Economics AT2 – Vietnam’s economic development since joining the WTO – Bùi Đặng Châu Anh (SACEi khoá 3)

AT2: Globalisation Report

Vietnam’s economic development since joining the WTO 

1. Introduction 

Vietnam’s accession to the World Trade Organisation (WTO) was seen as a significant step in augmenting the country’s global economic integration. From the organisation, Vietnam could tremendously reap the benefits of improved access to foreign markets, openness to international trade and economic growth. However, due to greater competition and stringent international standards, challenges remain. This report will examine the impact of the WTO on the economy ever since its admission. 

2. Pre-WTO Vietnam 

Before becoming an official member of the WTO, the country’s transition from a planned economy to a more market-driven system ever since the 1986’s Doi Moi reform has helped the country integrate into the world economy in diversified levels. Before 2007, Vietnam had gradually implemented bold economic reforms to establish strategic partnerships with global economies through negotiations of new trade policies (Tumbarello 2007). 

Figure 1. Milestones in Vietnam’s trade policy before WTO accession (World Bank Group 2016)

Consequently, throughout 1993-2007, Vietnam’s total export-import values more than doubled in relation to gross domestic production (GDP), tripling its export market share (Tumbarello 2007). Significant export growth had stimulated GDP growth, which averaged above 7.5% per year. Such impressive performance also had an impact on a microeconomic level as it led to job creation and poverty reduction among approximately 30 million Vietnamese people, in turn decreasing the population share of the poor and near-poor class from 65.5% to 59.6% in 2004-2006 (World Bank Group 2016). Because goods are rationed by price in the market system, this redistribution of income has diminished the problem of limited income and made necessities affordable to more households. Subsequently, Vietnam had gradually proven itself eligible for relations with international institutions and global trade pacts.

Figure 2: Vietnam’s changes in income distribution in 2004 – 2012 (Ưorld Bank Group 2016)

3. Reason for joining the WTO 

As a developing nation, Vietnam’s accession to the WTO was initiated with an incentive to facilitate trade, strengthen access to leading markets and boost sustained economic growth (Tumbarello 2007). 

3.1. Potential benifits 

To begin with, the WTO would augment Vietnam’s economic link with other trading partners and boost its export performance (Tumbarello 2007). As member countries of the WTO collaborate to promote trade liberalization, trade barriers would gradually be phased out. When remaining restrictions on imports among WTO members are removed, Vietnam can enhance export earnings from major industries such as textile and garment, further improving the country’s trade balance. 

From a national and local perspective, increased trade should improve the efficiency of the labour force and raise national income. To meet increasing global demand for Vietnamese merchandise, national firms will shift their focus to the quality of goods and services (G&S), employee training and cost efficiency, in turn creating a competitive business environment. Throughout the process, local workers can benefit from greater knowledge, higher wages and eventually bring added value to the economy. In the long term, Vietnam’s comparative advantage would be strengthened, which ensures trade competitiveness and national income growth. 

Additionally, according to WTO rules, Vietnam would have to abolish tariff exemption measures and export subsidies. Reductions in most tariff rates would be phased in gradually from an average of 17.4% in 2007 to 13.6% by 2019 (Tumbarello 2007). Due to this, cheaper imports should be instrumental in controlling inflation and creating welfare gains. Vietnam could negotiate lower prices for imports of raw materials and semi-processed inputs, hereby reducing local firms’ production costs and lowering prices of consumption goods. Subsequently, accession to the WTO could efficiently control cost-push inflation.

Figure 3. Vietnam’s falling tariffs under the WTO rules (Tumbarello 2007)

Lastly, foreign competition would influence national firms to efficiently allocate scarce resources and cut costs while ensuring maximum satisfaction of consumers’ wants. Larger volumes of imports into the local market would influence domestic firms to lower their price levels and improve product quality in order to remain competitive. Hence, when competition arises, Vietnamese consumers would benefit from more diversified consumption choices and lower prices of G&S.

