POLICY RESEARCH WORKING PAPER 3 076 Trade Reform in Vietnam Opportunities with Emerging Challenges Philippe Auffret The World Bank F East Asia and Pacific Region Poverty Reduction and Economic Management Sector Unit June 2003 POLICY RESEARCH WORKING PAPER 3076 Abstract In 1986 Vietnam initiated a transition from a centrally Auffret argues that the pace of implementation of planned economy to a market-oriented economy where trade reform-which has been impressive so far-is the government would keep playing a leading role. These raising new challenges. On one side, fast liberalization of renovation (doi moi) policies were successful at trade reform may soon conflict with the slow pace of generating economic growth and reducing poverty. In implementation of other reforms, including restructuring the ten-year socioeconomic strategy endorsed by the of state-owned enterprises and state-owned commercial Ninth Party Congress in April 2001, the authorities banks. On the other side, Vietnam would greatly benefit further articulated their development objectives in terms from fast implementation of trade reform and of economic growth and poverty reduction. To reach particularly fast accession to the World Trade these objectives, the government indicated that its Organization (WTO), especially after China's recent structural reform priorities were to change Vietnam's WTO accession. Auffret concludes that implementation trade and financial policies, liberalize the climate for of trade reform will be a testing ground to reveal the private investment, increase the efficiency of public extent of Vietnam's commitment to a market-oriented enterprises, and improve governance. economy. This paper-a product of Poverty Reduction and Economic Management Sector Unit, East Asia and Pacific Region-was written as a background paper on trade for the 2002 Vietnam Development Report. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Kevin Tomlinson, room 14-076, telephone 202-473-9763, fax 202-676-1494, email address ktomlinson@worldbank.org. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at pauffret@worldbank.org. June 2003. (19 pages) TRADE REFORM IN VIETNAM: OPPORTUNITIES WITH EMERGING CHALLENGES' Philippe Auffret World Bank lThis paper was written as a background paper on trade for the 2002 Vietnam Development Report. Viet Tuan Dinh (Word Bank) and Theo Larsen (Word Bank) provided valuable inputs. Claire Pierangelo (Counselor for Economic Affairs, Embassy of the United States of America), Jessica Levine Adkins (Deputy Economic Counselor, Embassy of the United States of America), Will Martin (World Bank), James Riedel (Senior Economic Advisor, STAR Vietnam) and Susan Adams (IMF) provided comments on an earlier version. Tuyet Thi Phung provided editorial support. I TRADE REFORM IN VIETNAM: OPPORTUNITIES WITH EMERGING CHALLENGES A. Fast Pace of Implementation of Trade Reform Pre-renovation Vietnam's trade regime was characterized by a small number of Foreign Trading Corporations (FTCs) with effective monopolies over imports and exports of their product range. Planned import volumes were determined by the projected differences between domestic demand and supply for particular goods, with export volumes set at levels necessary to finance planned imports. Prices served as an accounting function and had no real role in allocating resources. The reform of Vietnam's trade policy which was at the cornerstone of the 1986 renovation policy had two main objectives. The first objective of the trade reform was to make the transition from a centrally-planned to a market-based economy by: (i) liberalizing domestic prices and linking them to world prices so that they play a role in guiding resource; (ii) increasing the number of trading entities beyond the initial number of centrally controlled FTCs to avoid that price signals are distorted through anti-competitive behavior by monopoly state traders or through de facto quantitative restrictions; (iii) developing trade policy instruments such as tariffs, quotas and licenses; and'(iv) removing exchange rate distortions. These reforns of the trading system were inextricably linked with reform of the enterprise sector to allow indirect regulation through market-determined prices to replace direct regulation of enterprise outputs. The second objective was to promote export-oriented industries--by redressing the anti-export bias embodied in the protectionist regime--while simultaneously protect the manufacturing sector developed during the centrally-planned era. Since the introduction of doi moi in 1986, progress to reform trade has been impressive (Table I summarizes recent changes. Annex 1 describes major changes in trade policy since 2 doi moi). Measures that have been taken include: (i) relaxation of the restrictions to establish FTCs, allowing for a rapid increase in the number of enterprises allowed to engage in trade from about 30 in 19882 to over 1,200 by the end of 19943 and 16,200 in 20014; (ii) introduction of trade policy instruments including quantitative restrictions (QRs) and tariffs followed by a gradual significant liberalization, with a gradual reduction in import barriers and improvements in export incentives; and (iii) liberalization of foreign exchange regime. Reform measures have been motivated by the overall reform efforts of the World Bank and the International Monetary Fund (IMF) as well as a number of regional and multilateral trading arrangements. Table 1: Major Changes in Trade Policy since 2000 Year Objectives Increase numbers Develop trade policy Remove exchange Become a member of international of FTCs Instruments rate distortions trading arrangements 2000 o Removed quantitative o Signed a bilateral trade agreement with import restnctions on 8 out the US in July paving the way for MFN of remaining 19 groups of access of Vietnamese exports to the US products i e. including market, gradual opening up of Vietnam's fertilizer, liquid soda, economy, for goods and services as well ceramic goods, plastic as investnents packaging, DOP plasticizer, ceramic sanitary ware, electnc fans, and bicycle 2001 a Pemutted all o Removed QRs o Reduced the a Moved 713 tariff lines from the legal entities multilaterally on all tanff foreign exchange Temporary Exclusion List (TEL) to the (companies and lines of the following surrender Inclusion List (IL) individuals) to groups of products liquor, requirement from export most clinker, paper, floor tiles, 50 to 40 percent goods without construction glass, some havmg to acquire types of steel, and vegetable a special license oil by revising the implementing decree of the Trade law 2002 o Reduced the o Detailed a list of goods and tax rates for foreign exchange implementing the Agreement on the surrender Common Effect Preferential Tanffs requirement from (CEPT) Scheme of ASEAN countries for 40 to 30 percent the year 2002. (May) o Issued the implementing decision for the USBTA, including guidelines for responsibilities and actions (March) o A Government negotiaton team started working sessions on WrO accession in Geneva (April) Quantitative restrictions: Since 1986, the