International Conference: Green and inclusive economic rebound in Viet Nam - lessons from international experiences
25 February 2022
Session 2: Trade, Investment and Innovation for a Sustainable Rebound
Keynote address
Excellencies,
Ladies and gentlemen,
I wish to thank you for the kind invitation to deliver this keynote address on issues fundamental for the recovery from the COVID crisis and building a better future.
If there is a country that has harnessed the power of trade and investment to foster economic development, it is Viet Nam. It is a success story.
But as most countries in the world, Viet Nam is faced with the threat of climate change and a digital revolution which has left many behind.
For decades, trade and investment have been engines of growth and development. They are the very face of integration. That is why when COVID struck and spread like a domino effect across the world, trade and investment were hit so badly in 2020. But then both showed remarkable resilience and recovered to pre-pandemic levels in 2021.
Yet, this did not happen across all countries and sectors, creating deeper divides and diverging recovery paths. And the climate emergency and the ever more far-reaching digitalization will lead to further transformations of trade and investment.
In my exposé, I will focus on the opportunities and challenges of trade agreements and FDI to promote sustainable and inclusive growth. I will draw on UNCTAD’s research and experience, and share reflections on how Viet Nam could continue its successful path and achieve its development aspirations.
First, the power of trade.
In support of the country’s reform processes, Viet Nam has pursued a gradual and strategic integration into the international trading system. It joined the WTO in 2007 and has been part of the ASEAN Free Trade Area (AFTA) since 2010, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) since 2018, and the Regional Comprehensive Economic Partnership (RCEP) since 1 January 2022 when it came into effect.
Integration has enabled Viet Nam to seize opportunities provided by international trade and the expansion of global and regional value chains. The country could rapidly increase its productive capabilities in manufacturing, including intermediate goods and technology-intensive consumer goods such as mobile phones and laptops. Today, Viet Nam is deeply integrated into production networks in East and Southeast Asia. It is, to say the least, a manufacturing powerhouse.
The trade-intensive nature of production in global value chains calls for a holistic approach. Such an approach seeks a “trade-investment-services nexus” to reduce transaction costs throughout the value chains.
But not all trade agreements are aligned with this objective. Trade agreements differ in their depth and scope.
Traditional regional trade agreements (RTAs) focus on rather “shallow” integration.
The RCEP is similar to a traditional trade agreement focused on border measures. It leaves countries relatively unconstrained in the use of behind-the-border measures, such as subsidies.
Yet, the RCEP will still bring benefits. It will improve member States’ access to markets, the competitiveness of producers in member States over non-members, and the allocation of resources in the RTA member economies.
But the benefits are neither automatic nor shared evenly across member States. For instance, our estimates show that RCEP tariff concessions may result in lower exports in some member States, including Viet Nam. Due to the negative trade diversion effect, Viet Nam’s exports are expected to fall by US$1.5 billion equivalent to 1.2 per cent of its RCEP exports. Nonetheless, Viet Nam would not be better off by excluding itself from the agreement, as trade diversion effects would accrue anyway.
Several recent RTAs have become deeper and more comprehensive, going beyond the WTO and covering behind-the-border regulatory measures. This evolution is often driven by the desire to support a duty-free and NTB-free trading environment to facilitate trade and activities associated with value chains.
A good example is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The objective of this partnership is broad, and its 30 chapters cover a wide range of issues: Goods, SPS (sanitary and phytosanitary measures)/technical barriers to trade, investment, cross-border trade in services, financial services, temporary entry for business persons, telecommunications, electronic commerce, government procurement, competition policy, state-owned enterprises (SOEs), intellectual property, labour, environment and regulatory coherence.
We know from our research that deeper trade agreements can help member states to establish more stable and stronger trade networks regionally or globally. One of our recent studies showed that trade within RTAs, particularly the deep agreements, has been relatively more resilient against the COVID-19 global trade downturn.
But high-standard agreements can pose new challenges for developing countries.
Regulatory harmonization may constrain developing countries’ regulatory autonomy and “policy space” to pursue proactive industry and development policy objectives.
For instance, the Investor-State Dispute Settlement Mechanism is seen to confer greater rights to foreign investors. This may lead to a regulatory freeze as regulators may refrain from taking certain regulatory actions, such as environmental regulations, out of fear of legal challenge and large financial compensation.
Disciplines on government procurement, state-owned enterprises and export tax can constrain the ability of the government to support domestic industries and SMEs. Some mega-RTAs have sought to address the potentially anti-competitive effect of state-owned enterprises that tend to receive some preferential treatment, and establish “competitive neutrality” between them and private companies. But this might have negative implications for national efforts at delivering public policy goals through state-owned enterprises.
