FTAs with South Korea and ASEAN hurting Vietnam’s domestic sales

Vietnam’s trade agreements with South Korea and the 10 member-countries of the Association of Southeast Asian Nations (ASEAN) have made some petroleum product imports cheaper than their domestic counterparts. This has resulted in an increase in imports from South Korea and ASEAN countries. In January, Vietnam’s imports rose 7.4% to 788,790 metric tonnes compared to the same month in 2015. The combined imports from Singapore, Malaysia and Thailand rose 77% year-on-year, while imports from South Korea rose 9.9%.

Under the Free Trade Agreement with South Korea, which was signed in May 2015, Vietnam reduced the import tariff on gasoline from South Korea to 10%, from 20%, effective December 20, 2015. This new rate is expected to remain in place till 2018.

South Korea also has a Free Trade Agreement (FTA) with ASEAN, of which Vietnam is a member. Nevertheless, the new bilateral agreement will move to liberalise trade relations between the two countries even further. South Korea is Vietnam’s fourth-largest export market and South Korea is also the largest foreign investor in Vietnam.

One of the key conditions agreed upon under the bilateral FTA is that Vietnam must fully remove import tariffs on almost 90% of shipments coming from South Korea, while the latter will reciprocate by doing the same for about 95% of Vietnamese products over the next 15 years. The pact is expected to bring about a sharp rise in Vietnamese exports of agricultural produce and seafood to South Korea, and more South Korean materials and components imported for Vietnam’s garments and electronics factories.

However, Vietnam’s sole refinery, which is owned by Viet Nam National Oil and Gas Group (PetroVietnam) and operated by Binh Son Refining and Petrochemical Company (BSR), is losing gasoline market share to Korean imports, which are cheaper. That’s because Vietnam has imposed a 20% tariff on petroleum products from the 130,000 barrel-per-day refinery. As a result, in January, the price of South Korean gasoline was about USD 4.87 per barrel cheaper than domestic gasoline. BSR, which is located in Quang Ngai Province in Central Vietnam, currently supplies 30-40% of petroleum product domestic demand.

PetroVietnam has proposed that the government lower the taxes imposed on refined products being produced by BSR. Right after the FTA with South Korea took effect, Vietnam National Petroleum Group (Petrolimex), Vietnam’s largest fuel distributor, has requested BSR to consider lowering the selling price of gasoline on both a spot and term basis for the second half of 2016, so that the refiner’s prices would be equal to South Korean imports. Other domestic oil companies had the same requests, BSR said.

Under the ASEAN Trade in Goods Agreement, or ATIGA, Vietnam will maintain the 20% import duty on gasoline from ASEAN members until 2018, but has removed the import taxes on gasoil, kerosene and fuel oil starting Jan. 1, 2016.

The FTA with South Korea also resulted in import tariffs on gasoil, jet fuel and kerosene to be reduced to 5% over 2015-2017, which will be abolished from 2018.

BSR has agreed with domestic oil companies to reduce the price of gasoil by USD 1.30 per barrel for contracts covering the first-half of 2016, compared with the contract price in the second half of 2015. But the companies only accepted that price for the first two to three months of 2016 and reduced the volumes they plan to buy from BSR for the rest of the year.