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ARE YOU READY FOR ASEAN 2015?Free trade agreements and economic partnerships are dramatically changing Asia’s business opportunities
Scan this QR code with your smartphone to visit:
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Inside This Issue:
Why ASEAN isImportant for Your Asia Business StrategyThe term “ASEAN” is cropping up more often these days, yet st i l l many businesses globally remain unaware of its impending impact on trade and the supply chain.
Inter-Asia Trade FlowsWe outline the fastest growing China trade corridors.
Using Singapore as a Base for Asia ExpansionAs a financial and services hub, Singapore is the new corporate base for Asia.
Vietnam as a Manufacturing Destination for Sales to ChinaAs China labor becomes more expensive, Vietnam’s factories are poised to fill the cost gap.
Issue 1 • January and February 2013
From Dezan Shira & Associates
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2 - ASIA BRIEFING | January and February 2013
Chet SchltemaSenior Legal Affairs Consultant, China
My NguyenLegal Affairs Consultant, Vietnam
Olaf GriesePartner, Dezan Shira & Associates, India
Christian Fleming Managing Editor, Asia Briefing Online
ASIA BRIEFINGIssue 1 • January and February 2013
Asia Briefing Contributors
This Month’s Cover ArtBy: Pham Khanh Thanh
Courtesy of: Green Palm Gallery, Hanoihttp://v2.greenpalmgallery.com/main.php
Dear readers,
Welcome to Asia Briefing, our new publication for the new breed of Asia-focused regional executives.
Many of you are familiar with China Briefing magazine and business news website, which has now moved
entirely online at www.china-briefing.com.
Asia, however, offers an even larger panorama than just China; one toward which businesses in Asia,
and overseas to the United States, Europe, Middle East, South America and especially Australasia are all
looking. This huge region is being brought together by increasing economic integration, and its rapid
development – from India to Australia and all points in between – will dramatically impact the global
supply chain and trade corridors.
At Asia Briefing, we believe that there is still a dearth of information examining the Asian region as a whole
and drawing meaningful comparisons for foreign investors between economies in the region. For this
reason, we have brought our company name to life in the form of this new business magazine and a
newly revamped business, legal, and tax portal: www.asiabriefing.com.
In this first issue of the bi-monthly Asia Briefing magazine, we introduce the vision that Asia is about to
project into reality, focusing on the new dawn that ASEAN free trade brings to the entire region, as well
as the dramatic added impact of pan-Asian free trade agreements such as the RECP - changes of which
many seem blissfully unaware.
We are of course able to do this do with the assistance of Dezan Shira & Associates (www.dezshira.com),
a specialty foreign investment firm now in its 21st year in Asia, and we have them to thank for much of
the legal, tax and technical information within these pages.
Welcome to Asia. Welcome to Asia Briefing.
Kind regards,
Introduction
All materials and contents © 2013 Asia Briefing Ltd. No reproduction, copying or translation of materials without prior permission of the publisher.
Chris Devonshire-EllisPrincipal, Dezan Shira & Associates,
Singapore and ASEANPublisher, Asia Briefing
ASIA BRIEFING To subscribe to Asia Briefing Magazine (US$60/year), and choose your complimentary Asia Country Guide, please visit www.asiabriefing.com
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. For further details or to contact the firm, please email [email protected], visitwww.dezshira.com to download the company brochure.
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Corporate Establishment, Tax, Accounting & Payroll �roughout AsiaTwenty-one years of excellence
January and February 2013 | ASIA BRIEFING - 3
Why ASEAN is Important for Your Asia Business Strategy
– By Chris Devonshire-Ellis, Dezan Shira & Associates
The term “ASEAN” is cropping up more often these days, yet
still many businesses are unaware of what it is and why it
is gaining in importance. The basic answer is fairly simple
– free trade across Asia. That means reduced or zero
customs duties across a space that includes the 10 ASEAN
nations in Southeast Asia, and includes additional agreements, still
under negotiation, that are expected to link in China, India, Australia,
New Zealand, Japan and South Korea with the same ASEAN bloc.
But firstly, let’s step back from that weighty statement - with all its
trade and supply chain implications - and examine exactly what
ASEAN is and how it will impact all businesses in China, India,
Australasia, Asia and beyond to the EU and United States.
