How much of Vietnam’s policy reform is driven by FTAs ?

Over three decades, Vietnam’s economy has transitioned successfully from a centrally planned agrarian economy to a dynamic manufacturing and services hub, due largely to the doi moi reforms initiated in 1986 and the country’s pursuit of free trade agreements (FTAs). The effectiveness of these FTAs in driving ground-level reforms remains questionable — the ratification of Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the EU–Vietnam Free Trade Agreement have significantly impacted intellectual property and labour law reform, while having limited effect on state-owned enterprise reform.

Vietnam is one of the most successful stories of economic transition in Asia, transforming from an isolated, centrally planned agrarian economy into a dynamic manufacturing and services hub within three decades. The doi moi reforms initiated in 1986 provided the foundation for the shift and the rapid economic growth that ensued, supported by expansion in trade and investment, has brought unprecedented improvements in social and economic conditions.

Despite embracing market-based reforms, Vietnam’s reform agenda remains unfinished. To fill gaps and advance more challenging reforms, Vietnam has actively pursued bilateral and plurilateral free trade agreements (FTAs). Vietnam now has 16 FTAs in effect, with three under negotiation. But the success of these FTAs in driving reforms on the ground remains in question.

Vietnam’s FTA journey began with its accession to the ASEAN Free Trade Area in 1995, which provided most-favoured-nation and national treatment benefits for its exports in ASEAN countries. To prepare the groundwork for World Trade Organization (WTO) accession, Vietnam concluded a bilateral trade agreement with the United States in 2001. A host of other economic, legal and institutional reforms were introduced before Vietnam was accepted into the WTO in 2007. 

These reforms enabled Vietnam to sign more ambitious, modern agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018 and the EU–Vietnam Free Trade Agreement (EVFTA) in 2020. WTO accession likely contributed to reforms associated with subsequent FTAs.

But attributing Vietnam’s reforms to specific sources is difficult due to the presence of multiple policy drivers. Some reforms trace directly to FTA provisions, while others may have occurred indirectly.

The CPTPP, ratified by Vietnam in November 2018, has discernibly impacted intellectual property (IP) and labour law reform. For instance, the process to register a sound mark follows requirements of Article 18.18 of the CPTPP, incorporated under Vietnam’s 2022 IP Law. The implementation of the CPTPP and EVFTA is improving Vietnam’s legal system governing industrial relations and labour standards in accordance with international commitments. 

Though Vietnam has not ratified the International Labour Organization’s collective bargaining convention, workers’representative organisations now exist following CPTPP standards. The 2021 New Labor Code allows employees to join or form representative organisations independent of the Vietnam General Confederation of Labour, the sole trade union organisation. This is a significant development that must have involved a rethink within the Party, with the CPTPP appearing to have played a role in bringing about the change.

Vietnam is the only other ASEAN country besides Singapore with an FTA with the European Union. Like the CPTPP, the EVFTA addresses WTO-X and WTO+ issues and 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 education and health sectors, as well as in green procurement.

The EVFTA provides a template for developing rules and standards to regulate exchange in these sensitive areas. Once established, they can be easily multilateralised, ensuring that the FTA acts as a stepping stone towards non-discriminatory liberalisation. In most cases, it is impossible to regulate access in a preferential manner like with tariff concessions. Even when possible, the cost associated with preventing free riding may not justify the benefit. 

Despite these achievements, these agreements have had limited impact on reforming state-owned enterprises (SOEs). Although the CPTPP’s SOE chapter includes advanced regulations, negotiated carve-outs and extended timeframes indicate limited appetite for reform in this area. 

Though not as ambitious or deep as the CPTPP or EVFTA, RCEP is the world’s largest FTA with a comprehensive reform agenda. RCEP aims to promote global supply chain growth through open rules of origin, already benefitting Vietnam. Progress on regulatory convergence has been slow but could lead to impactful changes over time, given Vietnam’s reliance on foreign direct investment.

Vietnam’s experience demonstrates how modern FTAs like the CPTPP and EVFTA can maintain momentum for reform. But their ability to safeguard against rising protectionism is less clear, as the global shift towards increasing resilience through industrial policy and export controls may lie beyond the purview of FTAs. 

While tangible outcomes indicate the role of FTAs in shaping the reform agenda, membership can expose countries to indirect and demonstration effects, the benefits of which may be difficult to quantify but are no less real. Vietnam’s big bang changes came with decisions to join ASEAN and the WTO and associated preparatory reforms, which continue to influence the economy more than any of the FTAs signed subsequently.

By Jayant Menon -Yusof Ishak Institute / EastAsiaForum.org – September 3, 2024