Trade Liberalization, Distributional Coalitions and Economic Growth: A Case of Vietnam

Abstract

This paper examines the economic growth of Vietnam by focusing on trade liberalization and the strategies that the distributional coalitions have chosen in response to this reform. It analyses the tariff schedules annexed to six key free trade agreements that Vietnam signed. This paper finds that the distributional coalitions intentionally under-protect three groups of products to keep their benefits. Group 1 consists of products with high amounts of revealed comparative advantages (RCAs) and a strong presence in the state sector. Group 2 comprises products with low RCAs and a tenuous presence of the state sector. Group 3 represents products where the presence of the state sector is strong, but their production capacities cannot meet the massive domestic demand. The strategically administered under-protection has also allowed the distributional coalitions to preserve their privileges. While these strategies have been effective in achieving static efficiency, they have been considerably less effective in bringing about structural changes necessary for sustainable long-run economic growth.

1. Introduction

It is widely accepted that institutional settings are key determinants that explain different economic performances among economies in the long run [1,2,3]. There have been many arguments contending institutional settings and their essential components, often summarized as ‘market versus state’ [4,5,6,7,8,9]. However, these debates waned suddenly and were dominated by the neoliberal Washington Consensus when the collapse of the Soviet Union and the Asian Financial Crisis occurred in the 1990s. Key components of the Washington Consensus—the rule of law, democratic governance, free market, fiscal budget balance, and the solid protection of private property rights—came to the fore as the prerequisites for sustainable economic growth. They were recommended for less-developed economies and those in transition by multinational donor organizations [10].

The economic performance of economies that implemented reforms showed a wide spectrum. For example, a striking contrast was observed in two transitional blocs. Those economies in the Eastern European bloc that adopted shock-therapy reforms barely achieved the expected economic outcome. Most of them failed to restore their 1989 GDP levels [11]. In contrast, transition economies in Asia including China and Vietnam that adopted gradual reforms outperformed their Eastern European counterparts. An extensive summary of the debate on the rational of shock theory versus gradualist reform in transitional economies is found in [12].

Explanations of this contrast include, for example, the considerable difference in the extent of political regime stability between the two blocs [13], and the presence of a pre-reform period before major reform was launched [14]. These explanations are based on the widely accepted observation that reform almost always creates winners and losers, resulting in intense competition among entrants and incumbents vying to be included in the winners group. It is argued that a stable and strong political regime is more likely to resolve conflicts that arise between the winners and losers during the course of reform with lower costs [2,15,16].

Nonetheless, specific institutional settings may not always function optimally. Institutional settings that were previously effective in managing conflicts under certain politico-economic conditions may no longer operate as efficiently as before. Olson [17] explained the relationship between institutional settings and economic growth, suggesting that a stable and strong political regime can transform into an exclusive entity by establishing a distributional coalition to maintain their monopoly rent. Consequently, this behaviour is likely to hamper both static and dynamic economic efficiency.

The logic that Olson demonstrated regarding the dynamics of distributional coalitions can be applied to analyse the economic growth of Vietnam from two reasons. Firstly, many studies indicate that Vietnam’s economic growth has heavily relied on market embracing reforms. In particular, the exponential growth of exports following trade liberalization is one of key growth engines of Vietnam’s growth. Vietnam’s compound annual growth rate over the last two decades is 6.3 percent. During this period, both exports and imports showed robust growth, averaging at 18.8 percent and 16.9 percent each. The GDP share of merchandise trade jumped from 60.7 percent to 190.2 percent (the author’s calculation using data from the World Development Indicators). Moreover, Vietnam has successfully diversified its export structure, shifting from low demand-elastic products such as rice and coffee to high demand-elastic goods such as machinery, computer chips and mobile phones [18]. Secondly, the state sector of Vietnam is an entity that has dominated its politics and economy, which has established a significantly stable and strong political regime.

Until recently, Vietnam has maintained robust economic growth without significant macroeconomic turbulence for three decades since launching its reform, known as doi moi, in December 1986. However, Vietnam’s economic growth rate has begun to slow down over the last decade. This paper raises barely asked questions regarding Vietnam’s economic growth: Has the political regime in Vietnam transformed into a distributional coalition? If so, how has this coalition affected the structural changes in the export sector? Additionally, will these structural changes, if any, likely enhance or hamper Vietnam’s economic growth? This paper aims to address these inquiries by examining the methods of trade liberalization as well as the protection measures implemented by the distributional coalitions to preserve their incumbent benefits. These measures will be analysed through the examination of tariff schedules annexed to free trade agreements (FTAs) that Vietnam signed.

This paper is structured as follows. Section 2 summarises existing studies that analyse the impact of adopting freer international trade on Vietnam’s economy. Section 3 reviews theories on the parochial behaviours of distributional coalitions in the context of trade liberalization, serving as the analytical foundation of this paper. Section 4 defines the distributional coalitions and explores their development in Vietnam. Section 5 explains the data collection and collation process, and then presents and analyses the collated data. Section 6 concludes that the distributional coalitions of Vietnam have strategically deployed FTAs to preserve their privileges. It further argues that this situation is unlikely to change in the near future due to the hysteresis present in Vietnam’s political economy.

2. Trade Liberalization and Its Impact on the Economic Growth of Vietnam: A Literature Review

Many studies conducted on Vietnam’s economy have shown a positive correlation between trade liberalization and the country’s development, particularly in terms of poverty reduction [19,20,21]. Multilateral international organizations such as the World Bank and the International Monetary Fund (IMF) that are key proponents of laissez-faire international trade regularly publish documents, such as the World Bank’s Taking Stock and the International Monetary Fund’s Staff Country Report, highlighting liberalized trade as a crucial factor for the rapid growth of Vietnam. However, they also caution against the weakening of continued reform, which remains a significant obstacle [22]. In contrast, Ngo [23] presents a critical argument, suggesting that trade liberalization has exposed Vietnam to excessive competition in the motorbike industry because of poor industrial policies from the analysis of the Vietnam–China border trade.