ASEAN – the Association of Southeast Asian Nations – was formed in
1967 and comprises 10 Asian countries as an economic trade bloc.
It includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar,
Philippines, Singapore, Thailand and Vietnam.
Collectively, ASEAN represents a market of some 600 million people,
with a combined GDP of about US$1.8 trillion. If it were a country, in
economic terms it would be the ninth largest in the world. Effectively
a trade bloc situated between China and India, ASEAN is the third
Asian dragon in terms of its development as an emerging economy.
The OECD (Organization for Economic Cooperation & Development)1
for has projected growth within ASEAN to be about 6 percent per
year for the period 2011-15, making it the second fastest growing
4 - ASIA BRIEFING | January and February 2013
Why ASEAN Is Important for Your Asia Business Strategy
region globally after China. Because of that, and ASEAN’s developing
wealth and trade opportunities, China has specifically targeted
ASEAN as a bloc with which Chinese companies need to be doing
business. It makes sense; China-based companies and foreign
investors need to expand overseas, ASEAN is right next door, and
ASEAN represents a fast growing opportunity for growth in sales
and trade. Indeed, ASEAN overtook Japan in 2011 to become the
third-largest trade partner with China with trade figures reaching
US$362.3 billion, only behind the European Union (US$567.2 billion)
and the United States (US$446.6 billion).
Even so, aware that not everyone has fully recognized the
significance of ASEAN, the Chinese government has been going to
some lengths to encourage Chinese trade with the bloc, even setting
up a China-ASEAN trade office to raise ASEAN’s profile within China.
That is important, as China has double tax and free trade agreements
with ASEAN, only recently inking a deal that permits zero tariffs on
over 7,000 products.
That was done as part of the ASEAN-China Free Trade Area (ACFTA),
being an agreement between China and the 10 member states of
ASEAN. The ACFTA is the largest free trade area globally in terms of
population and third largest in terms of nominal GDP. The free trade
agreement reduced tariffs on 7,881 product categories, or 90 percent
of imported goods, to zero. This reduction has already taken effect
in China and the six original ASEAN members: Brunei, Indonesia,
Malaysia, the Philippines, Singapore and Thailand. The remaining
four countries – Cambodia, Laos, Myanmar and Vietnam – will follow
suit in 2015. With India following on with its own ASEAN FTA in 2016,
these dates acquire some significance for Asian-focused trading
companies in getting prepared.
However, ASEAN has also signed other significant agreements.
The ASEAN-India Free Trade Area (AIFTA) is a similar agreement
and came into effect on January 1, 2010. The AIFTA will see tariff
liberalization on over 90 percent of products traded between the
two dynamic regions, including so-called “special products,” such
as palm oil (crude and refined), coffee, black tea and pepper. Tariffs
on over 4,000 product lines will be completely eliminated between
ASEAN and India by 2016.
Additional agreements are also in place with Australia and New
Zealand in the form of the ASEAN–Australia–New Zealand Free Trade
Area; with Japan in the form of the ASEAN–Japan Comprehensive
Economic Partnership; and in South Korea with the ASEAN–Korea
Free Trade Area. All of these came into effect in 2010 and have already
begun to lift trade figures between ASEAN and these respective
countries. What this means is that from now until 2015 and then
2016, the flow of trade, the shape of the global supply chain, and
the opportunities for selling goods and services right across Asia are
changing and, in doing so, the customs duties will be increasingly
attractive. Taking advantage of the trade opportunities means
getting prepared now. The impact of the ASEAN bloc upon the
region, and upon global trade dynamics will be immense. It also
opens up huge potential for global businesses to enter the ASEAN
market, establish a presence, and use that to reach out to China,
India, and beyond.
It makes sense – China’s manufacturing capacity is slowing, and
becoming more expensive just at the time when its population is
moving to a more consumer-based society. The immediate impact
of ASEAN, to some extent, is to provide a lower cost manufacturing
base and to use that as a springboard to export to China. This is why
manufacturing in Vietnam is starting to take off as an alternative
to China – not purely because Vietnam is cheaper in terms of
labor costs, but also because as part of ASEAN, that 90 percent
of manufactured goods will be traded with zero duties by 2015.
