VIETNAM’S ECONOMIC INTEGRATION FUNDAMENTALS, FTAs AND ITS POTENTIAL IMPACTS ON VIETNAM’S ECONOMY

Prime Minister Nguyen Tan Dung on January 7, 2016 approved the specificobjectives through 2020, vision to 2030 of international economic integration that are “expand markets, take advant

FOREIGN TRADE UNIVERSITY

HO CHI MINH CITY CAMPUS

Group 7:

1 Trương Phương Thảo

2 Võ Thị Thanh Thảo

3 Nguyễn Bùi Linh Thi

4 Nguyễn Đặng Minh Thi

5 Trần Minh Thi

List of group 7:

Table of content

4.2 Predicted positive impacts of CPTPP on Vietnam’s economy at the time of its

Over 30 years, Vietnamese international integration process has achieved bothmany successes and the limitations side by side Our process focuses on three main parts:economy; politics, defense and security; culture-society, education, science-technologyand others, with the core center in economy In recent years, the trend of multi-leveleconomic integration has become more popular and deeper, especially Foreign TradeAgreement (FTA) New situations in the world help found new-generation FTA tocomply with the continuous changes of the global economy Simultaneously, Asia-Pacificregion plays the leading role of actively promoting and connecting the economies ofother regions Given that, new FTAs regarding the region are negotiated successfully,typically as a Comprehensive and Progressive Agreement for Trans - Pacific Partnership(CPTPP) and Regional Comprehensive Economic Partnership (RCEP) The participation

of Vietnam in these two big FTAs is expected to contribute more huge potential benefitsand new difficulties to overcome Thus, this paper is created to define the importance andfundamentals of Vietnam’s economic integration in general and research on FTA inparticular, then analyze the opportunities and challenges of CPTPP - the big FTA Vietnamjust joined, finally finding some crucial implications Hopefully, the paper can contribute

to improve and encourage the development of Vietnam’s economic integration in the newcontext

The paper has five main parts: The overview of international economic integration

is discussed in the next part Part II will identify the fundamentals of economicintegration in Vietnam The part III will consider FTAs, its main contents and Vietnam’sparticipation The careful analysis on the case of CPTPP and some evaluations andimplications on it are given in part IV The final part concludes the paper with thoseimplications

Chapter 1: Overview of Fundamentals of Economic Integration

1.1 Definition

While Economic Integration is defined in various ways, the most fully and clearlyunderstandable definitions that are widely accepted are listed below:

payments, international trade and factor mobility Economic integration thus leads

to the uniting of two or more national economies in a regional tradingarrangement

region to cut back and ultimately eliminate tariff and non-tariff barriers to the freeflow of products or services and factors of production among each other; any type

of arrangement in which countries conform to coordinate their trade, fiscal, and/ormonetary policies are referred to as economic integration

Therefore, the main objective of Economic Integration is to maximize welfare ofevery participant by increasing GDP through stimulating trading between country-members of economic unions

1.2 Levels of Economic Integration

Economic Integration is classified in five levels, each present in the globallandscape

- Free-trade area: This is the least restrictive and loosest level of integrating, inwhich members agree to remove all tariff and nontariff barriers among themselves,but are free to independently determine trade policies with nonmember nations.The main goal of free trade agreements is to develop comparative advantages and

economies of scale

- Custom union: This type of integration involves the free-trade zone’scharacteristics In addition, however, each member nation imposes same traderestrictions against nonparticipants Custom unions are specifically helpful to levelthe competitive playground and address the problem of re-exports by usingpreferential tariffs in one country to enter another country

characteristics: (1) the free movement of goods and services among membernations, (2) the initiation of common external trade restrictions againstnonmembers, and (3) the free movement of factors of production across nationalboundaries within one economic bloc

- Economic union (single market): All tariffs are eliminated for trade betweenmember countries in order to a uniform market There are also free movements oflabor, enabling workers in a member country to move and work in anothermember country Monetary and fiscal policies between member countries areharmonized, which means a level of political integration

