Vietnam needs free trade zones

Before the opening ceremony of the zone recently, a businessman told me that the greatest thing the government could do is to give us policies for a free trade zone instead of leaving us hanging.

I share his sentiment. Government Resolution 45 in 2019 discussed the macro design of Hai Phong towards 2030, with an overall development vision until 2045. The resolution focused on researching successful case studies, domestically and internationally, of policy designs and implementation regarding free trade zones, which aims to help the city and the central government make more informed decisions for Hai Phong.

This is a big step, putting free trade zones into the focal point of policy discussions at the government’s highest decision-making levels. However, despite the discussion, implementation remains feeble. Lach Huyen Free Trade Zone, despite the name, remains a prototype to test the waters in Hai Phong, one of the country’s most important commerce hubs.

In international commerce, goods circulation between countries has two major hindrances, the first being taxation and the second being trade management measures including licenses, quotas, specialized inspection, and technical standards, etc. These hindrances slow down the frequency and quantity of trade between countries significantly, and consequently, lower capital circulation. In free trade zones, those hindrances practically disappear, or at least, are minimized.

This should not be mistaken for the related concept of a free trade area, which indicates a group of countries voluntarily bound together by multilateral international treaties to remove trade barriers, quotas, and tariffs. The establishment of free trade zones, meanwhile, can be a unilateral decision of one country, where goods from other countries can be brought to, handled, processed, packaged, and assembled into different products, before the products can be imported into the country or exported to other countries.

Such zones work best at the focal point of international goods circulation networks, especially seaports. Seaports still play the largest role in international trade, handling significantly larger volumes of goods compared to airports or border gates. There are several zones within Southeast Asia, such as Batam and Bintang in Indonesia, Clark and Subic in the Philippines, and Port Klang, and Tanjung Pelepas in Malaysia.

Most significantly, Singapore, the smallest country in the region, has a total of nine free trade zones, with the first one established in 1969.

China participated in zone establishment later, but now already has 21 zones, with the entire Hainan province being one free trade zone, the largest in the world.

If corporates invest in seaport free trade zones, they would gain many benefits, such as becoming a good processing chain for international corporates without necessarily paying either import and export taxes, which significantly improves the corporal profit margin and creates advantages for goods transportation and logistics, regionally and internationally.

Such zones also facilitate the generation of a commerce and logistic ecosystem nationally, which translates to significant increases in foreign direct investments.

If Hai Phong approves the establishment of a free trade zone, Dinh Vu Cat Hai economic zone could be a prime candidate, with the geographical advantage of being a separated peninsula from the main city, and with many seaports. The area also barely has any residents, which makes it easier for the city to create a boundary between the city and the potential free trade zones.

The area could be one gigantic bonded warehouse, with full logistics and manufacturing ecosystems.

Vietnam has participated in 15 international free trade agreements, but still has no free trade zone, a shortcoming which detriments the country’s growth speed. With more of these zones, Vietnam could open the country to large flows of capital, goods, and trade, which would consequently rocket the country’s economy in the future.

*Tran Thanh Hai is an expert on international commerce.