The Vietnamese government has just announced plans to make
corporate income tax in the country among the most competitive
in Asia, reducing it to 23 percent (against China’s 25 percent) later
this year. The same applies to Cambodia, Laos and Myanmar, which
is one reason the latter suddenly appears to be in such a hurry to get
its reforms in place. But multinationals being based in Vietnam, with
a border directly with China and a long coastline with increasing
TEU capacity through its ports, in order to target the China and India
markets is beginning to make a lot of sense.
When it comes to the Asia-Pacific region, including the west coast
of the United States, the UN Economic and Social Survey of Asia and
the Pacific released a 2012 survey2 showing that Asia is the world’s
fastest growing region and an anchor for global economic stability.
With those sorts of sustainable growth rates, it is no wonder that
investment gurus such as Mark Mobius are so bullish on Asia. Quoted
in Thailand’s largest English language newspaper, “The Nation”, he
stated that “emerging markets are growing four times faster than
developed countries.”
For more business news, foreign investment legal,
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Available in multiple languages
Inside This Issue:
The Annual Compliance Process for China FIEsGetting your China accounts and audits to international standards can be problematic. We discuss China GAAP vs. U.S. GAAP/IFRS, and the 2012 annual audit and filing processes for ROs, FICE, WFOEs, and JVs.
Individual Income Tax Finalization for ExpatriatesAn annual IIT declaration needs to be completed by almost all expats in China for 2012 earnings. We discuss what determines salar y, what can be counted as tax deductible expenses, and the exact definition of the 183 day residency rule.
Current U.S. Securities and Exchange Proceedings W e c o m m e n t o n t h e
proceedings against the
Chinese arms of the Big Four
and how this may impact
foreign investors.
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Annual Compliance, License Renewals, & Audit ProceduresIncluding discussions of audit procedures, China’s audit quality gap, China GAAP vs. IFRS, and annual renewals for ROs, FICE, WFOEs and JVs
Issue 131 • January and February 2013
From Dezan Shira & Associates
January and February 2013 | ASIA BRIEFING - 5
Why ASEAN Is Important for Your Asia Business Strategy
Our complete guide to all ASEAN nations including demographics, double tax treaties and free trade agreements between ASEAN nations and the US, EU and other key regional markets. Includes foreign investment information for Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
Look out for our February Launch of www.aseanbriefing.com
Scan this QR code to visitthe ASEAN Briefing website.
ASEAN then is developing as an excellent starting point for reaching
out to the region’s developing markets, but the benefits of that
extend beyond setting up a physical presence in the bloc. An
ASEAN-based company enjoys not just the automatic tax and free
trade benefits of intra-ASEAN trade, but also those sexy free trade
and double tax agreements that ASEAN is currently negotiating with
China, India, Australiasia, Japan and South Korea. This includes the
Regional Comprehensive Economic Partnership (RCEP).
These ASEAN agreements are the primary reason why international
trade and tax experts expect Asia to help the world economy get
out of the current financial doldrums. Taking advantage of ASEAN
then is a relatively simple matter; just as many Hong Kong companies
have been used as springboards and advantageous tax structures for
getting into China, foreign-owned Singapore companies now offer
tax efficiency combined with a level and transparent regulatory and
legal environment, coupled with a zero approach tolerance towards
corruption and a free trade springboard into ASEAN and its other
free trade agreements.
Establishing such a presence gives access to the ASEAN free trade
agreements that the bloc has between its own members, and with
China, India, Australasia, Japan and South Korea. Using a Singaporean
company to hold subsidiary operations in any of these then allows
foreign businesses the ability to enjoy Singapore’s low tax rates
while also taking full advantage of the free trade and double tax
agreements of ASEAN and each of its trade partners, including
China, India and the Japan-Korea-Australasia triumvirate. This is a
total free trade area that is already the fastest growing in terms of
returns and will become the largest free trade area in the world.
Businesses interested or even currently based in Asia, China and
India should be looking at Singapore-based ASEAN subsidiaries to
take advantage of what is going to be a huge free trade area with a
significant impact on global trade and supply chains.
Furthermore, China has agreed to negotiations to create a 16-nation
trade bloc, known as the Regional Comprehensive Economic
Partnership (RCEP), formalizing the steps at the 21st ASEAN summit
in Phnom Penh3 two months ago. The RCEP will include the 10
members of the Association of Southeast Asian Nations (ASEAN) plus
China, India, Japan, South Korea, Australia and New Zealand, and
when implemented will have the effect of lowering trade barriers
and custom duties across the region by the end of 2015.
