Trade liberalization: Theories, experiences and solutions for Vietnam

Socialism construction reality Sunday, 14:38 25-04-2021
Communist Review - Simultaneously exploiting the positive and overcoming the negative side of trade liberalization to ensure national interests; integrating with the outside world but still retain its identity is essential. That is the goal and content of the foreign trade policy and management mechanism of a country in each stage of development.

The development process of trade liberalization

The trade liberalization policy originated in the UK. Free trade was recognized by the common law system long before this policy was applied in other countries. In fact and legally, in market economy countries, free trade is both a policy and a citizen's right.

In recent decades, this term has become popular around the world and trade liberalization is a policy accepted by many countries, with varying degrees depending on the conditions of the country. During the period of competitive liberal capitalism, The capitalist countries both practice trade liberalization and protect trade to different degrees, with the common goal of ensuring and serving the national interests.

At the end of the nineteenth and early twentieth centuries, the emergence of capitalist organizations causing international manipulation and increasing competition among them led capitalist countries to shift from trade liberalization to imposing trade protectionism (what VI Lenin called “super protectionism” policy). The characteristic of the “super protectionism” policy is the strong intervention of the State in foreign trade and international trade through a system of measures to restrict imports, promote exports, and facilitate national economic organizations that expand trade abroad. Protective trade protectionism has turned to the extreme.

After the Second World War, with the formation of the world socialist system, the disintegration of the colonial system, the tendency to expand specialization and international cooperation, the developed capitalist countries shifted from “super protectionism” policy to trade liberalization policy (mainly between countries in regional and inter-regional economic linkages), with a combination of “conditional” protectionism (also called “moderate protectionism”).

Many regional and inter-regional linkages have formed on the continents, typically: 1- European Economic Community (EEC) or Europe’s Common Market, founded in 1957 - a strong economic linkage with 12 founding members, accounting for 20.9% of the gross national product (GNP) of the world; 2. The European Free Trade Association (EFTA), established in 1959, includes six industrialized countries of Northern and Central Europe; 3- The Association of Southeast Asian Nations (ASEAN), originally consisting of 5 members and now expanding to 10 members. In November 2001, the leaders of ASEAN and China established the Asian - Chine Free Trade Area (ACFTA). On December 31, 2015, ASEAN Economic Community (AEC) was established; 4. North American Free Trade Agreement (NAFTA), established in 1992, includes the US, Canada and Mexico. Recently, after 14 months of negotiations, the US, Canada and Mexico reached a consensus on a new North American free-trade agreement - the United States-Mexico-Canada Agreement (USMCA) replaced NAFTA at the end of 2018; 5- The African Continental Free Trade Area (AfCFTA) is a free trade area that includes 54 of the 55 African Union countries. It is the largest free-trade region in the world in terms of a number of participating countries, aimed at bringing together 1.3 billion people, creating an economic bloc of 3.4 trillion USD.

Globally, the General Agreement on Tariffs and Trade (GATT) entered into force on January 1, 1948, with member countries' commitments not to return to a “super protectionism” policy as in the early decades of the twentieth century. It was a reflection of the trade liberalization trend, at the same time accepting protective trade protectionism by tariff measures. In 1995, GATT was replaced by the World Trade Organization (WTO) under the new rules. The World Trade Organization is not an extension of GATT, it completely replaces GATT with important differences, further promoting trade liberalization among member countries that voluntarily join the WTO.

On the one hand, trade liberalization on the basis of the theory of “comparative advantage” and an open economic viewpoint contributes to the reduction and gradual elimination of tariff and non-tariff barriers that obstruct goods exchange and services, in line with the trend of economic internationalization, globalization and regionalization. In this respect, trade liberalization is an objective indispensable goal of all nations. On the other hand, trade liberalization is the consequence of “opening” the domestic market to foreign goods and services. Trade liberalization is beneficial for developed countries with a high competitive advantage in economics, science, technology, goods and services, but not fundamentally for developing countries, especially countries where goods and services are not competitive enough in the domestic market.

Trade liberalization is a process whereby any country, whether large or small, developed or developing, must be for their own benefit and base themselves on their specific conditions to handle the problem, on the basis of combining two opposing sides: Freedom and protection in trade policy, depending on conditions of each country, each stage of development.

A non-tariff measure impeding trade that cannot be justified in accordance with the spirit and principles of the WTO is considered a Non-Tariff Barrier (NTB). Although the term “non-tariff barrier” is widely used, it is quite vague and not the official term used by the WTO. The legal documents of WTO use only the term “non-tariff measures” (NTMs), never mention the term non-tariff barriers. In fact, it is very difficult to distinguish a non-tariff measure as a non-tariff barrier. In addition, a non-tariff measure may be legal for a certain period but is seen as a non-tariff barrier at another.

