MULTILATERAL TRADE ASSISTANCE PROJECT VIETNAM II (MUTRAP II)

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Ministry of Industry and Trade in Partnership with the European Commission ASIE/2003/005711

ACTIVITY HOR-9
Comprehensive evaluation of the impact of increased key imports-exports and regulatory changes resulting from Vietnams WTO membership

FINAL REPORT
By Claudio Dordi, Michel Kostecki, Francesco Abbate, Andrina Lever & Paul Baker And Pham Chi Lan, Le Dang DoanhVo Tri Thanh, Dinh Hien Minh, Nguyen Thi Lan Huong, Tran Thi Mieng, Nguyen Duc Thanh, Duong Ngoc Thi, Bui Trung Nghia, Dang Duc Anh, Nguyen Dang Binh, Nguyen Le Minh, Nguyen Ngoc Son, Bui Thanh Huan & Nguyen Thi Thuy

Hanoi, May 2008

This document has been prepared with financial assistance from the European Commission. The views expressed herein are those of the authors and therefore in no way reflect the official opinion of the Commission nor the Ministry of Industry and Trade.

TABLE OF CONTENT
INTRODUCTION................................................................................................................................................................ 7 1. The research content .................................................................................................................................................... 7 2. The difficulties in evaluating the effect of reforms mandated by the WTO membership; the short and long term effects of WTO accession ................................................................................................................................................. 8 3. What is not (and has not been) possible to measure: subjective and long term effects. .......................................... 8 EXECUTIVE SUMMARY................................................................................................................................................ 10 CHAPTER I. MACROECONOMIC IMPACTS .......................................................................................................................... 18 1. Introduction .................................................................................................................................................................... 18 2. Theoretical perspectives on macroeconomic effects of trade liberalisation ............................................................ 19 3. Vietnams macroeconomic performance since accession .......................................................................................... 22 3.1 Economic structure and growth .............................................................................................................................. 23 3.2 Trade accounts.......................................................................................................................................................... 27 3.3. Impacts on budget revenue ..................................................................................................................................... 31 3.4 Balance of payments and capital flows ................................................................................................................... 35 3.5 Monetary aggregates ................................................................................................................................................ 37 4. Conclusion and lessons learned .................................................................................................................................... 42 5. References ....................................................................................................................................................................... 45 CHAPTER II: IMPACTS ON TRADE PERFORMANCES ........................................................................................................... 47 1. Introduction: trade policy reforms, trade performance and growth: a conceptual approach ............................. 47 2. WTO accession: some highlights of Vietnams commitments .................................................................................. 49 3. WTO impact on Vietnams trade in goods.................................................................................................................. 53 3.1. Export and import growth rates and world share ................................................................................................. 53 3.2. Openness indicator for Vietnam............................................................................................................................. 55 3.3. Concentration Index................................................................................................................................................ 56 3.4. Diversification index ............................................................................................................................................... 57 3.5. Composition of trade ............................................................................................................................................... 59 3.6. Trade balance per product ...................................................................................................................................... 62 3.7 Composition of trade and factor endowment.......................................................................................................... 66 3.8. Export and import performance and specialization per product.......................................................................... 81 3.9. Terms of trade.......................................................................................................................................................... 83 3.10. Direction of trade................................................................................................................................................... 84 4. WTO impact on Vietnams trade in services .............................................................................................................. 87 5. Conclusions ..................................................................................................................................................................... 90 6. References ....................................................................................................................................................................... 91

Annex 1: A Typology of MNE Participation in Manufacturing for Newcomer Exporting Countries ..................... 95 Annex 2: BEC Items Grouped into Five Stages of Production................................................................................... 96 Annex 3: Grubel-Lloyd Intra-Industry Trade .............................................................................................................. 97 Annex 4: Factor intensity classification ....................................................................................................................... 98 Annex 5: US and EU imports of clothing after quota removal, by volume and value............................................. 101 Annex 6: Price of commodities time series .............................................................................................................. 104 Annex 7: Viet Nams trade commitments under WTO agreement............................................................................ 105 CHAPTER III: IMPACTS ON THE INDUSTRIAL SECTOR .................................................................................................... 107 1.Introduction ................................................................................................................................................................... 107 2. Vietnams industrialization after 1996 ...................................................................................................................... 109 2.1 Vietnams industrialization strategy towards 2020...................................................................................... 109

2.2 Trade related policies to promote industrialization after 1996 ................................................................... 110 2.2.1 Trade policies before WTO accession....................................................................................................... 110 2.2.2. Trade policies after WTO accession......................................................................................................... 114 2.2.3 Other policies (FDI, private sector and SMEs promotion). ..................................................................... 116 3. Profile of Vietnams industry...................................................................................................................................... 117 3.1. Vietnams industry by factor intensity ................................................................................................................. 117 3.2. Manufacturing structure of establishments: numbers and share...................................................................... 119 3.3. Manufacturing employment ................................................................................................................................. 125 3.4. Structure of capital in manufacturing ................................................................................................................ 128 3.5. Structure of industrial ownerships ....................................................................................................................... 132 4. Growth of industrial output ........................................................................................................................................ 133 5. Manufacturing exports by factor intensity ............................................................................................................... 136 6. Other characteristic features of industry .................................................................................................................. 138 6.1. Important Role of Small and Medium Enterprises ............................................................................................. 138 6.2. Efficiency of Industry............................................................................................................................................ 139 7. Vietnams industrial and economic competitiveness ............................................................................................... 141 7.1.Vietnams competitiveness ..................................................................................................................................... 141 7.1.1. RCA and ERP indices of competitiveness and protection ............................................................................ 141 7.1.2 International ranking of Vietnams competitiveness................................................................................. 143 7.2. Dualistic Competitiveness of export and domestic markets................................................................................ 144 8. Impact of regulatory changes ..................................................................................................................................... 145 9. Action-oriented recommendations ............................................................................................................................. 146 10. References ................................................................................................................................................................... 149 CHAPTER III. PART II. THE IMPACT OF VIETNAMS ACCESSION TO THE WTO ON AGRICULTURE ............................ 151 1. Background on the agricultural sector in Vietnam.................................................................................................. 151 1.1. Investment in Agriculture ..................................................................................................................................... 151 1.2. GDP growth and change in agriculture sectors position .................................................................................. 151

2. Trade in agricultural products one year after accession ......................................................................................... 153 3. Expected impacts of WTO on trade of agricultural commodities.......................................................................... 155 3.1. Impact on trade performance ............................................................................................................................... 155 3.2. WTO disciplines on subsidies and agricultural trade policies............................................................................ 160 3.3. Impacts of WTO accession on farmers income and poverty in rural areas ..................................................... 162 4. Conclusion ..................................................................................................................................................................... 164 5. Policy Recommendations............................................................................................................................................. 164 6. References ..................................................................................................................................................................... 172 Annex 1: Vietnams implementation of agricultural reforms since 1995 ................................................................ 175 Annex 2. Changes on tariff structures in Vietnam since 1995.................................................................................. 181 Annex 3: Non-tariff measures applied by Vietnam.................................................................................................... 191 Annex 4: Third country application of trade barriers to Vietnams exports ............................................................ 201 Annex 5: Latest developments in the agricultural sector........................................................................................... 203 Annex 6: Trade performance of key agricultural commodities................................................................................. 209 Annex 7: Statistical Indicators .................................................................................................................................... 219 CHAPTER IV: PART I STRATEGIC IMPLICATIONS OF WTO FOR BUSINESS IN VIETNAM............................................. 232 1. Preliminaries................................................................................................................................................................ 232 2. The WTO Impact on Business: Issues and Perspective........................................................................................... 232 3. Improved Business Environment in Vietnam ........................................................................................................... 234 4. New Export Opportunities .......................................................................................................................................... 239 5. Access to Lower Cost Inputs and Technology Abroad............................................................................................ 241 6. The Threat of Foreign Competition ........................................................................................................................... 241 7. Attracting Foreign Direct Investments ...................................................................................................................... 242 8. Conclusions ................................................................................................................................................................... 243 9. References ..................................................................................................................................................................... 244 CHAPTER IV: PART II. THE EFFECT OF WTO MEMBERSHIP ON VIETNAMESE SMES .............................................. 246 1. Background................................................................................................................................................................... 247 2. Challenges for SMEs .................................................................................................................................................. 248 3. Negative impacts threats .......................................................................................................................................... 251 4. Positive impacts opportunities ................................................................................................................................. 253 5. Opportunities for women owned smes ..................................................................................................................... 256 6. Comparative experience of other WTO members ................................................................................................... 259 6.1. Japanese Sme Support Centres ............................................................................................................................ 259

6.2. India ....................................................................................................................................................................... 260 6.3 South Africa ......................................................................................................................................................... 260 6.4.Chinese Taipei ........................................................................................................................................................ 260 6.5. New Zealand .......................................................................................................................................................... 261 6.6. Chinas experience of smes in its post WTO accession ..................................................................................... 261 7. Lessons learned............................................................................................................................................................. 262 8. Recommendations to enhance the successful development of the Vietnamese sme sector after WTO accession ............................................................................................................................................................................................ 263 9.References ...................................................................................................................................................................... 265 CHAPTER V: THE SOCIAL IMPACT OF VIETNAMS ACCESSION TO WTO...................................................................... 267 1. Trade liberalization and poverty: a conceptual approach ...................................................................................... 267 1.1. The macroeconomic link....................................................................................................................................... 267 1.2. The microeconomic link........................................................................................................................................ 268 1.2.1.The distribution sector..................................................................................................................................... 268 1.2.2.Enterprises: profits, wages and employment.................................................................................................. 270 1.2.3.Trade taxes and government spending ........................................................................................................... 271 2. Economy-wide models and sectoral studies .............................................................................................................. 272 3. The empirical evidence ................................................................................................................................................ 275 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. Poverty reduction ........................................................................................................................................... 275 Human development ...................................................................................................................................... 277 Employment.................................................................................................................................................... 278 Wages.............................................................................................................................................................. 280 Industrial relations......................................................................................................................................... 282 Gender............................................................................................................................................................. 282 Child labour.................................................................................................................................................... 285

4. Possible adverse effects ................................................................................................................................................ 287 4.1.Impact of specific WTO commitments .................................................................................................................. 287 4.1.1.Agriculture....................................................................................................................................................... 287 4.1.2.Manufacturing ................................................................................................................................................. 288 4.1.3.Services ............................................................................................................................................................ 289 4.1.4.Intellectual property rights.............................................................................................................................. 290 4.2.Impact of international economic integration...................................................................................................... 290 4.2.1.External shocks................................................................................................................................................ 290 4.2.2.State-owned enterprises .................................................................................................................................. 292 4.2.3. Internal migration .......................................................................................................................................... 294 4.2.4. Income inequality ........................................................................................................................................... 295 5. Policy options ................................................................................................................................................................ 298 6. References ..................................................................................................................................................................... 302

INTRODUCTION

1. The research content Vietnams WTO membership and participation in regional trade agreements bring about, at the same time, benefits, opportunities and important challenges. The implementation of WTO commitments raises social concerns associated with trade policy reform and liberalization; domestic industries may also have difficulties in adjusting to the pressure of growing competition which results from Vietnams commitments undertaken in the WTO accession process. As it has happened for many other countries, the implementation of Vietnams WTO obligations is having a profound impact on the economy as well as the society in general. For this reason, in order to ensure that Vietnams WTO accession will result in a sustainable and equitable economic development, it is necessary to evaluate this impact and to work-out measures and action-oriented recommendations on how to capitalize on the benefits and mitigate possible negative impacts arising from the implementation process. The research financed by MUTRAP focused on the impact of the trade and institutional reforms implemented in Vietnam in the context of the accession to the WTO. In particular, the research analyzed the following subjects, each of them coordinated by a Vietnamese and a European expert: 1. the impact on the macroeconomic policies and on the public sector (with particular attention to public revenue); 2. the impact on trade performances; 3. the impact on some specific sectors; a. the industrial sector; b. the agricultural sector; 4. the impact on the business environment and on foreign trade investments; 5. the impact on social issues; The methodology of the research has been principally based on the analysis of quantitative and qualitative (e.g. interviews, surveys, etc.) data; the purpose is to verify what is, in the most objective manner possible, the present economic and social situation after one year of accession to the WTO. The relevant economic and social literature has been taken into account, especially that regarding the impacts of trade liberalization measures on the economic and social situation. Therefore, the findings and the recommendations are based on the prevailing theoretical assumptions among economists and social scientists. It has been deliberately and unanimously decided to avoid the adoption of econometric models based on a number of assumptions and insufficiently long time series ; the conclusions are based on data collected in the light of the prevalent economic rationale in the literature, with the awareness that the WTO-mandated trade reforms can only partially explain any change in the trends of the analyzed variables. In general, it has to be said that the short-term impact of the implementation of WTO rules on the economy of the newly accessed country cannot be understated: it should not be forgotten that the field of application of WTO rules is limited to some specific sectors related to trade in goods, services and protection of intellectual property rights. Moreover, most of the rules contained in WTO agreements provide negative obligations (i.e. not to do something; e.g. non discrimination, prohibition of quantitative restrictions, etc.) instead of positive ones. This means that most of the economic reforms have been implemented voluntarily by Vietnam, or under external constraints not connected with the WTO accession. However membership to the WTO promoted openness of the 7

market; as a consequence, Vietnam will be forced to implement supporting activities, beyond those required by the WTO, aimed at improving the efficiency and the competitiveness of all the economic actors (public and private) facing the challenges of increased international competition. 2. The difficulties in evaluating the effect of reforms mandated by the WTO membership; the short and long term effects of WTO accession The analysis of the economic and social impact assessment from Vietnams WTO accession is particularly complicated. First of all, inferences made on trends may be due to cyclical variations or other temporal considerations and therefore, the effects brought about by trade policy changes can only be reasonably measured only in the medium-long term. Secondly, the large and complex set of WTO accession commitments make it necessary to carefully select parameters and indicators to monitor change. Unavoidably, this makes the value of the research strictly limited to the sectors analyzed and to the variables and parameters selected. Thirdly, most of the trade policy reforms have been implemented by Vietnam long before the formal date of accession: some of them had been unilaterally implemented, others have been endorsed as a result of the participation to bilateral (i.e. the US- Vietnam BTA) or regional (i.e. the participation to the AFTA) agreements and some have been enacted as a specific requirement raised by other WTO member States during the negotiating process. Isolating the effects of the regulatory changes reflecting WTO commitments from those being the results of other international obligations has often proven impossible: for this reason only some of the effects on the selected parameters and variables can be explained by the trade and regulatory reform resulting from the WTO membership. Furthermore, limiting the data collection to the year after the date of accession would underestimate the effects of WTO membership. Fourthly, the value of the parameters and the indicators selected for assessing the impact of the accession may be influenced by exogenous variables (e.g. the price fluctuations in the international markets, the cost of raw materials, etc). Fifthly, it is important to stress that the impact of the most recent trade reforms can be assessed only in the long term, i.e. only after all the internal adjustments in the structure of Vietnams economy have been completed (e.g.: modification in the pattern of production; the restructuring processes enterprises are forced to implement in order to concentrate on their core business which enables them to exploit economies of scale and learning effects; the innovation efforts companies shall carry out to be able to compete - internally and in the global market with foreign companies). Thus, in the short-run, companies may lose from an integrated market since they might not be able to keep up their prior price-cost margins but in the long-run they will profit from higher sales and decreasing costs. As a consequence, the impact of accession is therefore likely to be more subtle than a one-off shock to the economy. It is the stability caused by adherence to international trade rules, and the internal growth that results from this which will likely have the largest impact on the economic and social issues, in the medium and long term. 3. What is not (and has not been) possible to measure: subjective and long term effects. On the other hand, it should be pointed out that the WTO membership produces immediately some positive results for the acceded countries that are not measurable: first of all, being members of the WTO prevents the other WTO members from applying discriminatory or restrictive policies against Vietnamese goods and services except those that are expressly permitted by the WTO agreements. Secondly, Vietnam obtained an improved and predictable access for its exports in the market of the other Members. In addition, non-member countries would have to negotiate border measures with their trade partners bilaterally or regionally and might be exposed to undue negotiating strength of 8

their partners. This situation is particularly critical during negative international economic conjuncture, when States tend to behave in a protectionist manner to defend their industries. Thirdly, the WTO membership raises the credibility of government policies among the trade partners. Developing countries often face a "credibility gap" in trying to convince foreign and domestic investors and the rest of the business community about their commitments to particular policies. As Vietnams policies in some relevant sectors are in legal commitments, the WTO membership provides powerful guarantees of the governments' policy directions. As pointed out by Bacchetta and Drabeck (2002), unlike in the case of unilateral policy reforms, policy reforms supported by multilateral commitments are more credible, in particular because of the strategic interaction between the government and the private sector which makes the agreement attractive. In this setting, governments use international trade agreements to enhance the credibility of their policy choices with respect to the private sector. Moreover, the membership is especially significant for a transition economy like Vietnam, as the same authors highlighted that the "credibility gap" is particularly important and present in the case of many if not most transition countries due to their history of central planning and political instability. Fourthly, from an institutional point of view, Vietnam has been required as a WTO member candidate to put in place a set of norms and institutions, which support the liberalization of markets and increases transparency and promotes the rule of law, contract enforcement and the evolution of an independent judicial system. Fifthly, the WTO contributes to the predictability, security and transparency of market access, both for foreign export and investors in Vietnam and for Vietnamese exporters and investors in other WTO members. For example, before accession Vietnam did not benefit from the Permanent Normal Trade Relations clause from the U.S, which was granted just one month before the acquisition of formal WTO membership. Sixthly, Vietnam, as all the other WTO members, has the possibility of resolving disputes through the dispute settlement mechanism: outside the WTO, the settlement of international disputes follows the general rules of international law: negotiations, ad hoc arbitration procedures or the retaliations and countermeasures which are admitted by the public international law. Seventhly, Vietnam has the opportunity to shape the future rules and disciplines of the WTO through active participation in the future multilateral trade negotiations. Accession will provide Vietnam with the opportunity to negotiate greater concessions in its export markets and reduce subsidies which may be harming its local production. Eighthly, One may ask whether the policy decision taken and the subsequent implementation of reforms would have occurred with or without WTO accession. What would have been the cost of non-WTO accession? It should be reminded that the accession to the WTO affects the economic performances even in indirect ways, such as the increased FDIs attracted by a more stable and predictable business and legal system. This would have been largely impaired without the number of reforms required, directly or indirectly, by membership in the WTO.

EXECUTIVE SUMMARY This report has been prepared with a view to determining the socio-economic impact of Vietnams joining the WTO. It is underpinned by macroeconomic, sectoral, political, legal and social analysis to identify the challenges faced by Vietnam in implementing its commitments. Furthermore, longterm recommendations are made to reinforce the benefits from participating in the multilateral trading system. The report is broadly divided into six areas of focus: the macroeconomy, trade performance, industrial and investment performance, agriculture and rural development, the business environment and SME development, and the social effects. 1. Macroeconomic Effects of WTO Accession Vietnams first year of accession took place in unusual global economic conditions. A crisis in the US banking sector led to a turmoil in international financial markets, which trickled down to Vietnam. Moreover, oil prices and the prices of commodities reached record levels, which has also had an effect on Vietnam. Furthermore, the year witnessed natural disasters, particularly drought, flooding and storms, as well as epidemic diseases such as the bird flu and livestock diseases. All of these conditions affected agricultural production and sales abroad. In other words, factors which are exogenous to the policy decisions of Vietnam, directly affected Vietnams macroeconomic performance in 2007. The combination of WTO induced effects on the macroeconomy and those induced by other policy variables and exogenous factors, make it very difficult to determine the exact results of accession. More importantly, the fact that there is a lag between the implementation of new policies and the response of economic sectors to these changes, leads to further complications in measuring the macroeconomic effects of WTO accession. The report attempts to disentangle the sources of changes in macroeconomic aggregates but the above caveats remain an integral part of any interpretations made. A literature review on the macroeconomic effects of trade liberalisation or WTO accession suggest the following stylized facts: An expected increase in economic growth, because of such factors as greater access to technology, dynamic effects of competitiveness, and inflows of investment. However, the adjustment process can lead to contraction in certain sectors. Adjustment costs are exacerbated by a fixed exchange rate and sluggish labour and capital markets. Lower macroeconomic volatility when the greater concessions for market access are made in the non-agricultural sector, as is the case for Vietnam. Increased investment from both a more stable policy environment and the enforcement of international trade rules, and the liberalisation of financial services. Increased exposures to external shocks, which may affect other economic aggregates, including the budget deficit. A mixed result with regard to the budget deficit. Lower budget deficits in fiscally responsible and reform driven economies but higher budget deficits in more vulnerable and less reform driven countries. Expected deterioration in the trade balance in the short run but long term re-balancing of the trade account. Increased access to capital flows and greater foreign direct investment. Also greater portfolio flows aimed at local financial markets. Greater difficulty in managing monetary policy in the face of growing capital inflows, a managed exchange rate system and a decentralized financial system. 10

Vietnams first year of accession did witness significant economic growth, at 8.5 percent, underpinned by buoyant investment, export growth and spending. Some of the determinants of growth may be attributed to WTO accession, although higher world commodity prices and a trend of increasing FDI levels since the US-Vietnam FTA were determining factors also. At the same time, underlying prices appeared to be spiralling out of control with double-digit inflation, domestic credit was alarmingly high and the trade balance rapidly deteriorated. However, contrary to expectations, tariff reductions in the context of WTO accession did not result in a decline in tariff revenue. Instead fiscal revenue actually increased in 2007, with an even higher contribution of tariff revenue to the general government budget. This is partly due to the fact that Vietnams tariff reduction under the WTO has been relatively small and gradual, thus only affecting a few key sectors. More importantly, the large increase in imports resulted in tariffs being applied to larger volumes. The government also introduced major reforms in its customs and taxation policies, and streamlined procedures prior to 2007 and consolidated its efforts during the first year of accession, thereby raising collection rates. Vietnams already open economy is poised to be more exposed to global market trends as the WTO both increases its exposure to imports and also magnifies the risks in export markets. Furthermore, portfolio flows appear to be an increasing source of finance for the trade deficit, which can lead to fast capital flight in the event of a change in investor confidence. Capital inflows have also weakened the effectiveness of monetary policy and raise important questions on the new instruments needed to manage inflation. Accession to the WTO, regional integration initiatives and growing inter-linkages of trade and investment flows will further increase Vietnams exposure to international markets and create the need for new policy instruments to affect economic variables. Some policy lessons can be drawn from the experience of Vietnams first year of accession. The positive bias of tariff dismantling in non-agricultural goods is expected to increase macroeconomic stability. The recent turmoil in agricultural and energy prices underlines the importance of reducing exposures to world commodity and energy prices. A continuing trend in this direction, as well as tackling real rates of protection, will not only be beneficial to the macroeconomic environment but also should lead to stronger and more sustainable economic growth. Subsidies to the agricultural sector should be maintained as far as possible, both as a pro-poor development strategy but also to curb any inflationary pressures arising from rising inputs into the agricultural sector, as well as rising international prices of food. Recent short-term and speculative capital flows have appeared with potentially de-stabilising consequences to the balance of payments and other macroeconomic variables. Authorities will have to monitor carefully the risks of mounting exposures to short-term capital. In this respect, the authorities also must improve the collection of data on portfolio flows to ensure that such monitoring is possible. Monetary policy has been affected by the large capital inflows and the removal of discretionary capital (and import) controls, which the Vietnamese monetary authority used in the past. The IMF pressure has restricted the scope of central bank intervention in money markets. The monetary authorities should find alternative measures of inflation targeting and resort to other sterilisation practises from those used in the past. Also, the surge in domestic liquidity brought about by capital inflows makes it increasingly unsustainable to maintain a fixed exchange rate, an open monetary policy and an open capital account. Moreover, a rigid exchange rate system such as this one will protract the adjustment of the economy to find a new equilibrium following the implementation of accession commitments. In this light, it is recommended that the monetary authorities review the

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current exchange rate policy, which also provides less flexibility to dampen adjustment costs through the exchange rate. 2. The impact on trade performance It is quite impossible to isolate the trade effects following the WTO mandated reforms from the reforms that Vietnam implemented, unilaterally or in the framework of regional trade agreements (ASEAN FTA, US BTA), long before the formal date of WTO accession. For this reason the trend in trade performances is only partially a result of WTO mandated reforms. The trade reforms implemented in Vietnam contributed to a progressive and gradual opening of the economy; this made the Vietnamese economy more sensitive to international economic shocks, such as the recent and sudden rise in raw materials and commodities prices in the world market. The analysis showed the lack of diversification of Vietnams exports and imports, both regarding products and markets. Vietnams trade deficit grew swiftly in 2007, mainly due to imports of iron and steel, ores, metals, fuels, machinery and electronic and computer products. Vietnam shows a high dependency on imports of industrial raw materials and equipment, reflecting the low level of Vietnamese industrial development and low international competitiveness in capital goods. As for exports, the increase in share of manufactured goods in total exports in the period 1995-2007 reflected the expansion of light industrial and handicraft exports. In particular, the sectors that showed the greatest growth are textiles and garments, footwear and electronic products. Primary commodities decreased their share in exports from 54% to 41% in the period 1995-2005, primarily owing to the decline of all food items, only partially compensated by the increased exports of fuels. However, in 2006, both food items and fuels increased their export values. In 2007, seafood, coffee, rice and coal were among the most exported products and their exported values increased respectively by 13%%, 52%, 14 % and 11.4%. As Vietnam successfully integrates into the world economy and develops, the composition of its trade flows tends to move away from primary products, initially towards unskilled-labour intensive products, and subsequently towards technology and human-capital intensive products. Associated with these changes there is an increase in the extent of intra-industry trade. This is particularly high for sophisticated manufactured products (chemicals, machinery, transport equipment, electrical equipment, and electronics; both based on product differentiation and fragmentation). The component trade for Vietnam is also growing, although still only accounting for a minor fraction of regional trade. Regarding the direction of imports, since Chinas accession to WTO, the share of imports of Chinese origins in Vietnam has sharply increased. China has become the leading supplier for Vietnam in 2003; among ASEAN countries, only Thailand has constantly increased its share in value in Vietnams imports from 2001 to 2006, and positioned itself as the sixth largest supplier of the country. This relocation of suppliers may reflect the reorganisation of production in Asia, where a triangular trade pattern has emerged. In many sectors, China is used as an export base by the firms located in advanced Asian economies, which instead of exporting finished goods to the US and EU, now export intermediate goods to their affiliates in China. This emerging pattern together with rising factor costs in China and fears of future trade disputes and safeguard measures applied by EU and US, may have elected Vietnam as a partner of the China-plus-one strategy, in which foreign companies invest in China and in another ASEAN country. Moreover, the rising costs and the 12

desire by multinational companies for diversification open up opportunities for countries like Vietnam, where wages for factory workers are rising, but labour costs are still as much as 35% lower than in coastal China. With regard to exports, the destination pattern has radically changed since the bilateral trade agreement with the US. In fact, in 2001 Japan was the leading destination market, followed by US, Australia, China and Germany while ASEAN was the third largest market. In 2007, the US was Vietnams leading destination market, together with EU, followed by ASEAN and China. Since the beginning of Doi Moi and the implementation of bilateral and multilateral trade agreements, Vietnam has increasingly diversified its export markets. It can be said that Vietnam has specialized in declining markets, where its export growth rate exceeds their import growth rates, notably: US, Japan, Germany, UK and Italy. On the other hand, Vietnam has reduced its market share in booming destination markets, like China and Singapore, or Netherlands and Korea, where Vietnams export growth rate is lower than the countrys ability to import. 3. The impact on industrial performance Since the implementation of trade reforms Vietnams economic structure has shifted mainly between agriculture-forestry-fisheries sectors to industry-construction sectors, including manufacturing. Along with industrialization, there has also been structural change within the manufacturing sector itself. The manufacturing sector moved away from simple labour-intensive activities to higher added value and complex activities. Production technology in manufacturing plays an important role in the economy. From 1995 to 2006, due to increased FDI that brought advanced technology into Vietnam, there has been an important increase in the economic share of the group of medium and high-tech industries in total manufacturing output. Along with the increase in the number of enterprises and of the output, the number of employees in manufacturing enterprises also increased strongly; in particular wearing apparel, leather tanning and processing, and furniture production absorbed the highest number of employees. Along with the increase in the number of establishments and employees, there is a huge rise in terms of absolute capital value in manufacturing, creating an enormous production capacity of manufacturing. With regard to the number of industrial establishments, SOEs have been declining relatively with the strong rise of non state establishments and foreign direct investment regardless of the size and scale of small, medium and large enterprises. Though there was an increase of output in terms of the value in all sectors, the growth rates of non state and foreign invested sectors were about 20 percent per year in the last few years, while the rate of the SOE sector was only about 10 percent per year (that is partly due to SOE reform including their equitization). As a result, there was also a decline in the share of the SOE sector in total industrial output. The decomposition of industrial activities showed that in 2006 Industrial subsectors that were considered to have competitive export advantages (e.g. agricultural resource-intensive and labourintensive production) maintained high growth rates (roughly the same showed in 2001-2005). At the same time, import-substituting subsectors growth (tobacco, paper and paper products, non metallic mineral products, machinery and equipment; medical, precision and optical instruments, watches and clocks; and motor vehicles ) has been lower than the 2001-2005 data . 13

The competitiveness of Vietnam's economy has been recognized as rather weak. The World Economic Forum (WEF) has ranked the global competitiveness of Vietnams economy, though improving, at the lower end on the list. However, looking at the global competitiveness index in detail for 2007, there are some positive points of Vietnams economy, such as the institutional changes and the macroeconomic stability. To conclude, a salient characteristic of Vietnams present manufacturing structure is its dualism, between a strong export sector vs. a weak and protected domestic (import-competing) sector. Moreover, there is a weak linkage between foreign firms and local firms and between upstream and downstream industries. In many industries, such as garment, footwear, electronics, automobiles, motorbikes, almost all the raw materials and intermediate inputs are imported. Many studies and surveys showed a common result that supporting industries are both lacking and poorly developed in Vietnam. Many other supporting industries, which serve the newly developed industries in Vietnam, are at a very primary step such as the moulding industry. Vietnam now can supply only the low and medium technology-supporting industries such as steel consumer components, carton packaging, etc. The weak linkage between foreign firms and local firms has also limited FDI spillovers. Knowledge-intensive activities such as R&D carried out by FDI in Vietnam are very limited. Most Vietnamese workers are employed for simple assembly activities. Despite the increasing contribution of FDI to Vietnams exports, newly increased export-oriented FDI projects in recent years generally have limited backward linkages with local firms and create limited spillover effects on the local economy 4. The impact on agriculture Though the importance of agriculture sector in Vietnams economy has seen a gradual decline, agriculture still plays an important socio-economic role, and ensures the stable and sustainable development of the economy. Vietnams agricultural production has made steady progress in productivity and yields. However, this sector still faces many challenges, latent risks and has a limited competitiveness in terms of goods and agro-industries. In the millennium era of regional and international integration, and in the context of accession to the WTO which brings opportunities as well as challenges, developing a modern, efficient and secure agriculture sector requires great Investment. Moreover, the opportunities to export become a challenge for Vietnam to reach the quality and food safety standards demanded by importing countries. The experience of China and problems faced by some Vietnamese goods underscores the importance of this issue. The chapter devoted to agriculture reviews the performance of key economic and social indicators and attempts to single out the effects of the WTO. Despite significant growth in the value added of agricultural production, which more than tripled in current prices, its contribution to GDP has decreased between 1995 and 2007, owing to the more dynamic sectors of the economy Since 2001, investment in agriculture has stagnated in absolute terms and declined in relative terms, from 9.5% of the countrys total investment in 2001 to 7.5% in 2006. Since and prior to joining the WTO, FDI inflows have soared in Vietnam, but most of the investment flows have been directed at the non-agricultural sectors

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Against a major surge in total exports during 2007, which grew by 21.5 percent, agricultural exports1 recorded substantial growth at 19.5%, to reach USD12.5 billion, thus remaining a vital source of foreign exchange earnings. Nevertheless, this marked a slowdown with previous years (22.2% in 2006 and 26.7% in 2005). Vietnam is competitive in exporting a number of agricultural commodities. However, it has specialised in a variety of products whose global demand is showing signs of stagnation or limited growth. This is the case for fruits and vegetables, seafood, wood and rice. On the other hand, Vietnam is successfully specialising in coffee for which there are more dynamic market opportunities. However, Vietnam appears to be losing market share in the rapidly growing rubber market. This trend, which started prior to accession, seems to be persisting after WTO accession. Overall though, export performance during the first year of membership to the WTO does not seem to have been affected. In the first 11 months of 2007, imports in agricultural products were valued at more than USD 3.7 billion, up by 31% compared to 2006. The structure of agricultural imports has changed little after WTO accession since most of the imports are products that Vietnam cannot produce (wheat and flour) or in which it has a low comparative advantage (milk, milk products, cotton, sugar and animal fat and vegetable oil). 5. Vietnamese Business Environment and SMEs Even if significant structural reforms and a more open market had already occurred prior to WTO accession, WTO membership has created a greater momentum for domestic reforms which are in general improving the business environment. This has had a significant impact on Vietnams trade in goods and services, exchange of technical knowledge, foreign direct investment and cross-border investments in financial assets. As part of the global market, Vietnam is now more affected by other world economic conditions such as the volatility of the energy and resource markets, the current vulnerability of the U.S. dollar and the volatile U.S. economy which complicates separating the real impact of WTO membership on Vietnam from other outside influences. Specific sectors have been liberalized in services, distribution, telecommunications, and financial services which are having a dramatic effect on the traditional way of Vietnamese life and ways of doing business by opening up telecommunications to rural areas, creating major distribution networks and offering more competitive financial products and terms. More consumer products and services are now available and the presence of more foreign owned enterprises is obvious. While offering great opportunities for business and consumers, this new competition also creates threats to unsophisticated small businesses and puts pressures on local resources and infrastructure. Vietnams WTO Accession Protocol required a radical change in its legal system with respect to the formal publication of laws and regulations, procedural fairness in decision-making, judicial review and non-discrimination principle as well as transparency, governance and national treatment: moreover, the clarification of ownership rights partly resulted from WTO commitments concerning privatization of numerous Vietnamese firms and clarification of the status of state-owned enterprises. The report makes a number of recommendations to create a more enabling environment, such as:
1

Includes agricultural, forestry and fishery products

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o The time required to implement import and export activities of Vietnamese trading firms needs to be substantially reduced and the cost of exporting decreased so that the export competitiveness of Vietnam is not weakened as compared to China, Malaysia and Singapore especially since Vietnams economic growth shall be based largely on the development of export-oriented sectors o The WTO commitment to open the banking sector to foreign ownership emphasizes the urgency of reforming state-owned commercial banks. o Massive amounts of FDI have been committed to Vietnam since its WTO accession but in order to continue to attract and disburse such levels of investment, Vietnam shall have to introduce more protection for investors. For example, new regulatory reforms introduce fiduciary duties for directors, but fails to ensure that those duties are enforced. The extent of director liability is among the lowest in the world and therefore there is significant room for improvement o It is well recognized that a strong and healthy SME sector is central to a strong economy. The rise of the Vietnamese SME sector has been huge and rapid with continued high growth anticipated in this area. However, attention needs to be paid to training, support and management and technology skills in this area in order for the SMEs to survive and become competitive o With respect to SMEs there are still issues around access to land and property, an inadequate infrastructure and the rapid and massive structural reform which need to be addressed o With respect to entering foreign markets, both Vietnamese goods and services must be of a high and consistent quality and standard in order to compete in developed markets. Attention should be paid and lessons leaned from the backlash of bad publicity and consumer anger at the poor quality of goods, particularly toys, medication and health products produced in China which contain toxic materials and have resulted even in the death of some consumers abroad o urban areas are reaping the benefits of FDI due to WTO membership, but rural areas remain underdeveloped. Local authorities must compete for investment to ensure that local and traditional sectors become competitive in order to try to curtail the flight of people to urban centres in search of jobs o many SMEs have indicated that there have been improvements in the regulatory environment but that the reality of implementation has been quite different and therefore there are still regulatory barriers that need to be addressed 6. The impact on social issues Since the early 1990s, the spectacular increase in economic growth, exports and FDI flows has contributed to a stellar performance in poverty reduction and human development, with a remarkable improvement in health and education standards. Fast international economic integration has generated key positive effects on labour in terms of job creation, increased employment in the non-agricultural and formal sectors, reduction in urban unemployment and real wage increases. Favourable impacts have also been registered in such critical areas as gender--with the increase in womens wages and the narrowing of the gender gap in earningsand child labourwith a sharp reduction in the number of working children. By contrast, SOE workers have been the most visible victims of the globalization process and are still the most vulnerable in terms of job security, but they are shielded by a safety net fund, and most of their households are well above the poverty line. There are worrying signs of a significant rise in labour disputes, particularly in foreign-owned enterprises, and of growing income inequality: a widening gap between the wages of skilled workers and those of unskilled workers, the so-called skills gap, and a worsening income distribution across households and provinces. If this trend accelerates, it could affect social cohesion, one of the pillars of the Vietnamese society. 16

A number of WTO accession commitments, such as those in agriculture, manufacturing, services and intellectual property rights, might have adverse social effects on poverty and employment. Fortunately, in the most sensitive areas Vietnam has been allowed to adopt a gradual approach to liberalization and a number of safeguards are already in place to limit any adverse social impact. This report presents a number of policy options to cope with possible adverse effects of international economic integration on the Vietnamese society and to enhance the positive impact. These proposals are in line with the Beyond the WTO Action Plan launched by the Government and include: Increasing the access of poor and vulnerable groups to social protection, including health and unemployment insurance, with such measures as those aiming at the formalization of their employment. Modernizing labour laws and labour market instruments, enhancing the role of trade unions and promoting a tripartite mechanism and collective bargaining. Strengthening human resource development, in order to increase the skills of the Vietnamese labour force and thus cope with international competition. Supporting migrant workers, including the family members left behind, in order to alleviate the social costs of internal migration. Devising regional policies aiming at reducing income inequalities across provinces and between rural and urban areas as well as focusing on the extreme poor and ethnic minorities, i.e. those groups that have been hardly touched by globalization. Establishing an early warning system to monitor vulnerable agricultural products and vulnerable groups so that ad hoc support programmes can be quickly executed in case of need. Vulnerable groups should also be the primary target of agricultural support programmes in the areas of research, extension, training, infrastructure and credit.An effective safeguard mechanism, in line with WTO rules, should be in place to protect vulnerable rural communities. Promoting and diversifying industrial exports through a number of channels, such as financial and technical assistance for export marketing; enhancing the productivity of enterprises through the provision of modern and efficient infrastructure and promotion of research and development. Adopting various measures to increase the competitiveness of small domestic retailers, including providing adequate credit facilities and training in modern managerial skills and marketing techniques as well as strengthening industry associations and building community networks for joint purchases and transport.

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CHAPTER I. MACROECONOMIC IMPACTS Content: 1. Introduction; 2. Theoretical perspectives on macroeconomic effects of trade liberalization; 3. Vietnams macroeconomic performance since accession; 3.1. Economic structure and growth; 3.2. Trade accounts; 3.3. Fiscal effects; 3.4. Balance of payments and capital flows; 3.5. Monetary aggregates; 4. Conclusion and lessons learned; 5. References

1. Introduction It is important to determine the likely consequences of trade liberalisation on macroeconomic variables for a variety of policy reasons. The most important of these is that liberalisation may affect the direction, magnitude and scope which fiscal and monetary policies may have in stabilising business cycles and smoothing out external shocks. Liberalisation has a tendency to make countries more vulnerable to international price shocks and thereby increase the exposure to risk. Liberalisation can also influence the terms of trade of a country, its competitiveness and prices, all of which may translate into wider implications for employment and poverty. This chapter will focus on some of the expected macroeconomic impacts resulting from Vietnams accession to the WTO. It will focus on the period from when Vietnam began to undertake its negotiations to join the WTO, in 1995, up to the date of accession, on 11 December 2006, and one year after, up to 31 December 2007. Vietnam has embarked on economic reforms since the mid 1980s and accession to the WTO has been a result of Vietnams drive to bring economic reforms to the economy and to better integrate in the world trading system. Vietnam has also promoted a policy towards regional integration and in this light is committed to the ASEAN Free Trade Agreement (AFTA), ASEA-China FTA (ACFTA), ASEAN-Korea FTA and is negotiating a number of other bilateral trade agreements, such as an agreement between ASEAN and Japan, India and Australia and New Zealand. Vietnams bilateral agreement with the US, signed in 2001 marked a major effort to liberalise and guarantee a stable trading environment for trade flows between the US and Vietnam. According to the requirements demanded by the WTO and bilateral agreements, Vietnams policies and regulations are expected to become more transparent and accountable, creating a favourable and fair environment for both domestic and foreign investors. Trying to measure the linkages between WTO accession and macroeconomic variables is difficult owing to a number of factors, not least of which the following: (i) deciding on a base year upon which to measure changes in macroeconomic variables is complicated by the fact that reforms began prior to accession and therefore are likely to have had an effect on the macroeconomy prior to accession; (ii) one would expect financial markets to anticipate the accession process prior to its actual conclusion, thereby making the exact date upon which the impact takes place difficult to determine; (iii) exogenous factors, such as higher commodity prices (particularly energy and food products) and financial instability in international markets in 2007, will have impacted on macroeconomic variables in the first year of accession; and (iv) Vietnams drive for regional integration and bilateral agreements will have already induced a certain drive and discipline for adopting international trade rules. Undertaking such an investigation poses a major challenge on deciding whether the policy decisions taken and the subsequent implementation of reforms would have occurred with or without WTO accession. Some subjectivity is required to answer this question, but it seems that had Vietnam not acceded to the WTO, it would still have undertaken most of the reforms which it did, simply 18

because to compete in a global environment, requires institutional changes. This is something that Vietnam has recognized since the start of economic reforms in the mid 1980s. Furthermore, integration in ASEAN and new trade agreements would have induced pressures for Vietnam to improve its policy environment. To corroborate this statement one can witness the ratification made by Vietnam of international treaties well before the accession process to the WTO. For example, Vietnam was a signatory to the Customs Cooperation Council (now World Customs Organisation) in 1993 and signed the Kyoto Convention in 1997. Thus Vietnam was clearly undertaking measures to facilitate transparency and stability in its trading environment prior to its application to become a member of the WTO. Its bilateral agreement with the US led to major commitments from Vietnam and changes to its regulatory environment. The impact of accession is therefore likely to be more subtle than a one-off shock to the economy as often depicted in quantitative models. It is the stability caused by adherence to international trade rules, and the endogenous growth which results from this, which will likely have the largest impact on the macroeconomy. Equally, accession may have done little to improve Vietnams market access to other WTO members, since it already benefited from preferential access to its main markets under bilateral and plurilateral agreements with ASEAN, US, China. The benefits of WTO accession are therefore likely to be transmitted in the form of a predictable trading environment which may have wider implications for investment decisions. Accession will also provide Vietnam with an opportunity to negotiate greater concessions in its export markets or make use of the dispute settlement system of the WTO to resolve its trade disputes. These can have major outcomes for the macroeconomy in the long term but are unlikely to shift any macroeconomic variables in the short term. Despite the difficulties of achieving this, the present chapter proposes to take a first look at the possible macroeconomic effects of accession. The macroeconomy is very large by definition since it encompasses all aggregated interlinkages of an economy. We narrow this down in this chapter to focus on five major areas, namely (1) economic growth and its underlying structures; (2) the foreign trade account; (3) fiscal account; (4) balance of payments and international capital flows; and (5) monetary aggregates and exchange rate. There is some overlap and linkage between these broad divisions, although these reflect genuine concerns for policy makers. The real economy and its social impacts, such as employment, poverty and labour markets are left to another chapter, as is foreign direct investment, each of which deserves more scrutiny owing to their major significance for Vietnam. 2. Theoretical perspectives on macroeconomic effects of trade liberalisation A large volume of literature exists on the expected impact of trade liberalization on economic growth2. In general, there is consensus on the fact that trade openness leads to economic growth beyond that expected under no policy change3. The reasons behind this include greater consumer welfare despite any loss in fiscal revenue, greater access to technology, dynamic effects of competitiveness, and inflows of investment. These results refer to the steady state expectations from liberalising trade. However, as mentioned in the introduction, the adjustments to the macroeconomy which take place subsequent to WTO accession (or trade liberalization more generally) can be decomposed into the short run effects (transitional effects) and the long run effects (or steady state
Trade liberalisation and WTO accession will be used interchangeably since in the case of Vietnam, WTO accession has induced it to undertake trade policy measures which involve liberalising trade in goods, services and investment through mode 3. 3 See for example the seminal papers by Edwards (1998) and Rodrik (1999)
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effects). Sticky wages and prices, and the sluggish response of supply are such that not all macroeconomic variables can adjust at the same speed to find a new equilibrium. These frictions in adjustment can lead to negative effects on production, employment and economic growth in the short term. Sluggish reaction to the policy change from the real economy (i.e. labour and wages) leads to an inefficient allocation of resources and results in a welfare loss. However, in the long run, the undisputed results of accession would be a welfare gain since any gains in consumer welfare always offset any losses brought about by the loss of government revenue. Under all plausible parameterizations (scenarios), modeling work shows that trade liberalization under flexible exchange rates involve a lower loss of welfare than fixed exchange rates4. Since Vietnam maintains a peg to the US dollar, one would expect the economy to require a larger time of transition to a new equilibrium state owing to the inability of policy makers to use the flexibility in the exchange rate to dampen the surge in imports and favour export growth. This is explained by the fact that a reduction in tariffs lowers the price of foreign imports relative to local production and shifts demand from domestic production to imports. Since domestic production faces rigidities, it is unable to adjust prices, which will induce a contraction in output and employment. Since the exchange rate is not allowed to depreciate, the export sector cannot boost its exports (and thereby raise employment and output) which would have compensated for the contraction of import competing industries. Nevertheless, despite these short-term losses, in theory the long-term gains from liberalization far outweigh the losses by a ratio of around 8 to 1, according to simulation models. The effect that targeted trade liberalisation5 can have on macroeconomic volatility is important for a country like Vietnam which is seeking to diversify away from primary and labour intensive sectors to more value added production systems. Modelling work shows that greater agricultural market access leads to greater volatility in macroeconomic variables owing to an increased exposure to primary commodity shocks. In this regard, the recent oil shocks and commodity price hikes will have an impact on macroeconomic volatility. On the other hand, increasing non-agricultural market access leads to the opposite effect, namely a stability in macroeconomic variables6. It should be noted that the greatest decline in tariffs for Vietnam will be in non-agricultural products, where tariffs are to fall from 16.3 percent pre-accession to 12.2 percent in 2019 (drop of 25 percent), compared to agricultural products which will fall from 25.7 percent to 21.7 percent in 2012 (drop of 16 percent). Thus, we would expect greater stability in macroeconomic variables in Vietnam following accession to the WTO. The impact of opening up services is expected to be particularly significant for sectors such as insurance and banking. Vietnam undertook a series of commitments for liberalising this sector in the WTO. A number of theoretical models in the literature find that trade liberalisation increases investment and the demand for labour. Since labour is relatively limited, productivity gains are made to satisfy the increase in demand which is achieved through higher investment levels7. A major conclusion is also found to be that liberalising the financial sector will facilitate greater investment, which in turn will enhance the marginal effects of trade liberalisation in increasing average productivity and the scale of production (firm size)8. Both these factors will play a crucial role in the competitiveness of Vietnamese firms across a broad range of sectors in its economy. On a more aggregated level, the increase in efficiency of financial intermediaries in tandem with the
Choudri et al (2006) Targeted liberalisation refers to policies aimed at favouring diversification by biasing against one or another sector (i.e. non-agricultural versus agricultural market access). 6 See Srour (2006), Tille (1999) 7 Baldwin and Forslid (2006) 8 Taylor (2008)
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increase in market openness is expected to lead to economic growth9. The findings of these studies are based on the long run effects as opposed to the transitional effects, which of course can move in quite opposite directions10. With regard to the fiscal account, wide-ranging measures to reduce tariffs are expected to influence fiscal revenue originating from trade taxes, which in 2007 represented less than 10 percent of total government revenue in Vietnam. For example, in the case of China, during its first year of membership in the WTO, the country witnessed a decline in its state revenues. Nevertheless, the loss in tariff revenue will only occur if the size and composition of imports remains unchanged after accession. This is unlikely to be the case if there are major changes to tariffs. Major changes to tariffs alter import demand, as well as displace domestic production since imported goods are relatively cheaper than domestically produced goods. An increase in imports, even at lower tariff rates could end up generating sufficient government income to compensate for the lower rates. The final outcome will depend on the elasticities of substitution between local and foreign goods and the elasticities of income and demand. Using econometric analysis for 66 developing countries, a paper found that trade openness increases a countrys exposure to external shocks11. A positive shock is met with political pressure to spend the budget surplus, making it difficult for a government to smooth its consumption out in the case of a subsequent slump. This leads to an increasing budget deficit, and boom followed by bust dilemmas12. The overall effect is not only worsening budget deficits but greater volatility in the fiscal accounts which end up being transmitted through the interest rates, exchange rate and monetary policy. On the other hand, when trade liberalization forms part of a broader package of reforms, such as those made in the context of Vietnams accession to the WTO, this can lead to a strengthening of the budget controls and therefore a smoothing out of temporary shocks. In such instances, trade liberalization does not weaken the budget but instead strengthens it. A number of studies document the offsetting of the reduction in collecting trade taxes by an increase in domestic indirect tax revenue or improved enforcement of laws and regulations governing taxation and custom duties13. Accession is expected to affect the composition of the economy, simply because market access changes will affect the relative price of imports in those sectors where tariffs have changed. An example of a sector that will be strongly affected by WTO accession is textiles and clothing, where the pre-WTO accession MFN rate was at 36.4 percent, but the final bound rate for 2007 is set at 13.6 percent. The change in tariffs will have an effect on Vietnams domestic competition and will lead to some form of restructuring of the sector. It is generally believed that in the case of Vietnam, economic integration in general, and WTOs accession in particular, will lead to a substantial expansion of light manufacturing industries, partly because of new market opportunities and partly because of Vietnams comparative advantage in labour-intensive sectors. In addition, possible dynamic benefits of economic integration could stem from three sources: (1) better access to foreign knowledge, which could have positive effects on productivity growth; (2) increase in returns on both physical and human capital, which, in turn, stimulates domestic and foreign investments; and (3) the open door policy that acted as a useful tool in accelerating domestic economic reform14. More generally, the reduction in price distortions caused by tariff barriers will induce changes to the
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Chang et al (2005) Abiad et al (2007) 11 Combes and Saadi-Sedik (2006). The study did not include Vietnam in the sample countries 12 See for example, Collier and Gunning (1999), Collier (2006), Talvi and Vegh (2000), Alesina and Perotti (1994) 13 Suliman (2005), ECLAC (1999), Combes and Saadi-Sedik (2006) 14 Fukase and Winters (1999)
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structure of the economy, resulting in a more efficient allocation of resources. This reallocation will affect various industries in the labour and capital they employ. Tariff reduction is expected to reduce the general price level of the domestic economy. A lower price level will reduce production costs and hence raise competitiveness for domestic production. If firms can take advantage of the new conditions then trade liberalization can lead to higher productivity and competitiveness and faster export growth. Trade liberalization has an ambiguous effect on the trade balance. Studies show a clear positive relationship between trade liberalization and import growth. There is, however, disagreement as to the effect on exports which could benefit from lower prices and easier access to technology and intermediary inputs, but which could also be adversely affected by exchange rate appreciation. The net effect on the trade balance is expected to be negative in the short run15 with possible dynamic effects redressing the trade balance in the long run. Trade liberalization is also expected to increase capital flows. This is due to the inter-temporal nature of trade flows whereby current account deficits need to be financed by capital inflows, and by the fact that an open economy attracts new investment opportunities, particularly with regard to services and export industries. The capital inflows provide a valuable source for supplementing domestic investments and for vitalizing the domestic stock market. On the other hand, capital inflows supplement a countrys international reserves and domestic credit expansion through the banking system. More available credit may stimulate aggregate spending through increased domestic investment and spark off a consumption boom (heavily favoring imports and generating a larger trade deficit) or a speculative asset price bubble. In case a country pursues a (crawling) pegged exchange rate, adaptive monetary policies have to be introduced to prevent exchange rate appreciation as high capital inflows, lead to an increase in the money supply and place pressure on inflation. The central bank may try to reverse these pressures by using its instruments to sterilize the negative impact of capital inflows such as through open market operation or augmenting commercial banks reserve requirement. However, this action can lead to a vicious circle of yet higher interest rates, which then attracts more capital inflows, stimulating yet a high interest rate and stronger exchange rate. In addition, capital flows carry risks and may magnify underlying macroeconomic and structural weaknesses, especially short-term inflows which are driven by speculation and which can easily be reversed if there are changes in fundamentals or investors expectation. 3. Vietnams macroeconomic performance since accession Reforms in Vietnam began prior to accession and will continue until final implementation of the agreement is made in 2019. There are nevertheless some major changes which occurred in the first year of accession. These include tariffs applied to textiles and clothing which fell from 36.4 percent in 2006 to 13.5 percent in 2007. Tariffs for footwear also fell from 43.9 percent in 2006 to 27.3 percent in 2007. Other goods are subject to longer transition periods but shall be gradually reduced prior to 2012 at the latest for agricultural products and most industrial products, and before 2019 for a limited number of industrial products16. Upon accession, Vietnam also allowed foreign financial

See for example Santos-Paulino and Thirlwall (2004) and Wu and Zeng (2008) Exceptionally, as we shall see in section 1.3.5, the government accelerated the reduction in tariffs for a few essential goods in order to curb inflationary pressures (namely new automobiles, animal feed, dairy products, pork, red meats and construction materials)
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intermediaries to establish 100 percent foreign owned banks in Vietnam17. Vietnam also allowed foreign securities firms to establish an office in Vietnam provided that 51 percent of the capital belongs to a Vietnamese counterpart. The distribution sector also witnessed a complete liberalisation by allowing foreign companies to establish retail and wholesale businesses. Upon accession, subsidies on agricultural production could be maintained under the 10 percent de minimis threshold accorded to developing countries. However, trade-distorting subsidies in the manufacturing sector had to be abolished. Furthermore, price controls can no longer contravene the WTO commitments. The latest model in the literature suggests that WTO accession will bring a fall in tariff revenue of between 0.3 and 0.4 percent of GDP in 2007, much in line with other studies18. The overall welfare gain in the first year of accession is however estimated to reach 1.1 percent of GDP owing to a major gain in welfare for consumers who can enjoy lower prices for imports. The net impact would depend on other factors such as the ability of industries to adapt to competition, the sectoral composition of effective rates of protection and of course dynamic effects related to technology transfer, competition, quality and variety effects. This section reviews the observed change to macroeconomic variables and to the extent possible makes a link between WTO accession and the change in macroeconomic variables. 3.1 Economic structure and growth The market-oriented reforms with the open door policy as the focal point have brought about positive impacts on Vietnams economy. In general, during 1996-2007, Vietnam recorded remarkable growth in economic output, maintained low inflation, expanded exports and attracted FDI. The economy of Vietnam has become quite open compared to other countries in the region in terms of the ratio of trade to GDP, which reached 152.7 percent in 2007 (see Figure 1). Figure 1: Total trade as a percentage of GDP of Vietnam and selected countries in 2006 (per cent)

Subject to a minimum capital of US10 billion and US$20 billion to open branches, and subject to some restrictions on Dong deposits from Vietnamese nationals until 2011. 18 IMF (2007) using a static partial equilibrium framework.

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Source: Vietnams data on trade (total export and import of merchandise goods) and GDP are from GSO and MPI and exchange rates from the IMF. Data of other countries from WTO. It is widely asserted that in response to economic reforms, international trade has become the most dynamic component of the Vietnamese economy over the last decade. Except for two years of unusually low growth rates, Vietnam has increased the value of its exports by an average of 20-25 percent a year.19 Along with rapid export growth, Vietnams GDP has risen by around 7 percent a year over the 1990s. Since 2000, GDP grew at annual average rate of 7.8 percent, the equivalent of 6.7 percent in per capita terms20(see Figure 2). Compared with East Asian countries Vietnams growth in this period is second only to China, and somewhat better than other strong performers such as India21. In 2007, GDP is estimated to have grown by 8.5 per cent, the highest rate in the last 10 years, leading to a GDP per capita of US$896. The ratio of exports to GDP has increased steadily, rising from 27 percent in 1995 to 67.6 percent in 2007.

Figure 2: GDP and export growth rate (per cent)

The drop of export growth in 1998 is widely attributed to the Asian financial crisis since Asian countries are important markets for Vietnams exports. Moreover, the contraction of imports, which began in 1997, contributed to the decline in export growth in 1998, since about 40 percent of inputs for manufacturing production are imported. The decline in export growth in 2001 resulted from the slowdown in the world economy and the reduction in prices of Vietnams key primary commodity exportsrice, coffee and petroleum. 20 In U.S. dollar terms, per capita GDP rose from US$415 to US$725 21 World Bank (2007)

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Source: GSO and MPI Vietnam has become a more export-oriented economy. The responsiveness of exporters to the opportunities opened up by AFTA, BTA and WTOs accession underlines this development. It appears that any increase in exports to markets did not divert resources away from existing markets, indicating dynamic supply side adjustments to demand22. One of the remarkable features in Vietnams recent economic development is that growth has also been more stable with a low variation around the trend. Figure 3 highlights this feature, indicating Vietnams ability to adapt to negative shocks from the world economy despite its large exposure to the world market. The reason behind this is that Vietnams growth is still heavily dependent on investment and consumption, with net exports (i.e. the trade balance) contributing negatively to GDP. Figure 3: Growth of Vietnam and the world economy (per cent))

Source: International Monetary Fund, World Economic Outlook Database

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CIEM/STAR (2007)

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Service is an important sector of the economy, accounting for 38.3 per cent growth in GDP between 2000 and 2007. The service sector achieved the highest rate of any sector in the last seven years and is higher than overall GDP growth in 2007. However, trade liberalization has not resulted in a strong impact on the structure of the service sector. Low value added services continued to account for a significant part of service activities (see Figure 4). These services mainly serve final consumption and have barely improved the competitiveness of the private sector. The contribution of high-added value services, such as banking and finance, R&D, information and logistics to the economy is modest, representing around 7 per cent of GDP and has not shown much change. More importantly, the share of banking and finance and R&D services remains at only 1.8 and 0.6 per cent of GDP respectively for over ten years. The relatively high levels of protection and the demand for (but lack of supply of) highly skilled employment in these sectors are main reasons explaining the low contribution and development of these sectors. Figure 4: Contribution of high-added value service sectors (per cent)

Source: GSO and our calculation Although becoming a WTO member has not resulted in a large increase in exports, the sustainable growth of manufacturing such as footwear and garment in total exports continues to support an acceleration of production in these sectors. Moreover, the implementation of multilateral agreements and the opening of the U.S. market under the bilateral agreement and other markets after WTO accession, manufactured exports are expected to become relatively more important. The surge in imports appears as a clear indication of this, however one cannot make such a statement with WTO accession in this first year where exports have grown close to their trend. Within manufactured exports, the dominance of clothing and footwear confirms Vietnams strong comparative advantage in these traditional labor-intensive products. Access to new international markets is the main source of apparel and leather expansion while expanding the domestic market plays a key role in the growth of other manufacturing sectors. Institutional changes, investment and domestic reform have resulted in improved capacity and enhanced productivity of the other manufacturing sectors23. The positive effects of WTO accession would therefore be slower to be felt than the one year review produced here.

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Abbott et al (2007)

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The increasingly export-oriented economy and the rise in exports of labour-intensive manufactures since 2001 have had impacts on the structure of industrial production. Figure 5 indicates that the growth rate of output of labour intensive products has increased significantly since 2001. Its annual growth rate increases from 17.6 percent in the period 1997-2000 to 25.6 percent from 2001-05. In addition, the growth rate of output of labour intensive products exceeds that of non-labour intensive products in the later period. One would expect that trend to continue under WTO accession, although increased competition in some sectors could displace local production altogether24. Figure 5: Growth of manufacturing output by structure (per cent)

Source: GSO and authors calculations 3.2 Trade accounts The trend in export growth in Vietnam is clearly affected by the world trend. Figure 6 indicates that the growth of exports has followed closely fluctuations in the world economy. This suggests that the more open Vietnams economy becomes, the more the world economic cycle will affect its economic performance. Figure 6: The relationship between export and world economic growth (per cent)

In the textile and clothing sector alone, member countries of the WTO such as Bangladesh, Madagascar and China could become serious threats to Vietnam, even in its domestic market

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Source: GSO and IMF, World Economic Outlook Database Vietnam, has pursued a policy of diversifying its export markets (see Figure 7). As Vietnam signs new trade agreements, the potential for diversification increases. WTO accession will provide yet more opportunities, not only through new market access conditions to emerging markets25, but also makes for a more stable trading environment and therefore more interesting to invest to supply new markets. This possibility to further diversify will assist Vietnam to mitigate its dependence on the economic fluctuation of its main export markets. This may therefore help stabilise its export earnings. The composition of exports has also changed rather significantly from raw materials to processed commodities, reflecting positive changes in economic structure and a higher development level. While the shares of agricultural and minerals components in total export value are still important, their significance has been declining. The share of manufactured products in total exports increased from about 37.3 percent in 1996 to about 50.4 percent in 2005. It is expected that the share in total exports of manufactured products will reach 52.4 percent in 2007. Access to new markets in the WTO may help sustain this trend, although it is unlikely to be a decisive factor in the medium term. Figure 7: Main export markets (percentage of total)

As mentioned before, market access in the EU and other OECD markets was generally already preferential, whereas developing countries have been more restrictive

25

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Source: GSO Note: China (including Chinese Taipei and Hongkong); East Asia (Japan and Korea) On the other hand, figure 8 shows that the increasing export orientation of Vietnams economy resulted from the expansion of labour-intensive light industrial and handicraft exports, especially with the opening up of the US market under the BTA. Figure 8: Average shares of exported products

Source: GSO and authors calculation The growth rate of imports reached 35.5 percent in 2007 compared with 15.7 percent in 2005 and 21.4 percent in 2006. This growth is led by a strong investment demand, high foreign capital flows and by the input needs associated with industrial expansion. Since tariffs in the first year have only declined significantly for textiles and clothing and footwear, it is not likely to have been a direct effect of WTO accession.

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The high proportion of commodities in the composition of imports reflects Vietnams low level of industrial development (Figure 9). At its current level of development, Vietnam is not internationally competitive in most capital goods and industrial raw materials, hence the heavy reliance on imports of these categories of goods. The low share of consumer goods in total imports is also the outcome of Vietnams policy of import-substitution in sectors producing consumer goods26. Figure 9: Share of import commodities (per cent of total import)
100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Materials and equipment Consumer goods Average 1996-2000 Average 2001-05 2007

Source: GSO and authors calculation However, there is a significant increase in the share of consumption goods imported with the ratio of consumption goods to total imports increasing from around 7.5 per cent in 1996 2006 to about 11.4 per cent in 2007. The consumption boom originated partly from higher population income, but also resulted from huge capital inflows and rapid credit growth. The lower tariffs applied to such goods as a result of WTO accession is likely to exacerbate this problem, though this should be a gradual deterioration in line with rising incomes and decreasing tariffs. ASEAN and China have become the most important suppliers to Vietnam. Their share in total imports has risen from around 30 per cent in 2005 to nearly 48 per cent in 2007 (Figure 10). More particularly, the share of imports from China increased tremendously from about 5.2 per cent on average in 1996 2000 to 13.4 per cent in 2001 2005 and continued to climb to 20.2 per cent in 2007. China currently does not benefit to the full extent of lower tariffs from Vietnam under the ASEAN-China FTA but would do so in 2020. ASEAN countries do benefit from lower tariffs but the use of preferences is relatively minor and therefore ASEAN countries will rely primarily on MFN rates. Thus, any changes in post-WTO accession tariffs are expected to affect Vietnams import significantly and be the major source of any changes induced by tariffs. It is nevertheless difficult, only one year after accession, to make a qualified guess as to the impact of accession on imports.

In addition, the low figure of imported consumer goods may be due to the overlapping classification between imported commodities for consumption and production.

26

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Figure 10: Source of imports

Source: GSO and our calculation The trade deficit had narrowed from 6.4 percent of GDP in 2003 to 2 percent in 2005. However, in 2006 and especially 2007 it widened again due to the rapid growth of import values, and is estimated to reach 13.2 percent of GDP by the end of the year 2007. As mentioned above, one expects to witness further worsening of the trade deficit in the medium term, some of it caused by accession to the WTO. 3.3. Impacts on budget revenue The importance of trade in the national budget revenue has changed significantly. Before the reforms in 1989, the import and export taxes played a negligible role in tax collection. Together with the rising importance of trade, the import and export taxes (mostly import taxes) have increased significantly, from about 10 percent of total revenue during 1991-92 to nearly 25 percent of total revenue in 1995. Along with the implementation of commitments as part of AFTA and the Vietnam-US Bilateral Trade Agreement, the number of tariff lines subject to taxes has declined27. Numerous studies28 forecasted that implementing WTO and other bilateral trade commitments would affect directly downwards the budget revenue. In addition, it may have indirect impacts because it was thought that cheaper imports will make it more difficult for domestic producers to compete, thereby affecting domestic revenue (for example on income or corporation tax). However, the import and export taxes have remained over 10 percent since 2004 (see figure 11).

27 The former Trade Minister Truong Dinh Tuyen (2006) pointed out that tariff cuts committed to WTO are not as deep and wide as those Vietnam has committed to the Association of Southeast Asian Nations (under CEPT/AFTA), and revenues of imports which are listed in WTO commitments will make up only 20% of the annual gross import revenues. Import tariffs collection contributes only nine percent to the State budget and the roadmap will take from five to seven years, thus leading to an estimated one percent reduction only in the State budget. The WTO membership meanwhile will enable Vietnam to expand production and boost imports-exports, opening up a prospect to scale up the State budget. 28 MOF (2007); Pham (2003); Fukase and Martin (1999a) and Bhide (1997)

31

Figure 11: Tariff revenue and its share to total budget revenue

Source: MOF (2008) Note: Tariff revenue to be read on the right scale (trillion VND) and its share to total budget revenue on the left scale (percentage terms) The reason why the forecasts that the budget deficit would increase with accession to the WTO include the fact that (i) it assumes that the share of tariff revenue in government revenue is disproportionately high, which it has not been for Vietnam; (ii) Vietnam has already reduced tariffs unilaterally and with its ASEAN partners, so that the reduction in the multilateral arena has been less of a shock; (iii) accession to the WTO induced other wider reforms, such as the adoption of the WTO Agreement on Customs Valuation, which would have widened the tax base29. Moreover, the institutional and legal reforms would have improved collection rates. However, the cost of implementation has often been overlooked in studies and these would weight negatively on the budget deficit. On top of the aforementioned reasons, the state budget in the first year of WTO membership took place under favourable conditions such as high economic growth30, strong commodity prices and further budgetary reforms. However, there were still negative factors such as natural disaster (draught, flood, storm, particularly...); epidemic diseases such as bird flu and livestock diseases; unpredictable fluctuation of the price of petroleum and other important imported material, major increases in the price of domestic consuming goods compared to the previous year, all of which affected negatively domestic production. In 2007, the budget mobilization policy underwent important changes due to the reforms and commitments made under the aegis of the ASEAN regional economic integration agenda, such as: Removing tax preference to support exports (WTO induced reform) Removing tax preferences for SOEs that conduct equitization (WTO induced reform) Intensifying decentralization for local authorities in deciding fee and charge levels (internal reform) Modifying the collection mechanism and levels of several kinds of fees and charges to help decrease costs for enterprises and burden for people. (internal reform); and
29 30

Bacchetta and Drabek (2004) GDP grew by an estimated 8.5% in 2007 (8.2% in 2006).

32

 Enforcing the Tax Management Law from July 1st 2007 etc. (internal reform and WTO induced) With stronger tax collection systems in place, a rise in imports and higher prices, led to an increase in the overall government budget in 2007, which is estimated to have increased by 16 percent compared to the 2006 budget. More interestingly still, the revenue accruing from trade taxes has increased in importance, from 10 percent of total revenue in 2006 to 12 percent of total revenue in 2007 (see Figure 12). Figure 12: Composition of budget revenue in 2006 and 2007 2006
Excise T rade 6% 10% CIT 15% PIT 2% Property 9% Other 7%
Value Added 25% T rade 12%

2007 Estimate
Excise 6% CIT 16% PIT 3% Property 10% Other 6% Oil revenues 22%

Value Added 21%

Oil revenues 30%

Source: Adapted from Taking Stock: An Update on Vietnams Recent Economic Developments, World Bank, Hanoi, December 6-7, 2007 In implementing the commitments made in the WTO, Vietnam has bound its tariff rates, meaning that it can only under difficult circumstances negotiate for an increase in the applied rates above the bound rate. This makes policy reversal difficult and provides the government with less autonomy to use trade taxes to supplement any unforeseen losses in the case of an external shock. Such a shock has not occurred in 2007 and therefore the effect could not be observed at this stage. However, in some instances, the new bound rates have declined to levels lower than those currently in force which requires the government to reduce applied tariff rates. The Government adjusted import tariff rates for 26 commodity groups, including 1,812 commodity lines (mostly related to textiles and clothing and fruit and vegetable), accounting for 17% of the committed tariff list in 2007. Overall, average tariff rates will fall from 17.3% in 2006 to 13.4% in 2019. In fact, besides complying with the bound commitment, the Government cut and reduced tax on some commodities by more than the committed levels to assure harmony among tax lines in a commodity group, reasonable correlation of tax rates among whole products and spare parts/accessories and to simplify the levels of tax rates (see box 1 for overall changes).

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Box 1: Vietnam's WTO accession commitments on import tax reduction Average tariff rate for all tariff lines to incur a reduction from 17.3% at present to 13.4% within 12 years. Average reduction of agricultural products from 25.7% presently to 21.7% within 5 years. Average reduction of industrial products is from 16.3% to 12.2% within 12 years. Joining some trade liberalization agreements in other fields such as: information, technology agreement (ITA), garment and textile, health equipments with in 3-5 years. Source: IMF (2007) and Ministry of Industry and Trade

Simultaneously, to curb a dramatic inflation pressure witnessed in 2007, the Government reduced import tariff rates for some commodities and commodity groups, such as gas, steel, meat, milk, and food for livestock31. It also reduced temporarily tariffs on some products to relieve inflationary pressures.

Box 2: Vietnam's fiscal reforms in the advent of WTO accession The achievements made in fiscal revenue reflects new measures adopted to compensate for losses due to the liberalization in general and WTO accession in particular. The intensification of administration procedures and tax collection procedures is believed to have created more favourable conditions for enterprises to operate the business and production, helping to increase the revenue resources. Through the media, tax agencies assisted enterprises by instructing them to make tax reports, setting up telephone lines to answer their questions, simplifying and explaining process, procedures on registering, enumerating, paying tax. Custom agencies have initially performed pilot electronic custom procedures. Tax and custom agencies coordinated with other authorities to implement measures to prevent smuggling, trade fraud, tax fraud and evasion; to intensify tax monitoring, examination and inspection. Custom agencies have improved the process of testing, consulting and determining the value of imported goods, as well as developed a price data list and provided standardized price levels to manage sensitive goods that are subject to trade fraud so as to prevent the price conversion and tax avoidance via wrong valuations. Tax debts have also been better managed and tackled. The enforcement of the Tax Management Law from July 1st 2007 brought about a direct positive outcome, contributing to the increase of the state budget revenue in the year. The reduction of number, rate and levels of some kinds of tax, fees and charges together with a widening tax base have not only helped decrease tax burden for enterprises, encouraging them to develop their business and production, but also helped to increase domestic revenue and offset the loss due to the import tax rate reduction.

