Vietnam is in danger of quickly using up quotas in some apparel categories raising the possibility of early embargoes. US importers apparently shifted orders to Vietnam, following last year's poor experience with China. The country is however reeling from a quota corruption scandal that has named the Trade Minister as having been personally involved. The government's allocation process has also been criticised by leading exporters.
Some categories of Vietnamese apparel exports to the US could be embargoed earlier in the year as quota fill rates rapidly increase, latest US Customs' data confirm.
Quick fill rates
Category 359-S/659-S (Swimwear) has so far used 22 per cent of its quota allocations whilst category 341/641 (woven blouses) has filled 10 per cent.
Such rapidity could see quotas quickly used up and consequently early embargoes but this could be simply down to seasonal summer orders and fill rates may slow down shortly.
On the other hand several other categories have yet to arrive at US ports such as hosiery and cotton sweaters.
US importers will be keeping an eye on the speed of arrivals and, if they increase too fast, may consider placing orders with other low cost producers such as China.
Quota irregularities
Vietnam has also been experiencing difficulties in operating its export quota allocations.
2006 quota allocations are being distributed on demand until 30 June or until 70 per cent has been used up.
The government caused a further uproar by announcing that, further to this, companies wishing to seek increased allocations will need to deposit the equivalent of the value of the export contract in a bank.
At a meeting with various company heads, angry scenes developed in protest against the proposals.
Minister implicated in corruption
The government has been reeling under a corruption scandal for the past two years that with allegations that Trade Ministry officials have been taking bribes from companies seeking export quotas.
For the first time in the saga, the Minister himself has been implicated in the episode following police investigations.
State media have directly accused Truong Dinh Tuyen of involvement after police said he was partially responsible for issuing documents against government regulations.
Police have investigated 45 enterprises and found all to have had major irregularities.
Some firms not authorised to export were given quotas whilst others received allocations above the permitted limits.
Non-quota attraction
There are also indications that Vietnamese companies, put off by quotas, are turning towards producing non-quota apparel.
Apparel and textile exports not limited by US quotas leapt to US$1.1 billion in 2005 - up from just $200 million in 2001.
Shipments of quota categories on the other hand dropped slightly by $100 million to $1.6 billion last year.
Getting closer to WTO
Quotas, however, could become a thing of the past should Vietnam be accepted into the World Trade Organisation (WTO) later this year as planned.
Efforts to join the WTO have received a boost from the latest round of talks between Hanoi and Washington at the end of January.
Negotiations concluded with the US delegation reportedly happy at good progress between the two sides.
In order to be accepted to the WTO, Vietnam needs to convince a handful of countries that it is ready to do so and the US is the largest obstacle remaining.
Process needs to speed up
The process is tricky and Vietnam needs to assure Washington it is willing to agree to open up its services sector to US business namely in banking and telecommunications.
There are two crucial steps for the country to pass if it is to join the WTO by the end of 2006:
1) Sign a bilateral trade agreement with the US.
2) US Congress to vote on according Vietnam Permanent Normal Trading Relations (PNTR).
Analysts have warned Vietnam that the bilateral agreement needs to be signed soon in order to allow US Congress to vote before crucial November elections.
Preparing for the challenge
Companies in Vietnam have already been preparing themselves for the onset of WTO accession and are busy investing in new technologies and advertising to promote business.
Apparel and textile exports have been projected by Vietnam's Trade Ministry at US$5.4 billion for 2006 encouraged by normalising trade relations with the US.
The largest apparel producer is state owned Vinatex which received $1billion revenue last year - up 11 per cent from 2004.
Despite soaring raw material costs, the company was able to increase profits on improved production and business efficiency.
Many companies are also turning to local raw materials in a bid to cut down their reliance upon more expensive foreign supplies.
High transportation costs
Quotas aside, exporters are also concerned at the expensive cost of shipping their produce to markets overseas.
Transportation costs of goods from Vietnam are expensive and increased by an extra 28 per cent from Ho Chi Minh City and 25 per cent from Hanoi in 2005 compared to the previous year.
By March last year, it cost around US$3,000 to ship a 40-foot container from Vietnam to the United States - about $1,000 more than a company in China was paying.
The higher costs have subsequently been aggravated by the rising cost of petroleum which were 46 per cent higher in the second half of 2005 than during the first half.
Furthermore, transport infrastructure domestically is in a poor state and the cost of transportation by land is expensive and slow and also burdened by loading and unloading services as well as burdensome administrative procedures.
Higher inflation and currency fluctuations
Vietnam's economy is set for a further growth of 8.45 per cent in 2006, suggests the General Statistics Office in Hanoi.
The strong momentum already established in the economy has also been predicted to carry on into this year the International Monetary Fund (IMF) confirm.
However, the downside to Vietnam's soaring economic growth is coupled with accelerating inflation of between 8 and 9 per cent above the government's earlier target of 6.5 per cent.
The IMF has further warned of overheating in the economy fuelled by the country's surging exports although this has been held back to a certain degree by Chinese dominance in foreign markets.
The national currency also continues to fluctuate unsteadily with one US dollar worth between 15,000 and 16,000 dong over the past twelve months.
The latest exchange rates indicate the dollar to be trading towards the higher end of the range.