quotas and targets, which were at the base of the central planning system, have been progressively eliminated. By early 2003, all QRs on imports will be abolished with the exception of sugar (to be kept until 2005) and petroleum products.5 With the exception of textile and garment (whose quotas6 are currently allocated 2 CIE, 1998, p.l0 3 CIE, 1998, p. 10 4 World Bank, 2002, p. 35 5 QRs on imports of cement, motorbikes and vehicles for fewer than nine passengers are scheduled to be abolished by end-2002 6 Textile quotas under the Multi-Fiber Agreement (MFA) of the WTO are scheduled to be phased out by end- 2004. A WTO Agreement on Textile and Clothing (ATC) is expected to take effect starting in 2005. Since 3 through an auction process) and a list of sensitive items, all QRs on exports have been already- eliminated. Importantly, the schedule to phase out QRs was announced in the Five-year Import-Export Program (2000-05), allowing the private sector to anticipate and adjust to the new trade regime. Tariffs: The 1988 Law on Import and Export Duties represented the first step to put a trade tax system in place. This original tariff schedule was rationalized in 1992 and simplified in 1999 following Vietnam's accession to AFTA and in preparation for the WTO. Duty exemptions and refunds for imports used to produce exports were a central part of this reform package and Vietnam currently has a well functioning duty drawbacks system.7 The current tariff structure has three sets of rates8: (i) Most Favored Nation (MFN) tariff rates applicable to imports from countries with which Vietnam enjoys MFN status (about 75 percent of imports in 2000); (ii) Common Effective Preferential Tariff (CEPT) rates applicable to imports from ASEAN countries (about 25 percent of imports in 2000 of which about half benefits from CEPT rates following the country-of-origin rule); and (iii) General rates (50 percent above MFN rates) applicable to imports from countries that do not fall under the MFN and CEPT rates (imports from these countries is negligible). The (unweighted) average MFN tariff rate has been increasing partially due to the conversion of QRs into tariff- equivalent. However, both the number of tariff lines (13 at beginning 2002) and the maximum tariff rate (120 percent at beginning 2002) have been decreasing. The (unweighted) CEPT tariff rate has declined to 10.7 percent in 2002. Table 2: Tariff Rates with Roadma for the Future Years 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 MFN Tanff Rate (%) 1/ Average (unweighted) 12.3 13.4 13 6 na na 15 1 15 7 Range 0-200 0-120 CEPT Implementation 2/ Number of Items Inclusion List 856 1,496 1,996 3,590 4,230 4,830 5,430 6,030 6,030 6,030 6,030 Temporary Exclusion List 2,123 1,483 983 2,440 1,800 1,200 600 0 0 0 0 Sensitive List 26 26 26 51 51 51 51 51 51 51 51 General Exceptions List 213 213 213 202 202 202 202 202 202 202 202 Total 3,218 3,218 3,218 6,283 6,283 6,283 6,283 6,283 6,283 6,283 6,283 Tanff Rate (%) Average ( unweighted) Inclusion List 70 6.8 5.8 5.6 4 7 3.9 3 8 2.8 2.6 2.5 2.3 Temporary Exclusion List 19.9 19.9 19.9 19 9 19.8 19.6 19.4 17 5 13.4 89 3.9 Average 12.7 12.6 12.1 11.9 11.4 10 9 10.7 9 3 7.4 5.3 3.0 USBTA 3/ ____ ___ ___ ___ __ 1/ MFN rates imposed on goods imported from countries having MFN status in trade relation with Vietnam 2/ Common Effective Preferential tanff(CEPT) imposed on goods imported from ASEAN countnes. 3/ USBTA agreed to reduce current tanff rates on a limited range of industnal and agncultural items (about 250) by 30 to 50 percent by 2004. Source Athukorala (2002); Kazi and Duc (2000), CIE (1997) Vietnam is not a member of WTO, it is expected to retain bilateral quotas with various countries. Textile quotas with the US have not yet been set. 7 For more on this issue, see lanchovichina, 2001. 8 A third set of rates (50 percent above preferential rates) is applied to countries that do not fall under the preferential and special preferential tates. However, trade with these countries is negligible. 4 External pavments: Major steps have been taken to liberalize the foreign exchange market including a gradual phasing out of the foreign exchange surrender requirement (reduced to 30 percent in May 2002) by end-2003.9 The tax on profit remittances from Foreign Invested Enterprises (FIEs) will be eliminated by end-2002 consistent with efforts to harmonize tax treatment between foreign and domestic enterprises. However, there are still some restrictions on current international transfers and payments.'0 Regional and Multilateral Trading Arrangements: Reform measures have been motivated by the overall reform efforts of the World Bank and the IMF as well as a number of regional and multilateral trading arrangements including the 1992 preferential trade agreement with the European Economic Community, the 1995 membership in the ASEAN Free Trade Area (AFTA) and the 2001 Bilateral Trade Agreement with the US (US BTA). In 1995, Vietnam submitted an application to join the World Trade Organization (WTO) and has started the process of negotiating the conditions of accession. Outside these trade agreements, the Government retains de jure control over a number of instruments that could affect trade. For example, in October 2002, the Government decided to limit the number of motorcycle parts which foreign motorbike assemblers could import in Vietnam in 2002. In December 2002, the Government made plans to raise import taxes on complete knocked-down (CKD) component kits for car without previous consultation with the industry. Pressure from the industry eventually prevented the plans to be carried forward. B. The Road Ahead: Growing Challenges The fast pace of implementation of trade reform is raising new challenges: o Challenges in terms of coordination with other structural reforms: faster liberalization of trade reform may soon conflict with the slower pace of implementation of other reforms including restructuring of State-Owned Enterprises (SOEs), State-Owned Commercial Banks (SOCBs) and tax administration reform; o Challenges related to the pace of accession to the WTO: Vietnam would greatly benefit from fast accession to the World Trade Organization (WTO); particularly in the context of China's recent WTO accession. B.1. Coordination of Trade Reform with Other Structural Reforms Vietnam has been so far able to liberalize the trade regime while maintaining a policy bias in favor of domestic-market oriented industries, particularly those dominated by state-owned enterprises (SOEs). In fact, so far, line ministries and other agencies have been able to comply with the trade liberalization commitments made by the Government while still protecting the SOEs under their dependence. First, although from a legal standpoint, all registered firms, regardless of ownership, can trade, there exist barriers which discourage trading by non-state enterprises, thereby protecting SOEs. For example, stringent regulatory requirements demanded by line ministries de facto prevent private firms from participating in rice exports and fertilizer imports. Also, monopoly in production may translate in monopoly in trading as in the case of coal, a major traditional export of Vietnam. Second, the tariff 9 Surrender requirement on foreign exchange was introduced in 1998. 