Rubber, Iron, General machinery, Behicles(1 each) Source : Survey of Japanese-Affiliated Firms in Asia and Oceania (FY 2011 Survey) Custom duties on textiles and clothing in Japan (Unit:%) Items HS Code WTO GSP FTA Silk. 50 0~12.5 0~ Wool, fine or coarse animal hair; horsehair yarn and woven fabric. 51 0~7.9 0~ Cotton. 52 0~7.4 0~7.4 0 Other vegetable textile fibres; paper yarn and woven fabrics of paper yarn. 53 0~10 0~2 0 Man-made filaments; strip and the like of man-made textile materials ~ ~8 0 Man-made staple fibres. 55 0~10 0~8 0 Wadding, felt and nonwovens; special yarns; twine, cordage, ropes and cables and articles thereof. 56 0~7.2 0~ Carpets and other textile floor coverings. 57 0~8.4 0~ Special woven fabrics; tufted textile fabrics; lace; tapestries; trimmings; embroidery ~14.2 0~8.2 0 Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable for industrial use ~ Knitted or crocheted fabrics. 60 4~9.8 0~ Articles of apparel and clothing accessories, knitted or crocheted. 61 5~10.9 0~ Articles of apparel and clothing accessories, not knitted or crocheted ~12.8 0~ Other made up textile articles; sets; worn clothing and worn textile articles; rags. 63 0~10.9 0~ Note: Some items are subject to specific tariffs. Source: "Japan's Tariff Schedule as of June 2009"(Ministry of Finance, Japan) Copyright (C) 2012 JETRO. All rights reserved

58 Other Issues Description of FOB price on CO (Certificate of Origin) Description of FOB price on CO is mandatory in major Asian countries. FOB price is sensitive for manufacturers/exporters because importers are able to know the margins of products. Different interpretation of HS code between exporting country and importing country Due to different interpretation of HS code, importing country may refuse to apply preferential tariff. Advance Ruling System will improve predictability of exporters. Different interpretation of HS code by officer Interpretation of HS code may vary from officer by officer. Establishment of tariff information database or Classification center in customs may be effective to harmonize their interpretation. Other issues on customs procedures Exempting import duty on returnable containers will facilitate intra-regional trade. Establishment of ASEAN Green Lane System will also streamline trade in goods. Copyright (C) 2012 JETRO. All rights reserved. 21 Concluding remarks Current FTA network in Asia Pacific Region and their utilizations Tariff elimination deepens in Asia pacific region. In addition to AFTA, so-called ASEN+1 FTAs between ASEAN and China, South Korea, Japan, Australia-New Zealand and India are already in effect. However supply chains (division of labor) expands across Asia. Some of products can not meet rules of origin under accumulation clauses of existing ASEAN+1 FTA. RCEP enlarging g accumulation from ASEAN+1 to ASEAN+6 may help exports of Vietnam in particular exports in clothing. Rules of Origins maximizing benefits of FTAs The co-equal criterion, the approved exporter system and acceptance of intermediary trade may contribute to reduce the trade costs. Other issues including description of FOB, effective advance ruling system, establishment of classification center etc. may also eliminate costs and improve predictability of FTA users. Copyright (C) 2012 JETRO. All rights reserved

59 Reference Comparative advantages by industry in major Asian countries 23 RCA, RCDA, RTA RCA (Revealed Comparative Advantage) RCA = (EXij/EXj)/(EXiw/EXw) - 1 where EX = value of exports, i = item i, j = country j, w=world RCA > 0 comparative advantage RCA < 0 comparative disadvantage RCDA (Revealed Comparative Disadvantage) RCDA = (IMij/IMj)/(IMiw/IMw) - 1 where IM = value of impots RCDA > 0 comparative disadvantage RCDA < 0 comparative advantage RTA (Relative Revealed Comparative Trade Advantage) RTA = RCA - RCDA RTA > 0 comparative advantage, RCA < 0 comparative disadvantage 24 Copyright (C) 2012 JETRO. All rights reserved. 12

