Identifying sectors with economic advantages in Viet Nam’s economic structure benefitting from new-generation free trade agreements

Rector of University of Economics - The University of Danang
Thursday, February 2, 2023 09:10

Communist Review - Trade liberalization as a result of free trade agreements (FTAs), especially new-generation FTAs stimulates growth unevenly among various sectors in the economy. Therefore, it is necessary to pinpoint sectors with economic advantages, propose measures to promote their development as a driving force for economic growth, reduce unemployment, and increase social welfare.

Politburo Member, Prime Minister Pham Minh Chinh visiting and inspecting the UAC aerospace components factory (USA) in Da Nang City _Photo: VNA

Sectors with economic advantages

Sectors with economic advantages occupy an important position in the development strategy of each country, especially when it opens up its economy and integrates into the international economy. There are different perspectives and ways to determine sectors with economic advantages. Following is a summary of the main points about the concept of sectors with economic advantages. Sectors with economic advantages are defined as industries that:

Firstly, yield high productivity in relation to the world productivity; are characterized by large world market size, comparative advantage in abundant resources, low input costs, few trade and non-trade barriers, and efficient use of resources.

Secondly, exert the most positive impacts on exports, other sectors and the economy as a whole; benefit from short, medium and long-term economic policies.

Thirdly, can take advantage of various resources to boost productivity; have the potential to create high competitiveness with a favorable business environment; form a close connection with other industries to support one another and to generate spillover impact, thus boosting productivity, innovation, commercialization, and entrepreneurship.

Fourthly, can tap into their own advantages, achieve scale efficiency with deep specialization; meet the needs of the world market.

Fifthly, are an integral part of the global value chain; are the pioneering, facilitator, contributor to the chain; account for a large proportion in the value-added distribution of the chain.

Sixthly, feature innovation, pioneering, breakthrough, technology, dynamism, and originality.

In essence, the concept of sectors (including production and services) with economic advantages that is formulated according to a dynamic and open approach carries the following main connotations. Being industries that are highly productive in relation to world productivity; having their own advantageous resources brought into full play, achieving scale efficiency with great specialization; meeting needs of the world market; being able to participate in the global value chain and become the pioneering, facilitator, and significant contributor to the chain, as well as to occupy a high proportion in the distribution of added value of the chain; and being able to exert positive effects on exports.

Sectors with economic advantages of Viet Nam

In reality, economic growth and priorities for development are subject to the contemporary context and conditions. Sectors with economic advantages of Viet Nam are determined on the following premises:

On the political-legal premise, many resolutions, decrees, decisions, such as Resolution No. 23/NQ-TW dated March 22, 2018 of the Politburo on the orientation to formulate the national industrial development towards 2030, with the vision toward 2045 (hereinafter referred to as Resolution No. 23-NQ/TW) clearly states that industry plays an important role in the economic development of Viet Nam. Industry is one of the largest contributors to the state budget in recent years, and has become a major export industry with a high growth rate. As far as the overall targets stated in the Resolution is concerned, “By 2030, Viet Nam will meet its industrialization and modernization target, basically becoming a modernity-oriented industrialized country among the top three ASEAN countries in industry, with some of its industries being globally competitive and deeply participating in the global value chain. By 2045, Viet Nam will have become a modern and industrialized country.”

On the scientific premise, the study which used the computable general equilibrium (CGE) models was employed as the main approach to analyzing, evaluating and forecasting the impacts of FTAs (reducing tariff and non-tariff barriers) on the economic structure by industry, hence identifying the industries with economic advantages. The study has developed different simulation scenarios (based on the baseline scenario in absence of tariff reduction or non-tariff measures), tailored to the roadmap for implementing commitments of important agreements signed to simulate and analyze in detail the impact of each FTA as well as the overall impact of all these agreements simultaneously on 41 economic sectors, 8 economic regions, 20 types of households and 7 factors of production in Viet Nam, together with trade relations with countries that are members of FTAs with Viet Nam.

Criteria for determining sectors with economic advantages.

