Vietnam: achievements and challenges for emerging as a FTA hub

Abstract

Vietnam joined the Association of South East Asian Nations in 1995, and that opened its gate afterward for participating in the Free Trade Areas (FTAs) with regional and international partners. The pace of Vietnam’s economic integration through FTAs gathered momentum since 2001. By 2016, it has singed 12 FTAs, of which eight have already become operational, and is negotiating another four for formation. With this FTA endeavour, Vietnam is set to emerge as an FTA hub along with Singapore and Thailand in the South East Asian region. In selecting partners and signing FTAs, Vietnam maintains a distinct economic and political strategy. The participation in older and new-generation FTAs has brought both opportunities and challenges to Vietnam. This study aims at examining and discussing the FTA drive of Vietnam to emerge as an FTA hub, identifying the achievements and challenges appeared in the process, and proposing some measures for Vietnam to address the FTA related challenges in the coming years.

Keywords:

• FTAs
• Vietnam
• free trade
• trade liberalisation

Notes

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 TPP had a total of 12 members, viz. Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Japan, Peru, Singapore, USA and Vietnam. The USA has withdrawn from the deal recently.

2 Jacob Viner published his work on The Customs Union Issue in 1950 and first introduced the terms ‘trade creation and trade diversion’ in that work.

3 Global Competitiveness index is created based on three criteria: (i) The basic requirements including institution, infrastructure, macroeconomic environment, primary education and health; (ii) The efficiency enhancers including higher education and training, efficiency of goods market, labor market efficiency, financial market development, technological readiness and the market size; (iii) The innovation and sophistication factors including business sophistication and innovation. Vietnam’s ranks in these three indicators are very low, only 72nd, 70th and 88th, respectively.

4 For instance, related to the Law on Investment and Law on Enterprises, the government is required to release 51 new legal documents. However, as of 1 July 2016, there have been only 21 documents released (Quang, 2016a). Vietnam will also have to add 43 articles in the Labor Code; 12 decrees need to be amended, completed, removed or reissued. Some new issues such as freedom of association or the establishment independent trade unions, etc. should be legalized (Quang, 2016b).

5 Joining FTAs means that the member countries shall fully comply with tariff elimination/reduction commitments. The revenue from taxes may decrease under two impacts: (i) Direct impact on revenue due to tax reductions applied to imported products from FTAs partners, and (ii) Indirect impact on revenue due to trade diversion. This happens as member countries stop importing products from non-FTAs countries in order to receive tax and tariff preferences. Both the impacts should lead to a decrease in government income, affecting the revenue side of the national budget.

6 In Vietnam, an enterprise having capital less than VND10 billion is termed as small. They in particular will face this problem for the following reasons:

A majority of Vietnamese enterprises are small and medium, even super small enterprises, (registered capital is about 6 billion VND/company on average). Thus, enterprises face difficulties in capital mobilization (due to lack of capital, limited access to loans, especially long-term loans), lack of competence and management experiences (lack of skilled employees and consultants). Meanwhile, foreign enterprises have both advantages of capital, labor, science and technology resources, and advantages of management experience and high reputation. According to the Global Competitiveness Index Report in 2015–2016, the innovation and sophistication factors of Vietnam scored 3.4, ranking 88th/140. The indexes of technology, high-quality human resources also ranked very low, and the innovation sub-indexes are all in the bottom of the list (WEF, 2016). Moreover, the production capacity remained weak, especially in high technology industries. Among 550,000 enterprises in Vietnam, only 25% are exporting enterprises. However, their products are mainly processed items which cannot create high values added for the economy.State-owned enterprises have received a number of privileges for a long time and enjoyed an ask-favor mechanism, which hampered their business effectiveness and competitiveness. The state-owned enterprises are considered the most vulnerable victims once new generation FTAs come into force. However, Vietnamese enterprises are not aware of integration knowledge as well as necessary self-defense measures when participating in FTAs. The percentage of Vietnamese enterprises which can take advantages from FTA is less than 50% (Ngoc & Son, 2015) (Box 1).

Box 1 Challenges of the rules of origin to Vietnam’s garment industry

The garment industry, a key export earning sector, accounted for 15% of GDP in 2012. The deepening and widening of international integration through FTAs have brought promises to this industry. However, to realise that the Vietnamese garment enterprises are facing many challenges, especially from the rules of origin.

The local content requirements on garment products in Vietnamese export markets are very different. In some FTAs such as AFTA, FTA with China, Korea and Chile, the local content requirements are not stringent (raw materials can be imported and only the final stages of cutting and sewing the fabric take place in Vietnam), but for the FTAs such as ASEAN – Australia/New Zealand, ASEAN – India, the local content requirements are much more stringent (final products are required to have a minimum localisation rate of around 35–40%). While ASEAN – Japan FTA requires a minimum of 35–40% local contents and fabric is sourced from ASEAN countries or Japan.

Vietnam is importing approximately 70–80% of fabrics and raw materials (higher in 2012, 86.7%) while the remaining 20% of fibre and fabric produced locally. Therefore, final garment products cannot meet the quality requirements to export. In 2015, while Vietnam’s total exports value worth 27.3 billion USD, its imports reached 13.5 USD billion for raw materials. Domestic raw materials are estimated at around 7.8 billion USD (Ly, 2016). Moreover, the fabric imported in Vietnam is mainly from China (accounting for 35% of the total), Korea (15%), and Taiwan (9.4%) (Minh, 2016). Both China and Taiwan are not members of TPP: hence, garment products of Vietnam shall not be able to meet the strict regulations on the rules of origin of new-generation FTAs.

7 The rules of origin articles vary among FTAs, thus the local content requirements differ among FTAs and even among production sectors within an FTA. The challenge for Vietnamese exporters is to fully and clearly understand and be aware of the rules of origin regulations in each FTA to comply with these requirements and to be well-prepared to prove the origins of products status if necessary.

8 As of June 2016, there are nearly 100 anti-dumping lawsuits against Vietnamese enterprises. Notably, the use of this policy instrument is becoming more and more popular in both the U.S and Russia. Over the 2005–2014 period, Russia has implemented 38 anti-dumping lawsuits and the U.S have lodged anti-dumping lawsuits against Vietnam’s exported shrimp, catfish, leather and footwear and steel, etc. which are key export products of Vietnam. This can be attributed to some main reasons as follows: (i) The use of trade remedies instruments to protect domestic products in Vietnam are not popular (trade remedies are new to the authorities and domestic enterprises); and (ii) Domestic enterprises did not pay much attention to trade remedies instruments. It requires the application from enterprises for the government to implement the lawsuit and settle trade disputes. If domestic enterprises refuse to file the application (due to the lack of knowledge or reluctant to the cost and the complexity of the process…), the government cannot carry out the lawsuit. A survey of 1000 businesses in 2014 showed 63% of the enterprises have heard about trade remedies instruments but did not fully understand, 20% have preliminary awareness, more than 15% have no idea at all and only 2% have a full understanding of these instruments. This survey reveals that 11% of enterprises believed their staffs could make use of trade remedies instruments, 48% thought they might have difficulties in using them and 41% admitted that their staffs couldn’t use these instruments (Cuong, 2015).