10 For more details, see RMF, July 2002, p.41. 5 structure embodies a policy bias in favor of domestic industries, particularly those dominated by SOEs. Most low tariff rates are on items predominantly used by SOEs as inputs in the production of intermediate goods or final goods for the domestic market. Also, although Vietnam has taken steps to meet its AFTA commitments on tariff reductions, it has been able to differ their impacts by declaring goods that are already at zero or low rates and importantly to maintain a number of key products in the General Exception List (GEL) thereby excluding them from any tariff reduction schemes." Third, although in principle all firmns can buy foreign exchange from banks, in practice, only large firms, mostly SOEs are able to secure foreign exchange from state-owned commercial banks (SOCBs). However, the policy bias in favor of domestic-market oriented industries and SOE in particular could have considerable welfare costs, in particular because of its impact on investment decisions., It leads to inefficient allocations of resources by all types of investors (public, foreign invested and private) in all sectors of the economy by creating a bias in favor of the manufacturing sector (and a corresponding bias against agriculture) and, within the manufacturing sector, in favor of some industries like motor vehicles and motorbikes, wearing apparels and plastic products (Table 3).12 A large share of public'3 and foreign investments14 are directed toward sectors with relatively high levels of protection. In addition, the policy emphasis to build up joint ventures between foreign investors and state firmns (instead of private firns) so that physical capital levels of output grow rapidly does not encourage the emergence of a market-oriented economy. Table 3: Effective Rates of Protection by Sectors, 2002 Effective Rate of Protectdon (ERP) 1/ Sector 1997 2002 agriculture 7.7 7.4 ining 6.1 16.4 Manufacturing 121.5 96 0 Average (Simple) 59 5 54.1 Me.no: radables 72 2 58.5 1/ QR inclusive estimates. Sourc: Atbukorala (2002) " Items in the GEL include among others alcoholic beverages, vehicles with fewer than 15 seats and motorbikes with capacity less than 250cc and kits. Vietnam has yet to announce -a schedule to reduce tariffs on products included in the GEL. 12 The Effective Rate of Protection (ERP) (defined as the percentage change in producers' value-added, as a result of taxes on trade, over the level of value-added that would have prevailed in the absence of those taxes) is estimated at 7 percent for agriculture compared to 96 percent for manufacturing. It is particularly high for motor vehicles and motorbikes (559 percent), sugar (366 percent), tea (241 percent), wearing apparel (181 percent) and plastic products (163 percent). However, the market is segmented between domestic-oriented production and export competing production. -ERPs for export-competing production are drastically different: motor vehicles and motorbikes (-501 percent), sugar (-28 percent), wearing apparel (-31 percent) and plastic products (-43 percent) which helps explain booming exports in these sectors (For more details, see Athukorala, 2002). 13 For example, under the Public Investment Program (2001-05), the public sector will continue to invest in construction materials (11 percent of total investment in industry) and food processing (11 percent) which both benefit from high levels of protection. 14 McCarty (1998) observes that among the five highest sectors fecipients of FDI (in the traded-goods sector) cement, fuels, vehicles, electrical machinery, and beverages, all the sectors except fuels are producing import- substituting goods (reported in Fukase and Martn, 1999, p. 14). 6 Commitments to implement already ratified international trade agreements provide an opportunity to revitalize and deepen the SOE and banking reforms. Implementation of commitments under AFTA and the USBTA will decrease SOEs' level of protection. Under AFTA, most QRs are being abolished while items in the Temporary Exclusion List (TEL) are expected to be transferred to the Inclusion List (IL) by 2003 with tariffs to be reduced to 0-5 percent by 2006 (Table 2). In addition, the Sensitive List (SL) is expected to be phased out by 2010. As a result, the (unweighted) average CEPT tariff rate applicable to imports from the ASEAN region (except those in the SL and the GEL) is expected to decline sharply from 10.7 percent in 2002 to 3 percent by 2006. Most industries and SOEs in particular will be affected by a decline in protection level. Under increasing pressure from the SOEs (and SOE management in particular), the authorities may decide to postpone SOE restructuring, which can be achieved by increasing the level of fiscal transfers to SOEs. This is not recommendable for two reasons. First, there are substantial welfare costs associated with the provision of subsidies to non-efficient SOEs. Second, subsidizing SOEs would de facto lead to a redistribution of fiscal resources to SOE employees who are mostly non-poor, thereby reducing resources available to finance poverty-reduction programs. The authorities may also request SOCBs to make loans to the failing SOEs. This would only (momentarily) transfer the burden associated with keeping afloat non-efficient SOEs to the banking sector. International experiences invariably show that such a strategy eventually leads to extremely costly banking crises. Instead, an appropriate strategy would be for the authorities to take advantage of the pressure brought about by the trade reforms to: (i) restructure SOEs, equitizing those in the competitive sector while regulating natural monopolies, and (ii) curtail the relation of inter-dependence between SOEs and SOCBs as agreed under the 1MF Poverty Reduction and Growth Facility (PRGF). Vietnam also committed to open important services, including banking and insurance, under the 1USBTA (Box 1). This is expected to lead to a slightly more competitive banking and insurance sectors starting in three years which will have a direct bearing on banking reform. The authorities could take advantage of the pressure brought about by the USBTA to reinforce regulation and make SOCBs independent from both the regulator and Government's inference possibly through equitization. 