VIETNAM – CUSTOMS REFORM AND WTO TRADE FACILITATION AGREEMENT (“TFA”) – HOW CPTPP AND EVFTA CAN EFFECT CHANGE

Every day I ride a boat along the Saigon River between Districts 1 and 2 when I am in Ho Chi Minh City. Monday through Friday, it is full of container barges moving containers to and from major distribution points. Saturdays and Sundays, however, are basically void of such traffic. I wondered to myself “why?” With the amount of import/export volume funneling through this major artery to trade, how could the weekends shut-down the volume of traffic this much? After reading the law on customs and the various other regulations and laws concerning Vietnamese customs and procedures, it became clear that a substantial portion of customs clearing and private transportation services did not operate on weekends; and if they did, it was sporadic. It would seem logical to assume that since worldwide shipping did not stop transport vessels in the middle of the sea because it was the weekend that major backlogs would occur on Fridays, Saturdays, and Sundays, hindering efficient clearance of goods. Mondays would be very intensive days for customs services and transportation.

The infrastructure for Vietnamese ports is growing and several large projects are already underway to accommodate the increased volume of shipping that is occurring.[1] Ports in Ho Chi Minh City are the main gateway for the region, accounting for 67 percent of the total throughput of all Vietnamese ports.[2] The enhanced infrastructure to absorb extensive increases to shipping volume is necessary and critical for Vietnam’s economic growth sustainability; however, it is the responsibility of customs to expeditiously accept and clear those goods for shipment to their destinations within Vietnam. Many developing (and, by the way, some developed) nations and economies have struggled with customs efficiencies for this new operational environment, and Vietnam is no different. The WTO TFA (Trade Facilitation Agreement; hereafter referred to as “TFA”) which entered into force 22 February 2017 was partly enabled to assist developing nations in streamlining their customs functions to facilitate a smoother, easier, trade process through a provision of assistance and support for capacity building for implementation of Section I [of the TFA].[3] Section I of the TFA includes Article 7 (Release and Clearance of Goods) and Article 9 (Movement of Goods Intended for Import Under Customs Control). How has Vietnam been addressing the concerns raised by these articles of the TFA and how do the CPTPP (Comprehensive and Progressive Trans Pacific Partnership; 2018) and EVFTA (European Union—Vietnam Free Trade; 2019) agreements add-to, or reduce, these concerns?

Article 7 of TFA

This Article provides standards for different factors that affect the release and clearance of goods such as expedited shipments, perishable goods, electronic payments, and pre-arrival processing. Article 7.3 calls for a separation of release of the imported goods from final determination of customs duties, taxes, fees, and charges. The article states that members shall allow importers to obtain release of their goods, under a guarantee, if required, prior to the final determination and payment of customs duties, taxes, fees and charges where the final determination is not done prior to, upon arrival or as rapidly as possible after arrival.[4] This is a wonderful measure for importers (to have their goods released with a very limited delay) and also for customs-efficiency as customs can receive legal guarantees of importers paying the final determination of any incurred fees at a later date. This can have the effect of rapidly clearing goods from customs intake/staging locations to create inventory space for more goods. Any reduction in delay of release of goods is a good thing, and according to a global trade report, full TFA delivery will help…”save 1.5 days of customs clearance for imported goods, down 47% from the present average and nearly 2 days of customs clearance for exported ones, down 91%.”[5] Vietnam’s logistics’ costs account for 16% to 17% currently [2018] of GDP, with 30-40 percent of that cost associated with custom’s clearances.[6]
In response to this concern—and under Article 7.3 of the TFA—Vietnam turned to CPTPP to address it. Under recently published Decree No. 57/2019/ND-CP (26 June 2019) governing Export/Import preferential tariffs under CPTPP, “…Within 1 year from the date of…export declarations, the customs declarant shall submit all documents proving that the goods satisfy the regulations specified…”[7] This mirrors the intent of TFA Article 7.3 and directly compliments it. Now, member states of CPTPP have increased flexibility in submitting any further documentation requested of Vietnam Customs instead of having those goods held and delayed for clearance until they were obtained. This is a great example of Vietnam aggressively pushing their regulatory changes forward to comply with TFA and CPTPP.

Article 9 of TFA

This article attempts to prevent bottleneck issues from occurring (mainly in developing or under-developed countries) at a customs port of entry by requiring member states to allow a customs-declarant to move goods from a customs port of entry to another customs office within the same customs territory (under customs control), and permit that declarant to clear them at the destination rather than at the port of entry. It is a straight-forward and fairly simple sounding statement; however, in practice, it is riddled with complexities.
Vietnam’s law on customs[8] delineates authority for customs responsibilities between 1) General Department of Customs; 2) Customs Departments of Provinces; and 3) Sub-department of Customs Sub-Departments, Customs control teams and equivalent units. Additionally, under Article 16 (5) of same, “The arrangement of manpower and working time must meet the requirements of import, export, exit, entry and transit activities.” Furthermore, Article 23 (4) requires, “Customs authorities…to carry out formalities for goods on public holidays and weekends and overtime hours in order to ensure timely loading and unloading of imported and exported goods…in conformity with practical conditions of customs operating locations [emphasis added]”. On paper, this would indicate a fully-developed system for expediting customs clearances and/or processes for clearing goods through a port of entry to another custom’s operations area for clearance seven days a week (and the customs law does further state that unless a shipment requires a physical inspection for certain agricultural or health reasons, it should be expedited to a different clearance location).

