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Impacts of free trade agreements on Viet Nam’s economy
1/3/2016 15:17' Send Print
Promoting free trade, strengthening Viet Nam 's economy. Photo: Finance Magazine

Background and issues

The completion of the legal system and policies have contributed to improving the investment environment, enhancing Viet Nam’s attractiveness to foreign direct investment (FDI) and benefits from remarkable export growth from FDI, contributing significantly to GDP and export turnover (65%). Overseas remittances have also increased. In 2013, more than US$ 8 billion were remitted to Viet Nam. In 2014, Viet Nam was the ninth country in the world and the second largest recipient in ASEAN (after the Philippines) of remittances worth US$ 11 billion.

Liberalization and integration have made positive impacts on economic growth. With an import and export turnover 1.5 times higher than GDP in recent years, Viet Nam is considered a relatively open economy. By signing the bilateral trade agreement with the United States (BTA) in July 2000, we have committed to operating in accordance with international rules, equality, elimination of discrimination between domestic and foreign commodities and investment, opening even service sectors such as telecommunications, and finance which were blocked for “national security” reason.

In 2007, with the accession into the World Trade Organization (WTO), we took a big step on the path to integration. Viet Nam’s economy is likened to “a boat sails out into the ocean.” Pressure from renovation has brought changes to several laws, such as the laws on customs, taxation, investment and business. This is highly appreciated by international investors.

Besides achievements, the economic integration has not really created positive, and long-term impacts. The ability to adapt to the market economy and proactively grasp opportunities is still weak. Viet Nam has not yet been proactive and active in integration. There are constraints in integration. Viet Nam has merely taken advantage of new short-term benefits, not long-term ones. It has not yet generated motivation for renovation and innovation, and brought into full play its internal strength to reach position with higher added value in the global value chain. The national interests obtained from the process of international economic integration have not yet lived up to the country’s potential, geo-economic, and geo-politic position.

Free Trade Agreements and economic impacts on Viet Nam

Advantages and positive elements

Looking back, we can see three successive generations of free trade agreement (FTA) in the processes of globalization, and regionalization. By the end of 2013, Viet Nam has joined 8 FTAs, 6 of them are regional FTAs (ASEAN, ASEAN-China, ASEAN-South Korea, ASEAN-Japan and ASEAN-Australia-New Zealand, and ASEAN-India) and two bilateral FTAs (Viet Nam-Japan Economic Partnership Agreement (VJEPA) and Viet Nam-Chile FTA with various liberalization scales and extents. The level of commitments to international economic integration has gone from low to high, from narrow to wide, and is consistent with the trend of economic development of the region and the world.

Besides the 8 traditional FTAs, the recently-signed Viet Nam-South Korea FTA (VKFTA) and the Viet Nam-Eurasian Economic Union (EEU) FTA and the participation into the ASEAN Economic Community (AEC) in December 2015, other special events include the completion of negotiation for new generation FTA with the European Union (EVFTA) and the promising Trans-Pacific Partnership Agreement (TPP).

The new generations of FTA have broader scope and contents are beyond commitments on trade, services and partially investment, referring more to the institution and legal issues in the fields of environment, labor, State-owned enterprises, intellectual property, government procurement, and “non-economic” or “political economy” rules. When coming into force, these FTAs will strongly influence institutions of stakeholders. Joining the FTAs, we have an opportunity to restructure export and import and avoid heavy dependence on one market. Two-way trade between Viet Nam and its partners will increase after signing the FTAs. However, this aspect is more evident in the FTAs with partners which have highly supplementary structure of export and import, such as Japan, Australia, New Zealand, and South Korea. The remaining partners (ASEAN, China, and India), especially China are less supplementary, if not competitive. With more FTAs, Viet Nam’s exports will increase but now Viet Nam will also face anti-dumping and anti-subsidy lawsuits.

With VKFTA, investment, trade and tourism between Viet Nam and South Korea will be improved. The FTA between Viet Nam-South Korea opens up opportunities to attract huge investment flows from South Korea to Viet Nam, expectedly to supporting industry, electronics industry, and agricultural processing. Especially, Viet Nam is South Korea’s first FTA partner having access to its market. South Korea implements scheduled elimination of sensitive products, such as fruits, processed fruits with tariff of from 30% to 50%; some tropical fruits and vegetables especially garlic, ginger, honey, sweet potato, red bean with high tariff from 241% to 420%, because these commodities are sensitive to South Korea).

With EEU, we have resumed large-scale, and long time trade, and investment relations with countries in the bloc, especially Russia, Belarus and Kazakhstan. Bilateral trade turnover between Viet Nam and the 3 countries are expected to increase 3 times than at present at a rate of 18%-20%/year, and by 2020 it will reach approximately US$ 7.2 billion to 8 billion.

When EVFTA is concluded, it will help increase 7%-8% average growth of Viet Nam, with 90% of goods to the EU market enjoying 0% tariff, creating an advantage in export volume and added value. Viet Nam’s exports to the EU will increase by 10% by 2025.