60 Vietnam : advantages and disadvantages(2009) (Comparative Disadvantage/Absolute) (Comparative Disadvantage/Open) R C D A (Compa rative Disadva ntage/ Close) Air Conditioner( ) Base metal/base metal products Motorcycles(+) Machine tools(-) Plastic/rubber Industrial chemicals(+) General equipment( ) Automotive parts( ) Transport equipment(+) Passenger cars IT parts Petroleum products(-) Electrical equipment Finished IT products Precision instruments Food products(-) (Comp arative Advant age/ Open) (Beyond table)textiles(+)(1.4,7.3) (Beyond table)apparels(+)(4.6,-0.9) (Comparative Advantage/Close) Copyright (C) 2012 JETRO. All rights reserved. RCA (Comparative Advantage/Absolute) 25 How to understand the table 3.0 (Comparative Disadvantage/Absolute) (Comparative Disadvantage/Open) (Horizontal)Share of item iof Vietnam a share of total exports of Vietnam < Share of item iof the world as a share of world exports. (Vertical)Share of item iof Vietnam as a share of total imports of Vietnam > Share of item iof the world as a share of world imports. Item ihas comparative disadvantage in both export and import (Horizontal)Share of item iof Vietnam as a share of total exports of Vietnam > Share of item iof the world as a (Comp share of world exports. arative (Vertical)Shareof item i of Vietnam as ashare of total imports of Vietnam > Share of item iof the world as a Advant share of world imports. age/ Open) Item ihas comparative advantage in export, but disadvantage in import. (Processing trade patern) R C D A 0.0 (Comp (Horizontal)Share of item iof Vietnam as a share of total exports of Vietnam < Share of item iof the world as a 1.0 arative share of world exports. Disadv (Vertical)Share of item iof Vietnam as a share of total antage imports of Vietnam < Share of item iof the world as a / share of world imports. 2.0 Close) Item ihas discomparative advantage in export, but advantage in import. (possibility of existence of trade barriers) (Horizontal)Share of item iof Vietnam as a share of total exports of Vietnam > Share of item iof the world as a share of world exports. (Vertical)Share of item iof Vietnam as a share of total imports of Vietnam < Share of item iof the world as a share of world imports. Item ihas comparative advantage in both export and import (Comparative Advantage/Close) (Comparative Advantage/Absolute) RCA 26 Copyright (C) 2012 JETRO. All rights reserved. 13

61 Comparative advantages and disadvantages by major industries Items General equipment Comparative Advantage Comparative Disadvantage Absolute Open Close Close Open Absolute J C(+) T M(-) S(-) P(-) K(-) In A N V(-) Id(-) Air Conditioner C(+) T(+) M P(+) K(-) J(-) A(-) V(-) Id(-) N(-) In(-) S(+) Machine tools J(+) S(+) P A(-) N K(+) C(-) T(-) M(-) In(-) Id(-) V(-) Electrical equipment IT equipment J(-) S(+) C(+) P K(+) M(+) In A N V Id(-) T J S(+) () C(+) () K T M P In A N V Id(-) () Finished IT products C(+) T(+) K(-) M P(-) S(-) J(-) V In Id(-) A N IT parts J S(+) P K(+) M(+) In A N V Id(-) C T(-) Precision instruments K(+) J(-) S(+) T M(+) Id N V P In C(-) A Transport equipment J(+) K(+) C In(+) T(+) V(+) M(-) Id P S N A(-) Passenger cars J(+) K T(+) In(+) C(-) M Id V P(-) N A(-) Motorcycles J C(+) In(+) T(+) J(-) Id(-) M(-) K(-) V(+) A P(-) N(-) Automotive parts P(+) J(+) K(+) S(+) C Id(+) M A N V(-) In T(+) Chemicals T(+) S(+) J K M In C(+) P A Id(+) V(+) N Industrial chemicals In S(+) J V(+) T(+) M C P K Id(+) A N(-) Plastic/rubber J K S(+) T(+) M(+) Id(+) In P A V C(+) N Food products In(-) T(-) A(-) N(+) V(-) C(-) K S S M Id(-) J(+) P(-) Petrochemical products V(-) M C T(+) In(+) K(+) P J(+) N A(-) Id Textiles and Apparels C(+) In(-) V(+) Id(-) M P(-) K(-) T(-) A(-) S J N(-) Textiles In(+) J K(-) C(+) T(+) Id M S A(+) N V(+) P(+) Apparels V(+) C(-) In(-) Id(-) T(-) M P(-) K(-) S J N(-) A(-) Base metal/base metal products In J(+) N A(-) P(+) S K C(+) T(-) M Id(+) V Note: Each alphabet stands for T=Thailand M=Malaysia Id=Indonesa P=Philippines V=Vietnam J=Japan C=China K=South Korea In=India A=Australia N= New Zealand S=Singapore. Copyright (C) 2012 JETRO. All rights reserved