- Political union: Represents the potentially most advanced form ofintegration with a common government, in which the sovereignty of a membercountry is dramatically reduced This level is only found within nation-states, such

as federations where there is a central government and regions having a level ofautonomy

Chapter 2: Fundamentals of Vietnam’s economic integration

2.1 Purposes in economic integration

When regional economies agree on integration, trade barriers gradually fall andeconomic and political coordination significantly increases The process of economicinternational integration; therefore, creates new opportunities and huge benefits forVietnam In other words, economic integration has played a key role in enhancingefficiency and promoting economic growth “The purposes of economic integration arerelated to Vietnam's efforts to ensure trading rights, protect domestic production,especially the SOE sector, and create incentives for export promotion”, according to VoTri Thanh (2005) There are two main kinds of targets of economic integration:economic and political ones

Economic integration can bring various benefits to Vietnam, especially in terms

of enhancing access to different markets and helping to stimulate the production oftraditional products which Vietnam has comparative advantage Besides, implementingthe commitments of the WTO will also help Vietnam to improve its businessenvironment in conformity with international best practices Vietnam will use itsparticipation in international trade agreements as a tool to ensure and advance nationalinterest and security through increased economic power In the short run, we canincrease our share in the internal trade of grouping and terms of trade are getting better

And it is possible, thanks to elimination of tariffs, para tariffs and extra tariffs barriers.

In the longer run, we can observe profitable changes and maximization of profits in oureconomy as a member country of the integration grouping

Thanks to specialization of production and division of work, production andinvestments with relatively lower effectiveness will soon be eliminated in replacement ofthe most effective branches Integration processes make it easier for countries, which takepart in it, to access outside production factors, especially raw materials, labor sources andtechnical knowledge Therefore, it enables a series of ready-made goods, increasing aproduction range at a lower cost

Also, the second group of targets - political ones - played an essential role in theintegration As for the political targets of economic integration, there are two main targetsthat a country wants to achieve, which are firstly to “strengthen their political position”and then “auction strength in relations with other countries, especially with highlydeveloped ones” Political cooperation with other countries can help Vietnam to improveinternational relationships because of stronger economic ties, which provide an incentive

to resolve conflicts peacefully and lead to greater stability For developing economies likeVietnam, joining an economic community helps us to reflect their growth as well as theircurrent position both in economic and political aspects “In the opinion of most policymakers, integration is the best chance for reform and innovation” said Doan Quang Huy(2013)

Prime Minister Nguyen Tan Dung on January 7, 2016 approved the specificobjectives through 2020, vision to 2030 of international economic integration that are

“expand markets, take advantage of capital, technology, management knowledge;improve the competitiveness of the economy, businesses and products; foster thedevelopment of domestic industries, establish higher positions in the regional andinternational production and supply chain; actively make contributions to the process oftransforming growth model and restructuring the economy; beef up industrialization andmodernization, enhance internal strength, reduce dependence from the outside, andnarrow development gap with ASEAN-6 countries Regarding the degree of international

integration, strive to catch up with ASEAN-6 countries by 2020, ASEAN-4 countries by

2025, and to become one of the top ASEAN countries in such areas that Vietnam hasstrengths and have a catch-up strategy, including improvement of business environment,

by 2030, etc In the short run, successfully realize the socio-economic developmenttargets that have been figured out.”

2.2 Strategic orientations

The trade policy of Vietnam and its participation in various trade agreements can

be viewed as the result of a deliberate and strategic choice of its domestic forces fornational interest, increased prospective future economic wealth and power – and,therefore, more security

Firstly, Vietnam has prioritized international trade integration with its most

significant trade partners outside the ASEAN region For Vietnam, its own internationaltrade integration is a more important objective than the shared ASEAN interest ofestablishing a fully functioning, globally integrated AEC Vietnam has known that, intoday’s world, ‘international’ goes side by side with ‘national’ or ‘domestic’, but thatthere is a fundamental difference between ‘international’ and ‘supranational’

