An economist perspective on Vietnam’s trade future

14:15 | 05/11/2017
Vietnam’s economic prospects are expected to be brighter after the intended completion of APEC trade liberalisation by 2020 under the Bogor Goals, and amid the country’s joining a string of free trade agreements. Nihad Ahmed, senior economist for Vietnam for global economic analysts FocusEconomics, shares her view on Vietnam’s many advantages in attracting APEC investors and enterprises.

Vietnam has pursued various initiatives to facilitate trade liberalisation, enabling it to diversify its production base to higher value-added areas, source inputs from a wider range of overseas markets at more competitive prices, enhance the transfer of technology, and boost the competitiveness of its exports.

Since 1990, when Vietnam started to transition to a market-oriented economy, the economy has expanded at a spectacular pace, propelling the country to middle-income status. It has kept growing at a rate of more than 6 per cent for the last three years. This transition was underpinned by a set of reforms adopted in 1986, which paved the way for Vietnam to join the Association of Southeast Asian Nations (ASEAN) in 1995 and sign numerous bilateral free trade agreements (FTAs).

An important milestone in solidifying Vietnam’s commitment to free and open trade was the adoption of the Bogor Goals, agreed upon by APEC member economies in 1994. The Bogor Goals provide a framework aimed at reducing barriers to trade and investment.

Following the completion in 2010 of the first phase targeting trade with developed economies, Vietnam is pushing efforts to meet the second phase for developing countries by the 2020 target as it hosts APEC 2017, a year of APEC meetings held in Vietnam, which will culminate with the 2017 APEC Economic Leaders’ Meeting in the central city of Danang from November 6-11.

Notably, it was Vietnam’s entry into the World Trade Organization (WTO) in 2007 which encouraged a massive inflow of foreign direct investment (FDI). FDI jumped from $2.4 billion in 2006 to $7 billion in 2007. A hub for low value-added manufacturing, together with its low wages, the country brought in billions of US dollars in FDI. From January 2016 to September 2017, Vietnam recorded $28.3 billion in disbursed FDI as the economy moved up the value chain in a shift to high value-added production. The state has also played a pivotal role in steering foreign investment into priority areas to optimise the capacity of capital inflows as engines of growth.

Vietnam’s trade evolution has progressed at a similar rate as APEC’s implementation of the Bogor Goals

Vietnam’s advantages for APEC investors and enterprises

Attractive opportunities for investment, socio-political stability, membership in the WTO, participation in multiple global economic

integration frameworks, and favourable corporate tax rates in special economic zones have made Vietnam one of the most attractive investment destinations globally.

APEC partners are among the top investors in Vietnam, thanks to lucrative investment opportunities and targeted initiatives by the Vietnam Chamber of Commerce and Industry to connect businesses directly and build partnerships at the executive level across all economies, such as the APEC CEO Summit.

Vietnam’s membership in APEC has also enabled it to enhance its infrastructure development, increase the transfer of technology and management skills, and improve market development through technical and economic co-operation exchange programmes.

Moreover, Vietnam remains focused on improving its business climate. A new draft Law on Special-Administrative Economic Zones is expected to be discussed by the National Assembly later this month or next. The draft law focuses on building a more favourable business environment in three special economic zones in Quang Ninh, Khanh Hoa, and Kien Giang provinces. It aims to simplify investment at a regional level, especially for public-private partnerships and offshore investment projects.

The law would also provide improved access to land for domestic and foreign investors. Investment projects in the priority areas of research-and-development, healthcare, education, and projects advancing strategic interests would be granted 99-year land leases. Furthermore, it would provide tax incentives, especially for startups and enterprises operating in the aforementioned industries.

Other key initiatives to liberalise trade and their expected benefits

The Regional Comprehensive Economic Partnership (RCEP), which was launched in 2012 and is currently under negotiation, is an initiative that would help Vietnam achieve the Bogor Goals by the target year of 2020, by reducing barriers to trade and investment and strengthening co-operation between developing economies.

The initiative aims to connect the 10 ASEAN economies, including Vietnam, with six existing FTA partners (China, India, Japan, the Republic of Korea, Australia, and New Zealand) under one overarching FTA, thereby establishing one of the world’s largest free-trade zones. The partnership, which would represent around 30 per cent of global GDP, seeks to deepen ties between the participating economies, including strengthening connections between leading regional manufacturing hubs.

The EU-Vietnam Free Trade Agreement (EVFTA), also launched five years ago and expected to be ratified in 2018, has a similar premise: to widen economic prospects through further trade liberalisation. The EVFTA is seen as one of the furthest-reaching and most ambitious trade and investment bilateral agreements ever between the EU and a developing country. Under the agreement, over 99 per cent of existing tariffs would be dismantled over the next decade, with different tariff elimination timelines for different export goods.

Both agreements promise to improve access to Europe and Asia-Pacific, respectively, for Vietnam’s exports by reducing tariffs and non-tariff barriers in Vietnam’s areas of interest, including textiles and apparel and agricultural products. Vietnam would also be able to obtain inputs at more favourable prices through access to a greater number of markets.

Furthermore, improved technology transfer would help it achieve its mission of diversifying production and participating in higher value-added areas, which would not only strengthen trade and investment and accelerate economic development, but also help build the economy’s resilience to external shocks.

Risks around trade liberalisation

FTAs are not in themselves a panacea for growth, however, and their limitations must be addressed. One drawback of having multiple FTAs is the widely-criticised investor-state dispute settlement (ISDS) mechanism. The ISDS gives exclusive rights to corporations to sue host governments at international tribunals for treatment that is deemed unfair and discriminatory, circumventing domestic regulations and legal procedures.

The laws an ISDS can challenge include ones upholding environmental protection and labour rights, which are critical to ensuring sustainable and inclusive long-term development. While the European Commission is taking steps to find an alternative by proposing a multilateral investment court system for the EVFTA, the RCEP includes the controversial ISDS clause.

Steps to attract more FDI

As the economy shifts to high value-added manufacturing, these risks must be factored in, and there is a need to improve the efficiency of technology transfer from foreign-invested enterprises – which has been found to be surprisingly low in the garment and textile and footwear industries by the World Economic Forum.

Upgrading the quality of physical infrastructure and the connectivity of technology and communication are also important steps. In addition, it is imperative that Vietnam restructures state-owned

enterprises and expands highly-skilled labour through increased investment in education along with other public services to become an even greater magnet for foreign investment.

Completion of the current wave of trade liberalisation should help Vietnam meet the Bogor Goals by reducing trade and investment barriers, boosting export capacity, and enabling the development of high value-added industries. The country aims to climb to high middle-income status and eventually break out of the “middle-income trap” that has gripped countries like China, Brazil, and Malaysia.

At the core of making this successful is improving the efficiency of technology transfer and enhancing both physical and digital infrastructure, aided by initiatives such as the RCEP and the EVFTA. Moreover, by sustaining a strong business environment, reducing the impact of risks from FTAs by making the processes more transparent and efficient, and building buffers to geo-political risks, the country can become even more attractive to overseas investors while also ensuring sustainable economic growth.

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