close
close

How Much of Vietnam’s Political Reforms Are Due to Free Trade Agreements?

Vietnam has made progress in embracing market-based reforms, but its reform agenda remains unfinished. Recent free trade agreements have maintained the momentum of reform, but Vietnam’s past accession to ASEAN and the WTO continues to affect the economy.

Vietnam is one of the most successful stories of economic transformation in Asia, if not the world. Over the course of three decades, Vietnam has transformed from an isolated, centrally planned agricultural economy to a dynamic manufacturing and service hub deeply connected to global supply chains. The doi moi (renovation) reforms that began in 1986 laid the foundation for the shift. The rapid economic growth that followed, supported by expansion in trade and investment, has seen almost without precedent improvements in social and economic conditions for citizens.

Despite the progress Vietnam has made in embracing market-based reforms, its reform agenda remains unfinished. To fill the gaps and move forward with the more challenging reforms, Vietnam has actively pursued bilateral and plurilateral free trade agreements (FTAs). To date, Vietnam has a total of 15 free trade agreements (Figure 1), of which four are under negotiation. But have these FTAs ​​been successful in driving reforms on the ground? This is the key question we seek to answer, based on interviews with Vietnam’s decision-makers, researchers, industry representatives and development partners, supplemented by desk research.

Figure 1. Vietnam’s bilateral and plurilateral free trade agreements

Source: https://oneip.vn/

Vietnam’s free trade journey began with its accession to the ASEAN Free Trade Area (AFTA) in 1995, when it became the seventh member of ASEAN. This decision signaled Vietnam’s intention to pursue greater economic integration with the region and subsequently with the world. Membership in AFTA also provided Most Favored Nation (MFN) and National Treatment (NT) for its exports in ASEAN countries, which was not guaranteed without membership in the World Trade Organization (WTO). While MFN ensures non-discrimination at the border, NT provides the same when the good enters the importing country. To prepare the ground for WTO accession, Vietnam concluded a bilateral trade agreement with the United States in 2001. A variety of other economic, legal and institutional reforms were introduced before Vietnam was finally accepted into the WTO in 2007.

We can trace some reforms directly to the provisions of the FTAs, while others may have occurred indirectly and possibly predated the FTAs.

These reforms changed the game. Their coverage, which surpassed that of free trade agreements in the decade after 2007, enabled Vietnam to sign the more ambitious, modern agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA ). Therefore, WTO accession may have contributed to reforms that tend to be associated with the subsequent FTAs.

To what sources then do we attribute Vietnam’s reforms? The presence of multiple political drivers makes this a difficult question to answer, but we can trace some reforms directly to the provisions of FTAs, while others may have occurred indirectly and possibly preceded the more recent proliferation of FTAs.

Ratified by Vietnam in November 2018, the CPTPP has had a noticeable impact on reforming intellectual property rights (IP) and labor laws. For example, the process of registering a sound mark follows the requirements of Article 18.18 of the CPTPP, which is incorporated under Article 105.2 of Vietnam’s IP Law 2022. Together with the EVFTA, the implementation of the CPTPP improves the legal system governing industrial relations and labor standards in accordance with international commitments .

Although Vietnam has not ratified the International Labor Organization’s Collective Bargaining Convention, there are now labor organizations that adhere to CPTPP standards. The new labor law came into effect in 2021 and allows employees to join or form a worker representative organization that is independent from the Vietnam General Confederation of Labor, which is the only and unified trade union made up of the 18 national industrial confederations.

Apart from Singapore, Vietnam is the only other ASEAN country to have a free trade agreement with the EU. Like the CPTPP, the EVFTA covers some areas ignored by the WTO (known as WTO-X) or goes deeper than the WTO (WTO+). The EVFTA is also expected to generate significant market access benefits as Vietnam does not have existing FTAs ​​with EU members, unlike with the CPTPP or the Regional Comprehensive Economic Partnership (RCEP). In the difficult area of ​​government procurement, the EVFTA is making progress in selectively opening up the education and health sectors as well as green procurement.

The EVFTA provides a template for the development of the many rules and standards associated with regulating exchanges in these sensitive areas. Once these rules and standards are established, they can be easily multilateralized, thereby ensuring that the FTA acts as a stepping stone towards non-discriminatory liberalization. In most cases, it is impossible to regulate access in a favorable way, for example with tariff concessions. Even when possible, the costs of preventing free-riding may not justify the benefits of trying to do so.

Despite these notable successes, neither agreement has managed to effectively address the difficult issue of state-owned enterprise (SOE) reform. Although the CPTPP’s separate chapter on state-owned enterprises includes some of the most advanced and innovative rules among investment treaties, the exemptions and extended timeframes negotiated by Vietnam, which themselves indicate limited appetite for reform, have dampened the impact.

Although not as ambitious or in-depth as CPTPP or EVFTA, RCEP is the world’s largest free trade agreement with a comprehensive reform agenda. One of RCEP’s main goals is to promote the growth of global supply chains through its open rules of origin, which has already benefited Vietnam. Progress on regulatory convergence has been slow but can lead to impactful changes, given time.

The experience of Vietnam shows that modern free trade agreements, especially the CPTPP and EVFTA, have been able to keep the momentum of reform going and fill the gaps in some of the more difficult areas of reform. But their ability to protect themselves against rising tide of protectionism is less clear, as the global shift towards increased resilience and self-sufficiency through industrial policy and export controls may lie outside the scope of free trade agreements.

Although various concrete results indicate the role of FTAs ​​in shaping the reform agenda, membership may also expose countries to indirect and demonstration effects, the benefits of which may be difficult to identify or quantify but are no less real. The big bang changes that came with the decisions to join ASEAN and the WTO, and the preparatory reforms associated with them, continue to affect the economy more than any of the free trade agreements signed later.

2024/207

Back To Top