3.2. Potential drawbacks 

However, influxes of imports could threaten Vietnamese businesses, such as local producers of garments and footwear (Tumbarello 2007). If Vietnam’s level of exposure to international trade is high, domestic firms’ earnings along with workers’ income can be reduced. Nonetheless, this disadvantage can be minimized since cheaper imported intermediate goods could preserve these sectors’ competitiveness. 

Furthermore, heavily protected industries would not remain viable unless there is significant reform (Tumbarello 2007). For instance, from April 2007, foreign banks would be allowed to operate on the domestic market. If measures are not taken to aid this sector, the banking market could be vulnerable to low-profit margin and labour shedding, which dampens employment and citizens’ living standard.

4. Impact over the last 10 years 

4.1. Increased trade 

Vietnam had made considerable achievements in expanding its openness to trade. After the 10-year membership, its trade to GDP ratio climbed from 139% in 2006 to 200% in 2017 (OECD & WTO 2019, pp. 446–447). This can be attributed to the country’s implementation of important WTO commitments, including tariff cuts and policy reforms. Additionally, the removal of protectionism amongst member countries also significantly contributed to Vietnam’s substantial gains in exports, which increased by 438% and 156% for G&S, respectively, in 2017. Hence, under the WTO’s framework, Vietnam was able to reap the benefits of market access and increased its trade values. 

Figure 4. Changes in Vietnam’s trade flows before and after WTO accession (OECD & WTO 2019, pp. 446–447) 

Nonetheless, the growth in foreign trade could be attributed to other factors, such as the implementation of trade agreements. Over the decade, Vietnam had signed 12 bilateral and multilateral FTAs, which aim to curb protectionism and promote trade liberalization (VIR 2017). Consequently, barriers still exist in practically assessing the effectiveness of WTO in stimulating Vietnam’s foreign trade. 

4.2. Foreign investment 

WTO’s accession was crucial in stimulating rising inflows of foreign investment and providing domestic firms with the necessary capital finance. The Vietnamese government continually implemented pro-investment policies, improved the business climate and made use of technological advancements, which resulted in the country’s macroeconomic stability and strong investor confidence (Nguyen, TH 2017). By 2016, Vietnam had recorded a disbursed FDI volume of USD15.8bn, nearly doubling that of 2007. Moreover, foreign-invested enterprises have substantially contributed to Vietnam’s trade, whose share of exports rose from 57% in 2007 (World Bank Group 2016) to 71.5% in 2015 (VOV 2017). 

Figure 5. Vietnam’s rising FDI inflows from 2000 – 2014 (World Bank Group 2016)

As global leading groups, namely Samsung or Toyota, shifted their production to Vietnam, domestic producers greatly benefitted from the transfer of advanced technology and management skills from leading companies of developed nations. Thus, Vietnam had strengthened the quality of human capital and increased the availability of skilled labour resources. For instance, the female labour force participation rate climbed from 71.6% in 2006 to 72.2% in 2017, indicating that Vietnam is further diminishing the problem of labour shortages (OECD & WTO 2019, pp. 446–447). With well-educated workers and reasonable wages, Vietnam continued to remain an attractive platform for investment and exports. 

Lastly, it can be seen that as Vietnam moved away from a planned economy, its pro-investment policies and rising FDI inflows have led to greater production, thereby increasing the diversity of G&S in the market. This can be explained by Vietnam’s manufactured items’ shares in the export structure, which rose from 55.4% in 2007 to 76.2% in 2015 (VOV 2017). 

4.3. Strong domestic production 

As international trade gave rise to competitive pressure, domestic enterprises were compelled to improve their production in order to remain viable. Vietnamese firms had proactively reaped the benefits of WTO’s large trade networks by seeking suitable markets boosting linkages with more diversified foreign sourcing partners (VOV 2017). Hence, owing to Vietnamese firms’ growing connections with foreign enterprises, the country gradually became more connected to the global supply chain with an increase of 29% in the market openness rate (Nguyen, T 2017).