Regarding the correlation between trade liberalization and wage rates, some argue that there has been a negative relationship between these two from the analysis of firm level data [24]. Others argue that there is a positive correlation largely due to the increasing demand from the export sector [25]. Similarly, the wage-premium works only in the export sector and in FIEs [26] and the Stolper-Samuelson theorem is observed in labour-intensive industries [27].

Studies on the winners and losers of trade liberalization have often overlooked the impact on the dominant politico-economic groups in Vietnam. Understanding how their interests are affected by trade liberalization and their reaction to it is crucial to correctly assess and predict Vietnam’s economic growth. However, few scholars have specifically focused on this matter. For example, Ghosh and Whalley [28] conducted simulations to assess the impact of trade liberalization on the efficiency of state-owned enterprises (SOEs) using data from the 1996 Input-Output Table of Vietnam. Running three versions of the specific factor model, they show that free trade results in the fall in shirking in SOEs, the output increase in the import-competing sector, the output decrease in the export sector, and welfare gains. Vu-Thanh [29], whose work inspired this paper, highlighted that Vietnam’s accession to the World Trade Organization (WTO) has indeed made the state sector reform regressed because of the perpetuating doctrine of keeping the dominance of the state sector. Nonetheless, he did not provide detailed explanations of how this doctrine was implemented.

3. Theories on the Behaviour of Distributional Coalitions

Adopting freer international trade almost always entails institutional changes. For example, new rules are legislated, the existing ones are amended or abolished to foster the free market, and competition is encouraged. These changes often challenge monopolized power, and the incumbent power is likely to respond in various ways to these changes. It is most likely they do not welcome the changes that would potentially threaten their privileged status.

However, there are cases where distributional coalitions may not resist institutional changes. If distributional coalitions are so solid that the odds of losing their power are effectively low, they have no reason to resist institutional change as long as they can strategically embrace or even initiate institutional changes [30]. In general, distributional coalitions tend to resist reforms that pose a threat to their political power. This effect, known as the “political replacement effect” [30] (p. 129), can have implications for economic growth. Historical examples, such as the landed elites in Russia and Austria-Hungary during the 19th century illustrate this phenomenon. These elites blocked development, likely due to the higher political stakes they faced and the greater likelihood of losing their political power.

The strategic behaviour of distributional coalitions and their response to institutional changes have been explained by various versions of rent-seeking theory. The author reviews the central ideas of several theories to set up an analytical framework for this paper.

3.1. New Political Economy Game Theory

The New Political Economy (NPE) explains and solves issues of political decision-making by utilizing the framework of individual utility maximization from neoclassical economic theory [31]. The NPE assumes that politicians are personal utility maximisers who are primarily driven by their interest in winning elections or holding their positions. This motivation compels them to listen to the voices of their constituency. This perspective is extended to the analysis of trade policy [32,33]. The idea that trade policy can be influenced by external factors exemplifies how politicians are not entirely free from the influence of economically powerful constituencies [34,35,36].

Grossman and Helpman [37] provided an insightful game theory model that explains the decision-making problem of governments during FTA negotiations, particularly in selecting which products or industries should be included in the protection list. Politicians involved in FTA negotiations are expected to assess the benefits of entering into the agreement compared to not doing so, taking into account factors such as the gifts they receive from distributional coalitions and the welfare of the public. The decision-making problem of the government can be described by the following equation: $\sum _i{C}_{iF}+a{W}_F\ge \sum _i{C}_{iN}+a{W}_N$ (where W represents aggregate welfare under free trade (F) and no free trade (N), and C represents the gifts associated with the realisation of an FTA (F) and without an FTA (N)). The government will endorse an FTA if and only if the above condition is satisfied [37] (p. 671). The government can “avoid the biggest political costs associated with an FTA, and the net political gain may be positive once these particularly exposed sectors are sheltered from the agreement” [37] (p. 683). It is apparent that distributional coalitions would engage in intense lobbying efforts to have their industries included in the protection list.

The viewpoint of NPE may not fully capture the dynamics of Vietnam’s distributional coalitions, as the relationship between the government and the distributional coalitions is not simply a patron-client one. In the NPE models, special interest groups typically lobby the government to include their industries in the protection list. However, in the case of Vietnam, SOEs, which are the counterparts of special interest groups, do not need to engage in such lobbying because it is the government itself that aims to prioritize SOEs by including them in the exclusion list during FTA negotiations. Therefore, analysing the workings of this state-sector priority doctrine requires a broader perspective beyond that of an individual utility maximiser.

3.2. Political Settlement Approach

The political settlement is defined as “a description of the distribution of power across organizations that are relevant for analysing a specific institutional or policy problem” [16] (p. 640). The power distribution among these organizations is primarily determined by their holding power, which allows them to outlast their competitors either by inflicting pain on them or by enduring pain for a longer period. As a result, organizations that are more powerful have a higher likelihood of winning contests [38].

A political settlement is not a static arrangement and can evolve over time. While gradual changes are common, disruptive shifts can occur if powerful organizations become dissatisfied with their current share within the settlement. North, Wallis, and Weingast stated that “(i)f a group attempts to extract too much, then other groups who normally are not active on an issue are likely to begin paying attention and become active, with the potential to alter dramatically the political forces on this issue” [15] (p. 128). It is not difficult to speculate why distributional coalitions try so hard to keep their interests. Economists now can explain better the motivation behind this with the endowment effect developed in behavioural economics. People put more value on what they already own and price it higher than the bidder prices it. Incumbent vested interests are likely to evaluate their stake at much higher value than contenders do [39], which also implies that providing compensation to the contender is cumbersome because the contenders can walk away any time if they feel the proposed compensation is unfair [40]. Hence, the holding power of the incumbent hinges not only on the resources they hold, but also on the expected evaluation. If the conflicts amongst distributional coalitions are managed in a way to maintain political stability and circular and flow of resources, it is said that the political settlement is growth-enhancing. If, however, the conflicts are heated, this would disrupt political settlements, which could be growth-hampering. For example, it is argued that enterprises owned by the party or military have led to productive economic outcomes in Rwanda [41] in contrast to the general phobia of mainstream economists on the state in business [42].