The dramatic increase in prices was exacerbated by an overheating of the economy, large capital inflows (see section 1.3.4) and a rise in the international price of commodities and foodstuff.

31

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Through the vigorous increase of exports and imports together with more efficient and effective operation of custom and tax management agencies (see box 2), the impact of tariff changes was minimized. The net revenue from export-import activities was even estimated to increase by over 39% compared to that of 2006, a little higher than the increase of 35.5% in imports. This infers that high increases in imports contribute considerably to the increase of net revenues from export-import activities. An indirect effect of WTO accession has been to increase foreign direct investment. The substantial increases in FDI activity attracted a large volume of new licenses and fees related to this sector. The budget revenues from this sector increased by about 25% in 2007 compared to those of the year 2006. 3.4 Balance of payments and capital flows Vietnams current account has undergone a dramatic change since 1996, when it was in deficit by 9 percent of GDP. The current account deficit narrowed in 1997-1998, and reached a surplus in 1999. One of the measures that was used to curb the deficit was to control imports. Moreover, the Asian crisis hit the economy and FDI inflows, which reduced the demand for imports. The recovery of Vietnams main export markets, primarily ASEAN member countries, from 1999 resulted in an increase in demand for Vietnams exports. The trade and current account balance showed the first significant surplus in 2000 and 2001 before going back into deficit in 2002. The current account deficit can be expected to reach around 9.2 percent of GDP in 2007, compared to 0.3 percent of GDP in 2006. Despite the high current account deficit, the balance of payments situation of Vietnam remains sound, with the current account deficit largely financed by FDI inflows, official development assistance (ODA) and portfolio investment. ODA commitment reached a record of US$5.4 billion and disbursement amounted to US$2.4 billion in 2007. Portfolio inflows also witnessed a sharp increase in 2006 and 2007 with a boom in the stock market. The high levels of commitments of both FDI and ODA means that actual inflows could be greatly accelerated if there were intensive efforts to ease implementation constraints. WTO accession is likely to be one of the determinants for these surges in portfolio and direct investment flows. However, other factors also play a key role, such as the equitisation programme of state owned enterprises, greater transparency in investment procedures, the continuing result of the US BTA, capital flight from mature markets and favourable fundamentals in Vietnam. As a result of large capital inflows, foreign exchange reserves have built up quite rapidly. From 1996 to 2002, the foreign reserves annually accumulated by the State Bank of Vietnam have been limited. However, reserves have been accelerating from 2003 and especially in recent years. The foreign reserves increased from US$11.5 billion at the end of 2006 to an estimated record of around US$23 billion by the end of 2007, equivalent to nearly 32 percent of GDP in 2007 (see Figure 13). At the same time, the import coverage of reserves has increased significantly, from about 2 months of imports in 2000 to nearly 4 months of imports in 2007.

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Figure 13: Improvement in the foreign reserves

Source: GSO, IMF and SBV and authors calculation Note: Reserve values to be read on the right scale and ratio of current account and trade account balance on the left scale

This reserve accumulation may be regarded as an appropriate position in the context of quite an open capital account. This is because with greater exposure to unpredictable and reversible portfolio inflows, there is an understandable need to hold a larger amount of reserves than Vietnam held in the past. At the same time, this increase is also matching closely the trend witnessed by other Asian countries, even though the amount is much lower than all other countries in the region. Greater exports and FDI will generate yet further reserves. Since WTO accession is one of the determinants behind this trend, one can assume that reserve surpluses will continue to be significant owing in part to WTO accession. At present, Vietnam has sufficient sources of foreign currency inflows to offset the trade deficits. Nonetheless, persistently high deficits could hamper economic growth over the long term. Although WTOs accession will support export growth, falling tariff barriers will also make imports increasingly competitive compared to domestic products, so that net exports will have a negative contribution to growth in the medium term. This leaves some concerns over the sustainability of the current account deficit. Nevertheless, the fact that the largest component of capital inflows is FDI and the largest component of imports is intermediary and capital goods, it is expected that long-term competitiveness will be achieved with the current imbalances (Figure 14).

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Figure 14: Current account deficit and compensation

10,000 8,000 6,000 4,000

mil USD

2,000 0 -2,000 -4,000 -6,000 -8,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Current Acco unt Balance

FDI and lo ng term bo rro wing

Source: SBV

However, the composition has changed rapidly with a higher proportion of short-term capital inflows emerging32. This therefore poses the problem of higher risks of capital reversals and then stability of the balance of payments.

3.5 Monetary aggregates Inflation in Vietnam increased quite rapidly in recent years after a period of deflation at the start of 2000. With transition and developing countries, such as Vietnam, inflation can stem from many sources such as commodity price increases in the world market, expanded monetary policies to finance budget expenditure, overheating of the economy and capital inflows. At the same time, inflation may be due to bottlenecks in infrastructure and the process of liberalization of input prices. One of the salient macroeconomic phenomena one year after accession has been the acceleration of inflation, which has generated substantial debates among policy makers on the most appropriate response strategy. The State Bank of Vietnam has gone as far as rationing credit and forcing commercial banks to purchase under performing government bonds. The Consumer Price Index (CPI) in 2007 achieved the highest increase in over ten years, at 12.6 percent in December 2007. The annual figure for 2007 will be far above the governments target which tries to keep the CPI below the growth rate of real GDP. It also shows that consumers will not benefit from lower overall prices after tariff reductions, despite the expectation for the opposite. There are many explanations for this increase in the consumer price index from both supply and demand sides. The process of input price liberalization continued. Electricity prices were raised by an average of 7.6 percent in January 2007. For gasoline, removal of price controls was effected in
ANZ estimates that portfolio investment in 2007 is about US$5.7 billion and will increase to US$7.3 million in 2008. However, Vietnamese authorities have not identified exactly the circulation of portfolio investment in Vietnam because the statistics are overlapped between the SBV and SSC not having such crucial statistics is a fact which remains worrisome in itself.
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May 2007, a move which is in line with international commitments and is designed to end subsidization through the budget. In the past, the government had adjusted its tariff on gasoline in an ad-hoc way to mitigate the impact of international price movements on consumers and distributors. After the removal of controls, the price of gasoline increased by 7.3 percent and fed into other prices over the year33. At the end of November, the price of petroleum continued to increase by 15 per cent due to higher oil prices in the world market, exacerbating inflation. Figure 15 highlights the significant increases in the prices of energy in the world market from 2002 to 2007, rising on average by more than three times. Though Vietnam exports oil, it imports all refined fuel products and consequently is only marginally a net exporter of energy products. Moreover, the high trade openness to the international market, makes domestic prices follow closely international ones, especially in agricultural products and other materials such as steel, fertilizer and chemicals. Along with the increase in prices witnessed in the world commodity market, the rigid peg of VND to US$ also made international inflation pass through domestic consumer prices. With inflation, it would be expected that these price increases may negatively impact more on the manufacturing sector than consumers and subsequently may have a negative impact on export competitiveness34. In addition, the international prices of agricultural products have increased steadily in recent years. This in turn affects the prices of domestic food and foodstuff and has an impact on the livelihoods of the poorest members of society.

Figure 15: Commodity price index in international markets

Source: IMF, International Financial Statistics, January 2008 The increase in input prices affected directly non-food components and perhaps indirectly food components. For example, in the category of housing and construction materials, upward pressures
33 34

World Bank (2007) ANZ (2007)

38

come especially from the prices of electricity, fuels, cement and steel and the category has recorded large increases with 17.1 per cent, much higher than the average increase of previous years. In the case of food, along with higher prices in international markets, supply shortages have led food prices to increase by 18.9 percent compared to that of December 2006 (Figure 16). Figure 16: Consumer price index

Source: GSO Inflation in Vietnam has been higher than that of other East Asian neighbors since 2004 except for Indonesia. In 2007, Vietnam reached the highest inflation among East Asian high performers (Figure 17). Although high prices of oil and other commodities explained a part of the price increase, inflation differential between Vietnam and other countries seems to arise from other factors besides these common factors. Similarly, typhoons and other epidemics pushed up food prices in Vietnam, but neighbouring countries also experienced these difficulties. Therefore, it is necessary to find additional explanations for Vietnams inflation situation35.

35

Vietnam Development Forum (2007)

39

Figure 17: Consumer price index in Vietnam and other countries in the region (%, year on year)

Source: IMF, International Financial Statistics, March 2008 and GSO In the past, the causal impact of monetary aggregates and credit on inflation was not really significant36. However, since 2004, this relationship has been changing as Vietnams financial system develops and especially with the development of the securities market. The transmission of monetary policy to inflation is not only through traditional credit channels but also wealth effects. This development creates more risks in controlling inflation. The rapid expansion of broad money from 2003 through 2005 was primarily attributable to credit expansion in the economy and a significant increase in net foreign assets held by commercial banks. At the same time, the ability of monetary policy instruments such as interest rates and open market operation to affect credit or prices remains relatively weak. More recently, broad money37 rose sharply in 2006 and 2007 on the back of high capital flows. Therefore, the rapid increase in broad money and credit in 2006 and 2007 played an important role in explaining the high inflation of 2007. Vietnams WTO accession may have both direct and indirect impacts in raising inflation. The direct role would be the reduction in subsidies to the manufacturing sector, though these appear to account for a far smaller share of the rise in prices than the food sector. An indirect effect would be to induce further investment through the liberalisation of mode 3 access (the establishment of foreign enterprises in Vietnam) in services such as financial, travel and retail services. It is difficult to extrapolate the exact contribution of the WTO to inflation, though it appears likely to have been one important determinant.

IMF (2006); Le (2007) Internationally referred to as M2 which denotes money in circulation (coins and notes), deposit balances with no withdrawal restrictions (such as checking and current accounts), and deposit balances with withdrawal restrictions (such as savings accounts, money market accounts, certificates of deposits under a certain threshold)
37

36

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Vietnams objectives for its exchange rate regime are to provide short-term exchange rate stability while allowing for longer-term depreciation in line with market forces, promote exports and foreign direct investment, control inflation, and encourage the use of VND in domestic transactions. However, the persistent depreciation and peg of the VND to the dollar may also serve to exacerbate imported inflation because the exchange rate cannot adjust to external shocks. The rising of capital inflows is puzzling to Vietnamese authorities38. In the past, Vietnam often faced the shortage of foreign exchange for imports. The central bank required commercial banks to surrender foreign exchange revenue and they were only allowed to buy back foreign exchange to satisfy import demand. The required ratio of foreign currency to be surrendered has been relaxed gradually and abolished in 2003 following commitments made to the IMF. The above situation has been reversed recently, especially in 2006 and 2007. Increasing capital inflows has put lots of pressures on the exchange rate to appreciate. In January 2007, the SBV widened the trading band for the VND/USD rate from 0.25 percent to 0.5 percent. In the first two months of 2007, the VND appreciated around 0.3 percent against USD after depreciating around 0.9 percent in 2006. Fearing that greater appreciation of VND to USD may affect negatively the competitiveness of exports, and hence slow down growth, the SBV then intervened in the market by purchasing foreign exchange. VND has as a result returned to a slow depreciation. However, under pressure of higher capital inflows and inflation, in the late 2007, the State Bank of Vietnam was forced to widen the trading band from 0.5 percent to 0.75 percent. Vietnam now is confronted with what is often called the impossible trinity, a situation when central banks cannot simultaneously maintain three objectives which are a pegged exchange rate, independent monetary policy and an open capital account. The WTO further renders the central banks operations more difficult by insisting that foreign exchange controls are not contravening the free flow of trade. However, commitment to the IMF is equally strong and enforceable by the IMF (through its article IV consultations), making the WTO just add another layer of restraint on the government. To measure the price competitiveness of goods, the real effective exchange rate (REER) is usually used. In simple terms, the REER is an overall index of international price competitiveness with weights reflecting the importance of each trading partner39. Despite a high inflation rate, the price competitiveness of Vietnamese exports seems to be maintained as the REER has depreciated compared to the equilibrium level as shown by Figure 18. The reason is due to the depreciation of US$ compared to currencies of other main trading partners of Vietnam and the peg of the VND to dollar. From 2002 to 2007, the US dollar lost 23 per cent of its value compared to the euro, about 32 per cent to the Australian dollar, 14 per cent to the Swiss franc and about 15 per cent to the British pound. Figure 18: Evolution of real and nominal effective exchange rate

In February 2008, the authorities even asked Euromoney to postpone an investors conference on the fear of more capital inflows. 39 REER is not really a good indicator of price competitiveness for Vietnamese commodities due to the vertical structure of exports. Vietnam has to import a significant amount of materials and inputs from overseas to produce exports such as garment and footwear. In addition, the main competitors of Vietnam are not the US, Japan and the EU but other Asian countries such as China, Thailand, Malaysia and Indonesia. Therefore, it is also necessary to be concerned with the bilateral REER between Vietnam and ASEAN countries and China.

38

41

160

140 120

100 80

NEER
60 40

REER

20 0

Sources: Authors calculations using IMF International Financial Statistics (exchange rates and CPI), GSO trade statistics (trade weights). Base year is 2000. Note: Average annual exchange rate and CPI data are used to compute Vietnams trade-weighted, inflation-adjusted index of international price competitiveness. Nineteen largest trading partners, on average, accounting for 85 percent of Vietnams total trade in 2000-2007, were included in partner weights. An upward trend means a depreciation However, price competitiveness against regional counterparts may be lost in the medium term, especially if the US dollar gains its value compared to other hard currency. The Vietnamese governments strategy to jointly pursue strong economic growth and VND depreciation to promote export growth has become increasingly difficult to sustain. The exchange rate policy is more complicated in the context of strong remittance flows, and foreign direct and portfolio investment. The stabilization of the exchange rate between local currency and the dollar has not proved successful as a large amount of domestic currency could not be sterilized effectively. Sustained capital inflows, especially short-term capital inflows, will make the macroeconomic situation yet more difficult to control in 2008. 4. Conclusion and lessons learned Vietnams first year of accession witnessed record-breaking levels of economic growth underpinned by buoyant investment, export growth and spending. At the same time, underlying inflation appeared to be spiralling out of control, domestic credit was alarmingly high and the rapid deterioration of the trade balance mitigated some of the positive news on economic growth. This chapter made an attempt to determine the impact caused by accession to the WTO on macroeconomic indicators. As argued throughout, it is difficult to single out specific WTO effects from other broader effects related to the reform agenda of the government, and external factors such as rising commodity and energy prices and a banking crisis in mature markets. Some fine econometric modelling and theoretical papers have been devoted to forecasting the impact that WTO accession would have on Vietnams economy. Even if some of the magnitudes differ, some common and salient features are common to all. These include major welfare gains for Vietnam, increase in imports, negative effect on government revenue, negative impact on the trade balance, capital inflows and dynamic gains in the long run. In many instances it is too early to tell what have been the actual results. Growth did indeed exceed previous levels, imports have increased at a faster pace than previous trends and capital inflows 42

2 20 T08

19 90

19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

19 99

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

exceeded any previous year. Some of these factors can be attributed to WTO accession, although higher world commodity prices and a trend of increasing FDI levels since the US-Vietnam FTA will be determining factors also. However, contrary to expectation, tariff revenue did not display a decline but actually increased, leading a higher contribution of tariff revenue to the general government revenue. This is partly due to the fact that Vietnams tariff reduction under the WTO has been relatively small and gradual, only affecting a few key sectors. More importantly, the large increase in imports resulted in tariffs being applied to larger volumes. The government also instated major reforms in its customs and taxation policies and streamlined procedures. Vietnams already open economy, is poised to be more exposed to global market trends as the WTO both increases its exposure to imports but also magnifies the risks in export markets. Furthermore, portfolio flows appear to be an increasing source of finance for the trade deficit, which can lead to fast capital flight in the event of a change in investor confidence. Capital inflows have also weakened the effectiveness of monetary policy and raise important questions on the new instruments needed to manage inflation. There is overwhelming evidence that in recent years, macroeconomic variables and fiscal reforms have created a new policy environment. The WTO, regional integration initiatives and growing inter-linkages of trade and investment flows will further increase Vietnams exposure to international markets and create the need for new policy instruments to affect economic variables. Some policy lessons can be drawn from the experience of Vietnams first year of accession. The positive bias of tariff dismantling in non-agricultural goods is expected to increase macroeconomic stability. The recent turmoil in agricultural and energy prices underlines the importance of reducing exposures to world commodity and energy prices. A continuing trend in this direction, as well as tackling real rates of protection, will not only be beneficial to the macroeconomic environment but also should lead to stronger and more sustainable economic growth. Subsidies to the agricultural sector should be maintained, both as a pro-poor development strategy but also to curb any inflationary pressures arsing from rising inputs into the agricultural sector, as well as rising international prices of food. The accession to the WTO is also a major opportunity for Vietnam to join in the negotiations to reduce subsidies in developed countries which harm the returns on farming in Vietnam. The balance of payments situation is not yet alarming, with strong inflows of long term investment and aid making up for a large part of the financing of the current account deficit. However recently, short term and speculative capital appears to be channelled into the local stock market with potentially de-stabilising consequences to the macro-economy. The increase in competition of securities trading companies brought about by WTO accession is a welcome addition to the transparency of the local stock market. However, authorities must monitor carefully the risks of mounting exposures to short term capital. In this respect, the authorities also must improve the collection of data on portfolio flows to ensure that such monitoring is possible. Monetary policy has been affected by the large capital inflows and the removal of discretionary capital (and import) controls, which the Vietnamese monetary authority used in the past. The WTO and IMF pressure have without a doubt changed the landscape in which the central bank can intervene in markets to maintain its current policy of pegging the Vietnam dong to the US dollar. The monetary authorities should find alternative measures of inflation targeting and resort to other sterilisation practises from those used in the past. Following on this, the exchange rate policy of Vietnam has undoubtedly managed to favour stability of prices but is now increasingly becoming untenable. The surge in domestic liquidity brought 43

about by capital inflows makes it increasingly unsustainable to maintain a fixed exchange rate, an open monetary policy and an open capital account. Moreover, a rigid exchange rate system such as this one will protract the adjustment of the economy to find a new equilibrium following the implementation of accession commitments. In this light, the current exchange rate policy simply exacerbates the magnitude of the losses which the economy will incur during the transition phase.

44

5. References Abbott, P., Bentzen, J., Thi Lan Huong, P. and Tarp, F. (2006), A Critical Review of Studies on the Social and Economic Impacts of Vietnams International Economic Integration, mimeo Abiad, A., N. Oomes and K. Ueda (2007) The quality effect: does financial liberalization improve the allocation of capital?, mimeo, revised from IMF Working Paper 04/112. Alesina, A. and R. Perotti (1994) The political economy of budget deficits, IMF Working Paper, 94/85 ANZ (2007) Vietnam update: Tacking inflation without monetary policy, Hanoi, August Bacchetta, M. and Z. Drabek (2004) Tracing the Effects of WTO Accession on Policy-making in Sovereign States: Preliminary Lessons from the Recent Experience of Transition Countries in The World Economy, 27(7) Baldwin, R. E. and R. Forslid (2006) Trade liberalization with heterogenous firms, NBER Working Paper, No. 12192 Chang, R., L. Kaltani and N. Loayza (2005) Openness can be good for growth: the role of policy complementarities, NBER Working Paper, No. 11787 Choudri, E., H. Faruqee and S. Tokarick (2006) Trade liberalization, macroeconomic adjustment, and welfare: the unifying trade and macro models, IMF Working Paper, 06/304 Collier, P. (2006) The bottom billion: Why the poorest countries are failing and what can be done about it?, Oxford and New York: Oxford University Press Collier, P. and J. W. Gunning (1999) Trade shocks in developing countries, Oxford and New York: Oxford University Press Combes, J-L. and T. Saadi-Sedik (2006) How does trade openness influence budget deficits in developing countries?, IMF Working Paper, 06/3 ECLAC (1999) The impact of trade liberalisation on government finances in Jamaica, Document No. LC/CAR/G.574, November, ECLAC:Santiago de Chile. Edwards, S. (1998) Openness, Productivity and Growth: What do we really know?, Economic Journal, Vol. 108 Fukase, E. and R. Martin (1999) Evaluating the implication of Vietnams accession to the ASEA Free Trade Area (AFTA): a quantitative evaluation, Development Research Group, World Bank Fukase, E. and L. A. Winters (1999) Possible dynamic benefits of ASEAN FTA accession for the new member countries, Development Research Group, World Bank IMF (2007) Vietnam: Selected Issues, IMF Country Report, 07/385 IMF (2006) Vietnam: Selected Issues, IMF Country Report, 06/423

45

Le, V. H. (2007) A vector autoregressive (VAR) analysis of monetary transmission mechanism in Vietnam, National Graduate Institute for Policy Studies (GRIPS), mimeo MUTRAP (2002) Vietnams Integration into the World Economy, Accession to the World Trade Organization and the Development of Industry, Hanoi. Pham, L. H. (2003) Vietnams access to the WTO and its impact on income distribution, ANU Asia Pacific School of Economics and Government Working Paper Rodrik, D. (1999) The new global economy and developing countries: making openness work, Overseas Development Council Santos-Paulino, A. U. and Thirlwall, A. P. (2004) The impact of trade liberalization on exports, imports, and the balance of payments of developing countries, Economic Journal, 114 Srour, G. (2006) The implications of trade barriers for sectoral diversification and macroeconomic stability in developing countries, IMF Working Paper, 06/50 Suliman, K. M. (2005) The impact of trade liberalization on revenue mobilization and stability in Sudan, Talvi, E. and C. A. Vegh (2000) Tax base variability and procyclical fiscal policy, NBER Working Paper, No. 7499 Taylor, A. (2008) Trade and financial sector reforms: interactions and spillovers, Conference paper for IMF On the causes and consequences of structural reforms, Feburary 28-29 Tille, C. (1999) The role of consumption substitutability in the international transmission of monetary shocks, Journal of International Economics, Vol. 53, No. 2 Truong, D. T. (2006) WTO Commitments and implications on Vietnams investment and business policies, Vietnam News Agency: Hanoi, 6 December Vietnam Development Forum (2007) VDF Report Draft Why inflation is rising?, Hanoi Vo, T. T. (2003) Impacts of WTO accession on the Vietnamese economy: a literature survey, CIEM: Hanoi World Bank (2007) Taking stock: an update on Vietnams recent economic developments, Halong, June Wu, Y. and L. Zeng (2008) The impact of trade liberalization on the trade balance of developing countries, IMF Working Paper, 08/14

46

CHAPTER II: IMPACTS ON TRADE PERFORMANCES Content: 1. Introduction: trade policy reforms, trade performance and growth: a conceptual approach; 2. WTO accession: some highlights of Vietnams commitments; 2.1. Expected benefits and possible threats; 3. WTO impact on Vietnams trade in goods; 3.1. Export and import growth rates and world share; 3.2. Openness indicator for Vietnam; 3.3. Concentration Index; 3.4. Diversification index; 3.5.; Composition of trade; 3.6. Trade balance per product; 3.7. Composition of trade and factor endowment; 3.8. Export and import performance and specialization per product; 3.9. Terms of trade; 3.10. Direction of trade; 4. WTO impact on Vietnams trade in services; 4.1. Export and import growth rates and world share; 5. Conclusions 6 References; 7. Appendix 1: A Typology of MNE Participation in Manufacturing for Newcomer Exporting Countries; 8. Appendix 2: BEC Items Grouped into Five Stages of Production; 9. Appendix 3: Grubel-Lloyd Intra-Industry Trade; 10. Appendix 4: Factor intensity classification; 11. Appendix 5: US and EU imports of clothing after quota removal, by volume and value; 12. Appendix 6: Price of commodities time series

1. Introduction: trade policy reforms, trade performance and growth: a conceptual approach The association between trade liberalisation and growth has been central in recent economic research, especially for developing countries. This debate has put particular emphasis on the export growth/economic growth relationship, since export promotion strategies seem to have constituted a superior development policy for most developing countries40. There are many studies based on the orthodox supply tradition which explain the impact of trade liberalisation on export growth in developing countries. Some such investigations confirm that the countries that embarked on liberalisation programmes have improved their export performance (Thomas et al, 1991; Weiss, 1992; Joshi and Little; 1996; Helleiner, 1994; and Ahmed, 2000). On the other hand, other researchers have found little evidence to uphold the relationship between trade liberalisation and export growth (see UNCTAD, 1989; Agosn, 1991; Clarke and Kirkpatrick, 1992; Greenaway and Sapsford, 1994; Shafaeddin, 1994; and Jenkins, 1996). Crucial factors behind trade policy reforms based on a more outward-oriented economy in developing countries were: the debt crisis in the early 1980s, the failures of protectionist policies in some developing countries (see Krueger, 1998) and the membership to regional trade agreements as well as the accession to the World Trade Organisation (WTO). There are some common elements that characterized developing countries prior to trade liberalisation. As summarized by A. U. Santos-Paulino (2005), they are: 40

Import substitution industrialisation (ISI) strategy, and its intrinsic policies: high tariff barriers, import controls, credit and exchange rate subsidies to ISI industries, protection of specific commodities via complex tariff structures. Tariffs as the main source of fiscal revenues. The use of import tariffs and exchange rate controls.

Rodrik (1992) discusses the limits of trade reforms in developing countries. See also Rodrguez and Rodrik (2000), Harrison and Hanson (1999), and Thirlwall (2000). Various comparative studies analyse the impact of trade liberalisation on economic growth and exports (see Little et al, 1970; Balassa, 1978, 1982, 1985; Bhagwati, 1978; Krueger, 1978; World Bank, 1987; and, Michaely et al, 1991). Edwards (1993) survey presents a detailed account of the studies on export growth and economic growth, as well as the literature on trade liberalisation and growth. Greenaway and Sapsford (1993, 1994) also provide empirical evidence regarding the links between trade liberalisation, exports and economic growth in a growth accounting framework.

47

The coexistence of an anti-export bias and export-promotion, mostly in the form of infant industry protection of the manufacturing sector, overvalued exchange rates, tax and credit concessions, etc.

Most of these elements are also common to the Vietnamese experience: - extensive use of tariff and non-tariff measures to protect selected domestic industrial goods and sectors; - greatest protection to the existing import-substituting (often capital intensive and SOEs dominated) industrial base such as cement, steel, construction glass, all of which might be viewed as sunset industries; - compensating export-promotion measures were introduced side-by-side the stronger and more pervasive system of domestic industrial protection It has been demonstrated that the elimination of trade policy distortions has a positive impact on export growth41: - exports react negatively to an increase in relative prices; - external demand (i.e. world income growth) has a positive effect on export growth; - export duties, as an indicator of trade distortions, appear to negatively affect export growth, although the magnitude of the effect is small; - trade liberalisation processes emerge as a positive and important determinant of export performance. In particular, according to the standard neo-classical model of exogenous growth, trade-policy changes bring about changes in the pattern of product specialization but not in the steady-state rate of growth. According to the principle of comparative advantage, in fact, trade patterns are determined by how relative costs of production within a country differ from those in the rest of the world. These differences are in turn linked to differences in productivity levels across industries (as in the Ricardian model of trade) or to differences in relative factor endowments across countries (as in the Heckscher-Ohlin model). However, more recent endogenous growth theory stresses the impact of dynamic efficiency gains as engines of endogenous growth. WTO accession and trade liberalization, in fact, also generates dynamic effects, which refer to long-term implications for economic development. Some of these dynamic effects can be summarized as follows. First, since the potential market is expanded, the economies of scale in production can be reaped and thus the production of final goods, as well as intermediate goods, will be concentrated in the most efficient site. The international competitiveness of these products will be stronger and exports will be expanded; Second, direct investment flows are expected to expand and to determine productivity gains deriving from knowledge spillovers, as a result of the ability to imitate the products of foreign producers, or, as illustrated by Hale and Long (2006), as a result of informational spillovers which enables local firms to learn more about market opportunities in foreign locations, improving local firms export capabilities and enabling new trading relationships and the expansion of the number of traded products42;

Amelia, Santos Paulino (2005) The Chinese experience suggests that the positive impacts of multinationals in new trading contacts is greater for wholly owned foreign enterprises than joint ventures. Another benefit, the increased multinational activity helps to prod local and central governments into providing infrastructure and improving the regulatory environment for private firms in China. On the other hand, there is evidence of the ability of Chinese private firms to benefit more from FDIs spillover effects by reason of their flexible wages and personnel policies, which make it easier for them to attract talent who can act as the conduit of technology and knowledge transfer from foreign firms. For further details on the Chinese experience with MNCs see Swenson (2007), Wang and Wei (2007), Dean, Fung, Wang (2007), Gaulier, Lemoine, Unal-Kesenci (2005)
42

41

48

Third, the pressure of international competition will be stronger and therefore resources will be re-allocated from less efficient areas to more efficient industries.

2. WTO accession: some highlights of Vietnams commitments The following is a summary of Vietnams commitments for WTO accession:

Source: Vietnam Development Report 2007

49

Expected benefits and possible threats: the paradigm In the following the common agreed expected benefits and threats brought about the accession to WTO is summarized. However, it is important to highlight that WTO is only a legal and institutional framework: as already pointed out in the previous paragraphs, the effects will be positive or negative according to the relative situation of Vietnams economy compared to that of the other countries: -Tariff reductions are to be phased in over 5 to 7 years. The most direct consequence of reduced tariffs will be greater competition of domestic production with imports. In certain cases, the domestic suppliers of both goods and services will have the potential for becoming more competitive. Reducing protection is likely to improve the availability of imported inputs at lower cost, and often better quality. In other cases, the goods or services may not be in line with Vietnams comparative advantage and may be forced to decrease or cease production. The role of government policy in the first case is to ensure that the competitiveness of producers is not hampered by regulatory hurdles or access to key inputs at distorted prices. In the latter case, the role of government is to help mitigate the adverse impacts on those who might stand to lose. - The ability to compete in world markets will be a critical point particularly in terms of product quality. With rising incomes, consumer preferences in both export and domestic markets shift towards higher-value and safer products. The example of agriculture is particularly relevant in this respect. Owing to the strong supply-side response to the policy reforms of the early 1990s, Vietnam quickly became a leading exporter of a number of agricultural commodities, including rice, coffee, rubber, pepper and, more recently, fisheries products. But this agricultural export growth came largely from relatively low-value, low-quality products. Future agricultural growth will be driven more by demand for higher-value, higher-quality goods such as fresh fruits and vegetables and livestock products, in which Vietnam is still at low levels of competitiveness, particularly in terms of quality and delivery, food safety, and agricultural health. - Another crucial point in the increased international competition exposure are the bottlenecks depending on facilitation and logistic services, especially as the volume of trade increases rapidly. Such facilitation services include modernized customs processes that rely on riskassessment rather than physical inspection. They also involve streamlining the documentation required for trade, employing IT to speed-up processing, and ensuring easy access to trading rules and procedures. A related priority is to improve the coordination among border management agencies such as customs, agriculture, health, standards and security, to accelerate the movement of cargo and persons. Addressing bottlenecks and inefficiencies in supply chains will also need massive investments in the physical infrastructure of ports, customs, inland transport, and telecommunications. - In order to develop certain sectors or poorer regions, and encourage exports, Vietnam will have to rely on WTO-consistent instruments. Some traditional forms of industrial policy which were available to other East Asian countries in the early stages of their industrial development are prohibited under WTO rules. Firm-specific subsidies, in particular, cannot be used to increase the domestic value added in exports, or to stimulate inter-industry linkages and value chains. In this respect, global integration is also accelerating the process of phasing out any special treatment for SOEs. - One of the advantages of WTO accession for Vietnam is to gain access to a trade disputes resolution mechanism, making it possible to counter antidumping measures affecting its sales

50

abroad, such as those imposed by the EU on leather shoes or by the US on catfish exported by Vietnam. - However, this potential advantage will be greatly diluted in practice, because Vietnam will still be considered as a non-market economy after accession, possibly until 2018. The non-market economy status makes it less onerous for trading partners to take antidumping actions against Vietnam. In particular, its production costs will be comparable to those of other reference countries which may or may not provide an appropriate benchmark. - Enforcing the TRIPS agreements is one of the most complex requirements associated with WTO accession, and it is one which is given high importance by large trading partners. While Vietnam has passed a WTO-compatible law on intellectual property, focus will now shift to its implementing guidelines. A key requirement for effective enforcement will be coordination among the agencies involved. This is also an area where the capacity of officials and legal personnel needs enhancement; - Vietnam has agreed to comply with the SPS and TBT agreements upon accession. As a result, it has the right to adopt standards that it considers appropriate for food safety, animal or plant health, industrial products, to protect the environment or meet other consumer interests. By complying with the standards of trading partners Vietnam can enhance its export opportunities, as noted for the improvement of quality standards. Producers and exporters need to know what the latest standards are in their prospective markets. In line with WTO requirements, Vietnam has set up enquiry points to make such information easily accessible. The attention now needs to turn to the smooth functioning of these agencies, as well as meeting the transparency requirements of the SPS and TBT agreements and enhancing the capacity of Vietnamese agencies to test the conformity of Vietnamese export products with foreign technical regulations. - As for liberalization of services, entry by foreign banks and opening up the capital of SOCBs are among the most important commitments made in this process by Vietnam. These commitments, in turn, generate strong incentives to accelerate the reform of the banking sector. In fact, though the share of outstanding banking credit going to SOEs has been drastically reduced in the period 20012005 from 42% to 32%, non-performing loans is still one of the policy areas with more limited progress over 2001 -2005. The ratio of non-performing loans in the banking system was estimated at 10% in 2005.

51

Source: Vietnam Development Report 2007 BOX: Vietnams commitments under AFTA, the US-Vietnam Bilateral Trade Agreement and the World Bank-IMF reform programme AFTA Deep tariff reduction for ASEAN imports according to a committed road map. The vast majority of tariff lines will be brought down to 20% by 2003 and 0-5% by 2006. ASEAN Investment Area [AIA] to promote regional investment. ASEAN Industrial Cooperation [AICO] to promote industrial cooperation. Various cooperation programmes (standards, conformance, etc.) US-VIETNAM BILATERAL TRADE AGREEMENT Limited tariff reduction (only more than 140 tariff lines) over 3 years. Removal of NTBs, including QRs. Relaxing trading rights for US firms (up to 7 years, depending on the equity share). Comprehensive opening of services sectors, including important sectors such as banking, telecommunications, insurance and other financial services. Improvement of access for US FDI projects, including the elimination of Vietnams trade-related investment measures (the US is calling for an implementation of TRIMs according to the interpretation of the BTA, which may or may not be equivalent to the 52

WTO TRIMs agreement). Protection of intellectual property rights according to WTO standards. Improvement of transparency of laws and policies. WORLD BANK-IMF REFORM PROGRAMME Removal of QRs on six product groups: cement-clinker, some remaining steel products, paper, construction white glass, vegetable oil, and granite and ceramic tiles by the start of 2003. Source: Mutrap II 3. WTO impact on Vietnams trade in goods 3.1. Export and import growth rates and world share Since 1995, Vietnams exports have grown at the rate of 17,36% a year and its share in world exports rose from less than 0,11% to almost 0,3% in 2006, accounting for about US$ 35.4 billion. The annual growth rate was higher from 1995 to 2000, with an average 19,7% annual increase. By contrast, the annual average growth rate was about 17% from 2000 to 2005. This increase is confirmed by exports data available for the first nine months in 200743. As for imports, they expanded at the rate of 14,8% between 1995 and 2005, reaching in 2006 a value of US$35.36 billion in that year. In the period 1995-2000, imports grew faster, at an average annual rate of more than 20%. In 2007, the growth rate of imports reached 35,5 percent44 on an annual basis. Vietnams share in world imports grew from 0,16% in 1996 to 0,29% in 2006. Figure: Vietnams import and export evolution
Vietnam trade - U$
40000

35000

30000

25000

20000

Exports Imports

15000

10000

5000

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

43 44

Source: IMF DOT Database See Chapter 1 on macroeconomic impacts of WTO accession, in this report.

53

Source: UNCTAD -Handbook of Statistics 2007 and WB, East Asia Update, Nov. 2007. Note: U$ at current prices in millions

Figure: Vietnam share of world trade

Vietnam trade as % of world trade
0,4

0,35

0,3

0,25

0,2

Exports Imports

0,15

0,1

0,05

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: UNCTAD -Handbook of Statistics 2007

Figure: Vietnam trade growth %

Growth rate of Imports and Exports

2000 - 2005

1995 - 2000

Vietnam - Imports World - Imports Vietnam - Exports World -Exports

1995 - 2005

10

15

20

25

Source: UNCTAD -Handbook of Statistics 2007

54

Trade Balance 1000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 -1000 -2000 Trade Balance -3000 -4000 -5000 -6000 2006

Source: UNCTAD -Handbook of Statistics 2007

In conclusion, in the years between 1995 and 2007, imports grew faster than exports showing increasing trade deficits mainly after the year 2000. The trade deficit ratio on GDP had narrowed in the period between 2003 and 2005, widening again and reaching 13,2% in the 2007, due to the rapid growth of import values45. One year after WTO accession, the most evident impact seems to confirm an immediate response in terms of acceleration in import growth, not compensated by exports, and a consequent enlarging trade deficit. 3.2. Openness indicator for Vietnam Since the beginning of Doi Moi and ASEAN accession, when Vietnam undertook foreign trade reform, its economy has been gradually opening. Accordingly, its ratio of trade to GDP has increased from 96 % in 2001 to 152 % in 200746. In particular in the period 1996- 2006, exports of goods and services as a share of GDP grew from 40,9 % to 75,5 %. The increased measured openness of Vietnam economy, therefore, is not a direct effect of WTO accession, since it follows many years of the countrys pursuit of openness in policies, which have radically changed the trade landscape. However, with WTO accession, Vietnam has agreed to strongly adjust its commercial situation toward transparency and liberalization and to link its trade environment with the international trade environment, enjoying the chance to deeper participate into
See Chapter 1 on macroeconomic impacts of WTO accession, in this report. Data from 2001 to 2006 are available from the World Bank Development Indicators. The ratio of 2007 is illustrated in Chapter 1 on macroeconomic impacts of WTO accession, in this report.
46 45

55

the international labour allocation, besides enjoying those rights as non-discrimination by other members and the ability to use the WTO's dispute-settlement procedure. Figure: Evolution of Trade dependency ratio
Merchandise trade (% of GDP) 160 140 120 100 80 60 40 20 0 2001 2002 2003 2004 2005 2006

Source: World Bank - World Development indicators. Note: Merchandise trade is the sum of merchandise exports and imports measured in current U.S. dollars. (World Trade Organization and World Bank)

3.3. Concentration Index The Herfindahl-Hirschmann index is used in trade literature to measure the extent to which exports (or imports) are diversified or specialized. Its values rank from 0 to 1 as the maximum. The following figures show that both exports and imports of Vietnam are specialized. Vsietnams imports are more concentrated than exports. Vietnam trade is more specialized than that of China, Indonesia, Japan and ASEAN countries. Figure: Exports Concentration Index

56

0,5 0,45 0,4 0,35 0,3 0,25 0,2 0,15 0,1 0,05 0 China Bangladesh Cambodia Indonesia Lao People's Democratic Republic Viet Nam United States of America Japan ASEAN 0,144 0,259 0,203 0,075 0,124 0,126 0,143 0,267 0,203 0,078 0,123 0,141 1995 0,07 0,352 1996 0,073 0,379 1997 0,073 0,383 0,299 0,149 0,252 0,203 0,081 0,128 0,15 1998 0,075 0,435 0,376 0,16 0,26 0,21 0,088 0,135 0,16 1999 0,077 0,427 0,376 0,119 0,426 0,221 0,093 0,138 0,177 2000 0,078 0,413 0,377 0,126 0,313 0,251 0,091 0,136 0,184 2001 0,081 0,407 0,41 0,124 0,304 0,225 0,085 0,136 0,163 2002 0,088 0,399 0,398 0,119 0,346 0,219 0,084 0,149 0,169 2003 0,102 0,407 0,416 0,124 0,345 0,211 0,08 0,146 0,169 2004 0,109 0,37 0,416 0,096 0,347 0,22 0,076 0,137 0,164 2005 0,11 0,396 0,345 0,13 0,281 0,227 0,074 0,139 0,155 2006 0,11 0,398 0,364 0,129 0,374 0,224 0,076 0,147 0,157

Source: UNCTAD -Handbook of Statistics 2007 Figure: Imports Concentration Index

0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 China Bangladesh Cambodia Indonesia Lao People's Democratic Republic Viet Nam United States of America Japan ASEAN 0,603 0,745 0,676 0,284 0,381 0,398 0,579 0,754 0,669 0,276 0,378 0,4

1995 0,474 0,667

1996 0,468 0,684

1997 0,464 0,695 0,783 0,59 0,761 0,669 0,266 0,389 0,392

1998 0,464 0,738 0,774 0,586 0,762 0,563 0,254 0,375 0,404

1999 0,461 0,735 0,772 0,535 0,77 0,65 0,256 0,373 0,399

2000 0,452 0,793 0,772 0,484 0,74 0,577 0,266 0,382 0,387

2001 0,451 0,803 0,81 0,508 0,759 0,645 0,261 0,383 0,375

2002 0,457 0,827 0,773 0,508 0,718 0,667 0,262 0,373 0,382

2003 0,465 0,853 0,813 0,503 0,771 0,658 0,263 0,409 0,376

2004 0,455 0,832 0,811 0,481 0,773 0,663 0,259 0,407 0,369

2005 0,446 0,844 0,819 0,505 0,776 0,651 0,265 0,422 0,347

2006 0,446 0,833 0,765 0,497 0,778 0,643 0,275 0,396 0,346

Source: UNCTAD -Handbook of Statistics 2007 3.4. Diversification index 57

The lack of diversification is confirmed by the diversification index, which ranges from 0 to 1 and reveals the deviation of Vietnams trade from world average structure. The index value closer to 1 indicates a large difference from the world average. The lack of exports diversification results in more vulnerable trade performance and fluctuations of export revenues and import values. This vulnerability could be amplified by the countrys exposure to foreign competition and trade liberalization. Figure: Exports Diversification Index
0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 China Bangladesh Cambodia Indonesia Lao People's Democratic Republic Viet Nam United States of America Japan ASEAN 0,603 0,745 0,676 0,284 0,381 0,398 0,579 0,754 0,669 0,276 0,378 0,4

1995 0,474 0,667

1996 0,468 0,684

1997 0,464 0,695 0,783 0,59 0,761 0,669 0,266 0,389 0,392

1998 0,464 0,738 0,774 0,586 0,762 0,563 0,254 0,375 0,404

1999 0,461 0,735 0,772 0,535 0,77 0,65 0,256 0,373 0,399

2000 0,452 0,793 0,772 0,484 0,74 0,577 0,266 0,382 0,387

2001 0,451 0,803 0,81 0,508 0,759 0,645 0,261 0,383 0,375

2002 0,457 0,827 0,773 0,508 0,718 0,667 0,262 0,373 0,382

2003 0,465 0,853 0,813 0,503 0,771 0,658 0,263 0,409 0,376

2004 0,455 0,832 0,811 0,481 0,773 0,663 0,259 0,407 0,369

2005 0,446 0,844 0,819 0,505 0,776 0,651 0,265 0,422 0,347

2006 0,446 0,833 0,765 0,497 0,778 0,643 0,275 0,396 0,346

Source: UNCTAD -Handbook of Statistics 2007

Figure: Imports Diversification Index

58

0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 China Bangladesh Cambodia Indonesia Lao People's Democratic Republic Viet Nam United States of America Japan ASEAN

1995 0,405 0,568 0,584 0,428 0,541 0,474 0,215 0,301 0,267

1996 0,407 0,563 0,564 0,426 0,505 0,468 0,2 0,285 0,267

1997 0,388 0,562 0,542 0,436 0,586 0,467 0,194 0,286 0,278

1998 0,398 0,569 0,657 0,475 0,599 0,458 0,186 0,286 0,322

1999 0,38 0,569 0,663 0,512 0,6 0,46 0,184 0,282 0,307

2000 0,356 0,574 0,677 0,467 0,601 0,469 0,179 0,275 0,296

2001 0,378 0,57 0,663 0,465 0,569 0,454 0,184 0,28 0,292

2002 0,389 0,556 0,647 0,471 0,535 0,463 0,196 0,274 0,305

2003 0,387 0,554 0,64 0,45 0,529 0,45 0,202 0,273 0,304

2004 0,378 0,56 0,65 0,419 0,492 0,451 0,197 0,271 0,298

2005 0,382 0,525 0,541 0,428 0,477 0,452 0,195 0,285 0,288

2006 0,37 0,525 0,541 0,434 0,477 0,445 0,186 0,298 0,29

Source: UNCTAD -Handbook of Statistics 2007

3.5. Composition of trade Manufactures accounted for about 71% of Vietnam's total merchandise imports in 2006, down from 79% in 1995. In 2007, the more dynamic components of imports were iron and steel (+ 66%), ores, metals, fuels (gas and petroleum increased by 25%), machines and devices (+ 56%), electronic and computer spare parts (almost 44% increase over 2006)47. The dependency on imports of industrial raw materials and equipment, whose ratio on imports is about 90%, reflects the low level of Vietnamese industrial development and low international competitiveness in capital goods. In 2007, the share of consumption goods48 on imports increased significantly and reached 11,4%. Imported cars boomed with a 101% increase in 200749, as a result of the progressively reduced protectionism in this sector. As mentioned before in this report, the import growth is associated with a strong investment demand, high foreign capital flows and input needs generated by industrial expansion. Since tariffs in the first year have only declined significantly for textiles and clothing and footwear, it is not likely to have been a direct effect of WTO accession. Moreover, it should be noted that the tariff applied for petroleum, metals, chemicals and transportation devices, are already below the committed rates. As for exports, manufactured goods accounted for 46% in 1995. Their share has increased and is expected to reach 52,4% in 200750, mainly attributable to the expansion of light industrial and

47 48

Authors calculation on data from GSO and MOIT For more details on consumer and capital goods imports see Chapter 1 on macroeconomic impacts. 49 Authors calculation on data from GSO and MOIT 50 See Chapter 1 on macroeconomic impacts of WTO accession, in this report.

59

handicraft exports. In particular, textile and garments (+ 33%), footwear (+ 10%), electronic products (+27,5%)51. As for WTO impacts, tariffs on textiles, whose export value on total exports represented 16,3 percent in August 200752, faced the largest cuts upon accession, from 36.4 percent to 13.5 percent. It should be noted that approximately 80 % of the textile sectors raw materials, such as cotton, are imported and the most evident impact of WTO accession is a significant reduction of import duties on textile raw materials (to 1015 percent from the previously applied MFN rate of 4050 percent). As expected, the liberalization lowered substantially the costs of inputs, sustaining producers competitiveness. Tariffs on footwear were also reduced upon accession and, at the same time, subsidies to these industries were removed. Primary commodities decreased their share in exports from 54% to 41% in the period 1995-2005, primarily owing to the decline of all food items, only partially compensated by the increased exports of fuels. However, in 2006, both food items and fuels increased their export values. In 2007, seafood, coffee, rice and coal were among the most exported products and their exported values increased respectively by 13 %, 52 %, 14 % and 11,4 %. In sum, there is a notable move out of primary commodities exports, showing after 2002 a decisive step toward an economy driven by industrial development and light industrial manufactured goods exports.
Imports
35000000

30000000

25000000

20000000

Primary commodities, including fuels (SITC 0 + 1 + 2 + 3 + 4 + 68) Manufactured goods (SITC 5 to 8 less 68)

15000000

10000000

5000000

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

51

52

Authors calculation on data from GSO and MOIT IMF - Vietnam: Selected Issues December 2007

60

Imports: shares of industries

Primary commodities including fuels (SITC 0 + 1 + 2 + 3 + 4 + 68) All food items (SITC 0 + 1 + 22 + 4) Agricultural raw materials (SITC 2 - 22 - 27 - 28) Ores and metal (SITC 27 + 28 + 68) Fuels (SITC 3) Non-ferrous metals (SITC 68) Manufactured goods (SITC 5 to 8 less 68) Chemical products (SITC 5) Machinery and transport equipment (SITC 7) Other manufactured goods (SITC 6 + 8 less 68) Iron and steel (SITC 67) Textile fibres yarn fabrics and clothing (SITC 26 + 65 + 84)
0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 90,0

1995

2000

2005

2006

Source: UNCTAD -Handbook of Statistics 2007

Exports
25000000

20000000

15000000 Primary commodities, including fuels (SITC 0 + 1 + 2 + 3 + 4 + 68) Manufactured goods (SITC 5 to 8 less 68) 10000000

5000000

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

61

Exports: shares of industries

Primary commodities including fuels (SITC 0 + 1 + 2 + 3 + 4 + 68) All food items (SITC 0 + 1 + 22 + 4) Agricultural raw materials (SITC 2 - 22 - 27 - 28) Ores and metal (SITC 27 + 28 + 68) Fuels (SITC 3) Non-ferrous metals (SITC 68) Manufactured goods (SITC 5 to 8 less 68) Chemical products (SITC 5) Machinery and transport equipment (SITC 7) Other manufactured goods (SITC 6 + 8 less 68) Iron and steel (SITC 67) Textile fibres yarn fabrics and clothing (SITC 26 + 65 + 84)
0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0

1995

2000

2005

2006

Source: UNCTAD -Handbook of Statistics 2007

3.6. Trade balance per product Vietnam showed a widening trade surplus in primary commodities, accounting for 7,6 billions $ in 2006, four times the surplus in 1995, driven by fuels and food items. Fuels trade balance accounted for 3,8 billions in 2006, 27 times its value in 1995 and food items trade surplus increased fourfold in ten years, accounting for 5,4 billions $ in 2006. Trade balance in manufactured goods is negative and slightly increasing, mainly generated by increasing imports of machinery and transport equipment, chemicals and iron and steel. On the other hand, trade deficit is compensated by a shifting sign in the trade balance of textile, clothing and other manufactured goods, such as footwear and furniture. Low Vietnams labour costs (lower than its major competitors), the reduction of import duties on textile raw materials and subsidies removal should help Vietnam in meeting the challenges of increasing global competition. Figure: Trade balance by product

62

10000000

5000000

Primary commodities including fuels (SITC 0 + 1 + 2 + 3 + 4 + 68) All food items (SITC 0 + 1 + 22 + 4) Agricultural raw materials (SITC 2 - 22 - 27 28) Ores and metal (SITC 27 + 28 + 68)

Non-ferrous metals (SITC 68) Fuels (SITC 3) Manufactured goods (SITC 5 to 8 less 68)

-5000000

Chemical products (SITC 5) Machinery and transport equipment (SITC 7) Other manufactured goods (SITC 6 + 8 less 68) Iron and steel (SITC 67)

-10000000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Textile fibres yarn fabrics and clothing (SITC 26 + 65 + 84)

-15000000

8000000

6000000

4000000

2000000

0 All food items (SITC 0 + 1 + 22 + 4) Ores and metal (SITC 27 + 28 + 68) Manufactured goods (SITC 5 to 8 less 68) Textile fibres yarn fabrics and clothing (SITC 26 + 65 + 84) Primary commodities including fuels (SITC 0 + 1 + 2 + 3 + 4 + 68) Fuels (SITC 3) Iron and steel (SITC 67) Agricultural raw materials (SITC 2 - 22 27 - 28) Other manufactured goods (SITC 6 + 8 less 68) Non-ferrous metals (SITC 68) Machinery and transport equipment (SITC 7) Chemical products (SITC 5)

-2000000

1995 2000 2005 2006

-4000000

-6000000

-8000000

-10000000

-12000000

Source: UNCTAD -Handbook of Statistics 2007

BOX: Multinational Presence in Vietnam and trade performance The relationship between activities of foreign-based multinational corporations (MNCs) and economic growth in host economies has come under increased scrutiny in recent years, particularly 63

in consideration of productivity gains determined by knowledge and information spillovers. Large increases in international trade and the activities of foreign-owned multinational corporations (MNCs) in Vietnam are two of the most conspicuous structural changes, according to Phan Minh Ngoc and Eric D. Ramstetter (2006). The interrelated increases of international trade and MNC presence have been pointed to as important causes of Vietnams rapid growth in recent years (Dollar 1996; Dollar and Kraay 2004). On the other hand, MNC presence has been highly concentrated in mining and manufacturing and tend to be concentrated in the major economic centres surrounding Hanoi and Ho Chi Minh City. Thus, it is not clear how widespread the benefits from trade or MNC production have been. According to Prema-chandra Athukorala (2006), whose paper examines the role of MNCs in the expansion of manufacturing exports from newly industrialized countries - South Korea, Taiwan and Hong Kong (NICs) - and latecomer exporting countries in Asia, including Vietnam, there is a close positive relationship suggesting that the entry of MNCs has been export creating53. MNCs have been responsible for a larger share of exports from latecomers to export-led industrialization in Asia compared with the historical experiences of the East Asian NICs. Contrary to the historically specific experience of Korea and Taiwan (and also Japan), for latecomers the entry of MNCs is virtually essential for export success. In the following figure, MNCs involvement in export expansion is measured in terms of the percentage share accounted for by MNCs affiliates in total manufactured exports (column 3). Export performance is measured in terms of three indicators export value (column 4), the share of each country in total world manufactured exports (world market share) (column 5) and annual export growth (column 6). The final column contains summary observations on the nature of the product composition of MNCs-related exports in terms of the typology illustrated in Appendix 1. As for Vietnam, the increased share of MNCs in exports corresponds to larger export value, world market share and export growth, with MNCs particularly active in the following areas: resource-based manufacturing and local processing of primary products, previously exported in raw state; the share of MNC-related exports of these product lines in total manufactured exports seems to have declined over time in favour of rapid expansion of the standard labour intensive products and/or component assembly labour intensive consumer goods, typically clothing and footwear; parts and component assembly. This activity is important since it is initially labour intensive but becomes skills intensive as the country moves up the value chain, and the role of MNCs is relevant in terms of knowledge spillovers.

A key policy inference from this analysis is therefore that, in designing policies of outward-oriented development, investment and trade policies must be considered together as co-determinants of the location of production and patterns of trade. Figure: MNCs (MNE) Share in Total Manufactured Exports and Selected Export Performance Indicators

On average, the 1 per cent increase in the share of foreign firms in total manufacturing exports is associated with a 0.96 per cent increase in the degree of penetration of these countries in world manufacturing markets (Prema-chandra Athukorala, 2006).

53

64

Source: Prema-chandra Athukorala (2006)

Figure: MNCs share in total manufactured exports (MNEXS) and world market share (WMSH) are plotted

Source: Prema-chandra Athukorala (2006)

65

Source: Phan Minh Ngoc and Eric D. Ramstetter (2006)

3.7 Composition of trade and factor endowment Following the principle of comparative advantage, predicting that trade patterns are determined by relative costs of production and differences in relative factor endowments across countries, we analysed the evolution of Vietnamese trade in terms of its factor intensity. Imports and exports have been classified following their factor intensity on the basis of the ITC - UNCTAD/WTO classification (see Appendix 4 for detailed information). In 2001, 52% of Vietnamese exports were composed of primary and natural resource intensive products, followed by unskilled labour intensive goods, accounting for 24% of exports. Four years later, primary and natural resource intensive products have decreased their share to about 47%, unskilled labour intensive goods increased their share to 28% of total exports. Technology intensive goods also slightly increased their share to 10%. Figure: Exports according to their factor intensity (2001)

66

Exports 2001

natural-resource intensive products 2% unskilled-labour intensive products 24% primary products natural-resource intensive products unskilled-labour intensive products technology intensive products human-capital intensive products not classified

primary products 50% technology intensive products 9% human-capital intensive products 5% not classified 10%

Figure: Exports according to their factor intensity (2005)

Exports 2005

natural-resource intensive products 1%

unskilled-labour intensive products 28%

primary products 46%

technology intensive products 10% human-capital intensive products 5% not classified 10%

primary products natural-resource intensive products unskilled-labour intensive products technology intensive products human-capital intensive products not classified

Source: Comtrade SITC3, 3 digit level. Note: Data are aggregated according to the factor intensity classification of the ITC,UNCTAD/WTO54 According to the factor intensity classification of the International Trade Centre (ITC),UNCTAD/WTO, as adopted by Jeroen Hinloopen and Charles van Marrewijk (http://people.few.eur.nl/vanmarrewijk/eta/intensity.htm) products are classified in five broad factor intensity categories at the 3-digit level, namely (within brackets the number of sectors belonging to the particular category): A. Primary products (83); e.g. meat, dairy, cereals, fruit, coffee, minerals, and oil. B. Natural-resource intensive products (21); e.g. leather, wood, pig iron, and copper.
54

67

As for imports, in 2001 human-capital and technology intensive products weighted for 51%, while in 2005 their share decreased to 46%, in favour of natural resources, unskilled labour intensive and primary products. Figure: Imports according to their factor intensity (2001)
Imports 2001

not classified 9%

primary products 22%

human-capital intensive products 21%

natural-resource intensive products 4%

unskilled-labour intensive products 14% technology intensive products 30%

primary products natural-resource intensive products unskilled-labour intensive products technology intensive products human-capital intensive products not classified

Figure: imports according to their factor intensity (2005)

C. Unskilled-labor intensive products (26); e.g. textiles, clothing, ships, and footwear. D. Human-capital intensive products (43); e.g. perfumes, cosmetics, cars, and watches. E. Technology intensive products (62); e.g. chemicals, electronics, tools, and aircraft.

68

Imports 2005

not classified 12%

primary products 24%

human-capital intensive products 19% natural-resource intensive products 6% unskilled-labour intensive products 12% technology intensive products 27%

primary products natural-resource intensive products unskilled-labour intensive products technology intensive products human-capital intensive products not classified

Source: Comtrade SITC3, 3 digit level. Note: Data are aggregated according to the factor intensity classification of the ITC,UNCTAD/WTO55

According to the factor intensity classification of the International Trade Cente (ITC),UNCTAD/WTO, as adopted by Jeroen Hinloopen and Charles van Marrewijk (http://people.few.eur.nl/vanmarrewijk/eta/intensity.htm) products are classified in five broad factor intensity categories at the 3-digit level, namely (within brackets the number of sector belonging to the particular category): A. Primary products (83); e.g. meat, dairy, cereals, fruit, coffee, minerals, and oil. B. Natural-resource intensive products (21); e.g. leather, wood, pig iron, and copper. C. Unskilled-labor intensive products (26); e.g. textiles, clothing, ships, and footwear. D. Human-capital intensive products (43); e.g. perfumes, cosmetics, cars, and watches. E. Technology intensive products (62); e.g. chemicals, electronics, tools, and aircraft.

55

69

Exports
16.000.000.000

14.000.000.000

12.000.000.000

10.000.000.000

8.000.000.000

2001 2005

6.000.000.000

4.000.000.000

2.000.000.000

0 primary products natural-resource intensive products unskilled-labour intensive products technology intensive products human-capital intensive products

Imports
12.000.000.000

10.000.000.000

8.000.000.000

6.000.000.000

2001 2005

4.000.000.000

2.000.000.000

0 primary products natural-resource intensive products unskilled-labour intensive products technology intensive products human-capital intensive products

70

Overall, Vietnam shows a huge and expanding trade deficit in terms of technology and human capital intensive products, a large surplus in primary commodities and an increasing positive trade balance in terms of unskilled-labour intensive products. Figure: Trade Balance
8.000.000.000

6.000.000.000

4.000.000.000

2.000.000.000

0 primary products natural-resource intensive products unskilled-labour intensive products technology intensive products human-capital intensive products

2001 2005

-2.000.000.000

-4.000.000.000

-6.000.000.000

-8.000.000.000

Source: Comtrade SITC3, 3 digit level. Note: Data are aggregated according to the factor intensity classification of the ITC,UNCTAD/WTO

Box: Intra-industry trade in Vietnam The following table depicts the extent of intra-industry trade (IIT) for products aggregated according to its factor intensity (for more details see Appendix 3). Figure: Trade-weighted average Grubel-Lloyd index Trade-weighted average Grubel-Lloyd index 2001 2005 primary products 0,111 0,052 natural-resource intensive products 0,229 0,214 unskilled-labour intensive products 0,249 0,157 technology intensive products 0,290 0,422 human-capital intensive products 0,283 0,315 Source: Comtrade SITC3, 3 digit level. Note: Data are aggregated according to the factor intensity classification of the ITC,UNCTAD/WTO The table shows that the level of intra-industry trade is particularly low and decreasing for primary products and unskilled-labour intensive sectors. High and decreasing value of IIT are shown for

71

natural-resource intensive products. More sophisticated products, characterised by technology and human capital intensity, show a high and rapidly increasing relevance of intra industry trade. This result is consistent with the increasing value of intermediate goods56 on both imports and exports in Vietnam, with a widening trade deficit in these products, as shown in the following figures. Figure: Imports of intermediate goods

Source: Comtrade BEC, Note: Data are aggregated according to Gaulier Guillaume, Lemoine Franoise, nalKesenci Deniz (2005)

Figure: Imports of intermediate goods

For detailed information on the classification used see Appendix 4. The components showing the larger increase are: 42 parts of capital goods, except transport equipment, 53 - Parts and accessories of transport equipment, 22- Industrial supplies, n.e.s., processed

56

72

Figure: Trade deficit in intermediate goods

Trade balance on intermediate goods 1997 53 121 322 22 1998 121 322 22 53 1999 121 22 53 2000 322 22 42 53 121 322 22 2001 121 322 42 53 2002 121 322 22 42 53 2003 53 121 322 22 42 2004 22 42 53 121 2005 322 22 42 53 121 322

-2000000000

-4000000000

-6000000000

-8000000000

-10000000000

-12000000000

-14000000000

-16000000000

As Vietnam, successfully integrates into the world economy and develops, the composition of its trade flows tends to move away from primary products, initially towards unskilled-labour intensive products, and subsequently towards technology and human-capital intensive products. Associated with these changes there is an ultimate increase in the extent of intra-industry trade. IIT is particularly high for sophisticated manufactured products (chemicals, machinery, transport equipment, electrical equipment, and electronics; both based on product differentiation and fragmentation). Component trade of Vietnam is also growing, but it still accounts for only a minor fraction of regional trade. Overall, contrary to other Asian emerging countries, Vietnam is not yet part of the Asian production network (except in clothing) dominated by China, as also noted by ADETEF (2007). Its trade with China corresponds to a South-North trade pattern: it exports raw materials and imports manufactured goods. Reducing the specialization in textile and joining the Asian production network in electronics represents a major challenge. 73

Box: Vietnams comparative advantages and disadvantages As illustrated by Tran Van Tho (2006) and discussed later, the interdependence of the East Asian economies has been strengthened and the intra-industry specialization has been developed among countries in the region. Smaller countries tend to benefit more from free trade since the room for reallocation of resources toward comparative advantage sectors is larger than the big countries. However, such improvement of resource allocation is static since it tends to strengthen the current comparative advantage. According to Truong and Nguyen (2006), who also adopted the CGE model to estimate the effects of trade liberalization on the Vietnamese economy, tariff reduction results in an expansion of output and exports of processed sea foods, textiles, garment, and leather products, which are the countrys current comparative advantage. Tran Van Tho has calculated a simplified competitiveness index57, whose values rank between -1, the minimum, and +1, the maximum, for three products with a large share in intra-regional trade of East Asian countries. The results are shown in the following figures. Clearly, Vietnam enjoys a comparative disadvantage in the goods analysed. However, its competitive position is improving in the production of parts and components.

i = (X-M) / (X+M) This index shows the competitive position of that industry in the world market. When the industry is in an early stage of development, export (X) is almost zero and there is only import (M) so that i = -M/M = -1. Along with the development of the industry, the international competitiveness is strengthened, M declines and X increases to a level of a situation which may show X=M and thus i=0 and if the international competitiveness of the industry becomes very strong, M may be fall to zero so that there is only X and thus i=X/X=1. The typical development process of a new industry in a country usually starts by import (i=-1), then import substitution (i moves toward zero) and if the competitiveness improves over time, i will turn to be positive and moves toward the value of plus one (+1).

57

74

75

Production of machinery involves many parts and other intermediate goods with different factor intensities. Multinational corporations tend to allocate production of these parts and other intermediate goods in various countries in East Asia, taking into account their respective factor endowments. However, the pattern of specialization in this regard varies depending on types of industries. In the case of computer parts, many East Asian countries recorded a large trade surplus. Their international competitiveness is very high, ranging from 0.4 to 0.8. In contrast, the Vietnamese trade deficit in intermediate goods reflects its comparative disadvantage. For long-term development, characterized by dynamic changes in comparative advantage and the upgrading of industrial structure, reforms and transformation strategy are crucial for creating new factor endowments to capture long-term gain and dynamic effects of liberalization. Steady inflows of foreign direct investment (FDI) are crucial in that context. These conditions stimulating the inflows of FDi include the building of legal and physical infrastructures, supply of skilled labor and so on.

76

Box: The impact of China on Vietnam trade performance In order to capture possible disruptive effects of China on Vietnam, we summarize the principle findings of John Weiss58, of the Asian Development Bank Institute. The results focus on the evidence on demand, production specialization and competitive effects. - Demand effects Rising exports to China have provided a major boost to demand in its neighbours. Rising trade surpluses of its neighbours with China will grow significantly in the future as trade is liberalized and rising trade will in turn create rising income, benefiting largely some ASEAN countries, and Vietnam, in particular. - Production Specialization effects These depend on the changing composition of production based on increased intra-regional specialization, where goods with a comparative advantage, that is a lower opportunity cost, are expanded relative to goods with a higher opportunity cost. The potential for future regional specialization will be strongly influenced by the extent of current and potential dissimilarities in trade and production structure between China and its neighbours. Given its current structure the expectation is that China will import high technology goods and equipment and foodstuffs, some natural resource based products, and various parts and components for use in the production of high technology final goods. Substantial gains in exports from Vietnam are envisaged for the primary products rice and sugar. Textiles and chemical and rubber products are other activities that are projected to expand significantly. - Competitive effects It depends on possible overlaps in exports to third country markets and lost of market share. The countries with the technologically most sophisticated export structures, which is not yet the case of Vietnam, are those where proportionately the direct threat category is largest, reflecting in part the very fast growth of Chinas high technology exports. However, textiles and clothing provide the most dramatic example of major shifts in export market share in favour of China as a consequence of the ending of the quota regime at the beginning of 2005. The study predicted that the main regional casualties from the end of the export quota regime of the Agreement on Textiles and Clothing would have been Vietnam and Cambodia. As for terms of trade, the rapid growth in China contributed to pushing up commodity prices, benefiting those, like Vietnam who are net exporters of these products. Foreign Direct Investments (FDI) inflows are linked to the competition effect. Potential benefits are envisaged for Vietnam, since it could take part in the regional process of FDI creation, that is at work. In fact, the production networking by international FDI in China is linked with FDI elsewhere in the region through the transfer of parts and components between different branches of global networks.

58

Weiss, 2006

77

Box: Textile and Clothing The WTO accession agreement of China includes a special textiles safeguard, available for 7 years after accession (until December 2008). This safeguard covers all products subject to the WTO Agreement on Textiles and Clothing. This measure allows restraining imports that determine market disruption and threaten to impede the orderly development of trade in these textile and apparel products for one year (renewable up to 2008). In 2005, shipments from China to the US and the EU surged in volume and value terms and the special safeguards clause was invoked and quantitative limits restored on fast-growing categories of Chinese shipments. A paper, written by James (2008) for the ADB, explores possible outcomes once the safeguards will be removed. The imposition of safeguard quotas on China has provided competitive Asian suppliers opportunity to increase their shipments to the US. While the relaxation of safeguard restrictions in 2007 has enabled China to recover market share, this was not at the expense of competitive suppliers. Rather it is uncompetitive former large quota holders and preferential suppliers that have seen their shares of the US market retreat. Competitive Asian suppliers, such as Viet Nam, have demonstrated increasing market shares, and along with other Asian suppliers are finding niche markets where they do not necessarily have to compete head-to-head with China. In fact, Vietnam managed this performance mainly because its unit values grew faster than volumes. Viet Nam volumes rose more slowly than the world average but values increased more rapidly than the world average. Moreover, suppliers of textile fabric and accessories from China play a complementary role by providing Asian suppliers with quality low-cost inputs that allow the latter to compete successfully in third country markets. In fact, quoting the Asian Development Outlook 2006: The migration of textile production has been to large developing Asian countries; smaller countries almost exclusively assemble clothing but rely on imported intermediate textile fabrics. This process is still taking place as the largest textile company in Chinese Taipei, Formosa Plasticshas recently chosen to invest in a large-scale textile complex in Viet Nam. However, price dynamics of clothing shipments in restricted items indicate that competition will become more severe once the safeguards end in 2009 and it is likely that downward pressure on unit prices will become stronger and suppliers will need to cut costs and enhance quality to avoid a downturn.

78

Figure:

Source: James (2008), ADB

79

Source: James (2008), ADB

80

3.8. Export and import performance and specialization per product Comparing the growth rates of world exports in those products where Vietnam has specialised, it is clear that Vietnam has grown at a faster pace, enlarging its market share, in a number of products, such as: - Footwear - Apparel and accessories - Furniture - Fish and seafood - Coffee - Rubber However, its export performance is in declining sectors, or sectors whose demand at world level is underperforming. Figure: Direction of specialization: Vietnam export performance compared to the worlds one

Source: ITC Trade Competitiveness Map HS 2. As for imports, Vietnam outperformed in: - Machinery, - Electrical and electronic equipment, - Plastics For these products it is a net importer, whose imports dependence increased faster than the world exports. In particular, as for machinery, there is a large share of intra-industry trade occurring within automatic data processing machines, parts and components for office machines. 81

Also Vietnams imports of mineral fuels and oils has increased more rapidly than the world exports, however it is a net exporter for these products. In particular, Vietnam is an increasing net exporter of crude oils and a net importer of petroleum. Figure: Direction of specialization: Vietnam import growth compared to the world export growth

Source: ITC Trade Competitiveness Map HS 2 Figure: Top imported and exported commodities (HS1996 code: 84) in Vietnam in 2005

Source: Comtrade, HS1996, 4-digits

82

3.9. Terms of trade The Vietnam terms of trade index 59 has only slightly deteriorated in the recent past, as a result of the composition of its trade balance and the evidence of a reversal in the historic relationship between the prices of commodities and manufactures. In fact, since China has accelerated its industrialization and opened its market, it has become the biggest source of import growth in the world. Its very rapid economic growth has increased the demand on world market for commodities and food60. As a consequence of the Chinese booming demand, prices of those primary commodities has sharply increased, benefiting countries, like Vietnam, that are net exporters of those products. However, Vietnam has rapidly increased its export specialization in labour intensive manufactured goods, whose world prices have fallen. Figure: terms of trade
120

100

80

Developing economies Cambodia Indonesia Lao People's Dem. Rep. Malaysia Myanmar Viet Nam

60

40 1999 2000 2001 2002 2003 2004 2005 2006

Source: UNCTAD -Handbook of Statistics 2007

59 60

It is the percentage ratio of the price of a country's exports in terms of its imports. Kaplinsky (2005)

83

3.10. Direction of trade After Chinas accession to the WTO, the share of imports of Chinese origins has sharply increased, from 12% in 2001 to about 18% in 2006, and to 20,5 % in 2007. Overtaking suppliers like Singapore, Taiwan, Japan, and Korea, in 2003, China became the leading supplier for Vietnam. Among ASEAN countries, only Thailand has constantly increased its share in value in Vietnams imports from 2001 to 2006, and positioned itself as the sixth largest supplier of the country. China and ASEAN together accounted for a share of 46%61 in total imports in 2007. This relocation of suppliers may reflect the reorganisation of production in Asia, where a triangular trade pattern has emerged. In many sectors, China is used as an export base by the firms located in advanced Asian economies, which instead of exporting finished goods to the US and EU, now export intermediate goods to their affiliates in China. This emerging pattern together with rising factor costs in China and fears of future trade disputes and safeguard measures applied by the EU and the US, may have elected Vietnam as partner of the China-plus-one strategy, in which foreign companies invest in China and in another ASEAN country. Moreover, rising costs62 and a desire by MNCs for diversification open up opportunities for countries such as Vietnam, where wages for factory workers are rising, but labour costs are as much as 35% lower than in coastal China. Figure: Import evolution Top Countries of Origin

Source: ITC Trade Competitiveness Map HS 2.