Although the WTO recognizes tariffs as the only legal protection tool, but countries are constantly using new non-tariff measures. The necessity, the reasons for the protection and the object to be protected are also different, making non-tariff barriers more and more diverse. A variety of non-tariff measures can be used to serve one goal. Conversely, a non-tariff measure can be used to serve many different purposes simultaneously. The general trend of using non-tariff measures to protect domestic production has been to shift away from direct quantitative restrictions, such as: Import ban, regulation of import quotas... to more sophisticated measures, such as: anti-dumping, anti-subsidy, self-defense, technical standards. In addition, the tendency to use import restrictions associated with compliance with environmental and labor standards is emerging and favored by many developed countries. Notably, the non-tariff measures are more commonly used by industrialized countries for exports from developing countries than for those from industrialized countries, especially industrial products, such as: textiles and garments, footwear, seafood...

The following are the common elements in the way countries conduct trade liberalization:

Reduce quota restrictions

The reduction of quotas is one of the important contents of trade reform towards liberalization. When reforming towards trade liberalization, countries often replace the quota system with the tax regime. In some cases, however, the quota system is a measure to allocate scarce foreign currency reserves. With important needs (both export and import), the state can control the balance of supply and demand, especially for countries with strained relations of supply and demand. The general trend is to plummet, maintain minimum quota, or delete the quota completely.

Towards the real exchange rate

The price change in accordance with the local currency price change will promote production and business activities for export goods. The next step is to try to stabilize the real exchange rate, avoiding its sudden ups and downs. In addition to the bank's professional technical measures, it is also necessary to synchronously implement financial policies and effective anti-inflation measures.

The right macroeconomic policies

Firstly, implementing the strategy of opening up and integrating, cooperating and coordinating international policies. Economic openness has been identified as an important driving force to boost exports in the context of globalization. Trade and investment liberalization plays an important role in the reform agenda, is one of the main ways, tools and measures to develop and expand the country's goods import and export market. Secondly, promoting the implementation of foreign trade institutional reform. Thirdly, applying many tools and measures to encourage and support exports, such as exemption and reduction of export tax, VAT refund for export goods, and exemption of import input tax for export processing, export financing and promotion. However, it is not encouraged to export at all costs, but to focus on building and implementing measures and policies to restrict and prohibit export in accordance with international commitments in order to to achieve the goals of social and environmental sustainable development

Develop a suitable reform roadmap

Reform programs will fail if they immediately begin to deal with capital market liberalization, prior to trade liberalization. Therefore, focusing on building institutional and professional capacity in parallel with the training of qualified staff in market economy and international business law,... and reforming administrative procedures, especially the handling of the relationship between the state and the market is an important premise; reorganizing and amending state financial institutions, the operating mechanism and managing of commercial banks as well as handling the relationship between banks and enterprises; promote internationalization of domestic enterprises, encourage businesses to invest abroad, penetrate deeply into the world market and implement a comprehensive, effective and long-term export market development strategy on a global scale;strengthening capacity building and implementation of technical barriers to trade (TBT), sanitary and phytosanitary measures (SPS),... to protect domestic production and markets; negotiate, require more favorable market access and combine import and export with major trading partners to balance the trade balance; analyze and deeply assess the impact of free trade agreements (FTAs) on national economic and trade development before deciding whether to join FTA or not.

Experience for Vietnam

Entering the renovation period initiated by the Party at the Sixth Party Congress (1986), trade liberalization is seen as an important innovation direction in trade policy and trade management mechanism and foreign economic relations. However, the reality shows that: Trade liberalization is an unprecedented issue in both foreign and domestic trade, posing many new and complicated issues. In the period of accelerated industrialization and modernization, trade liberalization is an objective, irreversible trend that needs to be strongly promoted but must take steps suitable to our country's characteristics and conditions and requirements for international integration, ensuring national interests.

Currently, Vietnam's growth outlook is still potentially risky. Vietnam has only made the most of static advantages, such as specialization and increased exports of existing comparative products, but has not yet taken advantage of long-term dynamic advantages, especially the creation of motivation for innovation and creativity, maximizing internal strength to be able to move to higher value-added positions in the global production chain.

Meanwhile, multilateral trade with the basic principles of free, open policy positions is facing the challenge of some countries' nationalist and protectionist perspectives. This will be a big challenge for Vietnam, a country with a commercial scale that is nearly twice as large as the gross domestic product (GDP).