3.3. Theory of Collective Action and Distributional Coalitions

As explained in the next section, the distributional coalitions in Vietnam are not only encompassing but also directed by the political doctrine. Their parochial behaviour is not easy to explain using an individualistic approach. Olson [17] developed the theory of distributional coalitions to explain the rise and fall of economies in terms of the scope and strength of distributional coalitions. These coalitions are often so firmly cartelized that they possess enough power to resist reforms that are expected to enhance the growth of their nations but may endanger their own interests. Bischoff [43] also argued that stable democratic political regimes are less capable of adjusting to shifts in their economic environment compared to relatively short-lived democratic regimes.

Olson argued, after observing the experience of the British economy from the late 19th to the early 20th century, that accommodating mutually advantageous freer international trade alone is not sufficient to foster economic growth. He proposed that certain policies should be deployed to weaken the reaction of distributional coalitions. Moe [44] expanded on this approach by introducing the concept of Schumpeterian growth, drawing from nine historical cases in five industrialized economies. This is why Vu-Thanh [29] argued that despite Vietnam’s adoption of trade liberalization and subsequent formal institutional changes, there has been a retrogression of reform in Vietnam. For example, Vietnam newly promulgated or modified approximately 500 laws and regulations to align with the core values of the WTO, such as free trade and fair competition. As demonstrated in this paper, the distributional coalitions in Vietnam have effectively maintained their monopoly power by strategically implementing tariff protection.

However, it should be noted that distributional coalitions often pay more attention to promoting the national growth if they are encompassing since their share in gains (or losses) is positively correlated with the growth national economy. The downside of being encompassing is that the market distortions resulting from the monopoly power of distributional coalitions can lead to general depression or macroeconomic malady [17]. The theory of distributional coalitions suggests that regardless of whether they are encompassing or not, distributional coalitions are likely to become entities that hamper economic growth or, at best, maintain simple reproduction in the long run as societies develop [45]. This paper applies the theory to the case of Vietnam.

4. The Distributional Coalitions in Vietnam

At first, it is necessary to specify the distributional coalitions in Vietnam. They are encompassing entities that have evolved over the course of economic reform towards a multi-sectoral economy in which the state sector plays a leading role. Three entities—the Communist Party of Vietnam as a governing organ, the state apparatus as planning organs and state-owned enterprises (SOEs) as executing agents—are interdependently involved in preserving the doctrine of the state-sector priority as a means of achieving the ultimate goal of the Socialist Republic of Vietnam. To accurately reflect the nature of the executing agents, it is more suitable to use the term ‘distributional coalitions-related enterprises’ instead of SOEs, as there are many first that informally belong to the state sector. As [46] quoted Đào Xuân Sâm, a leading reformist thinker of the 1980s, who stated that “one should understand that in Vietnam the public is never entirely public and the private is never entirely private” (p. 4). This has resulted from the development of obscure property rights throughout the reform process. However, documenting this phenomenon is rare, and it is extremely difficult to trace and substantiate its reality. For the purpose of this paper, the term SOEs will be used, excluding the informal private firms that belong to the state sector. This is the kernel of the evolution of the distributional coalitions in Vietnam. The outcome is a symbiosis between socialism and a market economy, officially referred to as the ‘socialist-oriented market economy (kinh tế thị trường định hướng xã hội chủ nghĩa)’ in the Constitution of Vietnam.

Considering that economic reform or liberalization typically involves the retreat of the state sector, one might wonder how this state-market symbiosis is viable. This question has been explored in some studies on Vietnam. For example, Adam Fforde explained the symbiosis referred to as ‘state business interest’, which began to arise in the early 1980s as a result of the commercialization of the state sector under the planning economic system. The state business interests have never been seized but have also grown stronger throughout economic reform. SOEs, executing agents, operate business and generate revenue, and the state apparatus (or supervising organs) and the CPV continue to claim on the ownership of the revenue of SOEs [14,46].

The development of the present distributional coalitions in Vietnam is closely intertwined with access to limited resources whose distribution has historically been under the discretion of the CPV and the state apparatus. The distributional coalitions emerged from the so-called ‘limited access orders’ in which coalitions of groups with power were organized and rents were secured for themselves. Limiting the ability to form contractual organizations only to members of the coalition ties the interests of powerful elites directly to the survival of the coalition, thus ensuring their continued cooperation within the coalition [15] (p. 17).

Hence, in the context of Vietnam, the decline of the state sector that would be caused by reform would lead to the systemic dissolution of the distributional coalitions. All participants in these coalitions have a strong common motivation to keep alive the state sector, which has resulted in a symbiotic relationship between the state and the market. The distributional coalitions in Vietnam consist of powerful political and economic groups that share the common objective: keeping the dominance of the state sector and upholding the values of socialism. It is highly unlikely for these coalitions to opt for subversion of the regime, as it would be contrary to their interests. Instead, their preferred strategy is to ostensibly support and participate in reforms, which allows them to conceal their parochial behaviours while still preserving their own interests.

Olson [17] explained that distributional coalitions can hinder the welfare of a nation they belong to by pursuing their own interests instead of focusing on the overall size of the pie. They are primarily concerned with capturing a larger portion of the pie for themselves. The behaviour of distributional coalitions exhibiting parochial tendencies becomes evident during FTA negotiations. Vu-Thanh [29] who inspired this paper showed that the accession to the WTO failed to reform the state economic sector in Vietnam because its leadership kept requesting to keep the interest of state-owned enterprises. They are likely to exert influence over negation delegates in order to preserve their interests, either by having the products they produce included or excluded from the list of protected items [37]. It is often assumed that a distributional coalition that fails to have its products included in the protection list will lose its privileges. However, the analysis presented in this paper reveals that it is not necessarily the case. Some SOEs that produce goods with a comparative advantage have been able to protect their interests by having their products excluded from the production list.