Vietnam exports have radically changed their destination pattern after the bilateral trade agreement with the US. In fact, in 2001 Japan was the leading destination market, followed by the US, Australia, China and Germany, as single countries, while ASEAN was the third largest market, with a share of almost 15%, after the EU and Japan.
61 62

Calculations from GSO database IFC/MPDF

84

In 2007, the US was Vietnams leading destination market, together with the EU, accounting for a share in total exports of 20,8% and 18,7% respectively63, followed by ASEAN with a share of 16% and China (7%). Since the beginning of Doi Moi and the implementation of bilateral and multilateral trade agreements, Vietnam has increasingly diversified its export markets. Figure: Export evolution Top Countries of Destination

Source: ITC Trade Competitiveness Map HS 2. As shown in the following figure, Vietnam is very active and has specialized in declining markets, where its export growth rate exceeds their import growth rates, notably: US, Japan, Germany, UK and Italy. On the other hand, Vietnam has reduced its market share in booming destination markets, like China and Singapore, or Netherlands and Korea, where Vietnams export growth rate is lower than the countrys ability to import. Figure: Distribution of destination markets, according to their demand for imports

63

Calculations from GSO database

85

Source: ITC Trade Competitiveness Map HS 2.

86

4. WTO impact on Vietnams trade in services Export and import growth rates and world share Trade in services gave an increasing contribution to GDP in the period between 1985 and 1998. In particular, the ratio of trade in services to GDP grew from 38.6% in 1985 to 43% in 1998. However, this ratio has slightly decreased since 1998. Table . Contribution of sectors to Vietnams GDP
Sectors GDP (billion VND) GDP change (%) Agriculture (billion VND) Agriculture (%) Industry (billion VND) Industry (%) Service (billion VND) Service (%) 2004 715,307 7.8 155,993 21.8 287,616 40.2 271,698 38.0 2005 839,211 8.4 175,984 21.0 344,224 41.0 319,003 38.0 2006 973,790 8.2 198,226 20.4 404,753 41.5 370,771 38.0 2007 1,143,442 8.5 231,568 20.3 475,728 41.6 436,146 38.1

Source: GSO and MOIT The amount of exports and imports in services has constantly increased and trade deficit has widened since mid-90s. Exports doubled and imports more than doubled. However, their shares on total Vietnamese trade decreased since 1997.

Figure: Vietnams trade in services as share of countrys trade

Percentage of Vietnam's total trade
25

20

15 Exports Imports 10

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: UNCTAD -Handbook of Statistics 2007 In 2005, services accounted for 12% of Vietnam's total exports, corresponding to 5,65 billions $. The annual average growth rate of service exports was 15.7% during the 2001-2005 period. Table 1: Service export in period 2001 2005 ($ millions, %) 87

2001 value Total export export/GDP 3,317 growth (%) 12.5 9.5

2002 value 3,741 growth (%) 12.8 10.0

2003 value 4,227 growth (%) 13.0 10.5

2004 value 4,887 growth (%) 15.6 11.3

2005 value 5,650 growth (%) 10.5 12.0

2001-2005 value 21,824 growth (%) 15.7 10.8

Source: Ministry of Industry and Trade Vietnams shares of world trade in services were 0,18% and 0,23% for exports and imports, respectively, showing an increase since mid-90s.

Figure: Vietnams trade in services as share of world trade in services

Percentage of the world total
0,25

0,2

0,15 Exports Imports 0,1

0,05

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: UNCTAD -Handbook of Statistics 2007 The Export Development Project set the following targets for the period 2006-2010.
Table : Service export target for period 2006-2010 ($ millions) Sector Total export value - Air transport - Maritime transport - Postal - Telecommunication - Tourism - Finance - Insurance - Export of Labour 2006 6,372 547 504 214 2,153 245 168 1,670 Average growth rate 2006-2010 (%) 16.3 14.8 21.5 24.5 10.4 22.4 29.3 14.9 2010 12,000 950 1,100 530 3,200 550 470 3,000

88

- Other service sectors

870

22.2

2,200

Soure: Export Development Project for period 2006-2010 The 9th Partys Congress highlighted the importance of services and set the Economic Development Strategy for the period 2001-2010 according to the following guidelines: - develop trade in services, increase quality of provided services to expand the domestic market and to integrate effectively into the world market - develop and improve the transports quality to achieve competitiveness for the expansion of regional and international markets, including public transportation development in major cities - continue to develop and to modernise postal and telecommunication services and internet diffusion - develop tourism and build or upgrade tourist infrastructures - expand financial and monetary services such as credit, insurance, audit and securities introducing modern technology and applying international standards. These guidelines are set to achieve a ratio of services to GDP of 42-43% and a share of labour force employed in the sector of 26-27% by 2010. The share of employment in the service sector has already increased. In 2000, this share was less than 22 percent and it increased to 24 percent in 2004. It is estimated to reach 26 percent in 2007.

Table : Distribution of Labour Force by sector Employment contribution Agriculture and Fishery Industry and Construction Service Source: GSO 2000 65.1 13.1 21.8 2002 58.7 11.5 22.7 2003 57.0 12.3 23.3 2004 58.7 17.4 23.9 2005 53.3 12.9 24.5 2007 54.5 19.5 26

The liberalisation of the market of services exposes domestic suppliers to foreign competition. The principal challenge comes from the more limited access for Vietnamese companies to financial and human resources, to research activities and advanced technologies if compared to foreign competitors. Securities, banking, distribution and maritime auxiliary services are expected to experiment the highest pressure from competition. On the other hand, these potential negative effects of service market liberalization may be offset by the increased capital, technologies, human and financial resource inflows. Detailed data for analysis of impact of WTO commitments on trade in services are not available at the time of this study, however, qualitative assessments can be drawn as follows: A strengthened legal and regulatory environment of services markets Particular benefits for Vietnams business will result from the improved institutional and regulatory framework that is currently being developed. In fact, Vietnam has committed to improve the transparency, predictability and objectivity of its administrative and licensing rules and procedures in services markets. Those improvements will not only benefit foreign service suppliers, but they will also help domestic suppliers and traders. 89

Efficiency gains for Vietnams business All exporting enterprises are directly affected by liberalisation of trade in services. The effects will be increasing with advancing industrial development, technical progress, and the trend of agricultural and commodities trade to move away from primary commodities towards more profitable processed products. Attracting foreign direct investment Trade in services and FDI are increasingly interrelated. Service suppliers all over the world are expanding their international activities, as globalisation offers new commercial opportunities. Vietnams entry into the WTO has made contribution to increasing the incentives for foreign investors. In 2007, Viet Nam has attracted more than USD 20 billion FDI. Opportunities for cooperation with foreign service suppliers With the participation of more foreign services suppliers in Viet Nams market, there will be more opportunities for Viet Nams enterprises to cooperate with them and to benefit from their capital, personnel and technology resources. Improving export opportunities Services exports of Vietnam play an important role. They are earning around 13 per cent of Vietnams total foreign exchange (which is far below the world average of almost 20 per cent). As stated above, service sectors that are expected to achieve particularly high exports are tourism, finance, posts and telecommunications and waterways transport. Increased opportunities for natural persons to provide services The market access commitments undertaken by most WTO countries on the movement of natural persons supplying services (mode 4) will allow Vietnam to make much better use of its comparative advantage in sectors where it has technically and professionally qualified service suppliers. 5. Conclusions One year after the accession of Vietnam to the WTO, many of the expected benefits and opportunities seem to be verified. All the openness indicators observed confirm the increasing foreign trade flows. While export growth rate in 2007 is similar to average in previous years, the ratio of trade to GDP increased to 152% and the growth rate of imports climbed to more than 35% as a result of the larger access to imported inputs to support the Vietnamese industrial expansion. However, Vietnamese foreign trade is still concentrated and less diversified than the ASEAN average, exposing the country to fluctuations in export revenues. In recent years, Vietnam showed an increasing trade surplus in primary commodities, associated with their increased international prices and the presence of multinational corporations active in local processing of primary products and resource-based exports. However, Vietnam also witnessed a decisive increase in exports of labour and technology intensive manufactured goods, mainly textile, clothing, footwear, electronics. There is evidence also for an increasing relevance of intraindustry trade in technology intensive manufactured products associated with a growing share of trade in parts and components, which still represents, however, a small fraction of regional trade. As for possible competitive effects of the simultaneous presence in the WTO of both China and Vietnam, the two countries seem to be complementary, being on different stages of industrial development. China contributed to push up commodity prices, benefiting a net exporter like Vietnam. China has a more technology intensive export structure than Vietnam, making overlaps in exports to a third market less possible. 90

However, the two countries are competitors for textiles and clothing exports to third markets. While, the relaxation of safeguard restrictions in 2007 enabled China to recover market shares, Vietnamese suppliers demonstrated they are be able to increase their share, mainly because prices grew faster than volumes. Once the special textile safeguard for China expires in 2009, competition will become more severe, downward pressures on prices more likely and Vietnamese suppliers will need to cut costs and enhance quality. 6. References ADB, Asian Development Outlook 2006, available at http://www.adb.org/Documents/Books/ADO/2006 Amelia U. Santos-Paulino, Trade Liberalisation and Economic Performance: Theory and Evidence for Developing Countries, The World Economy, Vol. 28, No. 6, pp. 783-821, June 2005 Amelia U. Santos-Paulino, Trade Liberalisation and Export in Selected Developing Countries, http://msu.edu/~olsonluk/politicalEconomy/InternationalTrade.htm Amiti Mary, Freund Caroline, An Anatomy of Chinas Export Growth, International Monetary Fund, April 6 , 2007 Ataman Aksoy, Gonzalo Salinas, GROWTH BEFORE AND AFTER TRADE IBERALIZATION WP4062, November 2006 Baldwin, Robert. 2003. Openness and Growth: What's the Empirical Relationship? Robert E. Baldwin. NBER Working Paper No. 9578 http://www.ssc.wisc.edu/~rbaldwin/isit.pdf Bhattasali Deepak, Li Shantong, Martin Will, China and the WTO Accession, Policy Perform and Poverty Reduction Strategies, The International Bank for Reconstruction and Development / The World Bank, 2004 Bown and Crowley, Chinas export growth and the China safeguard: threats to the world trading system, Federal Reserve Bank of Chicago, WP 2004-28, revised June 2007 Cerra Valerie, Rivera Sandra A, Saxena Sweta Chaman, Crouching Tiger, Hidden Dragon: What Are the Consequences of Chinas WTO Entry for Indias Trade?, WP/05/101, IMF Working Paper Clarke, R. and C. Kirkpatrick, 1992, Trade policy reform and economic performance in developing countries: assessing the empirical evidence Cline, William. 2004. Trade Policy and Global Poverty. International Institute of Economics, Washington Dean Judith M., Fung K.C., Wang Zhi, Measuring the Vertical Specialization in Chinese Trade, U.S. International Trade Commission, January 2007 Delpeuch Claire, EU and US safeguards against Chinese textile exports: What consequences for West African cotton-producing countries?, Groupe dEconomie Mondiale, Policy Brief, GEMPB2007-02, 2007 Dollar David and Wei Shang-Jin, Das (wasted) Kapital: Firm ownership and investment efficiency in China, IMF Working Paper, WP/07/9 Edwards, Sebastian, 1993, Openness, trade liberalisation and growth in developing countries, Journal of Economic Literature, 31, pp.1358-1393.

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Fontagn Lionel, Freudenberg Michael, Gaulier Guillaume, Disentangling Horizontal and Vertical Intra-industry Trade, CEPII, 10 July, 2005 Gaulier Guillaume, Lemoine Franoise, nal-Kesenci Deniz, Chinas Integration in East Asia: Production Sharing, FDI & High-Tech Trade, CEPII, No 2005 09 June Gonzalo Salinas Ataman Aksoy, GROWTH BEFORE AND AFTER TRADE LIBERALIZATION, World Bank WPS4062 Greenaway, David and David Sapsford, 1994, What does liberalisation do for exports and growth, Weltwirtschaftliches Archive, 130(1), pp.152-174. Hale Galina and Long Cheryl, Firm Ownership and FDI Spillovers in China, Stanford Center for International Development, April 2006 Harrison, Ann - Openness and growth: A time-series, cross-country analysis for developing countries, Journal of Development Economics, Vol. 48 (1996) 419-447 Hitt Greg, Made in Washington How the Textile Industry alone won quotas on Chinese Imports, The Wall Street Journal, 10 November, 2005 Iapadre Lelio, Proietti Alessia, OECD www.oecd.org/dataoecd/9/42/31778704.ppt Trade Indicators Project, available at

IFC/MPDF, The Garment Sector in Cambodia: Post-MFA Outlook, Business Issues Bulletin, Vietnam, N 5, http://www.ifc.org/ifcext/mekongpsdf.nsf/Content/Business_Issues_Bulletin James William E., Asian Textile and Apparel Trade: Moving Forward with Regional Integration ADB, ERD Working Paper Series No. 111, 2008 Kaplinsky Raphael, China and the terms of Trade: the Challenge to Development Strategy, The Open University, 2007 Kaplinsky Raphael, Revisiting the Revised Terms of Trade: Will China Make a Difference?, World Development November 2005 Kee Hiau Looi, Cicita Alessandro, Olarreaga Marcelo - Estimating trade restrictiveness, VOX, July, 18, 2007 Kee Hiau Looi, Cicita Alessandro, Olarreaga Marcelo - Estimating trade restrictiveness, World Bank Policy Research Working Paper 3840, WPS3840, February 2006 Kenneth S. Rogoff (eds.), MIT Press for NBER, Cambridge, MA, forthcoming. http://ksghome.harvard.edu/~drodrik/skepti1299.pdf Krueger, Anne O., 1978, Foreign Trade Regimes and Economic Development: Liberalisation Attempts and Consequences, Lexington, MA: Ballinger Press for NBER. Krueger, Anne O., 1998, Why trade liberalisation is good for growth, Economic Journal, 108 (450), September, pp.1513-1522. Krugman, Paul, 1987, Is free trade pass?, Journal of Economic Perspectives, Fall, 1, pp.131-144. Morici Peter, Barring entry? China and the WTO, Current History, September 2007 Murray, Adjustment of Chinas Economic Policies after WTO Accession, Seminar of Development and Research Center - Organization of Economic Cooperation and Development, 2002, available at http://www.adb.org/Documents/Speeches/2002/ms2002139.pdf 92

National Textile Association, Summary of safeguard filings and actions, 2005 OECD. 2002. Intra-Industry and Intra-Firm Trade and the Internationalisation of Production. Economic Outlook No. 71, Chapter 6: 159-170. Office of the United States Trade Representative, Background Information on China's Accession to the World Trade Organization, 2001 Phan Minh Ngoc, Eric D. Ramstette, Economic Growth, Trade, and Multinational Presence in Vietnam's Provinces, The International Centre for the Study of East Asian Development, Working Paper Series Vol. 2006-18, October 2006 Policy Development and Review Department, Review of the IMFs Trade Restrictiveness Index, February, 2005 Prema-chandra Athukorala, Multinational Enterprises and Manufacturing for Export in Developing Asian Countries: Emerging Patterns and Opportunities for Latecomers, Discussion Paper Series No.193 http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13572/1/D06-193.pdf Prema-chandra Athukorala, Nobuaki Yamashita, Production fragmentation and trade integration: East Asia in a global context, Forthcoming in North American Journal of Economics and Finance, http://rspas.anu.edu.au/economics/publish/papers/wp2005/wp-econ-2005-07.pdf Pritchett, Lant - Measuring Outward Orientation in Developing Countries, Country Economics Department, The World Bank, January 1991, WPS 566 Qin Julia Ya, WTO regulation of subsidies to SOEs A Critical Appraisal of the China Accession Protocol Rodrguez, Francisco and Dani Rodrik, 2000, Trade policy and economic growth: a sceptics guide to the cross-national evidence, Macroeconomics Annual 2000, Ben Bernanke and Rodrik Dani, Whats so special about Chinas export?, Harvard University, Revised, January 2006 Romer, Paul, 1994, New goods, old theory, and the welfare costs of trade Restrictions, Journal of Development Economics, 43, pp.5-38. Rumbaugh Thomas and Blancher Nicolas, China: International Trade and WTO Accession, WP/04/36, IMF Working Paper, 2004 Sachs, Jeffrey D. and Andrew M. Warner, 1997, Sources of slow growth in African economies, Journal of African Economies, 6 (3), pp.335-376. Swenson Deborah, Multinationals and the Creation of Chinese Trade Linkages, International Monetary Fund, January 31, 2007 Tran Van Tho, The Pattern of Trade Specialization Economic Integration in East Asia: Problems of the Late Comers, March 2006, http://www.esri.go.jp/jp/prj-2004_2005/forum/060123/01-3-R.pdf UNCTAD, 1989, Trade and Development Report, UNCTAD, Geneva. Van Marrewijk Charles, Intra-industry trade, forthcoming in: K. Reinert and R. Rajan, Princeton Encyclopedia of the World Economy, Princeton University Press, available at http://people.few.eur.nl/vanmarrewijk/pdf/marrewijk/Intra%20Industry%20Trade.pdf Wang Zhi and Wei Shang-Jin, The Rising Sophistication of Chinas Exports: Assessing the Roles of Processing Trade, Foreign Invested Firms, Human Capital, and Government Policies, Paper prepared for the NBER project on the Evolving Role of China in World Trade, September 2, 2007 93

Warner, Andrew. 2003. "Once More into the Breach: Economic Integration. Center for Global Development. Working Paper No. 34, 2003. Harvard Univeristy. Wattanapruttipaisan Thitapha, Taking Stock in a Non-Quota World - FOCUS/TEXTILE AND CLOTHING, Bangkok Post, 10 February 2005, available at http://www.aseansec.org/17307.htm Weiss John, China and its neighbours: evolving patterns of trade and Investment, Asian Development Bank Institute, 2006 Will Martin, Trade Policies, Developing Countries, and Globalization, by DRG World Bank, http://msu.edu/~olsonluk/politicalEconomy/InternationalTrade.htm World Bank Beijing Office, Foreign Capital Utilization in China: Prospects and Future Strategy, World Bank, 39008, 2007 WTO, WTO Secretariat, Trade Policy Review, WT/TPR/S/161, 26 February 2006 Xie Xuejin, WTO rules on SOEs and implications for Chinese SOE reforms, Perspectives, Vol. 3, N 6 Yang Cuihong, Pei Jiansuo, Import Dependence of Foreign Trade: A case of China, 16th International Conference on Input-Output Techniques, July 2-6, 2007 Zhang Juyan, Ownership Structure, Input Control and Bargaining in Chinas Processing Firms, Research Institute of Economics and Management, South-western University of Finance and Economics, Chengdu, China, September 2006 Zhihai Zheng and Yumin Zhao, ChinaS Terms of Trade in Manufactures 19932000, Discussion Papers, UNCTAD, No. 161, June 2002

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Annex 1: A Typology of MNE Participation in Manufacturing for Newcomer Exporting Countries

Source: Prema-chandra Athukorala (2006)

95

Annex 2: BEC Items Grouped into Five Stages of Production The BEC reclassifies the Standard International Trade Classification (SITC, Rev. 3) headings on the basis of the principal use of the products. It converts foreign trade data into categories of final or intermediate use, such as capital goods, intermediate goods or consumer goods, following the usage in the System of National Accounts (SNA). Following Gaulier Guillaume, Lemoine Franoise, nal-Kesenci Deniz (2005) BEC items have been grouped into five stages of production as follows:

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Annex 3: Grubel-Lloyd Intra-Industry Trade Intra-industry trade (IIT) arises if a country simultaneously imports and exports similar types of goods or services. The economic literature distinguishes between two different types of intra-industry trade, namely: horizontal intra-industry trade; this refers to the simultaneous exports and imports of goods classified in the same sector and at the same stage of processing. This is based on product differentiation, where products differ in appearance and characteristics catering to the desires of different types of consumers. - vertical intra-industry trade; this refers to the simultaneous exports and imports of goods classified in the same sector but at different stages of processing. This is likely based on the increasing ability to organize fragmentation of the production process into different stages, each performed at different locations by taking advantage of the local conditions. The most often used method for determining the extent of IIT is the Gruber-Lloyd intra-industry trade index. It measures the proportion of total trade comprised by intra-industry trade as:

If there is no intra-industry trade, then either xi or mi will be zero and the index will be zero. If all trade is intra-industry, then xi=mi and the index will be one for good i. The aggregate index for each country is the weighted mean.

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Annex 4: Factor intensity classification On the basis of the UNCTAD / WORLD TRADE ORGANIZATION INTERNATIONAL TRADE CENTRE classification using the SITC rev 3 codes, Jeroen Hinloopen and Charles van Marrewijk distinguish the following five main groups of sectors at the 3-digit level: Product group A: primary products (83 sectors) Product group B: natural-resource intensive products (21 sectors) Product group C: unskilled-labour intensive products (26 sectors) Product group D: technology intensive products (62 sectors) Product group E: human-capital intensive products (43 sectors)

Sectors not classified according to intensity (5 sectors)

Product group A: primary products eta code 001 011 012 014 022 023 024 025 034 035 036 037 041 042 043 044 045 046 047 048 054 056 057 058 061 062 071 description LIVE ANIMALS CHIEFLY FOR FOOD MEAT,EDIBLE MEAT OFFALS, FRESH, CHILLED OR FROZEN MEAT& EDIBLE OFFALS,SALTED,IN BRINE,DRIED/SMOKED MEAT& EDIB.OFFALS,PREPJPRES.,FISH EXTRACTS MILK AND CREAM BUTTER CHEESE AND CURD EGGS AND YOLKS,FRESH,DRIED OR OTHERWISE PRESERVED FISH,FRESH (LIVE OR DEAD),CHILLED OR FROZEN FISH,DRIED,SALTED OR IN BRINE; SMOKED FISH CRUSTACEANS AND MOLLUSCS,FRESH,CHILLED,FROZEN ETC FISH,CRUSTACEANS AND MOLLUSCS,PREPAR. OR PRESERV. WHEAT (INCLUDING SPELT) AND MESLIN, UNMILLED RICE BARLEY,UNMILLED MAIZE (CORN),UNMILLED CEREALS,UNMILLED (NO WHEAT,RICE,BARLEY OR MAIZE) MEAL AND FLOUR OF WHEAT AND FLOUR OF MESLIN OTHER CEREAL MEALS AND FLOURS CEREAL PREPAR. & PREPS. OF FLOUR OF FRUITS OR VEG. VEGETAB.,FRESH,CHILLED,FROZEN/PRES.;ROOTS,TUBERS VEGETAB.,ROOTS & TUBERS,PREPARED/PRESERVED,N.E.S. FRUIT & NUTS(NOT INCLUD. OIL NUTS),FRESH OR DRIED FRUIT,PRESERVED,AND FRUIT PREPARATIONS SUGAR AND HONEY SUGAR CONFECTIONERY AND OTHER SUGAR PREPARATIONS COFFEE AND COFFEE SUBSTITUTES

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072 073 074 075 081 091 098 111 112 121 122 211 212 222 223 232 233 244 245 246 247 248 251 261 263 264 265 266 267 268 269 271 273 274 277 278 281 282 286 287 288 289 291 292 322

COCOA CHOCOLATE & OTHER FOOD PREPTNS. CONTAINING COCOA TEA AND MATE SPICES FEED.STUFF FOR ANIMALS(NOT INCL.UNMILLED CEREALS) MARGARINE AND SHORTENING EDIBLE PRODUCTS AND PREPARATIONS N.E.S. NON ALCOHOLIC BEVERAGES,N.E.S. ALCOHOLIC BEVERAGES TOBACCO,UNMANUFACTURED; TOBACCO REFUSE TOBACCO MANUFACTURED HIDES AND SKINS (EXCEPT FURSKINS), RAW FURSKINS, RAW (INCLUD.ASTRAKHAN,CARACUL, ETC.) OIL SEEDS AND OLEAGINOUS FRUIT,WHOLE OR BROKEN OILS SEEDS AND OLEAGINOUS FRUIT, WHOLE OR BROKEN NATURAL RUBBER LATEX; NAT.RUBBER & SIM.NAT.GUMS SYNTH.RUBB.LAT.;SYNTH.RUBB.& RECLAIMED;WASTE SCRAP CORK,NATURAL,RAW & WASTE (INCLUD.IN BLOCKS/SHEETS) FUEL WOOD (EXCLUDING WOOD WASTE) AND WOOD CHARCO PULPWOOD (INCLUDING CHIPS AND WOOD WASTE) OTHER WOOD IN THE ROUGH OR ROUGHLY SQUARED WOOD,SIMPLY WORKED,AND RAILWAY SLEEPERS OF WOOD PULP AND WASTE PAPER SILK COTTON JUTE & OTHER TEXTILE BAST FIBRES,NES,RAW/PROCESSED VEGETABLE TEXTILE FIBRES AND WASTE OF SUCH FIBRES SYNTHETIC FIBRES SUITABLE FOR SPINNING OTHER MAN-MADE FIBRES SUITABL.FOR SPINNING & WASTE WOOL AND OTHER ANIMAL HAIR (EXCLUDING WOOL TOPS) OLD CLOTHING AND OTHER OLD TEXTILE ARTICLES; RAGS FERTILIZERS,CRUDE STONE,SAND AND GRAVEL SULPHUR AND UNROASTED IRON PYRITES NATURAL ABRASIVES,N.E.S (INCL.INDUSTRIAL DIAMONDS) OTHER CRUDE MINERALS IRON ORE AND CONCENTRATES WASTE AND SCRAP METAL OF IRON OR STEEL ORES AND CONCENTRATES OF URANIUM AND THORIUM ORES AND CONCENTRATES OF BASE METALS, N.E.S. NON-FERROUS BASE METAL WASTE AND SCRAP, N.E.S. ORES & CONCENTRATES OF PRECIOUS METALS;WASTE,SCRA CRUDE ANIMAL MATERIALS,N.E.S. CRUDE VEGETABLE MATERIALS, N.E.S. COAL,LIGNITE AND PEAT

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323 333 334 335 341 351 411 423 424 431 941

BRIQUETTES;COKE AND SEMI-COKE OF COAL,LIGNITE/PEAT PETROL.OILS & CRUDE OILS OBT.FROM BITUMIN.MINERALS PETROLEUM PRODUCTS,REFINED RESIDUAL PETROLEUM PRODUCTS,NES.& RELAT.MATERIALS GAS,NATURAL AND MANUFACTURED ELECTRIC CURRENT ANIMAL OILS AND FATS FIXED VEGETABLE OILS,SOFT,CRUDE,REFINED/PURIFIED OTHER FIXED VEGETABLE OILS,FLUID OR SOLID,CRUDE ANIMAL & VEGETABLE OILS AND FATS,PROCESSED & WAXES ANIMALS,LIVE,N.E.S.,INCL. ZOO-ANIMALS

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Annex 5: US and EU imports of clothing after quota removal, by volume and value US imports of clothing after quota removal, by volume

Source: ADB, Asian Development Outlook 2006

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US imports of clothing after quota removal, by value

Source: ADB, Asian Development Outlook 2006

102

EU imports of clothing after quota removal, by volume and by value

Source: ADB, Asian Development Outlook 2006

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Annex 6: Price of commodities time series

INDICATOR: PRICES

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Annex 7: Viet Nams trade commitments under WTO agreement Vietnam officially became the 150th Member of the WTO on 11 January 2007 and since then has began to implement WTO commitments, which are in line with Vietnams reform and integration policy. However, Vietnams reform integration process started well-before Vietnams accession to the WTO. The following part of the study reviews Vietnams WTO commitments in trade in terms of Tariff and Non Tariff Measures (NTMs). Tariff commitments Vietnam committed to bind 10,600 tariff lines, with the average tariff rate reduced from 17.4% to 13.4%, within an implementation period of 5- 7 years. About 3,800 tariff lines must be cut , accounting for the 35.5% of the tariff table. About 3,700 tariff lines are bound at the current rates and 3,170 tariff lines are bound by ceiling rates which are higher than the current rates. Agricultural products will be reduced by 11% (from 23.5% to 20.9%), within a period of 5 years. Industrial products will be reduced by 25% (from 16.8% to 12.6%), within a period of 5 7 years. Table. The average tariff rate for agricultural and industrial sectors

Sector

umber of tariff lines

MFN rate (%) 23.5 16.6 17.4

l WTO committed rate (%) 21.0 12.6 13.4

Reduction (%) 10.6 23.9 23.0

Agriculture Industry Total / Average

1,224 9,465 10,689

Table. The average tariff rate for groups of products

Groups of products Agriculture Fish, products thereof Gas and Petroleum Wood, papers Garment-textile Leather, rubber Metals Chemicals Transportation equipments echanical machines and devices lectrical machines and devices Minerals Other manufactured products Total / Average mber of tariff lines 1,219 176 37 630 1,159 341 1,201 1,579 1,026 1,436 766 396 723 10,689 N rate (%) 23.5 29.3 3.6 15.6 37.3 18.6 8.1 7.1 35.3 7.1 12.4 14.4 14.0 17.4 nal WTO committed rate (%) 21.1 18.0 36.6 10.5 13.7 14.6 11.4 6.9 37.4 7.3 9.5 14.1 10.2 13.4 23.5 2.3 26.9 22.0 2.8 32.8 63.2 21.5 uction (%) 10.6 38.4

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Garment-textile, fish and products thereof, wood and paper, some manufactured products and electronic and electrical devices are the most affected products by tariff reduction. For petroleum, metals, chemicals and transportation devices committed rates are higher than those applied before accession. However, tariff reduction is relevant for some products like platic and products thereof, automobiles and motorbikes). In general, tariffs in most other sectors are expected to decline substantially. The average bound tariff rates on most product categories other than cars and motorbikes range from zero to 35 percent, although certain sensitive products (such as eggs, tobacco, sugar, and salt) will be subject to tariff quotas, with higher duties for quantities beyond these quotas. While reductions in most bound rates are to be phased in gradually, most of the decreases are to occur by 2012. Vietnam committed to full implement the agreements on ITA, garment-textile, medical equipments, and partly the remaining agreements (aircraft devices, chemicals, construction instruments...), with an implementation period of 3-5 years. Table 11. Participation in WTO agreements
Agreements ation Technology Agreement (ITA) - 100% participation cal Harmonization Agreement (CHA) - 81% participation Aircraft Agreement (CAA) mostly participation Agreement (TAA) - 100% participation al Equipment Agreement (MEA) - 100% participation s, Vietnam also partly participates in some other agreements such as scientific instruments, construction instruments 1,600 er of tariff lines rate (%) WTO %) committed

Among the above agreements, ITA is the most important. As committed for this agreement, about 330 tariff lines for Information Technology products will be of the rate 0% after 3-5 years. Participating in the TAA also brings about remarkable tariff rate reductions: from 40% to 12% (for cloth), from 50% to 20% (for clothes), from 20% to 5% (for fibre). Other import duties and charges are set at 0. Vietnam also commits to make transparent the list of products of which the tariff lines could be subject to a transformation from ad valorem to specific or combined tariff; and not to decide import duty exemptions on the base of export performance, export ratios or local content requirements. Vietnam also commits that 3 years after acceding into the WTO, Vietnam will not levy internal taxes and charges on distilled spirits and beer; all distilled spirits with an alcohol content of 20 per cent or higher will not be subject to either a single specific rate per litre of pure alcohol or a single ad valorem rate; and Vietnam will not apply the single ad valorem rate to all beer products without regard to the packaging of the product, i.e., draught, draft, bottle, or can. In its WTO accession commitments, Vietnam, for the first time, applied specific duties for some products such as used motor cars and motor vehicles to monitor imports. According to this approach, the tariff rates for importing certain products are 200% or 150% plus 10,000 USD whichever is lower.

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CHAPTER III: IMPACTS ON THE INDUSTRIAL SECTOR Content: 1. Introduction; 2. Vietnams industrialization after 1996; 2.1. Target of process of industrialization and development; 2.2. Policies to promote industrialization after 1996; 2.2.1. Trade Policies before WTO accession; 2.2.2. Trade policies after WTO accession; 2.2.3.Other policies (FDI, private sector and SMEs promotion) 3. Profile of Vietnams industry; 3.1. Vietnams industry by factor intensity ; 3.2. Manufacturing structure of establishments: numbers and share; 3.3. Manufacturing employment; 3.4. Structure of capital in manufacturing; 3.5. Structure of industrial ownerships; 4. Growth of industrial output; 5. Manufacturing exports by factor intensity; 6. Other characteristic features of industry; 6.1. Important Role of Small and Medium Enterprises; 6.2. Efficiency of Industry; 7. Vietnams industrial and economic competitiveness; 7.1. Vietnams competitiveness; 7.1.1. RCA and ERP indices of competitiveness and protection; 7.1.2. International ranking of Vietnams competitiveness; 7.2. Dualistic Competitiveness of export and domestic markets; 8. Impact of regulatory changes; 9. Actionoriented recommendations; 10.References; Appendix Import quota 1.Introduction Background: The Renovation (Doimoi) in 1986 and especially the market-oriented reform in 1989 marked a turning point in the history of Vietnams economic development. Since 1989 Vietnams economy has been in transition, striving for industrialization and international integration. With regard to Vietnams industrialization, Vietnam adopted a radical and comprehensive reform package aimed at stabilizing and opening the economy, enhancing freedom of choice for economic units and competition so as to fundamentally change its economic management system. Between 1997-2000, however, the reform was, though continuing, somewhat slowing down, especially after the Asian financial crisis. Since 2000 up to the present, economic reform has been moved up with more policy actions on economic development. For the first time the 8th Congress (1996) initiated a primary objective to the year 2020 to turn Viet Nam into "an industrial country which has modern material and technological foundation, appropriate economic structure, advanced production relations suitable to the development standard of the productive forces, better-off material and spiritual life, firm defense and security, wealthy people, strong country, equitable and civilized society". The 9th Congress (2001) confirmed this objective in Vietnams Socio-Economic Development Strategy 2001-10. The overall goal of Vietnams Socio-Economic Development Strategy 2001-10 is to accelerate the industrialization and modernization process in order to bring Vietnam out of underdevelopment and to create a foundation so that by 2020 Vietnam will basically become a modern-oriented industrialized country. Vietnam recognized that there is a link between building a modern-oriented industrialized country and proactive international economic integration. Efficient international economic integration plays a key role in enhancing efficiency and promoting economic growth. Efficient international economic integration also creates the necessary conditions for building an industrial

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economy and through a proactive international economic integration process the goal of Vietnams Socio-Economic Development Strategy 2001-2010 will be materialized . Therefore, in parallel with economic reform, Vietnam has proactively implemented the open door policy and accelerated the process of international economic integration, especially through further trade and investment liberalization. In 1992, Vietnam signed a trade agreement with the European Union (EU). In 1995, Vietnam joined ASEAN and committed to fulfill the agreements under the AFTA by 2006. In 1998, Vietnam became a member of APEC. Two years later, Vietnam signed the Bilateral Trade Agreement with the United States and the Agreement became effective in December 2001. Most recently, Vietnam has also joined regional integration clubs such as ASEAN - China Free Trade Area (2003), ASEAN - Korea Free Trade Area (2006), and ASEAN-Japan Comprehensive Economic Partnership (2003). Becoming a WTO member is an important event for Vietnam and is considered a turning point in the process of international economic integration. Vietnam applied for WTO membership in 1995 and became a full member in January, 2007. Vietnam recognized that international integration including WTO accession could create opportunities such as greater foreign market access, larger foreign investment attraction, technology, management skill transfer, and efficient resource allocation for industrial sectors. So, international integration including WTO accession has been seen as a means in order to achieve the target of industrialization. However, international integration can also bring disadvantages due to a rapidly changing internal business environment in compliance with international commitments and fierce competition among enterprises on the world market as well as on the domestic market. As a result, some sectors may suffer negative impacts. Objective of the study: The study is aimed at examining the possible impacts of regulatory changes on industries resulting from implementing WTO commitments and then providing recommendations for successful industrial development as well as successful integration into the worlds economy. It should be noted that one year of WTO membership is too short a period of time for any comprehensive evaluation of its impact on Vietnams economy in general as well as on specific industries in particular. WTO membership is neither the beginning nor the end of Vietnams international integration. WTO accession is a memorable footprint of Vietnams international integration and a landmark in Viet Nams 20-year renewal process. In addition, during this time, Vietnam is a member of the ASEAN Free Trade Area (AFTA), ASEAN China Free Trade Area (ACFTA), ASEAN-Korea Free Trade Area agreements. The implementation of the WTO commitments of Vietnam do not depend on the FTAs commitments. However, the possible effects on industry need to be taken into consideration from the entire context, and this includes not only for commitments with WTO but also for liberalization commitments in the region. Scope of the study: assessing the evolution of variables showing possible impacts of regulatory changes on industry and manufacturing resulting from implementing WTO commitments. According to the system of national account industry means industrial activities including mining; manufacturing and electricity, gas and water supply. Here the paper will focus mainly on manufacturing. Vietnams manufacturing is classified by factor intensity: (1) agricultural resource-intensive branches; (2) labor-intensive branches;

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(3) capital-intensive branches; and (4) machinery and technology-intensive branches.64 Methodology: the analysis will be both qualitative and quantitative. While the qualitative analysis will be based on collecting up-to-date information from different studies and appropriate interviews, the quantitative analysis will be based on up-to-date statistical data that are available since 1996 from official sources such as the General Statistic Office, Ministry on Planning and Investment and Ministry of Industry and Trade. Structure of the report: This paper is about the impact of key imports, exports and regulatory changes on Vietnams industry resulting from Vietnams WTO membership.. Section 2 gives a brief review of Vietnams industrialization after 1996. Section 3 presents a profile of Vietnams industry since 1996. Section 4 analyzes the growth of industrial output. Section 5 deals with export manufacturing. Section 6 presents other characteristic features of industry (such as SMEs and productivity). Section 7 gives a brief overview of Vietnams industrial and economic competitiveness. Section 8 provides possible impacts, and Section 9 concludes with remarks on policy option alternatives. 2. Vietnams industrialization after 1996 2.1 Vietnams industrialization strategy towards 2020 A primary objective of the process of industrialization and development to the year 2020 is to turn Viet Nam into "an industrialized country which has modern material and technological foundation, appropriate economic structure, advanced production relations suitable to the development standard of the productive forces, better-off material and spiritual life, firm defense and security, wealthy people, strong country, equitable and civilized society". Targets of the process of industrialization have been clearly stated in the Socio-Economic Development Strategy 2001-2010 as well as in the Five-Year Socio-Economic Development Plan 2006-2010. The Socio-Economic Development Strategy 2001-10 sets the targets on building some selected important heavy industrial establishments (petroleum, metallurgy, basic chemicals, fertilizers, construction materials, cement) with high technology, which produce a necessary means of production to equip and re-equip advanced techniques and technologies for the whole economy and to meet national defense requirements. At the same time, the Strategy asks for mobilizing all possible resources to achieve a rapid and effective development of products, sectors and industries (agriculture, fishery, garment, footwear, electronics, some mechanics and consumption goods) that have comparative advantages in order to basically meet domestic demand and promote exports. Some growth targets up to 2010 are given numerically in the official documents (the Ten-Year Strategy 2001-2010 and the Five-Year Plan 2006-2010). Vietnam expects to achieve high value-added industrial growth, about 10-10.5 percent year on year during 2001-2010. Exports are to increase at a rate more than double that of GDP growth. Industrial exports are to amount to 70-75 percent of the total export value. By 2010 GDP size will be US$ 94-96 billion, GDP per capital is US$1050 1100. In order to turn Vietnam into a fulfilled industrialized country by 2020, the industrial sector aims to innovate and restructure itself and endeavors to increase the share of the industrial sector (including industry and construction) to 43-44 percent of the GDP by 2010 (SEDP, 2006).
64

According to MUTRAP ( 2002)

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Based on the Ten-Year Strategy 2001-2010 and the Five-Year Plan 2006-2010, the Ministry of Industry65 (MOI, 2006) worked out the Development Orientation of Vietnam industry to 2010. According to this development orientation, the industrial sector should be further developed in three sectoral groups: (1) group having competitive advantage; (2) group of basic industries; and (3) group bearing promising potentials. As for the first group, it is necessary to implement export-oriented policy on the basis of mobilizing all the needed resources to develop this group such as processing agricultural, forest and marine products, electric and electronic assembly, textile and garment, footwear, and shipbuilding. Great importance and priority must also be given to developing basic industries (such as power, oil and gas, basic chemical, fertilizer, mining, and mechanical engineering) for the purpose of ensuring the independence and self-sufficiency of the national economy and promoting infrastructure development in order to fulfill the goal of modernization and industrialization. At the same time, equal attention should be paid to developing the third group (promising industries), which is endowed with export potential and value added namely manufacture of electronic parts, software, mechanical processing, chemical - pharmaceutical cosmetics - detergent, and those making use of new technology. One of the specific objectives is to increase the share of processed products for export to 65%-70% of total export volume by 2010 and to pay due attention to using local materials and intensive labor. In fact, the industrialization process of Vietnam has been promoted primarily through pursuing the dual approach for a number of years. Vietnam, on the one hand, indicates its expectation to promote export-oriented sectors, where export manufacturing firms, especially the FIEs with regional and global competitiveness, play the leading roles. On the other hand, Vietnam has maintained protection to import-substituting SOEs. 2.2 2.2.1 Trade related policies to promote industrialization after 1996 Trade policies before WTO accession

It is noted that industrial policy has been associated with trade policy, which indeed is the vessel of much industrial policy. Vietnam has adopted trade policies in the way that it has encouraged rapid export growth while highly protecting domestic industry, though recently the level of protection has been reduced significantly. Vietnam has conducted remarkable trade reforms in the early stages of renovation (late 1980s and early 1990s), but they slowed down during the 1996 1998 period partly due to the East Asian crisis of 1997-1998 and partly due to complacency with the success of the initial reforms. However, in the late 1990s trade reforms have been exacerbated by the governments response to the Asian financial crisis. Trading rights Before 1988, under the centrally-planned mechanism, international trade was conducted only by the SOEs. Since 1989, together with the introduction of the market-oriented reforms, the crucial steps of abolishing the SOEs monopoly on trade have been undertaken. The entry into
65

In late 2006 MOI and MOT unified and became the Ministry of Industry and Trade

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international trading activities has been gradually relaxed with the more important role of private enterprises. Until 1997 the conditions for entry were still very restrictive. In 1998 a significant change in terms of the entry into international trading activities implemented by the Government was the Decree 57/1998/ND-CP dated July 31, 199866. The Decree indicated that all domestic enterprises were allowed to export and import goods registered in a business license with no need to ask for the import/export license except for four groups of special goods67. Further relaxation was experienced in 2001. According to the Decree 44/2001/ND-CP, dated August 2, 2001, all legal entities (individuals and companies) were permitted to export and import most goods without license except four groups of special goods. The trading activities of the foreign invested enterprises (FIEs) and business cooperation parties have been governed by the Law on Foreign Investment. Before August of 2001 FIEs were granted the same export rights as domestic firms this means that FIEs were allowed to export and import goods registered in a business license, but subject to more restrictive measures regarding imports. After the promulgation of Decree 44/2001/ND-CP, FIEs were granted the right to export commodities other than those they produce. However, FIEs that are established for manufacturing process were only allowed to import inputs for formalization of their assets, their production process and for export, but no other goods (Decree 24/2001/ND-CP, dated July 31, 2000) . In an effort to improve the business and investment environment before WTO membership, Vietnam unified the Law on Domestic Investment Encouragement (1998) and the Law on Foreign Investment (1996) into a Common Law on Investment (hereafter referred to as the 2005 Investment Law) with the aim to ensure that Vietnams investment legal framework conforms to international rules and provisions in the context of more in-depth economic integration, particularly in preparation for WTO accession. According to the 2005 Investment Law and the Decree 108/2006/ND-CP guide to applying the law, FIEs have the right to import and export commodities in conformity with regulations on investment and laws on trade and international treaties of which Vietnam is a member. Import tariffs The 1990s can be seen as a period of the formulation of the tax system on trade in Vietnam; frequent changes in the tariff system have taken place in order to protect domestic production and to increase the state budget revenues. Import tariffs were first implemented in 1988 with the enactment of the Law on Import and Export Duties approved on 29 January 1987. In 1991, Vietnam promulgated the Law on Export-Import Duties, which replaced the 1987 Law. The original tariff schedule was rationalized in 1992. The Law on Export-Import Duties has been amended in 1993, 1998 and 2005. Accordingly, tariffs have been changed frequently in order to promote the process of international economic integration, and particularly to meet the requirement of trade agreements between Vietnam and other countries, though they have still been for protection of domestic production. In sum, Vietnam has applied four types of tariff for its imports:

66

Decree 57/1998/ND-CP dated July 31, 1998 was promulgated for guiding the application of the Law of Commerce 1997 67 Group of commodities traded by quotas; group of prohibited commodities; group of commodities (such as rice export and fertilizer import) under Government management; and group of specialized management.

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1., the Common Effective Preferential Tariff (CEPT) rates under AFTA have been applicable to ASEAN countries since 1996. This schedule was promulgated each year, with inclusion of new products and modification of tariff rates. In 2006, Vietnam has also fulfilled its commitments in phasing out tariffs on imports originating from ASEAN member countries. 2. a different tariff schedule has been applied to imports under ACFTA and AKFTA. 3. the most-favored-nation (MFN) tariff rates have been applicable to WTO members and countries that have bilateral trade agreements with Vietnam. According to the trade statistics, almost all imports fall into these three categories. 4. the normal tariff has been applicable to imports from the rest of countries. Nevertheless, the value of imports under this category is negligible. Non-tariff barriers (NTBs): Non-tariff barriers have been the protectionist instrument of choice in Vietnam until recently. Non-tariff barriers (NTB's) were introduced in Vietnam when the country shifted from a centrally controlled economy toward market trade in the late 1980s to the early 1990s and quickly became a key component of Vietnams trade policy. However, in the past few years, as Vietnam has adopted stronger trade liberalization, it has made significant progress in reducing the use of NTBs.Until 2000, all the main NTBs controlling trade that were used within that year were introduced by the Governments Decision signed by the Prime Minister. NTBs have been imposed on the lists of imported/exported goods under the quantitative controls and under the specialized authority regulations. Under the governments regulations the balance between domestic production and consumption, and imported and exported items as well as the protection of domestic production has ensued.. Quantitative controls on exported goods were quotas for two key commodities: rice, and textiles and garments to quota markets. The quotas for rice export have reflected the Government's concern of food scarcity. The quotas for textile and garment exports had been set by the European Union (EU), Norway, Canada, and USA in 200368. The EU and Canada permitted the removal of quotas for Vietnam in textile and garment products in January of 2005, although Vietnam still was not a member of the WTO. Quantitative limitations on exports in most sectors have been eliminated. In 2001 the quota for rice export was removed by the government69. Import quotas were first introduced in 1993. Since 1994, when the industrialization program was launched, the quantitative controls on some key imported goods subject to the so-called the supply-demand balance have been introduced, with the main purpose to protect some industries developed under the import substitution strategy. Besides, quantitative controls on imported goods are said also to limit excessive import (e.g. consumer goods and petroleum). The number of goods under quantitative control has changed over time depending on pressure on the balance of payments and domestic production. The year 2001 witnessed a strong change in trade policy. The multiyear trade policy roadmap for the period 2001-0570 was announced for the first time. This was a change from the earlier practice of announcing one-year regimes. This roadmap has created a more transparent and
68

The Vietnam-US Bilateral Trade Agreement was signed in July, 14th 2000 and came into effect from December 2001. In April 26th 2002 there was an official signing of the Vietnam-US textile agreement 69 Decision No 46/2001/QD-TTg, dated April 4th , 2001. 70 Decision 46/2001/QD-TTg, dated in April, 2001

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predictable export-import environment. Under the trade policy roadmap, there is a schedule for removal of a large range of NTBs. In May 2003, the Prime Minister issued a decision to implement tariff-rate quotas on certain agricultural products that were not previously under quotas.71 (Appendix 1). The regulation to limit the import of consumer goods is another important aspect of the annual decisions on quantitative management and targets of trade. Up until 1997, the import of consumer goods was set with the target that it should not exceed the value of 20% of total exports in the preceding year72. In 1997, in response to the problem of a build-up of short-term debt through L/Cs and high current account deficit, the target was lowered to 9% and a list of specific consumer goods to be restricted from importing was created.. Since 1999, the consumer goods and some intermediate goods had been mainly regulated by tariffs, surcharges, and payments through the banks, The enterprises should balance their foreign exchange and pay in advance when importing consumer goods73. Foreign exchange Regarding foreign exchange regulations, before August 1998, there was a very strict control over foreign exchange. In terms of foreign trade, foreign exchange policy was aimed at three targets: 1. The first was to reserve the foreign exchange needs for some specific enterprises (mainly the SOEs); 2. the second was to control the import of consumer goods; and 3. the third was to force the FIEs to export their products and to buy domestically produced inputs. These targets were set in order is to promote the production of some industries and to narrow trade deficit. However, year by year the strict control has been loosened. Particularly, all economic entities were required to deposit foreign exchange in one onshore account with the foreign exchange surrender up to 80% of the available balance in 1998. Then, the requirement ratio was reduced to 50% in August 1999, to 40% in April of 2001, to 30% in May of 2002 and finally to 0% in April of 200374. The foreign exchange balancing requirement for foreign invested enterprises was relaxed in May 2000. From then on foreign direct invested enterprises have been able to purchase foreign currency from domestic banks to repay loans obtained from offshore banks. The Ordinance on Foreign Exchange Control, which had been passed by the Standing Committee of the National Assembly in December 2005, had removed the obligation for legal residents to sell their current revenues in foreign currencies to commercial banks. Incentives for export In order to promote export, Vietnam had implemented several measures such as zero export duty, exportsupport credit and rewards, and subsidies privileges in corporate income tax Under the duty drawback scheme, exporters could get reimbursements for the portion of imports used for producing exported goods. However, despite an improvement in operation, there were
71

According to the Circular No 04/2006/TT-BTM dated on 4th April 2006 guiding the implementation of Decision No 12/2006/N-CP on 23rd January 2006 72 Decision 864/1995/QD-TTg 73 Decision 254/1998/QD-TTg, dated 30 December 1998 74 Decision No. 46/2003/QD-TTg dated April 2nd , 2003

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still problems in operating the scheme. Particularly, local producers who supply inputs to export producers were not eligible for duty rebates on imports used in the production process. An Export Promotion Fund was also established in 1999 to assist, encourage and promote exports. The Export Promotion Fund managed by the Ministry of Finance provided subsidies in the form of interest rate support and direct financial support to first-time exporters, for exports to new markets, or for goods subject to major price fluctuations. Starting in 2001, the Export Promotion Fund provided subsidies in the form of interest rate support and direct financial support to first-time exporters, for exports to new markets, or for goods subject to major price fluctuations. The Fund also provided export rewards and bonuses. Provision of export bonuses, originally targeted for exports of agricultural products, was expanded in 2002 to include non-agricultural products such as handicrafts, rattan and bamboo ware, plastic products and mechanical products. The reward regulations in 2003 extended rewards to enterprises from all ownership types participating in export. The conditions for being rewarded required that enterprises had an increase in direct export value in the current year as compared to the previous year. 2.2.2. Trade policies after WTO accession Trading rights Enterprises including domestic and foreign invested enterprises have the right to import and export commodities in conformity with regulations on investment and laws on trade and international treaties of which Vietnam is a member. Import tariff reduction75 Within the WTO accession framework, Vietnam committed to bind all tariff lines in its tariff schedule of 10,600 tariff lines. The 2006 average tariff level will be cut off from 17.4% down to 13.4% after the implementation period generally from 5 to 7 years. To compare the bound rates of the Schedule of Commitments with the applied tariff rates as of December, 2006, in general, more than one third of all tariff lines shall be reduced, the majority of which are at the rate of over 20%. For the agricultural sector, the average of initial bound rates were 25.2% upon accession and 21.0% as the average at the final reduction (final bound rates). Compared to the 2006 average of the MFN applied rates for the agricultural sector of 23.5 %, the reduction is about 10%. For the industrial sector, the average of initial bound rates was 16.1% upon accession and 12.6% as the average at the final reduction, which means a reduction of 23.9%. Specific commitment is to reduce immediately tariffs on some products whose current tariffs are more than 20-30%. Tariffs on machinery and electronics components with the largest margins are to be cut Like other newly acceded countries, Vietnam also joined some sectoral initiatives. Sectors that Vietnam committed to full participation are the Information and Technology Agreement (ITA), Textile and Clothing Agreement, and Medical Equipment Agreement. Sectors that Vietnam partly committed to are the Civil Aircraft Equipment Agreement, Chemical Harmonization Agreement and Construction Equipment Agreement. The implementation period is from 3 to 5 years. Among these agreements, the participation in ITA was the most significant, by which
75

This part is taken from Nguyen Van Chi (2007) Commitment of Vietnam on import duties and nonbanking financial services, MUTRAP-II, HOR-7

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about 330 tariff lines of information technology products would be reduced to 0% during 3-5 years. Accordingly, remarkable reduction has to be implemented for electronic products such as computers, mobile phones, and digital cameras with the implementation period of 3-5 years, and a maximum period of 7 years. Participating in the Textile and Clothing Agreement was in fact the multilateralizing of the bound rates in the Textile and Clothing Agreements that Vietnam has signed with the EU and the U.S for all WTO Members. This also leads to a significant tariff reduction for these items, in particular textiles from 40% to 12%, clothing from 50% to 20%, and fibers from 20% to 5%. Tariff rate quota According to the WTO accession commitments, on tariff quotas, Vietnam reserves the right to apply tariff quotas on poultry eggs, unmanufactured tobacco, sugar and salt. Although salt is not considered by the WTO as an agricultural good and thus not subject to tariff quotas, Vietnam could continue to maintain tariff quotas on salt for the benefit of Vietnamese salt-producing farmers. For these four kinds of goods, the tariff quota rate is equal to the current MFN tariff rate (40% for eggs, 30% for unmanufactured tobacco, 25% for raw sugar, 40-50% for pure sugar, and 30% for salt). Out-quota tariff rate is higher than in-quota tariff rate. Non tariff measures Foreign exchange controls would only be applied in exceptional cases, as determined by the Government of Vietnam, to maintain the national financial and monetary security in accordance with the IMF Articles of Agreement and IMF Document No. 144 (52/51) of 14 August 1952. The WTOs regulations on subsidization stipulate allowed and disallowed subsidies. The allowed subsidies include the actions supporting research and development, assisting difficult areas, and assisting in environmental protection. The disallowed subsidies include the measures to directly encourage exports or replace imports Under the WTO commitments, Vietnam had to remove the direct subsidies on agricultural export soon after it joined the WTO. As for the domestic subsidies, Vietnam has the right to give the subsidies equivalent to 10% of the total output, the level is being applied for other developing members of WTO. However, according to the Ministry of Finance, the level of allowed domestic subsidies is now lower than 10%. Regarding industrial subsidies, several kinds of subsidies were removed right at the moment of Vietnams admission to the WTO, including subsidies for export and import replacement subsidies paid directly from the State budget. Indirect export subsidies for non-agricultural goods, in the form of preferential investment incentives for export production (such as tax holidays and lower tax rates) are no longer granted to new firms76. Notably, an enterprise, that obtained its investment license, investment certificate, or business registration certificate before the official WTO accession date of Vietnam (i.e. January 11th, 2007), and is enjoying the incentives based on an export ratio, shall continue to enjoy the incentives until the end of the tax year 2011. However, the preferences will not be applied for the projects started after the admission date.

76

According to the Decree No. 24/2007/ND-CP on 14 February 2007, those enterprises already granted incentives should remain effective (under the Decision No 53/2004/QD-TTg)

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The subsidies provided to the textile and garment industry had to be stopped right after Vietnam joined the WTO. It eliminated subsidies for garment and textile exports in 2006. In practice, the 2005 Investment Law, which had come into force on 1st July 2006, abolished all the subsidies banned by the WTO. The government had also transformed the Development Assistance Fund into the Development Bank and adjusted the objectives and operations of the Export Support Fund and changed WTO banned subsidies into other more common and recognized subsidies. The Ministry of Trade (now Ministry of Industry and Trade) on July 2, 2007 officially announced the removal of the scheme of rewarding for export achievements77. 2.2.3 Other policies (FDI, private sector and SMEs promotion). FDI attraction Recognizing the important role of FDI in terms of capital attraction, technology transfer, renewable technology and markets expansion, the Vietnamese Government has paid significant effort in creating a favorable environment for doing business in Vietnam. Since the Law on Foreign Investment in 1987 was initiated, the Government has made continuous improvement in foreign investment regulations in order to attract foreign investors to Vietnam. The Law was amended four times in 1990, 1992, 1996 and 2000. Accordingly, investment areas where foreign investors are allowed to do business are expanded gradually, including the services sectors. Foreign investors in Vietnam have been given more rights and fewer requirements, including the start-up administration procedures requirement. The Government shortened the list of FDI projects that required export of 80% of the production output in 2002 and eliminated the export ratio requirement in 200378. Government also allowed the foreign investor to use the land use rights for mortgage and to recruit labor; expanded the business forms of FDI and trade rights, etc. Resolution No 9 issued by the Government in 2001 requires speeding up the elimination of the dual price system for almost all charges and fees, further expansion of FDI in some sectors such as agribusiness, fisheries, retail sales and distribution. Decision No.36/2003/QD-TTg in March 2003 regulates the investment of foreign investors in contributing capital to and buying the share of Vietnam's firms. Foreign investors are allowed to acquire up to a 30% stake in all forms of Vietnamese companies. It creates also more channels for foreigners to invest in Vietnamese firms not only in the form of capital but also in the form of equipment, technology, materials, intellectual property and securities. In 2005, the Government was to move towards the unified domestic and foreign investment regulations aiming to establish a level playing field for both domestic and foreign investors. It leads to the 2005 Investment Law. Decision No. 43/2006/QDBTC on 29 August 2006 which also abolished policies of preferential import tariff rates contingent upon localization ratios with respect to products and parts of mechanical/electric/electronic industries as from 1 October 2006. In addition, the 2005 Investment Law and its implementing Decree no longer conditioned the granting of investment licenses or the receipt of investment incentives in the manner described in the TRIMs Agreement (WT/ACC/VNM/48, Working Party on the Accession of Viet Nam, Report of the Working Party on the Accession of Viet Nam, 27 October 2006). Private sector and SME promotion

77

The scheme on rewarding enterprises and individuals who have high achievements in export has been applied in accordance with the Decision No 02 dated in 2002 78 Decree No. 27/2003/ND-CP of 19 March 2003

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The Communist Party of Viet Nam at its 6th National Congress introduced "the comprehensive economic renovation (Doi moi process) which aims to eliminate the subsidy-based, bureaucratic, centrally-planned mechanism, develop a socialist-oriented multi-sector market economy under the State control". The 1992 constitution explicitly recognized a role for the private sector. Since then, the legal framework has improved greatly. During the "Doi moi" process, the legal framework for promoting private sector development was constantly improved. The promulgation of a series of laws such as the Law on Private Enterprises and Company in 1993, Law on the Encouragement of Domestic Investment, Land Law, Law on the Enterprise in 2000, New Enterprises Law in 2005 (unified the Enterprise Law and SOE Law) and Unified Investment Law 2005 has created easier conditions for the private sector to establish and perform business activities as well as creating a level playing field for business activities as well as in practice. This permits more and more participation of private companies, mainly SMEs in industrial production, particularly in labor-intensive production, while SOEs sill dominate heavy capital intensive and import-substituting industrial sectors. 3. Profile of Vietnams industry 3.1. Vietnams industry by factor intensity Vietnam has recorded considerable achievements At present it can be seen as an average developing country. In terms of share of value added in GDP at current price, Vietnams economic structure has shifted mainly between agriculture-forestry-fisheries and industryconstruction sectors including manufacturing. The share of the former decreased to 20.05 percent in 2007 from 27.76 percent in 1996 while that of the latter went up to 41.60 percent from 29.73 percent. Particularly, the share of manufacturing in total GDP at current prices increased from 15.18 percent in 1996 to 18.56 percent in 2000, 20.63 percent in 2005 and 21.38 percent in 2007. This is because industry-construction sectors including manufacturing achieved two-digit growth rates for a long time. Vietnams industry-construction sector has contributed a remarkable share for a relatively high GDP growth rate. As a result, total GDP in 2007 reached about US$ 70.6 billion, and GDP per capita US$ 830 at current price (these were respectively US$ 31.2 billion and US$ 401.6 in 2000). Along with industrialization, there has also been structural change within the manufacturing sector itself. The manufacturing sector moved away from simple labor intensive activities to higher added value and complex activities. Notably, the share of machinery and technologyintensive goods in total manufacturing output rose from 9.7 percent in 1995 to 14.01 percent in 2000, 15.90 percent in 2005 and 16.56 percent in 2006. At the same time, the share of food, beverages and tobacco output agro-based industrial output declined. Particularly, the share of agricultural resource-intensive output in total manufacturing output went down from 32.44 percent in 1995 to 27.60 percent in 2000, 24.48 percent in 2005 and 23.67 percent in 2006. This means that at 1994 prices the share of agricultural resource-intensive output in total manufacturing output decreased by (-) 7.16 percentage points, while the share of machinery and technology-intensive goods increased by (+) 8.59 percentage points (Table 3.1). With regard to production technology, the level of production technology in manufacturing plays an important role for its development as well as for the whole economy. According to United Nations Industry Development Organization (UNIDO), manufacturing is divided into high, medium and low technological industrial activities. The low technological industrial group includes the manufacture of food products and beverages; manufacture of tobacco products;

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manufacture of textiles; manufacture of wearing apparel, tanning and dressing of leather and manufacture of leather products; manufacture of wood and wood products; manufacture of paper and paper products; publishing, printing and reproduction of recorded media; manufacture of furniture; and recycling, The medium technological industrial group includes manufacture of chemical and chemical products; manufacture of non-metallic mineral products; manufacture of basic metal; manufacture of fabricated metal products, except machinery and equipment; manufacture of rubber and plastic products; manufacture of coke, and refined petroleum products;. The high technological industrial group includes manufacture of machinery and equipment; manufacture of office, accounting and computing machinery; manufacture of electrical machinery and apparatus; manufacture of radio and communication equipment and apparatus; manufacture of medical, precision and optical instruments, watches and clocks; assembling and repairing motor vehicles; and manufacture and repairing of other transport equipment (GSO, 2006). For a decade, from 1995 to 2006, thanks to more and more FDI inflow with more advanced technology into Vietnam, the share of output of the group of low-tech industries in total manufacturing output decreased by 11.03 percentage points, while the share of the group of medium and high-tech industries increased, respectively by 4.17 and 6.85 percentage points. This reflects the restructuring process of the industry toward expanding and developing high tech industries in order to meet the goal of the socio-economic development strategy 2001-2010 and the five year plan 2006-2010. Table 3.1: Manufacturing output at 1994 price, (%) Changes (+/-) 2006 compared to 1995 2006

1995 Total manufacturing Agricultural resource-intensive Food and beverages Labor-intensive production Textiles Wearing apparel Leather tanning and processing Wood and wood products Furniture Capital-intensive production Tobacco products Paper and paper products Chemical and chemical products Non-metallic mineral products Basic metal products Fabricated metal products Recycling Rubber and plastic products Coke, refined petroleum products Publishing and printing Machinery & technology-intensive

2000

2005

100.00 100.00 100.00 100.00 32.44 27.60 24.48 23.67 32.44 27.60 24.48 23.67 21.61 20.54 21.19 21.72 7.42 6.35 5.40 5.28 3.54 3.82 4.33 4.39 4.29 5.60 5.36 5.28 3.99 2.28 2.30 2.45 2.37 2.49 3.80 4.32 36.25 37.85 38.42 38.05 4.78 3.63 3.18 2.93 2.34 2.49 2.35 2.24 6.11 7.04 6.75 6.77 11.05 11.55 10.49 9.93 4.12 3.74 3.95 4.02 2.80 3.65 4.98 5.27 0.11 0.09 0.08 0.07 2.73 4.08 5.16 5.22 0.41 0.15 0.17 0.18 1.81 1.44 1.31 1.41 9.70 14.01 15.90 16.56

-8.77 0.12

1.79

6.86 118

goods Machinery and equipment Office, accounting and computing machinery Electrical machinery and apparatus Television and communication equipment Medical and optical instruments, watches Motor vehicles Other transport equipment Total manufacturing The group of low-tech industries The group of medium-tech industries The group of high-tech industries

1.62 0.03 1.31 2.48 0.24 1.75 2.27

1.75 0.82 2.29 2.78 0.27 2.04 4.06

1.56 0.91 3.39 2.59 0.22 2.76 4.48

1.36 1.11 3.72 2.53 0.20 2.86 4.78

100.00 100.00 100.00 100.00 63.08 55.79 52.59 52.05 27.22 30.20 31.51 31.39 9.70 14.01 15.90 16.56

-11.03 4.17 6.86

Note: Law on Enterprise 1999 was in effect in 2000, Unified Law on Enterprise 2005 in July of 2006 Source: GSO(2006), GSO (2007b) and authors calculatio 3.2. Manufacturing structure of establishments: numbers and share With regard to the number of acting manufacturing establishments, this number increased continuously from 596,334 in 1996 to 627,961 in 2000, 740,081 in 2005, 782,069 in 2006 and 805,579 in 2007 (Table 3.2a). It is easily recognized that the number of establishments in manufacturing increased significantly since 2000, when the Enterprise Law went into effect. The number of establishments in 2007 was 1.29 times as much as in 2000 (1.35 times as much as in 1996). Moreover, the number of acting establishments in capital-intensive manufacturing and labor-intensive industries has increased with the highest growth rates compared to other industries during the period of 20002007. Looking at 2007, the total number of acting manufacturing establishments rose 3.1 percent, lower than the rate of 5.67 percent in 2006, but much higher than the rate of 1.33 percent in 2005. It is noteworthy that in 2006 many legal regulations in Vietnam that were improved such as transparency and accountability in conformance with WTO rules came into force, so the growth rate of the number of acting manufacturing establishments was relatively higher than the average rate for the 2000-2005. As the growth rate of acting establishments in capital-intensive manufacturing and labor-intensive industries in 2007 was the highest one compared to others manufacturing, the growth rate of acting establishments in machinery and technology-intensive production went down about 2 percentage points compared to 2006, and 3.53 percentage points compared to 2005, though these establishments have increased much since 1996. In general, the number of acting establishments of all manufacturerers increased except four manufacturerers that were manufacturing tobacco products, non-metallic mineral products, machinery and equipment and electrical machinery and apparatus.

119

The industrial structure of acting establishments in 2007 shows that in 2007 about 51.6 percent of total establishments were found in labor-intensive manufacturing; about 31.5 percent in agricultural resource-intensive manufacturing; 15.7 percent in capital-intensive production. The number of establishments in machinery and technology-intensive industries accounted for a very small share of total manufacturing establishments, equivalent to 1.2 percent only (Table 3.2b). it is recognized that industrial structure of acting manufacturing establishments in 2007 was similar to that in 2006 and 2005.

120

Table 3.2a: Number of manufacturing establishments by subsectors in Vietnam Index (2005 compare d to 2004) 100.49 100.49 100.94 104.42 102.24 108.78 97.98 102.91 104.07 93.33 106.98 108.61 104.09 107.13 102.73 97.73 108.93 101.72 115.63 106.73 112.21 100.00 Unit: establishment Index Index (2007 (2006 compare compare d to d to 2006) 2005) 104.63 104.63 106.26 101.81 105.50 103.65 108.75 105.33 105.92 95.24 107.40 108.40 102.69 107.71 107.02 108.91 106.19 133.90 108.37 105.15 121.54 113.79 103.04 103.04 102.48 100.69 101.70 105.21 101.99 105.51 104.70 77.50 110.03 102.53 98.12 102.89 107.42 109.97 106.38 124.05 104.77 103.20 98.19 112.12 121

1996

2000

2005

2006

2007

Agricultural resource-intensive Food and beverages Labor-intensive production Textiles Wearing apparel Leather tanning and processing Wood and wood products Furniture Capital-intensive production Tobacco products Paper and paper products Chemical and chemical products Non-metallic mineral products Basic metal products Fabricated metal products Recycling Rubber and plastic products Coke, refined petroleum products Publishing and printing Machinery & technology-intensive goods Machinery and equipment Office, accounting and computing machinery

182,80 0 182,80 0 321,35 1 51,625 78,767 3,532 141,07 2 46,355 84,355 525 1,508 1,971 39,053 1,849 33,375 454 2,742 9 2,869 7,828 2,716 10

228,98 1 228,98 1 303,71 7 45,815 79,277 5,517 126,35 3 46,755 87,145 59 1,907 1,941 32,227 1,590 41,595 454 3,329 40 4,003 8,118 2,484 3

235,62 8 235,62 8 381,55 8 54,333 88,408 5,664 157,91 7 75,236 113,74 4 42 3,650 2,334 31,471 2,284 63,813 1,077 4,796 59 4,218 9,151 1,866 29

246,53 3 246,53 3 405,43 9 55,316 93,270 5,871 171,73 8 79,244 120,47 5 40 3,920 2,530 32,319 2,460 68,290 1,173 5,093 79 4,571 9,622 2,268 33

254,01 8 254,01 8 415,49 5 55,699 94,860 6,177 175,15 0 83,609 126,13 6 31 4,313 2,594 31,713 2,531 73,359 1,290 5,418 98 4,789 9,930 2,227 37

Electrical machinery and apparatus Television and communication equipment Medical and optical instruments, watches Motor vehicles Other transport equipment Total manufacturing

1,526 176 58 998 2,344 596,33 4

869 171 86 1,565 2,940 627,96 1

1,083 388 150 2,475 3,160 740,08 1

1,074 408 175 2,341 3,323 782,06 9

1,037 444 195 2,549 3,441 805,57 9

108.19 106.30 131.58 106.64 102.56 101.33

99.17 105.15 116.67 94.59 105.16 105.67

96.55 108.82 111.43 108.89 103.55 103.01

Note: Law on Enterprise 1999 was in effect in 2000, Unified Law on Enterprise 2005 in July of 2006 Source: GSO(2006), GSO (2007b) and authors calculation

122

Table: 3.2b: Share of manufacturing establishments by subsectors, (%) 1996 30.65 30.65 53.89 8.66 13.21 0.59 23.66 7.77 14.15 0.09 0.25 0.33 6.55 0.31 5.60 0.08 0.46 0.00 0.48 1.31 0.46 0.002 0.26 0.03 0.01 0.17 0.39 2000 36.46 36.46 48.37 7.30 12.62 0.88 20.12 7.45 13.88 0.01 0.30 0.31 5.13 0.25 6.62 0.07 0.53 0.01 0.64 1.29 0.40 0.0005 0.14 0.03 0.01 0.25 0.47 2005 31.84 31.84 51.56 7.34 11.95 0.77 21.34 10.17 15.37 0.01 0.49 0.32 4.25 0.31 8.62 0.15 0.65 0.01 0.57 1.24 0.25 0.004 0.15 0.05 0.02 0.33 0.43 2006 31.52 31.52 51.84 7.07 11.93 0.75 21.96 10.13 15.40 0.01 0.50 0.32 4.13 0.31 8.73 0.15 0.65 0.01 0.58 1.23 0.29 0.004 0.14 0.05 0.02 0.30 0.42 2007 31.53 31.53 51.58 6.91 11.78 0.77 21.74 10.38 15.66 0.004 0.54 0.32 3.94 0.31 9.11 0.16 0.67 0.01 0.59 1.23 0.28 0.005 0.13 0.06 0.02 0.32 0.43

Agricultural resource-intensive Food and beverages Labor-intensive production Textiles Wearing apparel Leather tanning and processing Wood and wood products Furniture Capital-intensive production Tobacco products Paper and paper products Chemical and chemical products Non-metallic mineral products Basic metal products Fabricated metal products Recycling Rubber and plastic products Coke, refined petroleum products Publishing and printing Machinery & technology-intensive goods Machinery and equipment Office, accounting and computing machinery Electrical machinery and apparatus Television and communication equipment Medical and optical instruments, watches Motor vehicles Other transport equipment

123

Total manufacturing 100.00 Source: GSO(2006), GSO (2007b) and authors calculation

100.00

100.00

100.00

100.00

124

3.3. Manufacturing employment According to an enterprise survey between 2001 and 2007, along with the increase in the number of enterprises, the number of employees in manufacturing enterprises also increased strongly. The number in employment in manufacturing enterprises in 2007 was 3,4 billion people, equal to 2.1 times as much as in 2001. Of which three subsectors that are wearing apparel, leather tanning and processing and furniture absorbed the highest number of employees compared to other manufacturers and respectively were 585,414; 581,731 and 320,147 employees, increasing much in comparison with previous years (Table 3.3). With regard to employment structure, Table 3.3 separates the employees in manufacturing by four categories (agricultural resource-intensive branches; labor-intensive branches; capitalintensive branches; machinery and technology-intensive branches). The share of laborintensive manufacturing in total manufacturing employment dominates with about 48.8 percent in 2001, 52.3 percent in 2005, 52.42 percent in 2006 and with more than 53 percent in 2007. This is followed by employment in capital-intensive branches with a 24.48 percent in 2001, decreasing to 23.65 percent in 2005, 23.49 in 2006 and 23.18 in 2007; employment in agricultural resource-intensive branches with a 16.77 percent in 2001 going down to 12.93 percent in 2007 and employment in machinery and technology-intensive manufacturing with 9.56 percent in 2001 increasing to 10.87 percent in 2007. It is noted that labor intensive manufacturing consists of five branches such as textiles; apparel; leather and leather products; wood and wood products and furniture. The share of employment in apparel and furniture in total manufacturing employment increased continuously year by year from respectively 14.52 and 4.13 percent in 2001, to respectively 17.21 and 9.41 percent in 2007. At the same time textiles and leather and leather tanning and processing had to reduce a little share in total employment of manufacturing during 20012007.

