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Vietnam Today

Coping with commitments

Released at: 18:35, 05/02/2015 2015 - Year Of FTAs

Coping with commitments

Will Vietnam sink or swim amid a proliferation of FTAs?

Ms. Wong Chian Voen & Mr. Hai Nguyen

The latest round of trade talks within the WTO framework - the Doha round - is in an indefinite gridlock for a variety of reasons but most often cited is the very large number of participants involved and their disparate economic/development levels. Eager to push ahead with trade liberalization, like-minded countries have come together to look for alternative trading arrangements. In this context, free trade agreements (FTAs) have come into play. Indeed, as at January some 604 notifications of regional trade agreements had been received by the WTO. Of these, 398 are currently in force. In this ongoing wave of FTAs, Vietnam has been actively engaged in trade negotiations with its major trading partners and has concluded a number of FTAs so far. 

Moving forward in a borderless world of trade 

With its entry into ASEAN in 1995, Vietnam started on the first chapter of its economic integration into the global trading system, culminating in its membership of the WTO in 2007. Vietnam was also busy with ASEAN-led regionalism efforts. Regionalism involving the ten ASEAN member states plus six of its major trading partners in the Asia-Pacific region (China, Japan, South Korea, Australia, New Zealand and India) has taken on the hub-and-spoke FTA structure, with ASEAN as the hub and the other partner countries as the spokes. The next development in regionalism will be when the ASEAN+6 consolidate into a 16-country wide FTA - the Regional Comprehensive Economic Partnership (RCEP) - currently under negotiation.
Recently, Vietnam has gained urgency (and confidence) in negotiating FTAs, away from the ASEAN structure, initiating FTA negotiations with South Korea (concluded in December), the Customs Union of Russia, Belarus and Kazakhstan (concluded in December), and the EU, and is participating in the 12-country talks on the Trans-Pacific Partnership (TPP). 

Opportunities to come

One can note that most of Vietnam’s existing FTAs focus on tariff liberalization. It has removed (or will eventually remove) tariffs on the majority of products and in return will gain preferential access to key markets in the Asian region. In other words, Made-in-Vietnam products will have a cost advantage (due to FTA preferential access) over goods from other non-FTA producers.

Vietnam is negotiating FTAs with its top two export markets: the US (under the TPP) and the EU, which together account for almost 40 per cent of Vietnam’s total exports. Furthermore, none of Vietnam’s competitors are in FTAs talks with these two markets. Thus, when the TPP and the bilateral Vietnam-EU FTA come online, likely within the next two to three years, Vietnamese businesses will have an advantage in boosting their exports to these two markets. Furthermore, these two FTAs, particularly the TPP, will likely deal with other issues such as intellectual property rights, competition policy, trade in services, and environmental rules, etc.; issues that businesses will increasingly be concerned about as they re-align their supply chain across the region. Vietnam will be well-positioned to attract such investments.

The soon-to-be-concluded RCEP will further integrate countries in the region. Vietnamese businesses can take a more strategic approach and increase their involvement in regional and global production networks. Even if businesses are unwilling or unable to export on their own, they can still take the opportunity of becoming suppliers to major exporters, including multinational companies, to boost the local content of their goods in order to capitalize on FTA preferences. 

Finally, while Vietnamese businesses may find it difficult to compete with low-cost manufacturers in China, this situation is changing. China’s cost advantage is slowly eroding over time and the Chinese domestic demand is gradually growing into a market into which Vietnamese businesses can sell finished goods.

If the TPP and the Vietnam-EU FTA are concluded as “advertised”, i.e. are 21st century trade agreements addressing issues other than tariff liberalization, we can be optimistic that Vietnamese businesses will have greater participation in lucrative production networks in the region, as well as be better positioned to expand to other markets. 

Negatives still to be addressed 

While it would be difficult to deny the potential benefits FTAs may bring, the adverse effects of FTAs may be equally enormous, especially for developing countries like Vietnam. 