The agreed list of exclusions that reflect the self-interestedness of distributional coalitions has the potential to either enhance or hamper long-run economic growth path of a nation, depending on the composition of products on the list. Over-protected products included in the protection list are likely to burden Vietnam’s long-run economic growth. Despite being provided with favourable access to scare resources such as capital and land, many of these products are not competitive in the global market, let alone in the domestic market. Furthermore, the protection granted to these products has resulted in foreign-invested enterprises (FIEs) dominating industries that generate a significant amount of value-added. Vietnam has primarily served as an assembly base within global production networks, where it has taken a relatively small portion of value-added. The doctrine of the state-sector priority has hindered the emergence and development of medium and high-tech industries that not only create more value-added but also have strong backward and forward linkages.

It is not odd to assume that Vietnam’s distributional coalitions have deployed the tariff schedule as a means to preserve their interests. However, it is challenging to provide detailed explanations on how exactly the distributional coalitions have protected their interests in the face of trade liberalization, because these activities are typically not well-documented. Recognizing this limitation, this paper addresses this question by collating information on the products produced by the distributional coalitions in Vietnam and cross-checking whether these products are protected under the tariff schedules annexed to FTAs. To better comprehend the protection strategy employed by the distributional coalitions, this paper conducts an industry-level analysis following the classification of the Harmonized System (HS) 2002 codes at the two-digit or four-digit level. This analysis reveals that the protection strategy has been selectively applied to specific sectors.

5. Trade Liberalisation and the Reaction of the Distributional Coalitions in Vietnam

As discussed above, government delegates who are more or less influenced by distributional coalitions of each country include a carefully chosen protection list in mutually agreed trade treaties. Infant industry protection is one of key themes that justify the trade restriction that low-income countries often choose to achieve industrialization in the face of growing requests for freer international trade by high-income countries. A significant amount of literature both for and against infant industry protection has been produced. However, this paper does not cover this extensive debate. An interesting debate between two schools of thought on industrial/trade policy is presented in the discussion in [47]. This implies that a tariff schedule annexed to an FTA can be used as a proxy to demonstrate the protection strategy of the distributional coalitions. This paper identifies protected products by collating data from the tariff schedules annexed to six key FTAs that Vietnam singed, and then compares them with main goods produced by SOEs. It should be noted here that in this paper, the terms ‘SOEs’ refers to ‘distributional coalitions-related firms’ whose ownership may or may not be held by the state. Distinguishing purely private firms from purely state-owned ones is a challenging task [14,48,49].

5.1. The Dominance of the State Sector

Examination of some economic indicators will reveal the dominance of the state sector. The General Statics Office of Vietnam defines an SOE as a firm in which the share of state capital is above 50%. The state includes state apparatus such as ministries, local governments and the military.

As demonstrated in

Table 1. Key indicators of the state sector of Vietnam (unit: percent).

	SOEs a	Non-SOEs a	FIEs a
GDP share
2005	35.59	49.19	15.22
2010	33.55	49.12	17.33
2015	31.67	49.09	19.24
2019	28.55	49.36	22.08
CAGR b	−1.46	0.02	2.51
Number of acting enterprises
2005	3.61	93.1	2.52
2010	1.18	96.23	2.14
2015	0.64	96.66	2.31
2019	0.32	96.88	2.41
Number of employees in acting enterprises
2005	32.67	47.76	16.49
2010	16.45	61.42	19.53
2015	10.67	59.99	26.99
2019	7.31	59.90	30.22
Annual average working capital
2005	54.08	26.15	11.48
2010	34.13	50.30	9.69
2015	31.36	49.77	15.28
2019	22.84	59.08	15.29
Value of fixed asset and long-term investment of acting enterprises
2005	51.10	20.60	14.84
2010	37.75	45.72	10.66
2015	43.95	36.90	14.89
2019	21.88	55.73	18.61
Profit before taxes of acting enterprises
2005	39.93	8.98	5.33 (51.09) c
2010	32.33	32.46	11.46 (35.21) c
2015	28.42	27.23	30.87 (44.35) c
2019	23.18	31.20	36.76 (45.62) c

Notes: ^a: SOEs: firms in which the share of state capital is above 50 percent; non-SOEs: private, collective, limited liability and joint-stock companies in which either the share of state capital is less than 50 percent or non-existent; FIEs: firms in which the share of foreign-invested capital is 100 percent, excluding joint ventures. ^b: CAGR: Compound annual growth rate. ^c: Shares when joint ventures are included. Source: The Statistical Yearbook of Vietnam. Downloadable at https://www.gso.gov.vn (accessed on 15 April 2023).

, the dominance of SOEs declined across various indicators, including their contribution to GDP, the number of SOEs, the number of employees they hire and the profits before tax they earn. The small number of SOEs further affirms the dominance of the state sector. As of 2019, the reported number of SOEs was 2109 which accounted for just 0.32 percent of the total number of enterprises with business outcome. Despite their limited number, a handful of SOEs consumed around 23 percent of the total working capital, hired 7.3 percent of the total workers, made 22 percent of the total physical investment and earned 23 percent of the total profits. However, they are not particularly efficient in utilizing working capital which is a scare resource in Vietnam. On the other hand, FIEs spent 15 percent of the total working capital to earn 37 percent of the profits before tax. In terms of job creation, FIEs that employed 30 percent of the total workers once again outperformed SOEs. However, there is another aspect of SOEs to consider. While it is often believed that SOEs tend to be large in size, there is a large number of small-sized SOEs in Vietnam. As of 2019, according to the General Statistics Office of Vietnam, out of the 2109 SOEs, 146 of them reported a capital size smaller than VND 10 billion (equivalent to USD 454,000) and 113 had fewer than ten employees.

5.2. Data Collection and Collation

5.2.1. Collating the Protection List from Tariff Schedules

Vietnam signed 15 bilateral and multilateral FTAs and is negotiating four FTAs as of May 2023. Signatory economies include ASEAN, Australia, New Zealand, China, Hong Kong, India, Japan, Korea, Chile, the EU, the Eurasian Economic Union, the UK and the US. For this paper, six FTAs have been selected based on their signatories’ average contribution, accounting for 77 percent of Vietnam’s total trade from 2004 to 2019. The selected FTA economies are China, Korea, Japan, the US, ASEAN and the EU.