Based on the above-mentioned political-legal and scientific premises, the criteria are set to determine sectors with economic advantages. These criteria are objective analysis; the ability to participate deeply in global production networks and value chains (with huge world market size, few trade and non-trade barriers, considerable impact on exports, high competitiveness, scale efficiency with deep specialization, the needs of the world market satisfied, participation in global value chains as an integral part of the chain, high position like the pioneering, facilitator, contributor to the chain; high proportion in the value-added distribution of the chain); the ability to exert spillover effect on the economy as a whole and on other economic sectors (through economic linkages, associated with the development of regional concentrations of related industries); the employment of clean and environmentally friendly technologies; innovation, pioneering, breakthrough, technology, dynamism, originality; the ability to generate high added value (high productivity and able to improve productivity by taking advantage of existing resources); the employment of a lot of labor of local advantages (abundance, low costs, contributing to exploiting efficiently national resources); high productivity in relation to the world's productivity; stability, inheritance in the short, medium, and long term.

Sectors of economic advantages in Viet Nam.

According to the results of the study, the change in export turnover of industries in the long term, as well as the deviation from the baseline scenario under the simultaneous impact of new generation FTAs (e.g. CPTPP, EVFTA and RCEP) were noticed. Specifically, mobile phone manufacturing industry witnessed the most dramatic increase in export turnover, followed by the tanning industry, textiles, and processed foods. Fishery products, cameras, camcorders and electrical wires also saw an increase in export turnover, albeit at a less dramatic rate. By contrast, other sectors including agriculture, forestry, machinery and equipment, other goods and trade fell short of the expectation of the baseline scenario in terms of export turnover growth.

In the long run, import turnover of all industries is expected to exceed estimates in the baseline scenario under the influence of FTAs. For example, the Regional Comprehensive Economic Partnership (RCEP) is expected to bring about an increase of 9.92% in the total import turnover, followed by the EU-Vietnam Free Trade Agreement (EVFTA) (9.59%) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (8.19%). In the simulation scenario that all the agreements are implemented simultaneously, import growth of all sectors would exceed the baseline, with an exception for the forestry sector. The simultaneous implementation of all the three agreements is bound to have greater impact on import growth than that of the CPTPP and EVFTA agreements. In terms of turnover, the industry of manufacturing phones and components will probably experience the biggest increase, leapfrogging other industries. In terms of growth rate, import of the tanning products is likely to be the fastest, followed by that of computer products, electronic products and textiles.

The growth in an industry's exports is the driver for its production, while an increase in imports (especially for consumption) can hammer the competitiveness of domestically produced goods, leading to shrinking production. The industries that have existing advantages and continue to benefit from the CPTPP, EVFTA and RCEP agreements in the coming time are the electronics industry including computers, electronic products, phones and accessories; the field of textiles and leather including textiles and leather shoes; and the field of food processing. The agricultural sector might be the loser in terms of production value. In the same boat with it might be the timber industry. It is likely that the production value of the remaining industries will change insignificantly in comparison with the baseline scenario.

Thus, basing on the selection criteria and research results, the industries with economic advantages in Viet Nam include Information technology; electronic industry; Food Processing; Seafood; Agriculture; textiles and tanning; furniture products; education - training and science - technology; travel; telecommunication services. These industries are the industries with a high spillover effect on the overall economy and huge potential for development in the future. Among those industries, food processing, fisheries, agriculture, textiles and tanning, and wood products are highly labor intensive in the short and long term. Although these industries make small contribution to economic growth, they play an important role in Viet Nam's economy because they create jobs, and make up large proportions in import and export volume. However, under the influence of free trade agreements, resource allocation to different industries as well as competition between them can lead to mutual development or widening gap in development in extremely complex mechanisms. This is because labor-intensive industries that employ the majority of the low-skilled workforce may be overwhelmed by industries that are able to attract venture capital for investment and development. The situation worsens if Viet Nam removes trade barriers with partner countries. The two industries of information technology and electronic technology are expected to create the driving force for the development of the Vietnamese economy if they are oriented and invested in the right direction. Because of weak domestic supporting industries and in order to attract foreign direct investment (FDI) in the fields of high-tech industry, low import tax commitment is given to these two areas. These two industries also play an important role in shaping production activities of the five key labor-intensive industries mentioned above. The fields of education - training and science - technology, tourism, and telecommunications services are predicted to maintain their sustainable development in the coming period.

