Vietnam’s Bright Future: FTAs as a Catalyst for Economic Transformation | Tractus

Vietnam’s current economic boom did not happen overnight. The nation’s future is deeply intertwined with its past, specifically its historical struggle for independence. After many years of colonial rule and the devastating Vietnam War, Vietnam gained its independence in 1976. 

Following the nation’s new independence, Vietnam faced the daunting task of rebuilding its economy. After it established domestic security, Vietnam focused on building up its Free Trade Agreement (FTA) portfolio with foreign governments. Vietnam has recognized the advantages of FTAs, as they have provided the country with broader market access, enhanced export opportunities, and improved access to foreign direct investment (FDI). These strategic benefits have positioned Vietnam at the epicenter of international conversations surrounding developing economies. Vietnam’s dedication to the pursuit of economic prosperity has been evident since it signed its first FTA in 1993. As of August 2023, Vietnam has 27 active and proposed agreements. Although far below its peers like Singapore, which has a whopping 45 agreements, Vietnam boasts room to grow.

Below is an overview of Vietnam’s significant agreements that have bolstered the nation’s competitiveness and eventually will help position the nation on a more level playing field with its neighboring countries.

Vietnam expects to be one of the largest beneficiaries of the Regional Comprehensive Economic Partnership (RCEP) agreement. The World Bank stated, “Vietnam’s income levels have increased by 4.9 percent relative to the baseline, higher than other countries [in RCEP], where the income level increases by 2.5 percent.” In conjunction with the average trade-weighted tariff faced by Vietnam, which is set to decrease from 0.6% to 0.1% by 2035, this deal proves to be fruitful for Vietnam’s future. Vietnam must continue signing agreements like RCEP to remain competitive with ASEAN nations.

The First Step

Vietnam’s first FTA, known as the ASEAN Free Trade Area (AFTA), was established in 1993 as a regional trade bloc between Vietnam, Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand. The AFTA had a few objectives, mainly unifying and integrating ASEAN economies. The larger vision for this collaboration was to attract and bolster FD and trade, while lowering tariffs. The deal was also intended to facilitate ASEAN development. Within this agreement, there are three subsections that helped propel those visions.

At the time of signing AFTA, Vietnam’s GDP was US$14.09 billion. The following year, the nation touted US$26.34 billion, a whopping 87% increase. Since then, there has been a steady increase in the nation’s GDP.

Vietnam has shown a commitment to growth. According to the International Monetary Fund (IMF), “Vietnam’s GDP based on purchasing power parity (PPP) stood in 25th position globally in 2022.” In the same report, the IMF states that by 2028, “Vietnam’s economy is anticipated to reach approximately $2.21 trillion, placing it among the top 20 economies globally.” Despite the ambitious nature of these estimates, they give hope to the developing nation that it too possesses the resources and capability to play a major role on the international stage, provided the economy sustains its historical growth rates.

USA TPP/CPTPP Withdraw

On January 23, 2017, the United States announced its withdrawal from the CPTPP. This geo-political plot twist had far-reaching implications, not only for the United States, but also for the other member economies, especially Vietnam. The CPTPP was projected to contribute an approximately 1.1% boost in GDP by 2030 across its 12 signatory countries. However, according to the United States International Trade Commission, Vietnam was expecting an even more substantial growth of around 8% over a 15-year period.

Currently, the U.S. government is attempting to reenter conversations with Vietnam. In September, President Biden visited Vietnam, where he and top Vietnamese party officials solidified a comprehensive strategic agreement focused on creating favorable conditions for market openings and fostering mutually beneficial economic policies. The agreement has multiple tenants to support both nations, including in education, training, trade/investment, and security, with a focus on science and technology, aligning with Vietnam’s drive toward innovation. This development bodes well for both countries and could pave the way for additional Free Trade Agreements (FTAs), which Vietnam is hungry for as it strives to compete with its more developed ASEAN peers.

Next Steps

In accordance with Vietnam’s vision to be a global economic powerhouse, the nation is attempting to establish more connections with the international community; however, strengthening political and economic relationships with allies while remaining politically neutral may be a difficult task for the young economy, particularly in regard to managing close relationships with both the United States and China. Vietnam values its neutrality and is cautious about isolating any one nation, a tactical move for the growing nation. 

Vietnam and Switzerland have long discussed a free trade agreement between Vietnam and EFTA (European Free Trade Association). Vietnam is eager to establish this alliance. The agreement would further affirm diplomatic ties between the countries, which have been in place since 1971. Both the Vietnamese and Swiss governments view each other as crucial stakeholders in their respective regions. Switzerland’s Southeast Asia Strategy 2023-2026 also noted that “Switzerland is working towards the conclusion of an EFTA-Vietnam free trade agreement as a way of further improving the conditions for business.”

Vietnam and Brazil have increased discussions about bilateral trade. While still in the early stages of development, an expected deal would drastically boost Vietnamese exports to Latin America, a key market for Vietnam. Bilateral trade between Vietnam and South America increased from US$14.2 billion in 2018 to US$23 billion in 2022. By 2030, the deal should produce an additional US$15 billion in two-way trade. While exciting, it is important to note that an FTA with Brazil may result in unintended outcomes for Vietnam since it runs a large trade deficit with Brazil and Argentina.

Ultimately, there is ample room for Vietnam to expand its network of FTAs and fully leverage its preexisting agreements in order to increase export competitiveness, expand market access, attract foreign investment, and promote economic diversification. Businesses are already reaping the benefits of Vietnam’s ambitious strategy—benefits that are expected to continue as Vietnam aims to enhance trade opportunities, stimulate economic growth, and strengthen its position in the global marketplace.

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About the Author

Hugh Goldstein is a Research Analyst based in Vietnam.