7 Box 1: Joining Regional and Multilateral Trading Agreements AFTA * Overall tariff reductions. Tanffs on the vast majonty of tariff lines (95 percent, according to preliminary estimates) on ASEAN imports will be reduced to at most 20 percent by the start of 2003, and to 0-5 percent by beginning of 2006. * Tariff reductions on manufactures. By early 2004 average tanffs on manufactures from ASEAN countnes will be cut by 50 percent. * Reduced average tariffs By early 2004, average tariffs on ASEAN imports of textiles, leather, wood products, non-metallic mineral products (e.g. glass and ceramic products), and food products will fall by more than 60 percent. USBTA * Liberalizing trading rights for U.S. firms in three to six years: * Reducing current tariff rates on a limited range of industrial and agricultural items (about 250) by 30 to 50 percent over three years. * Removing QRs on most products in three to seven years -- steel and cement after six years and petroleum products after seven years. * Opening the services sector. Vietnam will be providing more market access than low and middle income countries under the Uruguay round and only slightly less than the larger transition economies. * Banking sector: (i) penmit majority US ownership of banks after three years; (ii) grant national treatment in the possible equitization of SOCBs; and (m) phase in national treatment of deposit taking activities after eight years. * Leasing sector: 100 percent U.S. equity in financial leasing and in other leasing will be introduced after three years. * Insurance sector: : (i) permit majority US ownership of firms after three years; (ii) eliminate restrictions on the operations of joint ventures after three years (and wholly US-owned companies after six years); and (iii) permit wholly US-owned firm after five years. * Other services. Immediate introduction of 100 percent U.S. equity in a range of technical services, including in legal, accounting, engmeenng, computer-related, and construction areas. * Trade-related investment measures. All WTO-inconsistent measures (e.g. local content requirements) will be phased out within five years * Intellectual property rights. WTO-consistent protection of intellectual property rights are to be introduced in 12-18 months. * Transparency. All laws and decisions goverming issues in the agreement will be published; administrative or judicial tnbunals for review will be established, as will the right of appeal. WTO * Vietnam made its initial offer on specific comiutments in services in January 2002 * Fifth meeting of the Working Party on accession of Vietnam held in April 2002, to review the status of Vietnam's bilateral access negotiations and action plans for implementation of a number of WTO agreements, including those related to investment and intellectual property rights. * Sixth meeting held in December 2002; start of the bilateral negotiations. Commitments to implement international trade agreements also provide an opportunity to deepen the tax administration reform. A major consideration in the reductions in tariffs from AFTA, the USBTA and future trade agreements is their medium-term fiscal implications. International evidence suggests that significant tariff reduction can in fact lead to increase government revenue by both increasing total import duty collection and broadening the domestic tax base.'5 There is a need to develop a long-term tax revenue i5 Athukorala (2002, p. 30) provides examples and references. 8 strategy that fully incorporates the impact of trade agreements as part of the tax administration reform. Finally, commitments to implement international trade agreements provides opportunities to improve trade-related infrastructure. Vietnam's infrastructure for trade has been improving slowly. For example, the modification of port facilities and operations in response to containerization has increased efficiency and reliability of container handling operation. Also, the adoption of the new Custom Law in October 2001 has improved customs operations drastically. Customs clearance has already been streamlined while the modification of custom valuation to transaction values in compliance with WTO rules, to be implemented by end-2003 as agreed under the USBTA, will further increase efficiency. Ratification of the FAL Convention (Convention on Facilitation of International Maritime Traffic) of the International Maritime Organization (IMO) will further streamline the documentation process relevant to ship calls thereby further increasing productivity. However, further improvements are required to make the current system meet existing needs and keep up with future rise in trade volumes. Important issues are the high price and low efficiency of SOE cartel in ports -- with negative impact on the efficiency of sea-freight provided by the private sector -- and airports; and the low efficiency and high prices associated with SOE monopoly in air cargo, coastal shipping, railways, power and telecommunication. Key elements in the modem logistics of trade, including e-commerce and web pages, face stringent regulation that are difficult to justify from an economic perspective. Transport by land by the private sector is also constrained by low rural accessibility and poor road maintenance (Table 4).16 There is an urgent need for further deregulation and standardization of logistics industry and greater private participation in infrastructure services. 16 For more details, see Hopkins (2002), Nomura Research Institute (2002) and Almec Corporation (2000). 9 Table 4: Trade-Related Infrastructure Ports/ Air freight Inland Road Railways Power Telecom- Alrports waterway freight freight municati shipping on Market State cartel State Large barge Pnvate and State State State structure monopoly Public sector public trucks monopoly monopoly monopoly Small barge. Private sector Availability Reasonable Good Good Good Good Unreliable * Delays of service - with in new voltage line fluctuatio installati n on *Restricti ons on intemet- based business _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __________ ~~~to o ls. Price High Not available Depends on Competitive Adequate Adequate Very high location Productivity Low Low Low Low Very low Very high Low /Reason Insufficient . Insufficien Insufficient Insufficient Underuse losses container t cold managemnent road d railways handlity ing *DlStorage leading to development capacity capacity in insufficient and to outdated dredging and maintenance Insufficient secutty lack of safety airfreight checks facility in airports * Unsatisfact ory facilities and handling techniques Overall Vanes by Negative Vanes by Neutral Negative Negative Negative Impact on region and region and trade product product Source: Adapted from Hopkins (2002) and Nomura Research Institute (2002). B.2. Pace of Accession to the WTO Vietnam would greatly benefit from fast accession to WTO. To the extent that WTO sets accepted rules of trade among its members, it de facfo discriminates against non-member countries. As a consequence, Vietnam could gain enormously from WTO accession. As the experience of China indicates, accession to WTO generates considerable benefits in terms of improved legal framework and enabling environment which result in substantial productivity gains and incremental.capital inflows (Box 2). Also, as a WTO member, Vietnam would be in a better position to defend its interest on the international scene. There is some evidence that, as tariff barriers and quantitative import restrictions are progressively dismantled as part of the on-going global liberalization process, importing countries tend to intensify the use of sanitary and phytosanitary standards (SPS) or allegations of price dumping or subsidies to protect the interests of