The RCEP framework was endorsed by leaders at last November’s
ASEAN summit. South Korean Trade Minister Bark Tae-ho has said
that China at first only wanted to have ASEAN plus three other
nations (China, Japan and South Korea) included in the pact, but a
counter proposal from America for a Trans-Pacific Partnership (which
excludes China) pushed China to enter into talks for a wider-ranging
accord, and one that includes India.
With the dawning of the RCEP, Asia is poised to enter into a new era
of mutual trade and growth dynamics. ASEAN already has individual
free trade agreements in place with each of the participating
countries. The emergence of free trade across the region through
the numerous ASEAN FTA will have a profound effect on China,
India and Asia, let alone the global players that do business here. Is
your company prepared?
1 See: www.oecd.org2 See: http://www.unescap.org/pdd/publications/survey2012/index.asp3 See: http://asean2012.mfa.gov.kh/
MYANMAR
THAILAND
LAOS
CAMBODIA
BRUNEIMALAYSIA
CHINA
VIETNAM
PHILIPPINES
SINGAPORE
INDIA
INDONESIA
SOUTH KOREA JAPAN
AUSTRALIA
NEW ZEALAND
The Regional Comprehensive Economic Partnership
6 - ASIA BRIEFING | January and February 2013
Intra-Asia Trade Flows
Intra-Asia Trade Flows– China and India Corridors to Lead The Way
A report last month from the United Overseas Bank
(UOB) of Singapore has indicated that the global
economy will increase by 73 percent over the US$63
trillion seen in 2010 to reach US$109 trillion by
2020, with Asian trade flows one of the key factors
contributing to this robust growth.
Within Asia, bilateral trade corridors involving China and India will
be the fastest growing sectors, leading the way for Asia (excluding
Japan) to make up roughly one-third of the world’s total economy
by 2020 (double the region’s current levels).
The report, entitled “The Rise of Intra-Regional Trade in Asia”1
suggests that several trade corridors are opening up that are
of immense significance to both Chinese and global trade. The
fastest growing trade corridor globally will be India’s trade with the
Middle East, whereas the fastest growing trade routes involving
China are:
• China-India
• China-Africa
• Latin America-China
• EU-China
• China-MENA
• China-United States
• China-Asia
The report suggests that import demand from emerging Asia
will increase as private consumption develops to become an
important growth engine for the region. Structural factors
supporting this theory include strong demographics, growth in
disposable income levels, and increased urbanization throughout
Asia. An explosion of middle class wealth across Asia is expected
to launch a wave of spending power – good news for global
manufacturers looking to break out of their domestic markets.
The establishment of free trade across ASEAN by 2015 is a major
factor underpinning this evolution of higher intra-regional trade.
Although the free flow of most trade goods can be expected, there
may still be some resistance to banking and telecommunications,
although within ASEAN and its other trade partners such as
China and India, talks are underway to find common ground. The
statistics presented are likely to resonate beyond 2020, however,
as by that time the ASEAN member state Indonesia is expected
to become one of the world’s top 10 largest economies, with a
US$3 trillion GDP.
1 See: http://www.media-server.com/m/p/w32xt45v
ASEAN’s Total Merchandise Exports by Destination
Region Percent of ASEAN’s Total Exports2000 2011 2020 Forecast
Intra-ASEAN 22.8 25.3 30.0China 3.9 11.5 15.0India 1.6 3.7 6.0Japan 13.6 10.2 8.0EU 27 14.9 10.7 8.2United States 20.1 9.8 8.5Middle East 1.9 2.6 3.5Source: UOB Report, “The Rise of Intra-Regional Trade in Asia“
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January and February 2013 | ASIA BRIEFING - 7
Using Singapore as a Base for Asia Expansion
– By Eunice Ku and Nathan Susanto, Dezan Shira & Associates
As a financial and services hub, Singapore is the de facto
financial capital of ASEAN. For companies interested
in doing business with ASEAN, the place to start is
Singapore.
Companies in Singapore enjoy a low corporate income tax rate of
17 percent, no tax payable on dividends earned externally from
its borders, and even tax incentives for SMEs wishing to establish
operations in the country. It is also possible to operate a Singapore
company as a “shelf” entity to take advantage of these benefits
without going to the expense of setting up a full service office. As
such, Singaporean companies are an excellent base from which to
direct operations from ASEAN, thus qualifying for the intra-ASEAN
free trade agreements and for those with China, India and beyond.