Secondly, by the creative application of these two typical theories- trade creation

and trade diversion, Vietnam is consciously pursuing a trade creation strategy whereby itactively seeks to participate in preferential free trade agreements with importanteconomic markets outside the ASEAN region (mainly the EU and the USA) that couldpotentially have an important trade creation effect for the country In this scenario,Vietnam has more opportunity to reduce customs tariffs both within the AEC and with the

EU and the USA to attract exporting companies to produce in Vietnam, and from Vietnamexport to trade partners outside ASEAN In other words, Vietnam tends to create newtrade flows and concentrates on ensuring its own economic security by making use ofregional and international trade agreements

Thirdly, the rule-binding trade agreements assists a national domestic purpose of

locking in domestic reforms Domestic reforms, which are vital for the continued

economic growth of Vietnam in an increasingly globalized and interconnected world, butwhich are not easy to pass through and for which the Vietnamese political elite do notdefinitely have the courage to implement on their own The rule-binding agreements withthe EU and the TPP-11 countries that force Vietnam to reform serve this purpose betterthan the non-binding and voluntary of ASEAN

Through a careful selection of trade agreements, particularly Vietnam’sparticipation in the EU–Vietnam Free Trade Agreement (EVFTA), the Trans PacificPartnership (TPP), the Comprehensive and Progressive Agreement for the Trans-PacificPartnership (CPTPP) (more commonly known as the TPP-11) and the ASEAN EconomicCommunity (AEC), Vietnam aims to position itself in a strategically advantageousposition in comparison with other economies of the AEC “Within the AEC, Vietnamwants to capture some trade creation effects by orienting itself and attracting investors atthe end of the production chain where added value is higher” (Sophie Deprez, 2018) [3].Advantageous access to the EU and the USA, ASEAN’s main consumer markets, wouldpermit Vietnam to export finished manufactured products at a lower cost than othercountries in the AEC

Vietnam’s integration in international trade is mainly oriented by concerns fornational interest and security through increased economic power Through a vigilantselection of its participation in international trade, the political elite of Vietnam wants toensure continued economic growth through preferential access to key markets Thepolitical elite of Vietnam has a very strategic view on economic international integrationand has identified trade and export-oriented growth as international policy preferences,thereby using trade integration as a strategic instrument to optimize their nationalpriorities within the international trade system

In “Overall strategy for international integration through 2020, vision to 2030”,Prime Minister Nguyen Tan Dung also confirmed Vietnam’s orientation in economicintegration is that “Until 2030, the degree of economic integration is equal to the averagelevel of ASEAN-4 countries; international integration will be accelerated in parallel withthe process of enhancing linkages among sectors and regions; focus on implementing

effectively inked agreements, especially the new-generation FTAs.”

2.3 Achievements Vietnam has obtained

Vietnam has escaped its economic and political isolation, expanded its relationswith other countries, including the superpowers and other major world politico-economiccenters Vietnam has successfully created and maintained an environment favorable fornational construction and defense Meanwhile, large investment sources from outsidehave been utilized and the socialist-oriented market economy has been refined

In the area of culture-society and education-training, the expanded cooperation hashelped in hunger eradication, settlement of social security issues, poverty reduction, andimprovement of people’s cultural and spiritual lives Large cities and important economiccenters have made significant leaps forward in integration and are providing stronggrowth momentum for the national economy Vietnam’s position has been enhancedregionally and globally, creating a completely new image of the country as an active,responsible and economically successful partner in international integration

2.3.1 Foreign affair

Firstly, in 1995, Vietnam became a member of ASEAN and successfully joined theASEAN Free Trade Area one year later Over the past two decades, 2016, Viet Nam wasalso a signatory to a wide range of FTAs under the ASEAN-plus framework, remarkablyparticipating in ASEAN’s Economic Community and Socio-Cultural Community.Vietnam has highly been appreciated by the international community in terms of makingefforts in the negotiation of the Regional Comprehensive Economic Partnership amongASEANs