62 MATERIAL FOR THE WORKSHOP

63 12/6/2012 Role of Industrial Clusters and SME Linkages in Firms Upgrading: International Experiences Sothea Oum ERIA HANOI SEMINAR Vietnam s Upgrading in the Process of Economic Integration 20 September 2012, Ha Noi, Viet Nam 1 Outline of the Presentation 1. Evolution of International Trade and Industrial Clusters/Agglomerations 2. SME Participation in Production Networks Regional Evidence 3. Some Policy Implications 2 1

64 12/6/ The 2 nd unbundling Evolution of International Trade The 2 nd unbundling: international division of labor in terms of production processes and tasks. Production networks in manufacturing sector, most advanced in the world. Production blocks can move to developing countries/regions and accelerate industrialization, ending up with narrowing development gaps. 3 The 1 st and the 2 nd unbundling Bay A Bay B Bay A Bay B Bay C Bay C Bay A Bay C Connecting factory & doing business abroad: The trade-investment-services nexus 1) Two-way flows of goods, ideas, technology, capital, and technicians. 2) Investment and application of technical, managerial and market know-how abroad. Bay B 4 Source: The original is in Baldwin (2011), slightly modified by the author. 2

65 12/6/2012 The fragmentation theory: production blocks and service links Before fragmentation After fragmentation SL PB SL PB SL PB PB SL PB SL 5 PB: Production block SL: Service link Two-dimensional fragmentation: An illustration Disintegration Competitive spot bidding Internet auction Domestic arm's length fragmentation EMS Cross-border arm s length fragmentation (Boundary of firm) Subcontracting OEM contracts Outsourcing Domestic intra-firm fragmentation Cross-border intra-firm fragmentation Origin (National border) Distance Source: Kimura and Ando (2005). 6 3

66 12/6/2012 Cross-border production sharing (back-and-forth; intra-firm) The evolution of the 2 nd unbundling Production networks ( networks ; fragmentation and agglomeration; intra-firm in short distance, arm s length in long distance) The United States Japan Consumers Korea Consumers The United States Mexico Taiwan Consumers Vietnam The Philippines Headquarters or affliates Unrelated firms with same firm nationality Malaysia Internet auction Unrelated firms with different firm nationality 7 Agglomeration Agglomeration How to upgrade industrial agglomerations A path to step up from middle-income countries/regions to fully developed society The formation of industrial agglomerations with active inter-firm vertical division of labor The penetration of local firms/entrepreneurs into multinationals production networks in order to establish channels of innovation Human resource development with innovative urban amenity 8 4

67 12/6/2012 Industrial agglomeration in Bangkok Note: The circle of 100km is added by the author. Oi Original i source: Board of Investment, t Thailand. Source: Kimura, Fukunari (2009). The Spatial Structure of Production/Distribution Networks and Its Implication for Technology Transfers and Spillovers, ERIA Discussion paper Series No ( 9 Industrial agglomerations in East Asia Industrial Agglomerations Source: ERIA / IDE-JETRO GSM Team. 10 5

68 12/6/2012 Comparative advantage in manufacturing sector in Source: Kumagai, Gokan, Isono, Hayakawa, and Keola (2010). 2.. How to participate in production networks Utilize the mechanics of fragmentation and reduce three kinds of costs; find bottlenecks! Network set-up costs Institutional arrangements for hosting foreign direct investment Service link costs Develop logistics infrastructure/services (cost, time, reliability) and promote trade liberalization/facilitation Production costs per se Starting from special economic zones, improve investment climate with proper economic infrastructure such as electricity supply 6

