Managing the Transition to Free Trade: Vietnamese Trade Policy for the 21 Century

comments on earlier versions of the study. I have also benefited greatly from participating in the trade talks between OECD and Vietnam in early May 1997, and I would like to thank Jack Martens of OECD's Trade Directorate for providing this valuable opportunity to learn more about the making of trade policy. However, I am personally responsible for the views and opinions presented below, as well as for any remaining errors and shortcomings. SUMMARY During the ten years that have passed since the introduction of comprehensive market-oriented economic reforms during the Communist Party's Sixth Congress in 1986, Vietnam's macroeconomic performance has been remarkable. During the last few years, the Vietnamese economy has achieved annual GDP growth rates of nearly 10 percent, a reduction of the inflation rate from three-digit to single-digit figures, a stable exchange rate, and a substantial expansion and diversification of external trade. However, this paper has suggested that the potential benefits of past reforms are nearly exhausted, and that further change is needed to sustain macroeconomic stability and a high rate of economic growth. In particular, we have asserted that it may be necessary to reform trade policy more rapidly and more thoroughly than what has been agreed so far. Although Vietnam's exports have grown rapidly during since the late 1980s, import growth has been even faster, resulting in growing trade and current account deficits. A central question raised by these imbalances is whether the deficits are necessary consequences of a sound long term growth strategy or a sign of some fundamental structural problems in the Vietnamese economy. We have argued that the latter alternative is the more accurate, and that the trade deficits are largely generated by import substituting SOEs and foreign multinational companies. The current Vietnamese trade policy is complex and highly restrictive, and promotes investment and production in sheltered import substituting industries. The trade environment is also characterized by a large degree of uncertainty. The Vietnamese government has repeatedly declared that trade liberalization is a central element of the country's continuing economic reforms, and through its membership in the AFTA, Vietnam has made a commitment to eliminate most tariff and non-tariff barriers vis-à-vis the ASEAN member countries within the next decade. Vietnam has also applied for membership in the World Trade Organization and introduced some unilateral trade reforms with support from the IMF, the World Bank, and other members of the donor community. However, …