While Hong Kong remains an attractive location from which to
hold investments into China, Singapore’s close relationship with
ASEAN countries (Indonesia, Malaysia, the Philippines, Thailand,
Brunei, Burma, Cambodia, Laos and Vietnam) make it an appropriate
destination for all aspects of business in the region beyond the free
trade access provided under the ASEAN Free Trade Agreement itself.
While China (including Hong Kong) has a separate free trade
agreement with ASEAN, this agreement is not as far reaching as the
tax treatments that ASEAN members enjoy. Furthermore, economic
agreements such as the RCEP also enhance Singapore’s position as
a base from which to reach out to destinations such as India and
even Australia.
Requirements for IncorporationA professional services firm must be engaged to register on the
behalf of companies with non-Singapore National Registration
Identity Card (NRIC) holders, non-Employment Pass holders and/
or non-Dependant Pass holders in the role(s) of director, company
secretary and/or shareholder.
Key points of Singapore company incorporation include:
At least one shareholder
• A Singapore private limited company should have at least one
shareholder, but no more than 50.
• The shareholder can be a person or another legal entity and 100%
foreign shareholding is allowed.
• New shares can be issued or existing shares can be transferred to
another person anytime after the Singapore company has been
incorporated.
At least one director that is a Singapore resident
• A resident is defined as a Singapore Citizen, a Singaporean
Permanent Resident, an Approval-in-Principle Employment
Pass holder, or a person who has been issued an Entrepass,
Employment Pass, or Dependent Pass.
• There is no limit on the number of additional local or foreign
directors a Singapore private limited company can appoint. Most
companies will have at least two directors, as banks and other
financial institutions usually require two signatories.
• The sole shareholder and sole director can be the same person,
but non-shareholders can also be appointed as directors.
Company secretary who is a Singapore resident
• A company secretary must be appointed within six months of its
incorporation.
• In the case of a sole director/shareholder, the same person cannot
act as the company secretary.
Tax incentive programs offered by the Singapore government,
such as the Global Trader Program and HQ Program, are also draws,
as well as tax incentives are available under the Productivity and
Innovation Credit (PIC) Scheme, which encourages businesses,
especially SMEs, to invest in productivity and innovation.
Under the PIC Scheme, businesses can get cash payout or a
400 percent tax deduction/allowances on expenditure of up to
S$400,000 on each of the following six activities:
1. Purchase / lease of prescribed automation equipment
2. Training expenditure
3. Acquisition of intellectual property
4. Registration of intellectual property
5. R&D
6. Design expenditure
SME Tax Incentives
8 - ASIA BRIEFING | January and February 2013
Using Singapore as a Base for Asia Expansion
Paid-up Capital
• The minimum paid-up capital (also known as share capital) for
registration of a Singapore company is S$1.
• The paid-up capital can be increased anytime after the company’s
incorporation.
Registered Address
• A physical (residential or commercial) local Singapore address
must be provided as the registered address of the company.
• The premises of this address must be approved for business use
by the Urban Redevelopment Authority (URA) and residential flats
or properties can only be used under the Home Office Scheme.
(P.O. Boxes cannot be used.)
Incorporation ProcessSimilar to Hong Kong, most Singapore companies are registered as
private limited liability companies. Generally, a private limited liability
company can be incorporated in 1-2 days. Company registration
is completed online with the Accounting & Corporate Regulatory
Authority (ACRA).
Incorporation will only take between 14 days and 2 months if the
application needs to be referred to other authorities for approval
or review. Certain types of businesses (e.g. private school, spa,
telecommunications) require licenses and permits, which can be
obtained post-incorporation.
Annual ComplianceAnnual General MeetingEach Singapore company must hold the first annual general meeting
within 18 months of its incorporation, and no more than 15 months
may elapse between subsequent annual general meetings (unless
approval of the Registrar is obtained).
Private companies can dispense with annual general meetings if a
resolution to that effect is passed by all members with voting rights
at a general meeting of the company.
At the annual general meeting, directors should present a true
and fair view of the company’s profit and loss accounts to their
shareholders. Accounts presented at the annual general meeting
should be made up to a date not more than 6 months before the
annual general meeting.