69 12/6/2012 Policy Matrix e distance axis Fragmentation along the Reduction in fixed costs to develop production/distribution networks Policies to reduce investment costs Reduction in service link costs connecting production blocks Policies to overcome geographical distance and border effects Further costs reduction in production cost per se in production blocks Policies to strengthen location advantages (i) improvement in stability, transparency, and predictability of investment-related policies; (i) reduction/removal of trade barriers such as tariffs; (i) establishment of educational/occupational institutions for personnel training to secure (ii) investment facilitation in FDI-hosting agencies (ii) trade facilitation including simplification and various types of human resources; and industrial estates; and improved efficiency in custom (ii) establishment of stable and elastic laborrelated (iii) liberalization and development in financial clearance/procedures; laws and institutions; services related to capital investment. (iii) development of transport infrastructure and (iii) establishment of efficient international and improved efficiency in transport and domestic financial services; distribution services; (iv) reduction in costs of infrastructure services (iv) development of telecommunication and ICT such as electricity and other energy, industrial infrastructure; estates services; (v) improved efficiency in financial services related (v) development of agglomeration to facilitate to operation and capital movements; and vertical production chains; (vi) reduction in costs of coordination between (vi) establishment of economic institutions such as remote places by facilitation of the movement investment rule and intellectual property rights; of natural persons. and (vii) various trade and investment facilitation. he Fragmentation along th disintegration axis Establishment of economic environment to reduce set-up costs of arm's length transactions (i) (ii) (iii) (iv) establishment of economic system to allow coexistence of various business partners as well as making various types of contracts; various policies to reduce costs of information gathering on potential business partners; securing fairness, stability, and efficiency in contract; and establishment of stable and effective institutions to secure intellectual property rights. Development of institutional environment to reduce the cost of implementing arm's length transactions (i) policies to reduce monitoring cost of business partners; (ii) improvement in legal system and economic institutions to activate dispute settlement mechanism; and (iii) policies to promote technical innovations in modulation to further facilitate outsourcing. (i) (ii) (iii) Policies to strengthen competitiveness of potential business partners hosting and fostering various types of business partners including foreign and indigenous firms; strengthening supporting industries; and various policies to promote the formation of agglomeration. 13 SMEs Linkages in Global Value Chains 14 7

70 12/6/2012 Quality-Intensity nexusin Production Networks Quality High I Intermediate IV Most desirable Low II III Least desirable e Intermediate ed e Low High Notes: Quadrant I Low intensity-high quality production network participation (tier 1 and 2) Quadrant II Low intensity-low quality production network participation (tier 3 and 4) Quadrant III High intensity-low quality production network participation (tier 3 and 4) Quadrant IV High intensity-high quality production network participation (tier 1 and 2) Intensity SMEs and Regional Production networks Two critical issues: 1. How to participate in a production network (intensity) 2. How to participate in higher value adding activities in a production network (tier 1 and 2) (quality) Providing answers to these questions is of importance 8

71 12/6/2012 Key results Based on results of a survey questionnaire of SMEs in 9 countries in East Asia, and conducted by ERIA over a period of three months at the end of In total there were 912 completed questionnaires 1. Statistically significant factors impacting upon SME participation in a production network 2.Statistically significant factors impacting upon SME participation in a higher tier in a production network 1 7 Summary of Key Results Moving in. Moving up.. 1. Labour productivity Labour productivity 2. Foreign ownership share Foreign ownership share 3. Financial stability and cost of credit 4. Meeting international standards 5. Introduced ICT Introduced ICT 6. Established a new division 7. Acquired new machinery 8. Improved existing machinery 9. Acquired production Acquired production knowledge knowledge 10. Introduced new products 11. Positive attitude towards risk 12. Willingness to adopt a new business strategy Size 9

72 12/6/2012 To get in: 3. Some Policy Implications 1. Foreign ownership important (FDI and joint ventures). Brings in: Technology Finance Knowledge Networks Access to global and regional markets 2. Financial stability Corporate governance Transparency Access to finance/cost of finance Venture capital markets SME Bank 3. Quality compliant (price, quality, reliability, JIT) 4. IT literate Training and cost IT infrastructure E-commerce as a core part of business activity 5. Innovation active 6. Niche market strategy 7 E i l i d i k d fl ibili / d bili i b i 7. Entrepreneurial attitude to risk and flexibility/adaptability in business dealings Cross cultural differences Stage of economic development History 10