Solutions to developing sectors of economic advantages

Among Viet Nam's FTAs signed with partners, CPTPP, EVFTA and RCEP are the ones ​​that are the most beneficial to the country’s economic sectors. Viet Nam is said to have been taking off in terms of economic growth; its economy is experiencing structural change towards high productivity, modern technology, and fast growth rate, relying on sectors of economic advantages and competitiveness in the global arena. Therefore, in order to fully take advantage of new-generation FTAs, it is essential to:

Firstly, thoroughly grasp and effectively implement the policies, guidelines and action programs of the Party and State on international integration in general and international economic integration in particular, focusing on assessing the situation at home and abroad, building the right orientations, guiding and promoting comprehensive integration in localities and businesses.

Secondly, implement international integration commitments with an aim of improving the overall economic capacity; speed up the economic transition from outsourcing to manufacturing; change the growth model; perfect and build mechanisms and policies to create favorable conditions for domestic and foreign enterprises; actively study and prepare for the negotiation and signing of next-generation FTAs, opening up opportunities to access new markets for Vietnamese goods and services.

Thirdly, perfect the mechanism for mobilizing, allocating and exploiting the national resources. The method of allocating public resources that plays a strategic and encouraging and pervasive role should be based on development priorities in different periods. Capital mobilization must be commensurate with internal financial condition, stimulate consumption, improve technological levels and enhance manufacturing capabilities and capacities, thus stepping up the process of economic restructuring; prioritize investment capital in industries of innovation and creativity, advanced technology, high added value and global competitiveness; reduce direct public investment, while promoting competition; encourage the private sector and foreign investment in accordance with international customs and laws.

Fourthly, build high-quality human resources, which is one of the strategic and long-term priorities; undertake comprehensive reform of education in order to create high-quality workforce that can meet the requirements of knowledge economy; perfect labor market policies, at the same time, adopt policies to attract, employ and offer perks and benefits to experts, intellectuals and skilled workers who are Vietnamese at home and abroad or to skilled foreigners working in Viet Nam; speed up labor restructuring; enhance labor productivity while ensuring pay raise; promote the sense of professionalism in the business world; link education and training to the labor market demand; create digital platforms connecting businesses and job hunters; provide scholarships and incorporate real-life contents into training programs to better prepare students for future jobs.

Fifthly, improving science - technology capacity, which is a decisive condition for choosing the development course for industries with economic advantages, and which can shorten the implementation process in each stage; apply scientific and technological advances to rapidly boost productivity, quality, efficiency, and to improve the competitiveness of the economy; encourage and promote research and development (R&D), technological innovation, and digital technologies for product development and performance enhancement; promote the commercialization of scientific and technological research products; build a national database on science and technology; promulgate preferential policies for projects and enterprises investing in developing core technologies, with priority given to the fields that Viet Nam has potentials to improve competitiveness; promote technology transference, cooperation between educational and research institutions and enterprises; support potential research groups in universities and research institutes; establish research and venture capital funds; ensure the enforcement of intellectual property laws, efficient exploitation and use of inventions; beef up international cooperation to take a shortcut and the lead in scientific and technological capacity.

Sixthly, build modern, synchronous and efficient infrastructure to meet the requirements of economic development; be selective in investment and formulate mechanisms and policies to mobilize resources for investment in infrastructure development; promote public-private partnership (PPP) in infrastructure investment; build a system of industrial parks and economic zones, high-tech zones, modern, synchronous and highly connected complexes, according to ecological industrial standards; increase investment in construction, upgrade and complete inter-provincial and inter-regional transport axes, highways, roads, airports and seaports, logistics centers towards synchronousness and modernity to facilitate traffic, trade between regions and localities at low costs; speeding up the construction of key traffic routes to reduce traffic congestion and foster urban development; build synchronous and modern information technology and telecommunications infrastructure, especially in nuclear cities and big cities to facilitate the development of e-commerce on digital platforms.

Seventhly, perfect the system of legal documents, regulations and standards of testing and certifying products and services according to international standards; form associations and organizations on industrial promotion, trade promotion, start-up consultation, business incubators, legal support, environmental management and policy communication.

Eighthly, identify priorities, orientations and planning for development of industries and businesses. The process of identifying priorities and sectors with advantages must be dynamic and flexible, and efficiency evaluation should be done regularly to make adjustment if necessary. At the same time, industries benefitting the State's preferential and supportive policies must follow the market mechanism and comply with international commitments in FTAs ​​in which Viet Nam is a member.

This article was published in the Communist Review No. 995 (August 2022)