Table 2. Key facts of six FTAs that Vietnam signed with the US, China, ASEAN, Japan, Korea and the EU.

Economy	Year in Effect	HS Code Used	Average Share of Trade, 2004–2019, % b	Tariff Rates (%) or Years of Reduction (Y) c
US	2001	HS 2002	11.5	2, 3, 4, 5, 6, 7 and 10 Y
China a	2005	HS 2002	17.8	3, 5, 8, 10, 12, 13 and 15%
ASEAN	2009	HS 2007	16.5	5, 8 and 20%
Japan	2009	HS 2007	10.1	4, 6, 8, 11 and 16 Y
Korea	2015	HS 2012	9.3	3, 5, 7, 8, 10 and 15 Y
EU	2019	HS 2012	12.0	4, 6, 8, 10, 11 and 16 Y

Notes: ^a: Vietnam has not signed a separate bilateral FTA with China. Instead, a multilateral FTA between ASEAN and China was signed in 2005. ^b: The ratios are calculated by dividing the sum of exports and imports of each economy by the sum of Vietnam’s exports and imports in each year. The average of these ratios is then calculated over a period of 15 years. The trade data used for this calculation were collected from the World Integrated Trade Solution (WITS) website accessible at https://wits.worldbank.org (Accessed on 2 May 2023). ^c: The numbers in this column present all phases of tariff reduction declared in the tariff schedules annexed to the FTAs. The FTAs with ASEAN and China declared that tariff rates would become reach zero percent among signatories by 2018, with exceptions for some sectors included in the ‘general exception list’. All the FTAs allow for immediate removal of tariffs and exemption of tariffs.

provides a summary of key information regarding these FTAs.

The protection list is compiled from the tariff schedules annexed to the FTAs, and the relevant documents are gathered from the official webpages of each FTA. For example, the documents of the FTA with the EU can be accessed at https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/vietnam/eu-vietnam-agreement/texts-agreements_en (Accessed on 1 May 2023). Alternatively, you can visit the WTO Centre and Vietnam Chamber of Commerce and Industry (https://wtocenter.vn/fta; accessed on 1 May 2023) to obtain information regarding all the FTAs that Vietnam has signed thus far. As indicated in Table 2, three different versions of HS codes were used in the FTAs, and this paper converts them to the codes of the HS 2002 version. The conversion method used in this paper is explained in a document published by [50]. Correlation tables can be accessed at https://unstats.un.org/unsd/trade/classifications/correspondence-tables.asp (Accessed on 1 May 2023). The product information is collected at the four-digit level but is presented at the two-digit level in this paper due to space constraints. The classification of HS codes at the two-digit level is presented in Table S1.

Two criteria are used to create the protection list: the strength of protection, measured by tariff rates, and the length of protection, measured by tariff-reduction periods. As indicated in the last column of Table 2, each FTA specifies either the phases of tariff reduction (ranging from six to eight phases) or different tariff rates (ranging from as low as two percent to as high as twenty percent). A product is counted as ‘protected’ if it meets either of the following conditions: its tariff rate falls within the two highest rates, or its reduction period falls within the two longest periods.

For example, within the tariff schedule annexed to the EUVNFTA, one can come across the entry “8703.10.10; Golf cars, including golf buggies; 78.0; B10”. This signifies the prevailing base tariff rate for this product is 78 percent, and it is expected to be eliminated over a span of 11 consecutive years through even reductions. Consequently, the product with HS code 8703.10.10 should be included in the protection list under the category of 8703 at the four-digit level and 87 at the two-digit level. This category belongs to ‘Section 17 Vehicles, aircraft, vessels and associated transport equipment’ in the HS 2002 classification.

This paper iterates the same process for all six FTAs to create the protection list. It is expected that certain products will be consistently protected across the six FTAs. This paper measures the frequency of their appearance and presents the results in Figure 1. Out of all the products analysed, a total of 3599 products are found to be protected in the six FTAs. The sections with the highest frequency of protection are 86–89 (Vehicles), 15 (Processed foods) and 84–85 (Machinery and Electronics). On the other hand, the sections with the lowest frequency of protection are 97–99 (Art), 50–63 (Textiles) and 47–49 (Papers).

5.2.2. Collating SOEs Products

The task of collating information on the goods produced by SOEs begins with identifying and delimiting SOEs. In Vietnam, large SOEs are commonly referred to as General Corporations (GC, Tổng Công ty), specifically GC 91 and GC 90. The name GC 91 and GC 90 originated from the serial number of government documents that stipulated the establishment of these groups. GC 91s were formed based on the Prime Minister Decision QD 91/TTg and GC 90s were formed according to the Prime Minister Decision QD 90/TTg. Both documents were promulgated in April 1994. GCs are state conglomerates that consist of multiple affiliate SOEs. GC 91s are generally larger and more significant in terms of their size and contribution to the economy compared to GC 90s. Some of GC 91s are now referred to as state economic groups (SEGs). There are twenty-two GC 91s of which ten are SEGs as of May 2023. Whilst accessing the information on GC 91s was relatively easy, finding information on GC 90s is challenging, as the most recent publicly available list was produced by the Ministry of Finance of Vietnam in 2011. This list includes 78 GC 90s, and 73 of them were traceable as of May 2021. A complete list of GC 91s and GC 90s that this paper uses to collate product information is presented in Tables S2 and S3.

Having obtained the list of GCs, this paper collates information on the goods they produce by visiting each GC’s official webpage. These webpages typically contain details about the GC’s main business areas, main products and subsidiaries. While conducting surveys or interviews would be the ideal method for data collection, the author acknowledges that arranging official meetings with SOEs can be extremely challenging unless working with significant international bodies or government entities. The author had the opportunity to conduct interviews with SOEs in a particular city in 2005, which was made possible through sponsorship from UNDP Vietnam and support from the Department of Planning and Investment of that city. The process of arranging these interviews was not easy, highlighting the difficulties involved in accessing and engaging with SOEs for data collection purposes.