73 12/6/2012 To move up 1. Increase scale of activity Address the issue of the missing middle Potential economies of scope and scale Reduce capacity constraints 2. Embed further foreign involvement in the business 3. Further develop IT literacy/capacity (specifically ICT and production knowledge) 4. Niche production knowledge/expertise Thank You 22 Economic Research Institute for ASEAN and East Asia 11

74 12/6/2012 Challenges for Vietnam 1 SMEs in Vietnam Industrial Clusters in Vietnam Industrial Clusters and SME linkages Challenges to individual SMEs development Challenges to involving SMEs upgrading and linkages 2 1

75 12/6/2012 Number of enterpirses Total enterprises 129, , , , ,291 Manufacturing enterprises 24,622 28,662 35,108 41,855 46,469 SMEs 127, , , , ,970 As percentage of total enterprises 99% 99% 99% 99% 99% Manufacturing SMEs 23,999 27,919 34,206 40,789 45,191 As percentage of total enterprises 18.57% 17.93% 16.64% 16.41% 15.57% As percentage of manufacturing enterprises 97.47% 97.41% 97.43% 97.45% 97.25% 3 Mean SMEs Large SMEs Large SMEs Large SMEs Large Employee Capital (billion VND) Revenue (billion VND) Total tax (billion VND) Total company income tax (million VND) Labour productivity (million VND) Enterprise age

76 12/6/2012 Industrial clusters (Theory) Government Agencies Supporting Industries Cluster Enterprises (Including SMEs) Business Associations Universities/Research Centers SMEs outside Cluster 5 Industrial parks 260 industrial parks established in 57 provinces/cities; 174 in operation 72,000 ha in total; 43,500 ha in operation 30% of industrial production in 2010; USD billion 1,6 million direct labours; 1,8 million indirect labour Industrial clumps 1,872 industrial clumps established; 918 in operation 76,520 ha in total; 40,597 in operation 6 3

77 12/6/2012 Industrial clusters Still limited in number, low development status Traditional trade villages (2,017 villages in 58 provices/cities) Clusters located inside industrial parks: Canon and her related firms in Thanglong Industrial Park (Hanoi) Nomura Industrial Park (Haiphong) Phonoi Textile Industrial Park (Hungyen) Chulai Open Economic Zone with Truong Hai automobile assembler (Quang Nam) Poor supports, loose linkages, small impacts on clustered firms No effective policy in developing industrial clusters 7 Linkages through competition Forward linkages Backward linkages Technology and other partnerships 8 4

78 12/6/2012 Competitiveness Productivity ty and structural limitations Limitations relating to funding sources Assess to markets 9 Fierce competition in export markets; small domestic markets Need for imported parts/materials Lack of basic operational management knowledge/expertise Barriers to form businesses: lack of support in funding and research and development Non-favourable economic environment 10 5

79 12/6/2012 Outmoded or less productive operational assets/methods Insufficient use of technology; limited room for efficient operational levels Insufficient management and professional know-how Insufficient and inaccessible funding sources Unappreciated and inadequate professional services Insufficient incentives and inability to meet regulatory procedures Insufficient access to information 11 Number of enterprises by scale Micro Small Medium Large Total Enterprises 149,263 86,901 8,263 4,157 Percentage Manufacturing enterprises 16,821 18,940 3,669 2,421 Percentage Source: Enterprises Census

80 12/6/2012 Revenue and Productivity by scale Micro Small Medium Large All enterprises Revenue (million VND) 5,335 19,37 115, ,793 All enterprises Labour productivity (million VND) 1, Manufacturing enterprise Revenue (million VND) 7,596 16,387 97, ,242 Manufacturing enterprise Source: Enterprises Census 2009 Labour productivity (million VND) 1, Technology level: all enterprises Micro Small Medium Large R&D personels Enterprises with website Enterprises with LAN networks Total Enterprises Technology level: manufacturing enterprises Micro Small Medium Large R&D personels Enterprises with website Enterprises with LAN networks Total Enterprises

81 12/6/2012 Limited access to sources to capitalize the enterprise Low fixed assets and profitability Micro Small Medium Large All enterprises Borrowed capital/total equity 12.46% 23.78% 27.65% 26.40% Borrowing enterprises (number) Man. enterprises Borrowed capital/total equity 13.73% 23.59% 27.10% 26.14% Borrowing enterprises (number) Inadequate knowledge about market opportunities Sell locally, to final consumers; limited selling to main and permanent outlets (inability to meet volume requirements) Main customers are mostly poor and middle classes Similar products and greatly affected by competition 16 8