4.4. WTO safeguards 

Vietnamese firms were safeguarded by appropriate protectionism measures in accordance with WTO rules. In 2013-2015, the country experienced a dramatic rise in steel imports from China and South Korea, which nearly doubled in value and wreaked havoc on domestic producers of competitive merchandise (VOV 2016). They could have claimed significant market share and formed monopolistic advantages over Vietnamese producers. Yet, under the WTO rules, the Vietnamese government can “apply for a maximum of 200 days of provisional tariff protection” (VOV 2016). Therefore, Vietnam can invoke emergency measures from the organization to protect domestic producers.

4.3. Curreent trends 

In 2019, Vietnam marked 10 consecutive years of rising FDI inflows. The transition of leading global corporations’ factories to Vietnam means that the country is still experiencing a high transfer of knowledge and technology. For instance, Apple – a multinational technology company – has started plans to move its trial production to Vietnam due to high trade barriers caused by the US-China trade war (Nguyen, H 2020). As a result, Vietnam is on a positive trend towards integrating into the world supply chain and strengthening the workforce.

5. Conclusion & Future Potential 

Vietnam’s open trade network and substantial interconnection with other economies would continue to be the main economic growth drivers. With strong foreign trade and investment, Vietnam’s economic growth is expected to reach 6.5% in 2020 and 2021 (Nguyen 2020). Nonetheless, Vietnam’s dependence on exports and FDI could make it vulnerable to slowing global demand. However, it is proposed that continuous fiscal and policy reforms in recent years could help counter the negative effects of globalisation and boost growth in key industries. Taking everything into consideration, Vietnam’s accession to the WTO was a crucial step in augmenting the country’s economic growth and interconnection with global economies.

6. References 

Nguyen, H 2020, Vietnam’s Year in Review and Outlook for 2020, Vietnam Briefing News, viewed 17 August 2020, <https://www.vietnam-briefing.com/news/vietnams-year-in-review-outlook-2020.html/>. 

Nguyen, T 2017, Foreign trade revenue quadruples in decade of WTO membership, Dan Tri International, viewed 17 August 2020, 

<http://dtinews.vn/en/news/018/49805/foreign-trade-revenue-quadruples-in-decade-of-wto-membership.html>. 

Nguyen, TH 2017, Governor’s Statement No. 9, 13 October, viewed 17 August 2020, 

<https://www.imf.org/external/am/2017/speeches/pr9e.pdf>. 

OECD & WTO 2019, Aid for Trade at a Glance 2019, OECD iLibrary, OECD, pp. 446–447, viewed 17 August 2020, <https://read.oecd-ilibrary.org/development/aid-for-trade-at-a-glance-2019_18ea27d8-en#page447>. 

Tumbarello, P 2007, IMF Survey: Joining WTO Will Boost Vietnam’s Economy, International Monetary Fund, viewed 17 August 2020, <https://www.imf.org/en/News/Articles/2015/09/28/04/53/socar051a>. 

VIR 2017, Ten years in WTO have given valuable lessons, The Voice of Vietnam Online, viewed 17 August 2020, <https://english.vov.vn/economy/ten-years-in-wto-have-given-valuable-lessons-341753.vov>. 

VOV 2016, Vietnam invokes WTO safeguards on steel imports, The Voice of Vietnam Online, viewed 17 August 2020, <https://english.vov.vn/trade/vietnam-invokes-wto-safeguards-on-steel-imports-324791.vov>. 

VOV 2017, Vietnam grows strongly after 10 years of joining WTO, The Voice of Vietnam Online, viewed 17 August 2020, <https://english.vov.vn/economy/vietnam-grows-strongly-after-10-years-of-joining-wto-350057.vov>. 

World Bank Group 2016, Vietnam : Seizing the opportunities of new-generation free trade agreements, The World Bank, Washington, D.C, viewed 17 August 2020, 

<http://documents.worldbank.org/curated/en/101021521557242199/Vietnam-Seizing-the-opportunities-of-new-generation free-trade-agreements>. 

7. Table of Figures 

Figure 1. Milestones in Vietnam’s trade policy before WTO accession 

Figure 2. Vietnam’s changes in income distribution in 2004 – 2012 

Figure 3. Vietnam’s falling tariffs under WTO rules 

Figure 4. Changes in Vietnam’s trade flows before and after WTO accession Figure 5. Vietnam’s FDI inflows from 2000 – 2014 

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