Low awareness among the local business community

Analysts believe many Vietnamese enterprises, especially small and medium-sized enterprises (SMEs), may be unaware of existing FTAs and/or how they can take advantage of the preferences. According to a recent survey conducted by the Institute of Southeast Asian Studies, 76 per cent of Vietnamese enterprises surveyed are unaware of the 2015 ASEAN Economic Community (AEC) and 63 per cent among them believe that the AEC should not impact their business - the lowest awareness level among ASEAN countries.   

Capacity to capitalize on FTA preferences remains weak

The complexity of rules and procedures, particularly the rules of origin (ROO) and the operational certification procedures, as well as the compliance costs, have put off many companies from capitalizing on FTAs. Sifting through and understanding the hundreds of pages of negotiated FTA text take time and resources that many businesses may not have. Ensuring that the production process satisfies the ROO requirements and, in some cases, restructuring the process in order to receive preferential treatment, may raise transaction costs. In other words, the cost of accessing FTAs may sometimes outweigh the advantages, especially for SMEs.

In addition, some local industries may pay a price for their unsustainable development strategies of the past. For instance, the garment industry, which is expected to be among those who benefit the most from the TPP, has not adequately invested in the development of raw materials. The industry is currently dependent on as much as 70 per cent of imported raw materials (cotton and yarn), mostly from China and South Korea - two non-TPP participants. With the “yarn forward” ROO, which may be eventually implemented under the TPP, Vietnamese garment exporters may find themselves struggling to comply with the TPP’s ROO so as to benefit from the pact’s preferential market access.  

The lack of capable local distributors also poses concerns for local suppliers. The failure of local distributors to expand their operations to other countries would, to a certain extent, eliminate the capability of local suppliers to access foreign markets. Furthermore, local suppliers will have additional concerns in relation to recent acquisitions of local distributors by those from other countries in the region. As the 2015 AEC promises a completely free market in ASEAN, it is foreseeable that the foreign-owned distributors may shift their supply from local suppliers to suppliers from their home country. This will expose Vietnam to the risk of becoming a consumption market rather than a production hub in the Southeast Asia region. 

Are markets really free?

A tariff-free market does not necessarily mean that the cross-border flow of goods is completely free. In fact, the rise of trade remedy actions (antidumping and countervailing investigations) has become a nightmare for some local exporters in the country’s main export industries. To date, Vietnamese exports have been subject to more than 50 trade remedy actions taken by their export markets around the world. Those trade remedy actions cover a wide range of products, from fish fillets to steel products. Participating more and more in FTAs certainly promises more trade. Yet at the same time it promises more trade remedy actions, since these may be the only options left for Vietnam’s trading partners to protect their own domestic industries. Things may be even worse since the EU and the US - Vietnam’s top two major trading partners - have not recognized Vietnam as a market economy. Under its WTO commitments, Vietnam made the same commitments as China did with respect to non-market economy treatment (NME). Specifically, the NME applicable to Vietnam will expire in 2018 and China in 2016. Unfortunately, many scholars and practitioners have voiced their concerns that the China commitment on NME will not be interpreted as straightforwardly as expected and that certain WTO members will likely challenge the expiration of the NME. Accordingly, Vietnam will need to closely watch how China deals with its NME in 2016. Finally, FTAs, even the 21st century ones, do not go significantly beyond the current WTO rules to deal with trade remedy actions.  

All FTAs have pros and cons, and preparation brings its own luck. As the former Minister of Industry and Trade Truong Dinh Tuyen once said: “The WTO [and any other FTA] is not a magic stick nor is it full of traps. It simply brings opportunities and creates challenges. The possibility of realizing those opportunities all depends on us.” 

Wong Chian Voen is a Director of Mayer Brown Consulting. She advises clients on international trade issues, including trade, customs, export control and other regulatory requirements, and investment rules. She assists companies in rationalizing their manufacturing and supply chain strategies in order to capitalize on free trade agreements. Chian Voen was part of the Singapore government team involved in FTA negotiations.
Hai Nguyen is an associate of Mayer Brown JSM Vietnam. He has worked on almost all trade remedies involving Vietnam. He represents foreign steel manufacturers in the first-of-its-kind, inbound, anti-dumping investigation in Vietnam. Hai is also a visiting lecturer at the University of Social Sciences and Humanities. 

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