In January the deficit ballooned to nearly US$1 billion as imports rose by 1.7 per cent to $20.8 billion, according to the General Department of Customs.

Exports were down by 1.3 per cent to $20 billion.

The biggest reason experts think the deficit could be around US$3 billion this year is a sharp increase in import of feedstock and raw materials by many sectors.

According to the Ministry of Industry and Trade (MoIT), imports are likely to increase in sectors whose production is still strongly dependent on imported raw materials and equipment and those performing outsourcing.

They include leather shoes, textile and garment and agriculture processing.

The ministry said the deficit so far this year was mostly due to import of electronic products, fabric, technologies, and components and accessories.

The question is why do Vietnamese enterprises still import such large quantities of materials and equipment?

Nguyen Duc Thuan, chairman of the Vietnam Leather, Footwear and Handbags Association, said the domestic supporting industry in those sectors remain very weak and unorganised and so cannot ensure sufficient supply of high-quality materials and accessories required by manufacturers.

Consequently, leather, footwear and bag companies have no choice but to resort to imports.

This means the country has to cope with global price volatility and production costs increase, which affects the competitiveness of Vietnam’s exports.      

Another and more important reason for the trade deficit this year is the number of free trade agreements including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and EU-Vietnam Free Trade Agreement (EVFTA) that have come into force this year.

The agreements have begun to attract investments in many sectors by both local and foreign enterprises seeking to take advantage of the opportunity to sell to the great partner markets.

This also means imports of technology, equipment, accessories, and raw materials are set to accelerate, worsening the trade gap.

On the export front many Vietnamese agricultural and fishery enterprises are facing increasing competition globally.

Analysts said challenges would persist through 2019.

Global sources of supply are expected to increase since more and more countries are entering the supply chain for agricultural products. The increasing production also means many countries are paring down imports of these products and replacing them with local ones.

The increasing supply and dwindling demand will almost certainly keep prices in check meaning export value is unlikely to rise by much.

Experts said while the free trade agreements that Vietnam has signed would bring opportunities for its companies to export more, it would not be easy to make use of them because exporters are required to meet certain requirements, one of which is the origin of goods.

If Vietnamese firms want to export to partner markets they would have to use locally sourced materials or from countries that are part of the same trade treaty.

Many Vietnamese manufacturers are heavily reliant on imported raw materials from non-partner countries.

The Vietnamese cashew industry, for instance, imports 63 per cent of raw cashew for processing mainly from some African countries like the Ivory Coast, Ghana and Nigeria.

Similarly, furniture markers import more than 39 per cent of their total wood requirements from Laos and Cambodia, which are not part of any of the trade deals.

Vietnamese enterprises would need to look for new sources and obtain proper certificates of origin, experts said. 

VNS