Environmental and social concerns will also increasingly affect international trade deals in the future. An increasing number of government regulations and taxes on traded high-carbon products would be challenging for developing countries. Easing developing countries’ access to clean technologies, increasing global collaboration in green economies, and strengthening developing domestic capacities in these technologies would facilitate the transition towards a greener economy and trade.
Another challenge is that developing countries are often “rule takers”, rather than “rule makers”, in a RTA. It is essential that pure market opening objectives of trade agreements are balanced with a development context. This means that flexibility to design an adequate scope and pace of market opening are needed, together with flanking measures to support productive capacity, domestic innovation and productivity growth.
Adjustment in trade rules may also be warranted in view of the significant disruption to international trade brought by COVID-19. As a number of countries have imposed ad hoc unilateral measures in response to the pandemic, this has highlighted gaps in the existing trade rules in ensuring protection and resilience under crisis circumstances. Addressing paperless customs and trade facilitation, deepening regulatory cooperation on essential goods and services, exercising due restraint on export restrictions, particularly those affecting critical humanitarian needs, taking advantages of digital means, and facilitating transport and logistics services, among others, could be instrumental for reforming existing rules to better serve trade in the post-pandemic recovery.
Now, let me turn to investment.
The rebound of foreign direct investment in 2021 is encouraging. But developing countries, such as Viet Nam, need to continue to attract investments for sustainable development and the recovery from the pandemic. I want to share four ideas in support of this need.
1. Enhance investment for physical and digital infrastructure.
Building efficient and adequate physical and digital infrastructure is sine qua non for inclusive and sustainable growth. Of course, it has a cost. In ASEAN, about US$180 billion annual investment in infrastructure are needed until 2030. This sum calls for a role of the private sector and public private partnerships.
Growth of the digital economy and technology-led businesses is heavily dependent on the provision of fast and reliable telecommunication connectivity, 5G and data center facilities. Viet Nam could do more to strengthen its digital landscape and develop a regional digital hub by attracting investment in telecommunication connectivity, data centers and cloud facilities, and related security infrastructure.
It would also be helpful to develop or upgrade the industrial infrastructure, such as special economic zones and industrial parks, to smart and eco-friendly facilities. This takes me to point two.
2. Promote investment in renewable energy.
Viet Nam recorded a rise in international project finance deals in 2021. About two thirds of the value of these deals in 2021 and more than half in 2020 were in renewable energy activities. These numbers suggest that investors are increasingly interested in investing in renewable energy in Viet Nam. A positive sign.
3. Get ready for Industry 4.0.
Countries are taking actions to increase absorptive capacity for the transformation process triggered by the fourth industrial revolution.
Efficiency of industries will depend on the adoption of technologies, innovation capacity, skills development and attracting investment to build a competitive ecosystem. This should include attracting technology solution providers, manufacturers of Industry 4.0 equipment, centers of excellences, start-ups, related R&Ds and upstream to downstream activities.
4. Invest in health care and digital health.
Growing and ageing populations and chronic diseases are adding significant pressure to fragile health care services in most developing countries.
Private investment can complement public efforts in the provision of care services and universal access. The private sector share of hospitals in Viet Nam is about 20%, which is one of the lowest in ASEAN as compared to about 60% in Cambodia, Indonesia and Malaysia. Promotion of public private partnerships in health care services is worth considering, including the development of digital health, such as telemedicine, to increase efficiency in the industry and increase accessability in remote areas.
In Viet Nam, digital health is still in its infancy, but the country has the fundamentals and potential to support such growth.
The pandemic has also highlighted the importance for building a resilient healthcare industry. This includes attracting investment to strengthen capacity and develop skills for manufacturing of medicines and pharmaceutical products, personal protection equipment and R&D functions.
Promoting medical technology start-ups and building an efficient pharmaceutical industry environment offer a way forward to attract FDI in healthcare.
Ladies and gentlemen,
Both trade and investment offer opportunities to boost inclusive and sustainable growth in Viet Nam, and to contribute to achieving the Sustainable Development Goals. It is worth exploring new and innovative ways to adapt trade agreements and investment strategies to enhance sustainability and inclusiveness.
I hope that with my address I could offer useful reflections for public and private sector actors, and show that economic, social and environmental goals do not need to be at odds with each other but can be pursued simultaneously.
I thank you for your attention.
