Impacts of new generation of free trade agreements (FTAs) on the development of export - import markets of members - Vietnam case study

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Introduction This article has been derived from the results of the State-level research project entitled "Scientific arguments to develop Vietnam's export-import market in the context of implementation of new-generation Free trade agreements (FTAs)”, code BTBL.XH.07/16, with Dr. Tran Tuan Anh as the Chief investigator. Our main objective is to study and evaluate the impact of joining new-generation FTAs to the development of the import-export markets of their member countries, focusing on the case of Vietnam, in order to provide several policy recommendations and implications for the members concerning the development of these markets when joining such agreements. The paper uses a combination of methods including desk research, field research, and in-depth interviews with experts and businessmen on the impact of the new-generation FTAs on import - export market development. From the results, policy recommendations and implications are suggested to the government and business communities to best utilize positive impacts while minimize negative ones on the development of import- export market when joining any new- generation FTAs. Literature review There is abundant research, both domestic and international, relevant to the subject of the mentioned above project, as well as this article. Works studying and assessing the impacts of new- generation FTAs on the economies of their members and global trade includes studies of Shanping Yang & Inmaculada Martinez-Zarzoso (2014), Cooper H. William H. (2014), Shujiro Urata & Misa Okabe (2010), Hiratsuka D., Hayakawa K., Shino K. and Sukegawa S. (2009), Plummer M.G., Cheong D., Hamanaka S. (2010), Fukunaga Y. and Isono I. (2013), Yvan Decreux, Chris Milner, Nicolas Péridy (2010), Sungkook Lee (2013), USITC (2016), Peter A. Petri, Michael G. Plummer and Fan Zhai (2011), Alan V. Deardorf (2014), etc. Regarding Vietnam, research and assessment of the impacts of the country’s participation in new-generation FTAs on its economy and trade, notable studies include: Claudio Dordi et al. (2015), Stefano Inama et al (2011), Veena Jha et al. (2014), Binh Van Thånh (2012), Le Thi Thuy Van vå cong su (2015), Vu Tien Loc (2015), Nguyen Quoc Dung (2015), Bui Thånh Nam (2014), Tran Huu Huynh (2016), Vu Thanh Huong (2017), Tran Toån Thang vå Trån Anh Son (2018), etc. Most of these works used quantitative analysis models, such as gravity models, CGE, GTAP and SMART, etc., to assess the impacts of FTA participation on the economy, the import and export aspects of Vietnam. They are very useful scientific results that our team has inherited to carry out this study. In addition of the desk research, our team also conducted field surveys and in-depth interviews with experts and businessmen to demonstrate opinions and assessments concerning the topic of the impacts of new-generation FTAs on the development of import-export markets. From them, the recommendations and implications to relevant partners regarding the member country’s export - import markets are drawn. Overview of the impact of new generation FTAs on the development of international trade of member countries Recently, international economic integration has seen a particularly strong increase in bilateral and regional free trade agreements (FTAs/RTAs), due to the prolonged standstill of the Doha Round and the rise of regionalism with the emergence of economic links and division of production networks/multinational supply chains between countries. FTAs/RTAs open up trade and economic liberalization following a more comprehensive and deeper international economic integration, which was not limited to reducing and removing barriers to trade in goods. It also covers provisions on the opening of services markets and other areas such as investment, competition policy, government procurement, intellectual property rights, E-commerce and in many cases also include elements such as labor, environment, sustainable development, democracy, human rights... These FTAs/RTAs are called New Generation FTAs - NG FTAs. The explosion of FTAs with the introduction and implementation of many NG FTAs will lead to changes and shifts in world trade flows, with creating, developing effects and dynamic impact on trade due to the commitments to open markets and deepening reforms. However, there are trade- diversion effects that threaten to undermine global trade liberalization, social welfare and reduce trade flows of countries not participating in FTA. "Unlike previous generations of FTAs which