It is important to note that not all GCs engage in the production of tradeable goods. Therefore, this paper excludes GCs whose primary business areas involve trading, finance, telecommunications, postal services, transportation and logistics. As a result, seven GC 91s and 34 GC 90s are excluded from the analysis. The remaining 54 GCs are examined, and their respective products are categorized based on the HS 2002 codes.

Each GC holds ownership in numerous affiliates, subsidiaries and joint ventures, with some organization charts showing over 100 firms under their control. For the purpose of this paper, the focus is primarily on the main products of the GCs. Therefore, joint ventures and firms in which the GCs do not hold controlling shares are not included in the analysis. After excluding these entities, the number of firms belonging to the GCs amounts to 1056. A total of 741 firms are directly involved in the production of goods rather than providing services. These 741 firms collectively produce a total of 707 different types of products.

It is notable that the total number of SOEs in Vietnam as of 2019 was 2109 as stated earlier in this section. Thus, the sample size of 1056 firms included in this paper is considered substantial enough to identify general trends within Vietnam’s distributional coalitions. A firm-level survey data for Vietnam, known as the World Bank Enterprise Survey 2015, was published by the World Bank. This survey included a total of 996 firms and was conducted between 2014 and 2016. The author iterates the same process to collate information from this survey data. Within the surveyed firms, it was identified that the state had ownership in 37 firms, with its ownership exceeding 50 percent in 15 firms. As the main business area of five firms is either service or construction, the rest ten firms fell into the following sections in HS 2002, which is not quite informative. The sections and the number of firms belonging to each section are as follows: (03) 1, (10) 1, (22) 2, (61) 2, (68) 2, (69) 1, (82) 1 and (89) 1. The survey data can be accessed at https://microdata.worldbank.org/index.php/catalog/2664 (Accessed on 3 May 2023).

The HS code classification of the products produced by GCs is provided in Figure 2. Among these products, the largest number of GCs are engaged in the production of goods belonging to the 50–63 category, which corresponds to textiles and garments. Other prominent sectors include 39–40 (Plastics and Rubber) and 28–38 (Chemicals—Fertilizers, detergents and organic chemicals). On the other hand, the smallest number of SOEs are involved in the production of goods categorized under 15 (Animal and vegetable oils), 90–92 (Optical and medical instruments) and 68–70 (Ceramic products, glassware and articles of stone).

It is notable that a higher proportion of GCs operate in labour-intensive sectors such as textiles, garments, mining, furniture and primary products. The next step in the analysis is to examine how many of the goods produced by GCs are also included in the production list.

5.3. Are Products Produced by the Distributional Coalitions Protected?

To identify which products are over or under-protected, this paper calculates the strength of protection for each product and examines the presence of SOEs in relation to those products. For instance, the strength of protection for products under HS code 15 is determined by dividing the frequency of protection by the total number of tariff protections, resulting in a ratio of (186/3599). Similarly, the presence of SOEs in HS code 15 is calculated by dividing the number of SOEs producing the product by the total number of products produced by SOEs, which results in a ratio of (1/707). If a product’s strength ratio is higher than its presence ratio, it is categorized as over-protected, and vice versa. The comparison of these calculated ratios is illustrated in Figure 3.

At the two-digit level, it is found that 48 codes are classified as over-protected while 33 codes are considered under-protected. For 15 codes, neither tariff protection nor the presence of SOEs is recorded. Around 58.7% of the product codes exhibit over-protection, while 41.3% are categorized as under-protected. These findings suggest that the distributional coalitions may have utilized tariff schedules to protect their own interests. However, it should be noted that the value of 58.7% does not provide definitive evidence, and further analysis is required for a conclusive interpretation.

The author posits that the distributional coalitions deliberately have their products under-protected by deploying the tariff schedules to preserve their interests under certain conditions. To investigate this speculation, this paper employs the concept of revealed comparative advantages (RCAs). RCAs for the period from 2004 to 2019 are calculated using Vietnam’s export data obtained from the UN Comtrade Database. Then, it counts the number of products with RCAs greater than one each year. The results are recorded at the HS 2002 two-digit level. Throughout the period, a total of 3887 products were found to have RCAs greater than one. The frequency of products recording an RCA larger than one is then counted. As an illustration, if products belonging to code 61 exhibit RCAs greater than one 243 occasions throughout the analysed period, then the calculated ratio is 0.063, which is obtained by diving 243 by the total number of products with RCAs greater than one, 3887. The results are depicted in Figure 3. By considering these three indicators collectively, this paper identifies three distinct groups within the set of 33 under-protected products.

5.3.1. Group 1: Competitive in the World Market

Thirteen products that have RCA ratios higher than the average RAC, 1.18, are included in this group. They include coffee and tea (09—numbers are HS codes), cement (25), organic chemicals (28), rubber (40), wood (44), paperboard (48), silk (50), man-made fibres (55), knitted and unknitted garments (61 and 62), concrete (68), articles of iron or steel (73) and furniture (94). Notably, six of these products rank among the top ten in terms of RCA recordings. The six products are coffee and tea (09), cement (25), rubber (40), wood (44), knitted and unknitted garments (61 and 62).

This observation suggests that certain under-protected products possess competitiveness in the global market. Indeed, the most competitive products within this group, namely garments (61 and 62), receive zero tariff protection. Additionally, four out of these 13 products belong to the textile section. It can be inferred that these under-protected competitive products are intentionally kept that way to preserve the interests of SOEs engaged in the production of these products. Trade liberalization is unlikely to be a threat to these highly competitive sections.

In addition to the previously mentioned products, there are a few more that can be considered part of Group 1, despite not exhibiting RCAs greater than the average. These products include rice (10), starches (11), copra (12) and photographic cameras (90). Although they may not surpass the average RCA ratio, they are among the top export items of Vietnam during the same period. Furthermore, even though tin (80) is not classified as a top export commodity, Vietnam holds the position of the eighth-largest global supplier. Therefore, the speculation regarding the intentional under-protection of competitive products remains valid. In total, Group 1 consists of 18 products.

