People look at an electric car displayed during the launch of VinFast electric car models in Hanoi on 7 July 2023. Photo by Nhac NGUYEN/AFP.
Vietnam’s Economic Transformation: A Closer Look at Trade Policy and Reforms
Executive Summary
Vietnam stands out as a remarkable example of economic success in Asia, transitioning from a centrally planned agrarian economy to a vibrant hub of manufacturing and services. The role of free trade agreements (FTAs) in this transformation remains a subject of debate. Early reforms, propelled by Vietnam’s accession to ASEAN and the WTO, laid the groundwork, while modern FTAs like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the European Union-Vietnam Free Trade Agreement (EVFTA) are designed to maintain reform momentum. To ensure long-term growth, Vietnam must now focus on domestic reforms that enhance productivity and mitigate future employment challenges in manufacturing.
Introduction
Vietnam’s narrative is one of continual evolution, showcasing a transition from isolation to integration within global markets. The doi moi reforms of 1986 catalyzed this shift, facilitating increased trade and investment and markedly improving social welfare. However, the pressing question is whether Vietnam’s trade policy and FTAs effectively drive necessary domestic reforms.
By 2024, Vietnam boasts 15 FTAs, with another four being negotiated. The critical examination of these agreements provides insights into their effectiveness in instigating genuine reform on the ground.
The Impact of Vietnam’s FTAs on Domestic Policy Reforms
At the core of assessing FTAs is understanding their direct and indirect influence on national reforms. Vietnam’s early integration into ASEAN and the WTO set a precedent, paving the path for more comprehensive agreements. The adoption of CPTPP has notably impacted improvements in intellectual property and labor laws, introducing frameworks for more robust enforcement and representation of workers.
However, while these reforms are significant, challenges remain. For instance, despite advancements in IP laws, enforcement capacities lag, leaving Vietnam on the U.S. watch list for IP rights protection. On labor rights, significant strides suggest a willingness to reform, yet more robust commitment is needed to align with international labor standards.
EVFTA adds further layers of complexity by enhancing market access and addressing regulatory issues across sectors like government procurement, although similar challenges exist regarding state-owned enterprises (SOEs).
Structural Transformation in Vietnam
FTAs are seen as instruments that promote structural transformation, shifting labor from low-productivity agriculture to higher-yield industrial and service sectors. This transformation reflects two crucial phenomena: conditional convergence and the relationship between manufacturing employment and economic development.
Vietnam’s manufacturing sector has grown rapidly, surpassing many peer economies. However, the rise in productivity must now stem from enhanced productivity within the sectors rather than merely volume expansion, particularly as global trends show a tendency towards premature deindustrialization.
Future Economic Growth Projections
The projection of Vietnam’s manufacturing share of employment focuses on three scenarios for the upcoming decade:
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Baseline Scenario: The manufacturing share slightly declines from 17.9% to 17.5%, indicating modest employment contraction typical of middle-income countries.
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Optimistic Scenario: Extrapolating recent growth trends, the manufacturing share could rise to 28% by 2028.
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Moderate Scenario: A midpoint projection estimates a manufacturing share of 23%, aligning with Vietnam’s historical growth trajectory.
Insights and Implications
These scenarios present insights into the challenges Vietnam faces in sustaining its growth trajectory:
- Future growth must pivot towards cultivating productivity within existing sectors, especially manufacturing.
- The potential for employment deindustrialization looms, particularly if labor-intensive industries fail to adapt to automation and global market dynamics.
- As trade policies evolve amidst rising global protectionism, Vietnam’s engagement with its FTAs may become increasingly pivotal in diversifying market access and sustaining growth.
The Dual Role of FTAs and Previous Reforms
A dual narrative emerges: while modern FTAs like the CPTPP and EVFTA are essential, the earlier transformations connected to ASEAN and WTO participation appear to hold greater long-term influence. Future agreements may not replicate the significant change seen previously, which can complicate Vietnam’s strategy as it endeavors to lock in and continue reform processes.
Economic and Social Outcomes
As Vietnam navigates its economic future, the emphasis should not only be on manufacturing but also on enhancing service sector productivity. This broader approach is crucial for fostering sustainable development, addressing inequalities that can arise from a rapidly changing economic landscape, and ensuring that the growth benefits are equitably distributed.
The Road Ahead
In summary, Vietnam’s future hinges on integrating its trade policies with deliberate and comprehensive domestic reforms. The synergy between past achievements and current agreements will determine the effectiveness of Vietnam’s ongoing transformation, seeking not only economic growth but also stability and equity for its population. The lessons learned from both successes and setbacks in engaging with FTAs will serve as a guiding framework as Vietnam positions itself for the future on the global economic stage.