What are the opportunities for Vietnam in greening trade?

Growing U.S. demand for Vietnamese solar panels can be explained in the context of the U.S.-China trade friction between 2017 and 2020.

Greening trade is a priority for several reasons. First, it can help reduce the carbon or environmental footprint of trade industries. In turn, these reductions contribute to the implementation of a green, resilient, and inclusive development approach and help Vietnam reach its national mitigation objectives. Second, greening trade can spur existing industries to retool to green technology and remain competitive in the future low-carbon world. Third, it can offer new opportunities for trading in environmental goods and services. Finally, greening trade is expected to be a potential driver of new jobs as existing industries retool and businesses take advantage of opportunities in new environmental goods and services.

To assess Vietnam’s opportunities in environmental goods and service, WB used a list of environmental goods used by the Asia-Pacific Economic Cooperation (APEC) and the WTO.63 It consists of 54 products, each with a corresponding Harmonized System (HS) six-digit code, categorized in seven groups: (i) air pollution control, (ii) environmental monitoring, analysis and assessment equipment, (iii) environmentally preferable goods, (iv) management of solid and hazardous waste and recycling systems, (v) natural risk management, (vi) renewable energy plant, and (vii) wastewater management and portable water treatment. In the services sector, environmental services are identified as waste treatment and de-pollution services, corresponding to WTO database classification.

Vietnam’s total trade (exports imports) in environmental goods shows significant growth over the past two decades but appears to have plateaued in recent years. Vietnam’s exports of environmental goods as a share of total exports have increased sharply from 0.87 percent in 2015, reaching a peak in 2017 of 3 percent. After the peak, the export share dropped to 2.3 percent. However, the decline in environmental goods exports should be interpreted with caution as the calculation is based on mirror exports, and not all countries have reported import data for 2020. In value terms, total environmental goods exports have increased from US$18.1 million in 2002 to US$6.5 billion in 2020. Vietnam imported US$5.4 billion worth of environmental goods in 2015, increasing its purchase to US$12.9 billion in 2020. Environmental goods account for 4.9 percent of total merchandise imports in Vietnam, with intermediate goods constituting 85 percent of total environmental imports in 2020. Intermediate goods and final goods had equal shares in 2020 environmental goods exports.

In Southeast Asia, Vietnam has emerged as one of the top three countries trading in environmental goods. In 2020, Vietnam was the third-largest exporter of environmental goods after Singapore (US$21.6 billion) and Malaysia (US$9.6 billion), and the second-largest importer, following Singapore (US$15.6 billion). Between 2000 and 2020, Vietnam’s annual average growth of environmental goods export was 48 percent, and of environmental goods import 22 percent, which is higher than other regional comparators except Cambodia.

“Growth in Vietnam’s environmental exports was driven by an increase in exports to the United States, while exports to China, the EU, and the rest of the world have declined sharply. The surge in Vietnam’s environmental goods exports appears to be partly associated with trade diversion related to U.S.- China trade frictions, leading to new opportunities for Vietnamese exports to the U.S. market. Relatedly, exports to China have fallen sharply, but so have exports to most other export partners. On the import front, Vietnam now imports primarily from China, followed by the Republic of Korea and Japan. Total imports of environmental goods from China in 2020 were US$5.7 billion in 2020, tripling from US$1.9 billion in 2016”, WB said.

Vietnam’s trade in environmental products mainly has been driven by trade in renewable energy products among the seven categories. Exports of renewable energy products increased from US$3.5 million in 2002 to US$5.1 billion in 2020, accounting for more than 50 percent of total environmental goods exports on average between 2002 and 2020. In WB’s opinion, this sharp increase is associated with the strong demand for solar panels in the United States. According to the U.S. Energy Information Agency, demand for solar panels increased by 33 percent in 2020.64 Possible explanations include increased interest in home improvement, expiring solar tax credits, continued growth in utility scale solar capacity, and falling costs of solar systems. To meet this surging demand, the United States imported large volumes of solar panels from abroad. Among renewable energy products, Vietnam imported a large volume of solar cells from China, while it exported solar modules and panels to the United States. This tells two stories. One is the growing U.S. demand for “Made in Vietnam” solar panels. The other is about a booming solar energy sector in Vietnam. The surge in imports tells a similar/mirror story. Vietnam purchased US$7.9 billion worth of renewable energy products, which accounts for over 60 percent of Vietnam’s total environmental goods imports in 2020. The second-largest category in Vietnam’s imports is management of solid and hazardous waste.

Growing U.S. demand for Vietnamese solar panels can be explained in the context of the U.S.-China trade friction between 2017 and 2020. While China is the top solar panel producer, it faces high antidumping duties and countervailing duties, safeguard duties, and Section 301 tariffs.65 During this period, layers of tariffs on Chinese solar panels made its price less competitive in the U.S. market compared to Vietnamese solar panels, which are only subject to safeguard duty, as the U.S. most-favored-nation tariff on solar panels is zero. Additional costs stemming from tariffs might have helped Vietnamese products become more attractive to U.S. importers. U.S.-China tensions also played a role in the growth of Vietnam’s photovoltaic (PV) cell and semiconductor exports. In 2018, the U.S. solar group called for import tariffs on panels manufactured by Chinese companies in Southeast Asia. The United States Trade Representative’s (USTR’s) June 15, 2018, announcement66 of a 25 percent tariff on Chinese goods, including PV semiconductor devices (HS 854140), led to a decline in imports from China and a sharp increase in imports from Vietnam.

Relatedly, solar cell and heliostat exports registered compound annual growth rates of 81.6 percent and 71.2 percent, respectively, from 2010 to 2020, starting from a low base. Wind-powered electric generating sets registered about 38 percent compound growth, while export of heliostat parts grew about 42 percent. These exceptional growth rates were achieved from a low initial base, so that export values have yet to truly capture the promising indicative change in the structure of Vietnam’s export basket. “Such economic transformation and the emergence of new sectors are promising in that they will create new jobs in sectors that will continue to grow into the future as the world shifts to more climate-friendly trade, production, and consumption. The PV cell sector is a niche sector that is often embedded in complex”, WB noted.