Filing of Annual ReturnSingapore companies must file an annual return with the ACRA
within 1 month of the company’s annual general meeting.
Particulars of the company officers, registered address, and auditors
(if applicable) must be included in the annual return.
A company can engage the services of a professional firm or a service
bureau to file the annual return on its behalf.
For more information on establishing and maintaining Singapore
companies, please email [email protected] or visit
www.dezshira.com.
2013 Changes to the Singapore Companies Act
The Singaporean Ministry of Finance (MOF) has accepted 192
and modified 17 recommendations of the Steering Committee
for the Review of the Companies Act, as of October 2012.
This comprehensive review marks a major step forward in
Singapore’s corporate regulatory framework, and these changes
are scheduled to pass into law in mid-2013.
These wide ranging changes are expected to reduce regulatory
burden and compliance costs, provide greater flexibility for
companies, and improve corporate governance. They will bring
benefits to various stakeholder groups such as companies,
small-and-medium enterprises (SMEs), retail investors and
company directors, including the following:
• Impact on Companies
Companies will be allowed to issue non-voting shares and
shares carrying multiple votes if their Articles allow it and
subject to certain safeguards. This will give companies
greater flexibility in raising capital, and meet different investor
preferences.
• Impact on SMEs
A new small company concept will be introduced for
determining the requirement for statutory audit. SMEs can
look forward to lower compliance costs. An approximate
additional 10 percent of companies or about 25,000 more
companies can enjoy exemption from audit.
• Impact on Retail Investors
A multiple-proxies regime will be introduced to allow indirect
investors and Central Provident Fund (CPF) investors to attend
and vote at shareholders’ meetings. This will provide for more
active participation at general meetings by the beneficial
owners of the company, and help strengthen the culture of
corporate governance.
When passed into Singaporean legislation, these changes will
provide even greater incentives to invest into Asia via Singapore,
especially for SMEs. Coupled with the ASEAN FTA agreements
Singapore enjoys as a full member, these changes can be
expected to project the country as a primary destination for
finance and investment into Asia over the next decade.
Source: Singapore Ministry of Finance, October 3, 2012
January and February 2013 | ASIA BRIEFING - 9
Vietnam as a Manufacturing Base for Sales to China
– By Hoang Thu Huyen and My Nguyen, Dezan Shira & Associates
One of the great enigma’s concerning managers across
Asia today is Vietnam’s trade relationship with China,
its massive northern neighbor with which it shares
an 840-mile border.
This is a timely question to examine, not least because Vietnam is
one of Asia’s “Tiger Economies” and, although it has suffered over the
past three years like everyone else in the wake of the Global Financial
Crisis, the country has proven remarkably resilient.
The addition of an ASEAN-China free trade agreement in 2015
will likely mean that ASEAN, with Vietnam as a core member, will
become China’s largest trade partner that same year, with total
trade worth some US$500 billion. To contrast the enormity of this
figure, the entire United States sold just one-fifth of that in exports
to China in 2011.
Vietnam can easily link with China’s supply chain infrastructure - there
are already extensive rail connections between Hanoi, Kunming
and Nanning, and the northern Hai Phong Port is undergoing
substantial development. Yet Vietnam’s relationship with China is
both economic and political, and the manner in which these play
out that will provide clues as to the true nature of the stresses and
opportunities within the trade gap. Despite both countries being
officially communist regimes, Vietnam has offered a cool hand to
China, wary of getting too close due to the 1979 war and ongoing
territorial disputes still fresh in many people’s minds.
While other Asian nations – including nearby Myanmar and
Cambodia – have fully embraced China in the past in terms of
economic assistance, Vietnam has remained and continues to
remain aloof. That is not to say that bilateral trade between Vietnam
and China is not booming, because it is, reaching US$35.7 billion
last year.
Yet Vietnam remains politically cautious towards China. Ongoing
territorial disputes between the two in the South China Sea certainly
are not helping the situation, and Vietnam has recently refused to
endorse the new Chinese passports which depict the entirety of
the contested territory as Chinese.
