[Vnbiz] raising import taxes correlated with USD strength?

[Tran Dinh Hoanh]

Dear Brother Charles,

You've got it all backward. Import taxes doesn't make the USD increase in
price.

The USD price increase is, first, a matter of US economy and, sometimes,
global events like oil price increase.  That has nothing to do with
Vietnam.

Second, inside Vietnam, when the USD price is increased, import becomes
more expensive, and consumers buy less imported products (because they are
more expensive), importers therefore import less.  The import tax increase
even makes import more expensive, therefore reduces import even
further.  That is why a high USD and high import tax help reduce the
trade deficit (or even create a trade surplus) by reducing import (and
increasing export).

(Using your line of  reasoning, this would mean that high import tax reduces
the demand of USD for import, and therefore helps reducing the price of the
USD.  But I wouldn't go this route, because that kind of effect is so small
that probably no one can measure it out).
The flaw in your reasoning is that you leave out the main base of the
economy--the ultimate consumers.  They are the foundation of all demand.
Their behavior ultimately determines what and how much to import.

Now, when the USD is high, importers have a hard time buying USD, because of
Vietnam's peculiar exchange market.  First, there are two kinds of exchange
rates for USD: official rate is cheaper (less VND for a USD), free market
rate is more expensive.  Importers want to buy USD at the cheaper rate.  But
most banks refuse to sell at that rate.  So importers complain.  Then
importers have to buy USD at the higher free market price.  So importers
complain.  Even at the free market price, it has to be done under the table
or going through a bunch of weird trading techniques. So importers
complain.  That's all.

In sum,  when USD value increases, import decreases.  When import tax
increases, import decreases.  When we have the combination of high USD and
high import tax, we will reduce import quite a bit.  And that is what
Vietnam is doing to solve the trade deficit (which ultimately solves the
inflation crisis).

Of course, some import firms will get hurt through this process.  But that
is the nature of business and economy.  Business involves risks, especially
risks from the economy.

I am not sure I understand this part: "Did the government have an idea that
this kind of abhorrent hoarding of imports would happen with the import
taxes rising?  In my view, many importers will not be able to sell these
imported goods at the inflated dollar prices they were forced to use to buy
these goods.  Many will go out of business."  Please elaborate in detail
examples.

Great day, brother.

Hoanh



On Sun, Jun 22, 2008 at 6:55 PM, Charles Vo <cvo7651 at yahoo.com> wrote:

> [ Vietnam Business Forum ]
>
> Considering imports are all paid with dollars, the raising of import taxes
> (cars, cosmetics, electronics, gold) by the government has been a strong
> reason for dollar demand rising to a furious level especially in HCM city
> where I read the dollar supply is really, really low now.  Ships filled with
> imported goods have been blocked up the ports of Vietnam.
>
> http://vietnamnews.vnagency.com.vn/showarticle.php?num=04ECO070608
>
> I surmise the short-term dollar demand will decrease as soon as the
> importers have bought the huge sum of dollars needed to pay for all these
> imports.
>
> Did the government have an idea that this kind of abhorrent hoarding of
> imports would happen with the import taxes rising?
>
> In my view, many importers will not be able to sell these imported goods at
> the inflated dollar prices they were forced to use to buy these goods.  Many
> will go out of business.
>
>
>
> --
> Tran Dinh Hoanh, Esq., LLB, JD
> Washington DC
>
-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://mail.saigon.com/pipermail/vnbiz/attachments/20080622/2cf030bf/attachment.html