India and Vietnam Deepen Integration With Eurasian Economic Union
Rajaram Panda - 03 Jun 2015
Since the launch of Doi Moi (Renovation) in 1986, Vietnam has leapfrogged from a centrally planned economy to a market-driven one and has undertaken comprehensive reforms to make the economy market-friendly.
The various market-oriented reforms have helped encourage competition among economic units, which have helped boost the nation’s gross national wealth.
There were three thrust areas where the reforms were focussed: improvement of institutions with enabling motives, stabilisation of macroeconomic situations and pro-active integration into the regional and world economy.
In a world of increasing economic interdependence, the economies of nations are so closely interlinked that any adverse development in one country can have crippling effect on other nations.
This calls for constant coordination of policies that serve the common goals - that is fostering economic prosperity across nations and beyond boundaries.
The regional and international organisations dealing with economic issues also help in mitigating contending issues when they arise.
Besides, there is a flurry of bilateral and institutional arrangements across continents that also facilitate economic integration process.
In this, Vietnam is a front runner in becoming proactive in fostering international economic integration and enhanced all available opportunities to boost external trade.
Besides signing bilateral trade agreements, Vietnam joined the Association of South East Asian nations (ASEAN) and the associated Free Trade Area (AFTA) in 1995.
In 1998, it joined the Asia Pacific Economic Cooperation (APEC).
Since 2000, Vietnam has accelerated the economic integration process and entered into the most comprehensive bilateral trade arrangement with the US, before entering into various multilateral free trade agreements (FTAs) within the ASEAN framework such as ASEAN-China FTA, ASEAN-Korea FTA, ASEAN-Australia-New Zealand FTA, ASEAN-Japan Comprehensive Economic Partnership, ASEAN-India FTA.
In 2007, it became a member of the World Trade Organisation.
These however did not complete Vietnam’s economic integration process.
Vietnam started negotiations with the Eurasian (Economic) Customs Union (EEU) of Belarus, Kazakhstan and Russia in March 2013.
This was concluded in December 2014 in Vietnam’s Kien Giang province in a ceremony witnessed by Prime Minister Nguyen Tan Dung.
The document was signed on 29 May 2015 in the village of Burabay (Kazakhstan) at the meeting of the Eurasian Intergovernmental Council after finalizing some technical details.
The EEU is an international economic union of Russia, Belarus, Kazakhstan, and Armenia.
The agreement is the first international comprehensive preferential document with a country of the Asia-Pacific region that EEU signed regulating all aspects associated with the movement of goods and services such as reducing or waiving tariffs for many goods, and that creates a free trade zone between the EEU and a third party.
Russian Prime Minister Medvedev was quoted to having said that the FTA “will reduce or waive tariffs for many goods”, though tariff protection will remain for some of the more sensitive categories.
The parties also signed an agreement on the movement of ozone-depleting substances and products containing them and the tracking of ozone-depleting substances in the mutual trade between the member states of the Customs Union and the Single Economic Space.
Which way Vietnam is going to benefit apart from tariff reduction?
The FTA with EEU is not only in pursuance with Vietnam’s open-door economic integration strategy, but it would also facilitate liberalisation of trade and result in higher economic and trade cooperation between Vietnam and the EEU, apart from boosting investment.
Specifically, the FTA covers trade, custom facilitation, intellectual property, investment, legal issues, military industries, rules of origin, animal and plant quarantine, and lifting legal and technical barriers to trade.
From now on, Vietnamese exports can enjoy preferential tariff treatment and that would facilitate increased exports of agricultural products, seafood, textile and garments, and wooden furniture.
Similarly, goods imported from the EEU shall receive preferential tariffs and these include machinery, vehicles and livestock products.
Vietnam and Russia aim to have their bilateral trade to reach $10 billion by 2020. Currently, Russia has invested $2 billion in 104 projects in Vietnam, including $1.12 billion in 32 projects in the manufacturing and processing sector.
Twenty-seven per cent of Russian investment is in the oil and gas sector.
This is distributed as $ 1 billion in Binh Dinh province, $129.5 million in Hanoi, and $52 million in Ba Ria-Vung Tau province.
After the US and the West imposed economic sanctions over the Ukraine crisis, Russia started diversifying its agricultural imports when sources such as from Australia, Canada and the European Union dried up following sanctions.
According to World Trade Organization, agricultural products accounted for 21.6 per cent of Vietnam’s exports to Russia in 2013.
