THE IMPACT OF RCEP ON THE IMPORT VALUE OF THE IRON AND STEEL INDUSTRY IN VIETNAM FROM 2000 TO 2019

FOREIGN TRADE UNIVERSITYTHE IMPACT OF RCEP ON THE IMPORT VALUE OF THE IRON AND STEEL INDUSTRY IN VIETNAM FROM 2000 TO 2019 Name of authors: Phung Trang Linh1 Foreign Trade University, H

FOREIGN TRADE UNIVERSITY

THE IMPACT OF RCEP ON THE IMPORT VALUE OF THE IRON AND

STEEL INDUSTRY IN VIETNAM FROM 2000 TO 2019 Name of authors: Phung Trang Linh1

Foreign Trade University, Ha Noi

Do Thu Thao

Foreign Trade University, Ha Noi

Nguyen Son Tung

Foreign Trade University, Ha Noi

Nguyen Dang Tien

Foreign Trade University, Ha Noi

Abstract

The increasingly broad participation in world economic organizations provides Vietnam with many opportunities to attract foreign investors However, Vietnam faces a situation where many foreign investors would take advantage of the gaps in the Government’s tax incentive policies to avoid taxes This has caused many losses and serious state budget deficits Not only does the state lose a large amount of money which businesses have an obligation to pay, but it also creates a bad precedent, unfairness in tax for businesses In this article, the authors will analyze and assess the state of affairs of the Government’s preferential tax policies and the tax avoidance in the form of transfer pricing in Vietnam by foreign investors Following after are recommendations to complete the tax incentive policies and prevent tax avoidance in the form of transfer pricing of foreign investors

Keywords: Tax incentives policies, tax avoidance, transfer pricing, FDI enterprises,

Vietnam

1 Contacting author: phungtranglinh@gmail.com

1 Introduction

1.1 Overview of Vietnamese iron and steel market from 2000 to 2019

a) Growth situation

Vietnam's iron and steel industry has started in the 60s of the 20th century, with the first batch of iron in 1963 However, it was not until 1975 that the first steel batch came out at Thai Nguyen Iron and Steel Company After more than 50 years of development, Vietnam iron and steel industry has become an important industry in the economy

Previously, around 2004, Vietnam's steel technology was very modest, small, scattered and out of date Up to now, the steel industry currently has over 100 steel producers, notably Hung Nghiep Formosa Ha Tinh Iron and Steel Limited Company (Formosa), Hoa Phat Group (Hoa Phat), Hoa Sen Group, Hoa Phat Dung Quat Iron and Steel Production Complex,…

In 2016, Vietnam ranked 24th in crude steel production in the top 50 largest steel producing countries in the world according to statistics of the World Steel Association, up 2 ranks compared to 2015 (at the 26th place)

In Southeast Asia, Vietnam is at number 1, accounting for 29% of the total crude steel production of this region Finished steel production in Vietnam in 2017 ranked No 1 Association of Southeast Asian Nations (ASEAN), accounting for nearly 28.3% of the total output of steel products in the region

This is a very good step forward on the world steel industry map In 2020, Vietnam's crude steel production has reached a very high level of 19.5 million tons / year

b) The current situation of iron and steel industry import in Vietnam

Vietnam Imports of Iron and steel reached a peak at US$12.01 Billion in 2018, according to the United Nations COMTRADE database on international trade

In 2019, Vietnam spent some 9.5 billion U.S dollars importing roughly 14.6 million tons

of iron and steel Generally, in the first nine months of 2020, iron and steel imports was 6.05 billion USD at the volume of 10.36 million tons Compared to the same period in 2019, imported iron and steel decreased 4% in volume, 15.9% in turnover All in all, though import value increased dramatically in the first period from 2015 to 2018, it can be seen that since 2019, the import quantity of iron and steel to Vietnam experienced a downward trend This can be explained by sufficient supply from domestic producers and export control from our partners

Việt Nam was reliant on imported raw materials for steel production, including iron ore, scrap steel, fat coal and graphite electrodes It was predicted that Việt Nam would have to continue importing many types of raw materials for steel production this year with more than 18 million tonnes of iron ore, 6 - 6.5 million tonnes of scrap steel, 6.5 million tonnes of fat coal and 10,000 tonnes of graphite electrode Recently, due to soaring raw material prices coupled with delays in shipping due to the COVID-19 pandemic significantly pushed

up steel import prices The price of imported steel in the domestic market increased by up to

China was the largest country supplying iron and steel products into Vietnam with 52% value of import came from this country in 2015 In 2018, imports of finished steel products from China was approximately 6.27 million tons, down 10% in volume, but up 9.8% in value over 2017 The proportion of imported steel from China accounts for nearly 46.3% of total imported steel products The figure for 2019 showed a decrease in the imported value, which only takes up 30% of the total import turnover of iron and steel of the country Followed by Japan, Korea Taiwan, India and others It can be seen that the imports of iron and steel from majority of markets declined in both volume and turnover