their domestic producers. Indeed, Vietnamese exporters are increasingly facing these new trade barriers as evidenced in the exports of shrimps to the 10 EU17, frozen fish fillets to the US18, garlic"9 and water-proof footwear20 to Canada, and gas lighters to the EU.21 Because Vietnam is not yet a member of WTO and cannot thus take advantage of the dispute settlement mechanism, it must use separate and differing bilateral legal measures to resolve such disputes. In addition, dispute resolution may be very costly and require technical expertise which may not be readily available. It is important that Vietnam develops capacities to meet SPS standards for both exports and domestic purposes. In addition, this will help Vietnam prepare itself for effective participation in future reconsideration of SPS standards and the related implementation and dispute settlement procedures that have already been identified as key items on the WTO agenda for future multilateral trade negotiations.22 Finally, the cost of WTO accession will increase over time because the "terms of accession" into WTO will be increasingly demanding.23 Consequently, to the extent possible, it is important that Vietnam accede WTO before the conclusion of the Doha Development Agenda--which will raise the "terms of accession"--scheduled for January 1, 2005. Interestingly, China decided to accelerate its accession to WTO in early 1999 in order to benefit from much lower "terms of accession" in application until the end of 1999 when the WTO started a new round of multilateral negotiations (Wang, 1999). China's accession to WTO creates additional incentives for Vietnam to become a member. Competition with China's exports in third markets will intensify as a result of China's accession to WTO. Vietnam is expected to be especially affected by the abolition of quotas on Chinese textile and apparel exports, starting in 2005. Also, China's WTO accession will improve China's business environment which could divert away Foreign Direct Investments (FDI) from countries with a similar comparative advantage, including Vietnam. Box 3 provides a more detailed analysis of the impacts of China's WTO accession on Vietnam. 17 On September 2001, the EU unilaterally required chloreramphenical tests for shrimps imported from Vietnam generating considerable losses to Vietnam shrimp exporters. On June 2002, the Catfish Farmers of Amenca and individual U.S. catfish processors filed a petition for an antidumping investigation on imports of certain frozen fish fillets from Vietnam. In November 2002, the U.S. Department of Commerce decided to classify Vietnam as a non-market economy for the purposes of antidumpmg and countervailing duty proceedings. As the result of this decision, in making the dumping determination, the U.S. Department of Commerce will not use prices and costs that prevail in Vietnam but instead use those which prevail in a surrogate country. Full ruling is available on the web-site: http://www.ia.ita.doc.gov/download/vietnam-nme-status/vietnam-nme-status.htm 19 Canada has classified Vietnam as a non-market economy in relation to the garlic dumping suit. 20 On April 2002, the Shoe Manufacturers' Association of Canada filed a suit against imports of waterproof footwear originating from Hong-Kong, China; Macao, Chma and Vietnam arguing that these items have caused or are threatening to cause injury. Canada classified Vietnam as a non-market economy in relation to the garlic dumping suit. 21 On May 2002, the European Federation of Lighter Manufacturers filed an anti-dumping suit against cheap Imports of disposable gas-fueled pocket lighters from China, Indonesia, Malaysia and Vietnam. 22 The Uruguay round reform commitments in the area of agriculture are embodied in two related agreements: the Uruguay round Agreement on Agriculture (URAA) and the Sanitary and Phytosanitary Agreement (SPSA). The URAA contains the new rules and commitments in the key areas of export subsidies, domestic support and market access while the SPSA establishes general guidelines for ammal and plant health regulations as they related to international trade in agncultural products. Although the SPSA reaffirms the right of countries to set their own safety and health standards, it aims to minimize the likely trade-impeding impact of SPS regulations. A new WTO Committee on SPS measures for speedy settlement of disputes that arise in the implementation of the SPSA has been established. 23 The present WTO member countries determine the "terms of accession." In order to develop the global trade system new members have to adopt the highest standards when liberalizing their trade regime. Therefore, the expected commitments usually exceed by far those of the established WTO-members. 11 Consequently,. Vietnam may want to make special efforts to accelerate WTO accession. Currently, Vietnam accession process seems stalled.24 This may appear as surprising given the fact that (i) Vietnam's political leadership seems to indicate that WTO accession is a key priority, (ii) Vietnam would greatly benefit from rapid WTO membership, particularly in the context of China's recent accession, and (iii) USBTA negotiations have exposed Vietnam policy makers to a process similar to that of the WTO. In the end, implementation of trade reform is a testing ground that reveals the extent of Vietnam's commitment to a market economy. Vietnam is faced with competing pressures. On one side, proponents of the status-quo resist the implementation of trade reform because of its implications on other segments of the economy including SOEs and SOCBs. On the other side, proponents of a market economy encourage expedited implementation of trade reforrm including accession to WTO. The large cohort of young Vietnamese that join the labor force each year will, in the end, make the balance tilt. 24 The initial offer on specific commitments in services made in January 2002 fell short of key commitments under the USBTA. Bilateral negotiations are scheduled to begin with the EU and Japan in 2002 but negotiators in Geneva seem little optimistic about the process outcome. 