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Trade

Is Vietnam swimming naked?

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Vinhomes Central Park and Landmark 81, Vietnam

Author: David Dapice, Harvard Kennedy School

Vietnam’s economy has benefitted from a redirection of FDI from China due to a combination of rising wages in China, a shrinking domestic labour force and trade tensions. With US$1.5 billion entering Vietnam every month, employment is full, poverty is declining and growth sits at a brisk 7 per cent. This could spark further reform aimed at addressing the low value-add still in many exporting industries and a weak domestic private sector. But cross-currents make deep reforms more difficult, in spite of a reform-oriented prime minister.

One factor at play is the uncertain future of the strict anti-corruption campaign, given the health problems facing Communist Party Secretary and President Nguyen Phu Trong. He may not be able to prosecute corruption with the same energy and effectiveness as before. This would give space to those who prefer a more closed system in which privileged officials can convert power into substantial wealth.

Corruption is a chronic problem in any system but especially in one where the press and online discussion is heavily controlled and sanctioned. The recent Internet Law makes it more likely that only intra-party discipline will be used to control corrupt Party and government members, leaving the Party leadership itself with the discretion to decide internal discipline.

A second factor is the current political economy of taxes and transfers within Vietnam. Vietnam’s Central Committee is more like the US Senate — one state has two senators regardless of the size of its population. This makes redistribution from rich to poor provinces very popular — Ho Chi Minh City transfers 82 per cent of its tax collections to the central government. This is so that poor provinces will have more to spend, even though most of these provinces are exporting younger workers to thriving areas that need more infrastructure.

Binh Duong, a poor rural province not long ago, spent less per capita in 2016 than Thanh Hoa. Binh Duong’s population growth rate was eight times higher in the last decade. Binh Duong collected 21 million Vietnamese dong (US$897) per capita and spent only 6.5 million dong (US$277), while Thanh Hoa collected 5.8 million dong ($247) per capita and spent more than 9 million dong (US$384).

While some transfers are needed, the absence of meaningful mass transit in either HCMC or Hanoi is a bad sign for reform. Starving the healthy and feeding the slow is not a growth strategy.

The future of Vietnam’s growth will probably be in higher value-added activities, particularly services or highly-skilled manufacturing. These activities depend on individuals who are internationally mobile. If Vietnam’s cities offer pollution, congestion and flooding, they are not likely to attract or retain those who have the choice. Cities provide about four-fifths of the economic growth and virtually all of the population growth in Vietnam. If their development is starved of funding and available funds are ill-spent, the private sector will not grow and FDI will subside as wages rise.

Third is the unease with which the Communist Party views the domestic private sector, especially small and medium domestic firms. FDI is needed.Inefficient state enterprises are part of a system that provides funding for state priorities. Oligarch firms that rely on political connections are growing, resulting in a crop of billionaires that understand the need for good standing with the Communist Party. While acceptable to most, small and medium private firms may form interest groups to challenge the Community Party. Some at the top recognise the importance of these firms, but further down they are sometimesseen as a source of revenue.

The share of private, non-household output in GDP was less than 9 per cent in 2017, compared to 20 per cent for FDI and 29 per cent for the state sector. These small private firms would benefit from reforms in access to land, credit, contracts and a fairer legal system. Vietnam is ranked 69th out of 190 countries in terms of the World Bank’s Ease of Doing Business index but is in the bottom half for starting a business, paying taxes, trading across borders or resolving insolvency. Unless the private sector is given legal space to organise and present its concerns more effectively, reforms will not address these problems.

The questions posed by Party Secretary Nguyen Phu Trong to the recent Party Plenum suggest the elite are questioning current policies. He asked whether state enterprises were necessary, whether calls for political reform…

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Fixing fragmentation in the settlement of international trade disputes

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Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.

Fragmentation in Global Trade

Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.

Challenges with WTO Dispute Settlement

The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.

The Path Forward for Global Trade

Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.

Source : Fixing fragmentation in the settlement of international trade disputes

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WTO ministerial trading in low expectations and high stakes

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The WTO’s 13th Ministerial Conference is set to focus on e-commerce transparency, investment facilitation, and admitting new members. However, progress may be hindered by disputes, especially regarding fisheries subsidies.

The World Trade Organisation’s 13th Ministerial Conference

The World Trade Organisation’s (WTO) 13th Ministerial Conference is set to take place in Abu Dhabi on 26–29 February, with expectations of deals on electronic commerce transparency, investment facilitation for development, and the admission of Timor Leste and the Comoros as WTO members. Despite these positive developments, the expectations are relatively modest compared to promises made at the 12th Ministerial Conference, which included addressing fisheries subsidies and restoring a fully functioning dispute settlement mechanism by 2024.

Challenges in Dispute Settlement and Agricultural Trade Reform

However, challenges remain, especially in the deadlock of dispute settlement since December 2019 due to a US veto on the appointment of Appellate Body judges. Progress in restoring the dispute settlement mechanism has stalled, and discord continues regarding India’s grain stockholding policy as a potential illegal subsidy. Restoring a fully functioning dispute settlement mechanism hinges on addressing US concerns about perceived bias against trade remedies in relation to China’s state subsidies.

Geopolitical Tensions and the Future of Trade Relations

The likelihood of reaching agreements amid geopolitical tensions between Western democracies and China appears slim, with issues surrounding subsidies and global supply chains causing rifts in trade relations. As nations focus on self-reliance within the global value chain, opportunities for trading face obstacles. Advocacy for open markets and addressing protectionist sentiments remains crucial for fostering resilience to external shocks and promoting economic growth.

Source : WTO ministerial trading in low expectations and high stakes

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Getting Vietnam’s economic growth back on track

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Vietnam’s economy grew 8% in 2022 but slowed in 2023 due to falling exports and delays in public investments. The economy’s future depends on structural reforms and reducing dependency on foreign investment.

Vietnam’s Economic Roller Coaster

After emerging from COVID-19 with an 8 per cent annual growth rate, Vietnam’s economy took a downturn in the first half of 2023. The drop was attributed to falling exports due to monetary tightening in developed countries and a slow post-pandemic recovery in China.

Trade Performance and Monetary Policy

Exports were down 12 per cent on-year, with the industrial production index showing negative growth early in 2023 but ended with an increase of approximately 1 per cent for the year. Monetary policy was loosened throughout the year, with bank credit growing by 13.5 per cent overall and 1.7 per cent in the last 20 days of 2023.

Challenges and Prospects

Vietnam’s economy suffered from delayed public investments, electricity shortages, and a declining domestic private sector in the last two years. Looking ahead to 2024, economic growth is expected to be in the range of 5.5–6 per cent, but the country faces uncertainties due to geopolitical tensions and global economic conditions.

Source : Getting Vietnam’s economic growth back on track

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