Vietnam’s exports of seafood products to Russia totalled $61.3 million in the first quarter of 2014.
As Russia seeks trade alternatives, the FTA with Russia shall help this figure to rise.
How does this development impact India-Vietnam relations?
The answer to the question can be only positive. Vietnam’s open economy policy complements with India’s on-going market reforms.
Both the countries have found a great deal of commonality in the economic, political and security/strategic domains.
Historical bonds help this policy as well. Defence cooperation and particularly cooperation between the navies of the two countries hone the partnership.
China’s aggressive posture in the South China Sea and muscle-flexing ventures make the rest of Asia feel unease.
India is always on board with Vietnam in supporting and if necessary would not be found wanting to defend its own national interests.
India is engaged in oil exploration activities on the invitation of Vietnam in the areas of South China Sea that are claimed by Vietnam and would not hesitate to intervene if any outside power poses a threat to its activities.
Moreover, India has a very close relationship with Russia since during the cold war days. It still maintains a robust relationship in the defense sector, duly complemented by the economic benefits unleashed by its market economy policy.
With already strong ties with Vietnam and with Vietnam reaching out to Russia and other Central Asian nation, India-Vietnam-Russia trilateral ties gain traction.
This trilateral partnership shall also serve well to cope with the China challenge.
Relevance to India
How is the Vietnam-EEU FTA going to impact India’s economic footprint in the region? It is likely to be significant.
This major step towards economic integration between Eurasian region and Southeast Asia is going to be significant in boosting India’s trade in the region.
The Vietnam-EEU FTA deal is to be soon followed by Prime Minister Narendra Modi’s planned visit to five central Asian nations in July 2015 that is clubbed with his maiden visit to Russia for the BRIC summit in Ufa on 8-9 July.
Modi’s planned trip to the central Asian countries is being perceived as an ‘energy trip’ as India eyes to tap the huge natural resources including hydrocarbon and uranium.
Modi plans to spend a day each in Kazakhstan, Uzbekistan, Kyrgyzstan, Turkmenistan and Tajikistan.
He is also expected to attend the Shanghai Cooperation Organisation summit in the same city on 9-10 July.
India has remained as an observer in this regional grouping for years and is keen to be elevated as a full member.
Though it would be premature to hazard a guess on the deliverables from the single day trips to the five Central Asian countries, the message is loud and clear that a key objective behind India’s increasing engagements with this part of Asia is also to expand its presence and footprint in the periphery of China.
Vietnam shall be too happy to this move by India.
Not only their interests coalesce on the issue of China, the opening of this new frontier shall be conducive to further their economic integration strategies.
Also significant to note is the significance of President Pranab Mukherjee’s visit to Belarus in early June, days after the FTA deal.
Belarus is a member of EEU and Belarus and India are expected to discuss India joining EEU during Mukherjee’s visit.
India should take the cue from the Vietnam-EEU FTA in deciding to join the EEU.
As is elsewhere, Beijing has made huge inroads in the region, with which it shares geographical boundaries, by laying pipelines to harness hydrocarbon and constructing railway and road network to connect Europe via Central Asia.
Despite geographical proximity, India seems to have neglected somewhat this part of Asia despite the region’s strategic importance and abundant natural resources.
Prime ministerial trips to Central Asia have been few and Modi’s planned visit shall bridge this gap. For the record, while former Prime Minister Narsimha Rao visited four of the five central Asian states immediately after the dissolution of Soviet Union, Manmohan Singh made two separate trips to Uzbekistan and Kazakhstan during his decade-long tenure as Prime Minister.
Atal Bihari Vajpayee too had visited Almaty during his premiership.
In comparison leaders of Kazakhstan, Uzbekistan and Tajikistan have been in Delhi on several occasions since 1991.
Kazakh President Nursultan Nazarbayev was the chief guest at 2009 Republic Day celebrations.
That time, the two sides signed a deal for supply of uranium.
India had received consignments of yellow cake from Kazakhstan in succeeding years.
India is eyeing to harness crude oil from Kazakhstan besides natural gas from Turkmenistan and Uzbekistan.
Dipanjan Roy Chaudhury observes in the Economic Times:
“"However, lack of road and sea access has not allowed India to realize full trade potential with the region. This could change after India develops the Chabahar port in Iran and will use the nation as a transit for Central Asia. India’s defense ties with some countries of the region have been upgraded in recent years. India also shares historical bonds with Central Asia and enjoys goodwill in the region, thanks to its ties with the erstwhile Soviet Union of which the nations were a part.”