It is necessary to consider many factors in determining the roadmap of the trade liberalization process, such as rational protection of domestic production; ensure a reasonable balance of foreign trade; ensure the balance of import and export in a certain time; regional and world integration requirements; ...

In foreign economic relations, the liberalization process is done through reducing ordinance norms, expanding autonomy for localities and establishments in export and import; minimum limit pricing the list of quota-restricted goods.

In the market economy model, free trade activities for all economic sectors will strongly contribute to promoting the role of trade; But it is not illegal to trade, apart from the management of the State that makes the market become confused. Therefore, the arrangement and location of economic sectors participating in the circulation of goods are in line with the socialization of production and business, and exercise of State control over trade activities, reforming management mechanisms and policies to suit the multi-component trade model is an urgent and profound theoretical and practical issue.

Although import controls and restrictions are important, they will have a huge impact on international economic integration and opening up. Completion and renewal of import policy to encourage competitive imports, technological innovation, development of supporting industries, and enhancement of the competitiveness of exports and manufactured goods can be considered as a general orientation in the current context. Accordingly, it is necessary to continue: 1- Expanding and diversifying import markets, limiting excessive dependence on certain markets. Paying attention to markets with high technology and source technology, such as: EU, US and Japan markets; 2. Adopting open policies to encourage and attract investment in the development of supporting industries in order to gradually reduce the importation; 3- Building and completing a system of technical standards. Expanding regional cooperation to harmonize standards. Strengthening testing of technical standards for imported goods in order to limit and eliminate the import of old and outdated technologies.

The Commercial Law and regulatory mechanisms and policies are in need of supplementation and improvement in order to facilitate trade. The Law on Import and Export Taxes also needs to be revised to be consistent with the provisions of the Constitution and current laws; Compliant with international commitments and treaties to which Vietnam is a member.

Enhancing competitiveness for businesses requires creating a favorable business environment where businesses can operate according to the market rules. In fact, the business environment is not really open, so external liberalization has not really come with the liberalization of internal resources.

It can be said that the world economy has never witnessed such rapid, complex and unpredictable fluctuations at present. Although our export markets have been expanded through FTAs, we also face great difficulties in the face of rising protectionism, technical barriers and trade remedies of many major import markets. The US-China trade war and complicated economic and political developments in many countries and regions around the world have created many great challenges for Vietnam's economy in general and import and export activities in particular.

As of February 2020, Vietnam has joined 12 FTAs, 1 FTA has been signed but has not come into effect (EVFTA), 3 FTAs ​​are under negotiation (Regional Comprehensive Economic Partnership (RCEP); Vietnam - EFTA FTA; Vietnam - Israel FTA). These FTAs ​​have turned Vietnam into one of the large open economies. Vietnam has trade relations with more than 230 markets, including FTAs with 60 economies, thereby creating favorable conditions for Vietnamese businesses to expand their access to global markets, which is an opportunity to Vietnam connects and participate more deeply in the global value chain and production network. The “FTA highways” have been opened and the important thing here is what vehicles we will run on, how.

Implementation of international economic commitments, especially new-generation FTAs, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and EU-Vietnam FTA (EVFTA), together with the efforts of the Government, radical and drastic growth promotion are the favorable prerequisites for accelerating the process of trade liberalization in the period of 2020 - 2025 and the following years.

Thus, synchronous implementation and effective exploitation of already effective FTAs, while actively preparing for the effective implementation of new-generation FTAs should be considered an important issue. Accordingly, it is necessary to focus:

Firstly, attach importance to enhancing international integration capacities, focusing on information dissemination, raising awareness of international integration in the political system, sectors, localities, business community and the whole society. Implement effectively the Action Plan for the implementation of the free trade agreements that have already taken effect and the commitments with the WTO and ASEAN. Actively prepare for the study and effective implementation of scenarios for joining new FTAs.

Secondly, speed up the promulgation of documents detailing the implementation of effective laws, ordinances and resolutions. To attach importance to amending, supplementing and promulgating new legal documents in accordance with international commitments.

Thirdly, continue to drastically renew the settlement of administrative procedures for individuals and organizations. it is necessary to make public and transparent management activities, creating strong changes in improving the efficiency and effectiveness of state management. Promote the strong development of e-commerce and the link between e-commerce and traditional commercial activities. Strengthen management, market inspection, prevention of smuggling, trade fraud,... strictly handle violations./.

Source: Communist Review, No. 944 (June 2020)

Nguyen Thanh Binh - Doan Cong Khanh

* Banking Academy - Economist

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