5.3.2. Group 2: Weak Presence of SOEs

In contrast to the products in Group 1, there are 11 products in Group 2 with RCAs lower than the average. Additionally, the production of these 11 products involves fewer SOEs compared to the average presence of 1.72. Hence, this group is characterized as having a weak presence of SOEs. The products included in this group are live animals (01), sugars (17), animal fodder (23), organic chemicals (29), dyeing extracts and paints (32), dextrin (35), Printed books (49), man-made filaments (54), copper (74), aluminium (76) and railway locomotives (86). These products are often utilized as leverage during the negotiation of FTAs. Given their low RCAs and weak presence of SOEs, giving way this group does not significantly harm the interests of the distributional coalitions. Conversely, the distributional coalitions may use this group as a bargaining chip to persuade trading partners to maintain favourable conditions for other key sectors. Thus, Group 2 serves the purpose of preserving the interests of the distributional coalitions.

5.3.3. Group 3: High Political Burden Due to Low Production Capacities of SOEs

Four products remain to be explained: mineral fuels (27), pharmaceutical products (30), fertilizers (31) and ships (89). These products are considered essential goods, excluding ships. It appears that the significant presence of SOEs in these products might be a valid reason to protect Group 3. However, imports of these products far outweigh exports because the present domestic production capability is limited. Imposing protection on these essential products would heavily worsen national welfare. This option is not politically feasible for the distributional coalitions to consider.

Mineral fuels include national key industries such as coal, crude oil and petroleum. One might assume this sector would be protected, but it is not. Vietnam has a significantly increasing demand for coal to operate its thermoelectric power plants, which has not been met by domestic coal production. Vietnam exports crude oil, and the revenue generated from its sales contributed to the national budget. For example, the contribution from the sales of crude oil to the national budget varies depending on the global crude oil price, ranging from 6.5% in 2015 to 2.3% in 2020 [51] (p. 210). However, Vietnam imports petroleum because its oil refineries have limited capacity to meet the demand. According to UN Comtrade data, the imports of these products, on average, are nine times greater than the exports between 2004 and 2019. Pharmaceutical products recorded a negligible RCA, and the imports of these products are, on average, 25 times greater than the exports during the same period. Similarly, the fertilizer industry indicates that the import value was 29 times greater than the export value in 2004, although the ratio reduced to 4.4 times in 2019. Protecting these products and their producers would clearly have a negative impact on the welfare of Vietnamese.

Lastly, the Vietnamese shipbuilding industry, which used to be competitive, faced significant challenges due to a series of corruption and lex management cases involving two leading SOEs—Vinashin and Vinalines—in the early 2010s. This led to a major restructuring of the shipbuilding sector. The RCAs began to decline, falling from 5.2 in 2004 to below one since 2011. It is prudent to acknowledge that continuing to protect the shipbuilding SOEs poses a significant political burden for the distributional coalitions, especially considering that the corruption cases sparked widespread calls for reforming SOEs. As previously explained, when the distributional coalitions are encompassing, the losses they would collectively bear in the event of national economic failure would be significant. Therefore, the distributional coalitions are not inclined to unreasonably protect an industry that is facing challenges, as doing so could jeopardize their entire interests. Thus, the distributional coalitions are cautious about providing unwarranted protection to this sector.

5.3.4. Over-Protected Products

The average ratio of the presence of SOEs in the over-protected products is just 0.76, whereas the average ratio of all SOEs is 1.72. Similarly, the average ratio of protection for the over-protected products is 1.73, while the average ratio of all SOEs is 1.30. These figures support the argument presented in this paper that SOEs receive protection through the FTAs.

Several products deserve attention. Tobacco (24), machinery (84), electronics (85) and vehicles (87) have the highest levels of protection. Machinery and electronics are the main export items. The RCA of machinery is 1.60, while that of electronics is 3.86.

However, in Vietnam, the main players in these sectors are FIEs rather than SOEs or domestic private firms. The dominance of FIEs in the motorcycle market in Vietnam, characterized by crony capitalism, has been well analysed by [52]. The protection of these products likely aims to raise tariff revenue because Vietnam operates as an assembly hub, requiring a substantial number of imported inputs for these FIEs.

The RCA of tobacco is 0.39, indicating that it is not a competitive product. Given that tobacco products are typically monopolized by the state in many countries, it is not surprising that Vietnam imposes strong protection measures on these products.

On the other hand, the RCA for vehicles is 0.98, suggesting limited competitiveness in this sector. However, the level of protection for vehicles is extremely high, with a ratio of protection reaching 21.39. This indicates that around 21 out of every 100 tariffs are imposed on vehicles. Further examination reveals that the RCAs of four-wheeled vehicles, mainly 8703 and 8704, are negligible, while those of two-wheeled vehicles, such as motorcycles (8711) and their parts (8714) and wheelchairs (8713), are relatively higher. Detailed classification is presented in Table S6. The protection of four-wheeled vehicles (8703 and 8704) is 6.7 times greater than that of two-wheeled vehicles (8711). One possible explanation for this disparity is that the automotive industry in Vietnam is dominated by FIEs, whereas some SOEs produce four-wheeled vehicles like trucks and lorries, but there are no SOEs involved in the production of two-wheeled vehicles. It is worth noting that some SOEs produce passenger cars and buses, this aspect is not included in the analysis conducted in this paper. The reason for exclusion is that these vehicles are manufactured through joint ventures in which SOEs do not hold controlling shares. For example, companies like Toyota Vietnam and Honda Vietnam have Vietnamese partners, such as VEAM (Vietnam Engine and Agricultural Machinery Corporation), which is one of the GC 90s.

5.4. Implications for the Long-Run Economic Growth of Vietnam

This paper has examined how distributional coalitions in Vietnam have effectively deployed tariff schedules to protect their interests in the context of trade liberalization. The implication of this behaviour for the long-run growth path of Vietnam are significant. As reported in

Table 3. Top export products of Vietnam and SOEs’ involvement (HS 2002, four-digit, 2004–2019).