82 12/6/2012 Labor Education by scale Micro Small Medium Large All enterprises High skilled Medium skilled Non skilled Manufacturing enterprise High skilled Medium skilled Non skilled Source: Enterprises Census Information and matchmaking Technology upgrading Labour skill Business environment 18 9

83 2012/12/6 Potential Industry in Vietnam in More Integrated East Asia September 20, 2012 Mai Fujita Institute of Developing Economies 1 Structure of Presentation I. Elements of Industrial Competitiveness II. Roles of Policies III. Guidelines on Assignment for participants 2 1

84 2012/12/6 I. Elements of Industrial Competitiveness: The Holistic Picture National Borders Technological Change Transnational Corporations (Global value chains) Global/regional Trade/investment regimes Domestic system Source: Adapted from MOIT and UNIDO (2011: 14). 3 Technological Change Example: Gasoline vs. electric vehicle Technological change leads to changes in Product Architecture Integral Modular Sources of competitive advantage Non-standard (defined Components Standardized Types of components (engines vs. by lead firms) motors) Types of materials (steel/aluminum Fine-tuning between vs. plastic/carbon fiber) Needed Not needed component designs Linkages between firms Integralvs. modular architecture Competition patterns Infrastructure requirements Charging stations Based on close Outsourcing communication and coordination Source: prepared by the author. Arm's-length transactions 4 2

85 2012/12/6 Global value chains Actors, location, functions PROTOTYPE GARMENT/FOOTWEAR INDUSTRY THAI AUTOMOBILE INDUSTRY Disposal/Recycling Disposal/Recycling Secondhand car market? After-Sales Service End Consumer End Consumers in US/Europe/Japan End Consumers in Thailand Retail Sales Retail sales by Toyota's official dealers Product Strategy, Design, Marketing, Marketing Branding, Retail Sales by Product strategy, design, marketing, major retailers branding by Toyota in Japan/Thailand Product Strategy (e.g., GAP, Nike, Uniqlo, etc.) Product Conception Product Design Component design jointly undertaken by Toyota and its suppliers in Japan/ Buying/Trading Taiwanese Traders Thailand Assembly Cut/Make/Trim by Vietnamese SOEs Assembly by Toyota Thailand Components Accessories from China Components by Suppliers in Thailand Materials Textiles from China Steel/Alminium etc. from Japan (Source) Prepared by the author. 5 Trade/Investment regime Even under the WTO regime, there is still a scope for proactive industrial policies. Need to take account of agreements Vietnam already participates in/plans to participate in the future. National treatment/mfn rule Timetable for the reduction of tariffs/non tariff barriers Possible safeguards/anti dumping gmeasures Protection of intellectual property Technical barriers/standards and certification Provisions on SOEs? 6 3

86 2012/12/6 Domestic System Actors and Elements Factor markets Labor and skills Finance Natural resources Technology Infrastructure Producers (structure and rivalry) Business environment Macroeconomic environment Industrial/trade regime Legal/regulatory framework Supporting system Industrial associations Research institutes/universities Buyers (demand conditions) Suppliers (materials, components, related services) Source: Adapted from MOIT and UNIDO(2011: 14). 7 Buyers (quantity/quality of demand) Quantity and quality of domestic demand matters because. Size of demand affects economies of scale for producers Demanding consumers are a driver for innovations Export markets may substitute for domestic market, but Domestic market often offers advantage to local firms (knowledge of local demand/control of distribution channels) Local firms may serve both markets (e.g., garment firms) 8 4

87 2012/12/6 Producers (structure and rivalry) Competition as the driver of innovations Need to pay pyattention to the sources of rivalry However, need to ensure economies of scale as a prerequisite for efficient production Need for policies to control entry Tradeoffs? Need to strike the right balance Or devise alternative measures to ensure discipline Case of natural monopoly: utilities (electricity, water), transport, postal service 9 Suppliers (related industries and services) Suppliers of materials, parts/components, machinery/equipment, and related services typically forming clusters A key source of industry s competitiveness Also a key to location decision of transnational corporations May consist of local and FDI firms Need to be aware of clusters emerging gin neighboring countries (e.g., automobile cluster in Thailand) Consider ways of exploiting complementarities 10 5