mainly affect tariff policy at the border, new generation of FTAs have a number of commitments that directly and significantly affect domestic institutions and policies” [Vu Tien Loc 2015: 3]. With their high requirements and comprehensiveness, NG FTAs are expected to play an important role in promoting free trade in both quantity and quality. The role of NG FTAs can be seen in several aspects: (i) Promote trade and investment liberalization, competition, IPR protection criteria, environment and labor standards, not yet covered by current agreements of WTO; (ii) Enhance trade liberalization criteria; (iii) Open new development space for NG FTA members and (iv) Contribute to consolidating and ensuring economic security and empowering member states. Theoretically, when participating in the FTA, the economies of member countries will experience many effects, in which the most important ones are static effects and dynamic effects. These impacts can lead countries to engage in trade liberalization because of the multifaceted benefits it brings. These effects, however, could also have a negative effect, leading to joining the FTA at any cost not the best option for all countries [Bui Thånh Nam 2014: 1]. • Static impact Static impact is defined as the effect that will take place in any free-trade link, for any member. Static effects include: trade creation effects and trade diversion effects. Trade creation will occur when a member country of the FTA replaces the production of a high-cost domestic product by importing it with cheaper price from other FTA members. Due to the removal of tariff barriers, the price of imported goods is lower than the cost of producing the item locally. Trade creation will increase the economic well-being of the FTA members due to the adjustment of production structure, reduction of less efficient industries, diverting resources to increase the investment in other industries based on comparative advantages. In any FTA, trade creation has an important position because it creates a "new" status in a country's trade relations when it participates in an FTA. Trade diversion occurs when FTA members divert imports of goods. Instead of importing goods with low cost of production from non-FTA countries, a country will import goods of higher production cost (i.e., less efficient use of resources) by FTA members. Due to the removal of tariffs among FTA members, the import price of certain items from another member are lower than the price from non-FTA countries who still maintain high tariffs. Essentially, the trade diversion effect does not create "new" values in the trade of a country, it only changes its trading partner. In this case, non- members will suffer from the creation of an FTA. Thus, the impact of trade diversion will create discrimination against non-member countries. • Dynamic impact The dynamic impacts of FTAs, by three main forms of market expansion, competition promotion, and FDI attraction, are long-term, qualitative changes to the national economy. The greatest opportunity that NG FTAs bring is to expand the market and increase the competitiveness of member economies through tax cuts and removal of trade barriers, investment, promotion of institutional reform, improvement of policies and legislation behind the borders, creation of competition-friendly market to improve production and trade efficiency, deeper participation in the global production network and supply chain. In addition to the opportunities, if not taken, NG FTAs could bring significant risks and challenges to the economic and trade development of members, especially those with lower levels of development in the FTAs. Vietnam’s participation in new generation FTAs OverView of Vietnam 's FTA After more than 30 years of Doi Moi reforms, moving to a market economy and opening to international economic integration, Vietnam has actively participated in many bilateral and multilateral FTAs. The first FTA that Vietnam joined was AFTA in 1996 (now the ASEAN Economic Community - AEC). Since the signing and implementation of the BTA with the United States in 2001, Vietnam has strengthened its international economic integration, joined the FTAs in ASEAN+, became a member of the World Trade Organization in 2007, and most successfully, in 2015, signed four FTAs with the EU, South Korea, the Eurasian Economic Union (EAEU), and the TPP. By the end of 2017, Vietnam has signed and implemented and is negotiating 16 FTAs. Out of the 16 FTAs, 10 FTAs were implemented (six of them as ASEAN member, the other four FTAs with Chile, Japan, South Korea, and EAEU - Table 1). Three FTAs that have ended the negotiations were TPP (the United States withdrew and