Trade Policy, Domestic Reforms, and Structural Transformation in Viet Nam

Viet Nam is one of the most remarkable success stories of economic transformation in Asia. In a span of 3 decades, Viet Nam has managed to transform itself from an isolated, centrally planned agrarian economy into a dynamic manufacturing and services hub that is deeply connected to global supply chains. Increased trade and investment have been pivotal to Viet Nam’s economic success, with exports, in particular, playing a critical role. This study addresses the key question of whether Viet Nam has been able to utilise its trade policy, in general, and its free trade agreements (FTAs), in particular, as a vehicle to pursue and unlock difficult domestic reforms. If so, which of the agreements have had the greatest impact on domestic reforms, and in which sectors? To do this, the analysis employs a combination of qualitative and quantitative approaches, as well as an extensive review of existing studies. The findings indicate that modern FTAs, especially the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the European Union-Viet Nam Free Trade Agreement, have been able to keep the reform momentum going and fill gaps in some of the more difficult areas of reform. Nevertheless, significant changes came with the decisions to join the Association of Southeast Asian Nations and the World Trade Organization, and the preparatory reforms associated with them continue to influence the economy more than any of the FTAs signed subsequently. If the FTAs can promote domestic reforms, then they have the potential to further facilitate the structural transformation of the economy. Structural transformation modelling allows us to estimate the typical development path of the manufacturing share of employment relative to Gross domestic product per capita over time and compare this with the actual path for Viet Nam, in the past and into the future. The comparison reveals that Viet Nam’s manufacturing share of employment rose rapidly from substantially below the typical development path to one substantially higher and maintaining an upward trend. Nevertheless, avoiding employment deindustrialisation in the future will require further domestic reforms that enhance within-sector productivity growth. Continued implementation of the more difficult reforms embedded in the modern FTAs, together with strong domestic reform efforts, will play a determining role in ensuring Viet Nam’s continued economic transformation and growth.