1 2 Box 2: China: One Year into the WTlO Process This Box contains excerpts from a speech "China: One Year into the WTO Process" by People's Republic of China's Vice Minister of Fmance, Jin Liqun, delivered at the World Bank on October 22, 2002 (Video and full text of the Vice Minister's remarks are now available on-line at: htto://www.worldbank or2/wbi/B-SPAN/). This speech which describes the opportunities and challenges faced by China may be of interest to Vietnam in its accession to WTO. "Since accession, the govemment has taken a number of actions required of a WTO-member. The past year has been a year of improving the legal framework. The Congress has made or amended new laws and the govemment has done the same with its ordinances. The past year has been a year of training. A series of training courses have been arranged for senior officials at the central and local levels to learn about WTO and China's rights and obligations as a member. The past year has been a year of implementing the commitments. o Upon accession, the government took prompt actions to implement tariff reductions and to abolish a number of non-tariff barriers for 2002 as pledged. As of January 1I 2002, a reduction in average tariffs from 15.3 percent to 12 percent became effective, involving 5,300 tariff items, covering 73 percent of the tariff schedule. o The govemment has done a great amount of work to open the services market in accordance with the WTO commitments. Some foreign banks have started to negotiate with the Chinese banks for M&A deals. And foreign financial institutions have been invited to form joint ventures to dispose NPLs taken away from the four major commercial banks. o In some areas, the openness of the services market is even ahead of the timetable for the first year of membership. For, example, foreign insurance companies are allowed to open business in Beijing and Tianjing. Some foreign retail branches are negotiating with their Chinese counterparts to take a majonty share in their equity. From July this year, foreign travel agents have started to form joint ventures or set-up wholly-owned subsidiaries in Shanghai. o Laws and regulations on the protection of intellectual property rights have been reviewed or amended in line with the TRIP Agreement. The past year has been a year of improving the enabling environment for the country to function as a WTO member. o China has joined the General Data Dissemination System (GDDS) of the IMF, and is taking concrete measures to improve the accounting standards and information disclosure in related sectors. o To enhance transparency, a new office, WTO Notification and Enquiry Center, has been established, whose duty is to report on the implementafion of WTO protocols and answer inquiries on WTO-related matters. We are encouraged to see that the head-on competition has spurred technological upgrading and restructuring in many sectors such as the auto sector, resulting in marked improvement in efficiency. However, tough challenges remain to be tackled. a Since the beginning of this year, a number of sectors and products began to feel the pressure of WTO obligations, particularly m steel, petrochemicals and agriculture. O We are faced with a resurgence of protectionalism in industrialized countries. o Implementing WTO tanff schedules has led to a decline in our state revenues. In the first six months of this year, revenues from custom duties and import-related VAT taxes decreased by 7.5 percent. Although these policies [may] not seem directly relevant to WTO obligations, the major policy responses to meet the challenges are: o Deepening the public finance reform including delinking revenues from expenditures to eradiate abuses or even outright corruption. o Accelerating financial sector refonm. O Accelerating the restructuring of the agriculture and rural economy. o Investing in people and creating job opportunities. Intensifying protection of eco-environment. 13 Box 3: Impact of China's WTO Accession on Vietnam China's accession to WTO presents both opportunities and challenges for East Asian economies and Vietnam in particular. Its impacts will be felt through a number of channels: 1. Increased overall welfare. A decline in China's protection would push the production possibility frontier outward leading to an overall gain in welfare. However, China's large size may also shift the tenms of trade with possibly negative impact on third countries including Vietnam. Also, factor pnce equalization is expected to put a downward pressure on unskilled wages in third countries including Vietnam which may increase inequality. 2. Insignificant impact on Vietnam's aggregate export level. China' commitments to abolish non-tanff barriers and reduce tariffs (from an average of 13.3 percent mi2001 to 6.8 percent at the end of the irnplementation penod) will fuel trade with the rest of the world. However, China's accession to WTO is expected to have an insignificant overall impact on Vietnam's exports: the increase in Vietnam's exports to China is expected to be more than offset by substitution of third-country imports away from Vietnam. 3. Significant impact on Vietnam's export level and composition to China. Increased access to China's market is expected to stimulate exports from Vietnam across most industries including rice production, food processing industry, light manufacturing, metals and petrochemicals, and electronics. 4. Significant impact on Vietnam's export composition to third markets. Competition with China's exports in third markets will intensify as a result of China's accession to the WTO. This will hold especially for countnes like Vietnam that have similar comparative advantage in labor intensive products. Vietnam exports level to third countries is expected to decline. For example, Vietnam's textile and garment industry (16 percent of total exports) wll be directed affected by the abolition of quotas on Chinese textiles and apparel exports to the US and the EU starting in 2005, which leaves Vietnam with only 3 years to establish itself in the US market for apparel. China's WTO accession is expected to lead to a substantial decline in Vietnam's apparel exports and production by 2010 (the most significant decline is expected to occur around 2005 when quotas on Chinese apparel are removed). 5. Increased transparency and predictability of China's trade policy. As general WTO policy rules require member countries to publish trade rules and regulations, China's trading partners will benefit from the increased transparency and predictability of China's, trade policy. The specific commitments involve uniform application of the trade regime, independent judicial review and a mechanism to bring problems of local protectionism to the attention of the central govemment. Access to China's market will be more secured and disputes will be resolved following international standards, an important benefit to China's trading partners including Vietnam. 6. Increased China's attractiveness as a destination for Foreign Direct Investment (FDI). The opening of the service sector including telecommunication, distnbution, banking, insurance, asset management, and securities to foreign direct investment as well as the provision of national treatment to foreign funded enterprises may represent the most sigificant part of China's accession to WTO. Entry into the WTO will require China to amend its laws, regulations and practices to align them with a number of international investment-related rules. the General Agreement of Trade in Services (GATS), the Agreement on Trade- Related Investment Measures (TRIMS), and the Agreement on Trade-Related Intellectual Property Rights (TRIPS). The GATS, for example, requires members to provide MFN treatment and transparency on trade in services. China will also be required to abide by intemational standards in the protection of intellectual property and increase transparency in legislation formulation and justice practice, which should encourage further FDI into China. As China improves its bustness environment, FDI may be diverted away from other countries including Vietnam. Foreign investment to Vietnam may decline by as much as 30 percent by 2010 as the result of China's accession with negative impacts on economic growth. 