the remaining 11 members negotiated and signed the CPTPP on 8 March 2018), the ASEAN-Hong Kong FTA and the Free Trade Agreement between Vietnam and the EU (EVFTA). The three FTAs being negotiated are the Comprehensive Economic Partnership Agreement (RCEP), the FTA with Israel and the European Free Trade Association (EFTA). In addition to the increasing number of FTAs, one of the more important elements is the content of FTAs that features more comprehensive and deeper commitment, particularly with respect to environmental protection, employee rights and intellectual property rights. Of the 16 FTAs that Vietnam is currently affiliated with, the FTAs with Japan, Australia-New Zealand (through ASEAN), CPTPP and EVFTA all address intellectual property issues. In terms of environmental issues and worker rights, EVFTA and CPTPP have specific provisions on these issues. FTAs are opening a thriving space for Vietnam whereby the country has free trade relations with 55 partners worldwide, including G7 countries and 15/20 of G20 members. Impact of FTAs on Vietnam's export-import market Vietnam’s ongoing efforts in international economic integration, signing and joining many bilateral and multilateral FTAs, have brought positive results for the country’s economic and trade development. The FTAs have contributed positively to expanding market access conditions (Table 1), increasing Vietnam's export growth, attracting foreign direct investment (FDI) into the country, and promoting policy, legal reform, and improving the investment and business environment, strengthening the economy’s capability to compete. Table 1. Import tariff commitments in signed FTAs FTA Scope (% of tariff lines) Active since Completion year 1. ASEAN 98 1999 2015/2018 2. ACFTA 90 2005 2015/2018 3. AKFTA 86 2007 2016/2018 4. AANZFTA 90 2009 2018/2020 5. AIFTA 78 2010 2020 6. AJEPA 87 2008 2025 7. VJEPA 92 2009 2026 8. VCFTA 89 2014 2030 9. VKFTA 88 2016 2031 10. VN - EAEU FTA 88 2016 2027 Source: Compiled by the Research Project Team from tariff commitments in ASEAN, ACFTA, AKFTA, AANZFTA, AIFTA, AJEPA, VJEPA, VCFTA, VKFTA, VN - EAEU FTA Among these, all of Vietnam’s FTA partners are important trading partners, reflected in the high trade value and high proportion of Vietnam’s total trade data with the world every year. Vietnam's trade with its negotiated/negotiating partners always accounts for over 80% of Vietnam's total trade (Table 2). Table 2. Vietnam's goods export-import market situation in 2017 Market Export Import Volume (million USD) Share (%) ± compared to 2016 (%) Volume (million USD) Share (%) ± compared to 2016 (%) Asia 111,950 52.3 31.3 172,831 81.9 22.3 - ASEAN 21,510 10.1 23.9 28,021 13.3 16.4 - China 35,463 16.6 61.5 58,229 27.6 16.4 - Japan 16,841 7.9 14.8 16,592 7.9 10.1 - South Korea 14,823 6.9 30.0 46,734 22.1 45.3 America 52,332 24.5 10.5 15,644 7.4 7.9 - United States 41,608 19.4 8.2 9,203 4.4 5.8 Europe 43,002 20.1 13.7 14,917 7.1 10.4 - EU (28) 38,281 17.9 12.7 12,098 5.7 8.6 Africa 2,670 1.2 -2.1 4,017 1.9 52.5 Oceania 4,066 1.9 20.0 3,694 1.8 29.4 Total 214,019 100.0 21.2 211,104 100.0 20.8 Source: Tong cuc Håi quan Viet Nam. Tinh hinh xuat nhap khau hang hoa cua Viet Nam thang 12 vå 12 thang nam 2017. Retrieved on April 24, 2018 from URL: https://www.customs.gov.vn/Lists/ThongKeHaiQuan/SoLieuDinhKy.aspx? On export, the biggest opportunity for Vietnam is to expand the market by cutting tariffs and removing trade barriers to further engage in global/regional production networks and supply chains. In 2007, the total import and export volume of Vietnam was 111.3 billion USD (of which, 48.5 billion USD was exported, and 62.7 billion USD was imported). By 2017, the total volume of imported and exported goods has increased to 425.2 billion USD (export valued at 214.1 billion USD and import at 211.1 billion USD), reaching the average growth rate of 14.4% per year in the period of 2008-2017. Exports alone increased from 48.5 billion USD in 2007 to 214.1 billion USD in 2017, which is 4.4 times higher than 2007, achieving an annual average growth rate of 16% over the same period [GDC 2018: 3]. It can be said that this is an impressive export growth, especially in the context of the financial crisis and post-crisis and economic recession in 2008-2009. Empirical studies indicated that joining FTAs has had a positive impact on Viet Nam's export and import activities. According to one study [Le Thi Thuy Van et al. 2015: 5], the Vietnam's export growth rate to FTA markets significantly rose since the implementation of FTA as seen in Table 3. Table 3. Export growth rates from Vietnam to markets with FTA, unit: % Number Country/Region Before FTA After FTA 1 