88 2012/12/6 II. Roles of Policies Creating conducive general environment Macroeconomic stability Clear legal/regulatory frameworks Provision of general infrastructure Proactive policies targeting industrial upgrading? Facilitating technologicalupgrading (R&Dandinnovations) Coordinating changes across various fronts (industrial structure, investments, human resources, location, infrastructure, etc.) 11 Industrial policies: Lessons from historical experiences (Rodrik 2007) Support should be provided to activities, not sectors. Activitiesto to be subsidized have clearpotential of providing spillovers and demonstration effects. There should be clear criteria for evaluation of success/failure. There must be a rule (ex ante) on withdrawal of support in case the project turned out to be a failure. Presumption: The government may make mistakes in picking the winners. Firms given support should be monitored closely. Government agencies need to maintain channels of communication with the private sector. 12 6

89 2012/12/6 III. Assignments for participants Question 1: What would be the key industry and key activities to leadvietnam s industrialization towards 2020 and beyond? Question 2: What policy measures are needed to facilitate the development of the key activities in the key industry? 13 Guidelines on Question 1 Be explicit about which activities within a particular industry. Provide reasons for the choice of the industry, covering both international context and domestic systems. Focus on industry specific factors rather than macroeconomic/general environment. Be explicit about the industry s (potential) strengths and weaknesses. Discuss how the current weaknesses may be overcome. 14 7

90 2012/12/6 Guidelines on Question 2 Start with a brief assessment of the industry selected. You may refer to the framework on industrial competitiveness ii (see slides 5 and 9). Focus on industry specific policies for medium term development, not general/macroeconomic policies. Try to reflect on the lessons of historical experiences See slide 14. Consider what types of organizational arrangements may be needed for effective implementation. Provide suggestions on organizational reforms needed, if any. 15 References Ministry of Industry and Trade (MoIT) and United Nations Industrial Development Organization (UNIDO) (2011)Vietnam Industrial Competitiveness Report Ohno, Kenichi (2003) Kokusai Togo ni Idomu Betonamu (Vietnam Facing International Integration in Kenichi Ohno and Nozomu Kawabata eds. Betonamu no Kogyoka Senryaku (Vietnam s Industrialization Strategy). Tokyo: Nihon Hyoronsha. Rodrik, Dani One Economics, Many Recipes: Globalization, Institutions and Economic Growth. Princeton: Princeton University Press. 16 8

91 12/6/2012 Selecting Potential Industry in Vietnam Hanoi, Sep 20, 2012 Nguyen Thi Xuan Thuy Institute for Industrial Strategy and Policy (IPSI) 1 Vietnam Japan Joint Working Group (1) Purpose: Strengthen the partnership between VN and JP in industrial development Activities: Selecting some potential industries Drafting action plan for each industry Implementing & monitoring Progress: Potential industries basically agreed by top leaders Drafting action plans is on going 2 1

92 12/6/2012 Vietnam Japan Joint Working Group (2) Selection criteria: 1. Precondition: interestof enterprises 2. Main criteria: Quantity impact (growth, export ) Quality impact (productivity, technology ) Linkage impact (clustering ) 1. Necessary condition(s): environment friendly, lawfulness 2. Others: Compatibility with Vietnam s policy and donors assistance 3 Vietnam Japan Joint Working Group (3) Selected industries: Group 1: E E, food processing, ship building, agriculture machinery, and environmental industry/substitute energy (JICA consultant team is drafting action plans) Group 2: Automobile, motorbike, textile garment, and steel (Vietnam side should be proactive in drafting and proposing action plans) 4 2

93 12/6/2012 IPSI s Industrial Development Strategy (1) Purpose: Realizing the goal to basically become a modern oriented industrialized nation by 2020 Activities: Draft strategy document for government s approval Propose strategic directions, priority industries, and policy measures Progress: Drafting and revising the document, going to submit to the government for review and approval by the end of Sep IPSI s Industrial Development Strategy (2) Selection criteria: 1. Important to nation s security, and rural & agricultural development 2. Quality impact (productivity, technology intensive, high value added ) 3. Quantity impact (output, export, employment ) 4. Compatibility with global/regional trends, potential investors interests 6 3