HS Code	Description	Points	SOEs Produce?
6403	Footwear, with outer soles of rubber and uppers of textile	259
2709	Crude oil	248	Yes
9403	Furniture, other than seats and beds	238	Yes
6404	Footwear, with outer soles of rubber and uppers of leather	220
1006	Rice	202	Yes
0901	Coffee	194	Yes
8525	Mobile phones	193
6204	Female clothes (not knitted)	172	Yes
8471	Automatic data processing machines	158
8544	Insulated electrical conductors	141
0304	Fish fillet	133	Yes
8517	Electrical apparatus of line phones	133
6203	Male clothes (not knitted)	130	Yes
0306	Crustaceans	125	Yes
4001	Rubber	122	Yes
6110	Sweaters	106	Yes
8542	CPU	101

Note: The points in the third column are calculated as follows: The UN Comtrade data are sorted according to the value of exports, measured per thousand US dollars. Then, this paper selects the top 20 products each year between 2004 and 2019 and assigns 20 points to the first-ranked product and one point to the twentieth-ranked product. These points are then summed up. The maximum possible point is 320 if a product consecutively ranks first for 16 years. The table reports 17 products with a point value greater than 100. The table does not include the remaining 20 products that have a point value lower than 100.

, the contribution of SOEs to GDP has decreased between 2005 and 2020. The compound annual growth rate of SOEs stands at −1.46%, indicating that the protection of SOEs has not resulted in the growth of the state sector. This suggests that SOEs have not emerged as leading sectors or demonstrated competitiveness in the global market.

Looking at the industry level leads to a dismal prediction regarding the role of the state sector. As explained above, some products that SOEs produce are competitive in the global market. These products include seafood (03), coffee (09), rice (10), crude oil (27), rubber (40), garments (61 and 62) and furniture (94). Table 3 illustrates that many of these products were among Vietnam’s top exports from 2004 to 2019. However, they do have a downside. They are low-value-added products. On the other hand, high value-added export items such as machinery (84) and mobile phones and electronics (85) are dominated by FIEs, not SOEs.

For example, in 2019, the export value recorded by mobile phones (8525), which ranked first, was USD 40.7 billion, while that of female garments (6204), which ranked eleventh, was USD 3.4 billion. Coffee and rice have shown a similar trend. They were not included in the top 20 export products in 2019. Furthermore, the foreign share of value added in Vietnam has continued to increase over the last 20 years [18]. Ironically, the products that FIEs produce are the ones that are over-protected. SOEs have not taken advantage of this over-protection, but FIEs and their associated firms that have moved to Vietnam have exploited the benefits of over-protection. It should be noted that FIEs may have acted as special interest groups that exert influence on the negotiation of FTAs. As global value chains extend their scope, the power of transnational corporations (TNCs) has become stronger. Hosting countries that rely on the investment of these TNCs may be vulnerable to their requests for the inclusion of their products in the protection list, which may raise sovereignty concerns. One advantage expected from this offshoring is technology transfer occurring through forward and backward linkages, which potentially enhances economic growth. However, studies argue that this has not happened in Vietnam [52,53].

6. Conclusions

This paper examines the tariff schedules annexed to six key FTAs that Vietnam signed, aiming to demonstrate how Vietnam’s distributional coalitions have strategically deployed these FTAs to protect their interests in face of increasing global trade liberalization. The findings of this paper reveal that approximately 58.7 percent of products produced by SOEs are over-protected. Moreover, under-protection has intentionally been applied if SOEs products possess competitiveness in the global market or if the presence of SOEs is weak regardless of the competitiveness of products. This strategic under-protection has been employed to shield goods in which SOEs have a strong presence but lack competitiveness. This approach effectively addressed both the external demand from trading partners for market access and the internal demand from distributional coalitions to preserve the doctrine of the state-sector priority. Consequently, distributional coalitions have successfully protected their interest amidst the ongoing trend of trade liberalization.

The implications of this strategic protection on the long-run economic growth of Vietnam have been less than promising. One strategy for SOEs has been to make them large and competitive [29]. However, a close examination of trade data and tariff schedules reveals that this strategy has been largely ineffective. Competitive SOEs primarily operate in low-tech products such as garments, which contribute only a limited amount of value-added. In contrast, there are no SOEs operating in high-tech products such as electronics, machinery, automobiles and vehicles that have the potential for significant value-added. FIEs, on the other hand, have firmly established themselves in these high-tech products by positioning Vietnam as their assembly base, benefiting from a stable supply of cheap labour. It is notable that the classification of industries has changed following the leading technologies used in each industry and the nature of the combination between labour and capital input. Hence, the typical classification of low-tech and high-tech industries can change. Lall, et al. [54] suggested a new classification reflecting newly emerged combinations of labour and capital along with increasingly fragmented production processes due to global value chains. The development of technological capabilities requires tremendous effort and a well-designed long-term plan, and the present strategic protection measures are unlikely to facilitate technological transfer or foster the learning process in high-tech industries.

Certain changes are necessary in the structure of the existing distributional coalitions and the doctrine of the state-sector priority. However, implementing such changes is not an easy task. Drawing an analogy from biology, “once one team has started to dominate the gene pool of a species, … (i)t is difficult for a minority team to break in, even a minority team which would … have done the job more efficiently” [55] (pp. 171–172). In Vietnam, the doctrine of the state-sector priority holds significant influence. The entire socio-economic-political system has evolved to serve this objective, with the distributional coalitions forming its core. It is highly unlikely that anyone who has the potential to undermine this doctrine will be qualified to join the distributional coalitions. Incumbents have no incentive to disrupt the status quo as long as it reproduces distributional benefits. This suggests the divide between SOEs in low value-added goods and FIEs in high value-added goods is likely to persist. Similarly, Vietnam’s economic growth will continue to rely on the exports of these products produced by FIEs. The growth of FIEs would determine the economic growth of Vietnam unless SOEs and other domestic firms actively engage in the production of high-tech products. To make this happen, the monopoly power held by the present distributional coalitions should be weakened and be shared with other members of society.