WTO commitments prevent tax hikes to curb imports

Two key economic indicators, inflation and trade deficit, have plagued Viet Nam's economic recovery for the last two years, and caused the Government to walk a policy tightrope.

In February, the Government proposed a five-prong approach to address the dual problems of inflation and trade deficit. The approach sought to foster domestic production, encourage exports, and limit imports.

The most worrisome strategy, however, is related to efforts by the Ministry of Industry and Trade (MoIT) to limit imports – worrisome because the nation's WTO commitments require the removal of obstacles to cross-border trade. Nevertheless, MoIT issued Decision No 1380/2011/QD-BCT on March 25, listing goods it deems at risk of over-importation (the "Discouraged List").

Goods on the list are grouped into 297 categories and include 3,724 separate taxable items. The list is dominated by consumer and household goods and automobiles.

The Discouraged List is just that, a list. There is no guidance to tell what is to be done with items on the list. And that has been the concern. Will there be administrative measures applied arbitrarily that act effectively as tariffs? Will the existence of such a list interfere with foreign-invested businesses that rely on the listed items for their operations? Will there be any restriction on the trading rights of foreign-invested companies?

The answer came from the Ministry of Finance (MoF) with its Official Letter No 4388/BTC-CST, issued on April 5. The letter took into account international treaties and commitments in determining the policy direction.

Under WTO commitments, specific import goods are given a maximum rate for import taxes, a ceiling or cap. This cap varies by classification of goods. After reviewing the Discouraged List, MoF found that 3,406 items on the List were already being taxed at their ceiling rate. Nothing could be done to further discourage their import, at least not by the use of taxes. MoF found that taxes on 149 items were set at 1-3 per cent below the ceiling and 169 items at 4 per cent below.

MOF stated that it would take no action on those items already taxed at the ceiling rate, nor on the 149 items taxed at 1-3 per cent less than the cap. Of the remaining 169 items, the MoF found only eleven that it intended to tax further.

This has been the extent of action so far to the proposal to limit over-importation. No administrative measures, such as prohibition or suspension of certain imports, has been or seems likely to be introduced.

Absent straight-up tax increases, the battle to reduce trade deficit will have to look to other measures, especially sound management of banking and monetary policy and improved domestic production. It's good news to see that the Government is actually playing by the international rules. Compliance with international agreements demonstrates a commitment to sustainable trade policy, something necessary for Viet Nam to balance the trade deficit and stabilise the value of its currency.