125

Table: 3.3: Manufacturing employment Surve y 2001 16.77 16.77 48.86 7.68 14.52 18.57 3.96 4.13 24.81 0.76 2.29 4.09 8.00 1.78 3.18 0.02 3.21 0.05 1.43 9.56 1.95 0.19 2.46 1.04 0.43 Surve Surve y y 2005 2006 Share (%) 14.17 13.80 14.17 13.80 52.27 5.81 17.22 17.90 3.75 7.58 23.65 0.50 2.11 3.02 7.50 1.37 3.97 0.03 3.72 0.04 1.39 9.91 1.89 0.21 2.29 1.04 0.45 52.42 6.08 16.50 17.77 3.68 8.40 23.49 0.47 2.25 2.88 7.10 1.39 4.19 0.04 3.69 0.04 1.44 10.29 1.75 0.36 2.58 1.14 0.37 Surve y 2007 12.93 12.93 53.02 5.99 17.21 17.10 3.31 9.41 23.18 0.42 2.06 2.90 6.71 1.34 4.40 0.06 3.76 0.11 1.42 10.87 1.74 0.48 2.88 1.20 0.41

Survey 2001 Agricultural resource-intensive Food and beverages Labor-intensive production Textiles Wearing apparel Leather tanning and processing Wood and wood products Furniture Capital-intensive production Tobacco products Paper and paper products Chemical and chemical products Non-metallic mineral products Basic metal products Fabricated metal products Recycling Rubber and plastic products Coke, refined petroleum products Publishing and printing Machinery & technology-intensive goods Machinery and equipment Office, accounting and computing machinery Electrical machinery and apparatus Television and communication equipment Medical and optical instruments, watches 267,924 267,924 780,443 122,759 231,948 296,638 63,203 65,895 396,282 12,156 36,553 65,370 127,770 28,499 50,769 299 51,223 805 22,838 152,782 31,094 3,083 39,280 16,660 6,842

Survey Survey 2005 2006 Persons 410,016 427,775 410,016 427,775 1,512,24 1,624,70 3 8 168,196 188,365 498,226 511,278 517,882 550,851 108,624 113,979 219,315 260,235 684,252 728,088 14,544 14,598 60,975 69,887 87,501 89,217 216,861 220,001 39,713 42,957 114,735 130,016 968 1,319 107,697 114,298 1,040 1,232 40,218 44,563 286,569 318,815 54,668 54,331 6,023 66,392 30,102 12,999 11,179 80,017 35,292 11,313

Survey 2007 439,682 439,682 1,803,56 1 203,829 585,414 581,731 112,440 320,147 788,504 14,132 70,174 98,583 228,115 45,462 149,781 2,000 128,011 3,861 48,385 369,886 59,029 16,191 98,023 40,900 13,868

126

Motor vehicles Other transport equipment

15,601 40,222

34,217 82,168

36,801 89,882 3,099,38 6

42,489 99,386 3,401,63 3

0.98 2.52

1.18 2.84

1.19 2.90

1.25 2.92

1,597,43 2,893,08 Total manufacturing 1 0 Source: GSO(2006), GSO (2008) and authors calculation

100.00

100.00

100.00

100.00

127

3.4. Structure of capital79 in manufacturing Along with the increase in the number of establishments and employees, there is a huge rise in terms of absolute capital value in manufacturing, creating an enormous production capacity of manufacturing. Total capital of manufacturing in 2007 was 769,078 billion VND, more than three times as much as that in 2001 (Table 3.4a). As shown in Table 3.4a, in general, the growth rate of capital source in manufacturing in 2007 were 17.3 percent, higher compared to that of 16.8 percent in 2006. Particularly, export-oriented subsectors in 2007 increased their capital resource with relatively high rates compared to 2006. The subsectors were wearing apparel; furniture; office, accounting and computing machinery; electrical machinery and apparatus; radio and communication equipment and apparatus. In terms of the capital structure of manufacturing, the capital structure is in contrast to the structure of establishments and employees, the share of capital source of capital-intensive manufacturing and machinery and technology-intensive production in total manufacturing capital tends to increase relatively highly. In 2007 capital source of capital-intensive manufacturing machinery accounts for the largest share in manufacturing capital, equivalent to 40.93 percent or increasing 7.97 percentage points compared to 1995 (1995: 32.96 percent). The share of capital source of machinery and technology-intensive production in total capital of manufacturing increased to 20.07 percent in 2007 from 15.37 percent in 1995, equal to 4.7 percentage points. At the same time, labor intensive manufacturing accounted for 22.87 percent, decreasing about 4 percentage points compared to 1995 and capital of agricultural resource-intensive accounted for 16.13 percent, reducing strongly about 8 percentage points compared to 1995. (Table 3.4b).

79

Capital of enterprises means their equity and liability (GSO, 2008)

128

Table 3.4a: Value and growth rate of manufacturing capital at current price, 1995 a Survey 2001 Survey Survey 2005 2006 Billion VND Survey 2001- Survey Survey 2007 2005 2006 2007 Annual Growth rate (%) 10.39 15.5 124,049 15.78 124,049 15.78 10.39 15.5 10.24 16.5 175,902 26.23 53,246 20.83 13.91 10.1 2.11 23.3 34,332 27.49 35,780 23.46 5.70 7.1 11,940 26.04 8.90 -1.5 19.35 38.5 40,604 43.93 314,780 23.76 11.45 26.1 31.14 17.2 8,348 18.16 21,382 23.14 28.30 4.5 55,350 32.92 0.26 23.0 96,889 14.56 7.20 31.3 19.97 14.8 29,826 39.29 50,739 29.78 14.49 49.4 250 69.07 -41.91 50.6 37,960 26.68 12.77 23.3 1,742 8.01 22.24 25.4 23.84 11.5 12,294 24.21 154,347 24.68 43.35 5.0 18.51 7.9 15,977 22.77 9,464 32,135 19,078 3,060 24,564 50,069 12.56 23.61 14.94 17.47 26.18 33.67 53.84 35.43 16.00 -2.12 19.72 81.53 44.3 24.8 34.6 8.4 16.0 -18.9 129

Agricultural resource-intensive Food and beverages Labor-intensive production Textiles Wearing apparel Leather tanning and processing Wood and wood products Furniture Capital-intensive production Tobacco products Paper and paper products Chemical and chemical products Non-metallic mineral products Basic metal products Fabricated metal products Recycling Rubber and plastic products Coke, refined petroleum products Publishing and printing Machinery & technology-intensive goods Machinery and equipment Office, accounting and computing machinery Electrical machinery and apparatus Television and communication equipment Medical and optical instruments, watches Motor vehicles Other transport equipment

18,511 18,511 20,935 8,368 4,061 3,018 3,802 1,687 25,168 1,619 2,016 3,730 8,451 2,814 1,865 19 2,221 435 1,998 11,736 1,306 94 1,230 4,390 126 2,023 2,569

54,126 97,263 107,369 54,126 97,263 107,369 53,970 137,016 151,045 19,912 42,444 48,349 10,319 27,264 27,839 13,605 31,610 33,413 4,409 11,127 12,118 5,726 24,571 29,326 95,489 224,042 249,684 2,785 5,429 7,120 6,934 15,946 20,459 14,375 44,867 44,982 39,976 68,857 73,814 5,753 21,655 25,979 10,454 29,660 33,958 35 286 166 10,600 27,301 30,789 835 1,136 1,389 3,741 8,905 11,028 42,453 102,586 147,058 5,497 12,489 14,801 2,656 8,145 7,001 1,515 6,979 10,660 4,263 19,013 12,218 2,885 17,689 34,030 6,558 25,749 14,173 2,824 21,178 61,775

Total manufacturing 76,351 246,037 560,907 655,156 769,078 22.88 Note: a- data from GSO(2006) Source: GSO(2006), GSO (2008) and authors calculation

16.80

17.4

Table 3.4b: Manufacturing capital structure at current price Changes (+/-) 2007 Survey compared 2007 to 1995 16.13 -8.12 -8.12 16.13 22.87 -4.55 6.92 -4.04 -0.86 4.46 4.65 0.70 1.55 -3.43 5.28 3.07 7.97 40.93 1.09 -1.03 2.78 0.14 7.20 2.31 12.60 1.53 3.88 0.19 4.15 6.60 0.03 0.01 4.94 2.03 0.23 -0.34 1.60 -1.02 4.70 20.07 0.37 2.08 1.23 1.11 4.18 2.57 130

Agricultural resource-intensive Food and beverages Labor-intensive production Textiles Wearing apparel Leather tanning and processing Wood and wood products Furniture Capital-intensive production Tobacco products Paper and paper products Chemical and chemical products Non-metallic mineral products Basic metal products Fabricated metal products Recycling Rubber and plastic products Coke, refined petroleum products Publishing and printing Machinery & technology-intensive goods Machinery and equipment Office, accounting and computing machinery Electrical machinery and apparatus

1995 a 24.24 24.24 27.42 10.96 5.32 3.95 4.98 2.21 32.96 2.12 2.64 4.89 11.07 3.69 2.44 0.02 2.91 0.57 2.62 15.37 1.71 0.12 1.61

Survey Survey 2001 2005 22.00 17.34 22.00 17.34 21.94 24.43 8.09 7.57 4.19 4.86 5.53 5.64 1.79 1.98 2.33 4.38 38.81 39.94 1.13 0.97 2.82 2.84 5.84 8.00 16.25 12.28 2.34 3.86 4.25 5.29 0.01 0.05 4.31 4.87 0.34 0.20 1.52 1.59 17.25 18.29 2.23 2.23 1.08 0.76 3.31 3.39

Survey 2006 16.39 16.39 23.05 7.38 4.25 5.10 1.85 4.48 38.11 1.09 3.12 6.87 11.27 3.97 5.18 0.03 4.70 0.21 1.68 22.45 2.26 1.00 3.93

Television and communication equipment Medical and optical instruments, watches Motor vehicles Other transport equipment Total manufacturing

5.75 0.17 2.65 3.36 100.00

2.85 0.62 2.84 4.33 100.00

2.18 0.51 3.15 6.07 100.00

2.16 0.43 3.23 9.43 100.00

2.48 0.40 3.19 6.51 100.00

-3.27 0.23 0.54 3.15

Note: a- data from GSO(2006) Source: GSO(2006), GSO (2008) and authors calculation

131

3.5. Structure of industrial ownerships Officially, Vietnam has adopted the multi-sector economic principle which accepts the contribution of all sectors: household businesses, private enterprises, limited companies, joint-stock companies, cooperatives, state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs). Thus, three essential forms of industrial ownership have become dominant in Vietnam in the past ten years: 1 SOEs including central and local SOEs; 2 non-state enterprises (household businesses, private enterprises, limited companies , jointstock companies cooperatives); and 3 FIEs including both JVs and 100 percent wholly-owned foreign firms. Before the 1990s the SOEs dominated Vietnams industry. The economic reform process has changed the landscape for the state-owned and non-state-owned industrial sectors. Especially, the Company Law, Private Enterprise Law, the Enterprise Law (in 1999 and 2005) and the Law on Foreign direct investment have been promulgated or amended as well as the SOEs renovation program has been taken, all this has paved the way to allow private enterprises to develop. With regard to the number of industrial establishments, SOEs have been declining relatively with the strong rise of non state establishments and FIEs regardless of size and scale of small, medium and large enterprises. In 2007, the number of SOEs in industry was 1,033, about 54 percent of the number of SOEs in 1996, while the number of non state establishments and FIEs were, respectively, 845,652 and 3,632 and equivalent to 13. and 6.7 times as much as in 1996 (Table 3.5a). Though there was an increase of output in terms of the value in all sectors, the growth rates of non state and foreign invested sectors were about 20 percent per year in the last few years, while the rate of SOEs sector was only about 10 percent per year partly due to SOE reform including SOEs equitization. As a result, there was also a decline in the share of SOEs sector in total industrial output. Accounting for 50.3 percent in 1996 the SOE sector decreased to 29.7 percent in 2007. During the same period, the non state and foreign invested sector amounted to, respectively, 31.7 and 38.5 percent in 2007 as opposed to respectively, 24.6 and 25.1 percent in 1996 (Table 3.5b). Foreign invested sector in industry could develop strongly due to Vietnams business environment improvement in general as well as especially after WTO accession. FDI inflow has increased in Vietnam. Particularly, in 2007, FDI commitment and disbursement were, respectively, US$ 21.3 billion and 8 billion80 according to the Ministry of Planning and Investment. Of which, FDI capital inflow into industry and FDI disbursement in industry both account for more than 60%. Table 3.5a: The number of industrial establishments by ownership, 1996-2007 Total number State (central and local) Non-state (private, cooperatives and household) 623710 615296 590246 615453 Foreign (FDI sector)

1996 1997 1998 1999

80

626129 617805 592948 618198

1879 1843 1821 1786

540 666 881 959

Total FDI disbursement was US$ about 8 billion, but it includes both capital disbursement of foreign and Vietnamese side

132

2000 2001 2002 2003 2004 2005 2006 2007

654962 697225 766797 773533 768920 777441 824064 850317

1688 1535 1538 1425 1359 1181 1071 1033

652216 694242 763560 770102 765210 773581 819934 845652

1058 1448 1699 2006 2351 2679 3059 3632

Source: GSO (2006), GSO (2007b) and Department of Industrial Statistics, GSO Table 3.5a: Industrial output at 1994 price by ownership, 1996-2007 Total output State (centra l and local) Non-state (private, cooperative s and household) Billion VND 52.0 25.5 58.0 28.3 64.5 31.1 69.5 33.4 73.2 37.0 82.9 44.1 93.4 53.6 105.1 63.5 117.6 78.3 131.7 95.8 141.1 120.1 154.2 148.8 169.4 181.1 Foreign (FDI sector) Total output State (centra l and local) Non-state (private, cooperative s and household) Percent (%) 50.3 24.6 49.2 24.0 48.0 23.1 45.9 22.1 43.4 21.9 41.8 22.3 41.1 23.6 40.3 24.3 38.6 25.7 37.0 26.9 33.9 28.8 31.6 30.5 29.7 31.7 Foreign (FDI sector)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

103.4 117.9 134.4 151.2 168.7 198.3 227.3 261.1 305.1 355.6 416.6 487.5 570.7

25.9 31.6 38.9 48.4 58.5 71.3 80.3 92.5 109.2 128.2 155.3 184.5 220.2

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

25.1 26.8 28.9 32.0 34.7 35.9 35.3 35.4 35.8 36.0 37.3 37.8 38.6

Source: GSO (2006), GSO (2007b) and Department of Industrial Statistics, GSO 4. Growth of industrial output Industrial output plays a key role in the Vietnamese economy. It accounts for the largest share of total output of the economy. For a decade, from 1996 to 2005, Vietnams industrial production increased at a two-digit rate. The growth rate of the next 5-year period was higher than that of the previous 5-year period. Notably, the average rate was 13.94 percent year on year for the period in 1996-2000, 16.01 percent year on year for 2001-2005. For the year 2006 it reached 17.03 percent. It is estimated that for the year 2007, the figure was even a bit higher, at about 17.07 percent for a whole industry as compared to that in 2006. For manufacturing output, the trend of growth is similar to industrial output, the growth rate of the next 5-year period was higher than that of the previous 5-year period. In addition, its growth rate has been higher than that of industrial output. Notably, the average rate of manufacturing output was 13.71 percent year on year for the period of 1996-2000, 17.45 percent year on year for 20012005. It reached 19.2 percent in 2006 and is estimated to be about 19.1 for 2007. (Table 4.1).

133

With the two digit growth rate of industrial output including manufacturing output for more than ten years it can be said that the industrial sector has made the largest contribution for Vietnamese economic growth. If this trend keeps continuing in the future, the goal of the socio-economic development strategy for 2001-2010 as well as the five year 2006-2010 socio-economic development plan on economic structural change can be reached. Table 4.1: Growth rate of manufacturing output at 1994 price, 1996-2007 Annual Average Growth Rate (%) 1996-2000 2001-2005 Industrial Output Manufacturing Output 13.94 13.71 16.01 17.45 Annual Growth Rate (%) 2005 2006 2007est 17.14 19.21 17.03 19.20 17.07 19.10

Source: GSO(2006), GSO (2007b) and authors calculation Looking at four branches of manufacturing, machinery and technology-intensive production managed to keep a growth rate of more than 20 percent. Labor-intensive production increased remarkably with an annual average rate of 12.66 percent for 1996-2000 to 18.86 percent for 20012005. Particularly, in 2006 its growth rate reached 21.96 percent, higher than that of 20.34 percent in 2005. Agricultural resource-intensive and capital-intensive production also enjoyed a relatively high rate of growth, though they have growth rates lower than the other industrial activities. Notably, the annual average growth rate of agricultural resource-intensive production was 10.16 percent for 1996-2000 and 14.68 percent for 2001-2005. It stood stable at a level of more than 15 percent for 2005 and 2006. Regarding capital-intensive production, its annual average growth rate was 14.69 for 1996-2000 and 17.80 percent for 2001-2005. In 2006 it went down a little and reached 17.78 percent compared to 19.42 percent in 2005. If manufacturing is further decomposed by industrial activities, it is found that in 2006 there was a change in the growth of these industrial activities. Industrial subsectors that are considered to have competitive advantages to export such as agricultural resource-intensive and labor-intensive production managed still to maintain high growth rates, more or less as much as the average growth rate of 2001-2005. At the same time, industrial subsectors that are considered as import-substituting ones have growth rates less than compared to 2001-2005. These are tobacco products; paper and paper products; non-metallic mineral products; machinery and equipment; medical, precision and optical instruments, watches and clocks; and motor vehicles (Table 4.2). It could be partly explained that with regard to the latter to increase output is not easy because of the tough competition of the world market or because their capacity production is limited. With regard to the former, these industrial subsectors may face a fierce competition in the domestic market. It can be partly explained that since 2006 many industrial goods, on which import tariffs have been cut under the frameworks of AFTA, ACFTA, and AKFTA experienced slower growth in 2006 compared to 2005. Table 4.2 Growth of manufacturing output at 1994 price, 1996-2006, % 2006 increased/ decreased compared 1996- 2001to 20012000 2005 2005 2006 2005 Agricultural resource-intensive 10.16 14.68 15.7 15.00 0.32 134

Food and beverages Labor-intensive production Textiles Wearing apparel Leather tanning and processing Wood and wood products Furniture Capital-intensive production Tobacco products Paper and paper products Chemical and chemical products Non-metallic mineral products Basic metal products Fabricated metal products Recycling Rubber and plastic products Coke, refined petroleum products Publishing and printing Machinery & technology-intensive goods Machinery and equipment Office, accounting and computing machinery Electrical machinery and apparatus Television and communication equipment Medical and optical instruments, watches Motor vehicles Other transport equipment

10.16 12.66 10.47 15.60 20.78 1.86 14.88 14.69 7.87 15.15 17.01 14.86 11.98 19.92 12.82 23.27 10.32 8.65 22.68 15.78 232.93 27.36 17.31 17.99 20.16 31.62

14.68 18.26 13.76 20.52 16.51 17.81 27.87 17.80 14.42 16.32 16.57 15.26 18.91 25.11 12.75 23.24 22.86 15.46 20.48 15.09 25.03 27.42 15.83 12.33 25.61 20.03

8 15.7 8 20.3 4 14.7 5 19.6 4 18.1 2 23.5 9 31.7 5 19.4 2 10.5 7 16.4 1 25.3 2 10.6 7 24.2 5 35.7 4 2.42 20.2 2 34.1 8 22.5 7 22.7 6 2.30 73.6 8 32.5 0 14.8 4 12.4 0 12.2 1 30.0 9

15.00 21.96 16.24 20.64 17.28 26.62 35.37 17.78 9.63 13.29 19.20 12.57 21.03 25.94 7.34 20.31 27.68 28.50 23.86 4.06 44.88 30.40 16.32 10.89 23.34 26.79

0.32 3.70 2.48 0.12 0.78 8.81 7.50 -0.02 -4.79 -3.02 2.63 -2.69 2.12 0.83 -5.41 -2.94 4.82 13.04 3.37 -11.03 19.85 2.99 0.50 -1.45 -2.27 6.77 135

Source: GSO(2006), GSO (2007b) and authors calculation 5. Manufacturing exports by factor intensity Merchandise exports clearly reflect the consequence of the openness and reforms of the Vietnamese Economy. Total merchandise exports including manufacturing exports have continued to grow rapidly in both pace and scale. As a result exports have provided an important driving force for economic growth. Total merchandise exports increased 2.65 times (from US$ 5.45 billion to 14.48 billion) between 1995 and 2000, 2.16 times between 2001 and 2005 (from US$ 15.02 billion to US$ 32.44 billion) and then recorded $48.56 billion in 2007, a nine-fold increase from 1995. Total merchandise export value in 2007 is estimated to be equivalent to 68.79 percent of GDP. Before 2000, this export expansion was dominated by crude oil, but after 2000 by other commodities than crude oil. This is because non-oil exports of Vietnam grew at an average annual rate of 19.1 percent between 1995 and 2005 and 26.4 percent for 2006-2007. Meanwhile, the range of export products has been gradually expanded, contributing to the sustainability of export growth. It can be said that the growth of commodity exports has been less dependent on crude oil export, though in 2004 and 2005 crude oil prices also surged considerably to high levels (Figure 5 and Table 5). However, the primary commodities still account for a large portion of exports, making Vietnams exports vulnerable to the volatility of the world commodity prices. Regarding manufacturing exports, the average growth rate has been somewhat higher than the average rate of total merchandise exports with about 1 percentage point. As a result, the share in total merchandise exports rose from about 38.7 percent of total exports in 1995 to 46.8 percent in 2000, 49.6 percent in 2005 and an estimated 51.5 percent in 2007. If other commodities are taken into account (these other are mostly unclassified manufacturing) the share of manufacturing and other commodities in total merchandise exports increased from about 51.9 percent in 1995 to 63 percent in 2000, 63.7 percent and estimated 68.2 percent in 2007. Looking at a detailed level, manufacturing exports of Vietnam concentrate in labor-intensive products such as textile and garments; footwear; travel goods; wood and wood products and handicraft and fine art items. Export value of labor-intensive products accounts for more than 30% of total exports of Vietnam. Export value of these products has continued to increase with high rates. In 2007 the growth rate of export of labor-intensive products recorded 24.9 percent, much higher than that of 19.2 percent in 2006. The higher growth rate of export value of labor-intensive products in 2007 was due to the higher growth rate of export of textile and garments; travel goods; wood and wood products and handicraft and fine art items in comparison with the year of 2006. Textile and garments managed to increase with the rate of 32.82 percent in 2007, much higher than that of 20.59 percent in 2006. In terms of US$ value , export of textile and apparel industry was US$ 7.749 billion in 2007, rising over the 2006 year by over US$ 1.915 billion. This spectacular performance has raised Vietnam from rank 16 to the Top 10 of the greatest textile and apparel exporting countries and territories of the world. The result of Vietnams textile and apparel industry reflected it could overcome challenges in harsh competition in the regional and international markets in the first year of Vietnams WTO accession. For the first time, textile and apparel goods have taken over crude oil to become the commodity group that attains the greatest export turnover. The number one contribution for the impressive growth rate of this textile and apparel goods comes from the United States marketplace with its turnover value of US$ 4.4 4.5 billion representing 136

55% of total textile and apparel export value, although exports to this market encounter significant difficulties due to an unclear protection policy of the United States81. Besides the maximum exploitation of big and traditional markets, enterprises have enlarged a certain number of new markets, therefore these markets have altogether attained high growth rates, such as Turkey increases by over 500%, South Africa increases by over 400%, Argentina increases by over 60%, Canada increases by over 35%... Regarding footwear export, though in terms of value export of footwear in 2007 increased US$ 402 million in comparison in 2006, the growth rate of footwear export declined with 6.95 percentage points compared to 2006, because footwear still was subject to anti-dumping tax. Over the last few years, there has been a trend towards a larger role of export of machinery and technology-intensive in manufacturing export value. Due to high growth rates of machinery and technology-intensive manufacturing export value, the share of this group in total export value increased from 0.4 percent in 1995 to 6.4 percent in 2006 and 7.7 percent in 2007. Export in the machinery and technology-intensive group includes computer, electronic goods and components; electrical wire and cable; bicycles and parts of bicycles; and other. In 2007 the growth rate of the group was more than twice the growth rate of the total export value in 2007 and as well as its rate in 2006. In sum, the 2007 figures of export performance reflected that since Vietnam during its first year of WTO membership, has managed to take opportunities to increase export scale as well as diversify exporting commodities. However, performance of merchandise export in general and of manufacturing export in particular still presents certain weaknesses. Export growth contained elements which were unsustainable and vulnerable to outside shocks. Risks might increase in the context of changes in oversight mechanisms or policies (exchange rate policy, etc.) of big markets for Vietnams exports (EU and USA market). Besides, the shift of export commodity structure towards reducing export of products with high raw content import and increase the amount of those with high processing and hi-tech contents - was still slow. Figure 5: Merchandise export by industrial subsectors, US$ Millions
18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Crude oil Primary Agricultural resourceintensive Labourintensive production Capitalintensive production Machinery and technologyintensive goods other

2000

2005

2006

2007

Source: GSO and Authors calculation Table 5: Structure and Growth of Merchandise export in Vietnam (%)

U.S. Department of Commerce imposed The import monitoring program of textile and apparel products from Vietnam in 2007

81

137

Total Crude oil Non oil -Primary Agricultural Minning Manufactured products Agr. resourceintensive Laborintensive Capitalintensive production Machinery & tech-intensive -Other goods Total export Crude oil Non oil -Primary Agricaltural Mining Manufactured products Agr. resourceintensive Laborintensive Capitalintensive production Machinery & tech-intensive -Other

2002 2003 2004 2005 2006 2007est Structure (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 18.8 24.2 20.8 19.6 19.0 21.4 22.7 20.8 17.5 81.2 75.8 79.2 80.4 81.0 78.6 77.3 79.2 82.5 29.3 12.8 11.0 11.5 11.4 12.3 13.6 13.9 14.2 27.8 12.1 10.3 10.6 10.5 11.0 11.5 11.6 12.1 1.5 0.6 0.8 0.9 0.9 1.3 2.1 2.3 2.1 38.7 12.7 25.3 0.4 0.4 13.2 23.3 69.8 16.3 4.7 5.3 -5.9 26.3 18.6 30.5 17.5 7.2 46.8 12.4 26.9 0.7 6.8 16.2 25.5 67.4 16.2 -14.9 -15.5 -2.1 29.9 66.7 9.8 66.9 14.4 47.4 14.0 27.5 0.9 5.0 20.8 3.8 -10.8 8.4 -10.7 -12.3 20.2 5.1 17.0 6.1 40.3 -23.9 32.9 53.9 14.0 33.6 0.9 54.8 12.4 36.0 1.0 52.0 10.3 34.2 1.0 49.6 9.7 32.3 1.1 6.5 14.1 22.5 30.0 20.4 35.1 28.5 88.5 16.9 15.7 15.6 32.1 23.3 20.8 48.5 9.5 31.4 1.3 6.4 16.9 22.8 12.1 25.9 25.4 23.3 36.6 20.0 20.5 19.2 37.9 20.5 47.0 50.1 8.7 32.1 1.5 7.7 18.2 21.9 2.7 27.0 24.9 27.9 9.3 26.0 11.7 24.9 47.7 48.2 31.6

1995

2000

2001

5.5 5.4 6.4 15.0 14.9 14.3 Growth Rate(%) 11.2 20.6 31.4 4.6 16.9 48.4 12.9 21.5 27.5 16.1 19.2 42.5 14.5 19.3 38.1 38.1 18.2 92.7 26.5 11.2 35.8 7.0 22.3 -19.9 22.5 6.6 29.3 35.8 19.0 19.9 24.7 9.0 25.0 41.0 56.3 26.1

Source: GSO and Authors calculation 6. Other characteristic features of industry 6.1. Important Role of Small and Medium Enterprises According to Decree 90/2001/ND-CP by the Vietnamese Government, small and medium enterprises are determined by both labor and capital. A firm with an employment of less than 300 138

workers and less than VND 10 billion capital is defined to be a small or medium enterprise (SMEs). Otherwise it is considered to be a large one. In terms of employment by SMEs, small sized enterprises are engaging up to 49 and medium sized from 50 up to 299 employees. During the last few years SMEs have played an important role in the development of Vietnam, because they have created a source for domestic growth and employment. This is because most industrial production including manufacturing in Vietnam is carried out by SMEs. It is found from the 2001 enterprise survey that at the beginning of the year 2001, SMEs in the industrial sector comprised about 86 percent of total industrial enterprises in terms of capital or in term of employment, of which non state SMEs were many and accounted for about 83 percent of total industrial enterprises. According to the 2007 enterprises survey SMEs in the industrial sector comprised about 91 percent of total industrial enterprises in terms of capital or in terms of employment, of which non state SMEs were many and accounted for about 85 percent of total industrial enterprises. This implies that more and more SMEs have been established and put into operation. 6.2. Efficiency of Industry Regarding efficiency, efficiency of industry is still a main concern for Vietnams economy. It is due to the fact that in the last few years the gap between growth rates of production output and value added of the industry has been widening, from 4.24 percentage points in 2001 to 5.37, 6.37, 6.37, 6.58, and 6.85 percentage points in 2002, 2003, 2004, 2005, and 2006, respectively. Moreover, this gap is estimated at not less than 7.0 percentage points in 2007 (Figure 6.2a). The efficiencys picture of manufacturing is similar to the industry. The figure 6.2b shows that the gap between growth rates of output and value added of manufacturing has been widening, from 4.24 percentage points in 2001 to 4.57, 4.83, 6.80, 6.30, and 6.82 percentage points in 2002, 2003, 2004, 2005, and 2006, respectively. This gap is estimated at not less than 6.30 percentage points in 2007 (Figure 6.2b). Profit rate is an important indicator as to reflect efficiency of enterprises. This profit rate (%) that is the ratio between total profit before tax gained by production and other activities during a year presents how much profit is gained by one unit of turnover Looking at industrial subsectors, the efficiency of these subsectors reflects the fact that import substituting subsectors with relatively high protection (see more section 7.1) have gained a higher profit rate, while export oriented subsectors in general and labor-intensive branches in particular with relatively low protection (see more section 7.1) have gained a lower profit rate or even loss making ones. As Table 6.1 shows, with the exception of the agricultural resource-intensive subsector getting a higher profit rate of 4.67 percent; textile apparel; leather tanning and processing, wood and wood products and furniture gained very low profit rates, respectively, of 0.11; 0.61; 0.05; 1.27 and 1.99 percent in 2006 (Table 6.7). Figure 6.2: Growth rates of output and value added of the industry at 1994 price(%)

139

20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
GR GO of Industry GR VA of Industry Gap

Source: GSO(2006), GSO (2007b) and authors calculation Figure 6.2b: Growth rates of output and value added of manufacturing at 1994 price(%)
25.0

20.0

15.0

10.0

5.0 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Gap 2007

GR GO of manufacturing

GR VA of manufacturing

Source: GSO(2006), GSO (2007b) and authors calculation Table 6.1: Profit rate by industrial subsectors from different enterprises surveys, (%) 2000 2004 2005 2006 Total profit before tax per turnover during a year Agricultural resource-intensive Food and beverages Labor-intensive production Textiles Wearing apparel Leather tanning and processing Wood and wood products Furniture Capital-intensive production Tobacco products Paper and paper products Chemical and chemical products Non-metallic mineral products Basic metal products Fabricated metal products 1.25 1.89 2.37 2.93 2.32 3.50 5.52 7.28 3.53 1.92 3.34 -0.97 4.24 0.59 1.26 -0.63 2.91 1.96 6.50 1.23 5.70 3.82 2.26 1.87 3.97 -0.71 1.80 -0.61 2.01 1.32 5.94 1.26 5.54 4.47 -0.68 2.25 4.75 0.11 0.61 -0.05 1.27 1.99 6.62 1.11 6.57 4.64 0.37 1.76 140

Recycling Rubber and plastic products Coke, refined petroleum products Publishing and printing Machinery & technology-intensive goods Machinery and equipment Office, accounting and computing machinery Electrical machinery and apparatus Television and communication equipment Medical and optical instruments, watches Motor vehicles Other transport equipment Source: GSO (2004), GSO (2008)

-0.04 -1.25 6.65 7.51 1.27 1.54 3.90 5.81 6.64 6.38 5.71

0.77 2.27 5.62 5.68 5.20 1.77 4.42 7.79 8.81 7.88 9.30

-1.17 1.40 6.19 4.99 3.36 1.72 3.60 5.13 5.51 5.89 7.50

1.14 1.69 1.76 4.90 3.47 3.15 3.75 1.45 3.20 2.79 7.10

The above tendency was partly caused by the underlying structure and price competitiveness of Vietnams industry including manufacturing. Costs of industrial production have still been high and could not be reduced by industrial enterprises. Production of many industries depends heavily on imported materials whose prices have been increasing during the last few years. Assembled and manufactured goods with low value-added contents are still the key export items of Vietnams manufacturing industry. Technology transfer, scientific and advanced technical application in the industry sector progressed very slowly. 7. Vietnams industrial and economic competitiveness 7.1.Vietnams competitiveness 7.1.1. RCA and ERP indices of competitiveness and protection On the competitiveness of Vietnamese industries, one popular method is to classify individual industries into competitive, somewhat competitive, and not competitive and so on, according to revealed comparative advantage (RCA), effective rate protection (ERP), etc. This approach is only a static concept. The export-based RCA discloses the relative pattern of specialization in exports of an economy in relation to worldwide patterns. The greater a sectors RCA, the more level of specialization in that sector of an economy relative to worldwide patterns of specialization, indicating a stronger comparative advantage in that sector. Thus, the structure of RCAs over time provides information about an economys comparative advantage progress and improvement process of export structure. Vietnams industrial subsectors having comparative advantage are footwear, apparel, furniture, manufacture for travel goods, agricultural resource manufacture as shown in Table 7.1. Table 7.1a: Vietnams export commodities with current RCA>1 in the world market Product code (HS) Product label 64 Footwear, gaiters and the like, parts thereof 9 Coffee, tea, mate and spices Manufactures of plaiting material, basketwork, 46 etc.

2004 2005 2006 14.5359 14.8278 22.8604 19.6633 18.3297 22.8092 27.2580 27.6625 22.4596 141

3 65 62 16 10 94 61 42 50 11 8 63 69 80 40 14 27 96 7 55 53 34 56 44 54 19

Fish, crustaceans, molluscs, aquatic invertebrates nes 13.3681 13.5624 12.5445 Headgear and parts thereof 6.8498 6.6722 9.3713 Articles of apparel, accessories, not knit or crochet 6.5595 6.8271 8.2231 Meat, fish and seafood food preparations nes 3.3310 4.3999 7.2979 Cereals 6.7996 10.3768 6.7475 Furniture, lighting, signs, prefabricated buildings 2.9318 3.7176 5.8344 Articles of apparel, accessories, knit or crochet 4.7879 4.8212 5.4347 Articles of leather, animal gut, harness, travel goods 3.1447 3.3195 4.9894 Silk 4.9041 5.0787 4.4029 Milling products, malt, starches, inulin, wheat gluten 3.1117 3.6363 4.3604 Edible fruit, nuts, peel of citrus fruit, melons 3.6127 4.0034 3.1897 Other made textile articles, sets, worn clothing etc 3.0083 2.9540 3.1223 Ceramic products 2.7693 2.9432 3.0273 Tin and articles thereof 1.6526 1.3976 2.6329 Rubber and articles thereof 2.6699 3.0974 2.3238 Vegetable plaiting materials, vegetable products nes 4.3146 3.9531 2.2484 Mineral fuels, oils, distillation products, etc 1.9587 1.8854 1.9715 Miscellaneous manufactured articles 1.1437 1.1829 1.9013 Edible vegetables and certain roots and tubers 1.2160 1.1878 1.7085 Manmade staple fibers 1.4325 1.6980 1.5392 Vegetable textile fibres nes, paper yarn, woven fabric 1.3733 1.3711 1.4912 Soaps, lubricants, waxes, candles, modelling pastes 0.7680 1.0789 1.3911 Wadding, felt, nonwovens, yarns, twine, cordage, etc 1.1400 1.1812 1.2233 Wood and articles of wood, wood charcoal 0.7306 0.8732 1.1680 Manmade filaments 0.9487 1.2196 1.1602 Cereal, flour, starch, milk preparations and products 1.3217 1.5376 1.0056

Source: ITC and authors calculations (based on COMTRADE statistics) With regard to ERP, according to MUTRAP (2002) ERP provides a guide to the net effect of trade policy instruments (tariff and non-tariff barriers if included in the calculation) on producers. In other words, it calculates the impact of protection on valued added (the difference between revenues and input costs) of an industry. Specifically, it measures the percentage change in per unit value added of sector as a result of tariff and non-tariff protection over the value-added that would have been created in the absence of such intervention. With an escalated structure of protection that is typical of import-substitution strategies (lowest protection for capital goods, higher for intermediates and highest for consumer goods), revenues and profits will be relatively higher in the protected sectors, all things being equal. A positive ERP showing that the firm/industry is protected indicates that the returns to capital and labor are higher than they would have been in the absence of the state intervention. It suggests that tariff protection and other elements of the trade regime if included, working through final product and input prices, has tended to expand the given industry. A negative ERP can be interpreted in two different ways: (1) the firm/industry can be harmed by intervention (it would be better off under free trade); (2) or it could be worse off (for example, it 142

could be loss-making) under free trade. In the first case, a negative ERP where the value-added of goods priced at the world price (i.e., no state intervention) is greater than 0, then the industry is not protected; it is impeded. It is disadvantaged by state intervention and would do better under free trade. Second, a negative ERP where value-added of goods priced at the world price (i.e., no intervention) is less than 0, then the industry is so highly supported by state intervention that its value added measured at world prices is negative. According to Phan Van Ha (2007) the level of ERP for the whole economy as well as for manufacturing has been significantly declining. Notably, the level of ERP for the whole economy was reduced from 20.43% in 2006 to 16.94% in 2007, while the level of ERP for manufacturing from 38.9% in 2006 and 31.21 in 2007. At detail level, in 2007 for certain manufactures such as manufacture of food products and beverages, motorcycles and parts, manufacture of tobacco, manufacture of rubber and plastic products, assembling and repairing motor vehicles ERP were still relatively high and not much changed compared to 2006. 7.1.2 International ranking of Vietnams competitiveness It should be noted that the RCA may not indicate the true dynamic comparative advantage of Vietnam. First, RCA calculation rely on past and present situations, not future possibilities. Second, dynamic comparative advantage is not predetermined but can be created in some cases by appropriate policies. Therefore, analytical method via static comparative advantage has been supported by the approach to dynamic competitiveness which accounts better for changes in the investment and business environment, competitors, as differentiation of products of the same category (CIEM, 2007). National Competitiveness is defined as that collection of factors, policies and institutions which determine the level of productivity of a country and that, therefore, determine the level of prosperity that can be attained by an economy. Raising productivity i.e., making better use of available factors and resources is the driving force behind the rates of return on investment, which, in turn, determine the aggregate growth rates of the economy. Thus, a more competitive economy is one that is likely to grow faster over the medium to long term. The Global Competitiveness Index (GCI)82 brings together a number of complementary concepts aimed at providing a quantified framework for measuring competitiveness. GCI is developed to access the competitiveness of nations. The Business Competitiveness Index (BCI) focuses on the underlying microeconomic factors which determine economies current sustainable levels of productivity and competitiveness, thus providing a complementary approach of the GCI. In fact, The BCI specifically measures two areas that are critical to the microeconomic business environment in an economy: the sophistication of company operations and strategy, as well as the quality of the overarching national business environment in which they are operating. The competitiveness of Vietnam's economy has been recognized as rather low. The World Economic Forum (WEF) has ranked the global competitiveness of Vietnams economy, though improving, at the lower end on the list, positioned 53/59, 81/117 and 77/125 for the year 2000, 2005, 2006. With regard to the Business Competitiveness Index it is similar to the global competitiveness index, improving, but at the second half of the list, stood at 53/59, 80/117 and 82/125. However, in 2007, to the contrary, both GCI and BCI of Vietnam improved and were positioned 68/131 and 76/131. Looking at GCIs detail in 2007, positive points of Vietnams economy were institution changes and macroeconomic stability, while negative or it can be said weak points were infrastructure and health and primary education. Notably, institution and

82

The Growth Competitiveness Index for the five years from 2001 to 2005

143

macroeconomic stability stood at 70/131 and 51/131, respectively, at the same time, infrastructure and health and primary education 89/131 and 88/131, respectively. Table 7.1b : Vietnams International competitiveness 2000 Out of 59 countries / economi es Global Competitive ness Indexa Institutions Infrastructure Macroecono mic stability Health and primary education Business Competitive ness Index Sophisticatio n of company operations and strategy Quality of the national business 53 2005 Out of 117 countries / economi es 81 (3.37) 2006 Out of 125 countries/ Economi es 77 74 83 53 56 Scor e (Out of 7) 2007 Out of 131 countries / economi es 68 70 89 51 88 Scor e (Out of 7)

3.89 3.62 2.79 4.63 6.43

4.04 3.78 2.80 5.08 5.14

53 50

80 81

82 83

76 79

52

77

77

78

Note: a - The Growth Competitiveness Index for the years from 2000 to 2005 Source: MUTRAP (2002) and Global Competitiveness Report 2005-2006, 2006-2007, and 20072008 7.2. Dualistic Competitiveness of export and domestic markets83 According to Vo and et al (2004), a salient characteristic of Vietnams present manufacturing structure is its dualism, which has been created by the industrial and trade policies Vietnam has pursued for a long time. Export sector vs. weak and protected domestic sectors, including some FDI firms. On the one hand, export manufacturing firms, especially the FIEs, form the sector with global competitiveness. On the other hand, the import-substituting firms, especially the SOEs and some FIEs, are weak and protected. Moreover, there is a weak linkage between foreign firms and local firms and between upstream and downstream industries. In many industries such as garment, footwear, electronics, automobiles, motorbikes, almost all the raw materials and immediate inputs were imported. Many studies and surveys showed a common result that supporting industries are
83

This part is taken from Vo and et al (2004)

144

both lacking and poorly developed in Vietnam. Many other supporting industries, which serve the newly developed industries in Vietnam, are at a very primary step such as the molding industry. Vietnam now can supply only the low and medium technology-supporting industries such as steel consumer component, carton package, etc. The weak linkage between foreign firms and local firms has also limited FDI spillovers. Knowledge-intensive activities such as R & D carried out by FDI in Vietnam are very limited. Most Vietnamese workers are employed for simple assembly activities. Despite the increasing contribution of FDI to Vietnams exports, newly increased export-oriented FDI projects in recent years generally have limited backward linkages with local firms and create limited spillover effects on the local economy. 8. Impact of regulatory changes There were many concerns caused by Vietnams commitments upon Vietnams accession to WTO the reduction of import tariff, the abolishment of the export subsidies and import-substitution subsidies that implementation of these commitments could have strong impacts on the development of industry. It should be noted that Vietnam has only been a WTO member for one year, so direct impacts of WTO membership on the economy including industry is unclear. Firstly, any policy needs time to take effect. Secondly, many WTO commitments, including tariff reductions effect with times lag. Thirdly, the WTOs commitment is only one of many channels for international integration; others include commitments of AFTA, AC-FTA, AK-FTA, APEC, and bilateral trade agreements. Especially, in 2006 Vietnam had completed CEPT tariff reduction under AFTA. Moreover, many thought the WTOs influence was more negative than positive, but actually WTO membership forces Vietnamese businesses to adapt to a modern, international system, so one year of WTO accession could bring more positive than negative impacts on the economy as well as industry. Positive impacts and opportunities WTOs accession had positive impacts on the economy in general as well as on industry in particular. The biggest impact on the economy in 2007 was the shift of economic management policies towards more transparency, lessening discrimination between economic sectors. This stimulated the industrial sector of the economy to reach high growth rates, contributing the largest share to GDP growth rate of 8.48 percent in 2007, higher than compared to 2006 and the second highest rate in the South East region. By being a WTO member, Vietnam has become an attractive destination for foreign investors to invest in the country as a whole in general and in industry in particular. In 2007, FDI commitments and disbursement were about US$ 23 billion and 8 billion, the highest figures since 1987. More than 60 percent of total FDI commitments and disbursement in 2007 belong to industry. WTO accession has created more opportunities for industrial enterprises to access various sources of modern technology, services and raw material supply for production as well as helped the country get easier access to foreign markets abroad, allowing Vietnamese manufacturers to earn more foreign exchange. Vietnams industry have more opportunities to export its products now that there is no more discrimination as before. In 2007 industry continued to sustain a relatively high level of production, especially, agricultural resource manufacture and labor-intensive processing (garment, footwear, seafood, furniture, and handicraft). It means that in these manufactures Vietnam still sustains competitiveness. The 2007 figures of export performance reflected that Vietnam managed to take opportunities to increase export scale as well as diversify exporting commodities. Textile and garment and footwear have become the largest export oriented sectors in manufacturing.. Furniture, electronics, and other more sophisticated industries were successful in export. This reflects that the abolition of export subsidies makes no difference to their export capacity . 145

Negative impact and challenges Vietnams WTO accession has put a much greater pressure on Vietnam to sustain its competiveness. In 2007, for sure there was a fierce competition in the world market as well as in the domestic market, those heavily-protected industries and SOE sectors faced difficulties to keep a same growth rate of output as before. These were tobacco products; paper and paper products; nonmetallic mineral products; machinery and equipment; medical, precision and optical instruments, watches and clocks; and motor vehicles. Tariff reduction commitments with WTO are obviously expected to bring greater competition to the domestic industries, especially to those heavily-protected industries and SOE sectors. Protection is significantly reduced, monopolistic/market power (if any) can not be sustained, and traditional preferential intervention of the Government is largely restricted. Protection of industry had to be reduced and will be reduced further, industrial subsectors that enjoy high protection face difficulties in their production due to tough competition. They might curtail their production level. Although, the 2007 figures of export performance reflected that Vietnam managed to take opportunities to increase export scale as well as diversify exporting commodities. Performance of merchandise export in general and of manufacturing export in particularly stills presents certain weaknesses. Export growth contained elements which were unsustainable and vulnerable to outside shocks (high import content of export such as textile and garment, furniture). Risks might increase in the context of changes in oversight mechanisms or policies (exchange rate policy, etc.) of big markets for Vietnams exports (EU and USA market). Traditional comparative advantages of some main industrial products will be reduced, therefore, their industries will face difficulties in export and then in production. Upon WTO accession, Vietnam had to be accepted as a non-market economy for a maximum of 12 years or no later than December 31, 2018. As long as Vietnam is considered non-market economy status, it could be subject to unfavorable conditions in terms of anti-dumping and antisubsidy lawsuits. Many major export products of Vietnam to the US and the EU (such as catfish, textiles and garment, leather shoes) are easily subject to anti-dumping lawsuits. The US and the EU Law on Anti-dumping only allows for the use of production costs and domestic prices in a market economy, rather than those in non-market economies to calculate sale prices of products in the EU. As a result, domestic prices of products in non-market economies tend to be significantly overvalued, leading to the conclusion of evident act of dumping and, accordingly, the levy of high antidumping taxes. Confronting anti-dumping lawsuits, Vietnams exported oriented industries can be in a disadvantaged position, with hardly any ability to minimize losses and even lesser probability of winning those lawsuits. 9. Action-oriented recommendations In order to implement successfully the socio-economic development strategy 2001-2010 and fiveyear socio-economic development plan 2006-2010 in the context of full economic integration in the world economy, Vietnam should improve the quality of growth, particularly the competitiveness of the national economy in general and industry in particular. At macro level Vietnam should review and consolidate industrial development plans and strategies into a unified national roadmap in conjunction with WTO commitment schedule. It should take into account the consideration of ERP and development of supporting industries. As WTO still permits some types of supports by the Government. Nevertheless, effective industrial strategies and policies, to conform better with WTO rules, should be comprehensive and cover the whole economy rather than focusing on giving incentives to some certain industries. The 146

Government has no less important a role in development, yet the policy focus must shift to improving infrastructures, human resources, and establishing a favorable environment for investment, equal competition and technology renovation/transfer. The administrative reform should not merely target one-door routine or curbing corruption; instead, it should aim further at building a professional and transparent. Government with high accountability, and at facilitating enterprises to minimize transaction costs. This is directly related to the continuing changes in functions of the Government and creation of a suitable incentive structure for public servants. Improving the business environment also serves to achieve recognition of Vietnam as a market economy as soon as possible. Such recognition may help to narrow down the scope of anti-dumping lawsuits against Vietnams exports, as well as to reduce losses for Vietnamese enterprises once antidumping tax is levied. With regard to a sectoral development strategy for boosting Vietnams export to the world market, Vietnam should continue maintaining its comparative advantage in the existing leading export sectors like footwear, garments and textiles, agricultural resource manufactures, at least in the medium term. However, the country needs to increase the knowledge-based contribution for higher added values in its export products. This in turn requires more investment in human, capital and technologies. Otherwise Vietnam will still lag behind in the increasing global competition battle and find it hard to improve its economic position in the world. Therefore, the government should have assistances which conform with international practices and WTO rules, focusing on specific areas such as training, trade promotion and provision of market and product information. Regarding assistance in trade promotion, effective implementation requires close cooperation between associations and the Government in information provision and trade promotion at the macro level. In fact, the majority of export enterprises still lack experience and financial capacity to collect information and undertake large-scale trade promotion, particularly in foreign markets. Such assistances of the Government and associations will help enterprises to reduce costs and mitigate risks in export activities. The associations should help enterprises through effectively strengthening consultancy, providing information , business supporting services in trade promotion and market research; consolidate their role as reporters of enterprises issues related to business environment and export procedures to the Government; participate more actively in making policy recommendations, policy formulation and modification; and act as mediators in settling business disputes which hinder export activities of Vietnam in the world market At micro level Enterprises should be proactive in exploring WTO rules; take all relevant commitments relating to the sector under WTO into consideration so as to understand better their benefits and challenges. This will serve as a base for enterprises to rebuild their plan and strategies on production and business. Enterprises should develop long-term strategies, and improve their competitive capacity of production. Their business strategies need to combine the continuing promotion of traditional exports with diversification of products and improve non-price competitiveness. Step by step enterprises should shift from utilizing cost competitiveness to raising value-added contents in the value chain. Avoiding the imposition of trade remedies, exporting enterprises should get prepared for antidumping lawsuits, and the first thing they have to do is to learn about the laws applied by big importers. Domestic enterprises should diversify their products and export markets as well as input materials The enterprises should maintain accounting standards in compliance with general 147

international rules that will serve as the basis for investigation just in case of anti-dumping lawsuits. Associations of enterprises coordinate the behavior of the individual firms and control proactively export on the Vietnamese side. It is likely that the problems related to the non-market economy status of the country will become less severe.

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10. References GSO (2006). Cong nghiep Vietnam 20 nam doi moi va phat trien (Vietnamese Industry in 20 years of Renovation and Development). Statistical Publishing House, Hanoi. GSO (2007a), He thong nganh kinh te Vietnam 2007. (Vietnams industrial classification 2007), Statistical Publishing House, 2007. GSO (2007b).Statistical Yearbook of Vietnam. Statistical Publishing House, Hanoi. GSO (2008). The situation of Enterprises through the results of survey in 2005, 2006, 2007. Statistical Publishing House, Hanoi. Vo Tri Thanh, Dinh Hien Minh, Pham Thien Hoang, Nguyen Anh Duong and Trinh Quang Long (2007), Vietnams Export to the EU: An Overview and Assessment using the CMS-based Approach. Finance Publishing House. Vietnam: Hanoi. Mari Pangustu (2002) .. in WB(2002), Development, Trade and the TWO a handbook, 2002 Vo Tri Thanh, Trinh quang Long, Dinh Hien Minh (2004), Vietnams Regional Economic Linkages and Industrial Competitiveness: An Analysis with the case studies of Textile and Garment, Electronics, and Automotive Industries, Country Report for the Project Production Networks, Industrial Adjustment, Institutions and Policies, and Regional Cooperation CIEM (2006), Vietnams economy in 2005, Financial Publishing house, Hanoi, May. MPI (2006), The Five-year Socio-Economic Development Plan 2006-2010, 2006 MUTRAP (2002), Chapter V Vietnams Industry: Initial Conditions, Sectoral Analysis before Trade Liberalization and Potential Afterwards in Comprehensive industrial research 2002, MUTRAP report Pham Van Ha (Policy Advisory Group of Minisry of Finance) (2007), Study on Effective Rate of Protection in Vietnam in conjunction with integration process The Global Competitiveness Report 2005-2006, Online. Available from http://www.weforum.org/ [accessed 2 August 2007] The Global Competitiveness Report 2006-2007, Online. Available from http://www.weforum.org/ [accessed 2 August 2007] The Global Competitiveness Report 2007-2008, Online. Available from http://www.weforum.org/ [accessed 2 August 2007]. Orientation for National Industrial Development to 2010 Online. Available from http://www.moi.gov.vn/EN/News/detail.asp?Sub=101&id=22145 [accessed 2 August 2007] WT/ACC/VNM/48, Working Party on the Accession of Viet Nam, Report of the Working Party on the Accession of Viet Nam, 27 October 2006) Weiss, John (2002), Industrialization and Globalization: Theory and Evidence from Developing Countries, Routledge, London and New York

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Annex Import quotas - In 1993, covered seven items, including cars, motorbikes, tobacco, CKD components for radio, TV, and cassette players, and electronic goods; in 1996 the number of such goods was 5, in 1997 it was 8 (petroleum, fertilizer, steel, cement, construction glass, motorcycles and cars of 12 seats or less, paper, and sugar), and in 1998 it was also 8 items with adding liquors and abolishing truck and bus. At the beginning of 1999, 8 additional items were temporarily added to the list of imported goods under quantitative control in order to protect domestic industries and to regulate the balance of trade. These items were electric fans, ceramic and granite tiles, consumer goods made of porcelain, packaged in plastic, liquid caustic soda, bicycle, refined vegetable oil, and some plastics. In 2000, the list shortened to 12 items, excluding petroleum, fertilizer, sugar, motors SKD and CKD, cars of 16 seats or less, some kinds of steel, some kinds of cement, white and color glass, some kinds of paper, liquor, ceramic and granite tiles, and refined vegetable oil84. Tariff-rate quotas In May 2003, the Prime Minister issued a decision to implement tariff-rate quotas on certain agricultural products that were not previously under quotas. Cotton, tobacco materials, and salt are the three items on trial implementation as of July 01, 200385. During the trial period, import licenses for those items are granted in line with the demand level to set up a volume of quotas for the following years. Milk materials, corn, and poultry eggs are the remaining targeted items to be implemented sometime in 2004. in 2005, Vietnam removed tariff quotas for milk materials, corn, cotton86.

84 85

According to the Decision No 242/1999/QD-TTg dated December 30th 1999. Decision No 91/2003/QD, dated May 9th, 2003 86 Decision No. 46/ 2005/QD-TTg dated March 3rd , 2005

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CHAPTER III. PART II. THE IMPACT OF VIETNAMS ACCESSION TO THE WTO ON AGRICULTURE Content: 1. Background on the agricultural sector in Vietnam; 1.1. Investment in Agriculture; 1.2. GDP growth and change in agriculture sectors position; 2. Trade in agricultural products one year after accession; 3. Expected impacts of WTO on trade of agricultural commodities; 3.1. Impact on trade performance; 3.2. WTO disciplines on subsidies and agricultural trade policies ; 3.3. Impacts of WTO accession on farmers income and poverty in rural areas; 4. Conclusion; 5. Policy recommendations: Annex 1 Vietnams implementation of agricultural reforms since 1995; Annex 2. Changes on tariff structures in Vietnam since 1995; Annex 3. Non-tariff measures applied by Vietnam; Annex 4. Third country application of trade barriers to Vietnams exports; Annex 5. Latest developments in the agricultural sector; Annex 6. Trade performance of key agricultural commodities; Annex 7. Statistical Indicators

1. Background on the agricultural sector in Vietnam Though the share of the agriculture sector in the total GDP of the economy saw a decline, agriculture still plays an important socio-economic role, and ensures the stable and sustainable development of the economy. Vietnams agricultural production has made steady progress in production and trading activities over the past 20 years, striving for a considerable position. However, this industry still faces many challenges, latent risks and is of limited competitiveness in terms of goods and agricultural enterprises. In the millennium of integration into the regional and international economy, and in the context of accession to the WTO which brings opportunities as well as challenges, developing a modern, efficient and secure agriculture sector requires great efforts. A more synchronous and concentrated investment strategy should be built in a bid for an advancement by leaps and bounds of some locomotive products and enterprises which by turn will lead the development of the industry. 1.1. Investment in Agriculture Since 2001, investment in agriculture has stagnated in absolute terms and declined in relative terms, from from 9.5% of the countrys total investment in 2001 to 7.5% in 2006 (See Annex 7, Table 1). The average growth rate of investment in agriculture (agriculture, forestry, fishery) reached only 2.6% per year between 2001 and 2006 while, that of the non-agricultural sector was more than 14.4% per year (Annex 7, Table 2). Since and prior to joining the WTO, FDI inflows have soared in Vietnam, with total registered capital increasing from USD 2.5 billion in 2001 to more than USD 13.4 billion in 200787, but most of the investment flows have been directed at the non-agricultural sectors. The agricultural sector (agriculture, forestry, fishery) accounts for 3.3% of total projects and about 1.9% of total FDI capital on average (Annex 7, Table 3). 1.2. GDP growth and change in agriculture sectors position Despite significant growth in the value added of agricultural production, which more than tripled in current prices, the contribution of GDP has decreased between 1995 and 2007, owing to the more dynamic sectors of the economy. The share of agriculture in the national economy fell from over
87

January-November for 2007 151

27% in 1995 to around 20% in 2007 (see Table 1). The breakdown of agriculture into its subcomponents revealed that in 2007, agriculture accounted for 15.2% of GDP; forestry 1.1% and fishery 4%. Table 1: Agricultural GDP and its growth rate in the period of 1995-2007 1995 2000 2004 2005 2006 2007 108 155 198 231 GDP at current prices (VND bil) 62 219 356 992 175 984 266 282 GDP Growth rate at current prices (%) 27.1 6.5 12.8 12.8 12.7 16.7 Share of agriculture in total GDP at current prices (%) 27.2 24.4 21.8 21.0 20.4 20.2 GDP at the constant prices (VND bil) 43 658 54 493 62 107 64 072 65 892 82 090 Growth rate at constant prices (%) 4.4 4.1 3.9 3.2 2.8 3.3 Agricultural GDP/Total GDP at constant prices (%) 23.0 19.8 16.7 15.9 15.3 17.8 Source: Statistical Yearbooks over years, final report of Ministry of Agriculture-Rural Development. Note: GDP of agriculture includes agriculture, forestry and fishery. The growth rate of agriculture, forestry and fishery has been oscillating between 3% and 5% per year, while the average rate in the period of 1995-2007 was 4%, except for an exceptional growth rate in 1999, where growth reached 5.5%. Prior to joining the WTO, there was concern that the agriculture sector would be affected by a surge in imports from WTO member countries. However, in spite of many natural disasters and diseases that damaged agricultural crops and production, growth reached 3.3%, compared to the previous year (one year before joining WTO) which had a the growth rate of 3.4%. Agricultural production is divided into 3 sections, which are planting, breeding and forestry. They had different growth rates, especially in recent years. Planting grew steadily (from 1995 until now, its average growth was about 5%), meanwhile breeding trended downward. GDP of breeding and forestry still accounted for small shares in the agricultures GDP. While in the planting section, there was a steady growth in all kinds of plant, it was not so in the breeding section. For the past four years, the number of large domestic animals (buffalos, cows) increased but that of domestic fowls and pigs decreased. Domestic markets in the period of disease declined sharply. Many countries put a ban on Vietnams pigs, chickens (both live and slaughtered) which affected the domestic production. Under these circumstances, it was necessary to restructure the breeding section to: (1) accelerate the need to develop a central breeding and modern processing industry (2) improve public veterinary hygiene services, animal and plant inspection services to ensure food safety and security (3) raise the number of clean imported pigs and fowls.

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2. Trade in agricultural products one year after accession Against a major surge in total exports from Vietnam during 2007, which grew by 21.5 percent, agricultural exports88 recorded substantial growth at 19.5%, to reach USD12.5 billion. Nevertheless, this marked a slowdown with previous years (22.2% in 2006 and 26.7% in 2005). In the first 11 months of 2007, imports in agricultural products were valued at more than USD 3.7 billion, up by 31% compared to the same period 2006 (see Figures X and X). Thus, trade in agricultural products remains a vital source of foreign exchange earning for Vietnam. Figure X. Value of export turnover of goods, and agricultural export turnover (mil USD)
60000 50000 40000 30000 20000 10000 0
Tot al export 2001 2002 Agricult ural product s 2003 2004 2005 Ot her goods 2006 2007

Figure X. Value of import turnover of goods, and agricultural import turnover (mil USD)
60000 50000 40000 30000 20000 10000 0
Tot al import 2001 2002 2003 Agricult ural product s 2004 2005 2006 Ot her goods 11mont hs of 2007

Source: Calculated based on data of General Source: Calculated based on data of General Statistics Office and General Department of Statistics Office and General Department of Vietnam Customs. It has to be pointed out that, Vietnam Customs while for 2006 the graph refers to the total turnover of the whole year, the 2007 is limited to the first 11 months only..

From 2001 until 2007, Vietnam has maintained a high ranking in terms of its export share in world markets. Moreover, Vietnam has successfully gained market share in rice, pepper and rubber (see Table X) Table X. Ranking of Vietnams exports in the world market Commodity World Export Position 2001 World Export Position 2007 rd 2nd (after Thailand) 3 (after Thailand and India) Rice nd st 2 (after Brazil); 1 for Robusta 2nd (after Brazil; 1st for Robusta Coffee coffee coffee) Vietnam accounts for 18% of world coffee export volume n/a 1st since 2004 accounting for 30% of Pepper world pepper trading nd 2nd (after India) accounting for 25.6% 2 (after India) Cashew Nut of world trade in cashew nuts 7th 7th Tea n/a 4th (after Thailand, Indonesia and Rubber Malaysia) Source: USDA (2007)
88

Includes agricultural, forestry and fishery products 153

Vietnam is competitive in exporting a number of agricultural commodities. However, as illustrated in Annex 7, Figure 1, it has specialised in a variety of products whose global demand is showing signs of stagnation or limited growth. This is the case for fruits and vegetables, seafood, wood and rice. On the other hand, Vietnam is successfully specialising in coffee for which there are more dynamic market opportunities. However, Vietnam appears to be loosing market share in the rapidly growing rubber market. This trend, which started prior to accession, seems to be persisting after WTO accession. Overall therefore, export performance during the first year of membership to the WTO does not seem to have been affected. The same cannot be inferred from import statistics. Vietnams major agricultural imports are: milk and dairy products, cotton, animal fat and vegetable oil, wheat flour, wheat, sugar, raw material for cattle feed, raw material used for tobacco and rubber. Its major forestry products are timber and raw material for timber, and pulp. After joining the WTO, imports of these major commodities have been extremely high, ranging from 9% to 50% annual change. There is a slight fluctuation in the structure of agricultural imports. Products imported the most are those that could not be cultivated (wheat and wheat flour) or those of little competitive advantages (animal fat and vegetable oil, cotton, milk and dairy products, sugar). The marked difference since becoming a member of the WTO, is best illustrated in Table X. Table X. Average growth of imports of selected agricultural products Commodity Average Growth Growth 2007/06 2002 2007 Animal fat and 37.9% p.a. 84.3% vegetable oil Wheat 26.6% p.a. 64.3% Cotton 16.7% p.a. 2.1% Milk/milk products 20% p.a. n/a Wheat flour n/a 173.6% Sugar n/a n/a Timber/raw materials 38.3% p.a. 31.9% Cattle feed/raw mat. 38.2% p.a. 52.6% for cattle feed89 Raw materials for 6.75% p.a. 27.5% tobacco Pulp 19.6% p.a. n/a

Average Import in $US 2002 - 2007 473 milliom 370 million 267 million 498 million (2006) 23.8 million 9.8 million 1 billion 1.124 billion 205.3 million 84.9 million

89

Original data of statistic office does not allow separation of processed cattle feed with raw materials originating from agricultural products for cattle feed production 154

3. Expected impacts of WTO on trade of agricultural commodities 3.1. Impact on trade performance In an attempt to assess the impact of WTO accession on the agricultural sector, a comparison is made of the observed trends from the first year of accession with scenarios produced by computable general equilibrium modelling undertaken by Vanzetti (2006). Vanzetti forecasted that the impact on agricultural exports is likely to be minimal because Vietnams major exports (rice, coffee and rubber) did not face significant tariff barriers prior to WTO accession. Furthermore, it would be unlikely that WTO accession would have led to more market access in those commodities. Nevertheless, Vanzetti predicted that export would increase for livestock (pigs), rice, pigmeat, sugar, bananas, and citrus fruit. China would be a major market owing to its proximity and the income effects of continued growth in China. The lack of refrigeration systems in China and Vietnam, influences to a large extent these countries preferences for fresh as opposed to chilled or frozen meat. There is additional demand for pigmeat from the European Union, Norway and Switzerland but sanitary and phytosanitary considerations make these markets more difficult to access. On the import side, Vietnam was expected to increase imports in a range of sensitive products such as sugar, maize and oilseeds. Maize and oilseeds are inputs into the livestock industry and their tariff reduction will make the downstream industries more competitive. Rubber and cashew nut are not included in its model. Figures X and X analyse the observed performance of the most exported agricultural products during the first eleven months after accession, both in volume and in value terms. For each commodity, the export growth rate in 2007 is compared to the standard deviation around the average growth rates from 2001. It clearly stands out that the export growth rates of a number of products, such as pepper, tea, fruits, vegetables, peanuts outperformed, increased in value by a greater extent than they did in the past, although the export performance of pepper has been affected by the international price of pepper, since its exports have decreased in volume90. On the other hand, export values and volumes of rubber, cashew nut, timber, wooden products, rattan and bamboo grew less than average or decreased. As for rice and coffee, their exports have increased in value terms at a similar and a slightly higher rate than the average rate over recent years. Rice exports performed very poorly and registered a decrease between 2006 and 2007. A review of trade performance in agricultural products is given in Annex 6.