TPP is currently considered a “treaty of the twenty-first century”, a new playground to set new standards for trade, investment, international economic integration, so standards and objectives are very high. It is also an agreement of most strategic important position and significance being negotiated at the moment in the world. TPP will facilitate rebalancing trade relations between Viet Nam and other key market areas to avoid excessive dependence on a certain market. Besides, free trade relations with major markets will generate a breakthrough for Viet Nam’s exports. In addition, access to large markets, such as USA, Japan, and Canada with import tariff of 0%, and clearer commitments on improving investment environment and protection of intellectual property rights will certainly contribute to attracting foreign investment in Viet Nam, especially the multinational groups. Viet Nam will also greatly benefit from the new wave of investment, creating more jobs, building new production capacity to take advantage of export opportunities and participate in the value chain in the region and the world brought about by TPP. With deeper and broader commitments than the WTO, TPP will help Viet Nam’s economy effectively reallocate resources, thereby actively supporting the process of restructuring and growth model innovation. TPP gears towards an equal competitive environment, transparency and participatory approach in policy-making processes, hence is very useful to complete the economic institutions as well as strengthen administrative reform.

When joining TPP, growth in investment and consumption is expected to rise from 1.03% to 2.11%. It is estimated that each year, Viet Nam's GDP will increase from US$ 1.4 billion to US$ 2.9 billion in absolute value. TPP also contributes to labor mobility between sectors that Viet Nam no longer has comparative advantage such as agriculture to the industries with more advantages, such as footwear, textiles, and utility service. Obviously, with TPP we will speed up opening to the world, creating a market economy in its true sense-a basis for building a competitive economy. When negotiations complete, it is certain that the legal framework of TPP will be a model for the economy in the 21st century, with the higher and more comprehensive rules and regulations. Viet Nam will play on a high-level playing field of big economic businesses, and will have more opportunities to connect more deeply with the global economy and to grow faster, and stronger.

Difficulties and challenges

TPP is a real opportunity for Viet Nam because it has never had a good position as today. The overall impact of TPP on Viet Nam's economy is very positive, but by no means true to all sectors and all businesses. Lessons learnt 7 years after its accession into the WTO show that opportunities sometimes become challenges if there are no appropriate macroeconomic policies and necessary reforms.

TPP may cause some social consequences. Sectors which are heavily protected and less competitive enterprises will have to reduce production or even shrink or go bankrupt. Sectors with advantage may also encounter a few hurdles when Viet Nam joins TPP. This is also the biggest challenge, particularly for the agricultural sector where production is still fragmented with low productivity, and poor quality. Viet Nam’s agricultural brand can not compete with those of countries in the region and around the world.

Unlike other FTAs, in TPP negotiations, the United States put on the negotiating table higher demands, such as removing all barriers to trade, liberalize to the maximum investment activities and services (for special economic zone), protection of intellectual property rights, environmental protection and sensitive issues for Viet Nam, such as equality for domestic and foreign enterprises, State-owned enterprises (SOE), right to association, and government procurement. These issues have been included by the United States in its FTAs with TPP negotiating countries, like Peru, Chile, Singapore, Australia, New Zealand, or with Canada and Mexico in the of North American Free Trade Agreement (NAFTA).

In fact, to participate in TPP, Viet Nam will have to reform many laws to meet acceptable standards. TPP will not help remove anti-dumping/anti-subsidy measures and other protection measures that the US impose upon Viet Nam’s exports. TPP establishes a clear legal basis, not accepting preferential and special treatment to any enterprise. For SOEs, TPP requires transparency and equal treatment. Without clear and unified direction, as well as integrated plans right now, the pressure in the implementation of commitments are likely to be a barrier to new opportunities.

Lessons learnt from the accession into the WTO and other trade agreements have been reiterated by experts as a warning, because not a few industries have suffered damage due to poor preparation for integration. It is possible that Viet Nam’s exports in general and seafood export in particular benefit in terms of tariff. However, if enterprises fail to meet requirements which do not belong to tariff, especially the protective barriers that many countries impose, they ran the potential risk of being eliminated from the “game”.

In the implementation of FTAs, conflicts of interest always happen because opportunities of this sector may be challenges to other sectors and vice versa. This often happens in the economy, whether Viet Nam has participated in FTA or not. Nevertheless, the benefits derived from the FTAs are great for Viet Nam, though opportunities and challenges of each business are different, depending on the scale, industry, export markets and competitors. Viet Nam will now have to face increasing risks of trade protection, anti-subsidy, self-defense, and anti-dumping lawsuits in markets that Viet Nam is about to sign the FTA with. The technical barriers in trade and the quarantine requirements from the markets will also rise.

With an average registered capital of about 6 billion dong/ enterprise (less than US$ 300,000/enterprise), the majority of Viet Nam’s businesses are small and super small businesses which can not reach out to the region, and so far, they are less interested in integration. In recent time, each year from 50,000-60,000 of them stop businesses due to many reasons, and the underlying cause is a majority of the businesses can not stand the pressure of integration. This is the price we have to pay when we “open” our market. Viet Nam has to be well prepared for the new generation of FTA which will have high standards surpassing resilience of the vulnerable groups (farmers, agricultural enterprises, small and medium enterprises) and sensitive social groups (workers, and patients, among others).