Secondly, Vietnam–United States Bilateral Trade Agreement in 2000 wasconsidered as the solid stepping stone which mapped out a strategy for Vietnam joiningthe global playing field, particularly setting Vietnam a path to participate more deeply inregional (FTA-based) integration and WTO areas Former U.S Ambassador to Vietnam,Peterson, has argued “the Agreement will yield significant economic benefits to bothnations”

After an arduous and long process of negotiation, Vietnam officially became one

of the members of WTO in January 2007 Vietnam Chamber of Commerce and IndustryChairman, Vu Tien Loc emphasized that WTO membership has changed Vietnam’s legalframework, economic, trade and investment policies, as well as its economicmanagement manner Therefore, the accession to WTO is supposed to speed up tradeliberalization and improve market access for the new member country’s exports, whichshould result in increased trade (Cling et al 2009)

2.3.2 Economy

International integration has brought many benefits to Vietnam in terms ofeconomic performance Its trade with ASEAN has increased significantly, with averagegrowth of 13.0% per annum for imports and 16.8% per annum for exports (Figure 1) Thedeclining share of ASEAN in Viet Nam’s trade strongly reflects Viet Nam’s fasterexpansion of trade with its non-ASEAN partners, such as the United States, China, andJapan and the European Union

Figure 1 Vietnam’s Trade with ASEAN, 1995–2014

(a) Exports to ASEAN

(b) Imports from ASEAN

As trade expansion, Vietnamese businesses can more deeply participate in theregional supply chain ASEAN’s share in Viet Nam’s value added from exports has beenrather stable (Figure 2) East Asia’s share has tended to increase, reflecting the outcome

of Vietnam’s integration efforts with East Asian countries, which have induced moreimports of intermediate products from those countries The expanded share of East Asia

in Vietnam’s exports has also been induced by integration efforts under ASEANframework with these partners, namely through FTAs with Korea, Japan and China

Figure 2 Share of Value Added in Viet Nam’s Gross Exports by Country, 1995–2011

(%)

In addition, foreign direct investment (FDI) has increased remarkably and hasmade important contributions to gross domestic product, exports, and job and incomecreation Total registered capital decreased significantly during 1997–2000 due to theAsian financial crisis but gradually recovered during 2001–2006 In 2019, foreign directinvestment (FDI) flowed in Vietnam reached US$38 billion, marking a 10-year high andrepresenting a year-on-year increase of 7.2 per cent “Multiple multi-billion dollarprojects will arrive in Vietnam in the near future, with many of them under South Koreanand Taiwanese firms, who view Vietnam as a strategic and crucial investmentdestination,” Do Nhat Hoang, head of the Foreign Investment Department under theMinistry of Planning and Investment, said

2.3.3 Institutional reforms

Economic integration has also helped induce institutional reforms in Viet Nam,particularly in areas directly related to trade and investment (Vo et al., 2015) Forexample, under the ASEAN integration, trade facilitation received a substantial attentionframework and has been undertaken comparatively quickly in the country The Viet NamNational Single Window (NSW) was developed in 2005 and widely applied in 2013–

2016 An initial achievement of the NSW’s first pilot period was the technical connectionbetween three core governmental agencies, namely the Ministry of Finance (GeneralDepartment of Customs), the Ministry of Industry and Trade and the Ministry ofTransport, on 26 February 2014 Three other core governmental agencies, particularly theMinistry of Health, the Ministry of Agriculture and Rural Development, and the Ministry

of Natural Resources and Environment, were also connected to NSW in late 2015 VietNam was the fifth country to connect to the ASEAN Single Window just after Singapore,Indonesia, Malaysia, and Thailand in September 2015 Besides, customs modernizationhas become an essential activity of the General Department of Customs in recent years

On 20 June 2005, under Decision 149/2005 the government issued the first initiative onpiloting e-customs at Hai Phong Customs Office After acquiring considerableexperience, the piloting of e-customs was expanded to 19 other provinces in 2009