7. Increased bargaining power of developing countries in the WTO. China's accession to the WTO will strengthen the voice of developing countnes and East Asian countnes in particular in this intemational forum. Also, Vietnam can leam from China's experience in accessing the WTO which could facilitate its own accession. Source: Adapted from lanchovichina, Suthiwart-Narueput and Zhao (2002) 14 References: Almec Corporation - Pacific Consultants International, 2000. "The Study of the National Transport Development Strategy in the Social Republic of Vietnam (VITRANSS)." Final Report. Prepared by Japan International Cooperation Agency, Ministry of Transport, Socialist Republic of Vietnam and the Transport Development and Strategy Institute (July 2000). Athukorala, Prema-Chantra. 2002. "Trade Policy Reforms, Export Strategies, and the Incentive Structure." Background Paper to the World Bank study "Vietnam Exports: Policy and Prospects" (September 2002). Centre for International Economics (CE). 1999. "Non-Tariff Barriers in Vietnam: A Framework for Developing a Phase Out Strategy". (September 1999) Centre for International Economics (CE). 1998. "Vietnam's Trade Policies 1998". (July 1998). Centre for International Economics (CIE). 1997. "Vietnam's Trade Policies 1997". (August 1997). Fukase, Emiko and Martin, Will. 1999. "A Quantitative Evaluation of Vietnam's Accession to the ASEAN Free Trade Area." Policy Research Working Paper # 2220. The World Bank. (November 1999). Hopkins, Ben. 2002. "The Impact of Vietnan's Infrastructure on Exporters: A Survey." Background Paper to the World Bank study "Vietnam Exports: Policy and Prospects" (March 2002). Ianchovichina, Elena. 2001. "Vietnam's Duty Drawback System: Current State and Implications". World Bank Policy Note. (November 2001). Ianchovichina, Elena and Martin, Will. 2001. "Trade Liberalization in China's Accession to WTO". Journal of Economic Integration 16(4), pp. 421-444. Ianchovichina, Elena and Martin, Will. 2002. "Economic Impacts of China's Accession to the WTO". Paper presented at the seminar on WTO Accession, Policy Reform and Poverty Reduction in China. World Bank. Beijing. June 28-29, 2002. Ianchovichina, Elena; Suthiwart-Narueput, Sethaput and Zhao, Min. 2002. "Regional Impact of China WTO Accession". Paper presented at the Regional Workshop on East Asia Trade and Poverty. Singapore. (September 2002) International Monetary Fund (2002). Vietnam Country Report No 02/151. (July 2002). Liqun, Jin. 2002. "China: One Year into the WTO Process." Speech made spoke this week at the World Bank on October 22, 2002. See: http://www.worldbank.org/wbi/B-SPAN/ or http://www.worldbank.org/wbi/B-SPAN/sub_china_seminar.htm Lord, Montague. 2002. "Vietnam's Export Competitiveness: Trade and Macroeconomic Policy Linkages." Background Paper to the World Bank study "Vietnam Exports: Policy and Prospects" (March 2002). 15 Matin, Kazi and Duc, Minh Pham. 2000. "Vietnam Trade Liberalization: Following the AFTA Program." Social Development. (Summer 2000). Nomura Research Institute, 2002. "Vietnam Development, Trade Facilitation and the Impact on Poverty Reduction." Prepared for Ministry of Transport, Vietnam and the World Bank. (June 2002). Ministry of Planning and Investment. 2002. "Public Investment Programme 2001-2005". Social Republic of Vietnam. (July 2002). Pham, Van Thuyet. 2002. "Vietnam: Regulatory Environment and Support Service for Export Development" (2002). Background Paper to the World Bank study "Vietnam Exports: Policy and Prospects". Prime Minister's Research Commission, Vietnam Institute for Trade and German Technical Cooperation. (2001). "Inter-Ministerial Coordination during WTO Accession: Experiences of Selected (transition) Economies and some Considerations for Vietnam." (September 2001). Wang Yong. 1999. "Why China Went for WTO". China Business Review. Washington. July-August, pp. 4245. World Bank. 2002. "Vietnam' Export Policies and Performance: Challenges and Opportunities." Draft. Web sites: Classification of Vietnam as a non-market economy by the US Department of Commerce: http://www.ia.ita.doc.gov/downloadlvietnam-nme-status/vietnam-nme-status.htm 16 Annex 1: Major Changes in Trade Policy since doi moi Year Objectives Increase numbers of FTCs Develop trade policy instruments Remove exchange rate Become a member of international trading arrangements distortions 1988 o Restnctions on establishment of o Adoption of the Law on Import and Export o Foreign exchange control foreign trading organizations Duties decree liberalizes retension relaxed and central government foreign exchange, opening of monopoly of foreign trade foreign currency accounts, use terminated of transfers to pay for imports and repay foreign loans 1989 o Reqwrement that SOEs fulfill o Quotas removed on all but ten export and 14 o Foreign exchange rate system CMEA export targets before import commodities (subsequently reduced to unified exporting to convertible seven export and 12 import commodities) currency area removed o Number of export commodities subject to o Producers of exportable goods export duties reduced from 30 to 12 and most allowed to sell them to any rates reduced appropriately licensed foreign o Number of import commodities subject to trade company duties reduced from 124 to 80, range of rates expanded from 5-50 percent to 5-120 percent o All budgetary export subsidies removed 1990 o General export-import o Special import duties imposed on selected companies required to register goods such as mopeds and tounst vehicles with regulatory orgamzation for individual commodities o Exports of certain commodities limited to members of relevant I exporters associations 1991 a Pnvate companues allowed to o Export duty on nce reduced from 10 percent o Foreign exchange trading directly engage in intenational to I percent floors opened at SBVN trade o Imported mputs used to produce exports exempted from duty 1992 o Harmoruzed System (HS) of tariff o Trade agreement signed with European Union (EU) establishes nomenclature introduction quota on exports of textile and clothing to EU and grants tariff preference on selected imports from EU 1993 o Export shipment licensing relaxed - six o Vietnam joins Customs Cooperation Council monthly licenses issued for 22 export commodities o 90 day duty suspension system for inputs into export production introduced o Tariff and revenue laws amended to add Year Objectives Increase numbers of FlTCs Develop trade policy Instruments Remove exchange rate Become a member of International trading arrangements distortions provisions for other than normal importation (such as, goods in tansit) * United Nations (UN) Layout key for customs declaration adopted 1994 a Steps in process of hcensing to * Elimination of irnport permits for all but 15 * Vietnam gains GATr observer status engage in international trade products reduced from three to two * Duty exemption system for exports extended * Export shipment licensing to suspend duty payments for 90 days further relaxed - completely lifted for all commodities except nce, timber and petroleum 1995 * Requirement for importers to get * Coverage of export quotas reduced to one * Vietnam joms ASEAN and accedes to protocols of membership import pernuts on a by shipment commodity - rice of AFTA basis elirninated for a wide range . Export tax rates raised on II products . 