ASEAN - 18* 2 China 18 23 3 South Korea 13 31 4 Japan 15 19 5 Australia 11 11 6 New Zealand 3 37 7 India - 53 8 Chile - 59 * Average growth rate since 2002 until now Source: Le Thi Thdy Vån vå nhom nghien cuu (2015). Banh gia tac dong cua cac hiep dinh thuang mai tu do.Tap chi Nghien cuu tai chinh ke toån, so thang 6/2015. In addition, with the increasing utilization of preferential tariff in FTAs, the export of Vietnam became more diversified in term of products/markets (Table 4). Table 4. Preferential utilization rate under Vietnam's trade agreements 2017 FTAs 2017 (bil.USD) Export volume using preferential C/O (bil.USD) Total export volume (bil.USD) Using preferential rate (%) AANZFTA (Form AANZ) 1,230 3,757 33 AIFTA (Form AI) 1,807 3,755 48 AJCEP (Form AJ) VJEPA (Form VJ) 5,833 16,814 35 AKFTA (Form AK) VKFTA (Form VK) 7,621 14,822 51 ASEAN (Form D) 6,535 21,680 30 ACFTA (Form E) 9,170 35,462 26 VN-EAEU FTA (Form EAV) 484 2,167 22 Laos (Form S) 50 524 10 VCFTA (Form VC) 684 99 69 Cambodia (form X) 0,26 2,776 0 Total 33,419 99,486 34 Source: Bo Cong Thuang. Bao cao xuat nhap khåu Viet Nam 2017. Nhå xuat bån Cong Thuang, 2018 However, the Table 4 also showed the preferential utilization of Vietnam’s still low, especially in the case of VN-EAEU FTA, FTA with Laos and Cambodia, and to some extent, the AFTA/ATIGA. The causes of this fact may be that Vietnam has not paid sufficient attention to those markets, or that the structure of export products is more similar than complementary between these FTA member countries. In terms of imports, using the gravity model for some of the key partners in the 2007-2013 period, the Vietnamese researchers also showed that tariff reductions from integration have had a positive impact on imports, having a trade creation as well as trade diversion effects of Vietnam with partner countries [Le Thi Thuy Van et al. 2015: 6]. Estimates show that a reduction in the average import tax rate of 1% will increase import turnover by 5.28%. In addition, cutting taxes from FTAs also have the effect of diverting Vietnam's imports from its partners (in which China, Japan and South Korea will benefit the most from tariff integration). Participation in FTAs also facilitates the restructuring of import and export markets in a more balanced manner. Until 2017, 81% of Vietnam's imports came from Asia (mainly from East Asia and ASEAN) and more than 52% of Vietnam's exports are in this region (Table 2). If any adverse situation occurs in the region, import and export will be affected immediately. Free trade agreements with the European Union, the Eurasian Economic Union and other countries in the Asia-Pacific region will help Vietnam balance the import-export market. According to the research on the impact of EVFTA on Vietnam's export and import using the GTAP model, Vietnam's export to the EU are estimated to increase by about 50% by 2020, higher than the growth rate in the base projection [MUTRAP 2014: 50]. Export will increase further by 2025, when the agreement is fully implemented. In the ambitious scenario, the export growth rate will only slightly increase in comparison to the modest scenario. However, Vietnam's exports will increase from 89% in the base scenario to around 93-94% by 2020. By 2025, exports will increase by 10%. This implies significant trade volumes being diverted from other countries into the EU market (Figure 1) . Figure 1. Changes in Exports of Vietnam to EU by EVFTA Source: Paul Baker, David Vanzetti, Pham Thi Lan Huang (2014). Banh gia tac dong dåi han Hiep dinh thuong mai tø do Viet Nam-EU: Du bao cua Ho tro chinh sach thuong mai vå dau tu cua EU (MUTRAP) Vietnam's imports from the EU are also expected to increase significantly in the period 20152025 (Figure 2). Imports from the EU in the ambitious scenario increase by 43 percentage points compared to the base scenario by 2020, reflecting stronger tariff reductions. However, total imports from Vietnam (from all sources) only increased by about 10% in the base scenario. Figure 2. Changes of Import of Vietnam from EU by EVFTA Source: Paul Baker, David Vanzetti, Pham Thi Lan Huang (2014). Bånh giå tåc dong dåi han Hiep dinh thuong mai tu do Viet Nam-EU: Du bao cua Ho tro chrnh såch thuong mai vå dau tu cua EU (MUTRAP) One more study on the impacts of EVFTA on Vietnam trade in goods, using SMART model, also showed, to some extent, the similar results (Table 5) [Vu Thanh Huong 2017: 179]. Table 5. Changes in exports and imports of Vietnam with EU by EVFTA Items Data 1. Changes in exports Value ('000 USD) 1,586,047 Growth rate (%) 5.41 Trade creation effects ('000 USD) 723,277 Trade diversion effects ('000USD) 862,770 2. Changes in imports Values ('000 USD) 1,263,861 Growth rate (%) 14 Trade creation effects ('000 USD) 832,354 Trade diversion effects ('000USD) 431,506 Source: Vh Thanh Huong (2017). Hiep dinh thuong mai tu do Viet Nam-EU: Tac dong doi voi thuong mai gina hai ben vå ham у cho Viet Nam.Luan an tien si kinh te. Hå Noi. Quantitative studies of MUTRAP (2014), Le Thi Thuy Van (2015) - on the impact of other FTAs that Vietnam participates in, such as the RCEP, TPP (CPTPP), also predict that, when NG FTAs are implemented, Vietnam will have an advantage in medium term over the other export competitors, especially the regional competitors in terms of export growth, also the impact of FTAs is positive in diversification and development of export market and products, in addition, the export products/markets are also restructuring towards a more balanced trend. In fact, the survey of the project team (2017) also showed that the more transparent and freer trade and investment environment has provided the way for Vietnam to more effectively use its comparative advantages in relatively cheap labor costs and natural resources to enhance competition in the international market and promote exports. Mutual complementation in the trade structure with partners in NG FTAs will also be enhanced. As such, Vietnam will have a more positive shift towards producing and exporting capital-intensive goods that require higher levels of technology. In conclusion, it can be predicted that joining NG FTAs will have a profound impact on Vietnam's economic, trade development and development of the import-export market. The predicted positive impact of joining and signing NG FTAs are: (i) Promote GDP growth, import-export growth in Vietnam. (ii) Promote the diversification and restructuring of the import-export market towards a more balanced one, avoiding excessive dependence on some markets, especially China. (iii) Create positive effects in diversifying exports, restructuring export sectors more effectively. (iv) Open more opportunities to attract investment through NG FTAs, especially from EU countries, Japan, South Korea, Russia, Australia, etc. and (v) Lead to institutional reform, economy restructuring, development of effective growth models for Vietnam, improvement of market economy institutions, creation of a new business environment that is open, competitive, transparent and more predictable. This will help boost domestic and foreign investment, create new productive capacity and be a good stepping stone for enterprises to liberate creativity in business, promoting export and import. Besides that, it is possible to predict negative impacts of NG FTAs: (i) for exports, the opportunities for sudden surges in export volume under tariff liberalization are not as great as before, because many of Vietnam's export items have already enjoyed zero tariffs under the signed FTAs (for example, in ATIGA, ASEAN-6 countries have cut tariffs on Vietnamese goods to 0% since 2010); (ii) non-tariff barriers, technical barriers, rules of origin... become more diversified, complex and sophisticated, if Vietnamese exports are not diversified, innovated and improved to increase quality, design, trademark, it is difficult to overcome non-tariff barriers, TBT, SPS...; (iii) from the point of view of opening up the Vietnamese market to goods from FTA partners by eliminating most of the tariffs on imported goods, while non-tariff barriers have not been used effectively, will pose major challenges to quality control, hygiene and safety of imported goods, and also create greater competitive pressures on Vietnamese businesses and goods; (iv) Domestic production, especially agricultural production, is subject to pressure from institutional reforms in line with FTA commitments; (v) commitments on high and strict standards of labor - trade unions, social and environmental responsibilities in NG FTAs can cause some negative social consequences such as: bankruptcy and unemployment in enterprises with weak competitiveness or failing to meet rigorous labor and social standards for export goods, thus the income disparities and the gap of rich and poverty will increase, especially between urban and rural, remote areas; (vi) In addition to the opportunities presented by new generation FTAs, which can lead to institutional reforms for Vietnam, challenges remain. Indeed, when restructuring the economy, renovating the growth model and adjusting the domestic economic structure, at both the macro and enterprise levels, to better align with the new FTA commitments, require a lot of time and costs, as they involve resource allocation that is closely related to the institution, and a shift of the correlation between private and