How Much of Vietnam’s Policy Reform is due to FTAs?

Vietnam is one of the most successful stories of economic transition in Asia, if not the world. In the span of three decades, Vietnam has transformed from an isolated, centrally planned agrarian economy into a dynamic manufacturing and services hub deeply connected to global supply chains. The doi moi (renovation) reforms initiated in 1986 provided the foundation for the shift. The rapid economic growth that ensued, supported by expansion in trade and investment, has seen almost unparalleled improvements in social and economic conditions for its citizens.

Despite the progress that Vietnam has made in embracing market-based reforms, its reform agenda remains unfinished. To fill in the gaps and press ahead with the more challenging reforms, Vietnam has actively pursued bilateral and plurilateral free trade agreements (FTAs). To date, Vietnam has a total of 15 FTAs in effect (Figure 1), with four under negotiation. But have these FTAs been successful in driving reforms on the ground? This is the key question that we try to answer, drawing on interviews with Vietnam’s policymakers, researchers, industry representatives, and development partners, complemented by desk research.

Figure 1. Vietnam’s Bilateral and Plurilateral FTAs

Vietnam’s FTA journey began with its accession to the ASEAN Free Trade Area (AFTA) in 1995, when it became the seventh member of ASEAN. This decision signalled Vietnam’s intention to pursue greater economic integration with the region and subsequently with the world. Membership of AFTA also provided Most Favoured Nation (MFN) and National Treatment (NT) for its exports in ASEAN countries, which was not guaranteed without World Trade Organization (WTO) membership. While MFN ensures non-discrimination at the border, NT provides the same once the good enters the importing country. To prepare the groundwork for WTO accession, Vietnam concluded a Bilateral Trade Agreement with the US in 2001. A host of other economic, legal, and institutional reforms were introduced before Vietnam was finally accepted into the WTO in 2007.

We can trace some reforms directly to provisions contained in the FTAs, while others may have occurred indirectly and possibly preceded the FTAs.

These reforms were game-changing. Their coverage, which surpassed that of the FTAs in the decade following 2007, enabled Vietnam to sign up for the more ambitious, modern agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the EU-Vietnam Free Trade Agreement (EVFTA). Therefore, WTO accession may have contributed to reforms that tend to be associated with the subsequent FTAs.

To which sources, then, do we attribute Vietnam’s reforms? The presence of multiple policy drivers makes this a difficult question to answer, but we can trace some reforms directly to provisions contained in the FTAs, while others may have occurred indirectly and possibly preceded the more recent proliferation of FTAs.

The CPTPP, ratified by Vietnam in November 2018, has had a discernible impact on reforming intellectual property (IP) and labour laws. For instance, the process to register a sound mark follows the requirements of Article 18.18 of the CPTPP, which is incorporated under Article 105.2 of the Vietnam IP Law 2022. Together with the EVFTA, the implementation of the CPTPP is improving the legal system governing industrial relations and labour standards in accordance with international commitments.

Although Vietnam has not ratified the collective bargaining convention of the International Labour Organisation, workers’ representative organisations now exist following CPTPP standards. The New Labour Code took effect in 2021, allowing employees to join or form an employee representative organisation that is independent of the Vietnam General Confederation of Labour, which is the sole and unified trade union organisation made up of the 18 National Industrial Unions.

Other than Singapore, Vietnam is the only other ASEAN country to have an FTA with the EU. Like the CPTPP, the EVFTA covers some areas ignored by the WTO (known as WTO-X) or goes deeper than the WTO (WTO+). The EVFTA is also expected to generate significant market access benefits because Vietnam does not have existing FTAs with members of the EU, unlike with the CPTPP or the Regional Comprehensive Economic Partnership (RCEP). In the difficult area of government procurement, the EVFTA is making progress in selectively opening the education and health sectors, as well as green procurement.

The EVFTA is providing a template for the development of the many rules and standards associated with regulating exchange in these sensitive areas. Once these rules and standards are established, they can be easily multi-lateralised, thereby ensuring that the FTA acts as a stepping stone towards non-discriminatory liberalisation. In most cases, it is impossible to regulate access in a preferential manner, such as with tariff concessions. Even when it is possible, the cost associated with preventing free riding may not justify the benefits of trying to do so.

Despite these notable achievements, neither agreement has been able to effectively tackle the thorny issue of state-owned enterprise (SOE) reform. Although the CPTPP’s separate chapter on SOEs includes some of the most advanced and innovative regulations amongst investment agreements, the carve-outs and extended timeframes that Vietnam negotiated, which themselves indicate limited appetite for reform, have dampened the impact.

Although not as ambitious or deep as the CPTPP or EVFTA, RCEP is the world’s largest FTA with a comprehensive reform agenda. One of RCEP’s key objectives is to promote the growth of global supply chains through its open rules of origin, which has already benefitted Vietnam. Progress on regulatory convergence has been slow but could lead to impactful changes, given time.

The Vietnam experience demonstrates that modern FTAs, especially the CPTPP and EVFTA, have been able to keep the reform momentum going and fill the gaps in some of the more difficult areas of reform. However, their ability to safeguard against the rising tide of protectionism is less clear, as the global shift toward increasing resilience and self-sufficiency through industrial policy and export control may lie beyond the purview of FTAs.

While various tangible outcomes indicate the role of FTAs in shaping the reform agenda, membership can also expose countries to indirect and demonstration effects, the benefits of which may be difficult to identify or quantify but are no less real. The big-bang changes came with the decisions to join ASEAN and the WTO, and the preparatory reforms associated with them, continue to influence the economy more than any of the FTAs signed subsequently.  

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