In conformity with the vast potentials for expanding economic cooperation, India too is negotiating a free trade agreement with the Customs Union of Russia, Belarus and Kazakhstan.
A joint India-Russia working group was established in November 2014 to negotiate a comprehensive FTA between India and the Customs Union.
As most of the developed world in the West is suffering from an economic slowdown, the developing world has been stepping up efforts to bring their economies closer.
Even for the Customs Union, the advantages of establishing a FTA with India look attractive. Compared to China, India enjoys a demographic dividend with a bulging youth population whose energy can be an asset in fostering economic growth. India’s population has ballooned to 1.2 billion.
In contrast, China adopted strict measures to curtail births and this measure of one-child policy prevented the births of 300 million people in the last three decades.
India’s competitive edge vis-a-vis China is well noticed by its partners.
At present, the economic relations of the members of the Customs Union do not reflect the potentials and if the FTA is signed, the openings to expand economic relations shall expand further. India’s democratic structure also works to its advantage.
The European member countries see a clear disadvantage in entering into a FTA with China for fear of being swamped by Chinese products as the local industries would not be able to cope with the overwhelming competition with Chinese manufacturing that a FTA would unleash.
That makes India an attractive and preferred alternative.
Removal of tariffs would allow Indian textile and mining industries, pharmaceuticals and information technology to enjoy comparative advantage in the markets of the EEU member countries.
The fears can be minimized by quota restrictions on Indian goods and services.
Such restrictions will minimize the risks for manufacturers in the Customs Union. A FTA with India will offer advantages in other industries.
Vietnam’s FTA with the Customs Union and one with India, when that happens, shall offer greater synergy for India, Vietnam and the member countries in the EEU in promoting greater trade and investment cooperation.
The economic integration process would have made enough headway when complete. Political understanding by all the stakeholders shall also help.
Currently the EEU comprises Russia, Belarus, Kazakhstan and Armenia. Kyrgyzstan is likely to join the trade bloc soon and ratification procedures are underway.
As said, India joining this bloc can unfold immense scope to harness the region’s resource potentials.
Despite favorable political understanding that India enjoys with the countries of the region, this is not reflected at present in their economic engagement such as trade and investment, which are abysmally small.
Russia shall be too happy if India becomes a partner in the bloc.
The deal with Vietnam is seen as a path-breaking one.
The Chairman of the Board of the Eurasian Economic Mission Viktor Khristenko described the agreement as “a historic act”.
India cannot miss this golden opportunity to assess the economic benefits that could accrue if it joins the bloc as a member.
Message to China?
As regards Vietnam, according to a report in the Economic Times, it is estimated that the free trade zone will save exporters from the EEU about $40-60 million in the first year of its operation.
It further says that Vietnamese companies in turn can expect savings of up to $5 -10 million a year.
The FTA shall enter into force 60 days after it is ratified in accordance with national legislation in all EEU member countries and Vietnam.
Though political issues were not in the agenda for discussion, Vietnam’s Prime Minister Nguyen Tan Dung who signed the deal for Vietnam, had a meeting with his Russian counterpart Medvedev on the sidelines wherein the latter reaffirmed Russia’s advocacy for settling disputes by peaceful means on the basis of international law and the UN Convention on the Law of the Sea (UNCLOS) in the South China Sea region where China in recent weeks has stepped up activities on the artificial islands and taken belligerent stand vis-a-vis the US.
Dung also had discussion with Kazakhstan President Nursultan Nazarbayev on oil and gas issues. India’s presence in the oil and gas sectors of both Kazakhstan and Vietnam also drive India’s interests closer to the EEU member countries.
Given this development, China should get the message that its unilateral decisions on the South China Sea and other territorial issues of the region are not acceptable by the rest of Asia and must learn to respect the rule of law or else its long term interests shall be adversely affected.
Comment: While the territorial boundaries in the South China Sea have long been disputed, much of the belligerence and posturing is being directed by the United States as a means of keeping a foothold in the region and to limit China’s control and access to an important geopolitical location. Vietnam (and India) would do well in fully recognizing the ramifications of aligning with these influences.
Last year we saw Vietnam and China reach historic agreements in resolving conflict over the Paracel Islands.
Vietnam’s growing partnership with the EEU, their membership in China’s new Asian Infrastructure Investment Bank, and the weakening of territorial conflict provide signs that a future in South East Asia free from Western influence is possible.
The Russian-led EEU appears to be offering a back-door to help stabilize conflict in the region.