Trade agreements may place huge pressure on the state-owned enterprises in Vietnam

A new generation of trade agreements like the US-led Trans-Pacific Partnership (TTP) Agreement and the Free Trade Agreement (FTA) with the European Union require member countries to create a fair playing field for private business but this is likely to clear preferential treatment for state-owned enterprises (SOEs), raising concerns about their ability to survive.

Regardless of benefiting from subsidies and protections, SOEs are criticized as suffering from ineffectual management and lower profits than private companies. Meanwhile, streamlining efforts designed to augment their competitiveness have fallen completely.

According to Cao Sy Kiem, chairman of the Vietnam Association of Small-and Medium-Sized Enterprises., the agreements place huge pressure on the state sector to reform. If they don’t speed up their restructuring to raise their competitiveness, they’ll fail to compete in the market.

In order to comply with the agreements, the Vietnamese government will have to stop allowing its firms preferred access to loans, tax breaks, public procurement contracts and other advantages that leave foreign and local private enterprises at a competitive disadvantage.

Former Minister of Trade Truong Dinh Tuyen said that the government always strives to offer an equitable business environment and doesn’t differentiate between SOEs and private firms.

This in reality is quite different. As SOEs usually receives privileges like tax exemptions and priority access to land and investment funds. They are watched over from normal market regulations. However, the contributions from SOEs don’t match up to the benefits given to them.

Vietnam has roughly 1,000 state firms which takes up 45 percent of its total investments and assets, and 27 percent of bank loans, but yield less than 17 percent of its industrial output and provide jobs to only 1 percent of the workforce, as indicated by Nguyen Dinh Cung, director of the Central Institute for Economic Management.

With the signing of the FTA, the Vietnamese government will have to give up its power to micromanage bank credit. There is a ground for concern that many SOEs will face a high risk of bankruptcy once the agreements takes effect, as restructuring efforts have dragged. This is particularly evident in the garment sector.

Le Tien Truong, vice general director of state-owned Vietnam National Textile Garment Group said that the TPP, which has entered its final stretch of negotiations, will lower import taxes in many large economies like the US, Canada, Australia, and Japan. Import tariffs in the US, the biggest buyers of textiles, will be cut from 17-32 percent to zero.

The agreement will impose a "yarn-forward rule", which states that every piece of string, button and zipper in a garment will have to come from Vietnam (or one of the other 12 TPP signatories) to qualify for the tariff exemptions.

At the moment, most of Vietnam’s yarn and components are sourced from China and South Korea, which are non-TPP countries, making much of Vietnam’s products ineligible for the exemptions.

Without strategies to develop materials and designs, Vietnam’s domestic garment sector will be downgraded to the small and volatile outsourcing segment. It will have to accept prices decided by buyers for low-added value products.

Half of local garment firms currently export their products through outsourcing contracts with foreign partners that deal in cheap volume rather than quality and design. Vietnam will have a hard time improving the situation, as its garment manufacturers lack the financial strength to invest in their own yarn and textile facilities.

According to former minister Tuyen, the TPP and FTA agreements will force the government to level the playing field for SOEs and non-SOE firms. The agreements will create a driving force for Vietnam to reform its market mechanisms and improve SOE competitiveness.

While, Vo Tri Thanh, vice director of the Central Economic Management Institute is of the opinion that participation in the agreements will create pressure to accelerate Vietnam’s economic restructuring and SOE reform. The pressure will be much greater on Vietnam than during its World Trade Organization negotiations, because the TPP will require Vietnam to abide by the Agreement on Government Procurement.

SOEs will have to operate in a more transparent manner. But, these reforms can’t happen overnight. Although, Vietnam has promised to privatize more than 400 state-owned companies in the next two years and restructure others.

But, the SOE reform has been implemented too slowly. So far, SOEs have only gone seeking approval from local authorities for their restructuring plans, but they have done little to implement them over the past three years.

Some SOEs have only focused on debt restructuring and rearranging their investment. If they continue to deal with short-term issues alone, it will be difficult to improve SOE competitiveness and operational efficiency. Moreover, the 2014 state budget has not allocated any funds for restructuring, hence without great determination and funding for SOE restructuring, it will be hard to accomplish much. This is one major reason for slow SOE reform.

Free trade agreements is likely to be signed late this year and the Free Trade Agreement (FTA) with the European Union early next year.