94 12/6/2012 IPSI s Industrial Development Strategy (3) Selected sectors/industries (2020): Mechanical and metallurgy: Agricultural machinery, ship building, mechanical parts and components (SI), steel Agro forestry product and food processing: Wood processing, agro product processing, maritime product processing E&E and IT: Electricequipments equipments, E&E parts (SI), industrialsoftwaresoftware Energy: Renewable energies, oil exploitation and refinery Chemistry: Technical plastics and rubbers, pharmaceutical chemistry 7 4

95 DOCUMENTATION

96 Mrs. Pham Quynh Mai, Deputy Director General, Multilateral Trade Policy Department, Ministry of Industry and Trade delivered Opening Remarks Dr. Vo Tri Thanh, Vice President of CIEM delivered introductory speech

97 First presentation in the Seminar was presented by Dr. Kriengkrai Techakanont, Associate Professor, Thammasat University, Thailand. Participants of the Hanoi Seminar, 20 September 2012 at Melia Hanoi Hotel, Hanoi, Vietnam

98 Photo Session: (left to the right) Mr. Minoru Makishima, Mr. Yasushi Iwata, Mr. Kriengkrai Techakanont, Mr. Yasuhiro Yamada, Dr. Vo Tri Thanh, Dr. Le Huong Linh, Dr. Kazunobu Hayakawa, Dr. Sothea Oum, Dr. Nguyen Dinh Chuc, Ms. Nguyen Thi Xuan Thuy, Ms. Mai Fujita, Dr. Kohei Shiino. Dr. Vo Tri Thanh was interviewed by some local medias during coffee break

99 Presentation titled FTAs in East Asia was presented by Dr. Kazunobu Hayakawa, Research Fellow, BRC-JETRO, Bangkok Dr. Kohei Shiino, Deputy Managing Director, Jetro-Singapore delivered his presentation on the rules of origin maximaxing benefits on FTAs

100 Mr. Yasuhiro Yamada, President of BRC-Jetro, Bangkok, closed the Seminar Participants of Closed Working Group Session 1, scrutinized Dr. Sothea s presentation

101 Closed Working Group Session 2, the participants discussed all related to the potential industry in Vietnam Participants of Closed Working Group Session 1, scrutinized the presentations from the moderators

102 Dr. Sothea gave a certificate to one of the participant who has successfully completed the working group session 1 Ms. Mai Fujita gave a certificate to one of the participant who has successfully completed the working group session 2

103 Dr. Vo Tri Thanh had chaired the Moderators meeting Dinner Reception at Golden Lotus at Melia Hanoi Hotel, more than 20 people participated.

104 PRESS RELEASE Vietnam Concerns Economic Integration September 20, 2012 By the year 2015, ASEAN Economic Community will be established, facilitating the free flow of goods, services, investment and labor in the region. And all of the activities continue to encourage and promote international and regional integration said Dr. Vo Tri Thanh, President of Central Institute for Economic Management (CIEM) during his speech in one day seminar and workshop in Hanoi, Vietnam. The seminar and workshop entitled "Vietnam s Upgrading in the Process of Economic Integration organized by Economic Research Institute for ASEAN and East Asia (ERIA) in cooperation with the Ministry of Industry and Trade of Vietnam and Central Institute for Economic Management (CIEM), supported by Bangkok Research Center (BRC), IDE JETRO. The seminar focuses on the importance of supply chain and economic integration. It aims to facilitate the businesses, associations, researchers, policy makers and others to access updated information and exchange views related to the Vietnam s integration, especially in the industrial sector. The event composes a half day morning seminar and afternoon closed working group which is divided into two sessions: 1) Role of industrial clusters and SME Linkages in firms upgrading: international experiences and challenges for Viet Nam, 2) Potential Industry in Vietnam in More Integrated East Asia. In each session, moderators both from Vietnam and other countries provided the challenging issues for the country and introduced the current situation in the region and best practices from other countries. Participants discussed and presented the suggestions to be considered for the topics during the Workshop. Over 70 participants attended the seminar and completed the workshop program.