This lack of trust over longer-term Chinese intentions has steered
Vietnam to look in multiple directions – north and east towards
China, but also to the south and west towards Asia. Vietnam’s trade
with fellow ASEAN member countries is currently some US$27 billion
and, unlike countries such as Cambodia, the country has been active
in using ASEAN free trade agreements with other countries such as
India, Japan and Australia to widen its economic base and lessen
dependence upon trade with China.
Of the ASEAN members, Singapore, Thailand and Malaysia are
Vietnam’s largest partners, while outside of the group trade is also
growing significantly with India and Japan. Vietnam is spreading its
trade wings further afield at least partly due to its belief that China
has not always proven particularly sensitive to other nations within
the region. Vietnam has past experience of being treated as a de
facto vassal state, and until recently even Myanmar was treated in
this manner through China’s support of their military regime for
many years. Yet even the hard-line Burmese generals began to feel
enough was enough.
Additionally, Vietnam, while communist, is still largely Buddhist in
its beliefs, and quietly, the Dalai Lama is a respected figure among
many Vietnamese. The typical Chinese rhetoric towards the Buddhist
leader makes many Vietnamese uncomfortable. Meanwhile, while
Cambodia is still close to China, it too is being wooed by President
Obama, who visited shortly after his reelection. Such American
moves fit in with Vietnam’s China policy; trade is healthy, but
Vietnam remains cautious in terms of the political ramifications of
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10 - ASIA BRIEFING | January and February 2013
Vietnam as a Manufacturing Base for Sales to China
an overreliance on China’s economy – a necessary caution with a
powerful neighbor that has been well-observed in Hanoi.
Vietnam’s policy of enlarging its multilateral trade space is also
about to pay dividends. With the 2015 ASEAN free trade agreements
with China, India, Japan, South Korea and Australasia coming into
effect, the country is poised to offer a manufacturing base for many
companies wishing to sell to the entire region.
Wage increases in China are a matter of national policy, and although
this is creating a much-needed and fast-growing consumer market,
it is also having the effect of raising salary levels at an average rate of
some 22 percent per year. While prices in Vietnam have also risen –
and its economy is not immune to inflationary shocks – Vietnamese
wages are about one-third of those seen in South China.
This means that Vietnam is developing as an export-driven
manufacturing base, just as China was in the late 1990s to mid-2000s.
The free trade agreements coming into force mean that Vietnamese-
made products (or those from anywhere else in ASEAN) will, for the
most part, be able to be sold to the China market at zero tariffs.
Add to that an array of free trade and bonded zones (just like China
used to have) that minimize taxes on products assembled and
then exported, plus commitments to improve the nation’s ports
(especially those at Haiphong and HCMC), the tax and operational
infrastructure to push Vietnam forward as a credible manufacturing
destination for China consumption is already taking place. Vietnam
also offers a lower wage base compared to China, whose own labor
costs are increasing at an average rate of 22 percent per annum.
This trend has been duly noted, not least by American companies
already extant in Vietnam. As Christopher Towmey, current Chairman
of the American Chamber of Commerce in Hanoi mentioned in the
Chamber’s annual end of year 2012 Vietnam Business Forum address:
“AmCham cooperation with and support of Vietnam’s government
and business has led to a substantial increase in bilateral trade over
the last twelve years: from only US$1.5 billion in 2001 when the
BTA went into effect (December 2001); to US$9.7 billion in 2006
when Vietnam achieved WTO Accession and Permanent Normal
Trade Relations with the U.S. (December 2006); to more than US$22
billion in 2011.”
“Based on trade data for the first nine months of 2012, we expect
that Vietnam-U.S. bilateral trade will have been US$24.5 billion in
2012, and will reach nearly US$50 billion by 2020, if present trends
continue.”
For professional advice concerning investment into Vietnam,
please contact Dezan Shira & Associates at [email protected]
or visit www.dezshira.com.
The message is simple – while China evolves to a consumer economy, the choice of locations to service that from the manufacturing perspective do not necessarily have to be based in China. Vietnam offers an alternative option well worth consideration, and the lead up to ASEAN integration and the additional free trade agreements expected by 2015 will begin to shine the spotlight on Vietnam with increasing brilliance.
FDI by Economic Activity
(total registered capital, US$ million, accumulation of projects having effect by the end of 2011)
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
100,000
Manufacturing Real estate activities
Accommodation and food service
activities
Construction Electricity, gas, stream and air conditioning
supply
Source: General Statistics Office of Vietnam
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