Solutions for the future

To implement the FTAs, to meet the requirement of integration, in the future, efforts should focus on some urgent work as follows:

Regarding economic institutions

International economic integration requires acceptance to “play” by “the rules of the game.” Institutional innovation is a breakthrough, linking domestic institutional reform with harmonious, and smooth institutional integration. Reality shows that the business environment has not much improved and therefore external liberalization has not really come with the liberalization of internal resources. Without appropriate legal system, and business environment, advantages of the FTAs will not be harnessed. Besides, there must be a specialized apparatus with clear mandates to monitor, supervise, and evaluate the effectiveness of laws and institutions.

Reform of the institutional business environment must take appropriate steps, and be placed in systematic relation: prior work must pave the way for follow-up work, and not to create legal conflicts and policy inconsistencies. With a low starting point, and limited resources, the economy of Viet Nam “has its own characteristics,” how can Viet Nam reach international standards and best practices that advanced countries take several hundred years to gain.

Administrative institutions should have provisions requiring agencies and administrative officials to bear ultimate responsibility for administrative violations within their jurisdiction. Therefore, administrative procedures must be institutionalized and require strict enforcement. A team of capable systematically trained civil servants with professional ethics is needed.

The Commercial Law, mechanisms and management policies need to be supplemented and improved in order to facilitate trade. The Law on Export and Import should be amended for consistency with provisions of the Constitution and existing laws; compatible with commitments and treaties to which Viet Nam has signed or is negotiating, the approved Strategy on tax system reform in the period of 2011-2020. In addition, obstacles, gaps, and overlaps must be removed to ensure consistency, completeness, synchronization and feasibility.

On reform and business support

A survey in 2011 showed that 95% of the 2,500 businesses in 10 provinces and cities were super small. This ratio remained the same in 2014, the majority of them used outdated technology of the previous 2-3 generations. Of these, 75% of machines, production lines were of the 1960 to 1970; 75% of the equipment were fully depreciated; and 50% were refurbished. Only about 30% of small and medium enterprises have had access to bank loans, hence businesses of this sector have not had sufficient financial capacity to invest in machinery, and technology. Expectation for foreign investors’ transfer and roll out of technology is not a reality. Only 5% of FDI enterprises have applied high-tech, 80% have had relatively low medium technology. Contracts of technology, and know-how transfer are limited.

Centers and associations must have responsibility to support small and medium-sized enterprises, and newly established enterprises in the training of human resources, management skills, administration, market access, provision of information on market as well as the investment environment, and administrative procedures. In particular, these centers must support businesses access to capital through close collaboration with local Credit Guarantee Fund for small and medium-sized enterprises and other financial funds for enterprises in this sector. It is urgent to quickly adopt environmental management systems, such as ISO 14000, HACCP, good management practices (GMP), and good agricultural practices (GAP).

There should be a law to support small and medium-sized enterprises, connecting small and medium-sized enterprises with global value chains. Address issues of exchange rates, lending rates, and create favorable conditions for enterprises to have access to bank loans. These are not only to lower interest rates but more importantly is to improve lending procedures, enabling enterprises to get loans by the collateral and giving them guidance to be creative and focus on potential projects and sectors.

The possibility of being sued or retaliated will increase in the future, so preparation and transparency of the books, accounting, tracking information and coordinating information disclosure, good understanding of the rules, lobbying and diplomacy should be done by enterprises. Overseas Vietnamese can play a role in helping Vietnamese commodities to set foot on the small and retail markets.

Renovating the provision of market information and trade promotion

It is necessary to bring about powerful changes to provide timely information on political situation, market, policies and management measures for export and import, and barriers. Accordingly, trade promotion activities, assistance of enterprises in finding business partners, new markets, new products, penetrating into distribution channels, participation in fairs and exhibitions can be done immediately. Make full use of export portal of Viet Nam (www.vnex.com.vn) to promote the brands of the businesses to foreign partners in a fastest manner with lowest cost.

Preparation of human resources

Within ASEAN, Viet Nam ranks low in the Table on assessment of human resource development. To facilitate the participation of Viet Nam enterprises in the global supply chain, there is a need for a modern education system that turns out capable and skillful human resources.

With the completion of 14 FTAs in the coming time, Viet Nam will have free trade relations with 55 partners, including 15 members of the G20. This is the foundation for Viet Nam’s international integration at higher level, extending space for development cooperation in future. There will be no market economy without people who fully understand and operate well the rules of the market economy. This is the lesson of the “Asian dragons” that Viet Nam needs to learn. Thus, the preparation of human resources for the present and the future is very important.

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The article was published on Communist Review, No. 877 (November 2015)

Nguyen Bich Thuy, PhDHanoi Commercial University