90

It should be noted that in 2006, Vietnam adopted measures in support of exports of such products as peanut; coffee; tea; pepper; processed cashew nut; fruits and vegetables, poultry and cattle meat, consisting of export loans, export credit guarantees, debts remittance. 155

Table X. Range of export growth in key agricultural products between 2001-07 (value terms)
Average export growth rate (Value)
250,00

200,00

150,00

100,00 min max Growth rate 2007 50,00

%

0,00 Rice Rubber Coffee Cashew nut Pepper Tea (of all Fruit and types) vegetable Peanut Cinnamon Timber Rattan, and Bamboo wooden and sedge products products

-50,00

-100,00

Note: Minimum and maximum values for export growth between 2001-07 Source: Authors calculations on data of General Statistics Office of Vietnam and General Department of Vietnam Table X. Range of export growth in key agricultural products between 2001-07 (volume terms)
Average export growth rate (Volume)
200,00

150,00

100,00

50,00

min max Growth rate 2007

0,00 Rice Rubber Coffee Cashew nut Pepper Tea (of all types) Peanut Cinnamon

-50,00

-100,00

Note: Minimum and maximum values for export growth between 2001-07 156

Source: Authors calculations on data of General Statistics Office of Vietnam and General Department of Vietnam Table X. Range of import growth in key agricultural products between 2001-07 (value terms)
Average import growth rate (Value)
100,00

50,00

0,00 Cotton Animal fat Wheat flour and vegetable oil Wheat Milk and Dairy products Sugar Pulp Timber and raw materials Cattle feed Tobacco raw and raw materials materials

-50,00

min max 2007

-100,00

-150,00

-200,00

Note: Minimum and maximum values for import growth between 2001-07 Source: Authors calculations on data of General Statistics Office of Vietnam and General Department of Vietnam In the first year of accession animal fat, vegetable oil, wheat and wheat flour and tobacco raw materials appear to have experienced the largest surges. On the other hand, imports of raw material such as cotton and cattle feed are hardly changed from previous growth rates. As for milk and dairy products, in spite of a constant increase in imports in the past, the first eleven months of 2007 show a decrease in value91. In general, from 2001 to 2006 and even at the end of 2007 one year after Vietnam joining WTO, the main agriculture exports have maintained their high ranks on the world market. For example: In 2001 and 2002, Vietnam was ranked as the third largest rice exporter in the world after Thailand and India. Since 2003, Vietnam has strengthened its position as the second greatest rice exporter behind Thailand, the second largest coffee exporter just behind Brazil and the top Robusta coffee exporter in the world. Since 2004, the rank of top pepper exporter in the world has firmly belonged to Vietnam (accounting for 30% of the world trading pepper volumes). From 2001, Vietnam has become the second largest cashew exporter taking up 25.6% of total trading cashew volumes in the world market (just behind India). Vietnam has also passed China to become the 5th largest natural rubber producer and has consolidated its rank of the 7th largest tea exporter in the world since 2005. In spite of high ranks and increasing export value, there has been a decrease in the export growth pace of Vietnamese products in general and the agricultural products in particular compared to the
91

On products such as sugar, milk, cotton and maize import quotas were removed in 2005 157

previous years levels since 2006 (when Vietnam joined WTO). However, the decrease in the level of farming exports has been smaller than the decrease in the level of farming imports, which has led to the export surplus of Vietnamese farming produce. Generally, the scale of Vietnams export market which has been expanded to Europe and America, especially two great partners: the United State and EU, has been narrowed in ASEAN and Asian countries. The growth of Vietnams coffee exports to most markets is solid, and the most important markets are Europe and America with mainly EU and the United States. The rubber export market of Vietnam which is mainly China now is expanded to EU and the United States, but has narrowed in the ASEAN region. The volumes of Vietnamese fruits and vegetables exported to the traditional Chinese market have decreased. Although the export market is being expanded to Europe, America and other Asian countries, the growth level of export can not catch up with the decrease in the level of export to China. This problem causes the drop in total fruits and vegetables exports of Vietnam. So, the negative impact of ASEAN-China economic integration has been expressed obviously in fruits and vegetables trade. The structure of the export market of Vietnamese rattan, bamboo and sedge products has been moved slowly to European and American countries with mainly EU and the United States while the Asian market in general and the Chinese market in particular have become unstable and decreasing. The structure of the export market of Vietnamese wood and wooden products is comparatively varied. The volumes of Vietnamese wood and wooden products exported to most markets especially EU and the United States have grown steadily. After having been a member of WTO for one year, Vietnam has imported more agricultural products, and the growth rates of import run from 9% to 90%. At present, the main farming products that Vietnam has to import are: - Milk, milk products, cotton, flour, wheat, - Sugar, tobacco, rubber, materials to produce breeding food - Wood and wooden materials, pulp The structure of agriculural imports into Vietnam has changed little, most of the imports are the products that Vietnam can not produce (wheat and flour) or have low comparative advantage (milk, milk products, cotton, sugar and animal fat and vegetable oil) The import volumes of agricultural products of Vietnam have been increasing but are still smaller than the great trading partners figures except wood, materials to produce wooden products, breeding food and materials to produce breeding food that have high growth rates of import (nearly upto $1 billion import value). Therefore, Vietnam has an opportunity to export its farming products to European and American countries, helping Vietnam raise export value. However, this opportunity also becomes a challenge to the quality and hygiene safety of Vietnams agricultural products. The lesson from China and some other Vietnamese goods is a profound warning for this issue. Moreover, Vietnam must find out the reason why its export market scale in Asia has been decreasing recently. Box: Tariffs and effective rates of protection of selected commodities

Applied tariffs on Vietnams agricultural imports before the WTO accession were well above the average of non-agricultural goods and higher than those applied by some of Vietnams neighbours

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such as China, Philippines and Thailand92. Higher tariffs were applied on products such as rice and green coffee that are major exports for Vietnam, as is illustrated in the following table.
Vietnams applied agricultural tariffs before WTO accession

Source: Vanzetti (2006)

As for imports, some commodities are used as intermediate inputs into other products. This is the case for cattle feed such as coarse grains, oilseeds, maize and sorghum or for cotton used in the textile industry. Tariffs on intermediate goods have impacts on production and on the effective rate of protection, as illustrated in the table below. The effective rates of protection were in fact negative for livestock and sugarcane in the case of the tariffs on imported inputs.
Effective rates of protection in Vietnamese agriculture

Source: Vanzetti (2006)

In summary, before acceding to the WTO, Vietnam had moderately high tariffs on its agricultural imports, low domestic support and minimal export subsidies. It faced low tariffs in its current export markets, although somewhat higher tariffs on more processed products.

92

Vanzetti (2006) 159

3.2. WTO disciplines on subsidies and agricultural trade policies Vietnams adjustments in policies and regulations in the process of regional integration and accession to WTO have significant impact on agriculture. In brief, regional integration and WTO accession have created tremendous opportunities for Vietnams agriculture in terms of trade, and foreign investment attraction, as well as leveled off the playing ground for all economic sectors. The environment and regime which have been revised in accordance with international rules and practices have encouraged all economic sectors to increase investment, expand their agricultural business activities, helping Vietnam to achieve the goals of guaranteeing food security; diversifying agricultural activities conforming to the orientation of producing goods with high productivity, quality and efficiency, as well as enhancing the status of Vietnam's agricultural products in the international market, reducing the number of poor families, and developing rural socioeconomic stability to support the national economic development . On the other hand, joining WTO puts pressure on Vietnam to renovate policies and develop a legal framework harmonizing with international regulations that are more transparent, predictable and create stability. Along with that, administration in some phases has been simplified and harmonized in a bid to ensure favourable conditions for trading activities. Significant adjustments in policy must count the elimination of export subsidies for agricultural products, supports for domestic production abiding by WTOs regulations and, mainly belonging to the Green Box and Development program, selection and employment of limited non tariff measures, harmonization of customs system codes, the exercise of tariffs reducing commitments, expansion of rights to trade, and the removal of discrimination between domestic and overseas enterprises, between economic sectors, etc. A fair and competitive playing field generated for the enterprises as well as the other objects has led to the boom in the appearances of small-to-medium enterprises in the agriculture sector and has encouraged the FDI companies and the private economic sector to develop. The state-owned companies have been transferred to joint-stock companies, receiving less preferential treatment from the Government and starting to cope with sharper competition. Although Vietnam has joined WTO for one year, there is no signal of bankruptcy or loss in business as the result of WTO integration. We acknowledge that establishing a legal framework for the policy system of the Government is very important but not enough. The more important thing is how to put those policies into practice. One year after the WTO integration does not provide enough experience to criticize the delay of the execution of legal documents relating to Vietnams commitments. However, both the preparing period and the year of integration show that the management of the Vietnamese Government has not been effective. The Government has not regulated the governmental agencies to fulfill the system of legal documents and to reform the public administrative activities as well as it has not compelled the enterprises, manufacturers and other economical objects to carry out the regulations to enhance their competitiveness.

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BOX:

The Green Box measures: the case of China

The impact of WTO accession is not just confined to the trade of agricultural products but to a greater extent it results in multilateral disciplines on market access, domestic support and export subsidies. Chinese commitments in the agricultural sector include: removing state-set prices for major agricultural products, reducing tariffs, lifting export subsidies, establishing import tariff quotas to provide minimal market access, permitting non state-owned trading firms to deal in grains trade, and confining domestic agricultural support to 8.5 per cent. Under the broad WTO umbrella, domestic support policy instruments are usually classified into three categories. Support policies that are the least or minimally trade distorting are placed in the Green Box. Reforms were needed to transform more Chinese agricultural supports into Green Box measures. Zhao Yumin, Wang Hongxia, Linxuegui Mayu (2003) describe the principal Green Box measures adopted by China in its domestic support strategy, as follows: Green Box expenditure accounted for 14.2 per cent of the governments total budgetary expenditures. Chinas domestic support is basically aimed at food security. Its Green Box support is primarily focused on infrastructure construction and domestic food reserve. A number of measures directly linked with producers income are not adopted and the issue of ensuring and increasing farmers income was taken into account by the government only in recent years. Green Box measures in this respect include direct payment to farmers, decoupled income support, government financial participation in income insurance/safety-net programs, structural readjustment aid provided by farmers retirement program, etc. None of these, however, were adopted in China. Green Box measures, such as marketing and promotion were not included in the countrys domestic support programs. Some major problems persist, which have weakened the effects of these measures: Weak policy enforcement has reduced the effects of the Green Box measures owing to administrative and operational inefficiencies. Sometimes programs are not well designed and targeted with a tendency to pursue short term effects. More emphasis has been put on subsidizing the distribution rather than the production process. In the implementation of Green Box measures, other relevant agricultural support policies didnt follow therefore weakening or even partially offsetting the effects of these measures. The structure of the Green Box support didnt include either a marketing and promotion service network for agricultural products or the system of agricultural structural adjustment. Both are of great importance to sustainable agricultural development, structural readjustments and stable income for farmers.

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3.3. Impacts of WTO accession on farmers income and poverty in rural areas In the process of renovation, especially in the years after 2000, Vietnamese farmers income has increased, their living standard has improved. However the average income is still at a low level that is easily impacted by risky elements. Table 17: Monthly average income per capita by residence Unit: 1,000 VND 2002 356.1 2004 484.4 815.4 378.1 2006 636.0 1058.0 506.0

Whole country By residence Urban 622.1 Rural 275.1 Source: General Statistics Office of Vietnam

Farmers income increased in 2007 but the considerable increase in price of production inputs as well as consumer products means that the armers living standard remains unimproved.

Table 18: Monthly average income per capita by region Unit: 1,000 VND 2002 356.1 Whole Country By region Red River Delta 353.1 North East 268.8 North West 197.0 North Central Coast 235.4 South Central Coast 305.8 Central Highlands 244.0 South East 619.7 Mekong River Delta 371.3 Source: General Statistics Office of Vietnam 2004 484.4 488.2 379.9 265.7 317.1 414.9 390.2 833.0 471.1 2006 636.0 653 512.0 372.0 418.0 511.0 521.0 1065.0 628

With the income of the poorest regions, the increase of input price only had a very bad impact on agricultural produce, Consumer price index (CPI) increases also influence their lives. With the 162

poor regions, it is impossible to cancel all the subsidies to agriculture immediately. It is necessary to maintain even the assistance measure subject to the Amber Box, because farmers lives are threatened. The number of poor families has been reduced remarkably, but their income is still barely above the poverty level and it is easy for them to return to poor whenever there is an adverse change.

Table 19: Proportion of poor family households by region Unit: % 2004 Whole country 18.1 Red River Delta 12.9 North East 23.2 North West 46.1 North Central Coast 29.4 South Central Coast 21.3 Central Highlands 29.2 South East 6.1 Mekong River Delta 15.3 Source: General Statistics Office of Vietnam 2006 15.5 10.1 22.2 39.4 26.6 17.2 24.0 4.6 13.0 2007(estimate) 14.7 9.6 21.1 37.5 25.5 16.3 22.9 4.3 12.4

The percentage of poor families over the country decreased from 18.1% in 2002 to 14.1% in 2007, (4% in 3 years). This is a result of innovation, implementation of developing policies and the eliminating poverty programme. This has been maintained for one year after joining the WTO.. If the Government can not control the price, and the CPI is more than two numbers, it will be a major threat to the farmers who have just left poverty behind.

Table 20: Monthly average income per capital by household group Unit: 1,000 VND 5 groups of income Group of poor household Group close to poor Middle range group Well off group Group of highest income 2002 107,7 178,3 251,0 370,5 872,9 2004 141,8 240,7 347 514,2 1182,3 2006 184,3 318,9 458,9 678,6 1541,7

With the international standard of the poor pegged at an income of less than $1 per day, the income of the poor and close to poor group is under the level. This is a warning alert with Vietnams development policies and strategies to improve the living standard to the poor in the suburb. Vietnam entered the WTO to accelerate liberalization in trade, but the country has to pay

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more attention to welfare policies to the poor and vulnerable people. These are the economic and social sides of development that developing countries like Vietnam have to deal with. 4. Conclusion Integration into the regional economy has brought many opportunities to Vietnams agriculture in export volume, new markets, and new products. It has also created an equal, transparent trading environment for the domestic economic class and Vietnams partners. However, after one year of joining WTO, in accordance with the disadvantages in the global market, it has also brought potential danger to Vietnams agriculture and rural areas. It is necessary to have a more dynamic and intelligent policy, which is a combination of market regime and development policy, trade and welfare policy. Vietnam must choose what should open immediately and what should not. The next negotiation rounds will be Vietnams opportunity to negotiate with its partners about these important issues, to secure a success for Vietnams integration into the international economy. 5. Policy Recommendations In the year 2007 Vietnam succeeded in joining WTO; however, the country had to face many difficulties, including natural calamities, diseases and especially a jump in prices of consumer goods and inputs for agricultural production in the world market, which altogether deeply influenced its agriculture, producers and consumers. Yet Vietnams agriculture has overcome all to reach significant achievements. On the other hand, the agriculture sector has shown several shortcomings and limitations which need to be promptly addressed in order to reduce their negative impacts, to adjust to international economic integration, as well as to make better use of opportunities that the access to WTO has brought. Assessing the impact of joining the WTO on Vietnams agriculture is indeed a complicated task, especially when the sector is influenced by a wide range of synchronous factors. Besides, one year is not sufficient for a precise judgment. Nevertheless, after studying and analyzing agricultural production, and trade, as well as changes in tariffs on agricultural products and in agricultural policy, the report finds that: (1) Trade of agricultural products and changes in policy promoting free trade have a positive impact on the agriculture sector; (2) Warning that consumers have not yet benefited from the reduction in tariff rate due to weak price control and supervision; (3) Negative impact on the stability of low-income farmers income and life. Thus, the report has recommended some solutions to promote opportunities and limit the negative impact of joining WTO on Vietnams agriculture. In spite of a shortage of budget, time and human resource, and the availability of information and data, it attempts to provide accurate data and reliable analysis. In order to maintain competitiveness in international markets and enlarging market shares, the improvement of productivity is needed. This implies better quality of inputs, the promotion of farmer training, coordinating research programmes, which are all green box measures. For example, Vietnam has given high priority to agri-biotechnology, to achieve national goals for

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food, feed and fibre production. However, research institutes are still scattered, not integrated and research work is often not coordinated93. Labelling products is also a tool to increase this added value, matching by this way niche markets in developed countries. A complementary strategy is focusing measures such as export loans, export credit guarantees, debts remittance in support of those products where Vietnam enjoys a competitive advantage and international markets are more dynamic. Over94 90% of small and medium enterprises lack experience in international trade and practices and legal system in trading with other countries. Processing factories use out of date technologies. High level of residue of chemicals, insecticide and antibiotica affect the quality of products, exposing Vietnam to products rejections. Matching SPS criteria is required. This implies investments in warehousing, cold chain and labs, implementation of self inspection system, public control, training from farmers to exporters. 1. Improve the management of food quality and safety, based on business centered orientation. In 2007, Vietnams agricultural exports dealt with serious complaints concerning poor quality from its partners and export markets, meanwhile domestic consumers faced problems related to the safety of agricultural products. Obviously, quality and safety of Vietnams agricultural products has worried domestic consumers and importers. Vietnams government is fully aware of this issue and has taken actions to strengthen the management and supervision of agricultural food quality and safety. Political determination and propagation, however, seem inadequate. Thus, a system of quality standards and systems of examining, assessing and recognizing standards of quality should be built based on international organizations standards and guidelines, as well as in co-ordination with major import partners. Then a list of enterprises meeting exporting standards for each agricultural commodity shall be established based on assessing results. There should be a limited period given to the other enterprises for upgrading themselves to reach the standards. Annual inspections of export enterprises and export lots should be carried out to adjust the above-mentioned list. Another measure is to establish vertical linkages between producing and distributing commercial enterprises closely abiding regulations of management of food quality and safety in order to produce goods meeting quality standards. In addition, production scale of agricultural households at present is still too small and dispersed and which, as a result, strongly affects the application of management measures for food quality and safety. Policies to encourage agricultural households to co-operate and associate, to promote central producing farms are, therefore, indispensable. In terms of state governance, the Ministry of Agriculture and Rural Development (MARD) has set up a department for the management of food quality and safety. The former Ministry of Fishery also had experience in quality management of fishery exports. In the next years, the Department shall apply available experience, and co-ordinate with commodity associations to implement management measures for food quality and safety on agricultural export commodities. It also needs to sum up intensive experience of domestic fishery enterprises
93 94

Nguyen Tuong-Van Nguyen Duc Trieu 165

and study international experience to work out a route for shifting an enterprise from substandard food quality and safety to satisfying international agricultural export requirements. These measures will help Vietnam get international credit to maintain and expand the export of agricultural products, and offer goods at higher prices as well.

Box:

Impacts of SPS

The Sanitary and Phytosanitary (SPS) regulations are in general primarily aimed at safeguarding public health and avoiding losses from pests, diseases and contaminants in the domestic sphere. However, the Sanitary and Phytosanitary (SPS) and also Technical Barriers to Trade (TBT) agreements can become rather effective barriers to trade in replacement of a reduced tariff protection. Agriculture and food exports from developing countries are seen to be particularly vulnerable (Wolkenhorst, 2003). Evaluations of SPS capacity building and needs assessments in Vietnam have been carried out by international organizations, including FAO, UNIDO, WHO, and World Bank and are illustrated by Voituriez (2007) and reported in the following table. Table: Main projects on SPS needs assessments and coverage

SPS evaluations and needs assessments reviewed by Van der Meer (2007) show that SPS compliance issues are unevenly distributed. According to this study, across all the selected issues i.e. food safety, animal health, fisheries, plant health, Standards, Methodology, Testing and Quality (SMTQ) and governance, Vietnam SPS practices outperform Cambodia and Lao. They equal ASEAN practices on food safety and show excellent records on fisheries. According to the World Bank (2006), human health costs, production losses and forgone markets resulting from pests and diseases easily surpass US$ 1 billion per year, about equally distributed between food safety (public health) and agricultural health causes. The opportunity cost of non compliance would amount to an estimate of 15% of Vietnam agricultural exports. The World Bank (2006) prepared a comprehensive action plan for SPS capacity building, covering food safety, animal health and plant health. Its recommended public investments in Vietnam for a period of about five years were US$ 53 millions, which may be a proxy for the cost of compliance with SPS requirements. The main costs will come from the shift from passive to active surveillance systems in food safety, animal health, and plant health. Infrastructure (cool storage and port facilities) improvement are additional investments needed. The cost of compliance is hence far below the opportunity cost of non compliance.

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As noted at the paragraph 7.2, Vietnamese products rejected by importing markets have increased. Didier, Fontagn and Mimouni (2007) investigate which products are the most affected by these measures. They rank products according to three criteria: (i) number of notifying countries, (ii) coverage ratio95 and (iii) imports value in notifying countries. Results are shown in the following table. The top ten most affected products in terms of numbers of notifying countries represent a mere 0.43% of Vietnam agricultural exports. This ratio drops to 0.10% if we rank products according to the coverage ratio. The only criteria for which Vietnams export products would face the most serious SPS constraints is imports value in notifying countries. Rice which is ranked 9 represents 31% of Vietnam exports value. Vietnam export products do not rank among the top most SPS-affected products. Top exported products by Vietnam are not among the most notified; and conversely, the most notified products at the WTO are not among Vietnam top export products. Figure: Most affected products by SPS standards

Source: Didier, Fontagn and Mimouni (2007), except the two last columns (author)

In conclusion, the cost of membership associated with higher non-tariff barriers (NTB) faced by Vietnamese exports, under the Sanitary and Phytosanitary (SPS) and also Technical Barriers to Trade (TBT) WTO agreements, as well as the compliance costs incurred, are of limited magnitude in the case of Vietnam when compared to other Asean countries and to the most NTB-affected products worldwide.
95

The ratio of imports in notifying countries over world imports in affected products.

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2. Establish a system for price supervision; enhance the Consumers Associations role and ability of a social opponent Consumers in Vietnam should have benefited by considerable cuts in the tariff system, but consumers and agriculture producers turned out to face soaring prices due to the increase of the world prices in 2007. So as to subjectively control prices, the Government shall set up a system supervising prices and structure of production costs. This system will make a base for recalculating production costs and prices in the event of big input price changes. Governmental agencies should coordinate with the Consumers Association to implement price supervision. The capacity and power of the Consumers Association should be strengthened so that it can better play the role of a social opponent and a consumer protector. In terms of anti-corruption in Vietnam, individuals and organizations colluding in making false information to increase prices must be quickly discovered and strictly penalized. 3. Simultaneously carry out measures for monitoring and assessing the impacts of agricultural imports. As a result of liberalization after joining WTO, agricultural products are more and easier imported into Vietnam, which may negatively influence domestic trade and production. Actually there exists some information about the negative impact of Chinese imported vegetables into Vietnam in the recent years, but no detailed figures and evidence has been collected. Vietnam hasnt yet controlled cross border imports and exports due to its long shore and land borders, limited resources and technical equipment. An establishment of an import controlling system is essential so as to accurately estimate the affect of agricultural imported goods. This system is composed of the customs agency, border gate management agencies, and agencies managing wholesale markets, and market authority under coordination of a Ministry of Industry and Trades agency. The State should create a mechanism for reporting and regularly informing, as well as conduct uninformed investigations forming a base for estimating actual situations, warning dangers, and taking necessary interventional measures. It also actively forecasts levels of influence and proposes behavioral scenarios responded to each negative level. 4. Raise the added value and competitiveness of agricultural products based on innovation in agricultural production and processing technologies in the export value chain. Vietnams agricultural exports are mainly raw products; the rate of processed products is rather low. Agricultural exports which are a large quantity but at low prices and low level of competition heavily depend on competitive advantage of natural resources. This advantage is limited and will disappear quickly at equilibrium quantity, which is shown by a slowdown in the growth rate of export-turnover. Thus, improving added values and competitiveness of agricultural products is vital in order to maintain and stimulate the high growth rate. Moreover, agricultural products contain little content of technology which will be increased by processing more, as well as strengthening application of cultivated technology initiatives, biological technology in particular, in agriculture production. This is done only by providing enterprises

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with science and technology supports. This kind of support is not only allowed according to the Green Box but also included in the development program of many countries, and given preference to developing countries like Vietnam. For more efficient supports, major exporters which play a crucial role to the development of the commodities should be clearly identified. They then will place orders to research organizations. However, due to Vietnamese enterprises capital shortages, R&D activities should be funded by the State budget based on their orders. It is enterprises who evaluate research results, select results promising scientific and technological innovations to apply in production. They also investigate and propose needs for importing scientific and technological innovation. The State should have policies on payment for software, support for training technicians, hiring experts, and partial support for importing technological equipment and machinery. Furthermore, different types of enterprises should be treated equally; private enterprises should be paid attention to in terms of technological innovation; and foreign invested enterprises should be made full use of to gain access to and import new, modern technologies. All those measures are aimed at improving Vietnams agricultural processing technology in the next 10-15 years. 5. Develop a comprehensive strategy and active measures in agricultural export.

A comprehensive strategy composed of market strategy, strategy for main partners, product strategy, and strategy for export enterprises needs to be developed. In terms of market strategy, Vietnamese enterprises should pay high attention to new markets, such as Europe and America, EU and the U.S in particular; while retaining control over its traditional market (Asia); and improving domestic distribution network. In terms of product strategy, the structure of agricultural forestry fishery exports has moderately changed; for instance, the proportion of wooden and fishery processed products, and agricultural specialties has increased. Agricultural products, however, have not yet seen much change. Therefore, more investment in this commodity should be made and measures as mentioned in the fourth recommendation should be implemented within in the next few years. In terms of strategy for main partners, implement a variety of trade promotion measures. In the agriculture sector, accelerate concluding agreements on mutual recognition of quality standards, and testing and certifying agencies. Additionally, making full use of technical support from developed countries; coordinating with partners to study and analyze new markets (which are appropriate to the specific characteristics of Vietnams agricultural products, and have strict quality requirements but accept high prices). In terms of types of export: for a long period of time, Vietnam has only produced domestically then transported for export. In recent years, overseas communities of Vietnamese started investing in production in other countries; particularly in Laos in the agriculture sector. Export through foreign direct investment and selling goods in the home countries should be promoted in the next years. By doing so, Vietnam can export not only goods but also labour, especially when it has intensive experience in agricultural production and a strong labour force. 6. Experiment then broadly carry out policy on agriculture insurance

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Up to now agriculture insurance in Vietnam has not yet gained support from family households. They, however, have suffered great losses when floods, cold weather, and diseases have damaged crops, or slaughtered cattle which are their most valuable property in 2007 and in the early 2008. In spite of the States support, it took quite a long time for them to rehabilitate normal production activities. Additionally, prices vary making their income unstable. As a consequence, many agricultural households of modest and considerable production scale began to change their view. They want to buy insurance for their production so as to quickly recover in case of disaster and shocks. Insurance activities in the agriculture sector are not very attractive to insurance companies because of low interest, the high probability of a claim and high risk. Hence, insurance services in the sector shall be performed by businesses, but with the States support. Insurance companies will forecast and predict the insured risks for better prevention and loss reduction. If insured components and probability of occurrence are low, insurance companies will indemnify the insured; whereas if they exceed a specific degree and under force majeure, then the State shall consider to compensate for the damage. This requires that insurance companies and the State coordinate to formulate solutions, and come to an agreement on the liability of the insured, insurance companies and the State varying on each risk level. Policy on insurance is rather new that should first be implemented in some commodities and provinces, then broadly applied in other commodities and provinces after learning some lessons and developing experience. 7. issue policy on social security for the vulnerable and poor households, and on job creation for households affected by transferring the purpose of land use. Generally, income of Vietnamese farmers, particularly of poor households, and those living in areas where natural disasters often take place, is rather low. They are vulnerable to sudden changes in weather and the market, and easily become poor. The State and Vietnam Fatherland Front have helped and supported at the community level, but at the household level it is still poor. Vietnam Government and Fatherland Fund has implemented aid activities but the support for each family is still very low Therefore, a policy for more fundamental support should be formulated and issued. It will concentrate on housing support to help the poor live safely in storms, in case of floods, and on facilities for production, namely as breeding facilities which can resist freezing cold, protect breeder animals and breeder plants, and input materials for each crop, and food support for living above the poverty line during recovery after the catastrophe. Joining the WTO and integration into the world economy brings tremendous opportunity for economic development, industrialization, and urbanization. While industries benefit from the development process, family households suffer a loss. Their land is withdrawn, and compensation is not equivalent to market price at the point of withdrawal despite escalating prices in the real estate market. Moreover farmers now have no land to work on bringing about unemployment for several generations. As a result, the State should change from a cash compensation basis to allowing households to buy stocks of enterprises using withdrawn land, and to creating jobs for them. Its responsibility is to recruit and train farmers so as to become employees for those enterprises.

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8. Apply supports specified in the Amber Box; mobilize investment in agriculture from all economic sectors. After accession to the WTO, the agriculture sector is confronting lots of challenges, suffering a loss to pave the way for the development of the country and other sectors as agriculture plays a major role in stabilizing the socio-economic life of a nation. In order that farmers can enjoy the economic integration and development, the State should support the sector at the highest level that the Amber Box allows developing countries; i.e. 10% of agriculture production value. The figure for Vietnam is 20 thousand billion VND in 2007. Furthermore, the State should introduce policies on mobilizing other industries, such as industry, tourism, and transport and communication to investment in agriculture. This investment is actually a compensation for using resources originating from agriculture.

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6. References Didier A.C., Fontagn L. and M. Mimouni (2007), The Impact of Regulations on Agricultural Trade: Evidence from SPS and TBT agreements, Cepii N 2007-04. General Statistics Office (1995-2006), Statistical Yearbook, Statistical Publishing House, Hanoi. Hermelin B., Cambodian agriculture and WTO. Joining WTO: facing the challenges. GRET 2004 MALICA Seminar 2007 Recent changes affecting quality in Vietnams agriculture and food chainsinstitutional challenges and methods, Hanoi, December 11 & 12. Ministry of Finance (2005, 2006, 2007), Export et Import Tariffs and Import Value Added Tax. Nguyen Duc Trieu, Impact of WTO on Vietnam Agriculture and concerns of VNFU on WTO Nguyen Tuong-Van, Agricultural Biotechnology in Vietnam, Institute of Biotechnology, Hanoi, Vietnam Pham Thi Tuoc, VIETNAMS AGRICULTURAL POLICES AGRICULTURAL POLICES AND DIRECTIONS TOWARDS WTO ANVIETNAMS

Van der Meer K. (2007), Overview of SPS Capacity Building Needs Assessments and Compliance Studies for Cambodia, Lao PDR and Vietnam 2000-2006. Mimeo. Vanzetti D., Open Wide: Vietnams Agricultural Trade Policy, 50th AARES Annual Conference, Sydney, New South Wales, 8-10 February 2006 Vietnam, Government of (2004a) Circular No. 10/2004/TT-BTM of December 27, 2004 guiding the implementation of the Prime Ministers Decision No. 91/2003/QD-TTg of May 9, 2003 on the application of duty quotas to goods imported into Vietnam for 2005. Vietnam, Government of (2006d) Decision No. 39/2006/QD-BTC of July 28, 2006 promulgating the Export Tariff and the Preferential Import Tariff. Vietnam, Government of (2001) Decision No.46/2001/QD-TTg of april 4, 2001 on the management of goods export and import in the 2001-2005 period. Vietnam, Government of (2003a) Circular No. 04/2003/TT-BTM of july 10, 2003 guiding the implementation of the prime ministers decision no. 91/2003/qd-ttg of may 9, 2003 on the application of duty quotas to goods imported into Vietnam. Vietnam, Government of (2003b) Circular No. 09/2003/TT-BTM of December 15, 2003 guiding the implementation of the Prime Ministers Decision No. 91/2003/QD-TTg of May 9, 2003 on the application of duty quotas to goods imported into Vietnam for 2004.

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Vietnam, Government of (2003c) Decision No. 46/2003/QD-TTg of april 2, 2003 on the rate of foreign currencies earned from current revenue sources subject to compulsory sale, applicable to residents being economic organizations and social organizations. Vietnam, Government of (2003d) Decision No. 110/2003/QD-BTC of July 25, 2003 promulgating the Preferential Import Tariffs. Vietnam, Government of (2004b) Circular No. 87/2004/TT-BTC of august 31, 2004 guiding the implementation of export tax, import tax. Vietnam, Government of (2004c) Decision No. 90/2004/QD-BTC of November 25, 2004 adjusting the import tax rates of a number of commodity items according to the Preferential Import Tariffs for the implementation of the Vietnam-US Bilateral Trade Agreement. Vietnam, Government of (2004d) Decree No. 99/2004/ND-CP of February 25, 2004 promulgating Vietnams 2004-2008 list of goods and their import tax rates for implementation of the Early Harvest Program of the Framework Agreement on Asean-China Comprehensive Economic Cooperation. Vietnam, Government of (2006a) Decree No.12/2006/ND-CP of January 23, 2006, detailing the implementation of the commercial law regarding international goods sale and purchase and goods sale, purchase, processing and transit agency activities with foreign countries. Vietnam, Government of (2006b) Decision No. 35/2006/QD-BTM of December 8, 2006, on the volume of 2007 tariff quotas for imports. Vietnam, Government of (2006c) Decision No. 35/2006/QD-BTC of June 12, 2006 on issuing Vietnam's Products and Special Preferential Import Tariff rates for 2006 to implement the Agreement of Trade in Goods between ASEAN and China. Vietnam, Government of (2007a) Decree No. 23/2007/ND-CP of February 12, 2007 providing regulations for implementation of commercial law regarding purchase and sale of goods and activities directly related to the purchase and sale of goods by enterprises with foreign owned capital in Vietnam. Vietnam, Government of (2007b) Decision No. 26/2007/QD-BTC of April 16, 2007, promulgating Vietnams Particularly Preferential Import Tariff for implementation of the ASEAN-China Free Trade Area. Voituriez T., WTO Entry and Beyond: Accession Benefits and the Cost of Membership. World Bank (2006). Vietnam: Food Safety and Agricultural Health Action Plan. Washington D.C.: World Bank, Report No. 35231-VN; http://siteresources.worldbank.org/INTVIETNAM/Resources/vietnam_sps_report_final_feb_06. pdf

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Zhao Yumin, Wang Hongxia, Linxuegui Mayu, Green Box Support Measures Under the WTO Agreement on Agriculture and Chinese Agricultural Sustainable Development, ICTSD, 2003 http://www.ictsd.org/pubs/TKN/tkn_greenbox_china_sum.pdf

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Annex 1: Vietnams implementation of agricultural reforms since 1995 A1.1. Vietnams policies on the management of agricultural product imports.

A.1.1.1 Import prohibition. Since 2002, no agricultural materials and products have appeared in the List of prohibited products issued with the Decision No.46/2001/QD-TTg and the Decision No.12/2006/ND-CP. A.1.1.2. Quantitative restrictions and non-automatic import licensing. a) Tariff quotas. Since 2002, the Ministry of Trade has suggested tariffs on the following commodities: 2002 Tobacco, salt imported from all foreign countries, cotton imported from outside ASEAN 2003 Raw material tobacco, salt, cotton (principle based on balancing domestic demands versus domestic production capacity. Ministry of Trade in charge of issuing licenses to enterprises qualifying to import goods as indicated in the tariff quota list96 2004 Import quotas97 were extended including: raw-material tobacco, salt, cotton, condensed raw-material milk, non-condensed raw-material milk, corn and poultry eggs. The quota quantities of raw-material tobacco and salt were set at 22,379 tons and 200,000 respectively; the other goods would be supplied on demand. As for raw-material tobacco and salt, the Ministry of Trade shall issue import licenses to qualifying as specified in the tariff quota list based on the declared quota quantities and the balance between the import results and the demands for tariff-quota registration of the enterprises. For the other goods, after referring to the relevant Ministries, the Ministry of Trade shall announce the quota quantities at least three months before putting them into practice. The principle to define quota quantity is based on the balance between domestic demands for materials and domestic production capacity. 2005 The list of quota goods was similar to the 2004 list. The only difference was the increase of the salt quota to 29,774 tons98 2006 The number of imposed tariff quotas decreased to four groups of commodity items: poultry eggs, raw-material tobacco, salt and sugar 99
96 97

Circular No 04/2003/TT-BTM Circular No. 09/2003/TT-BTM 98 Circular No 10/2004/TT-BTM 175

2007 Tariff quotas were confirmed on 4 products100: poultry eggs (chicken eggs, duck eggs, and other poultry eggs); salt; raw-material tobacco; refined sugar, raw sugar. The quota quantities of all these goods were clearly specified: 30,000 tons (poultry egg); 37,000 tons (raw-material tobacco); 200,000 tons (salt); 55,000 tons (refined sugar and raw sugar).

b) Import licenses and the right to grant import licenses. 2001 Import licenses issued by the Ministry of Trade were required only for refined sugar and raw sugar101. The Ministry of Agriculture and Rural Development was responsible for managing seven groups of commodities: (i) (ii) (iii) (iv) (v) (vi) (vii) veterinary medicines and materials for production of veterinary medicines biologically produced articles used in the veterinary field pesticides and materials for production of pesticides plant and animal breeds and all types of insects feed for livestock and material for the production of feed for livestock fertilizers newly used in Vietnam genes of plants, animals and micro-organisms for the purposes of scientific and technological research and exchange.

The last group required import licenses while the others needed test licenses before being imported into Vietnam. Depending on the testing results, the Ministry of Agriculture and Rural Development shall decide whether to import those goods into Vietnam. After granting permission, the goods shall be imported on demand without restrictions on quantity, or value and shall not require an import license. 2006 No agricultural commodities required non-automatic import licenses from the Ministry of Trade.102 The list of restricted imports managed by the Ministry of Agriculture and Rural Development was extended to wild fauna and flora species103 under the CITIES Convention to which Vietnam has committed. The Ministry of Agriculture and Rural Development relies
99

Decision No.12/2006/ND-CP Decision No.35/2006/QD-BTM 101 Decision No. 46/2001/QD-TTg 102 Decision No. 12/2006 ND-CP 103 Decree No. 82/2006/ND-CP
100

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on the CITIES Convention to announce import conditions and to give directions to fulfill import procedures. In addition, pesticides and materials for the production of pesticides in the new list are divided into two groups: (i) (ii) those prohibited in Vietnam those restricted in Vietnam.

In the past, all sorts of pesticides and materials for the production of pesticides had to obtain test licenses from MARD to be imported. At present, only pesticides included in the group (i) and materials produced utilizing these pesticides are subject to import licenses. The rest of pesticides and theirs materials are imported without restrictions.

A.1.1.3. Foreign exchange policy related to quantitative restrictions Since 2003, the obligation to sell at least 40% of foreign currency earned from import and export activities was removed104. A.1.1.4. Surcharges In 1998, the Government Pricing Committee decided to apply surcharges for three types of imported fertilizer including Urea, NPK and DAP. The surcharges amounted to 3-5 % of the CIF price basis. The government gradually abolished the regulation related to surcharges for DAP, UREA, and NPK. Since 2002, no surcharges were levied on agricultural products and imported agricultural materials . 2.1.5. Customs valuation In 2001, the General Department of Viet Nam Customs issued the minimum price105 table for calculating import tax in the following: i) Imported goods without sales contract or with non-trading method; ii) Imported goods under a sales contract but not satisfying the conditions imposed by Circular No. 92/1999/TT-BTC (including five terms and conditions: (1) commodity; (2) quantity; (3) price; (4) payment terms; (5) place and shipment terms); or under a sales
104 105

Decision No. 46/QD-TTg Decision No. 177/2001/QD-TCHQ 177

contract satisfying conditions pursuant to this Circular but the price is lower than the70% of the minimum price indicated in the Minimum Price Table issued by the General Department of Vietnam Customs. The list of agricultural products that are subject to a minimum price table includes: fresh and frozen animal innards meat used for foods frozen fish, processed or rough processed fish, molluscs, crustacean dairy products flowers, dry flowers and plant breeds fresh and processed vegetables and fruits

However, since 2003106 Vietnam no longer implements a minimum price to calculate taxes imposed on goods. The tax calculated on exported goods, is calculated on the prices of goods sold to customers at the export border-gate (FOB, DAF prices),107 exclusive of insurance cost (I) and freight (F). For imported goods, it is the actual payable prices already paid or to be paid by the buyers at the first border-gate. The dutiable value is calculated on the basis of one of the following methods: 1) 2) 3) 4) 5) 6) A.1.2 . transaction value transaction value of identical imported goods transaction value of similar imported goods deductible value computed value determination of dutiable value by the deductive method Vietnams policies on the management of agricultural products export.

A.1.2.1 Export prohibition Pursuant to this Decision No 46/2001/QD-TTg, three commodity items shall be subject to export prohibition under the management of the Ministry of Agriculture and Rural Development, namely: (i) wild animals and rare animals; (ii) rare flora; (iii) rare animal and plant breeds;

106 107

Decision No. 87/2003/QD-BTC. Circular No. 87/2004/TT-BTC 178

In 2006, firewood or charcoal originating from wood from a domestic natural forest was added to that List. It has to be pointed out that the MARD could permit, on a case-by-case basis, the export of the above mentioned items. A.1.2.2 Export quotas and licensing a) Export quotas Prior to 1998, rice was subject to an export quota with the objective of balancing the domestic demand and supply in relation to the condition of each crop and international prices. Food-stuff export companies in general and rice export companies in particular were SOEs with the States export license. Since 1998, the State has loosened its export conditions and encouraged all economic classes to participate in exporting rice. However, in reality non-state owned enterprises are unable to directly export due to the management of rice imports by quotas.108 and due to strict criteria imposed by the government on the appointment of rice exporters. Since 2001, the State has carried out a new import-export controlling regime, in which importexport management by quotas and the appointment of rice exporters were abolished109. Those new regulations have paved the way for non State owned enterprises to be directly involved in exporting rice. This policy was recognized as a positive factor which has accelerated rice export in recent years. However, when domestic and overseas markets fluctuate, the Prime Minister shall consider and decide necessary and effective measures for intervening in the rice market.110 Pursuant to this Decision, three commodity items shall be subject to export prohibition under the management of the Ministry of Agriculture and Rural Development, namely: (i) wild animals and rare animals (ii) rare flora (iii) rare animal and plant breeds There are two forms of management for these goods:. export prohibition and export licensing. b) Export license For the 2001-2005 period, three commodity items were required to be licensed by the Ministry of Agriculture and Rural Development for export or export prohibition: (i) wild animals and rare animals (ii)rare plants (iii) rare plant and animal breeds111

108 109
110

Decree No. 99/1998/ND-CP and Decree No. 250/1998/QD-TTg Decision No. 46/2001/QD-TTg Decision No. 46/2001/QD-TTg, 179

Provision 4, Article 6 of Decision No. 46/2001/QD-TTg

111

In 2006, firewood or charcoal originating from wood from a domestic natural forest was added to that List. The Ministry of Agriculture and Rural Development issued detailed conditions and procedures for export. 112 A.1.3 Import and export rights in Vietnam

Vietnamese enterprises without foreign direct investment are allowed to import and export goods excluding products in the List of products subject to export prohibition, temporary export suspension and those in the Lists of products subject to import prohibition and temporary import prohibition, without being dependent on their fields of operation as registered.113 The rights to export and import by foreign-direct investment (FDIs) 114are provided in the guidelines on the implementation. Pursuant to this Decree and Circular, FDs are permitted to export and import goods which are not included in the List of products subject to export prohibition, temporary export suspension, or in the List of products subject to import prohibition (in the List of goods banned from import, only cigars and cigarettes are processed agricultural products). For goods under the List of exports, according to the roadmap, in which rice was to be exported, from 1 January 2001, FDIs are entitled to export and import according to a stipulated roadmap. The Ministry of Planning and Investment would grant an Investment Certificate after obtaining the Ministry of Trades approval for foreign investors that invest in goods purchase and sale and goods purchase and sale related activities in Vietnam for the first time. Then, the Investment Certificate also plays the role of the Business Permit.

112 113

Decision No. 12/2006/ND-CP, Article 3, Decree No. 12/2006/ND-CP 114 Decree No. 23/2007/ND-CP and Circular No. 09/2007/TT-BTM 180

Annex 2. Changes on tariff structures in Vietnam since 1995

A.2.1.

Vietnams tariff regime for imported agricultural products

The innovation of Vietnams tariff regime Since 1998, Vietnams tariff regime has gradually improved to be the foundation for tariff application. Vietnams tariff system is divided into three categories,. normal tariffs, preferential tariffs and special preferential tariffs. The innovation process of Vietnams tariff regime can be seen as follows: Preferential tariffs were issued under the Finance Ministers Decision No.110/2003/QD-BTC of July 25, 2003. From 2003 to 2006, preferential import tariffs were levied on the products imported from those countries having Bilateral Trade Agreements or Most Favored Nations Treatment with Vietnam (70 countries and territories). Preferential tariffs were also applied for imports in accordance with the Vietnam U.S. Bilateral Trade Agreement, which was issued along with the Finance Ministers Decision 90/2004/QD-BTC dated November 25, 2004. At the beginning of 2007, Vietnam became the 150th member of the WTO; as a result, preferential tariffs must now be applied to all WTOs members. Special preferential tariffs which came into force on January 1, 2005, are the particularly preferential tariffs imposed on all imported goods originating from ASEAN countries conforming to CEPT (AFTA). In the list of commodities subject to CEPT, a group of agricultural products which belongs to the Early Harvested Program EHP will finish tariff reduction earlier. Vietnams tariff which was applied in EHP in accordance with The Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China, was promulgated under The Governments Decree No.99/2004/ND-CP dated February 25, 2004 and the Ministry of Finances Circular No. 16/2004/TT. Normal tariffs were applied to all countries with no Most Favored Nations Treatment or Trade Agreement with Vietnam. Until to the beginning of 2007, this regime applied only to partners who are not WTO member and have not received preference. Among the three categories of tariff, special preferential tariff is the lowest one, the MFN tariff is the second lowest, and the normal tariff is the highest. The normal tariff is 50% higher than the MFN tariff. Vietnams import tariff regime has been reformed as follows: The new tariff list is completely consistent with the List of the Harmonized Commodity Description and Coding System of the World Customs Organization (WCO). In addition to tariff cuts, Vietnam rearranged the codes and renamed goods in conformity with the List of ASEAN or worlds Harmonized System.

181

The tariff nomenclature included the normal, preferential and special preferential tariff rates under CEPT. Vietnams tariff structure for agricultural products for the past three years has been changed. After joining WTO, Vietnams tariff structure, in general, and agricultural products in particular has changed significantly The share of preferential tariff has increased, whereas the share of normal tariff has fallen. Agricultural product tariff has also decreased, helping to open the opportunities of market access and free trade for the goods of Vietnams partners.

A.2.2

Bound tariffs for imported agricultural commodities

A.2.2.1. Early Harvested Program (EHP): Vietnam has discussed and issued bound tariff rates for a variety of Vietnams agricultural products conforming to the EHP. The Government has also given a yearly tariff reduction roadmap for each kind of tariff, commencing from 2004 to 2010 and discussed about the exceptions of EHP. EHPs tariff list includes eight chapters of live animals, fish, fresh meat, milk, fresh and preliminarily processed vegetables, live plants, and seeds. EHP tariff rates are divided into three groups conforming to the roadmap as below: Table 1: Vietnams tariff reduction roadmap according to EHP Item groups Tariff reduction roadmap (%, on January 1st of each year 2004 2005 2006 2007 1 20 15 10 the 10 10 5

2008 5 0

2009 0

2010 0

Group having tax rate > 30% Group 2 having 15%< tax rate < 30%) Group 3 having the tax rate <15%)

0 -5

0 -5

Source: Planning Department, Ministry of Agricultural and Rural Development, November 2005

A. 2.2.2. Bound tariff subject to the implementation of CEPT Vietnam divided CEPT tariff into four categories: (1): Inclusion List; (2) Temporary Exclusion List; (3) Sensitive List; and (4) General Exclusion List. Tariff lines for each category and reduction roadmap are as follows: 182

Table 2: The number of tariffs and CEPT tariff reduction roadmap, 1996-2006 (of same validity for all sectors)115 1996 1997 Amount of tariff lines Inclusion 1.496 1.996 List Tempora 1.483 983 ry Exclusio n List Sensitive 26 26 List General 213 213 Exclusio n List Total 3.218 3.218 Simple Average Tariff (%) Inclusion 6.8 5.8 List Tempora 19.9 19.9 ry Exclusio n List Average 12.6 12.1 1998 2000 2001 4.830 1,200 2002 5.430 600 2003 6.030 0 2004 6.030 0 2005 6.030 0 2006 6,030 0

3.590 4.230 2,440 1,800

51 202

51 202

51 202 6.283 3.9 19.6

51 202 6.283 3.8 19.4

51 202 6.283 2.8 17.5

51 202 6.283 2.6 13.4

51 202 6.283 2.5 8.9

51 202 6,283 2.3 3.9

6.283 6.283 5.6 19.9 4.7 19.8

11.9

11.4

10.9

10.7

9.3

7.4

5.3

3.0

A.2.2.3. Tariff reduction Commitments to ASEAN + For the past few years, ASEAN countries have negotiated and signed Agreements with China, Japan, Korea, India Australia, and New Zealand (in short, ASEAN +) . In addition, a tariff reduction roadmap and free trade implementation has appeared. Among these partners, China has been the most active in speeding up the negotiation progress. All countries have given a roadmap to cut tariff rates within the AC-FTA.

A.2.2.4. Bound tariff to agricultural products as a WTO member At the time of joining the WTO (December 2006), Vietnams tariff levied on agricultural products was as follows:116

115

Source: Auffret (2002)

116

Source: The Bound tariff Nomenclature within WTO announced by Ministry of Finance 183

Table 3: Vietnams bound tariff of agricultural commodities at the time of Vietnams joining WTO and the final commitment
Tariff rate 0% 1% 3% 5% 7% 8% 10% 13% 14% 15% 17% 18% 20% 22% 23% 24% 25% 27% 28% 30% 33% 35% 37% 38% 40% 45% 50% 55% 65% 80% 85% 90% 100% 135% 150% TOTAL Total tariff bands Simple average tariff rate At the time of joining WTO No. of lines Proportion (%) 95 7.83 2 0.16 3 0.25 180 14.8 165 1 58 2 145 1 20 4 149 22 4 3 232 22 22 46 4 29 5 1214 14.0 0.08 4.78 0.76 12.0 0.08 1.65 0.33 12.3 1.81 0.33 0.25 19.0 1.80 1.80 3.79 0.30 2.39 0.41 100 23 25.40 The final commitment No. of Lines 94 2 7 184 20 8 165 8 2 100 7 7 166 15 1 41 1 150 4 55 4 90 23 10 12 9 4 6 15 4 1214 Proportion (%) 7.74 0.16 0.58 15.76 1.65 0.66 13.59 0.66 0.16 8.24 0.58 0.58 13.67 1.24 0.08 3.38 0.08 12.36 0.33 4.53 0.33 7.41 1.89 0.82 0.99 0.74 0.33 0.49 1.24 0.33 100 30 21.04

Note: The figures in the final commitment column include the tariffs which have the tariff rate of 0%, the tariffs exempted commitment and tariff committed to reduce.

184

At the time of joining, there were 1,213 tariff lines applied to agricultural products, equivalent to 100%, with 23 different tariff levels, the lowest is 0%, the highest is 150%, the simple average tariff rate is 25.4%. Six tariffs which have the highest shares in descending order are
Tariff rate 40% 5% 10% 30% 20% 0% At the time of joining WTO No. of lines Proportion (%) 231 19 180 14.8 165 14 149 2.3 145 12 96 7.83

A.2.3. Applied Tariffs The applied tariff analysis below was based on Vietnamese Government Decisions and entry into force. A.2.3.1.Special Preferential Tariff within CEPT The origin and objective of ASEAN and CEPT were introduced in the Mutrap 2002 report.117 The list of the commodity groups introduced in that report, included: Included List IL will be reduced immediately; Temporary Exclusion List TEL from 2006, Sensitive List SL which allowed exclusions that would be reduced more slowly with the deadline of 2013, particularly 2010 for sugar; General Exclusion List GEL which contains everlasting excluded commodities not to be reduced within CEPT for reasons of national security, health protection, or public culture protection.... Table 4: Applied Tariff conforming to CEPT for 2006 and 2007118 Tariff Rate 0% 3% 5% 10% 20% 30% 40% 50% CNG
117 118

2006 No. of tariffs Proportion (%) 526 44.5 611 2 10 1 13 19 1182 51.69 0.17 0.85 0.08 1.10 1.61 100

2007 No. of tariffs Proportion (%) 526 44.50 4 0.34 609 51.52 10 5 28 1182 0.85 0.42 2.37 100

item 12, chapter 2, MUTRAP Report 2002

Source: Calculations from Taxation List announced by Ministry of Finance 2006, 2007

185

The levels tariff SIMPLE AVERAGE

of

7 4.04%

6 3.83%

Until 2006, Vietnam has applied 1,182 tariff lines with Special preferential tariffs for agricultural products imported from ASEAN countries. The simple average tariff rate is rather low at 4.04% for 2006 and 3.83% for 2007. In 2006, the tariff structure for agricultural products had seven levels: 0%, 5%, 10%, 20%, 30%, 40%, 50%; for 2007, there were six levels: %, 3%, 5%, 20%, 30%, and 40%. Among them, the group that has tariffs that have the rate of over 5% is only small at, below 4% of all the levels. This is remarkable progress in trade liberalization within ASEAN. A.2.3.1. Applied tariffs under AC-FTA ASEAN countries have discussed and signed onto the Agreements on Comprehensive Economic Co-operation with China. In terms of trading goods, China and ASEAN countries agreed to divide into three categories to implement the tariff reduction commitment, and boost trade liberalization, as follow: 1) Goods excluded from EHP (according to GATTs clause XXIV (8) (b) ) 2) Goods included in EHP 3) Goods subject to tariff reduction within MFN treatment, not EHP. Goods excluded from EHP In order to implement the AC-FTA Agreement, Vietnam proposed and was accepted for the list of agricultural products excluded from EHP: 0105: Live poultry including Gallus domestic chickens, ducks, swans, geese, pheasants (Japanese chickens) with seven tariff lines. 0207: Fresh, or frozen poultry meat and by-products after slaughter belonging to Group 01 05 (with 10 lines) 0407: Birds and poultry eggs with the shells, or preserved, or cooked (with six tariff lines) .0805: Fresh or dried fruits of the orange descent Goods included in EHP With regard to the rest of agricultural products listed in the first eight chapters Vietnam has exercised EHP; the result of the tariff reduction implementations in 2006 and 2007 are as below: Table 5: Tariffs conforming to EHP in 2006, 2007 Tariff rate 0% 3% 2006 No. of lines Share (%) 159 43.56 2007 No. of lines Share (%) 159 43.56 4 1.10 186

5% 10% 20% 40% TOTAL The amount of tariff levels The simple average

188 2 10 6 365 5

51.51 0.55 2.74 1.64

186 10 6 365 5

50.96 2.74 1.64 100

3.84

3.79

There were 365 tariff lines for agricultural products included in EHP, with only five levels left. The number of tariff lines with a rate of less than 10% was the greatest with a share of 95.62% for 2006 and 2007. Tariffs for EHP are reduced the most quickly, hence the liberalization and competition of agricultural products within ASEAN and between ASEAN countries and China has become fierce for the past three years. Applied tariff on agricultural products within AC- FTA Table 6: Applied tariff conforming AC-FTA year 2006 and 2007119 Tariff rate 2006 No. of Share (%) tariff lines 81 9.85 2 0.24 18 2.19 137 16.67 104 12.65 16 1.95 77 9.37 53 6.45 46 5.60 264 32.12 2.92 100 11 20.32 2007 No. of Share (%) tariff lines 133 11.45 2 0.17 68 5.85 375 32.27 119 10.24 80 6.88 2 0.17 50 4.30 46 3.96 264 22.72 23 1.98 1162 100 11 14.89

0% 1% 3% 5% 10% 15% 20% 25% 30% 35% 40% 50% 24 TOTAL 822 The amount of tariff levels The simple average
119

Source: Import tariff 2006 calculated from the tariff list issued along with the Finance Ministers Decision 35/2006/QD-BTC dated June 12, 2006; Import tariff 2007 calculated from the tariff list issued along with the Finance Ministers Decision 26/2007/QD-BTC dated April 16, 2007

187

The tariff levied on agricultural products under AC-FTA included 822 lines with 11 different levels. The average tariff for 2006 was 20.32%, 2007s figure was 14.89%. This is the group having the second lowest tariff rate after group EHP. Until 2007, 1,117 out of 1,2111 tariff lines relating to the WTO commitment on agricultural products, have been granted particularly preferential tariffs in trade between Vietnam and ASEAN as well as Vietnam and China. The average tariff prior to 2007 was below 15%. The number of tariff lines with high tariff rates (40%, 50%) accounts for a very small share. Tariff conforming to WTO regulations in 2007 When Vietnam became a member of the WTO, it carried its obligation to cut tariff. In 2007 the imported commodity tariffs were cut as follows: Table 7: MFN tariff conforming WTO regulations120 The levels of tariff rate 0% 1% 3% 5% 8% 10% 15% 18% 20% 25% 30% 35% 40% 45% 50% 65% 150% TOTAL The amount of tariff levels The simple average tariff 2007 Share (%) 11.20 0.16 1.24 16.47 0.08 10.54 4.61 0.16 10.87 2.14 14.09 3.05 19.36 1.15 0.66 3.79 0.41 100 14 23.59

No. of lines 136 2 15 200 1 128 56 2 132 26 171 37 235 14 8 46 5 1211

Source: Preferential tariff rate 2007 quoted from Finance Ministers Decision 39/2006/QD-BTC dated on July 28, 2006.

120

188

The tariff rate of 100% was imposed on cigarettes of all kinds, 80% on beer manufactured from malt, 65% on mineral water, dinner wine, fermented drinks, and ethylic alcohol, and 50% on many goods such as: coffee, tea, buckwheat, coconut oils, margarine, sausage, chocolate cookies, and food processed from cereal. A.2.3.1. The MFN tariff reduced for the past 3 years. The Preferential tariff rate imposed on agricultural products for the past three years has fluctuated from an average of 23.5% to below 26%. The number of tariff lines granted MFN accounts for approximately 100% of the agricultural product tariff lines. Table 8: MFN implemented tariff from 2005 -2007 (equivalent to WTO tariff)121 2005 2006 2007 No. of lines Share (%) No. of Share No. of Share (%) lines (%) lines 0% 136 11,21 135 11.13 136 11.23 1% 2 0.16 2 0.16 2 0.17 3% 15 1.24 15 1.24 15 1.24 5% 196 16.6 190 15.66 196 16.18 10% 127 10.47 105 8.66 128 10.57 15% 49 4.04 22 1.81 49 4.05 20% 143 11.79 154 12.70 141 11.64 25% 4 0.33 4 0.33 30% 172 14.78 173 14.26 171 14.12 40% 193 15.91 116 9.56 194 16.02 50% 125 10.31 250 20.61 124 10.24 65% 44 3.63 44 3,63 44 3.63 80% 2 0.16 2 0.17 100% 5 0.41 7 0.58 5 0.41 TOTAL 1213 100 1213 100 1211 100 The 14 12 14 amount of tariff levels The simple 23.61 25.84 23.59 average tariff A.2.3.2. Tariff Implementation conforming to Vietnam US BTA: Agricultural product trading between Vietnam and the US was extended after the validity of the BTA. Since 2004 Vietnam has levied 448 tariff lines, with 10 different preferential tariff levels

Source: MFN tariff rate 2005 calculated, MFN tariff rate 2006 calculated, Import preferential tariff rate 2007 quoted from Finance Ministers Decision 39/2006/QD-BTC dated on July 28, 2006.

121

189

on agricultural products imported from the US122. The average tariff is 27.26%, which is higher than the MFN average tariff as analyzed in the last table. The reason is due to the difference between the USs structure of imports and that of ASEAN and China. Table 9: Tariff for agricultural products conforming to Vietnam US BTA (2005-2007) 0% 5% 10% 15% 20% 25% 30% 40% 50% 80% Total The amount of levels The average tariff rate No. of lines 11 45 50 28 65 4 57 145 41 2 448 Share (%) 2.46 10.04 11.16 6.25 14.51 0.89 12.72 32.37 9.15 0.45 100 10 27.26

122

Decision 90/2004/QD-BTC dated November 25, 2004, 190

Annex 3: Non-tariff measures applied by Vietnam

Although trade liberalization has become an indispensable trend at this time, the existence of non-tariff barriers to farming producing for trade could not be denied. This section analyses two aspects of trade barriers: Vietnams trade barriers to agricultural products imported from abroad and the foreign trade barriers to Vietnams farming exports. Trade barriers are divided into five groups based on theirs effects: measures to control the quantities of imports measures to control the import prices supervisory measures such as price or weight investigation measures to subsidize export and to support domestic manufacture technical measures. On the whole, since 2002, Vietnamese imports have faced low trade barriers, consisting mainly in groups (i), (iv), and (v).. Most of goods subject to group (i) need to be controlled to ensure social security and safety. Group (iv) includes many regulatory policies focusing on support for domestic manufacturing. However, since 2002, these policies have been modified by removing the regulations that are inappropriate to the WTO and Vietnams commitments and by establishing more policies that Vietnam has permission to apply in order to increase the competitiveness of Vietnams agricultural products in the domestic as well as international markets. The measures of group (ii) such as import surcharges or minimum custom value, were abolished in the process of Vietnams integrating into the WTO. Moreover, Vietnam has been building the legal frameworks to regulate anti-dumping tax and anti-subsidizing tax. However, these measures are rarely used due to complicated application procedures and Vietnams modest position on the world stage. With group (iv), Vietnam has not had enough ability or a strong enough position to carry out the price and weight investigations to prevent the goods from being dumped on Vietnams market. With group (v), Vietnam has not formed the technical barriers to stop low-quality farming products from being imported into Vietnam. Many Vietnamese agriculture products with low technical standards have been refused entry into foreign countries because of not meeting their high technical standards. The author has found it very difficult to collect the information about the foreign trade barriers to Vietnamese products fully and accurately. Therefore, the author only deals with the difficulties of Vietnams farming produce export in the past, that is, the performance of foreign trade barriers to Vietnamese products. Since 2002, Vietnams agricultural products especially rice, tea, coffee-beans, pork, and poultry meat have had to face many strict barriers, namely import prohibition, tariff quota, and anti-dumping tax. Besides preventing the breakout of dangerous epidemics and contamination coming from pork and poultry products, Vietnamese agricultural goods have been prohibited to be imported, have been returned or compelled to be sold at cheap prices due to low quality, or prohibited poisonous chemicals, that has had a negative impact on Vietnams domestic manufacture and export activities. However, in some cases, the foreign countries application of import prohibition was unreasonable. These are the type of technical barriers which have been built up to protect the domestic manufacture of foreign countries.

191

Table 1. Vietnams trade barriers regulations

Trade barriers

Up to 2002

2003 - 2006

Now (2007)

A. The group of measures to control import quantity 1.Import prohibition Since 2002, Vietnam has not applied import prohibitions to any kinds of agricultural products based on Decision No.46/2001/QD-TTg and Decision No.12/2006/ND-CP. However, occasionally, Vietnam has applied provisional import prohibitions to certain goods to ensure the health of humans and animals and to avoid contamination or epidemics. For example: on January 8th, 2004 Vietnam issued the order to prohibit musk-cat imports from China to avoid the return of the SARS epidemic. Especially, when bird flu was spreading, the Minister of the Ministry of Agriculture and Rural Development of Vietnam issued some provisional orders to ban importing all sorts of poultry and birds from foreign countries from 11/1/2005 to 3/31/2006. 2. Tariff quota Tariff quotas were applied to four types of goods: poultry eggs; tobacco; salt; sugar (the Decree No.12/2006/ND-CP) Tariff quotas are applied to four types of goods: poultry eggs (30,000 tons); tobacco (37,000 tons); salt (200,000 In 2005, Vietnam removed tons); refined sugar and raw import quotas applied to: cotton; sugar (55,000 tons) (Decision No.35/2006/QD-BTM). cloth; milk; maize. Goods that must have import licenses from the Ministry of Trade: refined sugar and raw sugar. Vegetal protective medicines Similar to 2006 were transferred from the group that must have the test license to the group that must have the Under the management of the conditional import license. Ministry of Agriculture and

3.Import licenses

192

Rural Development, there was one kind of good that must obtain an import license (the genetic resources of plants and animals; microorganism serving scientific and technical research and exchange). Six others must have test licenses (veterinary medicines and materials to produce veterinary medicines; biological finished products used in the veterinary field; vegetal protective medicines and materials to produce vegetal protective medicines; breeder plants, breeder animals and insects; breeding food and materials to produce breeding food; fertilizers newly used in Vietnam). Depending on the testing results, the Ministry of Agriculture would decide whether to import those goods into Vietnam. After having permission, the goods would be imported on demand without limit to quantity, value and would not need any import licenses.

193

4. Conditional None of the farming goods must have conditional import import licenses licenses to be imported into Viet Nam.

Conditional import licensing was Similar to 2006 applied to two products: (i) vegetal protective medicines; (ii) the genetic resources of plants and animals; and microorganisms serving scientific and technical research and exchange. Wild plants and animals must be strictly controlled under the CITIES Convention, the Ministry of Agriculture would establish import conditions and give directions to fulfill import procedures

B. The group of measures to control the import price. 1.Import surcharges Prior to 2002, the Government Pricing Committee stipulated levy import surcharges on Urea, NPK and DAP fertilizer, at rates of from 3% to 5% of the import prices already paid at Vietnams bordergate (on CIF price basis). This regulation, however, was lifted in 2002. No agricultural products are then subject to the imposition of import surcharges. The General Department of Since 2003, Vietnam no longer exercises a minimum price to Vietnam Customs applied the calculate tax for any agricultural commodity items. Minimum price index to import commodity items not subject to the List of goods with import tax calculation prices controlled by the State pursuant to Decision No.

2. Tax calculation prices based on minimum price index

194

177/2001/QD-TCHQ, expired in 2003.

which In order to better develop the Similar to 2006 legal framework for antidumping and anti-subsidization activities, Vietnam consecutively introduced legal documents stipulating these issues, namely Ordinance No. 20/2004/PLUBTVQH11 and Decree No. 90/2005/ND-CP on antidumping of imports into Vietnam; Circular No. 106/2005/TT-BTC guiding the collection, payment and refund of anti-dumping tax and antisubsidy tax; Decree No. 04/2006/ND-CP on the establishment of the Council for handling anti-dumping and antisubsidy cases. These regulations are judged quite proper since they were made based on the WTO agreements. In fact, those measures have not yet been exercised because anti-dumping and anti-subsidy investigation procedures are highly complex and Vietnam does not have

3. Anti dumping Pursuant to 04/1998/QH10 the tax and anti- Law on Amendment of and addition to a number of articles subsidy tax of the Law on export and import duties, additional duties shall be applied to goods imported into Vietnam with sales prices which are extremely lower than standard prices as a result of dumping or subsidization by export countries, thereby threatening the development of the production of the same goods in Vietnam. This Law, however, did not stipulate guiding details on standard prices, nor on the level of differences to be imposed as additional duties.

195

much experience in this area yet. Another reason can be the fear of affecting relations with trading partners when these measures are applied. C. Surveillance measures As a small country with an underdeveloped legal framework, until now Vietnam has not yet implemented price and quantity investigations to measure the different levels between sales prices in the import market and the cost of production and transportation. D. Export subsidies and Production support Until 2002, Vietnam had 1. Export subsidies applied several measures for export assistance, dividing into three groups as follows: (i) Group of credit policies on export promotion and preference (Decision No. 133/2001/QD-TTg on export support credit); (ii) Group of assistance measures in specific circumstances (Decision No. 110/2002/QD-TTg on the establishment of Commodity Line Export Insurance Fund; Decision No. 195/1999/QDTTg on the establishment of Export Assistance Fund); (iii) Group of trade promotion Following Vietnams WTO accession roadmap, measures in the form of export subsidies were removed. Until 2006, the Export Assistance Fund was closed. In 2006, Vietnam issued Decree No. 151/2006/ND-CP stipulated details on export loans and export credit guarantees, ensured loans shall be given to 26 commodities items, 11 of which are agricultural goods (i.e. peanuts; coffee; tea; pepper; processed cashew nuts; fruits and vegetables (canned, fresh, dry, and preliminarily processed, juices); sugar fishery products, poultry and cattle meat; poultry eggs; cinnamon bark and

After joining WTO in late 2006, Vietnam has committed to abolished all the export subsidies. In 2007, almost no regulations relating to export subsidies were introduced.

196

measures (Circular No. 86/2002/TT-BTC providing guidelines on the spending in the support of trade and export promotion activities. In general, some of the export assistance measures in this period violated WTO regulations and became an obstacle to the trade of agricultural products. The Export Assistance Fund with its support measures including providing support for interest and bank loan, providing financial support, rewarding the most commonly used measure, are examples. In the year 2001, four agricultural commodities (rice, coffee, pork, and canned fruits and vegetables) were rewarded. In the following year, rewards were given to five agricultural goods, i.e. tea, peanuts, pepper, cashew nuts, and rattan and bamboo.

cinnamon oil). In addition, exporters can, in some circumstances, be considered to have their debts frozen or remitted (principals and interests). The States budget capital can be allocated for offsetting interest rate differences and post-investment supports. Regulation on subjects entitled to export loans was different from that of 2001. Pursuant to Decision No. 133/2001/QD-TTg, subjects entitled to export credit loans were Vietnamese economic organizations and units ( i.e. SOEs, joint-stock companies, limited liability companies, partnerships , private enterprises, cooperatives, unions of cooperatives, family households, and individuals with business registration), whereas pursuant to Decision No. 151/2006/NDCP they are exporters having export contracts and importers having import contracts importing goods subject to the list of goods entitled to borrow with export credit loans. These

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2.Domestic production support

policies on trade promotion are becoming more important. In 2006, the Ministry of Trade introduced Decision No. 15/2006/QD-BTM on the national trade promotion program covering some main agricultural commodities. In general, Vietnam is likely to gradually eliminate export subsidies which are not allowed by WTO. In accordance with Vietnams WTO accession roadmap, agricultural support measures have been adjusted in order to limit the States intervention and to enhance the competitiveness of agricultural products. Most of Vietnams support measures for domestic production since 2002 belong to the Green Box (scientific research, agricultural training services and extension, construction of rural infrastructure, assistance for the development of remote areas, veterinary activities, plant protection) and development programs (concentrating on Governments investment assistance ), thus they have no or minimal distorted effect on trade of agricultural products. Supports that have been calculated to the total AMS are much lower than the permitted level (10% of production value). In conclusion, Vietnams supports assisting domestic production can hardly distort trade.

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E. Technical Barriers to trade 1. TBT standards Prior to 2002, just a few legal documents stipulating standards that agricultural goods imported into Vietnam had to meet were issued, namely as Ordinance on measurements and protection of consumers right (Ordinance No. 16/1999/PL-UBTVQH10, Ordinance No. 13/1999/PLUBTVQH10). In this period, Vietnam lawmakers managed to introduce legal documents on the standardization on quality management, namely: Ordinance No. 12/2003/PL-UBTVQH11 on food hygiene and safety; Decision No. 444/2005/QD-TTg approving the scheme of implementing the TBT Agreement. Particularly, the Law on standards and technical regulations applicable to issues of standards, goods quality, food hygiene and safety, plant protection, veterinary protection and consumer protection, was passed by Vietnam National Assembly in June 2006. In 2007 alone, Vietnam has issued a number of legal documents on standards and technical standards (Decree No. 127/2007/ND-CP providing details on implementing a number of articles in the Law of Standards and Technical regulations; Decision No. 03/2007/QD-BNN promulgating the Regulation on the publication of quality standards of agricultural products and goods; Decision No. 36/2007/Q-BNN issuing Regulations on fertilizer production, trading, and utilization; Decision No. 41/2007/QD-BNN promulgating the Regulation on the certification of quality standard conformity of plant varieties..) Vietnams regulations do not conflict with WTO regulations but are inadequate and far below international standards. For agricultural products, 799 Vietnamese standards apply international and regional standards, of which only 390 apply international standards.

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2. Sanitary and Like TBT standards, there were just a few Vietnamese Phytosanitary regulations on SPS prior to 2002. system. Some relating to plant protection were Ordinance No. 36/2001/PL-UBTVQH10; Decree No. 58/2002/ND-CP guiding the implementation of the Plant Protection and Quarantine Ordinance; Regulations on the management of pesticides; Regulations on the business of pesticides; Decision No. 89/2002/QD-BNN related to plant quarantine for imported plant breeds and useful organisms

The number of legal documents providing details on issues of food hygiene and safety, plant protection, and veterinary quarantine increased considerably compared with the period prior to 2002. Regulations relevant to food sanitary and safety: Ordinance No. 12/2003/PL-UBTVQH10; Decree No. 45/2005/ND-CP; Decision No. 43/2005/QD-BYT; Decision No. 43/2006/QD-TTg.. Regulations relevant to plant protection: Inter-Circular No. 17/2003/TTLT/BTC-BNN-BTS; Decree No. 26/2003/NDCP; Decision No. 72/2005/QD-BNN; Decision No. 73/2005/QDBNN Related to veterinary quarantine: Ordinance No. 18/2004/PLUBTVQH11; Decree No. 33/2005/ND-CP; Decree No. 129/2005/ND-CP; Decree No. 45/2005/NDCP; Decision No. 15/2006/QDBNN However, these legal documents were still inadequate, asynchronous; regulations were of low influence.

Regulations issued in 2007 focus on plant quarantine and pest risk analyses (Decree No. 02/2007/ND-CP; Decision No. 34/2007/QD-BNN; Decision No. 48/2007/ QD-BNN. These regulations comply with WTO regulations. The scarcity of quality control institutions and procedures in Vietnam had negative consequences on the export of Vietnamese agro-products. Moreover, this was also an obstacle for the conclusion of mutual recognition agreement with third countries (i.e. even high quality products might face administrative obstacles in third countries).