In application, it can vary greatly by whoever is the customs authority in charge of the inspection location. Decree 08/2015/ND-CP (Ministry of Finance) Article 29 (2) states, “Head of the Customs Authority who is in charge of…inspection [places] shall make a decision on any change to the level or form of physical verification and bear responsibility for their decision.” This gives the customs director of a facility broad authority, but thanks to the last clause of the sentence, “…bear responsibility for their decision”, many customs officials will be hesitant to use that discretion in fear of making a “wrong” decision; therefore, they most likely will physically hold and inspect every shipment coming into their zone of control. One facility operating in that fashion can bottleneck an entire section of the country. Additionally, the provincial customs authority or facility director has broad discretion in determining the “practical conditions” to conform to. In Vietnam, it is doubtful a customs facility director will require personnel to facilitate customs procedures during “Tet” (Vietnamese New Year); therefore, for one week little customs activity occurs at that location.

Indeed, many issues that are problematic to the law on customs were supposedly being addressed by Circulars 38 and 39 (issued in 2018). In fact, on 10 July 2019 a $21.7 million USAID Trade Facilitation Program was granted to support the Government of Vietnam to adopt and implement a risk management approach to customs and specialized inspection agencies, which will strengthen the implementation of the World Trade Organization’s Trade Facilitation Agreement [TFA].[9] The General Department of Vietnam Customs (GDVC) organized six consultative workshops to gather feedback and recommendations on amending Circular 38 and Circular 39 – regulation guidance on Vietnam’s Customs Law. The workshops would help identify the challenges and practical compliance-burdens faced by import-export businesses in relation to implementation of the circulars.[10] It is evident that between the many iterations of decrees, circulars, directives, and laws regarding customs and procedures, every agency and business involved in the process is confused.

Decision 15 (12 May 2017) provides a clear example of the confusion customs officials and businesses encountered[11]; chiefly, that it did not specify what is considered the “entry gate” for carrying out customs procedures? Was it the place that goods were imported to, or the port listed on the bill of lading? Businesses (and officials) were receiving conflicting information and backlogs inevitably ensued.[12] Decision 23, recently issued 27 June 2019, addressed this issue and specifically identifies the proper port of entry for each type of transport.[13] CPTPP and EVFTA also affected Decision 23 in that it amended the type of goods requiring specific inspection procedures to comply with CPTPPs input-materials-for-production provision, and also EVFTAs (and CPTPPs) stricter requirements regarding potentially environmentally-hazardous materials.[14]

With the myriad regulations affecting customs, how can either the CPTPP or EVFTA assist Vietnam in resolving the predicament? Statutorily, the EVFTA already has. It mirrors portions of the TFA (such as creating trade facilitation committees), but also goes one step further in requiring Vietnam to comply with Article 2.12, in which Vietnam “…shall administer in a uniform, impartial and reasonable manner all its laws, regulations, judicial decisions and administrative rulings pertaining to…issues affecting…distribution, transportation…warehousing inspection…or other use of goods for customs purposes.” This section of the EVFTA is forcing Vietnam to take a hard look at their current system, and streamline and consolidate all their varying regulations concerning customs administration for efficiency. A quick solution Vietnam can implement now to help alleviate physical storage problems is EVFTA Article 2.15 which allows foreign pharmaceutical companies to establish their own warehouses inside Vietnam.[15] If Vietnam declares those warehouses as “customs operational locations”, that would free-up other customs warehousing space for other inventory.

Private Sector Must Be Engaged

Outside of the regulatory environment, private businesses have a crucial role in relieving bottlenecks. Even if everything flows smoothly and correctly through the government customs process and goods are cleared, it takes private businesses to physically move those goods out to make room for others. If the trucking company hired to move containers does not “work” on weekends, is short-staffed, can’t find anyone to work, drivers call out sick, etc., those containers do not move—they sit there. Many of the transport barges moving along the Saigon River are private contractors. You can see their entire family lives and works on that barge. If that barge does not want to work that day, it is not going to work. While most of the port terminal operations are conducted by State-owned enterprises (SOEs), they still struggle with general employment issues that affect port operations and add to the bottleneck issue as well.

Government can provide a statutory environment for success, but without private enterprise completing the circle, nothing will be resolved. Perhaps an incentive system for non-traditional work days for private contractors can help the situation; better screening of potential employees; requirements specifically spelled-out; any and all solutions need to be examined. The bottom-line is while regulatory efficiency is needed to allow for the legal and operational environment to flow seamlessly, the private sector must close the loop.

Summary

There is a regulatory quagmire surrounding Vietnam’s customs arena. The TFA is intended to assist developing and under-developed nations (primarily) with their trade processes to better facilitate trade on a global level so that all parties benefit. Vietnam’s growing economy and role as a Southeast-Asian trade hub are requiring substantial changes to current regulations and processes. Only a few examples of the many that could be given show that while Vietnam is making strides with reform, they need to accelerate that change. It cannot be haphazardly done, though. It must be structured, reasonable, and determined with both governmental and private sector collaboration. Vietnam followed that exact process for obtaining CPTPP and EVFTA. Those agreements should be the primary guiding documents for Vietnam to reform their customs legislation to, as they will affect Vietnam’s economic growth exponentially. They can provide the framework for statutory solutions to many of the customs issues Vietnam faces; however, without private-sector buy in, those statutory solutions cannot be efficiently implemented. The entire customs-cycle must be embedded into the mindset and carried out at the individual level for there to be a truly systemic change.

Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyers in our office listing if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

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