WTO membership heralds Vietnamese liberalisation in an increasingly market-oriented economy

Vietnam joined the World Trade Organisation (WTO) on 11 January, 2007, signalling a major step towards a more market-oriented economy. In the 880-page Working Party Report, Vietnam undertakes to implement a series of measures to liberalise its trade regime and privatise state-owned enterprises, and also to comply fully with WTO rules regarding trade-related aspects of intellectual property (TRIPS), technical barriers to trade and sanitary and phytosanitary measures agreements without restriction.

Vietnam will comply with the agreements on customs valuation, rules of origin, pre-shipment inspection, anti-dumping safeguards, subsidies and trade-related investment measures.

Although some provisions will be phased in over the next seven years, some of the fundamental reforms have already been adopted. Quotas and bans will be lifted or applied only according to WTO rules. State involvement in the economy will be reduced, leaving more room for the private sector, while competition will be enhanced through Vietnam's first competition law.

Trading rights

Vietnam undertook to grant all foreign individuals and enterprises (including foreign-invested enterprises) full trading rights from 1 January, 2007, except for some products subject to state-trading.

Trading rights in this context include the right to sell imported products to any licensed distributor in Vietnam, contrasting with the general position of Vietnamese trade officials that import trading rights cover only the right to buy imported products for one's own use, except in value-added products. Retail and distribution rights will remain limited.

Import/export restrictions

Foreign enterprises will have to wait until 2009 for the importation of certain restricted products such as pharmaceuticals, cinematographic film and printing machinery. Vietnam will maintain export controls on products such as rice (until 2011) and some wood products and minerals to prevent illegal exploitation.

Excise tax

Vietnam has agreed to reform the structure of excise tax applicable to alcohol within three years, applying a single rate for all beers and spirits containing 20% alcohol or more. This should eliminate the current de facto discrimination between imported spirits and domestically-produced rice wines.

Trade in goods

Vietnam also agreed to apply tariffs on a 'most-favoured nation' basis to WTO members and to reduce import duties. For most agricultural and non-agricultural goods, Vietnam promised ceilings on duties ranging between zero and 35%. Some reductions will be phased in by 2014. The trade-weighted average of these import duties is just 11%. Vietnam will also phase out certain import tariffs on items including eggs, tobacco, sugar and salt, which form the main income source for 100,000 farmers in coastal areas.

While Vietnam has promised not to subsidise agricultural exports, it can – like other WTO members – spend unlimited amounts on supports that do not distort trade.

Trade in services

Vietnam has opened up the service sector to foreign service providers, in particular to develop sectors such as professional and financial services, communications, education and health.

Vietnam will apply national treatment to about 150 types of foreign services suppliers, subject to certain exceptions. Foreign service suppliers in the listed categories will be allowed to establish a commercial presence in the forms of branches, business co-operation contracts, joint venture enterprises or 100% foreign-invested enterprises. However, branching and foreign ownership of service companies in Vietnam will remain limited for a period of three to five years depending on the sector. Representative offices of foreign service suppliers are permitted in most areas, provided they are not engaging in any direct profit-making activities.

One year after accession, the 30% stake limit for foreign acquisition of Vietnamese service enterprises will be eliminated for listed services, although limits will remain for joint-stock commercial banks.

Vietnam will allow foreign-natural persons to supply services but has reserved the right to limit entry and temporary stay of intra-corporate transferees and certain personnel, such as service sales persons, those setting up a commercial presence and contractual service suppliers.

Commitments and limitations on services

Products that will remain off-limits to foreign-invested distribution companies indefinitely include: cement; tires (excluding tyres of airplanes); papers; tractors; motor vehicles; iron and steel; audiovisual devices; wines and spirits; and fertilisers. From 2009 the list of restricted products will eliminate tractors and other motor vehicles.

Within three years of accession, foreign-invested companies engaging in distribution services will be permitted to engage in the wholesale and retail business of all other legally-imported and domestically-produced products.

Disappointments

Retail was one of the biggest disappointments for foreign investors. Beyond the first retail shop foreign-invested companies can only open subsequent shops if they meet an Economic Needs Test (ENT).

ENTs are banned by the WTO's general agreement on trade in services because they introduce an element of subjective discretion in the licensing of foreign service providers and invariably end up serving protectionist interests. It remains to be seen how Vietnam will be able to implement an ENT for foreign retail without falling into these traps.

Conclusion

The accession is not without its disappointments, particularly for foreign companies interested in distribution, especially retail distribution. But the overall commitments undertaken are profound.

If Vietnam opens state enterprises for greater foreign equity participation, allows import and distribution services to enter and protects intellectual property rights, current changes in Vietnam's economy will continue. n

Frederick Burke is managing partner of Baker & McKenzie Vietnam.