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Annex 4: Third country application of trade barriers to Vietnams exports Vietnam has experienced a number of negative reactions to its agricultural and food exports. The following table summarizes five such recent experiences Country Russia Issue Action Russia recalled all plant December 2, 2006, imposed blanket quarantine certificates already ban on rice imports including on issues citing substandard quality Vietnam. Exporters, including and dangerous chlorpyrifos Vietnam had to supply information about quality management, laboratories and food and safety certificates. As Russia is not a major market for Vietnam the effect was minimal. However, Russia did not provide proof of the herbicide therefore causing Vietnam to consider this as a technical barrier by Russia to protect their own domestic production. It is worth noting that Russia is not a WTO member In July, 2007, Taiwan returned Imports will resume after pesticide green tea and black tea to Vietnam residues is resolved. As a result of citing pesticide residue. anti-dumping duties, Taiwan spent Late 2007, Taiwan proposed anti- $140 NT on farmer relief, based on dumping duties on Vietnamese tea. the index measuring industry damage. However, Vietnam states that a large portion of tea from Vietnam is actually transported to Vietnam from China and then exported and that such a dramatic rise in production is not possible. The International Trade Commission under the Ministry of Economic Affairs is investigating the case. Only after an official conclusion can Taiwan raise tariffs or set quotas to protect their local tea farmers. Taiwan is the second largest tea export market (out of 64) for Vietnam. Vietnams Black Dragon Tea accounts for 73% of Taiwans total tea import. An anti-dumping tax is imposed on Vietnam by Taiwan, Vietnams tea production and export shall be adversely affected.

Taiwan

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Belgium the EU

and More than 600,000 bags of Vietnamese coffee from the 2005/2006 were rejected by Belgium for the European market this represents 72% of Vietnams coffee exports. Another one million bags were refused at 10 other ports as well as 708,250 bags in England of which 88% came from Vietnam. In mid 2007, China ceased the import of frozen food including chicken feet, pig ears and other animal parts from Vietnam, the U.S., the Philippines and seven other countries citing traces of arsenic and salmonella On 16 August 2007, Cambodia banned the import of pork and live pigs from Vietnam citing fear of porcine diseases and illegal smuggling of pigs into Cambodia Since 2004, avian flu and porcine disease have been spreading in Vietnam causing temporary import bans on these products citing the prevention of spreading diseases. In 2004, Te Philippines and Thailand also imposed temporary bans. India introduced similar bans on poultry, poultry meat, pork products, and live pigs. Bangladesh followed as did Cambodia and the EU

China

The reason for rejection was low quality which is deteriorating and that Vietnam cannot meet international quality standards of uniformity, colour and taste. The volume of returned or low priced coffee is increasing versus India and Indonesia having a damaging effect on domestic producers and traders and the reputation of Vietnam which has been the second largest coffee exporter in the world China has not stated how long the ban will last but exporters must report to Chinas General Administration of Quality Supervision, Inspection and Quarantine

Cambodia

Cambodia, Thailand, Philippines, Bangladesh, EU

Vietnams producers have experienced high losses but have to conform to better methods of disease control The bans were in effect until Vietnam could show the end of avian flu as approved by the WHO

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Annex 5: Latest developments in the agricultural sector

A.5.1.

Change in the production of some main commodities

A.5.1.1. Some trends in planting section According to the report of the Ministry of Agriculture and Rural Development, in the last four years the area for paddy declined about 1% each year due to the transfer in planting from paddy to some trees and water products, and some land lost because of urbanization and development of other industries. In 2007, the area of paddy was 7.2 million hectares, which had decreased by 125 thousand hectares compared with the previous year. However, due to high yield, paddy production did not decrease proportionately with a yield of 35.87 mil. tons. Another reason which caused the decrease in paddy area was the increase in more suitable crops.. This was caused by increased costs in inputs of agriculture in general and paddy planting in particular while the price of output could not follow. The result from lower tariffs in the WTO to inputs of agriculture in general and paddy planting in particular could not compete with the impacts of fluctuating paddy prices in the world market. On the other hand, the Governments price controlling ability is limited, proved by the fact that whenever world prices go up, domestic prices will go up more. In contrary, whenever the world prices go down, the domestic prices will go down less. There was a sharp growth in production of three main exported goods which are paddy, coffee and natural rubber. They are now joining the list of more than $1 billion of valued exported products. The success in the year 2006 - 2007 is the result of a long term investment in technology, market development and management of producing the above plants. The increased prices also contributed to the successful year.. Table 11: Area, productivity and yield of the 3 leading products in export
1995 Paddy Area (thousand hecta) Productivity (quital/hecta) Yield (thousand MT) Coffee Area (thousand hecta) Yield (thousand MT) Rubber 278.4 Area (thousand hecta) 124.7 Yield (thousand MT) Source: GSO, The figure of 2007year are from MARD 412 290.8 482.7 481.6 511.9 546.1 549.6 601.7 186.4 218 561.9 802.5 497.4 752.1 488.6 853.5 506.4 961.0 6765.6 36.9 24963.7 7666.3 42.4 32529.5 7329.2 48.9 35823.9 7324.4 48.9 35868 7201 49.8 35870 2000 2005 2006 2007

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Sugar is one of the three agricultural products that was planned to replace imports by domestic production. Though planting sugar-cane and processing sugar has been through ups and downs, this industry has performed well to meet domestic demand after receiving long term support from the Government in both producing and processing. The area for sugar-cane increased to 5.7 thousand hectares (equivalent to 2.6%) in the period of 1995-2007, productivity increased 47.7 quintal/hectares (8.67%) and yield increased 1699.9 thousand tons (10.84%). But the most significant increase was in granulated sugar yield which shot up to 937 thousand MT (about 986.3%). Now this industry can meet domestic demand and Vietnam imported only 25.9 thousand MT in the year 2006. Table 12: Increase in sugar-cane producing and granulated sugar processing from 1995 to 2007
1995 Sugarcane Area (thousand hecta) Productivity (quintal/hecta) Yield (thousand MT) Granulated sugar Yield (thousand MT) 95 790.3 1102.3 1032 937 986.3 224.8 476.5 10711.1 302.3 497.7 15044.3 266.3 561.3 14948.7 285.1 549.9 15678.6 290.8 597.6 17379.5 60.3 73.4 4967.5 26.8 15.4 46.4 2000 2005 2006 2007 Increase in 1995-2007 Qty %

The area, productivity and yield of maize also increased strongly, turning from a staple plant, used to assure food security, to a material of animals food to reduce importing. Up to 2007, maize area over the country was 1067.9 thousand hectares, average productivity was 38.5 quintal/hectare (increased 4% compared with 2006) and maize yield reached more than 4 mil MT, and provided more than 50% of maize demand for animals food. Table 13: Maize producing in the period of 1995-2007
1995 2000 2004 2005 2006 2007

556.8 730.2 991.1 1052.6 1031.6 1067.9 Area (thousand hecta) Productivity 21.1 27.5 34.6 36 37 38.5 (quital/hecta) 1177.2 2005.9 3430.9 3787.1 3819.4 4107.5 Yield (thousand MT) Source: Summary from data of General Statistic Department, only the year 2007 as per reports of Ministry of Agriculture and Rural Development.

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A.5.1.2. Breeding section Pigs and domestic fowl breeding have developed strongly from 1995 to 2003. However in the last four years, domestic fowl producing stood unchanged and tended to decrease, mainly due to bird flu disease, foot and mouth disease and green ear disease in domestic animals. The number of domestic animals almost doubled, from 142.1 mil in 1995 to 254.6 mil in 2003. In the last four years domestic fowls stood still, and then fell to 226 mil in 2007. However there were recovery signs in the year 2007. The number of pigs reached its peak in 2003 with the total of 28,885 mil, but in 2006 this figure decreased to more than 26 mil.

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Table 14: Quantity of domestic animals and fowls and annual growth rate
1995 1.Domestic fowls Quantity (mil) Annual growth rate (%) 2. Pigs Quantity (mil) Annual growth rate (%) 3. Buffalo Quantity (mil) Annual growth rate (%) 4. Cow Quantity (mil) Annual growth rate (%) 142.1 1996 151.4 6.54 16921.7 3.77 2953.9 -0.30 3800 4.43 1997 160.6 6.08 17635.9 4.22 2943.6 -0.35 3904.8 2.76 1998 166.4 3.61 18132.4 2.82 2951.4 0.26 3987.3 2.11 1999 179.3 7.75 18885.8 4.15 2955.7 0.15 4063.6 1.91 2000 196.1 9.37 20193.8 6.93 2897.2 -1.98 4127.9 1.58 2001 218.1 11.22 21800.1 7.95 2807.9 -3.08 3899.7 -5.53 2002 233.3 6.97 23169.5 6.28 2814.5 0.24 4062.9 4.18 2003 254.6 9.13 28884.6 24.67 2834.9 0.72 4394.4 8.16 2004 218.2 -14.30 26143.7 -9.49 2869.8 1.23 4907.7 11.68 2005 219.9 0.78 27435 4.94 2922.2 1.83 5540.7 12.90 2006 214.6 -2.41 26855.3 -2.11 2921.1 -0.04 6510.8 17.51 2007 226.0 5.34 26561.0 -1.1 2996.0 2.58 6725.0 3.29

16306.4

2962.8

3638.9

Source: Summary from data of General Statistic Department, only the year 2007 as per reports of Ministry of Agriculture and Rural Development.

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Instead of reducing pigs and domestic fowl breeding, bull breeding especially, beef breeding, has increased in recent years, and beef has become a substitute product for pork and chicken meat. There is a contrast between pigs and domestics fowl breeding and bull breeding. From 1996 to 2000, the bull breeding growth rate decreased gradually and reached a negative growth rate in 2001 (-5.1%). But there was a recovery and rapid growth after that, and it reached the growth rate of 17.5% in 2006. However in 2007, this growth slowed down again, which was 3.29% equivalent to the quantity of 6725 thousand. Ox breeding is a new trend for Vietnam, with the target of substituting imported formula but Vietnam has to pay dearly for informing some successful breeding areas in these 2 years. With the desire of substituting imported milk powder with domestic dairy cow breeding, the Government launched an ambitious program, and carried out activities without calculating sufficiently the technology and production management aspects. The program paid for the loss and the ineffectiveness of income investment by many farmers, who took part in this program. However, for the period of 2006 2007, the milk price increased rapidly worldwide, the demand for fresh milk increased dramatically, and some potential areas of ox breeding have innovated breeding techniques and have the prospect of extending ( such as Ho Chi Minh City, Ha Tay, Moc Chau, Da Lat) A.5.1.3. Forestry production The area of annual artificial forest remained at below 200 thousand hectares per year together with the area of regenerated forest that has helped increase forest coverage in 2007 to 38.8% in comparison with 37.9% in 2006. In 2007, the area of forests over the country reached 12.85 million hectares, an increase of 311 thousand hectares compared with 2006. The value of forestry production at constant 1994 prices increased from VND5033.7 billion in 1995 to VND 6503 billion in 2007. The growth rate of forestrys value in between 1995-2000 fluctuated strongly (-3% in the years 1997-1998) and then stabilized at 1-2% in recent years. However it is much more difficult to fulfill the program of planting 5 million hectares of new forest. Forestry has not yet undertaken the role as a timber supplier for the production of wooden products, while import of timber raw material is still high (in 2007, Vietnam imported USD1022 million of woods and wooden products) The striking success of export of forestry products does not come from domestic forestry production but is mainly based on imported timbers and timber goods manufacturers. A.5.2. Change in economic participants and forms of agriculture production

The structure of economic classes participating in agriculture production has changed considerably in recent years. State enterprises have been privatized and have transformed their possession from owned by the State only to owned by multi-classes; a number of foreign- invested enterprises have been established participating in agriculture production and operation activities. The number of agro-forestry-fishery enterprises saw a downward trend. The number of cooperatives fluctuated but is likely to remain constant, and the number of agricultural family households declined significantly, whereas that of agricultural farms rose rapidly.

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Table 15: Forms of agricultural organization of production and business

2000 No. of Agro-ForestryFishery enterprises No. of agricultural cooperatives No. of farms No. of agricultural family households 2001 3,599 6,411 57,069 7,513 61,017 11,676,840 7527 61,787 8,090 86,141 7,879 11,0832 8,068 11,4362 2002 2003 2004 2005 2006 2,136 7,237 113,699 10,348,668

Until 2006, out of 2,136 agricultural (agro-forestry-fishery) enterprises having State investment, 517 are SOEs (mainly in forestry), 20 are State limited liability companies, 83 are joint-stock and limited liability companies with the States investment. The production scale of cooperatives and agricultural farms is limited in terms of square hectares, number of labourers, and capital.. As a result, their capacity of production, operation, and competitiveness is very low. The States direct intervention into production and operation activities is declining. Still the linkage between agencies in each commodity and in the whole industry is insufficient; Associations for the commodity are not strong enough to create a commodity developing strategy Agricultural enterprises are focusing mainly on production (supply); those which are concerned about the demand and have measures to promote the market are a small number. Many enterprises have no intention, conception or enough resources to develop their reputation (trademark, and prestige in quality, goods sanitary and safety) to expand their scale and scope in the country and to overseas markets.

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Annex 6: Trade performance of key agricultural commodities Rice For the period of 2001-2007, the average growth rate of rice export was 16.78% per year. In 2006, rice export decreased by 10% compared to its record level of USD 1.4 billion in 2005. Yet in 2007, it reached approximately USD 1.46 billion and exceeded the 2005 peak. Vietnams rice export turnover to Asian and ASEAN markets has steadily increased for the period of 2001-2006 (Figure 5,6). These two markets always count for a significant portion in the structure of markets for Vietnams rice exports (Figure 7,8) although it decreased in 2007. Asian and ASEAN markets made up 39% and 35.9% respectively of 2007 total export turnover, compared to 62% and 55.3% (respectively) of 2006 figures. In general, Vietnam rice export maintains a high growth rate, but the export market has not been expanded outside ASEAN countries and Asia.
Figure 7. Structure of market for Vietnam rice export by continent (mil USD)
900 800 700 600 500 400 300 200 100 0 Amer i ca Eur ope 2001 2002 Asi a 2003 2004 Af r i ca 2005 Austr al i a 2006 2007 Other countr i es

Figure 8. Structure of market for Vietnam rice export by main partner (mil USD)
800 700 600 500 400 300 200 100 0 The U.S
2001 2002

EU
2003

ASEAN
2004

China + Hong Kong

2005 2006

Other countries
2007

Source: Calculated based on data of General Statistics Office and General Department of Vietnam Customs Figure 9. Vietnams market structure of rice export by continent (%)
70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00
Amer ica 2001 Eur ope 2002 Asia 2003 2004 Af rica 2005 Aust ralia 2006 Ot her count ries 2007

Source: Calculated based on data of General Statistics Office and General Department of Vietnam Customs Figure 10. Vietnams market structure of rice export by main partner (%)
70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00
The U.S EU ASEAN China + Hong Kong 2001 2002 2003 2004 2005 2006 Ot her count ries 2007

Source: Calculated based on data of General Statistics Office and General Department of Vietnam Customs

Source: Calculated based on data of General Statistics Office and General Department of Vietnam Customs

209

Rubber During the period of 2001 to 2007, rubber export turnover increased continuously from USD 166 million in 2001 to more than USD 1.4 billion in 2007 with an average growth rate of 43.91% per year. The main export market for Vietnamese rubber is Asia (making up 80.2% of total turnover in 2007), in which China and ASEAN countries account for 60.3% and 6.3% respectively; followed by the European market (13.8%), particularly the EU (10.5%), and the Americas (4.1%), particularly the U.S (2.8%). Most of the markets saw high export turnover growth rates. Vietnams rubber export to China rose sharply from USD 54.1 million in 2001 to almost USD 844 million in 2007. The figures for the EU market were USD 21.1 million and USD 147.6 million respectively, while that for the U.S were from USD 2.1 million to USD 39.1 million. Whereas the ASEAN market witnessed significant change. It jumped from USD 28.2 million in 2001 to USD 53.8 million in 2002, then gradually decreased in the three following years before rising to USD 30.7 million in 2006 and peaking at the record level of USD 87.5million in 2007. In conclusion, the market for Vietnams rubber export has broadened to ASEAN and the U.S. Meanwhile, Chinese and EU markets tend to stand still and compress.
Figure 11. Vietnams market structure of rubber export by continent (USD mil)
1200 1000 800 600 400 200 0
Amer ica 2001 Eur ope 2002 Asia 2003 Af rica 2004 2005 Aust ralia 2006 Ot her count r ies 2007
2001 2002 2003 2004

Figure 12. Vietnams market structure of rubber export by main partner (USD mil)
1000 800 600 400 200 0
The U.S EU ASEAN China + Hong Kong 2005 2006 Ot her count ries 2007

Source: Calculated based on data of General Statistics Office and General Department of Vietnam Customs Figure 13. Vietnams market structure of rubber export by continent (%)
100.00 80.00 60.00 40.00 20.00 0.00
America Europe Asia Af rica Aust ralia Ot her count ries 2001 2002 2003 2004 2005 2006 2007

Source: Calculated based on data of General Statistics Office and General Department of Vietnam Customs Figure 14. Vietnams market structure of rubber export by main partner (%)
80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00
The U.S 2001 2002 EU 2003 ASEAN 2004 China + Hong Kong 2005 2006 Ot her count ries 2007

Source: Calculated based on data of General Statistics Office and General Department of Vietnam Customs

Source: Calculated based on data of General Statistics Office and General Department of Vietnam Customs

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Coffee During the period of 2001-2007, except for the year 2002, Vietnams coffee export turnover remarkably increased from USD 391.3 million in 2001 to USD 1.86 billion in 2007. The average growth rate gained was 33.13% per year. Vietnams major coffee export markets include the European countries which accounted for 55.4 % of the 2007 total turnover, which mainly comes from the EU countries with that of 47.4 %. Next is the Asian market making up 14.6%, and the third is American countries (11.8%) with the biggest consumer being the U.S. (11.4%) Coffee export turnover to the EU market has climbed from roughly USD 159 million in 2001 to over USD 879 million in 2007. The figures for the Asian market are USD 50.8 million and USD 271 million, and for the U.S. market are USD 60 million and USD 212.7 million respectively In general, the coffee export turnover to all markets has experienced considerable growth, but the dominant markets are EU, ASEAN and the U.S.
Figure 15. Structure of Vietnams coffee export markets by continent (USD million))
700 600 500 400 300 200 100 0
America 2001 Europe 2002 Asia 2003 Af rica 2004 2005 Aust ralia 2006 Ot her count r ies 2007

Figure 16. Structure of Vietnams coffee export markets by main partner ( USD million)

700 600 500 400 300 200 100 0 The US EU ASEAN

Other China + Hong Kong countries

2001 2002 2003 2004 2005 2006

Source: Caculated based on General Statistics Office, General Department of Vietnam Customs Figure 17. Structure of Vietnams pepper export markets by continent (%)
70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00
America Europe Asia Af rica Aust ralia Ot her count ries 2001 2002 2003 2004 2005 2006 2007

Source: Caculated based on data of General Statistics Office, General Department of Vietnam Customs Figure 18. Structure of Vietnams pepper export markets by main partner (%)
70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00
The U.S EU ASEAN China + Hong Kong 2001 2002 2003 2004 2005 2006 Ot her count ries 2007

Source: Caculated based on data of General Statistics Office, General Department of Vietnam Customs

Source: Caculated based on data of General Statistics Office, General Department of Vietnam Customs

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Cashew nut During the period of 2001 to 2007, Vietnams cashew nut export turnover grew at an average growth rate of 28.72% per year. Although in 2006 the export turnover decreased by 2.4%, in 2007 it recovered by reaching the turnover of USD 649 million, the highest level since 2001 and 4.28 times higher than that of 2001. Unlike other agricultural products, Vietnams cashew nut export markets are spread equally. The American market accounted for 38.3% of the 2007 total export turnover in which the U.S. contributed 35.1%. The European market contributed 30.8% to the 2007 total turnover with the EU accounting for 25.5%. Asian countries accounted for 20.3%, in which China made the biggest contribution of 16.5%. The last is the Australian market with 8.0%. Cashew nut export turnover to the U.S. market saw a big increase from USD 44.1 million in 2001 to USD 227.9 million in 2007. The figure for the EU market was USD 29.3 million and USD 165.6 million respectively;of the China the market was from USD 44.2 million to USD 107.4 million; and the Australian market was from USD 20.1 million to USD 51.9 million. In general, Vietnams cashew nut export has achieved a comparatively high and stable growth rate in all markets. The sizes of the markets have continued to expand and the structure has remained comparatively balanced.
Figure 19. Structure of Vietnams cashew export markets by continent (USD million)
250 200 150 100 50 0
Amer ica 2001 Eur ope 2002 Asia 2003 Af r ica 2004 2005 Aust r alia 2006 Ot her count r ies 2007
2001 2002 2003 2004

Figure 20. Structure of Vietnams pepper export markets by main partner (USD million)

200 1 50 100 50 0
The U.S EU ASEAN China + Hong Kong 2005 2006 Ot her count r ies 2007

Source: General Statistics Office, General Department of Vietnam Customs Figure 21. Structure of Vietnams cashew export markets by continent (%)
50.00 40.00 30.00 20.00 10.00 0.00
America 2001 Europe 2002 Asia 2003 Af r ica 2004 2005 Aust ralia 2006 Ot her count ries 2007

Source: General Statistics Office, General Department of Vietnam Customs Figure 22. Structure of Vietnams cashew export markets by main partner (%)
45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00
The U.S 2001 2002 EU 2003 ASEAN 2004 China + Hong Kong 2005 2006 Ot her count ries 2007

Source: General Statistics Office, General Department of Vietnam Customs

Source: General Statistics Office, General Department of Vietnam Customs

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Pepper For the period of 2001-2007, Vietnams pepper export turnover has grown from USD 91.2 million in 2001 to USD 282 million in 2007, and at an average rate of 23.8% per year. The European market has become the largest importer of Vietnams pepper; accounting for 38% of the 2007 total export turnover. 27.9% of this figure mainly came from EU countries. The Asian market is the second market with 26.5%, with ASEAN being the biggest consumer with 5.2%. The third largest export market is America, with that of 7.8% and the U.S. was the main importer with 7.3%. The pepper export turnover to the European market has gone up from USD 22.6 million in 2001 to USD 107.3 million in 2007. The figure of the EU market was respectively USD 16.2 million and USD 78.6 million. The Asian market declined once from USD 48.7million in 2001 to USD 21.3 million in 2005, but then soared to USD 74.7million. The figures of ASEAN countries were comparatively USD26.2 million, USD 9.5 million and USD 14.7 million. Contrastingly, export turnover to the American market constantly increased from 2001 to 2006, and then suddenly dropped to USD 22.1 million in 2007 from USD 32.1 million in 2006. In general, European and EU markets, Asian and China markets are the markets witnessing a trend of steady grow for the past period. For the ASEAN market, after decreasing during the 2002-2005 period, pepper export turnover showed a sign of recovery in 2006 but actually fell in 2007.
Figure 23: Structure of Vietnams pepper export markets by continent ($ million)
100 80 60 40 20 0
America Europe Asia Af rica Aust ralia Ot her count r ies 2001 2002 2003 2004 2005 2006 2007
2001 2002 2003 2004 2005

Figure 24: Structure of Vietnams pepper export markets by main partner ($ million)
80 70 60 50 40 30 20 10 0
The U.S EU ASEAN China + Hong Kong 2006 Ot her count r ies 2007

Source: Caculated based on data of General Statistics Office, General Department of Vietnam Customs

Source: Caculated based on General Statistics Office, General Department of Vietnam Customs

Figure 25. Structure of Vietnams pepper export markets by continent (%)

60.00 50.00 40.00 30.00 20.00 10.00 0.00
America 2001 Europe 2002 Asia 2003 Af rica 2004 2005 Aust r alia 2006 Ot her count r ies 2007

Figure 26. Structure of Vietnams pepper export markets by main partner (%)
50.00 40.00 30.00 20.00 10.00 0.00
The U.S EU ASEAN China + Hong Kong 2001 2002 2003 2004 2005 2006 Ot her count ries 2007

Source: Caculated based on data of General Statistics Office, General Department of Vietnam Customs

Source: Caculated on based on General Statistics Office, General Department of Vietnam Customs

213

Tea For the period of 2001 to 2007, the growth rate of tea export was about 15.42% per year but unstable. The turnover of tea export decreased from USD 78.4 million in 2001 to USD 73.8 million in 2006, but rose again to USD131 million in 2007. Vietnams biggest tea import market was Asia (holding 41.8% of the total turnover in 2007) in which the Middle Eastern nations were the main importers; China and other ASEAN members were also considered important partners (accounting for 13.7% and 5.0% of Vietnams 2007 total tea exports ).The next was the European market (making up 18.6% of Vietnams 2007 total tea exports) with EU as the main importer (8.9%). And the smallest tea import market for Vietnam was the American market with the U.S as the main (taking up to 2.2% and 1.8% in turn). Whereas the value of Vietnams tea exports to China and other ASEAN members still trended steadily upwards from USD 1.5 million and USD 2.6 million in 2001 to USD 17.9 million and USD 6.6 million in 2007 in turn, that to Asian countries fluctuated and slightly increased from USD 52.5million in 2001 to USD 54.8million 2007, mainly due to the drop in export value to the Middle East market. There was a constant rise in Vietnams tea export to the European market and EU (from USD 11.3 million and USD 4.1 million in 2001 to USD 24.4 million and USD 11.6 million in 2007 in turn). In conclusion, Vietnams tea export has depended a great deal on the unstable traditional Middle East market while the other markets, namely China, other ASEAN members and the European market, have high potential with impressive, yet not sufficient, increases in tea imports from Vietnam.
Figure 27. Structure of Vietnams tea export markets by continents ($ million)
60 50 40 30 20 10 0
America 2001 Eur ope 2002 Asia 2003 2004 Af rica 2005 Aust ralia 2006 Ot her count ries 2007

Figure 28. Structure of Vietnams tea export markets by main partners ($ million)
60 50 40 30 20 10 0
The U.S EU ASEAN China + Hong Kong 2001 2002 2003 2004 2005 2006 Ot her count ries 2007

Source: Caculated based on data of General Statistics Office, General Department of Vietnam Customs Figure 29. Structure of Vietnams tea export markets by continents (%)

Source: Caculated based on data of General Statistics Office, General Department of Vietnam Customs Figure 30. Structure of Vietnams tea export markets by main partners (%)

214

80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00

America Europe Asia Af r ica Aust ralia Ot her count ries 2001 2002 2003 2004 2005 2006 2007

40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00

The U.S EU ASEAN China + Hong Kong 2001 2002 2003 2004 2005 2006 Ot her count ries 2007

Source: Caculated based on data of GSO, General Department of Vietnam Customs

Source: Caculated based on data of GSO, General Department of Vietnam Customs

Fruits and vegetables From 2001 to 2007, Vietnams fruits and vegetables export grew at an average of 1.74% each year. The value of fruits and vegetables export dropped from USD330 million in 2001 to USD 299 million in 2007, which was 41.4% increase over 2006s but lower than 2001s level. The most significant fruits and vegetables export market for Vietnam was the Asian countries (making up 43.6% of Vietnams 2007 total fruits and vegetables export), especially China (11.8%) and other ASEAN members (7.2%). The second was the European market (22.1%) with EU mainly (13.2%), and the third was the American market (8.9%) with the United States mainly (6.8%). Vietnams fruit and vegetables export to Asian countries declined from USD 203.9 million in 2001 to USD130.3 million in 2007 because of the decrease in export to China (from USD 147.1 million in 2001 down to USD 35.3 million in 2007). However, export turnover to the other markets continued growing, such as ASEAN from USD 9.6 million in 2001 to USD 21.5 million in 2007, the European market from USD 17.9 million to USD 66 million, with the EU at USD 10.7million to USD 39.5 million and the American market from USD 3.2 million to USD 26.6 million, with the United States at USD 2 million to USD 20.3 million. Although the fruits and vegetables export market of Vietnam has been expanded to Europe, America and other Asian countries, the growth could not make up for the drop in export to the traditional Chinese market, that led to the drop in Vietnams fruits and vegetables exports.
Figure 31. Structure of Vietnams fruits and vegetables export markets by continent ($ million)
250 200 150 100 50 0
America 2001 Europe 2002 Asia 2003 2004 Af r ica 2005 Aust r alia 2006 Ot her count ries 2007
2001 2002 2003 2004 2005

Figure 32. Structure of Vietnams fruits and vegetables export markets by main partner ($ million)

160 140 120 100 80 60 40 20 0

The U.S EU ASEAN China + Hong Kong
2006 2007

Ot her count ries

Source: Calculated based on data of General Statistics Office, General Department of Vietnam Customs

Source: Calculated based on data of General Statistics Office, General Department of Vietnam Customs

Figure 33. Structure of Vietnams fruits and vegetables export markets by continents (%)

Figure 34. Structure of Vietnams fruits and vegetables export markets by main partners (%)

215

90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00
Amer ica 2001 Eur ope 2002 Asia 2003 Af rica 2004 2005 Aust ralia 2006 Ot her count r ies 2007

70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00

The U.S EU ASEAN China + Hong Kong 2001 2002 2003 2004 2005 2006 Ot her count r ies 2007

Source: Calculated based on data of GSO, General Department of Vietnam Customs

Source: Calculated based on data of GSO, General Department of Vietnam Customs

Wood and wooden products From 2001 to 2007, Vietnams exports of wood and wooden products grew consecutively from USD 337.8 million in 2001 to over USD 2.4 billion in 2007 with a growth rate of 43.9% each year. The greatest wood and wooden products import market for Vietnam was America (taking up to 41.5% of Vietnams 2007 total wood and wooden products exports) with the United States the largest market. (39.5%). The second was Europe (28%) with EU mainly (26.7%). The third important import market was Asia (accounting for 27% of Vietnams 2007 total wood and wooden products exports) in which the Chinese market and other ASEAN nations only made up 7.3% and 1% in turn. There were steady increases in Vietnams exports of wood and wooden products to America from USD 20.1 million in 2001 to USD 997.1 million in 2007, to the U.S from USD 6.1 million to USD 948.5 million, to Europe from 99.7 million to USD 672.3 million, to EU from USD 88.5 million to USD 641.2 million, to Asia from USD207.1 million to USD 648.6 million, to ASEAN members from USD 17.4 million to USD 23.3 million; to China from USD 14.8 million to USD 174.7 million, and to Australia from USD 10.3 million to USD 60.2 million. In general, the structure of Vietnams wood and wooden products export markets is considerably varied and the growth rates of most markets, especially the American and European ones, are high. While export values to ASEAN and Australian markets fell significantly from USD 30.6million and USD 70 million respectively in 2006 to USD 23.3million and USD 60.2million in 2007. Still, Vietnam has to import wooden material and other auxiliary materials.
Figure 35. Structure of Vietnams wood and wooden products export markets by continent ($ million) Figure 36. Structure of Vietnams wood and wooden products export markets by main partner ($ million)

1200 1000 800 600 400 200 0

Amer ica 2001 Europe 2002 Asia 2003 Af r ica 2004 2005 Aust r alia 2006 Ot her count r ies 2007

1000 800 600 400 200 0

The U.S EU ASEAN China + Hong Kong 2001 2002 2003 2004 2005 2006 Ot her count r ies 2007

Source: General Statistics Office, General Department of Vietnam Customs

Figure 37. Structure of Vietnams wood and wooden products export markets by continent (%)

Source: General Statistics Office, General Department of Vietnam Customs

Figure 38. Structure of Vietnams wood and wooden products export markets by main partner (%)

216

70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00

Amer ica 2001 Europe 2002 Asia 2003 Af r ica 2004 2005 Aust ralia 2006 Ot her count r ies 2007

50.00 40.00 30.00 20.00 10.00 0.00

The U.S 2001 EU 2002 2003 ASEAN 2004 China + Hong Kong 2005 2006 Ot her count r ies 2007

Source: General Statistics Office, General Department of Vietnam Customs

Source: General Statistics Office, General Department of Vietnam Customs

Rattan, bamboo, and sedge products In the 2001- 2007 period, export turnover of rattan, bamboo and sedge products witnessed a continuous increase from USD 93.9 million in 2001 to USD 218 million in 2007, with an annual growth rate of nearly 15.3% per year. Europe remains the largest market accounting for 58.7% of these products export turnover in 2007 (export to EU contributed 55.7%), followed by the Asian market which held 22.4% (figures for ASEAN and China were 1% and 0.8% respectively). The American market stands third with 14.5% of the 2007 export turnover (in which the U.S accounted for 12.5%). Export turnover to Australia contributes only 3% to the total export turnover of these products in 2007. Exports to the European market grew steadily from USD 5.1 million in 2001 to USD 127.9 million in 2007. The figures of the EU market were USD 5.1 million and USD 121.4 million, of the American market they were USD 2.4 million and USD 31.6 million, of the U.S the figures were USD 2.4 million and USD 27.2 million, respectively. Meanwhile, export revenue to the Asian market was unstable. Starting at USD 42.9 million in 2001, it rose to USD 49.5 million in 2003, and decreased to USD 43.5 million in 2004, and then decreased dramatically to USD 29.4 million in 2006 after reaching a peak of USD 64.2 million in the previous year. In 2007 it recoverd to the level of USD 48.9million. Export turnover to China fell sharply from USD 12.3 million in 2001 to USD 1.8 million in 2007. In summary, Vietnams export market for rattan, bamboo and sedge products has a tendency to expand to European and American markets, EU and the US in particular, and to condense in Asian markets in general and China in particular.
Figure 39. Structure of Vietnams export market for rattan, bamboo and sedge products by continent (million USD)
120 100 80 60 40 20 0
Amer ica 2001 Eur ope 2002 Asia 2003 Af rica 2004 2005 Aust r alia 2006 Ot her count r ies 2007 2001 2002 2003 2004

Figure 40. Structure of Vietnams export market for rattan, bamboo, and sedge products by major partner (million USD)
120 100 80 60 40 20 0
The U.S EU ASEAN China + Hong Kong 2005 2006 Ot her count r ies 2007

Source: Caculated based on data of GSO and General Department of Vietnam Customs

Source: Caculated based on data of General Statistics Office and General Department of Vietnam Customs

217

Figure 41. Structure of Vietnams export market for rattan, bamboo and sedge products by continent (%)
70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00
America 2001 Europe 2002 Asia 2003 Af rica 2004 2005 Aust ralia 2006 Ot her count ries 2007

Figure 42. Vietnams export market for rattan, bamboo, and sedge products by major partner (%)
60.00 50.00 40.00 30.00 20.00 10.00 0.00
The U.S 2001 2002 EU 2003 ASEAN 2004 China + Hong Kong 2005 2006 Ot her count ries 2007

Source: Caculated based on data of GSO and General Department of Vietnam Customs

Source: Caculated based on data of GSO and General Department of Vietnam Customs

218

Annex 7: Statistical Indicators Table 1: Investment at current prices by kind of economic activity
2001 Total (bill. Dongs) % Agriculture (ext.) % agriculture, forestryA % Fishing % Non-agriculture % 170496,0 100,0 16141,8 9,5 13628,6 8,0 2513,2 1,5 154354,2 90,5 2002 200145,0 100,0 17539,0 8,8 14605,0 7,3 2934,0 1,5 182606,0 91,2 2003 239246,0 100,0 20220,0 8,5 17077,0 7,1 3143,0 1,3 219026,0 91,5 2004 290927,0 100,0 22963,0 7,9 18113,0 6,2 4850,0 1,7 267964,0 92,1 2005 2006

343135,0 398900,0 100,0 25749,0 7,5 20079,0 5,9 5670,0 1,7 100,0 29843,0 7,5 22123,0 5,5 7720,0 1,9

317386,0 369057,0 92,5 92,5

(Source: Calculated based on data of General Statistics Office of Vietnam) Table 2. Investment at constant 1994 prices by kind of economic activity
2001 Total (bill. Dongs) % Agriculture (ext.) % Agriculture, forestry % Fishing % Non-agriculture % 129455 12,5 12256,2 -23,1 10348 -21,1 1908,2 -32,5 117198,8 18,2 2002 147993 14,3 12945 5,6 10804 4,4 2141 12,2 135048 15,3 2003 166814 12,7 14130 9,2 12014 11,2 2116 -1,17 152684 13,1 2004 189319 13,5 14706 4,1 11907 -0,9 2799 32,3 174613 14,4 2005 213931 13 15962 8,5 12782 7,4 3180 13,6 197969 13,4 2006 239813 12,1 17737 11,1 13484 5,5 4253 33,7 222076 12,2

(Source: Calculated based on data of General Statistics Office of Vietnam) Table 3. Foreign direct investment projects licensed by kind of economic activity
2001 Number of projects Number of projects in agriculture (ext) % Number of projects in agriculture, forestry % Number of projects in fishing % Number of projects in non-agriculture 502 23 4,6 15 3,0 8 1,6 479 2002 754 29 3,8 18 2,4 11 1,5 725 2003 748 29 3,9 15 2,0 14 1,9 719 2004 723 12 1,7 7 1,0 5 0,7 711 2005 970 19 2,0 13 1,3 6 0,6 951 2006 987 20 2,0 15 1,5 5 0,5 967 11 thng 2007 1283 63 4,9 48 3,7 15 1,2 1220

219

% Registered capital (mill. USD) Registered capital in agriculture (ext.) % Registered capital in agriculture, forestry % Registered capital in fishing % Registered capital in non-agriculture %

95,4 2503 30,4 1,2 20,6 0,8 9,8 0,4 2472,6 98,8

96,2 1557,7 49,5 3,2 32,8 2,1 16,7 1,1 1508,2 96,8

96,1 1889,6 47,3 2,5 22,2 1,2 25,1 1,3 1842,3 97,5

98,3 4222,2 107,6 2,5 99,8 2,4 7,8 0,2 4114,6 97,5

98,0

98,0

95,1 13400,2 184,553 1,4 151,122 1,1 33,431 0,2 13215,65 98,6

6839,8 12003,8 52,1 0,8 39,1 0,6 13 0,2 169,4 1,4 146,5 1,2 22,9 0,2

6787,7 11834,4 99,2 98,6

(Source: Calculated based on data of General Statistics Office of Vietnam) Table 4. Trade of goods and trade of agricultural goods (USD mil)
2001 Total export Export growth rate(%) Agricultural products Export growth rate of agricultural products (%) The other goods Export growth rate of other goods (%) Total import Import growth rate(%) Agricultural products Import growth rate of agricultural products (%) The other goods Import growth rate of other goods (%) Trade balance Trade balance of agriculatural products -1,190.6 13,881.3 15,071.9 1,146.0 16,217.9 10,537.9 4,489.3 15,027.3 2002 16,647.4 2003 20,170.0 2004 25,234.6 2005 32,441.9 2006 39,826.2 2007 48,387.0

10.78
6,629.4

21.16
5,500.7

25.11
6,756.5

28.56
8,559.8

22.76
10458.1

21.50
12,500

47.67
10,017.9 -4.93 19,733.0 21.67 1,118.8

-17.03
14,669.3 46.43 25,226.9 27.84 1,474.4

22.83
18,478.1 25.96 29,614.5 17.39 1,960.9

26.69
23,882.1 29.25 36,978.0 24.86 2,630.9

22.18
29,368.1 22.97 44,891.1 21.4 3,549.1

19.52
35,887 22.2 60,830 35.5 3,732.4
(*)

-2.37
18,614.2 23.5 -3,085.7 15,528.5

31.78
23,752.6 27.6 -5,056.9 18,695.7

33.00
27,653.6 16.42 -4,379.9 23,273.7

34.17
34,347.1 24.2 -4,536.1 29,811.0

34.90
41,342.0 20.37 -5,064.9 36,277.1

31.00 48,160.1

(*) (*)

12,443.0 37,986,
(*)

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam Customs) Note: (*) - statistic data up to November 2007 Table 5. Trade of agricultural goods ( USD mil.)
2001 Exports of Agricultural (ext.) goods Agricultural products Forestry products (rattan, bamboo, and sedge; logs and wooden products) Aquatic products Imports of agricultural(ext.) goods 4,489.3 2,141.5 2002 6,629.4 2,269.2 2003 5,500.7 2,367.2 2004 6,756.5 3,016.6 2005 8,559.8 4,078.3 2006 10,458.1 4,975.7 8,700.0 570.3 1,777.6 1,146.0 2,348.7 2,011.6 1,118.8 934.0 2,199.6 1,474.4 1,461.7 2,278.2 1,960.9 1,742.8 2,738.8 2,630.9 2,124.4 3,358.0 3,549.1 3,800.2 3,732.4
(*)

2007 12,500.0

220

Agricultural products Forestry products ( logs and raw material) Aquatic products Trade balance of agriculatural products

987.2 158.8 0.0 3,343.3

939.8 179.1 0.0 5,510.6

1,200.7 273.7 0.0 4,026.4

1,455.4 505.5 0.0 4,795.6

1,980.2 650.7 0.0 5,928.9

2,774.2 774.9 0.0 6,908.9

2,846.9

(*)

885.5

(*) (*)

0.0

7,268.0

(*)

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam Customs ) Note: Highlight figures are according to MARDs data (*) - statistic data up to November 2007 Table 6. Growth rate of trade of goods and trade of agricultural goods (previous year = 100)
2002 Total export Agriculture Totas import Agriculture 110.8 147.7 121.7 97.6 2003 121.2 83.0 127.8 131.8 2004 125.1 122.8 117.4 133.0 2005 128.6 126.7 124.9 134.2 2006 122.8 122.2 121.4 134.9 2007 121.5 121.2
(*)

135.5 131
(*)

Note: (*)Data up to November, 2007 compared with that of 2006

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam Customs )

221

Table 7. Export of some major agro-forestry products (thousand MT/USD million)

2001 Volume Rice Growth rate of rice export (%) Rubber Growth rate of rubber export (%) Coffee Growth rate of coffee export (%) Cashew nut Growth rate of cashew nut export (%) Pepper Growth rate of pepper export (%) Tea (of all types) Growth rate of tea export (%) Fruit and vegetable Growth rate of fruit and vegetable export (%) Peanut Growth rate of peanut export (%) Cinnamon Tc tng trng la go (%) Timber and wooden products Growth rate of timber and wooden products export (%) Rattan, Bamboo and sedge products Growth rate of rattan, bamboo and sedge products export (%) 78.2 3,729.5 Turnover 624.7 2002 Volume 3,240.9 Turnover 725.5 16.14 267.8 61.33 322.3 -17.63 209.0 37.77 107.2 17.54 82.5 5.23 219.7 -33.42 50.8 32.98 5.9 -4.84 337.8 435.5 2003 Volume 3,813.3 Turnover 720.5 -0.69 377.9 41.11 504.8 56.62 284.9 36.32 104.9 -2.15 59.8 59.8 -27.52 182.6 -16.89 82.7 48.0 -5.51 5.0 5.4 -8.47 567.2 8.3 44.8 99.4 2004 Volume 4,059.7 Turnover 950.4 31.91 596.9 57.95 641.0 26.98 436.0 53.04 152.4 45.28 95.5 59.70 178.8 -2.08 27.1 -43.54 8.1 50.00 1,139.1 8.0 54.5 87.9 2005 Volume 5,250.3 Turnover 1,407.2 48.06 804.1 34.71 735.5 14.74 501.5 15.02 150.5 -1.25 96.9 1.47 235.5 31.71 32.9 21.40 8.0 -1.23 1,562.5 13.6 13.8 74.7 2006 Volume 4,615.7 Turnover 1,266.9 -9.97 1,274.8 58.54 1,189.5 61.73 489.4 -2.41 158.6 5.38 73.8 -23.84 211.4 -10.23 10.2 -69.00 13.3 66.25 1,912.7 22.41 186.5 2,364.0 23.59 218.0 12,5
(*)

2007 Volume 4500,0 Turnover 1,460.0 15.24 719,0 1,400.0 9.82 1200,0 1,860.0 56.37 153,0 649.0 32.61 86,0 282.0 77.81 114,0 131.0 77.51 299.0 41.44 37 30.8 -16.75 13.5
(*)

308.1

166.0

448.6

433.1

513.3

587.1

701.7

931.2

391.3

718.6

749.2

974.8

892.4

1,009.7

43.7

151.7

62.2

84.0

105.1

108.8

123.8

57.0

91.2

76.6

74.1

111.9

109.0

94.8

68.2

78.4

74.8

330.0

38.2

105.1

3.9

6.2

4.5

28.92 93.9 107.9

30.24 136.1

100.83 162.3

37.17 180.2

14.91

26.14

19.25

11.03

3.50

16.89

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam ) (*) figures up to November 2007

222

Table 8. Import of some major agro-forestry products (thousand MT/USD million

2001 Volume Cotton Animal fat and vegetable oil Wheat flour Wheat Milk and Dairy products Sugar Pulp Timber and raw materials Cattle feed and raw materials Tobacco raw materials 81.3 113.1 265.4 61.7 0.0 Turnover 131.9 83.6 11.2 0.0 21.3 158.8 174.8 138.9 0.66 46.9 2002 Volume 97.1 339.6 59.8 842.6 Turnover 96.7 140.9 11. 113.3 122.2 0.18 20.7 179.1 233.2 157.4 0.0 88.6 2003 Volume 90.5 50.6 857.9 Turnover 105.7 159.6 9.5 124.8 163.6 0.0 39.8 273.7 420.6 173.6 0.0 148.3 2004 Volume 127.0 47.0 810.7 Turnover 182.2 230.1 9.7 154.5 196.6 0.0 70.6 505.5 452 159.7 78.5 142.7 2005 Volume 150.6 38.8 1,121.4 Turnover 167.2 193.3 8.6 200.6 311.2 21.9 70.5 650.7 593.7 197.6 118.515 143.803 2006 Volume 181.3 37.8 1,245.7 Turnover 219.0 256.7 8.7 225.3 321.1 48.61 81.322 774.948 736.653 160.827 40.0 131.6 2007 Volume 212 76.4 1,280 Turnover 267 473 23.8 370 498 9.8 84.9 1,022 1,124 205.3

Note: (-) means no statistic data; (Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam ) Table 9. Rice export by market (thousand MT/USD million)
2001 Volume Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries 3,729.5 46.5 46.3 401.8 16.0 1,859.9 1,564.8 52.5 409.8 2.8 1,008.8 Turnover 624.7 7.2 7.2 60.9 2.4 379.9 249.1 8.2 58.4 0.5 117.9 2002 Volume 3,240.9 302.8 21.6 240.1 14.8 2,395.6 1,456.3 14.8 7.7 11.4 283.4 Turnover 725.5 52.3 5.7 43.9 2.6 579.3 291.5 2.8 1.1 2.1 46.9 2003 Volume 3,813.3 0.3 0.3 193.8 7.4 2,395.2 2,115.2 3.2 28.6 1.7 1,193.7 Turnover 720.5 0.1 0.1 34.4 1.3 461.8 388.7 0.8 4.8 0.4 219.1 2004 Volume 4,059.7 1.1 0.9 324.4 20.9 2,658.0 1,401.2 82.8 92.8 4.5 978.9 Turnover 950.4 0.3 0.2 70.8 5.3 456.8 318.3 19.9 18.9 0.9 402.6 2005 Volume 5,250.3 547.5 0.0 87.4 10.1 2,484.1 2,225.0 49.4 252.7 3.2 1,875.4 Turnover 1,407.2 136.9 0.0 23.2 3.3 686.0 616.9 12.3 57.3 0.8 502.9 2006 Volume 4,615.7 402.2 1.0 150.9 32.5 2,776.4 2,461.1 46.1 0.0 1.3 1,285.023 Turnover 1,266.9 103.8 0.4 43.6 9.1 786.1 701.1 13.2 0.0 0.4 332.9 2007 Volume 4,500.0 4.5 1.3 58.0 9.6 1,767.3 1,633.2 44.8 37.0 2.4 2630.8 Turnover 1,454.0 1.8 0.5 20.8 4.2 567.1 522.2 16.6 11.0 0.9 852.4

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam )

223

Table 10. Export of natural rubber by market (thousand MT/USD million)

2001 Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries Volume 308.1 4.5 3.9 78.7 39.9 214.3 62.8 101.3 0.0 0.8 9.8 Turnover 166.0 2.5 2.1 43.1 21.1 112.2 28.2 54.1 0.0 0.4 7.7 2002 Volume 448.6 19.6 16.5 78.1 69.3 334.4 95.8 174.1 0.3 0.6 15.6 Turnover 267.8 12.2 10.1 50.7 44.0 192.4 53.8 97.6 0.2 0.4 12.0 2003 Volume 433.1 16.3 12.3 84.0 60.8 301.3 44.5 198.4 0.3 0.3 31.0 Turnover 377.9 14.6 10.8 78.7 55.9 251.2 38.7 15.9 0.2 0.3 32.9 2004 Volume 513.3 19.3 16.1 96.6 66.7 387.0 18.8 308.4 0.4 0.5 9.4 Turnover 596.9 20.9 16.9 113.5 77.6 450.1 20.7 363.7 0.5 0.6 1.3 2005 Volume 587.1 22.3 19.2 98.7 69.3 452.0 14.8 374.1 0.0 0.4 13.8 Turnover 804.1 29.1 24.8 131.8 90.8 625.2 19.0 525.2 0.0 0.6 17.4 2006 Volume 701.7 26.1 17.4 114.3 89.7 560.1 17.6 472.4 0.3 0.9 0.0 Turnover 1,274.8 44.2 27.9 215.6 149.2 1,012.7 30.7 855.9 0.5 1.9 0.0 2007 Volume 1,454.0 1.8 0.5 20.8 4.2 567.1 522.2 16.6 11.0 0.9 852.4 Turnover 1,400 57.6 39.1 192.7 147.6 1,122.3 87.5 843.9 0.3 1.5 25,6

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam )

Table 11. Export of coffee by market (thousand MT/USD million)

2001 Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries Volume 931.2 160.5 147.1 608.9 380.7 121.3 55.0 6.8 2.1 11.7 26.6 Turnover 391.3 654 60.0 253.2 159.3 50.8 22.7 2.7 0.8 4.6 16.5 2002 Volume 718.6 94.4 90.1 432.7 393.2 118.5 47.7 9.2 3.5 14.9 54.7 Turnover 322.3 41.2 39.2 194.8 178.5 52.6 20.4 4.1 1.3 6.9 25.6 2003 Volume 749.2 112.4 109.4 457.4 391.1 118.0 46.8 10.1 3.7 15.3 42.5 Turnover 504.8 75.2 73.1 306.2 262.3 81.2 31.0 7.0 2.4 10.4 29.4 2004 Volume 974.8 150.5 135.4 633.0 556.7 110.5 39.1 9.5 6.4 17.1 57.3 Turnover 641.0 98.5 88.8 417.1 367.3 72.3 24.6 6.0 4.1 11.2 37.9 2005 Volume 892.4 131.7 117.7 400.9 370.2 105.7 40.0 9.8 7.5 15.7 231.0 Turnover 735.5 109.2 97.5 331.1 308.9 86.7 31.4 7.9 6.4 13.3 188.8 2006 Volume 1,009.7 137.4 130.9 487.8 470.8 133.7 40.6 14.1 8.2 10.0 232.6 Turnover 1,189.5 174.1 166.4 607.7 586.4 164.1 51.1 16.5 10.0 12.8 220.8 2007 Volume 1,194 139.2 135.0 660.6 558.4 173.6 74.6 16.5 8.3 12.3 200 Turnover 1854,0 219.2 212.7 1,026.5 878.9 271.0 113.2 26.0 12.6 18.6 306.1

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam )

224

Table 12. Export of cashew nuts by market (thousand MT/USD million)

2001 Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries Volume 43.7 14.3 13.0 8.0 7.5 15.8 0.2 14.0 0.0 5.1 0.5 Turnover 151.7 48.7 44.1 31.3 29.3 51.4 0.7 44.2 0.0 20.1 0.3

2002 Volume 62.2 22.6 20.9 12.4 12.2 18.1 0.5 15.5 0.0 7.2 1.9 Turnover 209.0 77.8 71.5 46.3 45.6 55.8 2.0 46.0 0.0 24.2 4.9

2003 Volume 84.0 32.3 29.1 15.6 15.3 21.6 1.4 18.6 0.0 10.5 4.1 Turnover 284.9 111.4 99.8 57.2 56.3 68.2 5.2 57.0 0.1 36.6 11.1

2004 Volume 105.1 48.8 44.1 20.5 18.9 21.6 1.5 18.2 0.1 11.6 2.3 Turnover 436.0 197.8 177.8 89.2 82.4 87.5 6.5 72.0 0.6 49.9 10.9

2005 Volume 108.8 39.0 34.9 26.3 23.2 28.1 1.8 23.9 0.2 12.0 3.2 Turnover 501.5 175.5 156.9 129.3 114.4 120.7 8.7 100.3 1.1 60.2 14.7

2006 Volume 123.8 45.6 41.6 29.3 24.0 33.5 1.7 28.8 0.4 14.5 0.5 Turnover 489.4 182.7 166.8 125.7 104.6 115.5 6.9 97.2 1.5 61.5 2.6 5

2007 Volume 153 56.8 51.9 46.1 39.5 32.7 3.4 27.2 0.5 11.9 Turnover 649 248.6 227.9 200.0 165.6 131.7 14.8 107.4 2.1 51.9 14.7

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam )

Table 13. Export of pepper by market (thousand MT/USD million)

2001 Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries Volume 57.0 3.8 3.2 14.0 10.1 30.5 16.7 5.5 2.9 0.2 5.7 Turnover 91.2 6.3 5.4 22.6 16.2 48.7 26.2 9.1 5.0 0.3 8.3 2002 Volume 76.6 12.0 11.2 27.0 22.9 19.6 10.2 4.1 0.1 0.4 17.6 Turnover 107.2 18.0 16.8 38.5 32.8 26.2 13.7 5.6 0.2 0.8 23.5 2003 Volume 74.1 11.2 10.6 23.7 16.1 18.1 7.9 1.7 0.2 0.7 20.3 Turnover 104.9 17.1 16.0 34.7 24.6 25.1 11.0 2.4 0.2 1.3 26.5 2004 Volume 111.9 19.5 18.8 39.0 25.4 18.1 8.1 1.0 0.5 0.8 34.0 Turnover 152.4 28.4 27.3 54.4 37.1 24.2 11.1 1.3 0.7 1.5 43.3 2005 Volume 109.0 20.9 19.8 42.3 30.4 16.0 7.0 0.0 0.8 0.5 28.5 Turnover 150.5 30.7 29.0 59.5 44.6 21.3 9.5 0.0 1.2 1.0 36.9 2006 Volume 94.8 18.9 17.8 45.2 35.1 29.1 10.3 0.4 1.1 0.6 0.0 Turnover 158.6 32.1 30.0 77.6 62.0 45.6 16.5 0.8 2.0 1.2 0.0 2007 Volume 86 7.2 6.7 31.2 22.6 24.0 4.8 1.1 0.8 0.3 22.5 Turnover 282 22.1 20.7 107.3 78.6 74.7 14.7 3.1 3.0 1.2 73.7

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam ) 225

Table 14. Export of tea by market (thousand MT/USD million)

2001 Volume Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries 68.2 1.8 1.0 11.9 4.0 41.9 3.3 0.9 0.0 0.0 12.5 Turnover 78.4 1.3 0.8 11.3 4.1 52,5 2,.6 1.5 0.0 0.0 13.3 2002 Volume 74.8 2.6 2.2 11.7 8.1 36.6 2.7 0.7 0.0 0.0 23.9 Turnover 82.5 2.0 1.7 11.1 7.4 47.8 2.3 0.8 0.0 0.0 21.7 2003 Volume 59.8 1.9 1.3 13.3 5.4 25.1 3.3 1.4 0.0 0.0 19.4 Turnover 59.8 1.4 1.0 12.1 5.6 27.3 2.0 1.3 0.0 0.1 18.9 2004 Volume 99.4 3.2 2.5 19.8 7.9 36.5 3.8 3.3 0.0 0.2 39.7 Turnover 95.5 2.0 1.6 18.0 7.8 39.9 2.7 3.6 0.0 0.1 35.5 2005 Volume 87.9 1.6 1.3 23.0 10.9 36.0 4.2 5.8 0.0 0.0 27.3 Turnover 96.9 1.3 1.0 22.9 10.9 42.2 3.2 6.1 0.0 0.0 30.6 2006 Volume 74.7 2.9 2.1 22.8 10.5 49.0 3.9 7.9 0.0 0.0 0.0 Turnover 738 1.8 1.6 23.3 10.9 48.6 5.5 7.9 0.0 0.0 0.0 33.9 2007 Volume 114 4.2 3.6 22.2 10.0 53.7 9.6 17.7 0.0 0.0 48.9 Turnover 131 2.9 2.4 24.4 11.6 54.8 6.6 17.9 0.0 0.0

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam )

Table 15. Export of fruits and vegetables by market (thousand MT/USD million)
2001 Volume Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries Turnover 330.0 3.2 2.0 17.9 10.7 203.9 9.6 147.1 0.0 2.1 102.9 2002 Volume Turnover 219.7 8.0 5.9 22.7 13.3 186.8 7.3 126.1 0.1 2.1 18.6 2003 Volume Turnover 182.6 10.4 8.1 29.1 19.2 139.9 20.5 70.8 0.4 2.8 0.0 2004 Volume Turnover 178.8 16.6 14.9 35.6 21.3 97.3 19.6 29.8 1.0 2.6 25.9 2005 Volume Turnover 235.5 15.5 13.2 49.3 27.3 1288 20.9 42.4 1.3 5.7 35.0 2006 Volume Turnover 211.1 23.7 18.4 52.1 27.3 130.3 29.3 34.8 0.6 4.5 0.0 71.2 2007 Volume Turnover 299 26.6 20.3 66.0 39.5 130.3 21.5 35.3 0.5 4.4

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam )

226

Table 16. Export of peanut by market(thousand MT&USD million)

2001 Volume Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries 78.2 0.0 0.0 0.5 0.0 77.1 75.2 0.5 0.0 0.0 0.5 Turnover 38.2 0.0 0.0 0.3 0.0 37.6 36.5 0.3 0.0 0.0 0.2 2002 Volume 105.1 0.0 0.0 0.0 0.0 105.0 92.5 1.8 0.0 0.0 0.1 Turnover 50.8 0.0 0.0 0.0 0.0 50.9 44.4 0.9 0.0 0.0 2003 Volume 82.7 0.0 0.0 1.5 0.9 80.5 79.0 0.0 0.0 0.0 0.7 Turnover 48.0 0.0 0.0 1.2 0.7 47.4 46.4 0.0 0.0 0.0 0.6 2004 Volume 44.8 0.0 0.0 0.2 0.0 44.5 43.8 0.6 0.0 0.0 0.2 Turnover 27.1 0.0 0.0 0.1 0.0 26.8 26.4 0.4 0.0 0.0 0.1 2005 Volume 54.5 0.0 0.0 0.0 0.0 54.0 54.0 0.0 0.0 0.0 0.5 Turnover 32.9 0.0 0.0 0.0 0.0 32.6 32.6 0.0 0.0 0.0 0.4 2006 Volume 13.8 0.0 0.0 0.0 0.0 13.8 13.4 0.4 0.0 0.0 0.0 Turnover 10.2 0.0 0.0 0.0 0.0 10.2 9.9 0.3 0.0 0.0 0.0 2007 Volume 37 0.0 0.0 0.0 0.0 29.0 28.7 3.0 0.0 0.0 8.0 Turnover 30.8 0.0 0.0 0.0 0.0 23.6 23.4 3.1 0.0 0.0 7.2

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam )

Table 17. Export of timber and wooden products by market (thousand MT&USD million)
2001 Volume Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries Turnover 337.8 20.1 16.1 99.7 88.5 207.1 17.4 14.8 0.5 10.3 0.0 2002 Volume Turnover 435.5 51.2 44.7 102.2 98.2 257.3 23.3 24.1 0.2 17.6 58.1 2003 Volume Turnover 567.2 123.2 115.5 162.3 158.8 246.8 14.5 22.6 0.3 27.8 6.8 2004 Volume Turnover 1,139.1 331.3 318.9 386.0 376.2 358.8 37.2 46.5 1.5 49.0 12.5 2005 Volume Turnover 1,562.5 584.6 567.0 467.5 449.7 433.6 28.9 68.9 3.8 55.9 20.9 2006 Volume Turnover 1,912.7 778.3 744.1 504.5 497.3 543.2 30.6 101.3 4.4 70.0 12.3 2007 Volume Turnover 2404.1 997.1 948.5 672.3 641.2 648.6 23.3 174.7 2.2 60.2 23.7

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam ) 227

Table 18. Export of rattan, bamboo and sedge by market (thousand MT&USD million)
2001 Volume Total America The U.S Europe EU Asia ASEAN China + Hong Kong Africa Australia Other countries Turnover 93.9 2.4 2.4 5.1 5.1 42.9 0.0 12.3 0.0 0.0 43.5 2002 Volume Turnover 107.9 4.7 4.7 7.5 7.5 46.4 0.0 12.6 0.0 0.0 49.3 2003 Volume Turnover 136.1 9.9 9.9 12.6 12.6 49.5 0.0 16.3 0.0 0.0 64.1 2004 Volume Turnover 162.3 23.6 23.6 16.0 16.0 43.5 0.0 15.8 0.0 0.0 79.2 2005 Volume Turnover 180.2 23.9 22.1 78.3 73.3 64.2 2.7 17.5 0.8 5.6 96.1 2006 Volume Turnover 186.5 29.0 25.5 98.7 94.5 29.4 6.0 4.6 1.0 4.3 24.1 2007 Volume Turnover 218 31.6 27.2 127.9 121.4 48.9 2.1 1.8 0.8 5.0 3.8

(Source: Calculated based on data of General Statistics Office of Vietnam and General Department of Vietnam )

228

Table 19. Export of rice in the world and in major exporting countries (MT million)
2001/02 The U.S India Paskistan Thailand Vietnam World 2.95 6.3 1.63 7.24 3.24 27.3 2002/03 3.86 5.44 1.99 7.55 3.8 28.62 2003/04 3.33 2.75 1.78 10 4.2 26.01 2004/05 3.33 2.5 2 8.25 3.9 24.37 2005/06 3.66 4.69 3.66 7.38 4.71 30.16 2006/07 (est.) 2.95 4.2 3 8.5 4.6 28.65 2007/08 (proj.) 3.42 3.4 3.2 9 5 29.69

(Source: WASDE/USDA) Table 20. Export of coffee in the world and in major exporting countries (1,000 bags)
2001 Brazil Vietnam Colombia Indonesia Guatemala Peru Honduras India Mexico Ethiopia The other countries Th gii 23,810 11,966 10,625 5,173 3,330 2,638 2,617 3,441 2,893 1,939 2002 29,751 11,555 10,478 4,280 3,965 2,838 2,439 3,567 2,561 2,277 2003 24,864 14,497 10,154 4,821 3,306 2,480 2,794 3,826 2,422 2,374 2004 27,465 13,994 11,005 5,822 3,457 3,305 2,395 2,790 1,907 2,620 2005 25,033 13,218 10,743 6,795 3,348 2,272 2,929 3,581 2,508 2,702 2006 28,402 17,154 10,235 4,770 3,504 4,114 3,104 2,878 2,687 2,766 2007 (From 11/06 to 10/07) 28,755 18,128 11,056 40,630 37,501 33,780 32,362 30,524 28,814 27,444

17,015
85,447

16,296
90,007

15,989
87,527

14,786
89,546

15,093
88,222

14,367
93,981

15,340
96,386

(Source: ICO), Table 21. Export of tea in the world and in Vietnam (MT)
Year 2001 2002 2003 2004 2005 2006 2007(est.) Vietnam 56,000 75,000 85,000 100,000 95,000 100,000 90,000 World 308,195 341,060 362,160 323,480 314,270 289,230 271,000

(Source: VPA) Table 22. Export of cashew nuts in the world and in major exporting countries (1,000 MT)
2000 India Viet Nam Brazil 81.67 21.07 33.59 2001 90.4 37.78 29.36 2002 122.08 54.17 30.12 2003 98.55 67.85 41.57 2004 109.87 81.19 47.44 2005 124.97 81.33 41.86

229

The other countries World

3,331.82 3,468.15

3,312.48 3,470.02

3,150.44 3,356.81

3,325.38 3,533.35

3,360.38 3,598.88

3,245.4 3,493.56

(Source: FAOSTAT) Table 23. Export of tea in the world and in major exporting countries(1,000 MT)
2000 Kenya China Sri Lanka India Indonesia Argentina Viet Nam Uganda Malawi United Arab Emirates The other countries World 217.29 238.11 287.01 200.87 105.59 50.01 29.04 26.41 64.06 13.92 231.62 1,463.93 2001 207.24 258.64 293.53 177.6 99.8 58.11 31.08 18.22 36.59 18.25 256.26 1,455.32 2002 88.37 259.04 290.57 181.67 100.19 57.65 42.65 30.38 28.19 27.24 242.5 1,348.45 2003 293.75 266.22 297.01 174.25 88.18 59.09 41.04 8.07 36.93 18.98 243.05 1,526.57 2004 284.32 285.69 298.91 174.9 98.58 67.86 70.47 36.86 32.74 19.2 222.75 1,592.28 2005 313.2 291.21 177.32 159.15 102.3 67.7 51.1 36.53 33.82 31.38 223.89 1,487.6

(Source: FAOSTAT) Table 24. Major natural rubber producers in the world (1,000 MT)
2001 Thailand Indonesia Malaysia India Vietnam China Sri Lanka Philippines Others Total 2,320 1,607 882 632 313 464 86 71 878 7,252 2002 2,615 1,630 890 641 331 468 91 76 619 7,361 2003 2,876 1,792 986 707 364 480 92 84 683 8,063 2004 2,984 2,066 1,169 743 419 486 95 80 707 8,748 2005 2,932 2,271 1,126 772 469 428 104 79 697 8,877 2006 2,900 2,367 1,165 853 560 483 115 74 503 9,019

Table 25. Export of natural rubber in the world and in major exporting countries (1,000 MT)
2000 Thailand Indonesia Malaysia Viet Nam Cte d'Ivoire Philippines India Liberia Guatemala Myanmar The other countries 2,003.7 1,370.51 886.16 206.93 119.53 30.68 3.45 32.15 17.79 30.17 4,394.93 2001 1,864.99 1,443.01 740.43 222.69 125.93 39.07 4.94 35.97 18.23 19.56 4,590.93 2002 2,053.82 1,487.39 808.9 289.71 123.53 44.56 36.78 30.71 22.48 25.76 4021.2 2003 2,307.74 1,648.42 868.02 247.69 129.08 55.24 42.04 33.4 24.26 16.33 3,937.16 2004 2,167.96 1,862.51 1,360.98 190 121.34 43.31 32 45.29 32.11 23.22 3,596.52 2005 2,137.54 2,019.77 1,091.51 248.75 138.03 61.2 48.2 44.34 36.3 34.32 3,419.96

230

World

9,096

9,105.75

8,944.84

9,309.38

9,475.24

9,279.92

(Source: FAOSTAT) Table 26. Export of peanuts in the world and in major exporting countries (1,000 MT)
2000 United States of America China Canada Netherlands Viet Nam The other countries World 13.85 9.56 14.9 4.19 1.84 2,260.61 2,304.95 2001 14.29 10.44 15.31 5.5 1.82 1,956.1 2,003.46 2002 13.82 11.65 14.87 6.99 2.05 1,955.36 2,004.74 2003 11.72 12.03 15.09 6.27 1.67 1,958.74 2,005.52 2004 17.48 13.1 14.11 4.77 1.97 1,957.13 2,008.56 2005 21.83 14.92 14.82 6.4 1.83 1,945.69 2,005.49

(Source: FAOSTAT)

231

CHAPTER IV: PART I STRATEGIC IMPLICATIONS OF WTO FOR BUSINESS IN VIETNAM Content: 1. Preliminaries; 2. The WTO Impact on Business: Issues and Perspective; 3. Improved Business Environment in Vietnam; 4. New Export Opportunities; 5. Access to Lower Cost Inputs and Technology Abroad; 6. The Threat of Foreign Competition; 7. Attracting Foreign Direct Investments; 8. Bibliography 1. Preliminaries The WTO decisions concern government policies. But, in the last resort, they impact on strategies and day-to-day operations of the Vietnamese and foreign enterprises which do business in a regulatory environment shaped by the WTO rules. The firms are also affected by the creative dynamics of the WTO trading system as exemplified by trade negotiations, resolution of trade conflicts, and modes of implementation of the WTO commitments. Managers respond to those changes by adapting their strategies (reactive response) to the WTO-related developments or by proactively attempting to influence the course of the WTO events. The latter option is most feasible for larger enterprises and business organizations such as chambers of commerce or industry associations. The present chapter dealing with the business environment attempts to overview the implications of the Vietnams participation in the World Trade Organisation (WTO) for the countrys business community and for the interest of foreign direct investors for Vietnam as a place of establishment. The main questions discussed are the following: Did Vietnams WTO commitments contribute to the improvement of the countrys business environment and to making it more attractive for foreign and domestic investors? What are the new export opportunities that may be attributed to Vietnams WTO membership? To what extent has Vietnams WTO participation improved the access to low-cost inputs and modern technology to Vietnam-based companies? How does the threat of foreign competition affect business firms in Vietnam? What lessons may be drawn from the experience of China and other WTO newcomers for foreign direct investors and the business community in Vietnam? 2. The WTO Impact on Business: Issues and Perspective Vietnam's accession to the WTO could be finalized only after long years of difficult and complex negotiations and many of the reforms induced by the WTO accession process still continue. Therefore two types of WTO impacts on the business community in Vietnam can be distinguished: the impacts of Vietnams WTO entry on business and its regulatory environment, and the impacts of post-entry implementation of Vietnams commitments and related developments in the WTO trading system. 232

Both aspects will be considered in this report. The last point is particularly important since many legal, political and social problems have not been tackled in terms of achieving real implementation of WTO provisions at the moment of WTO entry and because post-entry developments in the WTO trading system are likely to continue to shape institutions in Vietnam for years to come. Different time horizons may be adopted to evaluate the general WTO. For example, the evaluation may refer to short run (say, 2 5 years), intermediate run (5 - 10 years) or long run, i.e. it may consider the impact of continuous WTO-induced reforms on the business environment over a generation. Box 1 The Implications of Vietnams WTO Membership: A Review of Literature

The importance of Vietnams accession to the WTO has been recognized and studied. Publications such as ADETEF Studies (PROJECT NAME: FSP 2000-148, 2007) have provided an overall evaluation of the WTO impact on the economic system of Vietnam. Other researchers have undertaken quantitative studies of the effect of trade liberalization on the Vietnamese economy. Some studies, including those by MUTRAP 7, have looked into the implications of Vietnams WTO accession for the business community both in Vietnam and abroad. However, to our best knowledge, there is no systematic assessment of business implications of Vietnams WTO membership based on empirical data such as those presented in Chapter X of this volume.

