Import tariff on vegetable oil imports to remain in place

Updated
August, 13 2015 09:20:00

HA NOI (VNS) Viet Nam will continue to take protective measures against imported vegetables oil
because growing imports are affecting domestic production, the industry and trade ministry (MoIT)
said.

Under a recent decision by the MoIT, imported refined soya oil and refined palm oil with the trade
codes of 1507.90.90, 1511.90.91, 1511.90.92 and 1511.90.99 would be taxed at three per cent until
next May.

The rate will be reduced to two per cent from May 8, 2016, to May 7, 2017, and to zero per cent
after May 8, 2017.

Protective measures will be implemented in line with current regulations on such measures against
imports and other related regulations.

The MoIT said a rapid increase in vegetable oil imports in Viet Nam had led to sharp falls in domestic
enterprises' market share, turnover and profits, negatively affecting the enterprises.

In 2012, Viet Nam imported more than 568,000 tonnes of vegetable oil. The figure increased by 5.3
per cent in 2013.

Last year, the country imported nearly 666,600 tonnes of vegetable oil, a 11.3 per cent increase over
2013.

While imports jumped from 5.3 per cent in 2013 to 11.3 per cent in 2014, the growth of domestic
sales plummeted from 42 per cent in 2013 to 11.3 per cent in 2014.

On May 8 last year, the country applied four per cent duty on imported vegetable oil to protect
domestic oil producers. The rate took effect through May 6 this year.

Meanwhile, the average amount of cooking oil consumed by the Vietnamese people is expected to
touch 16kg per year by 2020, the General Statistics Office said. The figure is expected to reach 18.5kg
per person by 2025.

In 2014, the average was 9.55kg per year, lower than the world figure of 13.5 kg, the office said.

It attributed the increase in consumption to the rising demand for export and the development of
the food processing industry.

Cai Lan Oils and Fats Industries Company led in terms of cooking oil turnover in 2014, accounting for
37.3 per cent of the country's market share.

URL-http://vietnamnews.vn/economy/274400/import-tariff-on-vegetable-oil-imports-to-remain-in-
place.html 1|Page
In order to control increasing demand for imports, Vietnam employed protectionist policy 1which

restricted free trade between Vietnam and its importing partners. Vietnam took this step to protect

its domestic producers, who were unable to compete with cheaper imports of vegetable oil from

foreign industry. This caused high rise in unemployment and restricted entry for new firms, all these

factors would have limited economic growth of the country so to avoid such situation Vietnam

imposed a tariff2 on foreign vegetable oil.

1. The market for vegetable oil in

Vietnam

The price Pf and Pd represents the world price and domestic price of oil respectively. Qd and Qw

represent the quantity of oil sold(tones) in domestic market and the total oil sold to Vietnam

consumers respectively. The difference between Qd and Qw is the total amount of oil imported. As

1
Protectionist Policy: They are the policies implemented by government to protect their domestic firms from foreign
competition by applying any one of the measures- tariff, quota or subsidies.
2
Tariff: it is a tax or a duty to be paid on a particular class of imports or exports.
only some domestic firms were able to sell oil at such low price of Pf, Qd is very minute in comparison

with total imports.

To prevent this dumping of vegetable oil, Vietnam government imposed tariff on imported vegetable

oil.

Price of oil
(VMD) 2. Market of Oil after tariff is imposed

D S

Pd

Pf1 Sw+tariff
a b c
Pf Sw
Tariff revenue

Quantity of oil
Qd Qd1 Qw1 Qw (tones)

This will increase the world price of vegetable oil from Pf to Pf1 as now the world price would also

include the cost of tariff, thereby allowing more domestic producers to enter the market. This would

decrease imports and would increase domestic sale from Qd to Qd1. But it will lead to dead weight

loss, caused by the entrance of inefficient domestic producers in the market and the decrease in total

quantity consumed from Qw to Qw1, shown by the area of triangle A and B respectively.
 Consequently, the reduction in imports of Vietnam would decrease the supply of Vietnamese dollar

to foreign markets/decrease the demand of foreign currency in Vietnam; this will appreciate the

value of VMD in terms of other currencies.

3. Market of Foreign currency in 4. Market of VMD in foreign

Vietnam market

Both of the diagrams show the effects of the reduction in imports of Vietnam. The shrinkage in imports

would mean that the demand for foreign currency in Vietnam has decreased thereby shifting the

demand curve to the left in diagram 3. This can be reflected in the diagram 4 where the supply of VMD

also decreases because of the reduction in VMD entering into the foreign markets. Thereby in both of

the diagrams VMD appreciates, where in the first (3rd)- the value of foreign currency in terms of VMD

depreciates and in the second(4th)- the value of VMD in terms of foreign currency appreciates. It is

important that this change will only trigger if the market of vegetable oil is significant enough and has

elastic PED3.

3
Elastic PED: it is condition of demand when its PED is more than unity (1)
The eased competition due to high tariff on foreign firms, will help the Vietnamese startup or sunrise

firms to enter the market because of the new high world price, Thus helping in employment

generation in Vietnam. This is vital for a developing country like Vietnam for long term economic

growth; improving the quality of life in Vietnamese through sustainable income generation. The tariff

would also yield tariff revenue for government (green area in the diagram 2). Vietnamese

government can use that revenue in improving education, infrastructure or invest in research and

development of the country. This would improve countrys productivity in long term, thereby

bringing economic growth.

However, the tariff would increase the cost of living for Vietnamese as they wont be able to benefit

from the cheaper foreign vegetable oil, thereby deteriorating their living standards. This might also

lead to inflation because of two reasons. First- the producers, who import vegetable oil as a raw

material would experience an increase in there cost of production, they might pass on this increase

in costs to consumers by increasing price, causing cost push inflation. Second- the increase in

employment would mean more people have income to spend; leading to an increase in consumption

causing demand pull inflation; this would adversely affect people living on fixed incomes, pensions

and scholarships.

The appreciation of VMD would mean that foreign consumers would find Vietnamese products more

expensive therefore they may cut their demand. Effect on producers would depend on the elasticity

of demand of foreign consumers for Vietnamese products, It will benefit domestic producers if the

Marshall Lerner condition4 is met, that is, if PED of imports+ PED of exports >1, then it will benefit

4
Marshall Lerner condition: it states that the country will only benefit from depreciation, if the PED of imports + PED of
exports is greater than 1. PED of imports+ PED of exports > 1
Vietnam because it will increase net exports revenue conversely, if not then it will be harmful as then

it would reduce net exports revenue of Vietnam.

References

1. Tragakes, E. (2009). Economics for the IB Diploma. Cambridge: Cambridge University Press.
2. Investopedia - Educating the world about finance. (n.d.). Retrieved December 10, 2015,
from http://www.investopedia.com/