Currently, the domestic production of HRC, a key input material for cold-rolled steel and other pre-painted galvanized steel sheet, which cannot meet domestic demand In 2018, Vietnam imported around 10 million tons of HRC, accounting for approximately 60% of total steel imports

1.2 Overview of the Regional Comprehensive Economic Partnership (RCEP)

1.2.1 Definition

About RCEP, or fully known as Overview of the Regional Comprehensive Economic Partnership (RCEP) The main goal of the pact is to cover trade in goods and services, intellectual property, etc This agreement was signed on November 15, 2020, after an eight-year negotiation, between 15 Asian-Pacific countries

1.2.2 Content

By creating an integrated market across 16 countries, RCEP concentrates on facilitating the flow of products and services supply among these regions, with the main focus on trade

in goods and services, investment, intellectual property, dispute settlement, e-commerce, small and medium enterprises, and economic cooperation

The RCEP is less "comprehensive" than the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) or the EU's Free Trade Agreements It barely touches upon issues such as sustainability or labor rights, clearly privileging a focus on trade

as the two following key elements show First, the agreement forms the very first trilateral free trade agreement among China, South Korea, and Japan Each of these three countries has an FTA with ASEAN, but negotiations on a trilateral FTA have been stalled for a long time South Korea and Japan will eventually remove 83 percent of tariffs on each other's goods under the RCEP China would also reduce tariffs on Japanese products entering its market by 86 percent The tariff reduction in the automotive sector deserves specific attention, with a much significant decrease to facilitate trade Another significant achievement is the signatories' agreement to harmonize the Rule of Origin Products with 40% or more of their components sourced from RCEP countries will be treated equally among the 15 countries under this agreement, using a single unified form

1.2.3 Impact

The sixteen-country negotiation makes up for a third of the world gross domestic product (GDP), as well as almost half of the world’s population, attributable mostly to the combined GDPs of China and India accounting for more than half of that

a) On Vietnam:

In the midst of the Covid-19 epidemic that disrupted global and regional supply chains, impacting the global economy and the emerging trend of trade protectionism, the signing of the Agreement for Regional Comprehensive Economic Partnership (RCEP) marks an important milestone in Vietnam's economic integration process and brings benefits both in the short and long term

1.2.4 Timeline:

a) From the beginning

RCEP was first introduced during the 19th ASEAN meet held in November 2011, and then later the negotiations were kick-started during the 21st ASEAN Summit in Cambodia

in November 2012 Up until now, all the participating countries are in the process of finalizing and deals signing since November 2019 Member states of ASEAN and their FTA partners are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam, China, Japan, India, South Korea, Australia, and New Zealand

In Beijing in 2012, the procedure was pushed hard by China, in an attempt to counter the Trans-Pacific Partnership (TPP) valid at that time led by the US, without the membership of China However, since the withdrawal from this FTA by President Donald Trump in 2016, RCEP has been considered an indispensable tool for China to counter the

US efforts, in order to prevent the country from trading with Beijing

b) The separate official pathway for India

However, the pact has only included fifteen members since the decision against participating in the Regional Comprehensive Economic Partnership from the Indian government on November 4, 2019 The given reason was not because it was shying away from global competition, but rather that it would lean towards a more favorable situation to all countries and all other sectors It is stated by the Prime Minister that RCEP “does not fully reflect the basic spirit” as well as “does not address satisfactorily India’s outstanding issues and concerns in such a situation”

Despite the official claim from the government, words have been spread about fear

within the Indians of being unable to compete with China, resulting in the flow of Chinese products into the domestic market It was also believed that Indian farmers had a worry about their lack of capability to compete globally Although, in another scenario, if India had been a part of RCEP, it would have allowed the country to tap into a potentially huge market, especially to its pharmaceuticals, cotton yarn as well as services industry

c) Recent ratification progress of RCEP participants:

Once ratified by three-fifths of the 15 signatories – namely six ASEAN countries and three non-ASEAN countries, the RCEP agreement will enter into force in 60 days According to China’s commerce ministry, all signatories to the RCEP have made clear that they will strive to complete ratification within the year to expedite its enactment by January

1, 2022

This year, the first mover, Thailand has approved the agreement on 11, February, following by Singapore, China, and Japan, all in this April

3

3.1 Econometric model

The gravity model of international trade in international economics is a model that, in its traditional form, predicts bilateral trade flows based on the economic sizes and

distance between two units Research shows that there is "overwhelming evidence that trade tends to fall with distance."[1]

The model was first introduced in the economics world by Walter Isard in 1954 The basic model for trade between two countries (i and j) takes the form of

Xij = G

M i α M β j

D ij θ

In this formula G is a constant, X stands for trade flow, D stands for the distance and M stands for the economic dimensions of the countries that are being measured For the purpose of econometric analysis the equation can be changed into a linear form by

employing logarithms:

This linear function can be estimated with Ordinary Least Square (OLS) or other

methods In fact, this function can be developed as trade flows among countries are affected by multiple factors such as GDP, GDP per capita, population, … Various structures

of gravity models can be used to evaluate the effect of these factors by representing those by Mi and Mj Besides, Dij can represent other factors affecting trade friction

namely borders, governments’ trade policies… Tariff and non - tariff policies also play an important role as there have been several empirical researches based on gravity models have stated that tariff and non – tariff policies cause certain impact on trade cost For

example, Linders et al (2008) Using trade weighted applied bilateral importer tariffs and a dummy variable for ‘low tariff and nontariff barriers,' researchers discovered that both tariffs and nontariff barriers have a negative impact on trade volume

Empirical studies based on gravity models state that tariffs and non-tariff measures (especially technical barriers to trade) are important factors affecting trade cost Tu Thuy Anh, Le Minh Ngoc (2017) takes into account the potential economic impacts of RCEP on the Vietnam Automobile sector by using gravity model and smart model This paper will take a look into a specific case of Vietnam’s import value from RCEP countries with products in group 732690 - articles of iron or steel nesoi This group is one of the 20 most adversely affected groups mentioned in Tu Thuy Anh, Le Minh Ngoc (2017) study and we want to dig deeper into the relationship between tariff and the import value; using gravity model as follows:

When the size of a partner's economy is higher, the rate of trade is projected to

increase The distance variable expresses how, as transportation costs increase, more distant countries have a propensity to trade less Our imports are likely to suffer as a result of the exchange rate ten In a similar vein, as tariffs are reduced, trade volume should increase

3.2 Data description

This paper collected a panel data of 14 RCEP Countries on average for the years 2000 –

2019, so that the sample size is 280 The actual number of observations is smaller as the statistical data for these countries in RCEP is inadequate Data on imports, country’s GDP, GDP per capita, population come from the World Bank Data on distance are taken from Google map

WITS provides tariff information Because of the differences, we use two forms of tariffs: Effectively Applied Tariffs (AHS) and Most Favoured Nation Tariffs (MFN) MFN tariffs are what countries promise to levy on imports from other WTO members unless they are part of a preferential trade deal, according to WITS Besides, AHS is the lowest available tariff If a preferential tariff exists, it will be used as AHS; or else the MFN applied tariff will be used In the case of RCEP countries, it appears to be more rational to use AHS, as many regional FTAs have resulted in widespread use of preferential tariffs on most products But AHS has a problem that it only exists when there is trade on the product, which means when a very high tariff leads to zero trade, it will not count as AHS

In the model, we use both forms of tariffs

The variables are listed in the table below:

Variables used in the model Variable name Definition

associated with an depreciation of Vietnamese Dong

lndis Log of the distance between the foreign country’s capital and Hanoi

Summary statistics for the data are provided in Table 5

Table 5: Summary statistics

Table 6: Correlation Coefficient

lnGDPVN 0.137726 2.18E-18 0.245786 0.259002 0.963325 -0.94939 -0.86522 0.999886

3.3 Regression strategy and results

The following model is taken from the previous part:

lnIMij = β1 + β2lndisij + β3GDPij + β4lnPOPij + β5lnGDPpcij + β6GDPvnj + β7lnGDPpcVNj + β8lnexratej + β9lnMFNj + β10lnAHSj + uij

where i refers to country i (except Vietnam), and j refers to year j (2000-2019), uij is

a time-varying idiosyncratic error We first estimate a Random Effects model using the panel data we collected, and simultaneously conduct a Wald test for heteroskedasticity The result suggests that using a POLS model is inappropriate Next we conduct a Hausmann test to choose between a Fixed Effects model and a Random Effects model The p-value is small enough to conclude that using a Random Effects model is preferrable

in every tests below The model used in this paper pass all the diagnostic test of multicollinearity, autocorrelation, cross-sectional dependent and normal distribution of residual

The results of the tests are presented in the table below We have estimated 5 models The first model estimates impact of all gravity variables and tariffs on import value The second model omit the exchange rate variable The third, fourth and last model experiment with the tariff variables

As this is a log-log model, coefficients and be interpreted as elasticities This means

a one-percent increase in the independent variables is equivalent to an increase of β percent in the dependent variable

The variables GDP and GDP per capita reflects the size of the economies in the gravity model The results suggest that those variables have positive effects on Vietnam’s imports of 732690 products (although the coefficient of the foreign GDP variable is significant in the second test) A one-percent increase in foreign GDP results in a 0.335- to 0.348-percent increase in import value Similarly, a one-percent increase in Vietnam’s GDP translates into a roughly 1.65-percent increase in import value

GDP per capita of foreign countries is found to have negative impacts on import value This is intuitively correct since the group 732690 consists of products with low technology requirements to manufacture This intuition also confirms the positive coefficient of Vietnam’s GDP per capita variable

Surprisingly, both tariff variables do not have statistically significant coefficient

Const -463.438 -348.995* -337.158 -356.271 -302.748

lnGDPpci 0.348 0.335* 0.344 0.342 0.347

lnGDPi 1.657*** 1.657*** 1.655*** 1.656*** 1.651***

lnGDPVN 26.636 19.154* 18.510 19.545 16.338

lnEx -1.988

lnDis -2.461*** -2.423*** -2.453*** -2.448*** -2.475***