What is the relationship between a nations business environment and its economic development? An appreciation that economic development is a collective outcome, depending on the interdependence between many individuals choices, make in fact the WTO-induced institutional change in Vietnam absolutely central for economic progress. After all, institutions are by definition means for various business actors and individuals to combine together. This is a critical aspect because technological innovation is not a sufficient condition for development if organizational change does not follow. In a nutshell, institutions matter because they are the vehicles that may encourage or discourages business ventures. Most low-income countries tend to have inefficient economies due to weak institutions which detrimentally influence value-creating activities. Such countries are not able to use their physical and human capital or technology efficiently enough. In a deficient institutional environment, entrepreneurs, managers or employees under-perform and spend that precious commodity, time, on dealing with unproductive things. To put it simply, an immigrant from a lowincome economy to a developed country becomes instantly more productive when he lands, indicating that his human capital was not being fully utilized at home. The recent history of Vietnam is a good illustration of how things may be improved and what positive role may be played by the WTO in institutional change. Vietnams WTO membership helped maintain the momentum for domestic reforms, which are generally improving the business environment both for domestic and foreign firms. It had a major impact on Vietnams trade in goods and services, the exchange of technical knowledge, foreign direct investments (FDI) (or building and 233

buying factories and companies in Vietnam by foreign operators) and cross-border investments in financial assets like shares and bounds. A substantial proportion of foreign investments in Vietnam are designed to produce goods for shipment to foreign markets. While this remains true, trade and FDI flows are interdependent. Foreign investments both direct and in financial assets are widely recognized to be good for Vietnams economic growth. They are an excellent way to create jobs and learn cutting-edge technology or management skills. Unlike investments in financial markets, FDIs have another important advantage: they cannot rapidly be reversed in a panic. As the Financial Times economist Dr. Martin Wolf rightly noted, actories do not walk. Another important advantage of Vietnams integration into the world market is, contrary to popular believe, that it destroys the scarcity power of big firms both multinational and domestic stateowned giants by subjecting them to international competition. It encourages the use of new ways of working and of modern technology. Many experts also consider that Vietnams open economic policy promotes peace in the region by giving the nations benefiting from trade and FDIs powerful reasons not to risk military tensions. The terms of Vietnams participation in the WTO and the related reforms were not determined in a vacuum. Numerous members of the business community and civil society were involved in that process. The key private-sector stakeholders included Vietnams various types of chambers of commerce, industry associations, large state-owned firms and private businesses. Most of those players participated in various national working groups on trade policy and were involved in the WTO-related policy consultations. With over 90% of Vietnamese enterprises falling into the SME category, the role of business associations in trade-related advocacy is particularly important in that context. The empirical part of this project is based on in-depth interviews, case studies and series of questionnaires administered in the milieu of firms - local and foreign - doing business in Vietnam. The data collected refer to three major types of variables: 1. Firms characteristics such as type of ownership, location, size and degree of internationalization, WTO awareness, export readiness, company performance, ability to adjust, the firms access to major business organizations and awareness and readiness of structural adjustment. Perceived WTO impacts on the general business environment including issues such as the extent of change, degree of risk, cost structure, government attitude towards business, predictability of economic policy, extent of government intervention, quality of public service offered to companies and general effects of globalization. WTO impact on trade and investment environment: stability and improvement in market access, improvement in access to lower cost inputs, increased competition, and ability to influence policy- making.

2.

3.

3. Improved Business Environment in Vietnam There is every indication that Vietnams policy-makers see their countrys WTO membership as a means to fulfilling broader goals. One such goal is to facilitate the peaceful emergence of Vietnam as an important trading nation and to minimize the trade tensions associated with the countrys rapid export growth. Accession negotiations have also unleashed a massive process of reforming the laws covering trade issues in Vietnam, with many reforms going beyond those narrowly required by the WTO rules and commitments. The Vietnam WTO Accession Protocol required, for example, a 234

radical change in the countrys legal system in particular, with respect to the formal publication of laws and regulations, procedural fairness in decision-making, the judicial review and the nondiscrimination principle. Moreover, one of the main challenges of the improved business environment is the re-regulation of the banking sector which is like the nervous system of the national economy and, therefore, may have dramatic impact on economic performance (Sam, Thu, 2005).

Box 2 Robust Economic Growth after Vietnams WTO Accession The growth forecasts for 2007 and 2008 GDP of Vietnam are at 8.3% and 8.5% respectively according to ADO forecast (ADO, 2007). Private industry expands more rapidly than the stateowned sector. Investment grew by 14% in the first half of 2007, stimulated by Vietnams membership in the World Trade Organization and by improvements in the business environment (ADO, 2007). Led by rapid growth of two of its componentsmanufacturing and construction Vietnams industry is expected to grow by 10.6% in 2008. Higher value-added products, including electronic goods for export, constitute an increasing share of domestic production of manufactures. In the construction sector the initiated large projects include the building of roads, ports, and power generation facilities, expansion of the hotels and resort base for tourism and construction of high-end office and apartment buildings in Vietnams major cities. Vietnams service sector, spurred by growing domestic consumption and tourism, as well as the gradual opening of some sub-sectors to foreign participation, is projected to grow by 8.6% in 2008. Sub-sectors likely to expand fastest are banking and finance, trade, transport and telecommunications, and tourism. Agriculture is likely to pick up to 3.1% in 2008. Stock market capitalization of companies listed at the Vietnamese stock exchange has increased to the equivalent of about 28% of GDP in 2007, from just 5% in 2005 and it is likely to grow in spite of the 2008 financial crisis affecting the US economy. Based on: ADO 2007 The overall economic indications for Vietnam are impressive since the countrys WTO accession. Buoyant investment, consumption and increased trade drove robust economic growth since January 2007 when Vietnam became a WTO member country (Box 2). Obviously, the trends discussed in Box 2 may be attributed to a large number of factors of which the WTO membership may be only one element. Nevertheless, most members of the business community perceive WTO membership as a significant determinant of the improved business environment as shown. Indeed, in the years of Vietnams negotiations on WTO accession and since the WTO entry the domestic economy and business environment in Vietnam have changed in many positive ways. The principles of market economy and freer trade and investments have been integrated into popular thinking. The Vietnamese public widely accepts such WTO concepts as transparency, governance, and national treatment. Clarification of ownership rights partly resulted from WTO commitments concerning privatization of numerous Vietnamese firms and clarification of the status of state-owned enterprises. Protection of market mechanism through improved competition rules, reduction of 235

subsidies, reduced price controls, state protection of commercial contracts and the like largely contributed to excellent economic performance. Attempts to reduce bureaucracy and corruption, improve banking and financial reporting services and the functioning of local courts resulted in lower transaction costs. Foreign companies, began to be treated on pair with state-owned enterprises (STEs) and domestic companies which further fueled FDI s. Domestic legislation was revised to include concepts of property rights and human rights. The citizens have become more involved in policy-making than in the past, in part because the media more frequently published commentary on government policy that stimulated public discussion. In addition, government bodies released draft laws and regulations for public comment and often hosted public hearings to which business organizations and various NGOs citizens were invited. That these developments have happened during the years of Vietnams rapprochement with the WTO seems to support the argument that economic liberalization helps foster greater openness. Our empirical research suggests that the managers of business firms operating in Vietnam recognize many positive changes in the business environment, are satisfied with the recent economic reforms and rapidly adapt their strategies to the new challenges and opportunities. They also perceive noticeable improvement in the governments attitude toward business and better quality of government support to business firms. An overwhelming majority of surveyed managers (99%) agreed that Vietnams WTO participation resulted in key changes in their countrys economic policies, improved business-government relations (84%) and in better policy implementation (56%). Moreover, 85% of the interviewees also maintained that the investment environment in Vietnam was considerably improved due to such changes. About 87% of managers expressed optimism concerning current changes in Vietnams business environment but only one in two thought that the environmental risk for business firms has decreased. The above optimistic results seem to be confirmed also by other sources. The 2008 Asia-Pacific small business confidence survey conducted by HSBC Commercial Banking indicates that SMEs in Vietnam are particularly optimistic about their economic prospects for 2008 expecting high rates of business expansion (69% of the respondents expect it to be above 4%) and a particularly significant growth rate of trade with China . The survey indicates that the Vietnamese SMEs are more involved in cross-border trading than their counterparts in Malaysia, China, Indonesia or India and that 38 % of the Vietnamese SME s expect their trade with Mainland China to grow by above 20% in 2008 (HSBC, 2008). The survey also suggests that Vietnamese SMEs are consistently the most optimistic across the key indicators considered in the survey. Similar trends are confirmed by other foreign observers of Vietnam. The Washington-based preeminent think tank and The Wall Street Journal which track the march of economic freedom around the world with the influential index of economic freedom is largely recognized as a reliable measurement of economic freedom by the academic community. Vietnams ranking measuring the business freedom component showed spectacular improvement by moving between 2005 and 2007 from 10 to 62 points (100 points represent the maximum score) and Vietnams trade freedom index moved from 45.2 points in 2005 to 51.0 points in 2007 (Heritage Foundation, 2007). Both impressive shifts are closely related with the implementation of Vietnams commitments under the WTO Accession Protocol. Another measurement of regulatory performance is provided by Doing Business report published annually by the World Bank and the International Finance Corporation (IFC) - the private sector arm of the World Bank Group (Box 3). With respect to trading across borders, the report shows that Vietnams performance in this area is above average (ranked 63 out of 178). The report also

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identifies certain areas in which Vietnam has room for improvement such as protecting investors, closing a business, and paying taxes. Box 3 Doing Business Reports on Progress in Regulatory Performance The report investigates global regulations that enhance business activity and those that constrain it. The report ranks countries on their ease of doing business and deals with regulations affecting 10 areas: starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. The Doing Business gives policymakers and managers the ability to measure regulatory performance in comparison to other countries, learn from global best practices, and prioritize reforms. The indicators are used to analyze economic and social outcomes, such as informality, corruption, unemployment, and poverty. According to the 2008 report, Singapore retains the most business-friendly economy. Other top ranking economies in Vietnams proximity are Thailand (15), Malaysia (24), and Taiwan (China) (50). Doing Business in 2008 provides an encouraging picture of Vietnam stressing the tremendous progress made over recent years. Vietnams WTO involvement has clearly facilitated the import/export activities of Vietnamese trading firms. The time required to implement import and export operations can be substantially reduced and the cost of export decreased. Indeed, Vietnamese exporters still spend more time and pay much higher costs to export than their colleagues in such neighboring countries as China, Malaysia and Singapore. That problem should be addressed, not to weaken the competitiveness of Vietnam, where economic growth is based largely on development of export-oriented sectors (Doing Business, 2008). The costs and procedures involved in importing and exporting a standardized shipment of goods in Vietnam are detailed in Table 1 below. Every official procedure involved is recorded starting from the final contractual agreement between the two parties, and ending with the delivery of the goods.

Table 1 Cost and Procedures Involved in Importing and Exporting of Goods in Vietnam Indicators Documents to export (number) Time to export (days) Cost to export (USD per container) Documents to import (number) Time to import (days) Cost to import Source: Doing Business (2008) Year 2008 6 24 669 8 23 881

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The results of our empirical studies also confirm the above image. 72% of surveyed enterprises recognized procedural improvements in business registration and licensing and noted improvements in customs procedures in Vietnam. Managers recognize important progress accomplished in Vietnams foreign trade regime since the countrys accession. But, they also point to the fact that further trade facilitation measures are urgently needed and suggest a series of measures to maintain the development momentum. They noted that customs and public administration reforms had a more limited impact than originally expected. Many government policy measures where unpredictable and there were not enough consultations with the business community even if business-government dialogue had clearly improved. Delivery of licenses to foreign banks has progressed more slowly than expected. Technical infrastructure remained under-developed and so were supporting business services. Many companies suffered from an acute shortage of qualified labor and slow implementation of IP protection. A resolute implementation of anti-inflation measures was considered an urgent matter given the high prices for oil and other raw materials, rocketing real estate prices and the declining US dollar. There is a lot of interest in Vietnam for Chinas experience since the countrys WTO accession. What is Chinas interest in WTO and how is it managing to implement its WTO commitments? A brief note on that issue in included in Box 4 below.

Box 4 Chinas Interest in WTO and the Implementation of Chinas WTO Commitments China performed well with respect to many aspects of the implementation of its WTO commitments. Particularly good results have been achieved concerning trade liberalization in most industrial tariff lines and certain agricultural products. In 2007, Chinas import tariffs on industrial products were the lowest in the developing world. China's import tariffs on agricultural products were in 2007 lower than in most developing countries and lower than in some advanced countries such as Japan or the EU. Chinas subsidies to agriculture are today less trade distorting than equivalent subsidies maintained by the US or the EU (Fahra, 2006). Among the areas in which work needs to continue is protection of Intellectual Property Rights (IPR) (WTO, 2006). Important progress was made by China in that area in 2006 however, considerably more should be done. Such adjustments obviously take time and require the collective efforts both by China and other WTO countries concerned. Such efforts are also in China s own interests in the long run as they stimulate local innovation, development of trademarks and attract FDIs in most advanced sectors. In June 2006 the WTO conducted the first review of China's trade policy. The overall appreciation was positive and all WTO members have acknowledged that the political commitment and determination showed by the Chinese government is serious and responsible. However, there are still important areas requiring improvements. The review has also identified creative new non-trade barriers replacing some of the former tariffs and noted important shortcomings in Chinas efforts in subsidy notifications. Chinas interest in the WTO system is rather obvious. Given its relative openness, China has an offensive interest in ensuring a reduction of tariffs for many of its key manufactures in third countries and the WTO forum offers such opportunity. On agriculture, having become a net food importer, further trade liberalization can help China ensure adequate supply of food for its expanding population at stable and affordable prices. At the same time, the WTO system offers China the 238

possibility to protect a limited number of agriculture sensitive product lines so that the balance is still large and the Chinese agricultural sector is not upset. Further reduction of trade-distorting agriculture subsidies in developed countries would also benefit China's agricultural producers. As the main target of antidumping measure, strengthening the use of trade defense measures clearly is in China's interest. A further opening of Chinas services market can also contribute to a thriving economy in sectors such as banking and insurance, telecommunications and transportation services. Finally, new rules on trade facilitation would help China's exporters by cutting down customs red tape and discovering new trading opportunities. Free trade agreements (FTAs) and other regional arrangements, whether bilateral or regional, cannot, replace the WTO multilateral trading system. Nor do they constitute an alternative option for China, given its trade dependence, size of its exports and their geographical diversification. Regional arrangements are, by nature, discriminatory to third nations. China is implementing or negotiating such arrangements with a number of its neighboring countries because that regionalism may serve China's geopolitical interests or short-term commercial interests. However, they cannot serve China's systemic interests in the longer perspective. If customs unions and free trade areas continue to proliferate in the global economy, as China would not be able to be involved in most of them across the world, the environment of China's exports would deteriorate rather than improve. Regionalism may supplement but not replace Chinas trade strategy in the long run. Strategically, China has, thus, a long term interest to safeguard the multilateral trading system There are some signals that trade protectionism whether in developed or in developing countries may be on the rise. Given China's dependence on trade, foreign direct investments and access to technology abroad, multilateral trade opening and strong multilateral disciplines are the best means to safeguard China's economic interests. In the current multilateral trade negotiations (the so called Doha Round), China can negotiate with other trading nations the trade regime which will apply to all its trade for the next decade or so. Without a well functioning WTO and without a successful new round China could well be one of the biggest trade victims.

4. New Export Opportunities What are the new export opportunities resulting from Vietnams accession to the WTO? Although most of the market openings agreed to in Vietnams accession, like in all other WTO accessions, are to be carried out by the acceding country, at least two reasons for new market opening of interest to the Vietnamese exporters may be identified. First, almost all WTO members refrained from invoking against Vietnam non-application provisions of the type widely used against Japan when it joined the GATT. As a result, Vietnam has received most-favored nation treatment in virtually all export markets. Clearly this is a significant concession because this reduces the risk of market access - which has been rigorously shown to be a major benefit (Francois, 2006) - and it freed Vietnam from onerous, one-sided review procedures such as the annual reviews of MFN trade in the United States. Second, Vietnams WTO partners agreed to abolish the quotas on textiles and clothing originally maintained under the Multi-fiber Agreement (MFA). This concession is of great importance for Vietnam given the countrys reviled comparative advantage in textiles and clothing even thought it is qualified by the ability of importing countries to impose special safeguards during the transition period ending in 2008.

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Our empirical research suggests that Vietnamese exporters were generally (94%) satisfied with the improved access of their products to the main export markets following Vietnams WTO accession (Chapter X). They also noted that Vietnams WTO membership facilitated international cooperation, resulted in an improved access to modern technology ( 91%), improved Vietnams international image of made-in (86%) and resulted in better protection of intellectual property rights (84%) for Vietnamese exporters. However, they also recognized that the non-market economy status was a potential threat to their companies (in particular in the case of garment export into the US) and noted that several important anti-dumping cases are pending in the developed market economies. Vietnams traders reacted promptly to the improved market access conditions. The countrys exports have been witnessing rapid growth simultaneously with the WTO entry negotiations and after the accession. The export turnover of goods increased from US$5.4 billion in 1990 to over US$5.4 billion in 1995, US$14.5 billion in 2000 and US$32.5 billion in 2005. The figure was US$39.8 billion in 2006, and it is likely to reach US$47.5 billion in December 2007 (www.business-inasia.com). Growth in merchandise exports continued in 2007 at a high rate of 19.4%. Exports of textiles and clothing rose by 25.9% after the abolition of quotas following the WTO accession. The value of coffee exports more than doubled whereas coffee prices increased. The remaining export categories, other than oil and seafood, also performed robustly. Exports of wooden furniture, which have grown rapidly in the past couple of years, rose by 23% (ADO, 2007). One could also observe rising tourism receipts as well, as growing FDI in that service sector. The impressive export growth took place in spite of the 10% drop in value of Vietnams oil export resulting from reduced domestic production and limited seafood exports, one of the biggest export categories, which was due to concerns in some overseas markets about contamination of shrimp by antibiotics. Due to the two unfavorable developments, the 2007 rate of export growth is likely to be below the 2006 rate of 25.7%. In 2007 Vietnam has been among the fastest growing trading nations among the WTO member countries. Its trade growth has been faster than that of other developing countries. Vietnams 2007 ranking as the world's 57th largest trading nation is likely to improve rapidly given the countrys substantially above-average trade dynamics.

Box 5 Trade Dependence and Export Growth in Vietnam

The ratio of export turnover to GDP also increased rapidly from 30.8% in 1990 to 46.5% in 2000, 61.3% in 2005, to 65% in 2006 and 67% in 2007, high levels in the region and in the world (4th among ASEAN countries, 5th in Asia and 8th in region). Export turnover per capita rose from US$36.4 in 1990 to US$75 in 1995, US$186.8 in 2000, and US$391 in 2005. The figure was US$473.2 in 2006 and is likely to reach US$557 in 2007. Source: www.business-in-asia.com

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Benefits from WTO accession are expected to result in rapid export expansion in 2008 (ADO estimate: 22%) and 2009. Exports of textiles and clothing are likely to continue to build on the gains made from the ending of quotas on Vietnamese garments. In addition, the seafood industry which has improved its application of SPS rules and quality control following the 2007 crisis, may be expected to lift its exports in 2008 and beyond. 5. Access to Lower Cost Inputs and Technology Abroad An immediate liberalization of some 1800 tariff lines by Vietnam resulted in greater choice and increased competition in the Vietnamese domestic market. Vietnam lowered its average import tariff rate from 17.4% to 14.5% under its WTO commitments, and the average rate is scheduled to come down even further over the next few years. Vietnams pre-Doha MFN tariff rate is estimated at 16.41 per cent and its post-Doha 40% cut applied tariff is likely to be 9.84 % - suggesting substantial trade liberalization - and post-Doha 40 % cut bound tariff 16.15% (Kee, Hiau Looi, Nicita, Alessandro and Olarreaga, Marcelo, 2007). The liberalization was particularly significant in areas such as electronic products, textiles and clothing. The de-regulation of telecommunications enables rapid growth of that sector. The trade liberalization measures resulted in the improved access of Vietnamese producers to lower-cost inputs. (Import growth is expected to stay high, reflecting the continued need for capital goods, to support investment spending, and for export-related inputs). Trade liberalization has also led to substantial gains for domestic consumers who obtained improved access to a larger range of lowerpriced consumer goods. Such measures combined with increased investments led to a 30.4% growth in merchandise imports in the first half of 2007, about double the 2006 rate. Much of the import increase reflected capital goods and other inputs for export production (the clothing industry alone, imported almost 70% of its inputs). Imports of capital goods surged by 46.5% in the first half of 2007, and imports of raw materials and intermediate goods also increased substantially in 2007. The continuous inflows of FDI, portfolio investment, and aid are likely to maintain a surplus in Vietnams overall balance of payments in spite of strong import growth. Also the on-going reforms in Vietnams banking services helps to support structural adjustment elsewhere and mobilizes capital (see below)..

6. The Threat of Foreign Competition There were more than 40.000 small and medium sized enterprises (SMEs) in Vietnam in 2008 and the number is likely to grow as pressures from deepening integration with world markets have emphasized the need to reform state-owned enterprises (SOEs). Among moves already made, stateowned Bao Viet Insurance Corporation, the largest insurance company, issued shares through an initial public offering in June 2007, and others are lining up to follow the same roadmap. In addition, the states holdings in fully and partly owned SOEs are being transferred from ministries and provincial governments to the State Capital Investment Corporation, which is likely to reduce the involvement of ministries in the management of the enterprises. Moreover, the Vietnamese authorities envisage equitizing (partly privatizing) an additional 1,500 Vietnamese SOEs, out of the remaining 2,100, by 2010 and FDIs contribute to further growth of the private sector. The threat of foreign competition forces change in the structure pattern of many Vietnamese industries. Indeed, numerous business firms respond to Vietnams accession by mergers and 241

acquisitions in order to rationalize their operations, increase economies of scale and improve quality. There are clear signs that turn-around management and strategic adjustment is taking place in numerous enterprises across Vietnam as illustrated by the SME restructuring in Ouang Ngai province briefly discussed in Box 6.

Box 6 The Post-WTO Accession Developments: SME Restructuring and Training in Qunag Ngai Province Numerous business firms in Quang Ngai province responded to increased competition induced by Vietnams WTO accession by mergers in order to lower the cost of their operations through economies of scale and scope in production and distribution and to improve quality by becoming ISO 9000 quality management certified. In response to a more competitive environment, for example, the Dong Thanh Export Garment Company has become part of the Quang Ngai Agricultural Products and Food Joint Stock Company a leading export business in Quang Ngai Province. The latter company followed a diversification and quality improvement strategy since its equitization (partial privatization). The company continues to improve its management and marketing stills by having their employees trained in marketing, commercial contracting of export/import operations and market promotion techniques required to penetrate new foreign markets. The training is provided with the support of the Quang Hgai Department of Trade and Tourism which offers general assistance to local small and medium-sized enterprises (SMEs) since 2006. One of the projects concerned is PRISED through which business consultants are made available and company directors are offered management training. Source: Vietnam Economic News, no.33, vol.7, August 14, 2007.

A WTO commitment to open the banking sector to foreign ownership is underlying the urgency of reforming state-owned commercial banks. Due to the WTO accession, foreign and private banks benefit from improved operational conditions in Vietnam and Vietcombank is progressively improving its competitiveness and quality of services as service charges are reduced and quality of banking services for enterprises is improved (Sam, Thu, 2005). The Government encouraged such development in April 2007 by raising the stake that foreign banks and investors can hold in Vietnamese banks, from 10% to, in most cases, 15%. Two state-owned banksVietcom Bank and Mekong Housing Bank are likely to make initial share offerings, but volatility in the stock market has caused some slippage of the schedule. There were critical voices in the business community concerning , what was perceived as a slow pace of reforms in the financial sector and restrictive licensing of foreign banks willing to operate in Vietnam. In particular, there was a delayed licensing for 100% foreign-owned bank subsidiaries (overdue for April 2007). However, two UK banks (HSBC and Standard Chartered Bank) have been licensed in March 2008 to operate in Vietnam. 7. Attracting Foreign Direct Investments Vietnam is rated among the most attractive countries for foreign investors- both direct and those interested in financial assets like shares and bonds. Foreign direct investment (FDI) approvals in the first 7 months of 2007 rose by about 55% to $6.4 billion and seem headed for a record $13 billion 242

for the full year 2007 (ADO 2007). Is the investment flow likely to continue as the result of Vietnams WTO accession? A lot will depend on the degree of investors protection that the Vietnamese government will be willing to grant to foreign FDIs. For the time being, Vietnam remains among the emerging economies which protect investors the least. The new regulatory changes introduced fiduciary duties for directors- but failed to ensure that those duties were enforced. For example, no commercial tribunals in Vietnam have jurisdiction over investor suits against directors. As a result, the extent of director liability is among the lowest in the world (World Bank, 2008). There is thus a lot of room for improvement in this field. Moreover, better protection is also needed in other dimensions of investment, so investors can be more confident when coming to Vietnam. The FDI flows may also be accelerated as a result of further liberalization in Vietnams service industries. A study evaluating the impact of WTO accession on China underlines the importance of service sector liberalization as a determinant of FDI flow to China (Walmsley, T. Hertel, Th. and Ianchovichina, E., 2006). It finds that direct investment flows towards China and capital stocks increased substantially in the post-WTO accession years and that foreign ownership of Chinese assets is expected to double by 2020. Central to this increase is the expected catch-up in the productivity of the services sectors driven by reforms. The studys estimates are far larger than those predicted by earlier projections, which ignored the reforms affecting Chinese services sectors. It might be expected that a similar situation would arise in the case of Vietnam where many services such as tourism, transportation, infrastructure-related services, etc are likely to attract foreign investments.

8. Conclusions There is little doubt that WTO membership had a positive impact on the business environment and market-oriented reforms in Vietnam. The WTO accession negotiations resulted in substantial institutional and legal reform in line with the implementation of Vietnams WTO-commitments. Positive changes with the strongest impacts on the business environment comprises such measures as a modernized legal environment (e.g. Law on Enterprises and Law on Investment introduced in 2005), increased business-friendliness and transparency of economic policies, changes in public administration and business registration and licensing and simplification of import and export procedures. Privatization (equitization in the language of the Vietnamese reforms) permitted further development of private joint-stock companies and coincided with a rapid growth of foreign direct investments. Corruption was recognized as a major problem and anti-corruption legislation was introduced but its effects remain limited. Protection of intellectual property rights has been considerably improved, market oriented reforms substantially broadened and deepened to enhance domestic competition. A rapid liberalization of barriers to trade resulted in greater choice, improved access to lower-cost inputs and increased competition in the Vietnamese domestic market. An overwhelming majority of surveyed managers agreed that Vietnams WTO participation resulted in key changes in their countrys economic policies, improved business-government relations and improved policy-making and implementation. 85 % of the interviewees also maintained that the investment environment in Vietnam was considerably improved due to such changes and expressed optimism concerning the current evolution in Vietnams business environment.

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However, the managers also pointed to various less satisfactory aspects such as the limited impact of current reforms in public administration, the unpredictable nature of government intervention and certain shortcomings of business-government dialogue. They also noted that infrastructure remained under-developed and that there was a shortage of qualified labor. Vietnamese exporters were generally satisfied with the improved access of their products to the main export markets following Vietnams WTO accession. However, they pointed out the fact that the non-market economy status was a potential threat and drew attention to important anti-dumping cases threatening Vietnams export performance. 9. References ADO (2007) Asian Development Outlook, Asian Development Bank, Manila, Philippines, 2007. Bhattasali, D. Li, Sh and Martin, W. (2004) Impacts and Policy Implications of WTO Accession for China, in Bhattasali, D. Li, Sh and Martin, W. (eds.) China and the WTO, Washington D.C. The World Bank and Oxford, Oxford University Press. Fahra, Paulo (2006) Five Years of China WTO Membership. EU and US Perspectives about China's Compliance with Transparency Commitments and the Transitional Review Mechanism, Legal Issues of Economic Integration, Vol. 33, No. 3, pp. 263-304, August 2. Fracois, Joseph and Sinanger (2004) WTO Accession and the Structure of Chinas Motor Vehicle Sector, in Bhattasali, D. Li, Sh and Martin, W. (eds.) China and the WTO, Washington D.C. The World Bank and Oxford, Oxford University Press. Heritage Foundation (2007) 2007 Index of Economic Freedom, HSBC (2008) Asia-Pacific Small Business Confidence Survey, The Hong Kong and Shanghai Banking Corporation Ltd. Kee, Hiau Looi, Nicita, Alessandro and Olarreaga, Marcelo (2007) Estimating the Effects of Global Trade Reform, in Hoekman, B. Olarreaga, M. (eds), Impacts and Implications of Global Trade Reform on Poverty, Washington D.C., Brookings Institution, forthcoming. Luo, W. and Findlay, Ch. (2004) Logistics in China: Implications of Accession to the WTO, in Bhattasali, D. Li, Sh and Martin, W. (eds.) China and the WTO, Washington D.C. The World Bank and Oxford, Oxford University Press. Mascus, Keith (2004) Intellectual Property Rights in the Accession Package: Assessing Chinas Reforms, in Bhattasali, D. Li, Sh and Martin, W. (eds.) China and the WTO, Washington D.C. The World Bank and Oxford, Oxford University Press. Mattoo, Aaditya (2004) The Services Dimension of Chinas Accession to the WTO, in Bhattasali, D. Li, Sh and Martin, W.(eds.) China and the WTO, Washington D.C. The World Bank and Oxford, Oxford University Press. Messerlin, Patrick (2004) China in the WTO: Antidumping and Safeguards, in Bhattasali, D. Li, Sh and Martin, W. (eds.) China and the WTO, Washington D.C. The World Bank and Oxford, Oxford University Press.

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Sam, Phan Van and Thu, Vo Thanh (2005) Preparation by Vietnams banking sector for WTO Accession, in Gallagher, P., Low, P. and Stoler, A. (eds.) Managing the Challenges of WTO Participation, Cambridge, Cambridge University Press, pp. 621 633. Walmsley, T. Hertel, Th. And Ianchovichina, E. (2006) Assessing the Impact of Chinas WTO Accession on Investment, Pacific Economic Journal, vol. 11, Issue 3. World Bank (2007) Doing Business 2008, Washington D.C. International Finance Corporation.

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CHAPTER IV: PART II. THE EFFECT OF WTO MEMBERSHIP ON VIETNAMESE SMES

Content: 1. Background; 2. Challenges for SMEs; 3. Negative impacts threats; 4. Positive impacts opportunities; 5. Opportunities for women owned smes; 6. Comparative experience of other WTO members; 6.1. Japanese Sme Support Centres; 6.2. India; 6.3. South Africa; 6.4. Chinese Taipei; 6.5. New Zealand; 6.6. Chinas experience of smes in its post WTO accession; 7. Lessons learned; 8. Recommendations to enhance the successful development of the Vietnamese sme sector after WTO accession; 9. References

Executive Summary Assessing the impact of Vietnams WTO membership on smes just one year after its accession may be a bit early and there is not sufficient information available yet to do an indepth analysis. This paper shall serve as an overview of other papers and research from within Vietnam and outside Vietnam and shall attempt to give a broad reflection of the experiences of Vietnamese smes, In the year since Vietnams accession to the WTO many significant changes are taking place. In addition to WTO accession, there are a number of other world economic factors which are also influencing these changes in Vietnam: Vietnams membership in regional agreements such as the Asia Pacific Economic Cooperation (APEC), ASEAN, ASEM and AFTA and approximately 49 other agreements on investment, Recent bilateral trade agreements with the United States, Japan and others still underway the rise in the price of oil, volatility in world financial markets, and uncertainty as to the United States economy which is having a ripple effect on almost all economies including those that provide inexpensive consumer products to the U.S. market.

While it is still early days, it may be possible to review some of the effects that WTO membership has had on Vietnamese smes. Because smes are at the heart of the economy, virtually every aspect of WTO membership will affect them. Membership in the WTO is causing great structural reform in Vietnam which should benefit the development of the private sector as well as increase the number and successes of smes. WTO membership affects everyone and all facets of life even when it is not noticed. Because the WTO, as a rules-based organization does not differentiate between small and large enterprises, there is not a lot of data or information available as to the effect of WTO membership specifically on smes. Once accession occurs and structural reforms are in place, smes tend to disappear into the general business and trade arenas. However, the themes of smes and social impact go to the heart of the economy and its society they are virtually cross cutting and therefore much information can be extracted from other studies by simply asking, what is the effect of this on smes? and is there a differential impact on smes?. It is well known that what may create advantages for large businesses could in fact create threats and challenges for small businesses, but that what is good for smes tends to be good for business in 246

general. And even more specifically, what is generally seen to be good for women in business is also good for all business.123 New members of the WTO must look at three major tasks which incorporate WTO commitments and rules into its administrative and legal systems: Meeting the market liberalization commitments Incorporating the WTO rules into domestic laws Making changes to the existing administrative and judicial systems or establishing organs, functions or procedures in the administrative and judicial systems to comply with WTO requirements.

In addition to these commitments, Vietnam is also dealing with structural reform, privatizing or equitizing thousands of state owned enterprises (SOEs) and state trade enterprises (STEs), developing a full private sector with a massive increase of smes, bringing much of the informal sector into the formal sector, and coping with major infrastructure challenges while trying to absorb very large amounts of FDI and ODA. In Doing Business 2008,124 Vietnam showed a number of improvements with reforms in two important areas: protecting investors and access to finance. The protection of investors is focused on larger businesses with the implementation of a new enterprise law and securities act which should result in attracting more FDI as well as domestic investors. The easing of access to credit by broadening the scope of asset that can be used as collateral will hopefully assist small businesses in gaining better access to finance and credit and therefore encourage the growth of a robust sme sector. Economies with a thriving sme sector prove to be stronger economies. This year Vietnam has jumped from 104th to 91st in the list of countries surveyed which means that it is closing in on some of its competitor countries such as Thailand, Malaysia, Taiwan and China. Although it still has a long way to go, Vietnam is considered a fast reformer. The IFC report does site areas such as protection against directors misuse of corporate assets, closing down a business, and tax payment that still require significant improvement. Importantly, the IFC report for the first time finds that women owned businesses benefit from the ease of doing business and that the countries that score the highest in the IFC survey have the largest share of women business owners. Over the next two years, the IFC and World Bank shall be putting more emphasis on these indicators and especially how they relate to women in business. 1. Background Since 2000, the Vietnamese government has been bringing in a series of reforms which has improved the business environment for sme development considerably. With membership in the WTO and increased competition these reforms are even more important. WTO membership opens up all sorts of opportunities for smes but it also creates more competition and threats. Typically smes are not as well capitalized or sophisticated and therefore are the most vulnerable to open and

Dinh Hien Minh, According to Decision No. 681/CP-KTN (June 1998 by the Vietnamese Government), small and medium enterprises are determined by both labour and capital. A firm with an employment of less than 200 workers and less than VND 5 billion capital is defined to be an SME. Otherwise it is considered to be large., Paper prepared for MUTRAP ll on the Preliminary Impact of the WTO on Industries, 2007
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123

Doing Business 2008, IFC/World Bank Report 247

freer trade. Weaknesses are amplified. Smes in Vietnam tend to be quite small and fairly new to the market, thus lacking experience and expertise required to compete globally. Statistics regarding the growth in the number of smes and the change in Vietnams economy remain impressive. As of 2005, smes account for 97% of Vietnams domestic enterprises, contribute 26% of GDP, generate 49% of the countrys industrial production value and create jobs for 26% of the workforce.125 Since Vietnam has adopted more foreign-friendly reforms, its total economic output has nearly doubled in the past five years, at an average economic growth rate of 7.25% over the past decade and has doubled the per capita gross domestic product with economic growth reaching 8.2% in 2006, trailing only China.126 Currently it is estimated that there are about 200,000 smes in Vietnam and that women account for about 25% of these.127 The country hopes to have 500,000 by 2010 which represents a very aggressive growth plan. The numbers shall continue to rise as the regulatory burden on businesses is reduced, more SOEs and STEs are privatized and people are displaced (and use their skills to start their own micro and smes), Vietnam becomes more comfortable with private businesses and more opportunities open up. Smes are also an opportunity where more women and young people are involved. They become a source of innovation, jobs and income. 2. Challenges for SMEs In 1997, during the APEC ministerial meeting for Ministers Responsible for SMEs128 Ministers recognized that the challenges that smes in general face and in all countries fall into five areas of access: Access to finance Access to information Access to technology Access to training and human resources Access to markets Although Vietnam was not a member of APEC in 1997, and it is more than 10 years since that meeting, these access issues are still very much a reality. This was confirmed during a workshop for women in business that was held in Hanoi in December, 2007 as part of an APEC project on training women in micro and smes and MUTRAP II.129 In addition, in Vietnam, additional challenges include: Access to land and property Inadequate infrastructure Rapid and massive structural reform

125 126

SMEs plan for WTO accession, 12 December 2005, www.mof.gov.vn John, Karl D. Vietnams WTO Hopes and Dreams, www.x-vietnam.org 127 Pham Chi Lan, Phu nu Thu do (Capital Women) newspaper, 27 January 2007 128 Canada was the host of all APEC meetings in 1997. It was during the Economic Leaders Meeting in Vancouver in November, 1997 that the APEC approved the admission of Vietnam to APEC. The SME Ministers meeting took place in Ottawa in September 1997. 129 Micro and SME development workshop was delivered in conjunction with MUTRAP ll and the Vietnam Womens Centre for Development as part of APEC project SME 02/2007. More than 60 women attended to discuss different models to assist women exporters 248

Vietnam shall have to address each of these issues in order to help develop a thriving and competitive sme sector. The potential is great and the interest is very high and there is a real thirst from business owners to gain more access to information, especially about foreign markets, standards, requirements and opportunities. One gets the impression that virtually anything is possible if the smes are given the right training, resources and information to allow them to conquer and succeed in competition. As articulated in a previous paper by this author130, the following issues also present continuing challenges for Vietnamese smes: Opening markets will result in increased competition Producing products that are of a high standard and competitive in price and quality and that can be sold in both the domestic and international markets Size of smes Lack of management skills and expertise Lack of cooperation amongst smes Problematic macro policies Lack of competitiveness Facing non tariff trade barriers Language issues Infrastructure development to support smes and WTO obligations Other infrastructure issues such as roads, communications, energy supply Standardization, compliance with labeling and rules of origin A transparent legal framework which provides for protection and equitable remedies at law Protecting intellectual property Protecting traditional knowledge Reduction of tariffs which may lead to more competition which might be a threat to some but an opportunity for others Understanding international business practices Difficulty accessing capital from the formal financial sector according to the Ministry of Planning and Investment, only 32.4% of smes have qualified for formal bank loans thus requiring them to obtain financing from somewhere else in order to be competitive.

The biggest challenge clearly is to develop mechanisms and vehicles that will assist small and micro businesses to grow into viable, competitive enterprises. In encouraging the growth of smes it is important to ensure that they actually produce goods and services that are saleable and are not just make work projects. 97% of businesses in Vietnam are smes which is not an unusual percentage, but in Vietnam, the difference between smes, which tend to be on the micro side and larger companies, is huge. There are also nine million households involved in agriculture which represents nearly 20% of GDP and employs more than half of the population. Small farm holdings and processing of crops also operate as smes. Since WTO membership requires that subsidies be cut Vietnams international competitiveness will be dramatically affected. It is the worlds largest pepper exporter and second largest exporter of rice, coffee and cashew nuts. But most of the farming plots are small and not profitable or efficient. So, a restructuring of land rights and management shall have to occur in order to remain competitive and sustainable.

130

Lever, Andrina The Implications of WTO Membership on Vietnamese SMEs, July 2007 249

Box 1 General Implications of WTO membership131 The general implications of WTO membership which affect all smes can be summarized as follows: the impact of WTO and its agreements are on every economic activity be it agriculture, trading, service or manufacturing world markets are opening up due to the lowering of tariffs and dismantling of other restrictions in developed and developing countries. enlightened and awakened entrepreneurs have greater opportunities to benefit from their comparative advantages domestic markets will be increasingly threatened because of lowering of tariffs leading to freer entry of foreign goods and because of foreign companies establishing manufacturing bases locally Whereas the developing countries will have greater opportunities in sectors in which they have cost based comparative advantages, e.g. textiles and agriculture, developed countries will benefit by opening up of the service sector and tightening intellectual property rights. However without corresponding reforms in their domestic economic policies developing countries may fail to benefit from the WTO regime Export markets will become tougher because of competition among developing countries having similar advantages There is a wave of standardization blowing across the globe; products from developing counties are to face tougher quality standards in developed markets, particularly in the areas where they have comparative cost advantage Every company, whether serving domestic or international markets, will have to undertake internal exercises to identify factors affecting its international competitiveness in terms of cost as well as quality. It will need to study if it can stay competitive once the product becomes freely importable or tariffs are further lowered or both. The WTO regime will benefit those countries more which show wits and skills in the ongoing dialogue. The governments that are in constant touch with their inductees and affected groups will be able to determine with clarity how and what should be negotiated at multilateral negotiations to the best of their advantage International trade is increasingly becoming knowledge based. The entrepreneurial ability will come to fore in the new environment The concepts of liberalization of international trade, deregulation and privatization of internal economy [sic] have now been strengthened and legalized under WTO. The choice before countries in adopting a direction other than this has become almost unrealizable. The countries that have understood this, have moved swiftly in fine tuning their domestic and international trade policies creating a winning environment for their businesses. Those who are still debating the issue or are in the stage of bewilderment will help neither themselves nor their businesses.

131

A Brief Guide to the WTO for Small Business, Federation of Indian Micro and Small & Medium Enterprises, (2000) page 5, www.fisme.org.in 250

3. Negative impacts threats Many of the negative impacts and the threats are stated above and are abundantly clear. WTO membership is a club which opens up markets to opportunities and competition. Dang Duc Anh132 in his paper on macroeconomic performance and policies gives examples of negative effects on the economy from WTO membership all of these will affect the performance and sustainability of smes: by quickly liberalizing its market, including sensitive and infant sectors, Vietnamese firms will face fierce competition from foreign competitors. A number of enterprises in less competitive sectors will be forced to close down, thus increasing unemployment. Firms in service sectors may find themselves in a very disadvantageous situation in competing with foreign firms. Wide range of tariff reductions would significantly affect government tariff revenue, which presently constitutes a significant proportion of total government revenue. Tariff reduction also results in government tariff revenue losses if import volumes remain unchanged; however, cheaper prices for imported goods generally lead to higher demand for imports, which leads to additional tariff revenue. The final outcome depends on the net effect In case the country pursue [sic] pegged exchange rate, adaptive monetary policies have to be done to prevent exchange rate appreciation as [sic due to a] high capital inflow, leading to an increase in money supply and pressure on inflation control. Of course, the central bank may use its instruments to sterilize the negative impact of capital inflow such as through open market operation or reserve requirement. However, this action may cause higher interest rates, then attracting external capital inflows, stimulating a high interest rate-strong exchange rate spiral and reducing domestic investment. In addition, capital flows carry risks and may magnify underlying macroeconomic and structural weakness, especially short-term inflows driven by speculation can easily be reversed if there are changes in fundamentals or investors expectation. Because of their size and relatively new experience in business, smes are even more vulnerable to issues such as capital flow and monetary policy. Also as shown in Dang Duc Ahns paper, international trade has become the most dynamic part of the Vietnamese economy. In the paper prepared by Bui Huy Son133 on the Impact of the WTO on Distribution Services, it is stated that foreign companies shall be permitted to engage in the retail sector of all legally imported and domestically produced products with the exception of 10 which are deemed sensitive to the economy. Even those 10 products shall be made available in future years. Distribution services have developed quite rapidly with an expansion into franchising, retailing, supermarkets, trade centres and other large shops. Traditionally Vietnam has been an economy of small independent shops and businesses located in the community and run by families therefore much of the distribution of products and services has been conducted through small independent businesses. These smes shall not be able to compete with large distribution centres which can purchase
132

Dang Duc Anh, MUTRAP ll paper, Impacts of Vietnams WTO Membership on Macroeconomic Performance and Policies, March 2008

133

Bui Huy Son, MUTRAP ll paper, Impact of the WTO on Distribution Services, 2008 251

products at attractive prices and conduct business more efficiently due to economies of scale. Even in developed economies such as Canada and the U.S. smes in small towns have been decimated by the arrival of big box stores and Walmarts. Small local coffee shops and restaurants have been replaced by fast food chains and coffee shop chains. This also has the effect of driving up rents which only the larger, foreign owned enterprises can afford to pay, thus forcing smes out of the neighbourhood. Recently the government has announced an amendment to a government circular which shall expand the trading and distribution rights of foreign businesses in Vietnam. Under the new regulations, foreign importers shall be authorized to select their own distributors and sell goods to them anywhere across the country but they shall not be allowed to set up their own distribution networks. 134 It is hoped that this regulation shall be more in line with WTO commitments and shall be more attractive for foreign investors but it may present greater challenges for Vietnamese smes. While initially many Vietnamese may prefer to shop in their neighbourhoods and in the traditional way, purchasing fresh food and household supplies daily, as large supermarkets and distribution centres move into the community, small mom and pop smes are invariably forced out of business as they can no longer compete with prices and convenience. Vietnams young population will be less interested in the traditional ways of purchasing and invariably shall be drawn to larger enterprises, lower prices, and more product selection, especially as their disposable income rises due to the availability of more and better paying jobs as a result of FDI. In addition, as more salaried employees are required to work in the large enterprises, many operators of smes may prefer to be employed by a larger employer who can provide stability and benefits rather than taking the risks inherent in self employment. Box 2 WTO poses problems for Tin Giang135 The wholesale and retail sectors in the southern province of Tin Giang face many challenges since Vietnam joined the WTO requiring that the province make the most of every available opportunityUnder the countrys commitment to the WTO, Vietnam will allow the operation of joint venture companies and foreign companies will therefore be able to set up their own wholly-foreign invested businesses. The province has sought ways to raise the competitiveness of local products both domestically and internationally by establishing a more modern distribution network. Tin Giang is known for its orchards, as well as livestock, poultry, and its growing markets in fruit, rice, meat and seafood. The province needs to restructure its wholesale and retail network in order to compete. Competition from foreign owned large distributors is forcing local industries to look at improved methods of marketing as well as distribution. Billions of dollars of FDI have been committed to Vietnam in the last five years, but much of it has yet to be dispersed. Development is taking place at a rapid pace but not equally throughout the country. Urban areas are reaping benefits of WTO membership, increased FDI and markets, but the rural areas which still remain underdeveloped and primarily agriculture based may be adversely affected as jobs and wealth are created in the urban areas. Local authorities have to compete for
134

Quang Ming, Vietnam looks to clear foreign business obstacles, Thanh Nien News, 19 March 2008 135 Viet Nam News, 18 December 2007, page 15 252

investment and to ensure that local and traditional sectors become competitive while trying to curtail a flight of people to urban centres in search of better and higher paying jobs. As Vietnam has become more integrated into the world market, it has become more vulnerable to international economic conditions. Increased trade with developed countries, while improving markets and sales for businesses, and more open markets as a result of WTO membership and reduced quotas means that Vietnamese companies shall need to protect themselves against negative impacts. The United States is a major consumer of inexpensive garments and footwear. Should a recession occur or a tightening up of consumer spending continues, U.S. retailers will cut back on orders and inventory and stretch payment terms which can seriously threaten smaller companies that do not have diversified customers and have not been in existence long enough to create enough equity to ride out an economic downturn. Vietnamese smes shall have to continue to search for new markets and modify their products and services accordingly. As Vietnam expands more into globalization due to its WTO membership, the economy shall be influenced much more by world economic events. Traditionally the Vietnam dong has been tied to the U.S. dollar but the recent weakness in the dollar is causing the government to widen the band in which it allows the dong and dollar to trade. Vietnamese exporters are now feeling the pressure of lower incomes due to the low dollar. Fears of inflation are also a threat to the development of a healthy sme sector.136 4. Positive impacts opportunities According to a recent study137 undertaken by Hong Kong Shanghai Bank (HSBC), Vietnamese smes are the most optimistic about the future. The survey covered 2, 700 smes in Hong Kong, China, Taiwan, Singapore, India, Vietnam, Korea, Malaysia and Indonesia. Despite fears of the US recession Vietnamese smes were the most optimistic with respect to economic growth in Vietnam and their plans to increase capital expenditures within the first six months of 2008. Most also indicated that they planned to hire additional labour and increase exports, mainly to other Asian countries. A recent UNCTAD study found that smes usually comprise 99% of all enterprises worldwide, account for 50% of manufacturing output, from 44 70 % of employment and play an especially important role in new job creation. 138 It is also well understood and documented that economies with a healthy, thriving sme sector are successful economies. In addition, recent OECD research found that the highest rate of growth has been in the service sector with smes predominating in services relating to computer software and information processing, research and development, marketing, business organization and human resource development. Sme market share in these sectors has been growing due to the global growth in outsourcing and the advent of new technologies. Advances in technology will continue to increase smes global reach.139

Hookway, James, Slumping dollar gives Vietnam a painful lesson in economics, The Globe and Mail, 19 March, 2008 p. B13 137 Quang, Ming, Local enterprises readying for expansion as they expect booming economy to keep rolling, Thanh Nien News, 12 February 2008 138 Communication from Canada, Working to Ensure Benefits from GATS for Members Small and Medium Sized Enterprises, circulated to members of the WTO Council for Trade in Services, TN/S/W/36, 22 February 2005 139 Op cit 253

136

Box 3 iDVR International Inc. Headquartered in Toronto, Ontario, Canada, iDVR manufactures and markets digital video surveillance equipment to businesses as varied as supermarket and restaurant chains, banks, casinos, military bases, and even to the U.S. Federal Reserve and the U.S.-Mexican border authorities. The company is also moving into the European Union, with a manufacturing facility in the United Kingdom. Its equipment is state-of-the-art, using video analytic software that adds value to captured video data. Today, iDVR operates globally, with numerous sales and service centers throughout North America, Europe, and Asia. The company is an outstanding success in many ways. Not just a successful technology company, employing more than 150 people and generating in excess of $20 million annually, it has been the recipient of many Canadian and International awards including the Business Development Bank of Canada Young Entrepreneurs Award and the Toronto Star Immigrant Success Award. The company was founded by brothers Jack, Vy and Bob Hoang (only now in their 30s) who along with their 10 brothers and sisters and parents emigrated from Vietnam. Vys wife, Grace, who is a Japanese immigrant, is also in the company. The company credits its success to the immigrant population in Canada. Virtually all of its employees in Canada are immigrants that have been hired regardless of their language skills, how long they have been in Canada or where their qualifications are from. The firm offers English language training classes weekly to their employees. Even more exciting, the company employs more than 70 software designers and support staff in their native country of Vietnam. There is no question that this support has helped iDVR International Inc. become a world leader in its field. At the same time as investing in and creating jobs in Vietnam, the company is exporting to Vietnam, Canadian management techniques, expertise, market opportunities and increased value. A win win situation for both Vietnam and Canada. The negative impacts which pose a threat to old and traditional ways of doing business are more than set off by the positive impacts that WTO accession has on business and opportunities. Membership in the WTO is meant to be a win-win situation and if it was not, then every economy in the world would not be clamoring for acceptance into its membership! The necessity of having to comply with WTO commitments forces a developing economy to undertake significant reforms which ultimately improve the business environment. With more formalized and transparent procedures, investor protection is increased and development begins to occur through trade, investment and more open and wider opportunities. Simplifying the three procedures of obtaining a business registration certificate, a tax code and a stamp carving permit should have a positive impact on new enterprises. Many are advocating for the complete elimination of the stamp carving. The move to a one-stop shop for registration and reducing the time for establishing a new enterprise from 30 days to 15 and to 12 days for establishing a branch office is significant. The number of administrative visits to conduct these procedures has been reduced from 8 to 4. The time to grant tax codes has been decreased from 8

254

days to 4 days. Tax declaration and submission procedures have been reformed and simplified.140 Simplifying the procedures for formally establishing an enterprise helps to bring informal small businesses into the formal sector, encourages legitimate business practices, reduces the opportunities for corruption and creates a better source of taxation and revenue for the government. Opening up the financial system to competition will create more and better competitive access to finance for small businesses with new financial products in the areas of leasing, payment settlement services, financial consulting and information services. Financial institutions will become more competitive and consumer and customer friendly. This typically results in better public administration and more efficient economic policies which become more transparent. Anther positive change which will assist in the creation and administration of smes is the legal framework (Law on Enterprises and Law on Investment 2005). Import/export procedures have been simplified. There are increased opportunities for market access, learning, international cooperation, access to better technologies, better IP protection, improved quality and reputations of made in Vietnam brands.141 Opening up of the telecommunications services sector will be a huge positive effect on Vietnamese smes allowing even the smallest to compete globally through the internet and online businesses. Recently broad band internet access is being tested in the rural and remote regions of Vietnam which had their first fixed line phones installed in 2004 and were only connected to a regional electricity grid in 2005.142 Box 4 Broadband in Rural Vietnam143 In Ta Van, a remote village in north-western Vietnam, Intel is testing a high speed internet system in partnership with VDC whereby they are hoping to demonstrate that broadband can be a profitable business but also a way for Vietnams most remote regions to leapfrog straight to the most advanced forms of telecommunications. This has huge potential for smes as 70% of Vietnamese live outside urban centres. With a population whose average age is 26 and with a 90% literacy rate, the younger generation is eager to embrace such new technologies. According to an Alcatel-led survey last year, there are 650,000 micro businesses (informal sector) that were interested in internet access with most of them being in the countryside. The government of Vietnam is making moves to expand broadband before opening up the telecom sector inline with its WTO commitments. Such an exercise shall open Vietnams smes to the world for business. Access to the US market has led to the increase in the export of labour intensive products such as apparel, footwear, wood products and furniture. The government of Vietnam is committed to
140

Nguyen Dang Binh, Report on Comprehensive Evaluation of the Impact of Increased Key Imports-Exports and Regulatory Changes Resulting from Vietnams WTO Membership, MUTRAP ll, December 2007 141 Pham Chi Lan, Vietnams WTO Accession and Its Impact on Business Environment, speech delivered to Vietnam Trade and Investment Forum, 11 January 2008 142 Minder, Raphael Broadband makes connections in rural Vietnam, Fianancial Times, 6 February 2008, page 10 143 Minder, Raphael Broadband makes connections in rural Vietnam, Fianancial Times, 6 February 2008, page 10 255

making more products, investments, and services available to help support local businesses and innovations. In one year, FDI has doubled in 2007 to $20 billion and exports grew 21.5%144. Networks and associations are traditionally very important in the development and growth of smes. They play an important role in education, access to information and markets as well as creating a voice for smes to official departments. Vietnams increased support of professional associations and work with foreign chambers of commerce is helping to create a support system for smes. Business associations can also be instrumental in providing training and insight as well as connections into export markets. As demand for improved quality and consistency as well as dependable delivery increases, the overall standard of products and services is improved and ultimately, the smes that do survive tend to be stronger, more successful and more professional. These are the smes that shall grow and provide increased opportunity for employment and other smes. While FDI may provide more competition for local enterprises in Vietnam, it also brings with it great opportunities and added value. FDI brings with it new and better technology, new management systems, new market opportunities, job creation all of which adds to economic growth. Foreign enterprises also require support and supply from local enterprises for both products and services which creates more opportunities for local smes and employment. Many smes are in the service sector and they become suppliers to foreign operators in Vietnam as well as being able to benefit from exporting their services without having to leave Vietnam. Increased FDI is also attracting the return of the Vietnamese diaspora. The Vietnamese community outside of Vietnam is strong and has retained its ties to Vietnam and Vietnamese culture. They also have the added benefit of being fluent in the Vietnamese language. Many of the families of overseas Vietnamese are eager now to return to Vietnam to contribute to the success of Vietnams economic reforms, bringing with them skills, contacts, experience and capital. Vietnams reduction of high tariffs and import duties on such items as machinery and imported equipment and cars shall make more products available to Vietnamese consumers and businesses at a reasonable price and will help towards improving the efficiency of smes by providing better resources. Franchising can also help small individual businesses grow by introducing and training franchisees with management, marketing and accounting skills and creating employment and service standards. In return, quotas on Vietnams garment and textiles have been lifted which allows Vietnam to compete in larger markets. Many factories are still quite small or are supplied by smes. 5. Opportunities for women owned smes

144

Deputy PM Pham Gia Khiem, speech presented to Trade and Investment forum, 11 January 2008 256

Box 5 Women Business Owners in Vietnam A National Survey145 In 2006, the IFC undertook the first comprehensive national women business owners survey for Vietnam. The findings were based on a survey conducted among 500 larger, formal women-owned businesses across the country and provide an excellent in-site into the issues and challenges that women business owners in Vietnam face in general. While this research was focused on women owned smes, the issues and recommendations are relevant to most smes in general and provide critical recognition of what can be done to help support Vietnamese smes. Key issues that were identified include the following: Women business owners in Vietnam expressed a strong need for entrepreneurial education and training, especially training that is targeted specifically at women; They felt that the current lack of attention to the needs of women business owners in Vietnam is limiting their growth; Access to financing is as much about education as about capital; They want to learn more about international trade opportunities; There is a strong desire for more policies and programs focused on business development and the lack of formal programs may be limiting the growth of women-owned businesses; They need more opportunity for networking and forming mentoring relationships and would like to see regular fora that would help create these opportunities; Womens entrepreneurship in Vietnam needs a formal home such as an office for womens business development programs, womens business advisory council or both In December 2007, MUTRAP ll conducted a workshop in partnership with an APEC funded project for access to markets for women owned smes. Women business owners attending the workshop represented businesses in the following sectors and producing the following traditional products and services: Textiles, clothing, embroidered items such as table cloths, house wares, bed spreads, fashion accessories, shoes Jewelry Decorative items, basket ware, bamboo and rattan, furniture, lacquer products, artist products, ceramics Natural products, food products, cosmetics/skin care, homeopathic products/natural medicines Service Sector, business services, translation, tourism, professional services While the workshop was focused on women owned smes, the participants did not see the issues and opportunities they face as unique to women but rather to smes in general. The following summarizes the main findings of the workshop:
145

Sme associations can act as facilitators and provide training and trade promotion programs; they do field trips to markets and find information on markets to look at niche markets and exhibitions A textile company started 4 years ago as an sme, but needs to be introduced to more markets; they get assistance from customers; need professional assistance for each sector;

IFC Private Sector Discussions, Number 21, Women Business Owners in Vietnam: A National Survey 257

marketing capabilities are very limited and they do not receive any assistance from any agency A producer and exporter of textiles and garment products had a lot of difficulty and needed a lot of assistance from the government and agencies in finance, infrastructure and machinery; there are lots of textile and trade associations they need assistance to see how an association can have a voice e.g. there is not enough money to forward ideas to the Ministry Smes experience a problem learning what the quality of the foreign market expects there is a higher standard in the west than in the east Some have been exporting already to other parts of Asia but are now interested to know more about Europe and the rest of the world but lack access to information Timing and resources are a concern and they try to help one another The internet presents many opportunities that need to be exploited Law is one thing but the reality is different there are still regulatory barriers to implementation Government should try to find a way to put themselves in the place of smes Need more information in a timely way Need better ways to send and file taxes e.g. electronically Hanoi Businesswomens Association acts as a facilitator lots of direct contacts with regulators need financial support for women and policies to support women want to know how Canada deals with smes and licensing and registrations; they would like to participate in international exhibitions but it is too costly what can be done to help smes want to advertise their products and get support; the association has provided training for machinery and computers but there is no financial assistance to provide more training Sometimes training is not appropriate or relevant need more relevant training Financial access is a problem should have a certain level of knowledge - startup capital is limited they look for support from foreign donors financial support is very difficult and they need more money; problem shipping goods especially from rural sectors How can a road show of companies be done in Vietnam and then connect to other countries e.g. by sector. There is a big interest to understand what the situation is like for women smes in other countries and how they handle such challenges There is a big interest to connect with other associations and groups Box 6 Businesswomen can tap growing sectors, with a little know-how146 According to a recent interview with Mme. Pham Chi Lan, women head about 25 per cent of the nations 200,000 enterprises. Mme. Chi Lan indicated that trade exports to the U.S. had increased six fold in the last five years and that women owned smes should continue to look at penetrating the U.S. market. She also gave advice for businesswomen to develop strategies to increase their competitiveness: Two women who have done just that are Nguyen Thi Mai Thanh, general director of the Electric, Engineering and Refrigeration Company, and Dang Phuong Dung, general director of the Garment Company 10. Dungs company was recognized for its excellence in business twice. In production sectors like leather and footwear, wooden products, cosmetics, food processing,

146

Vietnam News, Phu nu Thu do (Capital Women) 27 January 2007 258

fine arts, banking services and tourism, the percentage of women in leadership positions is very high. Businesswomen have proved their ability to prosper many times and will do so again during Viet Nams WTO integration period. Mme. Chi Lan went on to deliver the following advice to women in business: First of all, businesses must adapt to the new policies, regulations, and trade agreements under the WTO. They should abandon their dependence on State subsidies and protectionism and look for ways to survive on their own. Secondly, businesses need to shift their focus from short-term planning to longterm strategies for success. In the context of international integration, short-term business plans wont cut it. Thirdly, seeking out co-operatives and joint venture partnerships should be encouraged. This will help companies play off each others strengths to compete in an international market. Finally, businesswomen should continue to educate themselves to make sure they have the information they need to stay profitable and adapt to changes. Mme. Chi Lan concluded her interview with the following recommendations for women owned businesses: Viet Nams garment sector is a hot market right now, but there are over 2,000 garment businesses already. Businesswomen that want to be successful should find a way to be unique and standout from the competition. Vietnamese businesses must keep in mind that our products are competing with Chinese and Thai-made goods. Our products need to be distinguishable and of good value to beat out these exporting giants. Price isnt necessarily the bottom line for many buyers either. Businesses should understand that product quality and how companies meet delivery deadlines are crucial to staying competitive. In my opinion, I would recommend businesswomen look into the service industry. This is a huge field with 155 different kinds of businesses outlined under the WTO. At present, many service sectors have not yet been tapped. It is opportunity for the future. In an effort to integrate more women owned smes into the opportunities that have opened up as a result of Vietnams WTO membership, several districts are implementing training and product promotion. In Binh Duong province, Huynh thi Kin Hoa employs more than 40 people in her three jewelry shops as well as in her factory manufacturing jewelry and is looking for increased opportunities to expand. Mrs. Nguyen Thi Bay, an owner of the Thanh Loc export bamboo company states that building a trademark is difficult. The company has grown from a small workshop of several workers, to in excess of 100 labourers and now earns annual revenue of over VND1bln. Her bamboo products are being exported to France, the U.S. and Holland. Mme. Nguyen feels that in the current competitive market, prestige and quality will create a reliable trademark. 6. Comparative experience of other WTO members 6.1. Japanese Sme Support Centres Supporting smes is a major focus of the government of Japan. The Small and Medium Enterprises Agency of Japan has established three types of business support systems for smes: 1) SME and 259

Venture Business Support Centers, 2) Prefectural SME Support Centres, and 3) Regional SME Support Centres. These centres, in collaboration with the private SME support institutions such as the Commerce and Industry Associations and the Chambers of Commerce and Industry, work as one-stop service counters which provide information concerning SME support strategies and implement support projects. SME Support Centers are established to provide one-stop services for smes, which include over-the-counter (OTC) consultation, dispatches of experts and incubator managers, on-site professional assistance, business feasibility assessments, information service and training programs. The focus of the centres is on business creation and new start-ups, and business innovation. The centres not only provide management strategy, marketing and consulting services to smes and entrepreneurs, but also they provide support for specific management issues of each sme. 6.2. India In India, the Small Industries Development Bank of India (SIDBI) has undertaken considerable research and training in order to increase the competitiveness of Indian smes in the face of globalization and the WTO. India has substantially liberalized its policies with respect to trade and industry. These have accelerated competition for smes not only in global markets but even in the domestic market due to the increased inflow of low cost imports and substantial FDI even in the previously sme dominated sectors. It was against this background that SIDBI initiated a series of WTO related sectoral studies to assess the impact of WTO Agreements on smes in order to recommend strategic policy initiatives to enable them to face the challenges of WTO and capitalize on the emerging opportunities. In the first phase the studies concentrated on: leather and leather products, gems and jewelry, drugs and pharmaceuticals, dyes and intermediates, textiles including readymade garments and toys many of these sectors are important to Vietnam as well. 147 6.3 South Africa South Africa saw the shrinking of the state and the increase of the private sector as many previously controlled state owned enterprises were privatized. In addition, they had to recover from trade embargoes and isolation brought about during apartheid as well as adjust to a new political regime. Most South African smes and women worked in the informal sector in manufacturing and agriculture which are two sectors vulnerable to open competition. These vulnerable groups had to learn to lobby to protect their traditional knowledge and rights. They also had to learn to scale their production as tariffs came down. South African smes benefited from trade simplification and harmonization. They created export councils to promote products and saw an increase in textile exports of 40% in five years. All of this required good and permanent feedback between the private and public sectors on issues such as poor infrastructure and encouraging exporters to negotiate together for better economies of scale. This helped them to attract inward investment as they developed better export promotion for their smes. 6.4.Chinese Taipei Chinese Taipei has been very creative and aggressive in supporting and developing their sme sector through their Small and Medium Enterprise Administration, of the Ministry of Economic Affairs. SMEA issues annual white papers with substantial research and analysis and directions for smes. As part of their membership in APEC, they have taken the lead in hosting conferences and training and have been instrumental in creating opportunities through such innovations as incubators, promoting the high use of technology and information, developing the crafts industry and encouraging the use of the One Village, One Product model created by Japan and also
147

Small Industries Development bank of India, www.sidbi.net 260

implemented in Thailand. In addition to creating a supportive business environment at home, Chinese Taipei enticed many highly trained, educated and experience former Taiwanese to return home by giving them the opportunities to start their own businesses with favourable grants and incentives, thereby encouraging these important assets to return with valuable information and market access opportunities. 6.5. New Zealand Although New Zealand is a highly developed economy, it is a small country in a remote location that must maintain its competitiveness in the world. Virtually all private enterprises in New Zealand with the exception of a few are smes which are truly the backbone of the economy and the source for most jobs in New Zealand. For New Zealand, the WTO has provided a sense of security because the rules-based trading system protects the smaller players that have limited abilities or resources to influence the policies of larger, more powerful countries. 6.6. Chinas experience of smes in its post WTO accession It has been five years since China acceded to the WTO and therefore worth taking a look at the effect of WTO membership on Chinese smes. Comparison to China is difficult as it is virtually in a class of its own due to the sheer size of the population and opportunities of the country. Transnational companies and foreign governments have been competing to enter the Chinese market. The opening up of China and its borders and liberalization of its policies has been nothing less than astounding, including how rapidly the changes have been able to occur. The very nature of the Chinese phenomena has touched billions of people worldwide. From attracting unheard of amounts of FDI to becoming virtually the manufacturing base for the world, the explosion of the Chinese entry into the world trading system has created an unheard of global integration of business production, management, services and economies never seen before. China has now become the 4th largest economy in the world and recently surpassed Canada as the number one exporter to the U.S. Virtually no industry has been left unaffected by the influence of China. Trade volume for China is expected to exceed two trillion dollars in 2007. China has become the second largest producers of cars, there has been more openness in all areas, their market system has improved and the pressure of such explosive growth has forced SOEs to reform faster than planned. Private sector companies have sprung up all over with many becoming world leaders such as Alibaba. Companies which started as smes have grown to become some of the most competitive in the world. China prepared in advance for its WTO accession by putting into place policies and procedures that would speed up the development of smes and the private sector. Traditionally a culture of small businesses and shops and retail, the young, educated population of China opened its arms to the creation of new technology and markets. With such a large market, Chinese smes had an advantage with respect to foreign companies due to difficult language and cultural conditions. Most countries must accept foreign languages such as English in order to successfully trade in the global market. While that is also true of China, the Chinese market is so huge, many foreigners had to adapt to the Chinese languages and cultures. China encouraged the education of its young people in Western ways and languages and welcomed back the huge network of successful overseas Chinese with their networks, knowledge of western markets, needs, standards and management while providing low cost labour and rapid turnarounds. China also improved its social security system and invested in order to develop informal sectors into formal sectors and create new jobs. Undertaking huge international events such as the APEC 261

Leaders meetings in 2001 and the 2008 Beijing Olympics helped focus the world on China and create opportunities for FDI and smes to become suppliers for such world scale events. Domestic benefits have been summarized in four areas:148 Gains in international trade Huge gains by specific sectors such as industrialization, automobiles, virtually all of those that were liberalized Development gains with respect to more FDI, FDI related employment and tax income from foreign companies Reform gains with the market system improved, domestic companies increased their competitiveness Negative impacts were smaller than expected and included: SOEs non performing loans Inappropriate investment in sectors with over capacity Low agriculture productivity and lack of advancement in methodology Regional inequality between coastal and inland areas has increased significantly Dependency on imported resources has increased 7. Lessons learned The most important lesson to be learned from the Chinese experience is that for change to occur there must be the political will to do so. There must be a vision and a plan to systematically support the creation, growth and sustainability of smes in order for the economy to grow. While much of the work force is still dependent on cheap labour and low cost manufacturing, there also needs to be an educated management level, a thriving service sector and infrastructure for technology as well as energy and transportation. Investments in such sectors are necessary but reap many rewards. As Vietnam becomes more interconnected with the world economy the biggest risk is that of inflation caused by uncontrolled growth and being pegged to a declining currency such as the US dollar. China has experienced the widening in the standards of living and opportunities between the coastal and inland communities. Vietnam should learn from this and try to integrate its rural communities as much as possible in its economic development plans and continue to test the expansion of new technologies such as broadband in these regions. Chinas economic growth has occurred so quickly that many international standards were not put in place. Hence the increasing number of scandals relating to toxic paint on childrens toys, poison elements in pharmaceutical components, unsafe food composition and other substandard qualities that in some cases have even led to deaths. This has had a negative impact on the reputation of China and is now causing a backlash against made in China products. As consumers become savvier about working conditions, child labour, corporate social responsibility and good corporate governance have become the poster children for good corporate practices, there has been more pressure for companies to comply with higher ethics and standards. Vietnam should learn from these incidents in China as well as the public relations backlashes that they cause, and implement good international and transparent standards from the beginning.

