How would plans by Vietnam to mitigate environmental damage affect foreign trade?

Most export sectors will not be significantly affected as they are not direct emitters, except for coal (which is only marginally exported).

In WB’s opinion, Vietnam can reduce its level of carbon emissions without affecting the country’s competitiveness. This can be done by using higher prices (tariffs and taxes) or regulations on goods and services that cause the most pollution. An analysis using an economic model finds that a carbon tax in Vietnam leads to a significant reduction in emissions without penalizing the country’s competitiveness. Most export sectors will not be significantly affected as they are not direct emitters, except for coal (which is only marginally exported). The textile sector will be negatively impacted because of its relatively high emission intensity, but this decline will be compensated for by the gradual increase in green exports boosted by higher labor and capital productivity over time.

Vietnam’s export competitiveness, however, could be affected by the mitigation policies of its major trading partners, according to WB. Consumers in Vietnam’s major export markets—such as the US or the EU—are increasingly demanding more environmentally friendly goods and cleaner production processes. Also, many FDI firms are part of value chains where the central corporations have committed to greener practices as part of their corporate social and environmental commitments. Such commitments will trickle back to producers along the value chains. Apple, for example, is converting its entire supply chain to 100 percent clean energy.FoxConn, one of Apple’s major suppliers, which has recently moved its assembly lines to Vietnam, will be subject to Apple’s environmental-social-governance (ESG) and decarbonization requirements.

According to the World Bank, industrial parks (IPs) that house a large portion of FDI in Vietnam will need to transition to cleaner production processes or risk losing investment to competitor countries that have already done so.IPs account for a large share of the manufacturing sector and about a quarter of total emissions. Vietnam currently has 372 industrial zones, including 17 coastal economic zones. They generate approximately 30 percent of the total industrial output and a large part of the country’s exports. IPs also account for approximately 25% of total annual CO2 emissions.The role of IPs in total emissions is likely to increase, in line with the experience of its regional peers. In China, for example, IPs are responsible for between 33% and 50% of total emissions.Given the shift in consumer sentiments in destination markets and new GVC environmental commitments, inaction by Vietnamese authorities could translate into GVCs moving their production elsewhere.

Also, many countries are contemplating setting higher tariffs on polluting goods and services to reduce emissions by raising the price of carbon. Such decarbonization policies can impact global markets and cause shifts in technology, fuel availability, and trade dynamics due to changing consumer preferences or tariffs on emission-intensive goods. Two key determinants of the level of potential exposure to transition risks are the level of exposure to international markets, and the emission intensity of its trade-exposed sectors (relative to the emission intensity in other countries).

Impacts of the EU Green Deal and Border Carbon Adjustment Mechanism on Vietnam exports to the EU, in percent, compared to the Covid L-shape recovery baseline in 2030.

For example, the European Union (EU) is one of Vietnam’s main export destinations. An analysis of Vietnam’s relative emission intensity and trade exposure of key products to the EU finds that Vietnam’s exposure is to inorganic chemicals and machinery, given the high export share of these products.

An analysis of the 2019 EU Green Deal, which includes a plan to implement a border carbon tax adjustment, finds that it would have a limit ed impact on Vietnam. The main explanation for this limit ed impact is that the share of the EITE sectors in exports to the EU was only about 4 percent in 2019, with the highest sector being iron and steel (3.8 percent).

"Only the exports of chemicals, cement, wood, paper, and metals would decline, but they already represent only a small share of Vietnam’s total exports. The exports of some sectors, however- namely, non-carbon-intensive products such as other manufacturing, computers and electronics, and some transport sectors- to the EU increase, representing new opportunities to integrate more deeply into global value chains. By 2030, the value of exports would even increase marginally due to trade diversion. It is also noteworthy that as the EU CBAM coverage expands and as other countries implement their own CBAM schemes, their macro impacts will become more significant, "WB said.

The low impact of the EU Green Deal applies to the entire East Asia and Pacific (EAP) region. The most penalized regions by the EU Green Deal CBAM will be Eastern and Central Europe and South Asia. The magnitude of the impact is related to the share of EITI goods exported by each country to the EU and their carbon intensity. Vietnam and its EAP neighbors have relatively lower carbon intensity of exports to the EU than Eastern and Central Europe and South Asia, and are expected to see their exports increase marginally because of the CBAM.