state ownership structures. Therefore, if Vietnam has not completed reforms, there will be many disadvantages when joining the NG FTAs. It can be said that the process of international economic integration is deepening and the indispensable trend of the formation of NG FTAs will have profound and multifaceted effects on all aspects of Vietnam's economy and society, creating tremendous opportunities for the development of exports and imports, attracting foreign investment, promoting economic growth and job creation, promoting reform and social progress ... but challenges are also enormous, both at the national, industry and business levels. Therefore, Vietnam’ s economy and businesses need to be prepared to readily take on opportunities and actively address the major challenges from joining NG FTAs to achieve economic and social development targets. Recommendations and policy implications From the case study of Vietnam, the paper proposes some recommendation and policy implications for the governments and businesses of member countries on developing export-import markets when joining new generation FTAs as follows: • For the government Firstly, participation in the NG FTA should be considered as an important trade policy tool, especially for countries with high trade openness like Vietnam in the context of globalization and deepening international economic integration today. From the practical lessons learned from Vietnam, the participation in FTAs has had many positive impacts on national economic and trade development. Secondly, the government should consult, inform and coordinate with all stakeholders (business community, civil society organizations) in the process of signing and joining the FTA to enhance effectiveness, positive impact of FTA on national economic and trade development. Thirdly, for transitional and developing economies like Vietnam, the development of an appropriate FTA strategy, combined with the implementation of institutional market economy reforms, revise, adjust and perfect policies and laws are key to ensuring positive impacts, limiting the negative impact of FTAs on national economic and trade development. Fourth, the government needs to have appropriate and effective policies to improve the infrastructure of the economy, both hardware and software, in which, improvement of the quality of human resource and application of scientific and technological achievements are determining factors for the competitiveness and success of joining NG FTA Fifth, intensify cooperation and coordination of intergovernmental policies with member economies and the multilateral system of economic and trade institutions to build a global economic and trade environment with liberalization, high standards, democracy and equality. • For Business Actively explore and research on new bilateral and multilateral FTAs; prepare internal resources and make good use of external resources to catch up and take advantage of FTAs; take initiative in studying and gaining information on the FTA markets, increase investment in the renovation of technological equipment in order to raise the quality of products and meet international standards in order to overcome the barriers to promote export; actively select and change the appropriate input materials to meet the standards of origin; raise the quality of human resources, especially skilled labor and high-level human resources, raising the quality of corporate governance; Strengthening joint ventures, linking and cooperating within enterprises from FTA members in the regional and global supply chains, to attract investment and develop new products, applying advanced technology and science in production, processing and distribution of products to improve the quality and efficiency of business operations, take advantage of the best opportunities from new generation FTAs for sustainable development of enterprises.

About the authors

Nguyen Minh Pham

Institute of Industry and Trade Strategy and Policy Research, Ministry of Industry and Trade

Dr., Leader of Group

Thi Hieu Nguyen

Institute of Industry and Trade Strategy and Policy Research, Ministry of Industry and Trade

Dr., Member of Group, Senior researcher

Huy Khoi Le

Institute of Industry and Trade Strategy and Policy Research, Ministry of Industry and Trade

Dr., Member of Group

Thi Van Anh Hoang

Institute of Industry and Trade Strategy and Policy Research, Ministry of Industry and Trade

MA., Member of Group

Khanh Linh Nguyen

Institute of Industry and Trade Strategy and Policy Research, Ministry of Industry and Trade

Email: nkhanhlinh80@yahoo.com
MA., Member of Group

References

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