Vietnam Poised to Profit from Free Trade Agreement Opportunities

Since the Doi Moi policy reform overhaul starting in 1986 and more recently through its accession into the World Trade Organization in 2007, Vietnam has become a success story of robust economic growth driven by trade liberalization and global integration. Indeed, Vietnam's opening to international commerce and foreign direct investment has undoubtedly played a pivotal role in the stellar growth it has experienced over the last three decades, that transformed it from one of the poorest nations in the world to a middle-income market economy. Its economic narrative has been one of a rapid transition from an agriculture-based economy to one where manufacturing and services play a much larger role.

One key way of boosting trade and economic development is through participation in free trade agreements (FTAs). Two such pacts that are slated to come into effect in 2019 and could have a profound impact on the economy are the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the European Union-Vietnam Free Trade Agreement (EVFTA).

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership is a multilateral trade agreement composed of 11 Pacific Rim nations encompassing more than 13% of global GDP and a shared market of around 500 million people. According to the European Commission, the EU-Vietnam FTA is the most ambitious free trade framework it has ever pursued with a developing country. Both deals will substantially hack away at tariff and non-tariff barriers.

The principle of both frameworks is to boost growth prospects through greater economic cooperation and stronger trade ties. Vietnam stands to gain from both of them through increased foreign direct investment, further integration in regional and global supply chains and a growing export market share. Both deals are seen boosting Vietnam’s trade opportunities for many of its sectors including textiles, leather and footwear, e-commerce and services, and helping fortify the country’s status as a low-tech manufacturing hub.

However, more importantly for Vietnam’s economic development will be the continued shift away from exporting low-tech manufacturing products and primary goods to more complex high-tech goods like electronics, machinery, vehicles and medical devices. This will be made possible firstly through more diversified input sources from larger trade networks and cheaper imports of intermediate goods from partner countries, which should boost the competitiveness of Vietnam’s exports. Secondly, through partnership with foreign firms that can transfer the know-how and technology needed to make the leap into higher valued-added production. More sophisticated business practices and technology will help boost Vietnamese labor productivity and expand the country’s export capacity.

As most of Vietnam’s current FDI largely originates from Asian countries, the presence of investors from Europe and advanced countries like Australia and Canada has room to grow—and these trade pacts will provide fresh impetus. Moreover, while recent FDI has been primarily channeled into manufacturing or real estate, other emerging sectors represent untapped opportunities for foreign companies to reap profitable returns on investment. Indeed, one sector that has already begun to allure investment is clean energy, particularly natural gas and wind development.

European firms’ entry into Vietnamese service markets including banking and insurance, maritime transport, and environmental services should help modernize those markets and improve service quality. A recent survey by the European Chamber of Commerce revealed the majority of participants believe EVFTA will make Vietnam more competitive and turn it into a hub for European business in the region.

Mergers and acquisitions will likely become more prevalent and will be pivotal in boosting total factor productivity. Further global integration resulting from the trade deals, combined with the prolonged trade dispute between the U.S. and China, could see an influx of multinationals establishing bases in Vietnam to divert their supply chains away from China. 

Apart from the direct benefits of trade and foreign direct investment, the deals should be catalysts of other important changes. One such advantage will be greater alignment with international standards from workers’ rights to environmental protection. Both FTAs require compliance with the International Labour Organization's (ILO) standards, including the freedom of association and the elimination of forced labor. Commenting on potential labor market reform, Chang-Hee Lee from ILO Vietnam noted: “This is really an opportunity for Vietnam to modernise its labour laws and industrial relations system, and the need for such reforms firstly comes from the country’s internal context.” Meanwhile, articles of the treaties will require Vietnam to abide more closely by international standards for products like pharmaceuticals and motor vehicles.

While the FTAs will likely be beneficial to Vietnam’s economy overall, there are still downsides. For one, these agreements will unleash fierce competition from foreign rivals on local businesses, with agriculture in particular set to be exposed to greater foreign competition, particularly from meat and dairy products from the EU, Australia and Canada. If firms are not poised to adapt and make use of new market opportunities and the potential for partnership with foreign firms, they could struggle to compete. Moreover, the benefits of FDI and trade are not inherent to the agreements themselves, but rather are largely dependent on the frameworks put in place to ensure sustainable growth and the contribution of foreign firms to local markets.

In order to maximize the potential these agreements offer, the Vietnamese government needs to continue making progress on important reforms, especially with regard to strengthening the banking sector, refining legal and tax structures, eradicating corruption and improving trade facilitation. Emphasis should be made on FDI projects that transfer technology or expertise to domestic businesses.

Vietnam’s thirty years of remarkable growth and advancement on the global stage make it a posterchild for the benefits of trade liberalization. With a low-cost base, demographic dividend, and strong government commitment to reform, Vietnam stands poised to benefit significantly from its involvement in CPTPP and EVFTA. According to the Ministry of Planning and Investment, CPTPP could increase Vietnam’s GDP by 1.3 percentage points and exports by 4.0 percentage points by 2035, while the EU considers that the EVFTA could boost Vietnam’s GDP by 15%. These two deals—along with other FTAs which will likely come in the future—should help ensure that the next thirty years are just as positive.

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: January 4, 2019


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