Vietnam's integration process into global trade has evolved on a cycle of seven years. The first step in Vietnam's international trade integration was the conclusion of the bilateral trade agreement with the United States in 2000. Seven years later, Vietnam became the World Trade Organisation's (WTO) 150th member. Another seven years have passed and Vietnam is now part of the Pacific Rim free trade deal – the Trans-Pacific Partnership Agreement or the TPP, concluded in Atlanta on 5 October 2015. While commentators have portrayed Vietnam as the biggest winner among the 12 Pacific Rim countries, can Vietnam capitalise on the opportunities the TPP may bring? Significant commitments made by the signatories to the TPP, including Vietnam, would result in a greater flow of trade in both goods and services within the region and hopefully, would increase the size of the pie for all. This briefing discusses key notable commitments on trade in services made by Vietnam under the TPP.
No More Economic Needs Test
When adhering to the WTO, Vietnam made an Economic Needs Test (ENT) exception in relation to distribution services. This is provided that a foreign-invested entity's establishment of retail service outlets (other than the first outlet) is subject to ENT for each outlet, a time consuming and unpredictable process that has dissuaded foreign investors from directly investing in retail. This exception has been widely considered as an obstacle to foreign investors seeking to invest in the distribution business in Vietnam in particular, as some regulators consider that even a single foreign shareholder with de minimis shareholdings would trigger this requirement. Under the TPP, Vietnam has committed to abolish ENT within five years after the trade agreement comes into force. While it will take time to reap the benefits of this change, investors from TPP countries will clearly profit from this improvement in the long run.
In contrast to Vietnam's WTO commitments whereby it sees WTO as a ceiling for opening the market (and not a floor) by listing those specific services that foreign providers can engage in, under its TPP commitments, Vietnam has listed all measures that are not opened to foreign investors. Pursuant to its WTO commitments, Vietnam promises to open its education sector in the following areas – technique, natural sciences and technology, business administration and sciences, economics, accounting, international law and language training. Vietnam's TPP commitments contain a list of fields in which foreign investors are not allowed to participate – national security, defense, political science, religion, Vietnamese culture and other fields of study deemed necessary to protect its society.
This implies that other than the educational fields listed above, foreign investors from the TPP countries are now free to invest in any other education disciplines, subject to any reservations and/or non-conforming measures made by Vietnam under the relevant trade in services chapter. Vietnam's approach under TPP therefore offers foreign investors more opportunities than under the WTO.
Leasing of Machinery and Equipment Without an Operator (CPC83109)
This service was largely outside the scope of Vietnam's WTO commitments. Pursuant to the TPP, Vietnam now allows service providers from TPP countries to engage in this service via cross-border supply. That means that a service provider located in the United States will be able to lease its machinery into Vietnam.
Interestingly, Vietnam has recently allowed Korean investors to provide this service via commercial presence mode according to the free trade agreement between the two countries signed in May this year.
Financial services are comprehensively regulated under a separate chapter of the TPP i.e., Chapter 11. In addition to regulating market access for this service sector, it also provides for other related aspects such as treatment of new financial services, transparency and administration. Of particular note, Chapter 11 allows financial service providers to directly challenge member states before an independent arbitral tribunal in accordance with the investor-states dispute settlement mechanism as set forth in Chapter 9 (Investment) for certain claims such as the breach of minimum standard treatment.
Each TPP member also makes a list of reserved matters to the general commitments. Vietnam's reservations generally reflect its ceiling WTO commitments in sensitive sectors as well as limitations in its current legislative framework. For example, foreign investment in port infrastructure projects, such as container handling terminals, will remain capped at 50 percent. As for new financial services, Vietnam reserves its right to impose a pilot testing program by imposing a cap on the number of financial service providers or restrictions on the scope of the pilot program.
In comparison to its WTO commitments and other free trade agreements concluded thus far, Vietnam's TPP commitments are significantly broader than in the past, covering business services such as asset appraisal and the real estate business. Those additional commitments, in fact, reflect the country's liberalisation in legislative developments during the WTO era.