Hu, Angan, China in 5 Years after WTO Accession: Sharing Experiences with Vietnam, paper delivered in Hanoi and HCMC, September 2007 262

148

8. Recommendations to enhance the successful development of the Vietnamese sme sector after WTO accession Issues Access to finance Smes often lack the training on how to apply for loans Smes often do not understand what to do with financing if they do receive it Costs of financing are often prohibitive Banking staff often do not understand business issues of smes or communicate in condescending manners Access to information About new WTO obligations About new legislative requirements or procedures About standards and conformance About their own industry About innovation Recommendations Promote new financing products Improve skills of banking and financing staff Improve skills of sme management in loan applications and dealing with financial institutions Develop attractive financing options focusing solely on sme development and growth

Promote and support business associations Develop business information centres with trained sme counselors Use media as much as possible Develop simple guides such as those created in India specifically for smes Participation by both private and public sectors in innovation fairs in Asia Undertake joint public private partnerships with technology companies to assist with developing attractive and innovative packages that can assist smes to invest in technology Ensure that low cost, reliable internet access is available for all throughout Vietnam including rural areas Provide incentives for smes to train personnel on technology as an investment for growth and competitiveness Develop training centres for smes with courses available at low cost and at a time and place that are convenient for smes to attend Develop training partnerships with associations and NGOs including foreign chambers of commerce and foreign companies

Access to technology Smes do not have the capital to invest in technology Telecommunications are either too costly or undependable or not even available in remote areas Smes do not have the human resources to invest in technology

Access to training and human resources Lack of skilled management Lack of experienced skilled employees Lack of time or resources to invest in training Lack of knowledge about what is needed

263

Access to markets Lack of information of markets Inadequate understanding of standards and compliance Insufficient capital to develop markets

Access to land and property Difficulties in land titles Unable to use for collateral

Inadequate infrastructure Lack of roads and transportation for shipping and transport Lack of telecommunications systems Unreliable or inadequate energy for growth and development Rapid and massive structural reform Access to current information about new regulations and procedures Difficulty keeping up with and complying with changes Lack of understanding about reforms

Promote simple materials and guides for smes through media, associations, and other means of distribution Education and promotion programs Training of trade promotion officials on smes and opportunities Trade shows, branding Vietnam, low cost trade missions Export development programs that support sme exports, insurance and market development Joint programs with foreign investors, associations, chambers of commerce Simplify application and registration procedures Work with local authorities, associations and other stakeholders to develop workable solutions that can assist smes and protect land and property rights Continue to invest in infrastructure development Provide incentives for alternative energies

Use of media and other means of communication to increase information flow (through associations and local centres0 Simplifying regulations and reporting as well as reducing regulatory burdens Improve training of civil servants as well as training to sme on legal and regulatory reforms Encourage smes to invest in young people, language and technology

264

9.References Bui Huy Son, MUTRAP ll paper, Impact of the WTO on Distribution Services, 2008 Communication from Canada, Working to Ensure Benefits from GATS for Members Small and Medium Sized Enterprises, circulated to members of the WTO Council for Trade in Services, TN/S/W/36, and 22 February 2005 Dang Duc Anh, MUTRAP II paper, Impacts of Vietnams WTO Membership on Macroeconomic Performance and Policies, March 2008 Deputy PM Pham Gia Khiem, speech presented to Trade and Investment forum, 11 January 2008 Dinh Hien Minh, According to Decision No. 681/CP-KTN (June 1998 by the Vietnamese Government), small and medium enterprises are determined by both labour and capital. A firm with an employment of less than 200 workers and less than VND 5 billion capital is defined to be an SME. Otherwise it is considered to be large. Paper prepared for MUTRAP ll on the Preliminary Impact of the WTO on Industries, 2007 Federation of Indian Micro and Small & Medium Enterprises, A Brief Guide to the WTO for Small Business (2000) page 5, www.fisme.org.in Hookway, James, Slumping dollar gives Vietnam a painful lesson in economics, The Globe and Mail, 19 March, 2008 p. B13 Hu, Angan, China in 5 Years after WTO Accession: Sharing Experiences with Vietnam, paper delivered in Hanoi and HCMC, September 2007 IFC Private Sector Discussions, Number 21, Women Business Owners in Vietnam: A National Survey IFC/World Bank, Doing Business 2008 John, Karl D. Vietnams WTO Hopes and Dreams, www.x-vietnam.org Lever, Andrina The Implications of WTO Membership on Vietnamese SMEs, July 2007 Minder, Raphael Broadband makes connections in rural Vietnam, Fianancial Times, 6 February 2008, page 10 Ministry of Finance, SMEs plan for WTO accession, 12 December 2005, www.mof.gov.vn Nguyen Dang Binh, Report on Comprehensive Evaluation of the Impact of Increased Key ImportsExports and Regulatory Changes Resulting from Vietnams WTO Membership, MUTRAP ll, December 2007 Pham Chi Lan, Phu nu Thu do (Capital Women) newspaper, 27 January 2007 Pham Chi Lan, Vietnams WTO Accession and Its Impact on Business Environment, speech delivered to Vietnam Trade and Investment Forum, 11 January 2008 265

Quang, Ming, Local enterprises readying for expansion as they expect booming economy to keep rolling, Thanh Nien News, 12 February 2008 Quang Ming, Vietnam looks to clear foreign business obsacles, Thanh Nien News, 19 March 2008 Small Industries Development Bank of India, www.sidbi.net Vietnam News, Phu nu Thu do (Capital Women) 27 January 2007 Viet Nam News, 18 December 2007, page 15

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CHAPTER V: THE SOCIAL IMPACT OF VIETNAMS ACCESSION TO WTO

1. Trade liberalization and poverty: a conceptual approach; 1.1.The macroeconomic link; 1.2. The microeconomic link; 1.2.1. The distribution sector; 1.2.2. Enterprises: profits, wages and employment; 1.2.3; Trade taxes and government spending; 2. Economy-wide models and sectoral studies; 3. The empirical evidence; 3.1. Poverty reduction; 3.2. Human development; 3.3. Employment; 3.4. Wages; 3.5. Industrial relations; 3.6. Gender; 3.7. Child labour; 4. Possible adverse effects; 4.1. Impact of specific WTO commitments; 4.1.1. Agriculture; 4.1.2. Manufacturing; 4.1.3. Services; 4.1.4. Intellectual property rights; 4.2. Impact of international economic integration; 4.2.1. External shocks; 4.2.2. State-owned enterprises; 4.2.3. Internal migration; 4.2.4. Income inequality; 5. Policy options; 6. Bibliography

Introduction In this chapter, the topic of the social impact of Vietnams accession to WTO will be approached in a broad fashion. First, the analysis will cover not only the effects of the countrys commitments to accede to WTO, but also those of a wider range of trade reforms and capital account liberalization policies implemented by the Government since the mid-1990s to pave the way to its WTO accession. Second, the chapter will encompass a variety of subjects, including poverty, human development, employment, migration, gender, income distribution and child labour. 1. Trade liberalization and poverty: a conceptual approach Before examining Vietnams experience and prospects in the relationship between trade liberalization and poverty, it is useful to provide a conceptual framework for a theoretical and empirical analysis. Following Winters methodology149, the link between trade liberalization and poverty can be examined from two perspectives: The macroeconomic link: how openness affects poverty through its impact on economic growth. The microeconomic link: trade liberalization can produce direct effects on poverty via three different channels: a) changes in prices of goods and services; b) impact on profits and hence on wages and employment; c) changes in the governments fiscal position. 1.1. The macroeconomic link The macroeconomic relationship between trade liberalization and poverty has recently been the subject of ample debate in the economic literature.150 There is a broad agreement among economists and development specialists that economic growth is a prerequisite for sustained poverty alleviation. Admittedly, growth can worsen income distribution, but there is no evidence that uneven income growth has increased absolute poverty (the number of people or households in a country falling below the poverty line). There is, however, a strong controversy over the impact of openness on economic growth. Theoretically, in the long term, liberalization can increase welfare by improving the countrys productivity in three different manners: a) increasing the efficiency in the use of existing resources by raising the degree of competition faced by domestic producers; b) promoting specialization in sectors in which the country has a comparative advantage; and c)
149 150

Mc Culloch, Winters, and Cirera (2001); Winters, McCulloch and McKay (2004). Winters, McCulloch and McKay (2004). 267

stimulating economies of scale by means of exports to world markets. In the short term, however, trade liberalization is likely to bring about adjustment costs, such as losses in incomes and jobs in the formerly protected sectors. Empirically, the argument that openness has a positive long-term effect on growth has received strong support but still lacks conclusive evidence. At the same time, trade liberalization has not been identified as an obstacle to growth and, more important, there is strong evidence for the beneficial impact of trade liberalization on productivity. Furthermore, there is no convincing evidence on the negative impact of trade liberalization on macroeconomic instability, a phenomenon that could adversely affect growth and poverty. 1.2. The microeconomic link The direct effects of trade policy on poor individuals and households can be better gauged by examining a simple analytical scheme linking the two variables through three groups of institutions: a) the distribution sector; b) the enterprises and c) the Government (Figure 1). In this scheme, the household income is typically the sum of wages, profits from household production, and official and private transfers.

Source: Winters (2000) 1.2.1.The distribution sector The most direct impact of trade liberalization on households is to change prices of goods or services. Households will be better off if they are net sellers of the good or service for which there is a price increase and, conversely, they will be worse off if they are net buyers. Changes in prices of goods (consumer, intermediate or capital goods) brought about by trade policy are transmitted to households through the distribution sector. Figure 2: Trade policy and poverty Causal connections

268

Source: Winters (2000) Figure 2 shows how a trade policy action, such as a tariff reduction, might work through to the variables determining household welfare in a given country. For example, the world price of an imported good, the tariff it faces and the exchange rate combined define the post-tariff border price. If we add to it domestic taxes and transport costs from the port to major distribution centres, we obtain the wholesale price. From the distribution centre the good is sent out to more local distribution points, and potentially faces more taxes. The resulting price is the retail price. Finally, from the retail point, goods are distributed to households and individuals. The translation of price shocks into economic welfare depends on the households characteristicsits endowments of time, skills, land, etctechnology and random shocks such as weather. The same channels apply to exports, starting from the bottom of Figure 2. The export good produced by the household is sold to local marketing institutions at farm-gate prices, aggregated into the national supply of the good concerned and finally exported. At each stage the institutions involved incur costs and add mark-ups, all of which enter the final price. If the export price is determined by the price on world markets, all such additions occur at the expense of the farm-gate price that determines household welfare. Figure 2 is a useful tool to focus on the price transmission channels and the role of the distribution sector in determining the effects of trade policy shocks on poor households. As an example, the transmission of price changes can be severely limited by the anticompetitive behaviour of exporting or importing firms and other distribution centres. In some situations, the tariff reduction will not translate into a benefit to the consumer in terms of a lower final price but it will bring about an increase in the intermediaries markups. In extreme cases, trade liberalization can trigger the disappearance of marketing institutions, thus insulating households from the market.151 In addition, for poor households living in remote regions, such as Vietnams ethnic minorities, price transmission can be marginal unless it is accompanied by complementary policy measures. Furthermore, if many goods are liberalized at the same time, as is usually the case, the net effect on each household is quite complex, being the sum of many individual price changes which will affect them in different ways, positively or negatively, and in different degrees.
151

For the empirical evidence of incomplete transmission of world prices to rural households, see Hertel and Winters (2006). 269

The overall welfare impact of a price shock will depend not only on the initial first round direct effects discussed above but also on the households reaction to the shock, its capacity to adjust, for instance, by reducing consumption or increasing production of a good experiencing a price increase. This reaction will trigger second round indirect effects on another market that may not have been directly affected by the trade policy action. The scope of these second round effects is determined by the domain over which the second round goods and services are traded. As illustrated on the far right of Figure 2, the domain can range from non-traded subsistence goods to regional, national and international markets for tradables. The trading domain will determine the number of people and institutions that will be affected by the second round effects. There is a widespread concern that trade liberalization will expose not only the entire nation but also households to greater risks. Admittedly, they will have to face new risks, but it can be argued that because international markets, typically with many players, are more stable than domestic markets, the overall risk can be reduced as a net effect. However, poor households are obviously much less able to withstand negative shocks than better off families, a point that will be discussed later. 1.2.2.Enterprises: profits, wages and employment The circles on the left hand side of Figure 2 portray the effects of trade on poverty through the enterprises. These are meant to be units producing and selling output and employing, either formally or informally, labour from outside their households. These activities are undertaken through market transactions, linked to border, wholesale and retail prices, as shown in the figure. In examining the impact of the enterprise sector on poor households, a crucial element is the behaviour of the markets for the factors of production (land, labour, capital), where demand for factors is matched with supply through movements in factor prices (rent, wages, profits). In this process, two variables of critical importance to poverty, namely employment and wages, are determined. There are two different theoretical approaches explaining how this may take place: 1. A trade theory approach, assuming a fixed economy-wide level of employment and flexible wages. In this context, price changes associated with trade liberalization will trigger changes in wages, with employment staying the same. A classical example of this approach is the Stolper-Samuelson theorem,152 which proves that an increase in the price of the labour-intensive good raises real labour incomes and reduces real returns to capital. Typically, trade liberalization causes a rise in the price of exportable goods, which are likely to use intensively a countrys abundant factors, i.e. labour in most developing countries. At the same time, trade policy reforms will reduce the price of importable goods, which are likely to use scarce factors, such as capital. As a result, developing countries, being labour abundant, should experience an increase in real wages. The impact on poverty alleviation will obviously depend on the extent to which poor households depend on wage jobs, as opposed to self-employment and on whether the wage increase is sufficient to move the household beyond the poverty line. 1. In the development theory approach, wages are fixed but employment is variable. Trade liberalization will then bring about changes in employment, not in wages. If increased employment in the formal sector takes place at a wage level that is higher than the subsistence wage, there will be a positive impact on poverty.

For a detailed explanation of the Stolper-Samuelson theorem, see Krugman and Obstfeld (2003) and, for a more technical treatment, Feenstra (2004). 270

152

In the real world, both impacts will be felt. The trade theory approach is more suitable to explain the behaviour of the market for skilled labour, characterized in many developing countries, including Vietnam, by near full employment. By contrast, the development theory approach is more useful for analyzing the functioning of the market for unskilled workers where the supply of labour can be considered as almost perfectly elastic. The net effect of the two different impacts will depend on the relative flexibility of wages and employment. The empirical evidence on the effects of trade policy reform on wages and employment shows that these effects are not easily predictable. If trade liberalization stimulates the demand for labourintensive products, it increases the demand for labour, and either wages or employment (or both) will increase. There are, however, revealing circumstances, where capital-intensive natural resources, such as petroleum and minerals, play a predominant role in exports or where sectors producing import-competing goods are adversely affected by price shocks. But even when trade reform boosts labour-intensive exports, poverty will be hardly affected if such exports rely mostly on semi-skilled labour, while the poor, who could be the least skilled and illiterate workers, are predominantly employed in non-traded and subsistence sectors. This issue is related to a broader debate over the relative wages between skilled and unskilled labour, i.e. the skills gap, an indicator that affects income inequality, but not necessarily poverty. In many developing countries, particularly in Latin America, this gap widened over the past 15 years, as opposed to the earlier experience of East Asia where it narrowed as a result of trade reform.153 This more recent evidence does not conform with the conventional wisdombased on the StolperSamuelson model described aboveaccording to which trade liberalization in developing countries, which are typically richly endowed with unskilled workers, would benefit more from this category than skilled workers. This trend can be explained by several factors including the much greater international mobility of extremely highly skilled workers since the 1990s, accompanied by a wider use of outsourcing involving the employment of workers that are relatively skilled in their own labour market, although relatively unskilled compared to developed country workers they have replaced. Furthermore, and perhaps more importantly, skill-biased technological change favouring skilled workers may have interacted with trade reforms in lowering the relative demand for lowskilled labour. 1.2.3.Trade taxes and government spending The third key link between trade and poverty, through trade taxes and government social spending, is shown on the right hand side of Figure 2. A widespread concern among policymakers and civil society is that falling tariff revenues resulting from trade liberalization will reduce social spending, thus hurting the poor. There is, however, no simple link between trade reform and revenues, either theoretically or empirically. Theory, in fact, suggests that tariff revenue will increase with tariff reduction if the initial tariff level is not optimal, i.e. if it exceeds its revenue maximizing level, as in the case of tariffs that are so high that in effect prohibit imports and thus produce no revenue. In addition, tariff revenue may rise as a result of tariffication, that is transforming quantitative restrictions into tariffs. Positive revenue effects can also originate from improved tax collection and lower level of evasion associated with falling tariff rates. On the empirical front, there is mixed evidence regarding the impact of trade liberalization on tariff revenues, with some countries experiencing an increase in revenues and others a fall. Furthermore, there is no direct evidence linking trade reform with reductions in social spending. However, the experience of the East Asia crisis in the late 1990s, characterized by much stronger shocks than
153

See Goldberg and Pavcnick (2007) and Winters, McCulloch and McKay (2004). 271

trade liberalization, suggests that social spending benefiting the poor can be substantially shielded if there is political will. To summarize, a number of conclusions can be drawn from the preceding theoretical and empirical analysis of the several macroeconomic and microeconomic links between trade reform and poverty alleviation: 1. The linkages between trade liberalization and poverty are extremely complex and specific to individual countries, policy instruments, the socio-economic features of the poor households, including their sources of income and the role of intermediaries in price transmission. It is thus very useful for policymakers to focus on the various channels linking the two policy variables. 2. Although on theoretical and empirical grounds, trade liberalization is expected to result in poverty alleviation in the long run, there may be, at least in the short term, losers, some of which belonging to poor households. 3. Poorer households are less capable than richer ones to withstand the eventual negative effects of trade reform or to exploit new opportunities. In this context, there is a key role to be played by government action aimed at strengthening social protection for losers and strengthening the ability of poorer households to take full advantage of positive changes. 2. Economy-wide models and sectoral studies Several studies have recently been conducted on the socio-economic impact of Vietnams integration into the world economy, including three surveys assessing their results.154 These studies can be grouped into two categories: 1) 16 economy-wide computable general equilibrium (CGE) models: these simulate the effects of changes in tariffs and subsidies on output as well as factor prices, by taking into account existing relations among the different sectors, factor markets, households and the government; and 2) 14 sectoral studies: these predict the impact of openness on production and employment of specific sectors, by taking a partial approach, which ignores feedbacks among markets and activities and are based instead on deep knowledge of sectors and related actors. Figure 3 - CGE models: expected changes in output of selected sectors

154

See Vietnam Development Report 2006; Abbott et al (2006); Abbott, Bentzen, and Tarp (2007)

272

Source: Vietnam Development Report 2006 There are some common patterns emerging from the different scenarios contained in the CGE models. They predict a robust growth in the production of textiles and garments, trade and freight, petroleum and lubricants and paper products. However, the output of equipment and machinery, electric and electronic equipment, transport vehicles and personal services is expected to decline significantly (Figure 3). The sectoral studies provide more details on the possible effects of integration, as they separate the economic from the social effects and thus are more useful for the purposes of this chapter. On the whole, their results are less positive than those coming from the CGE models (Table 1). Table 1 Sectoral studies: economic and social impact in selected sectors

Source: Vietnam Development Report 2006 CGE models too can foresee possible social effects by simulating the impact of trade liberalization on factor prices, i.e. wages, returns to capital and rents, and, thus, estimating the change in total income by household type. The results of the Vietnam studies, however, are unclear as the expected increases in the prices of the various factors of production are similar. The CGE models, therefore, do not predict any major change in income distribution. But the projected increase in wages for 273

unskilled labour bodes well for poverty alleviation (Figure 4). On the whole, there is conflicting evidence on poverty reduction, with some models predicting an increase in the poverty rate. Furthermore, the impact of trade reform on poverty seems to be small compared to the effects of tax regimes that could replace the loss in tariff revenue. In this respect, it is useful to mention the results of one of the latest models, prepared by the International Monetary Fund after Vietnams accession to WTO155. In this partial equilibrium model, annual revenues from import tariffs are projected to fall by about US$300 million (roughly 0.4 percent of GDP) in 2007, and by US$650 million (0.5 percent of GDP) by 2012, before levelling off at around US$700 million from 2013 onwards. The significant revenue losses predicted over the next five years have triggered calls for increased efforts to expand other revenues, with no incidence on poor households. The most interesting studies are those156 examining the microeconomic effects of trade reform in Vietnam over the five-year period 1993-1998 (unfortunately too short to draw longer-term conclusions), in terms of the three pathways of transmission prices, employment and wages, and the fiscal channel, described in Figure 2. These studies conclude that poverty was reduced as a result of trade reform, including the liberalization agricultural markets, particularly for rice, which induced many subsistence farmers to become more market oriented. Exports and imports boomed and the prices of some tradable goods increased strongly. The analysis found evidence of transmission of these impacts at the household level, with the real incomes of the poor increasing because of their involvement in the rice, coffee and light manufactures sectors. Figure 4 - CGE models: expected changes in returns to capital and wages

Source: Vietnam Development Report 2006 The outcomes of all these studies, both CGE models and sectoral analyses, should be treated with great caution. They provide no more than an order of magnitude and direction for possible effects, because they suffer from severe limitations highlighted in Box 1 below.

155 156

IMF (2007)
Niimi, Vasudeva-Duttaand , and Winters (2003); Isik-Dikmelik (2006); World Bank (2007b)

274

A critical review of the CGE studies157 suggests that future research should address issues related to institutional reformsand their effects on incentives to investand trade in services, as well as the important role played by unemployment, productivity growth and international capital flows in determining the economic and social impact of international economic integration. Box 1 Shortcomings of CGE models and sectoral studies CGE models are static and, therefore, do not capture the effects of trade liberalization on investment and productivity. CGE models assume that domestic markets are perfectly competitive before trade reform and that there are no economies of scale. CGE models do not capture regional differences. The results of CGE models are sensitive to key assumptions, which can be selected so as to obtain desired outcomes. CGE models do not capture the impact of legal reform, liberalized trade in services, increased FDI flows, all policy areas that are perhaps more important than tariff cuts. CGE models can hardly predict new emerging sectors with small initial shares. CGE models can, basically, only explain the price effects of trade liberalization, which appear to be modest. CGE studies have based predictions of the impact of WTO accession by Vietnam on analytical modeling frameworks, which are similar to those that have failed to predict the past success of bilateral trade agreements, such as those concluded with the EU, ASEAN and the EU. Some sectoral studies provide little quantitative information in terms of predictions and assessments. A number of sectoral studies focus on advocating policy measures that are needed to seize important benefits. 3. The empirical evidence This section examines the empirical evidence on the effects of international economic integration on a number of social aspects, such as poverty reduction, human development, employment, wages, industrial relations, gender and child labour. 3.1. Poverty reduction Since the early 1990s, trade liberalization has coincided with a stellar performance on poverty reduction. This is shown by a sharp drop in Vietnams poverty rate, measured in terms of the national poverty line, from 58 % in 1993 to 16% in 2006, a decline of slightly above 40 percentage points. Over the same period, the poverty gap, which measures the average income shortfall of the poor in terms of the poverty line, narrowed massively from 18 % to 4 % (Figure 5).

Figure 5. Poverty reduction in Vietnam, 1993-2006

157

Abbott, Bentzen, and Tarp (2007). 275

60.0 50.0 40.0 30.0 20.0 10.0 0.0 Poverty rate Poverty gap 1993 58.1 18.5 1998 37.4 9.5 2002 28.9 6.9 2004 19.5 4.7 2006 16.0 3.8

Source: Vietnam Development Report 2008 As shown in Table 2, the most significant decline in the poverty rate occurred among the urban households and the Kinh and Chinese communities. By contrast, rural households and ethnic minorities still lag far behind, despite the important progress that they have registered since 1993. Interestingly, the distance between urban and rural households in terms of poverty gap is shorter than in terms of poverty rate. Furthermore, Vietnam outperformed other East Asian countries, by reducing poverty (at $1 PPP a day) faster than China, Indonesia and Thailand and any other country in the region (Figure 6). However, despite the plethora of analytical studies, it is not possible to determine the extent to which global economic integration and the concomitant export boom have contributed to such a remarkable record in poverty alleviation. Table 2: Poverty rate, food poverty and poverty gap, 1993-2006

Source: Vietnam Development Report 2008

Figure 6: Reduction in poverty rates Cross-country comparison 276

Source: Vietnam Development Report 2007

3.2.Human development Since the mid-1980s, Vietnam has made outstanding progress not only in poverty reduction, but also in the area of human development. According to the UNDP, human development is defined as the process of enlarging peoples choices. Their three essential choices are: to lead a long and healthy life, to acquire knowledge and to have access to the resources needed for a decent standard of living. UNDPs Human Development Index (HDI) is a composite index that measures the average achievements in a country in those basic dimensions of human development: a long and healthy life, as measured by life expectancy at birth; access to knowledge, as measured by adult literacy and combined gross enrolment in primary, secondary and tertiary level education; a decent standard of living, as measured by GDP per capita in Purchasing Power Parity US dollars (PPP US$). The concept of human development is undoubtedly much broader than what the HDI can measure. However, the HDI constitutes a powerful alternative to the traditional GDP per capita as a summary measure of human wellbeing. Table 3 Vietnams ranking in the Human Development Index, 2005

Source: UNDP (2007)

277

In 2005, Vietnam reached an HDI value of 0.733, ranking 105th out of 177 countries covered by the HDI (Table 3). The position attained by Vietnam is remarkable for the following reasons: The country is classified in the medium human development cluster (HDI of 0.500 0.799)158, together with many countries with much higher levels of GDP per capita. This means that, despite its low income level, Vietnam has been able to achieve relatively high health and education standards As an example, Vietnams HDI value is equal to Algerias, while Algerias income is more than twice Vietnams. The latter country exhibits higher values in such indicators as life expectancy and adult literacy rate. Chinas HDI value, at 0.777, is somewhat higher than Vietnams, but Vietnams performance is somewhat better in terms of life expectancy and about the same in terms of adult literacy. Table 4 Trends in the Human Development Index, 1985-2005
1985 1990 1995 2000 2005

C INA H A G R L E IA V IE NA T M IN IA D

0.595 0.613 0.590 0.487

0.634 0.652 0.620 0.521

0.691 0.672 0.672 0.551

0.732 0.702 0.711 0.578

0.777 0.733 0.733 0.619

Source: UNDP (2007) Turning to long-term trends in human development, it is noteworthy that since the launching of the doi moi in the mid-1980s, Vietnams HDI value grew rapidly from 0.590 in 1985 to 0.733, faster than Algerias but not as fast as Chinas (Table 4). Interestingly, another Asian tiger, India, still lags far behind Vietnam, despite the formers recent improvement in social indicators. In fact, in 2005 India reached the level of human development (0.62) that Vietnam had attained in 1990, i.e. 15 years earlier. 3.3.Employment During 1996-2007, high economic growth, spurred by the expansion of exports and external capital, generated a number of important employment effects, both quantitative and qualitative: Total employment grew at an annual rate of 2.32%: nearly 925,000 new jobs were created every year (Table 5). Urban employment, which is, in principle, better remunerated than rural employment, rose by 4.9% per annum, much faster than rural employment, growing at 1.72%. The share of rural jobs in total jobs thus declined, albeit slowly, from 85% in 1996 to 75.5% in 2007. This trend has been accompanied by a large migration from rural to urban areas entailing not only economic benefits but also social costs.

Table 5: Employment of labour force aged 15 and above, 1996-2007 (1000 people) Year National Total
158

Rural Female Total Female

Share of rural / total (%)

UNDP has created two other clusters of countries: high human development (HDI of 0.800 or above) and low human development ( HDI of less than 0.500). 278

14,630 1996 35,385 17,997 28,553 15,050 2000 38,367 19,075 30,055 45,558 22,042 34,384 16,793 2007 2. Growth rate , % per year, 1996-2006 2.32 1.86 1.70 1.23 3. Growth level, thousand of people per year, 1996-2006 925 386 530 192 Source: GSO and MOLISA

80.7 78.3 75.5

0.57

The rapid increase in urban jobs contributed to a reduction in the urban unemployment rate from the peak of 6.5% in 1998 to 5.1% in 2006 (Figure 7). Figure 7: Unemployment in rural and urban areas , 1996-2006 (1000 people and %)
800.0 600.0 400.0 200.0 0.0 199 6 286 410 0.9 5.6 199 7 591 461 2.0 5.8 199 8 319 547 1.0 6.5 199 9 349 560 1.1 6.4 200 0 323 562 1.0 6.3 200 1 602 505 1.9 5.4 200 2 296 575 0.9 5.8 200 3 378 571 1.1 5.6 200 4 352 575 1.0 5.4 200 5 361 569 1.0 5.1 200 6 440 590 1.2 5.1 7.0 6.0 5.0 4.0 3.0 2.0 1.0 -

Rural/NT

Urban/TT
%, Rural/NT % Urban/TT

Rural/NT Urban/TT %, Rural/NT % Urban/TT

Source: MOLISA

Export expansion has had a direct beneficial impact on job creation. Enterprise surveys in fact show that the higher the export orientation of enterprises the higher was the increase in employment (Table 6). During 1998-2006, employment in highly export-oriented firms grew almost three and a half times faster than in those with low export orientation. Furthermore, export specialization was associated with a strong increase in employment of better paid skilled labour.

Table 6: Employment in enterprises by export level159

Wage Labor Growth rate/year, 19982006, % 5.82

Wage Skilled labour Growth rate/year, 19982006, % 8.32

Sectors 1. Non export

159

Total (mil.people) 1998 2002 2006 5.66 6.38 8.90

Total (mil. people) 1998 2002 2006 2.04 2.22 3.86

Enterprises included in the survey are grouped into the following categories according to the level of their exports as a percentage of total output: (1) High export level : exports above 75% of total output (2) Medium export level : exports above 25% and below 75% of total output (3) Low export level: exports up to 25% of total output (4) No exports: = 0% of total output

279

2. Low export 4.54 4.41 3.78 3. Medium export 1.66 1.08 1.98 4. High export 0.29 1.07 1.24 Source: GSO, (VHLSS) 1998, 2002,2006

-2.29 2.29 20.02

0.29 0.22 0.08

0.26 0.16 0.12

0.60 0.39 0.28

9.39 7.41 17.60

A major shift took place in the sectoral composition of employment with the share of the primary sector (agriculture, forestry and fisheries) shrinking from 70% to 52%, while those of the secondary sector (industry and construction) and services rose to 19% and 29% respectively (Table 7). Table 7: Sectoral composition of employment, 1996-2006 (percentage) Agriculture, Year Total forestry, fishery 1996 100.00 69.98 2000 100.00 65.26 2007 100.000 52.33 Source: GSO and MOLISA Industry and construction 10.65 12.44 19.07 Services 19.37 22.31 28.60

As shown in Chapter 3, in manufacturing, employment in labour-intensive sub-sectors, such as clothing and footwear, grew faster than in the capital-intensive sub-sectors as a result of the formers stronger export performance. The share of wage jobs (i.e. jobs in the formal sector) in total employment grew from 17% to 24% (Table 8). This means, however, that a large proportion of the labour force is still employed in the informal sector, thus lacking good and secure working conditions.

Table 8: Share of labour by job status, % 1996 Total Wage jobs in state sector Wage jobs in non state sectors Employers Self employed Household labour without wage Other Source: GSO and MOLISA 3.4.Wages 100.00 8.45 8.33 0.72 36.31 45.8 0.39 2000 100.00 9.33 9.1 0.21 43.02 37.04 1.3 2007 100.0 10.26 13.1 0.4 41.9 36.5 10.4

280

The impact of globalization on wages has been equally positive. During 1998-2006, the average wage growth rate was 7,58 % per year (Table 9). As consumer prices increased by 4.2 percent per year, the annual growth rate of wages, in real terms, was 3.3 percent, only half of GDP growth rate.

Table 9: Wages, 1998-2006

Monthly wages (1000 VND)160 567.25 744.36 805.62 1018 Growth rate per Growth rate per year, 1998-2006 year 2002-2006

1998 2002 2004 2006

7,58

8.16

Source: VHLSS, GSO This trend is the result of three different factors: a) workers getting wage raises in their jobs; b) workers moving from lower to higher paying jobs in the same location; c) workers migrating typically from rural to urban areas - in search of better paid activities. Occupational and geographical mobility (i.e. the second and third factors) have played a major role in setting this favourable trend. The direct effects of international economic integration on wages can be gauged through two indicators: Enterprise surveys show that, during 2000-2004, the higher the export orientation of firms the higher was the wage increase. By contrast, growth in labour productivity was higher in enterprises with low export orientation (Table 10). Table 10: Growth in employment, wages and labour productivity by export level, 2000-2004
25.0 20.0 15.0 10.0 5.0 0.0 -5.0
Labor increase/Tng L No import/khng xu t kh u <=25% 25%-75% >75% 11.5 11.0 13.0 9.6 Wage increase/Tng TL -3.1 14.5 12.7 20.5 Labor productivity ncease/Tng NSL 1.7 12.2 5.3 -0.3

No import/khng xut khu <=25% 25%-75% >75%

Foreign-invested companies pay much higher wages than domestic firms, particularly compared to household business. The wage gap between the two categories has increased from 1.2 times in 1998 to almost 2 times in 2006 (Table 11). However, the wage gap between SOE workers and those of foreign-invested firms has disappeared a little bit.

Table 11: Monthly average wage per employee by enterprise ownership, 1998-2006

160

It corresponds to the average earnings of a full-time worker in domestic private enterprises. The figures include bonuses and overtime pay, as well as labor earnings from secondary occupations. They exclude the value of payments in kind and benefits such as health insurance or access to old-age pension.

281

Ownership

Household business Private and collective State FDI Wage gap between FDI/ household business, times 1.2 Source: VHLSS, GSO 3.5. Industrial relations

Average wage per month Growth rate per year (%) per employee, 1000 d 2006 (1998-2006) 1998 2002 2.34 552 606 664.2 6.77 554 771 935.5 8.55 572 1002 1,103 8.60 680 1037 1,316.0 1.7
1.98

Since 1995, labour disputes have significantly increased, particularly in foreign-invested enterprises (Figure 8). It is common for countries, such as Vietnam, in the process of market-economy transition, to face a steep rise in labour conflicts at the individual and collective levels. The main reasons for labour strikes in the FDI sector are the uncertainty of employment, high requirements for production targets, the limited role of trade unions and a lack of adjustment of the minimum wage accompanied by a strong increase in the cost of living. Figure 8 - Number of strikes by enterprise ownership, 1995-2006

Source: Vietnam Development Report 2008 3.6.Gender On gender issues, the Vietnam Development Report 2007 stressed that: Standard indicators of gender equality show Vietnam under a positive light. Girls do as well as boys in access to education and on nutrition. Labor force participation rates are as high for women as they are for men. .the representation of women in the National Assembly is the highest in the East Asia-Pacific region. However, there are two indicators showing women at a clear disadvantage. They refer to paid employment and to formal legal rights on household property. The most recent data throw further light on gender equality: As described in Table 5, during the period 1996-2006, female employment grew more slowly than male employment at the national level as well as in the urban and rural sectors.

282

On average, female workers earn less than male workers, but the gender gap in earnings has declined a little bit (Table 12). By 2006, female workers average income had risen to 79% of male workers wages, as a result of differential growth rates in wages over the preceding 6 years (7% per year for women against 3.5% for men). The gender gap in earnings varies significantly between different education levels and sectors. The largest gaps are found for skilled manual workers and for FDI workers. Foreign capital, therefore, has not directly contributed so far to achieving gender equality.

Table 12. Monthly average wages of female and male workers, 1998-2006 Monthly average wage per worker, 1000VND 2006 1998 Female Male Female Male 410 525 731 925 376 408 380 534 379 402 457 683 352 436 256 528 599 504 503 485 537 546 575 507 951 502 494 326 651 705 529 663 702 984 1,051 1,076 1,830 1,918 523 1,046 587 1,082 1,036 663 827 827 1,047 1,263 1,353 1,529 2,880 761 1,157 913 1,239 1,837 Wage increase Wage rate per year, between female 1998-2006 and male, % 1998 2006 Female Male 78.1 79.1 7.5 3.5 6.4 74.6 4.4 3.5 79.8 81.1 6.3 6.4 80.1 78.3 8.0 6.9 84.8 99.4 7.9 8.7 94.0 69.5 13.6 11.1 83.2 69.9 90.2 71.8 70.1 88.4 78.6 81.1 85.0 79.5 119.7 66.6 68.9 90.4 64.3 87.3 56.4 13.1 18.9 13.8 5.1 11.5 10.9 9.4 7.1 11.3 14.8 14.9 5.3 11.2 13.8 8.4 12.7

General 1. By education level No degree Primary school Lower secondary school Upper secondary school Technical worker Professional Highschool training/eductraination Junior College diploma Master Degree & Doctorate 2. By ownership Household State sector Collectve Private FDI Source: VHLSS

Export expansion has led to a positive impact on womens jobs. Survey data show that, during 1998-2004, the higher the export orientation of firms the higher was the growth in female employment (Table 13).

Table 13: Distribution of women earning wages by export level, 1998-2006 Percentage point change 1998-2006

No export Low Medium HIgh

1998 38.30 39.50 18.87 3.33 283

2002 42.97 33.80 11.01 12.22

2006 81.3 10.6 8.1

-6.35 7.86

Total Source: Enterprise surveys

100.00

100.00

Furthermore, in the most export-oriented firms, the share of female jobs in total jobs increased most rapidly (Figure 9)

Figure 9: Percentage of women in total wage jobs by export level

1.00 0.80 0.60 0.40 0.20 0.00 khng XK/no export 2000 2001 2002 2003 2004 0.33 0.28 0.26 0.62 0.27 <=25% 0.35 0.35 0.33 0.35 0.32 25%-75% 0.42 0.51 0.49 0.30 0.51 >75% 0.40 0.71 0.67 0.10 0.78 2000 2001 2002 2003 2004

Source: Enterprise surveys In addition, the most export-oriented companies hired the highest percentage of skilled women (Figure 10).

Figure 10: Employment of women by skill level and export level, 2004 (%)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% No export/Khng XK 24.68 20.08 4.66 50.58 Prof . secondary/THCN Col.Uni./C, H++

.
< 25 % 2.04 2.09 3.15 92.73 25-75% 4.72 2.43 5.27 87.58 >= 75% 2.63 4.13 19.46 73.78

Vocaltional/CNK T

No skill/khng CMKT

Col.Uni./C, H++ Prof . secondary/THCN Vocaltional/CNKT No skill/khng CMKT

Firms export orientation has had a positive impact on womens wages. In fact, over the last few years, the highest female wages have been consistently paid by the firms with the highest export orientation (Figure 11).

Figure 11: Womens monthly average wages by export level, 1000VND

284

Sources: GSO, VLHSS The export level, however, has had an adverse impact on gender equality. The firms with the highest export orientation consistently exhibited the largest gender wage gap, which widened over time (table 14). By 2006, that gap had reached 29%. Apparently, women in export industries, such as textiles and clothing, food processing and footwear, are relatively more concentrated in lower skills jobs than men.

Table 14: Trends in wages by gender and export level, 1998 2004 Export level Total 0 Low 1. Female wage as % of male wage 1998 0.78 0.83 0.73 2002 0.82 0.91 0.70 2006 0,79 0.77 2. Annual growth rate, % Female wage 7.5 5.66 Male wage 3.5 6.27 Differential (female - male) 4.0 0.61 Sources: GSO, VLHSS 3.7.Child labour Like most developing countries, Vietnam is afflicted by the problem of child labour, but its incidence, which was relatively high in the early years of doi moi, is today rather limited. The share of children aged 10-14 participating in economic activities sharply dropped from 13% in 1990 to 3% in 2004 (Table 15). This proportion is lower than in better-off countries such as China, Indonesia and Thailand. However, the issues of children dropping out of school and early working children are still obstacles for poor households and trade villages (Box 2 below). Table 15: Proportion of children aged 10-14 participating in economic activities, 1990-2004, percentage Country China 1990 15.2 285 2004 4.7 Medium High 0.74 0.71 0.58 9.08 4.88 -4.20 0.65 0.83 0.76 9.24 10.79 1.55

Korea, Republic of Mongolia Cambodia Indonesia Lao Malaysia Myanmar Philippines Singapore Thailand Vietnam Bangladesh India Pakistan Sri Lanka Australia Japan

0 2.5 25.6 11.3 29 4 26.1 10.7 0 20.2 13.3 32.5 16.7 20 2.9 0 0

0 0.8 23 6.4 23.9 1.4 21.7 3.3 0 9.3 3.1 26.1 10.2 13.5 1.2 0 0

Source: ILO Database on International Labour Standards (ILOLEX) There are several factors that may explain the strong improvement on the child labour front: Drastic measures were taken by the Government to curb this plague and they proved to be successful. To the extent that international economic integration reduces poverty, it is also expected to have a positive indirect impact on child labour since the incidence of this phenomenon is usually associated with poverty. Economic openness can also have positive direct effects on child labour. While trade liberalization entails an increase in the relative price of the exported products, trade theory provides ambiguous predictions on how this price change affects the incidence of child labour. A recent study examined the relationship between price movements of rice and the economic activities of children161. Using a panel of Vietnamese households, the authors found that reductions in child labour were increasing with rice prices. Income effects played an important role in this relationship. Rice price increases were associated with the largest declines in child labour in households that were large net producers of rice. Reductions in child labour were the largest for girls of secondary school age, and they found a corresponding increase in school attendance for this group. Overall, rice price increases accounted for almost half of the decline in child labour that occurred in rural Vietnam in the 1990s. Greater market integration, at least in this case, appears to be associated with less child labour. In conclusion, the sign of the effect of international market integration on local prices is obviously of great importance. Integration lowers prices of import-competing goods and might have different implications for child labour in households associated with the production of an import-competing product. However, most child labour in Vietnam occurs in either non-traded sectors or exportoriented sectors. Box 2
161

Edmonds and Pavcnik (2005)

286

Child labour in Vietnam, 2006 Studies on child labour, conducted by the Institute of Labour Science and Social Affairs (ILLSA) in conjunction with the ILO in 2006, show that many early working children come from households with difficulties, having chronically ill members or disabled members who have lost working capacity. Many parents, as a result of difficult circumstances, only want their children to do unskilled jobs regardless of the low pay and hard working conditions. Up to 50 per cent of working children are living outside the family structure and dropping out of school, as they have financial difficulties in attending school or their parents find no benefits of sending their children to school. Children mainly do such jobs as cook helpers in restaurants and unskilled work in electric welding, mechanics, garments and textiles. More than 80 per cent of working children are engaged in the private sector. There is a large proportion of child labour taking place in disadvantaged and unsafe working conditions. Source: ILSSA and ILO (2006). 4. Possible adverse effects Because of the difficulties encountered by recent macroeconomic and sectoral studies in producing reliable estimates of the social costs and benefits of trade liberalization, this section focuses on a simplified, qualitative, policy-oriented approach which attempts to capture the problem areas where potentially adverse effects of WTO accession commitments and, more broadly, of international economic integration on poverty, wages, employment might occur. 4.1.Impact of specific WTO commitments A number of WTO accession commitments could have adverse social effects on poverty and employment. These commitments encompass a variety of sectors including agriculture, manufacturing, services and intellectual property rights. For the purposes of this analysis, agriculture is the most important sector as most of Vietnamese poor households reside in rural areas and are engaged in agricultural activities. 4.1.1.Agriculture Vietnam is committed to reduce agricultural tariffs from the current average level of 23.5% to a final bound of 21% over a maximum of 5 years, which amounts to a marginal decline. But the abolition of tariff rate quotas on cotton, dairy products and maize, all import-competing products, raises some concern. Maize production has been already identified in the sectoral studies summarized in Table 1 as a problem area that might experience a negative social impact. It should be noted, however, that maize is not only a staple crop, which strengthens food security, but also an animal feed. Therefore, any decline in maize prices triggered by the tariff reduction will lower incomes of households that are net sellers of maize, while raising incomes of net buyers. Sugar production is another potential problem area, according to the results of the sectoral studies (Table 1). The replacement of licensing for sugar imports with tariff rate quota may result in a decline in sugar prices and incomes of sugar producers, provided that tariffication does not provide roughly the equivalent level of trade restrictions on sugar imports. In any case, Vietnam can replace sugar licenses with tariff rates up to 85%, a rather comfortable protection level. Sugarcane is cultivated mainly in poor and disadvantaged areas (the mountainous midland, central coastal regions, highlands and in the Cuu Long delta). Government policies supporting the sugar sector have a strong pro-poor content.

287

With regard to agricultural export subsidies, Vietnam is committed to abstain from them. The country, however, has a strong competitive edge in its main agricultural exports, such as rice, coffee and rubber. Nevertheless, the problem may arise in the case of a heavy fall in the export price of these commodities, which are subject to sharp fluctuations in international markets. Experience with export subsidies shows that in certain situations they may help increase exports and stabilize incomes and livelihood of rural households. Furthermore, a recent study on poverty trends in Vietnam points out that while a sharp price increase in most part of the 1990s helped many coffee growers escape poverty, the price drop in the late 1990s and the early 2000s pulled them back to poverty. This is a major cause of sluggish reduction in poverty in the Central Highlands between 1998 and 2002. Many poor in Central Highlands cannot participate in coffee production because they see it as too risky.162 Vietnam, however, is still allowed to support its farmers with measures that could have distortionary effects on trade (so-called Amber Box measures which, up to now, have benefited almost exclusively sugar production) of up to the equivalent of about US$250 million, in addition to the usual allowance for developing countries (known as de minimis) of up to 10% of the value of domestic agricultural production. In practice, only the subsidy for sugar, which at present is estimated at around 45% of the production value, needs to be downsized. 4.1.2.Manufacturing Vietnam is committed to reduce non-agricultural tariffs from the current average level of 16.3% to a final bound of 12.2% over 12 years. This relatively small reduction of 4 percentage points, however, conceals heavy tariff cuts for some manufacturing products. Upon accession, tariffs on textiles and clothing have declined from 36.4% to 13.5% and those on footwear from 43.9% to 27.2%. At the same time, subsidies have been removed for these products, which constitute, however, key export items, for which Vietnam has a strong comparative advantage. For other export products, new subsidies have been banned and existing subsidies will be phased out over 5 years. For import competing products, such as cars and motorbikes, the tariff reduction has been much less steep, from 90% to 70-74% over 7-12 years. This gradual approach to liberalization should help avoid compression of profit margins as well as labour shedding or further losses in troubled SOEs or declining firms. WTO accession is expected to improve Vietnamese exporters access to foreign markets. As a result of a growing volume of competitive exports, many manufacturing firms, may, however, be subject to the increased risk of antidumping measures in importing countries. Before accession, Vietnams exports have been hampered by these measures particularly in the United States (catfish) and the European Union (footwear, bicycles). The social cost of antidumping duties has been high. Reportedly, the EUs antidumping measures were expected to cause difficulties not only to 60,000 to 70,000 workers in the footwear industry but also to many others whose jobs serviced the industry and who were already living under the poverty line. Small enterprises mainly subcontracting lowprice shoes and enterprises slow to develop new designs were in the worst position, possibly facing bankruptcy. In principle, following WTO accession, Vietnam should be better protected against unjustified antidumping action by importing countries, because now it can use WTOs dispute settlement procedures. On the other hand, under the terms of its accession, Vietnam will remain on a list of socalled non-market economies (NMEs) for up to 12 years, which could make it more difficult for the country to avoid antidumping measures. In fact, it is argued that in an NME, domestic prices are
162

Vietnamese Academy of Social Sciences (2006).

288

not determined by supply and demand, making it difficult to determine the true costs of producing exports. Importing countries are, therefore, allowed, to apply antidumping duties justified by calculations based on costs in surrogate countries (e.g., Brazil, in the case of the EUs recent antidumping measure against footwear imports). Moreover, upon accession, the United States imposed a monitoring system on certain Vietnamese clothing imports to prevent possible dumping violations. This unprecedented action, which has been accompanied by the establishment of an export licensing system in Vietnam, might cause chilling effects on further trade and investment in Vietnam by a key trading partner like the United States. 4.1.3.Services As regards commitments in the field of trade in services, there are a number of areas deserving closer attention for the possible adverse impact on employment and poverty. These areas are distribution, banking and national treatment. Upon accession, the distribution sector has been opened up to foreign companies engaged in joint ventures that are allowed to operate in all but a specified number of products. The limit on foreign capital contributions will be abolished in 2009. Restrictions on products will be completely lifted by 2010. Liberalization is expected to increase competitive pressures on the domestic retail sector, particularly on small firms operating as family-owned businesses, which may be vulnerable to the entry of foreign distribution firms, typically subsidiaries of large multinationals and endowed with cost-effective management techniques and supply chains. This can affect the earnings of family businesses engaged in retail trade, with negative effects on employment and poverty. In this regard, it is important to note that wholesale and retail trade is a key sector of Vietnams economy, accounting for 16% of GDP, or as much as agriculture. It should be noted, however, that a number of safeguards are already in place to limit such an adverse social impact. The establishment of outlets for retail services beyond the first one will be allowed on the basis of an economic needs test. The criteria applied in that test include the number of existing service suppliers in a particular geographic area, and the stability and geographic scale of the market. Nevertheless, opening up the retail sector needs to be accompanied by complementary measures aimed at ensuring fair competition between domestic and foreign firms. Banking is another liberalized services sector where a fierce competition is expected between domestic and foreign suppliers. From a poverty viewpoint, fears have been expressed regarding the negative impact of competition on the profit margins of the much weaker rural banks, that may be forced to cut much needed services to rural households. Among Vietnams WTO commitments in trade in services is the compliance with the principle of national treatment, which applies to all sectors in which the country has made a specific market access commitment. National treatment is defined as no less favourable treatment for foreign services and service providers than that accorded to a countrys own nationals. According to this principle, the minimum wage imposed on foreign firms operating in all sectors, including liberalized services, which is higher than the minimum wage for domestic firms can be considered as discriminatory. The most obvious way to ensure national treatment would be to raise the minimum wage in domestic firms, rather than lower that in foreign firms. But this procedure can hardly be limited to domestic firms engaged in liberalized services. If the wage rise is extended to all domestic firms, this can worsen unemployment, underemployment, and poverty. It can also push

289

up prices in an already inflationary environment, which is particularly harmful to the real incomes of the poor.163 4.1.4.Intellectual property rights Upon accession, Vietnam is committed to comply with trade-related intellectual property rights (TRIPS). There is concern that the TRIPS Agreement will have a negative impact on poor households by resulting in higher prices for essential medicines. Since 2003, this issue has been widely debated among WTO members and some progress has been made towards supporting Governments rights to promote access to medicines for all. A Declaration was agreed at the Doha Ministerial Conference to confirm what was already contained in the TRIPS agreement, namely the right of governments to impose compulsory licenses164 when faced with national public health emergencies. However, one aspect, that of permitting countries having no domestic capacity to produce medicines, to issue compulsory licenses to producers in other countries for import into the affected country, required amendment to the TRIPS Agreement. This was finally accomplished in December 2005. Despite these improvements, however, the supply of cheap generic medicines through the issuance of compulsory licenses to domestic or foreign producers is still limited to national emergencies and, thus, does not apply to normal health situations. But each WTO Member has the right to determine what constitutes a national emergency, a circumstance that is not restricted to such public health crises as HIV/AIDS, tuberculosis and malaria, which are mentioned in the Doha Declaration as examples of epidemics. 4.2.Impact of international economic integration 4.2.1.External shocks In addition to the adverse social impact of specific WTO commitments, it is possible to identify problem areas arising from the broader trend of Vietnams further integration into the world economy, encompassing not only WTO accession but also a wide array of bilateral and regional trade and investment agreements concluded with ASEAN countries and other nations as well as Vietnams capital account liberalization policies, leading to huge flows of FDI and, more recently, of portfolio equity investment. A striking illustration of Vietnams extremely rapid integration into the global economy is provided by some indicators of trade openness. As shown in Figure 12, the share of Vietnams merchandise exports in world markets has quadrupled over the 13-year period 1993-2006, although starting from a very low level. During the same period, total trade (merchandise exports plus imports), as a percentage of GDP, more than doubled, reaching a level close to 140% in 2006. This trend is likely to continue over the next several years, although perhaps at a slower pace. Figure 12

163

The Vietnam Development Report 2006 (p. 107) argues that the dual minimum wage regime needs to be abolished upon WTO accession, as it contradicts the national treatment principle. In accordance with WTO commitments, however, this statement, is valid only for the liberalized services, not for the entire economy. But reportedly, the dual regime is also inconsistent with some of the bilateral investment treaties signed by Vietnam. 164 Compulsory licensing is when a government allows someone else to produce the patented product or process without the consent of the patent owner.

290

Vietnam has certainly benefited from its rapidly growing trade and capital openness - which can also be labeled, using a much abused word, as globalization in terms of a starring economic growth performance, accompanied by a remarkable reduction in the poverty rate. The country, however, has increased its exposure to the vagaries of the world economy, which manifest themselves as fluctuations in several key variables of the Vietnamese economy: Exchange rates Foreign capital inflows Export prices Import prices World demand for Vietnamese exports This exposure is bound to increase in the foreseeable future also because of the favourable impact of WTO accession and other trade agreements on Vietnamese exports penetration into the world markets and the concomitant boost in the countrys import capacity. The macroeconomic consequences of these fluctuations, especially those related to exchange rates and foreign capital inflows, are examined in another chapter. Here the focus will be on their social impact. Following the methodology presented in section A, it is useful to examine both the macroeconomic and microeconomic links between increased exposure and social variables such as poverty, employment and wages. On the macroeconomic side, the international market fluctuations described above increase significantly the complexity of Vietnams macroeconomic management. As an example, the vulnerability of the Vietnamese economy to external shocks related to a widespread fall in export prices or in the demand for Vietnamese exports has certainly grown with exports of goods and services rising to as much as 73% of GDP. At the same time, however, the country has been able to diversify exports both in terms of products and markets, thus reducing its vulnerability. In fact, the most important export item, excluding oil, is garments, which account for only 18% of non-oil exports. Similarly, the share of the United States, the largest market for Vietnams exports, in total exports is around a comfortable 20%. But despite Vietnams achievements in export diversification, external shocks can come from a variety of sources, both in the current and capital account of the balance of payments. As shown in 291

Figure 13, external shocks deriving from sharp increases in import prices, such as those experienced over the period 2002-2005, can be much more significant than price effects of trade liberalization. To the extent that there are important policy slippages in dealing with major external shocks, these shortcomings can result in increased inflationary pressures and/or a major slowdown in economic growth or even recession, with an adverse fiscal impact and, eventually, a reduction in social spending. Strong inflation and a downturn in the business cycle can have more serious repercussions on the weaker segments of the society, just below or above the poverty line, rather than on the poorest households, many of which, particularly those belonging to ethnic minorities, are virtually insulated from these vagaries. Figure 13 External shocks and trade reform effects

Source: Vietnam Development Report 2006. The price changes in both axes are measured in percent, over the period 2002-2005. Turning to the microeconomic side, if the price transmission is not hampered by anticompetitive stances of economic agents, particularly in the distribution sector, incomes of poor households can be adversely affected by declining prices of export products or by falling international demand for such products, as net sellers of these goods or as workers in enterprises producing such goods. A case in point is the sharp drop in coffee prices at the turn of the millennium, which has been mentioned earlier. In Vietnam, assessing the extent of price transmission is rendered more complex by the operations of state trading enterprises (STEs), which play a key role in foreign trade, controlling virtually 100% of rice exports and 35-40% of coffee, despite recent liberalization efforts allowing entry of private traders. There is, however, evidence that STEs do not fully exploit their market power in extracting rents from producers. In some cases, STEs, reportedly, even subsidized coffee producers when international prices were low.165 However, these socially-oriented non-commercial objectives are no longer compatible with WTO commitments calling for transparency and for STEs transactions to be based only on commercial considerations. 4.2.2.State-owned enterprises Beyond WTO commitments, the larger group of State-owned enterprises (SOEs), to which STEs belong, will be increasingly exposed to international competition as a result of Vietnams further integration into the world economy. Despite equitization policies, the State is still the largest
165

Vietnam Development Report 2006, p. 119 292

employer in Vietnam, accounting for roughly 10% of total employment. In the industrial sector,166 the one most vulnerable to external shocks and competition, where the States share in total output is roughly one-third, there were 862,000 State workers in 2006 (or about 20% of total State sector employment), down from the recent peak of 933,000 in 2003. But in terms of the countrys total employment, the share of SOE workers is a meagre 3.3% (Table 16). Table 16 - Labour force by occupation

Source: Vietnam Development Report 2008. All figures are in percent of the population aged 15 to 64, except for unemployment rates, which are in percent of the active population. Employment figures are based on main occupation. SOE workers have been the most visible victims of the globalization process. SOE equitization and restructuring has resulted in labour shedding. Since 2002, about 220,000 workers (or about14 % of total SOE workforce in 2002) have been separated. From a social point of view, this retrenchment has been facilitated by a safety net fund, under which about $460 million have been spent to compensate redundant labour force (Table 17).

166

Including mining and utilities 293

Table 17 - The Safety Net for Redundant SOE Workers

Source: Vietnam Development Report 2008 This trend is bound to continue over the medium term, as a result of persistent SOE overstaffing and domestic and external pressures on SOEs to improve their productivity. In fact, over the next couple of years, another 120,000 SOE workers are expected to be laid off. Again, the social implications of this policy will be cushioned by the social safety net, which has been recently extended to cover agricultural SOEs as well. Furthermore, there is, reportedly, a broad satisfaction among redundant workers with the fund. In sum, SOE workers are still the most vulnerable to Vietnams further international economic integration in terms of job security, but they hardly are the most vulnerable from a poverty viewpoint, not only as a result of the safety net, but also because most of their households are well above the poverty line. The largest group of households that are poor or close to the poverty line are represented by those where the head is engaged in agriculture (Table 18). 4.2.3. Internal migration Another tangible social effect of global economic integration is increased internal migration. This phenomenon, which, statistically, is not well documented, has several causes: The push factor. Internal migration is largely associated with high rates of under- and unemployment in rural areas, particularly in the Red River Delta. These redundancies are explained by two main factors: the expansion of labour-saving modern agriculture and the rapid increase in the labour force, at the pace of 1.5 million per year. The pull factor. At the same time, the income gap between urban and rural areas has been rapidly widening, as a result of growing job opportunities in the cities, generated particularly by private enterprises and foreign-invested companies, both closely linked to the countrys economic integration process. These two categories, which dominate in the urban areas, today employ roughly one-fourth of active labour force, compared to 14% in 1993 (Table 16). Migrants, however, move not only from rural to urban provinces. It is estimated that over 25% of migrants are employed in the primary sector, thus witnessing an important rural-rural migration component.

294

Table 18: Household vulnerability by occupation of its head

Source: Vietnam Development Report 2008 Despite the relaxation of the household registration system that associated residence status with the provision of jobs and daily necessities, migrants, the majority of which are under the age of 25, still face a number of problems. Those moving to the largest cities, such as HCMC and Hanoi, plagued by inadequate infrastructure and public services, are confronted with restrictions on permanent residence permits, which, in turn, reduce access to social services, such as health and education, formal sector employment, bargaining power at the workplace and secure housing tenure. In most cases, increased earnings allow migrants to send money home. Migrant remittances constitute in fact an important share of the incomes of the household members left behind. It should be remembered, however, that those left behind are generally the weakest: children, the elderly and women. Despite remittances, poor families remaining in the rural areas can sometimes be worse off as a result of migration of some of their family members. In the future, the continuing trend of massive rural-urban migration is likely to stimulate the development of nuclear families, thus weakening the intergenerational support of the elderlythe most vulnerable memberswithin a household. 4.2.4. Income inequality There are several signs indicating that Vietnams rapid integration into the world economy and strong economic growth have been associated with growing income inequality: The widening gap between wages of skilled workers and those of unskilled workers, the skills gap. Over the period 1998-2004, the wages of the most skilled workers, including managers, increased more than twice as fast as those of unskilled workers. The ratio between the two rose rapidly from 1.4 in 1998 to a peak of 2.9 in 2002 and then down to 2.11 in 2006. It is also interesting to note that in 2006, except the medium-level trechnical worker had highest growth rate, the higher the skill the higher was the wage growth rate (Table 19). Table 19: Average wages by skill Occupation Monthly income 1000VND 1998 2002 295 per worker, Wage growth rate per year 2006

(%) Leadership/ High-level technical expert Medium-level technical worker Staff Technical worker Unskilled worker Ratio of high level worker to unskilled worker Source: VHLSS 1998-2006, GSO Another way to measure the skills gap is by examining the rate of return on different educational achievements. The gap between the rate of return on the highest achievement and that on the lowest achievement increased from 11 percentage points in 2002 to 14 percentage points in 2004 (Figure 14). Interestingly, the highest return on education was in foreign invested enterprises, reaching roughly 16% against a national average of 14% (Table 20). 699 746 600 578 492 1.4 1563
1525

10.2 13.8 8.2 9.6 4.9

1114 804 758 538 2.9

2,100 1127 1,203 723.99 2.11

Figure 14: Rate of return on education (%)

2002 2004 21,34

16,49 14,07 10,84 9,22 6,8 2,99 10,8

-0,38 Illiterate

0 Unfinished primary school

1,02 Finished primary school

2,14 Finished lower secondary school

Finished upper secondary school

College, university and higher

15

Table 20: Rate of return on education by enterprise ownership, %, 2004 Ownership Household economy Private Collective Foreign-invested State Total
Source: ILSSA,

Average working years 17.4 13.8 20.2 10.8 19.1 17.2

Average schooling years 6.8 9.6 9.8 10.9 12.9 9.5

ROR (%) 8.9 11.4 8.9 15.6 13.1 14.5

Average hourly wage (1000 VND) 3.8 5.1 4.5 6.1 6.3 5.0

The worsening income distribution 296

Although Vietnam has made fast progress in poverty reduction (Figure 5) and growth in per capita income, the country has witnessed a growing income inequality, with a widening of the gap between the richest and the poorest. In 2006, the expenditure of the richest 20% of the households was 6 times higher than that of the poorest 20%, against 5 times in 1999 (Table 21). It is likely that the rich-poor divide is greater than what these data show, as household surveys fail to capture fully the rapidly growing incomes and expenditures of the richest, as manifested by the increasing consumption of durable goods, such as automobiles, and luxury items. If this trend continues at a faster pace, it could affect social cohesion, one of the pillars of the Vietnamese society. However, the Gini index, which measures the skewedness of expenditure distribution across all quintiles, registered just a slight increase from 0.34 to 0.36.167 Income distribution in Vietnam seems to be less skewed than in other East Asian countries, such as China, Thailand, Malaysia, Philippines. Interestingly, empirical evidence shows that during the past two decades, most developing countries experienced an increase in inequality as they became more exposed to globalization.168 Table21: Share of expenditures by population quintile

Source: Vietnam Development Report 2008 Income inequality across regions Growing income inequality across regions is another worrying sign. Although poverty rates have rapidly declined in all regions and faster in the poorest areas, the poverty rate in the poorest region (Northern Mountains) as a multiple of the poverty rate in the richest region (Southeast) has sharply increased from 2:1 in 1993 to 6:1 in 2006 (Table 22).

Table 22: Poverty rate across regions

167 168

The Gini index varies from 0 (maximum equality) to 1 (maximum inequality). For a review of the evidence, see Goldberg and Pavcnick (2007).

297

Source: Vietnam Development Report 2008 5. Policy options In light of the analysis, developed in sections 3 and 4, regarding the past and future impact of international economic integration on the Vietnamese society, this section presents a number of policy options to cope with possible adverse effects on a variety of social aspects and to enhance the positive impact. These proposals need to be considered against the background of the Beyond the WTO Action Plan launched by the Government, which already includes a number of initiatives in the social sphere, such as those on wages, social security and industrial relations. Poverty reduction

Despite the remarkable nationwide progress on poverty reduction, three are still a number of regions and social groups afflicted by extreme poverty, such as the ethnic minorities and the inhabitants of the Northern Mountains, the North Central Coast and Central Highlands. There is a strong case for targeting the poorest households in these areas through regional programmes financed by ad hoc budgetary transfers, on a larger scale than current initiatives. Vietnams fiscal situation is strong enough to accommodate these transfers, especially if they are, obviously, not excessive and, directly or indirectly, income-generating, thus widening the tax base in the poorest regions. Human development

Health care for the poor has certainly improved with the establishment of the Health Care Funds for the Poor (HCFPs). But a number of problems need to be addressed. First, Government funding is still inadequate, despite the recent increase in Government contributions. Second, HCFPs do not cover all vulnerable groups, such as migrant workers. Third, the regional distribution of HCFP resources does not reflect the distribution of poor households across regions. Migrant workers, and their families left behind, need special attention in other areas, such as issuing permanent residence permits, in order to mitigate the social costs of internal migration, one of the most visible effects of globalization. Employment In line with the Beyond the WTO Action Plan, an Unemployment Insurance Fund is expected to come into effect on 1 January 2009. The unemployed would be entitled to between three months to one year of unemployment benefits (up to 60% of their previous salary) depending on the length of 298

their working period. Funding would come from all three sides the State, enterprises and workers.169 The fund will be used not only to pay unemployment allowances, but also to support job training and job seeking, pay health insurance premiums for persons on unemployment allowance, and administrative costs. In principle, the establishment of such a social safety net responds to the need to protect workers from the vagaries of globalization. However, concerns have been expressed over the fact that the fund would cover only workers in the formal sector, i.e, those engaged in wage jobs, who account for just 25 per cent of total workers. Moreover, by increasing the cost of labour for enterprises that have to contribute to the fund, it could discourage the formalization of workers currently in the informal sector.170 There is a need therefore, to devise schemes to protect vulnerable workers in the informal sector as well, including those engaged in family businesses, by supporting the formalization of their employment. Furthermore, since it is not possible to calculate in advance the number of beneficiaries, detailed guidance and monitoring of policy implementation would be needed to ensure the viability of the fund. Industrial relations The recent surge in labour strikes, especially in foreign-invested enterprises, calls for a rapid improvement in industrial relations for the benefit of workers, enterprises, both Vietnamese and foreign, and for the country as a whole, whose economic future significantly depends on the attraction of further FDI flows. In this respect, it is important to note that the Beyond the WTO Action Plan calls for the following measures: To amend legislations and policies on labour relationships in line with factual situations, to supplement and complete regulatory framework for labour relationships so as to effectively promote three-stakeholder and two-stakeholder mechanisms in establishing healthy labour relationships. Furthermore, other key policy measures have been proposed such as strengthening the role of grassroots trade unions in handling labour disputes, and developing sectoral collective bargaining 171 agreements. All these proposals are most welcome. The adoption and implementation of such measures would also contribute to Vietnams faster exit from its non market-economy status, thus protecting its jobs from unjustified anti-dumping measures. Gender The Gender Equality Law, which came into force in July 2007, is expected to greatly improve womens advancement, including the quality of womens participation in economic, political and social fields. The findings of a recent survey conducted by IFC show that the growth of womenowned business is limited by the lack of formal programmes aimed at stimulating it.172 The IFC survey recommends that detailed consideration be given to promoting women's enterprise development with special emphasis on access to entrepreneurial education and training, access to capital, and access to new markets.

Workers will contribute 1% of monthly salary and employers will pay 1% of the total fund of monthly salaries of workers who join unemployment insurance. The State will provide monthly support equivalent to 1% of the fund of salaries of workers covered by unemployment insurance.
170 171
172

169

See Vietnam Development Report 2008, p. 45 ILO (2008)

IFC (2006)

299

Such recommendations are worth considering in developing programmes under the new Gender Equality Law, especially those concerning access by women to capital, both domestic and foreign and to foreign markets. The implementation of these proposals would allow women to better exploit the advantages of international economic integration. Agriculture In developing measures aimed at coping with the adverse effects of international economic integration, special attention should be devoted to agriculture, where the bulk of the poor is employed. An early warning system could be established to monitor vulnerable agricultural products and vulnerable groups so that ad hoc support programmes can be quickly executed in case of need. The vulnerable products would include both import competing products, such as cotton, dairy products, maize and sugar, which may be affected by the implementation of WTO accession commitments, as well as export products, such as coffee, rice and rubber, which are exposed to heavy price fluctuations in international markets. In setting up the early warning system, special attention should be paid to measuring the transmission of international prices from the border to poor households, as illustrated in section 1.2. Although under WTO rules export subsidies are no longer allowed and distortionary support measures (the Amber Box measures) are severely limited, Vietnam may in principle spend unlimited amounts on agricultural support that does not distort trade (so-called Green Box support), such as research, extension, training, and infrastructure. There is therefore sufficient agricultural policy space to target these programmes to vulnerable groups, particularly the extremely poor households, including the ethnic minorities. Manufacturing As in the case of agriculture, despite the WTO prohibition on direct export subsidies Vietnam still has ample policy space for the promotion and diversification of industrial exports through a number of channels such as Providing information on export markets and assistance to enterprises in establishing contacts with foreign buyers; Providing financial support through export credit and insurance schemes for export marketing; Assisting firms in meeting product standards in export markets through efficient testing and certification institutions. With regard to import-competing manufacturing enterprises, in the short and medium term, the gradual reduction in the level of protection provides a reasonable breathing space for those enterprises to adjust to the new economic environment and for the Government to adopt and implement industrial policies that are consistent with WTO commitments, such as the following, which would also benefit export-oriented enterprises: Provision of modern and efficient infrastructure, which would significantly reduce production costs. Human resource development, which would not only ease the shortage of skilled labour but also attract foreign investors in the high-technology sectors.

300

Promotion of research and development (R&D) conducted by enterprises and research institutes in the Universities and elsewhere, in order to enhance the competitiveness of Vietnamese firms and the quality and technological content of their products.173 Services Domestic wholesalers and retailers would need Government support in competing with foreign distributors. Such assistance can take different forms: When the Government of Thailand liberalized retail trade in the late 1980s, it adopted various measures to increase the competitiveness of small domestic retailers, including providing training in modern managerial skills and marketing techniques and building community networks among small retailers for joint purchases and transport.174 Simplifying rules, regulations, paperwork and expediting permits. These transaction costs are higher for domestic suppliers than for large international firms. Strengthening industry associations in the distribution services sector and providing adequate credit facilities. Providing better retail space and other consumer amenities within the modern marketplace, which can include domestic and foreign providers, both small shops and large firms. Facilitating business contacts and deals between foreign and domestic firms so that large international retailers operating in the domestic market can become an avenue for increasing exports as domestic suppliers are incorporated into the global procurement network. Intellectual property rights In the light of the recent developments in the TRIPS agreement, described in section 4, 1, Vietnam may wish to ratify the 2005 Amendment and draw up legislation to govern compulsory licensing.175 Such legislation may also require provisions to ensure the admissibility of parallel imports.176

For a detailed analysis of the implications of WTO membership for industrial policy and export promotion, see German Development Institute (2006). 174 UNCTAD ( 2005) 175 As of 17 January 2008, only 41 Members had accepted the Amendment, which enters into force when it is accepted by two-thirds of the Members. The deadline for entry into force has been recently extended to 31 December 2009. 176 These are products marketed by the patent owner or with his/her permission in one country and imported into another country without his/her approval.

173

301

6. References P. Abbott et al, A Critical Review of Studies on the Social and Economic Impacts of Vietnams International Economic Integration, CIEM, December 2006; P. Abbott, J. Bentzen, and F. Tarp, Vietnams Accession to the WTO: Lessons from Past Trade Agreements, mimeo, 2007. E. V. Edmonds and N. Pavcnik, The Effect of Trade Liberalization on Child Labor, Journal of International Economics, Volume 65, Issue 2, March 2005, Pages 401-419 Feenstra R. C., Advanced International Trade, Princeton University Press, 2004. German Development Institute, Vietnam the 150th WTO-member: Implications for industrial policy and export promotion, Bonn, 2006 Goldberg P.K. and N. Pavcnick. 2007. Distributional Effects of Globalization. Journal of Economic Literature, 45 (1): 39-82. T. W. Hertel and L.A. Winters, eds., Poverty and the WTO: Impacts of the Doha Development Agenda, World Bank, 2006. IFC, Women Business Owners in Vietnam: A National Survey, March 2006 ILO, Implementation of the Global Employment Agenda: Country presentation Viet Nam, March 2008 ILSSA and ILO, Report on assessing the ability to access vocational training and employment of children aged 15-17, 2006. International Monetary Fund, Vietnam: Selected Issues, December 2007 Isik-Dikmelik, Trade Reforms and Welfare: An Ex-post Decomposition of Income in Vietnam, 2006, Policy Research Working Paper 4049, World Bank, November 2006 Krugman, P.R and Obstfeld, M. (2003), International Economics: Theory and Policy, sixth edition, Reading, Mass., USA: Addison Wesley McCulloch N, L.A. Winters, and X. Cirera, Trade Liberalization and Poverty: A Handbook, DFID, 2001 Niimi Y., P. Vasudeva-Duttaand , and L. A. Winters, Trade Liberalisation and Poverty Dynamics in Vietnam, Working Paper, Poverty Research Unit, Sussex (PRUS) March 2003 UNCTAD, Distribution services, Geneva, 2005, TD/B/COM.1/EM.29/2. UNDP, Human Development Report 2007/2008, New York, 2007 Vietnamese Academy of Social Sciences, Vietnam Poverty Update Report 2006: Poverty and Poverty Reduction in Vietnam 1993-2004, December 2006 302

Winters, L. A. Trade and Poverty: Is There a Connection? in Trade, Income Disparity and Poverty. Ben David, D.; H. Nordstrom and L. A. Winters, eds. Special Study 5, Geneva: WTO. 2000 Winters, L.A, N. McCulloch and A. McKay. 2004. Trade Liberalization and Poverty: The Evidence So Far, Journal of Economic Literature, Vol. XLII, March, pp. 72115 World Bank, Vietnam Development Report 2006, World Bank Hanoi, 2005 World Bank, Vietnam Development Report 2007, World Bank Hanoi, 2006 World Bank, Vietnam Development Report 2008, World Bank Hanoi, 2007a World Bank, World Development Report 2008, World Bank, Washington D.C., 2007b

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