Figure 3 GDP per capita (US$), ASEAN Member States, 2000-2017

Secondly, the country’s transition towards a market economy has resulted inuneven development Remote localities with untrained human resources, unfavorablegeographical conditions and poor infrastructure have reduced the benefits of internationalintegration and left Vietnam at a disadvantage This has led to the expansion of wealthand development gaps between regions Since Doi Moi, inequalities between and withinrural provinces and, even more, between rural and urban areas have increased Thehighest levels of rural income inequality are in the Central Highlands, while increasinglandlessness and poverty in the Mekong River Delta is linked to the commercialization ofagriculture (Douglass et al., 2002)

Thirdly, there have been insufficient measures to minimize the drawbacks ofinternational integration, particularly negative impacts in the areas of labor, employment,and the protection of domestic production and products A great number of workers may

be at risk of losing their jobs because of the inability of domestic goods to compete withforeign goods, leading to enterprises to narrow production, in many cases even shut downand exit the industry Besides, participating in the international integration will contribute

to speeding up the movement of labor from rural areas to cities and industrial parks Thepressure on employment in urban areas will increase, resulting in an imbalance betweenlabor demand and supply, which implies higher risk of going unemployed

Finally, in Vietnam, however, rapid growth and industrialization have not beenfriendly to the environment and natural assets Final energy consumption tripled over thepast decade, growing faster than output Unsustainable exploitation of natural assets such

as timber, fisheries, and sand could negatively affect potential for future and long-termgrowth Furthermore, urbanization and population growth and strong economies arecausing rapidly increasing waste management and pollution challenges Waste generation

in Vietnam is estimated to double in less than 15 years Linked to this is the problem ofmarine plastics Ninety percent of global marine plastic pollution is estimated to derivefrom just 10 in-land rivers, and the Mekong river is one of them Vietnam is among theten countries around the world that are heavily affected by air pollution

Chapter 3: Free Trade Agreements

So far, many different organizations and countries have come up with their ownconcepts of FTA This reflects different viewpoints on the free trade agreements as well

as the diverse development of each country Today, FTA also includes new content thataims to promote and liberalize investment, technology transfer as well as labor

3.1.2 FTAs’ main contents

A typical FTA usually contains four main contents The first is the provision oftariff and non-tariff barriers reduction The second one is to regulate the list of items to

be included in the tariff reduction The common practice for this is 90% of trade Thethird fosters the stipulation of roadmaps for tariff reduction and the period of taxreduction is usually extended to no more than 10 years The fourth part presents the

rules of origin

Other issues include liberalization of services and investment, quantitativerestrictions, technical barriers, intellectual property rights, competition, governmentprocurement, and labor activities, insurance and environment

3.2 Vietnam’s wide-ranging free trade agreement

3.2.1 Vietnam’s principles and directions in negotiating FTAs:

Principles and orientations for joining, negotiating and signing FTAs are stated inthe "Strategy for participation in FTAs of Vietnam until 2020", which was approved bythe Prime Minister in Decision No 1051 / QD- TTg on August 9 , 2012 th

Accordingly, we enter into negotiations for FTAs with the following mainprinciples First, thoroughly grasp the guiding views stated in the Resolutions andAction Programs on international integration in general and international economicintegration in particular Second, ensuring the balance of interests between the partiesand taking into account the level of Vietnam's economic development Third, carefulconsideration between advantages and disadvantages, opportunities and challenges,domestic and international capacity in negotiations to ensure that the agreements willbring about the highest national benefits; create new opportunities for socio-economicdevelopment, especially for export and attract more foreign investment

3.2.2 Vietnam’s participation in FTAs:

Since the very beginning of international trade and integration, Vietnam hasactively engaged in the negotiation and signing of 16 free trade agreements, not onlyregional but also bilateral and multinational agreements among different countriesacross the world These FTAs can be categorized into 3 main types based on their status

of effect There are 12 FTAs in effect, 1 signed but have not been in effect and 3currently in negotiation The data was updated up to February, 2020 by VCCI

The first category to mention is FTAs that have been in effect, including 12 FTAsmentioned in the following table