1996 lst of goods under the common effective preferential tariff of consumer and producer goods * Range of goods subject to management by (CEPT) for AFFA promulgated (involves no change in duties) import quota reduced to seven 1996 . Maximum tariff rate reduced to 80 percent * Inward foreign exchange * List of commodities under CEPT of AFTA for 1997 special sales tax imposed at rates up to 100 renuttance tax lifted promulgated percent on imported (but not locally produced) passenger cars following reducton in tarifftate * Import-export policy decision for 1996 reduces number of goods managed by import quota to six 1997 . Imports of sugar prohibited. Number of goods subject to mport quotas to achieve natural balances increases * Temporary prohibitions imposed on imports of wide range of consumer goods then lifted - 1998 * Licensed exporters allowed to * Highest tariff rate reduced to 60 percent * Forward and swap foreign * Informal road map of CEPT tanff reductions to 2006 issued export any non-regulated export . Management of imports of most consumer exchange bransactons . List of commodities under CEPT for 1998 promulgated, products, regardless of whether goods shifted to tanrffs rather than quotas or authonzed completing coverage of inclusion hst the goods are specified in their licensing . Partial surrender requirements license * Restrictions imposed on imports of alcohol imposed on enterpnses holding . Producers of all non-regulated * Use of mimmum pnce list for valuation of foreign exchange accounts export products allowed to imports by foreign invested enterprises export directly, rather than terminated through a trading company . Amendment to import/export tax law _____ introduces 3-schedule tanff, and provision Year Objectives Increase numbers of FICs Develop trade policy Instruments Remove exchange rate Become a member of International trading arrangements distortions for antidumping and countervailing duty 1999 o Encouraged tradmg activities by reducing the foreign exchange surrender requirement from 80 percent to 50 percent of foreign exchange eamings 2000 o Removed quantitative import restrictions on a Signed a bilateral trade agreement with tde US in July paving tde 8 out of remaining 19 groups of products i.e. way for MFN access of Vietnamese exports to the US market, including fertilizer, liquid soda, ceramnuc gradual openig up of Vietnam's economy, for goods and goods, plastc packaging, DOP plasticizer, services as well as investments ceramic sanitary ware, electric fans, and bicycle 2001 o Permitted all legal entities o Removed QRs multilaterally on all tariff o Reduced the foreign exchange o Moved 713 tanff lines from tbe Temporary Exclusion List (companies and individuals) to hnes of the following groups of products surrender requirement from 50 (TEL) to the Inclusion List (IL) export most goods without liquor, chnker, paper, floor tiles, construction to 40 percent having to acquire a special glass, some types of steel, and vegetable oil license by revising the implementing decree of the Trade law 2002 o Reduced the foreign exchange o Detailed a list of goods and tax rates for implementing the surrender requirement from 40 Agreement on the Common Effect Preferential Tariffs (CEPT) to 30 percent (May 2002) Scheme of ASEAN countries for tde year 2002 Based on the schedule, 481 items were moved in to Inclusion hst with tariff lower than 20 percent. To date there are 5558 lines in the Inclusion List, 770 in the Temporary Exclusion List, 53 m the Sensitive Agricultural List and 139 m General Exclusion List o Issued tde implementing decision for the USBTA, including guidelines for responsibihties and actions (Decision no. 35/2002/QD-TTg March 12, 2002) o A Govemment negotiation team started working sessions oh WTO accession in Geneva (April 2002) Policy Research Working Paper Series Contact Title Author Date for paper WPS3056 Avoiding the Pitfalls in Taxing Patrick Honohan May 2003 A Yaptenco Financial Intermediation 31823 WPS3057 Teaching Adults to Read Better and Helen Abadzi May 2003 H Abadzi Faster Results from an Experiment 80375 in Burkina Faso WPS3058 Working for God? Evaluating Service Ritva Reinikka May 2003 H. Sladovich Delivery of Religious Not-for-Profit Jakob Svensson 37698 Health Care Providers in Uganda WPS3059 Do Capital Flows Respond to Risk C6sar Calder6n May 2003 T Tourougui and Return? Norman Loayza 87431 Luis Serven WPS3060 World Market Integration through the Rui Albuquerque May 2003 T. Tourougui Lens of Foreign Direct Investors Norman Loayza 87431 Luis Serven WPS3061 Reciprocity in Free Trade Caroline Freund May 2003 P Flewitt Agreements 32724 WPS3062 Labor Effects of Adult Mortality in Kathleen Beegle May 2003 E de Castro Tanzanian Households 89121 WPS3063 Trade Liberalization, Firm Paolo Epifani May 2003 P. Flewitt Performance, and Labor Market 32724 Outcomes in the Developing World What Can We Learn from Micro-Level Data? WPS3064 Trade Policy, Trade Volumes, and Ana M. Fernandes May 2003 A. Fernandes Plant-Level Productivity in Colombian 33983 Manufacturing Industries WPS3065 Ghost Doctors. Absenteeism in Nazmul Chaudhury May 2003 H Sladovich Bangladeshi Health Facilities Jeffrey S. Hammer 37698 WPS3066 The Potential Demand for and Shreelata Rao Seshadri May 2003 H Sladovich Strategic Use of an HIV-1 Vaccine P Subramaniyam 37698 in Southern India Prabhat Jha WPS3067 The Mini-Integrated Macroeconomic Pierre-Richard Agenor May 2003 M. Gosiengfiao Model for Poverty Analysis A Framework 33363 for Analyzing the Unemployment and Poverty Effects of Fiscal and Labor Market Reforms WPS3068 Poverty and Economic Growth in Heba El-laithy June 2003 P Sader Egypt, 1995-2000 Michael Lokshin 33902 Arup Banerjli WPS3069 International Migration, Remittances, Richard H. Adams, Jr. June 2003 N Obias and the Brain Drain. A Study of 24 31986 Labor-Exporting Countries WPS3070 Are You Satisfied? Citizen Feedback Uwe Deichmann June 2003 Y. D'Souza and Delivery of Urban Services Somik V Lall 31449 Policy Research Working Paper Series Contact Title Author Date for paper WPS3071 Survey Techniques to Measure and Ritva Reinikka June 2003 H Sladovich Explain Corruption Jakob Svensson 37698 WPS3072 Diversity Matters: The Economic Somik V. Lall June 2003 V. Soukhanov Geography of Industry Location in Jun Koo 35721 India Sanjoy Chakravorty WPS3073 Metropolitan Industrial Clusters: Sanjoy Chakravorty June 2003 V. Soukanov Patterns and Processes Jun Koo 35721 Somik V. Lall WPS3074 The Gender Impact of Pension Estelle James June 2003 M Ponglumjeak Reform: A Cross-Country Analysis Alejandra Cox Edwards 31060 Rebeca Wong WPS3075 Child Labor, Income Shocks, and Kathleb. Beegle June 2003 E. de Castro Access to Credit Rajeev H. Dehejia 89121 Roberta Gatti