Vietnam's Market Economy Status: Opportunities and Challenges in Global Trade

Vietnam's Market Economy Recognition

As of now, 69 nations worldwide have recognized Vietnam's market economy status, offering significant opportunities for Vietnam to enhance its global investment and trade cooperation. Nihad Ahmed, the senior Vietnam economist at Spain-based Focus Economics, explores how Vietnam can effectively seize these opportunities.

WTO Accession and Economic Liberalization

Since joining the World Trade Organization (WTO) in 2007, Vietnam has been on a path toward economic liberalization. Being granted market economy status (MES) by 69 nations signifies that Vietnam's prices are determined by open market competition rather than government intervention. This recognition has significantly boosted Vietnam’s economic performance over the past decade, enhancing export competitiveness and market accessibility, highlighting the major strides the country has made towards an open economy.

ASEAN was the first entity to recognize Vietnam as a market economy in 2007. Australia and New Zealand followed suit two years later, and in 2012, the European Free Trade Association, comprising Iceland, Norway, Switzerland, and Liechtenstein, also awarded Vietnam MES recognition.

Trade and Investment Opportunities

The recognition of Vietnam as a market economy has paved the way for numerous trade and investment opportunities, including various bilateral and multilateral trade agreements. These agreements have facilitated a substantial influx of foreign direct investment (FDI) into the economy. For sustained high growth, Vietnam must shift from low value-added, labor-intensive industries to high-tech, high value-added manufacturing activities.

To achieve this economic diversification and boost competitiveness, Vietnam is actively seeking to strengthen trade and investment cooperation. Notable agreements include the Regional Comprehensive Economic Partnership (RCEP) and the EU-Vietnam Free Trade Agreement (EVFTA).

Regional Comprehensive Economic Partnership (RCEP): First proposed in 2012, RCEP is a transformative trade pact between the 10 ASEAN member states and six significant partners with existing bilateral FTAs with ASEAN: Australia, China, India, Japan, South Korea, and New Zealand. This ambitious agreement aims to create a vast free trade area encompassing nearly 50% of the global population, around 30% of world GDP, and more than 25% of global exports. By dismantling tariff and non-tariff barriers, RCEP enhances Vietnam's export competitiveness, streamlines market access, and reduces the cost of importing technologies needed to move up global value chains.

EU-Vietnam Free Trade Agreement (EVFTA): The EVFTA, expected to take effect in 2019 after ratification in 2018, will significantly expand Vietnam's trade and investment opportunities beyond the Asia-Pacific region. The agreement will ease access to 29 markets, catalyzing high-quality investments from the Euro bloc. Upon implementation, around 85.6% of EU tariff duties on Vietnam’s exports will be lifted, extending to 99% within seven years. Vietnam will reciprocate by eliminating nearly all tariffs on EU exports over a decade. However, preferential rules of origin may initially limit export growth.

Attaining MES from All WTO Members

Despite significant progress, Vietnam is not yet classified as a market-based economy by the WTO. Achieving this status should be a priority for policymakers, as it provides greater leverage in trade disputes. Trade laws allow for easier imposition of anti-dumping duties on imports from a non-market economy (NME).

Vietnam's non-recognition as an MES by the US and the EU is due to perceived shortcomings in meeting technical criteria, particularly pricing distortions. The WTO’s NME provisions, set to expire in 2019, have sparked renewed debates, especially after the WTO denied China MES status at the behest of the US and the EU.

Achieving MES recognition from all WTO member states, particularly the US and the EU, is crucial for Vietnam to ascend global value chains, enhance productivity, and overcome the "middle-income trap." However, given the treatment of China, US recognition in 2018 appears unlikely. Completion of the EVFTA, however, may influence the EU to grant Vietnam MES recognition.

Reference: Vietnam Investment Review