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Monday, September 26, 2022

WTO commitments open up distribution market

Updated: 17:13’ - 29/06/2012

LL.M Nguyen Nhu Chinh

Lecturer, Economic Law Faculty,
Hanoi Law University

Under the United Nations Provisional Central Products Classification, the distribution service sector comprises four major types of services, namely commission agents’ services, wholesale trade services, retailing services and franchising services.

Distribution services have increasingly developed in Vietnam, especially in the context of trade liberalization. According to Ministry of Industry and Trade, by the end of 2011, the country had 638 supermarkets and 117 trade centers, up by 12.52 per cent and 23.15 per cent respectively over 2010. Compared to the 2002-2006 period, the number of newly established supermarkets during the post-WTO accession period from 2007 to 2011 increased more than 20 per cent (303/251) and the number of trade centers rose over 72 per cent (62/36).

Vietnam’s distribution service market is currently experiencing a fierce competition between foreign and domestic distributors. Many foreign groups like Metro, Big C, Parkson and Lotte came to the country before its WTO accession and have been continuously expanding their operation. Vietnamese distributors have been able to establish their own brands like Saigon Co-op, Citimart and Maximart.

In the course of opening the market, Vietnamese enterprises face many challenges from foreign groups. They have to compete with these groups through diversifying their products and improving their quality. But they also have opportunities to learn experiences on managing modern distribution systems and to expand business cooperation. In order to promote the distribution market, it is necessary to create a complete legal system in conformity with WTO accession commitments.

WTO commitments on distribution services

Upon accession to the World Trade Organization (WTO), Vietnam committed to opening all the four sub-sectors in distribution services and implemented its commitments when it became an official member of the WTO in January 2007. The committed roadmap for opening the distribution service market is as follows:

Firstly, foreign distributors are subject to limitations on goods items they are permitted to distribute in Vietnam. These goods items are divided into two lists: those subject to permanent limitation (prohibition) and those subject to temporary limitation.

The list of prohibited goods is provided in the Section “measures applicable to all sub-sectors in distribution services, including cigarettes and cigars; books, newspapers and magazines; video records on whatever medium; precious metals and gems; pharmaceutical products and drugs; explosives; processed oil and crude oil; rice; and cane and beet sugar. These are sensitive items which Vietnam has no intention to permit foreign distributors to distribute in the country.

Foreign distributors are prohibited from acting as commission agents, wholesalers, retailers and franchisers of all of these goods items. In addition, they are disallowed to sell those goods through establishments opened in Vietnam like joint ventures and wholly foreign-owned enterprises and to sell them online.

The list of goods items subject to temporary limitation covers those specified in the list of limitations on market access which foreign distributors (foreign-invested enterprises) are not allowed to distribute in Vietnam for a certain period from the date of accession.

These items include cement and clinkers; tires (excluding aircraft tires); paper; tractors; motor vehicles; cars and motorcycles; iron and steel; audiovisual devices; wines and spirits; and fertilizers. From 2010, as committed, this list is removed and foreign-invested enterprises are allowed to distribute home-made as well as imported products. However, this list does not apply to franchising services, which means that foreign distributors may provide franchising services with regard to all goods items in this list.

Secondly, foreign service providers may set up joint ventures with Vietnamese partners and their capital contributions must not exceed 49 per cent. 

As of January 1, 2008, they are allowed to contribute capital to joint ventures at any rate.

As of January 1, 2009, wholly foreign owned enterprises are allowed to be established.

Thirdly, online distribution and other forms of electronic commerce - cross-border provision (Mode 1) are those whereby service providers and recipients are not in the same country.

Commitments to Mode 1 apply only to foreign service providers selling goods from abroad into Vietnam via the Internet and in other forms of e-commerce. In this case, foreign service providers stay overseas and do not establish commercial presence like branches or foreign-invested enterprises. According to practices, these commitments do not apply to foreign-invested enterprises in Vietnam selling goods from Vietnam abroad through establishing sale websites or in other forms of e-commerce. Accordingly, Vietnam has not yet made any commitment on the form of online sale, except for sale of products for personal needs and lawful computer software for personal or commercial use.

Fourthly, the distribution by foreign service providers is always associated with the right to set up retail outlets. As committed, a foreign service provider may establish one retail outlet in Vietnam. From the second outlet, they must obtain permission of a competent authority. In this case, competent authorities will base on the following criteria: number of existing service in a particular geological area; stability of market; and geological scale, to permit the establishment of additional outlets (based on the Economic Needs Test - ENT).

Foreign service providers include wholly foreign owned enterprises, joint venture companies between Vietnamese and foreign businesses and companies with foreign capital contribution in the form of share purchase. Therefore, when wholly domestic enterprises engaged in distribution sell shares to foreign investors, they may be regarded as service providers with foreign elements and will therefore be subject to ENT.

Fifthly, regarding franchising services, upon accession, foreign service providers are allowed to set up joint ventures in which their capital contributions must not exceed 49 per cent. As of January 1, 2008, this 49 per cent capital contribution cap is removed. From January 1, 2009, they are allowed to establish wholly foreign-owned enterprises. Branching is allowed from January 1, 2010, on the condition that the chief of a branch must be a resident in Vietnam.

The list of goods items subject to temporary limitation does not apply to franchising services while the list of items subject to permanent limitation still applies.

Legal loopholes

Before the country acceded to the WTO, Vietnam has no single legal instrument specifically governing distribution services. Among the four types of services mentioned above, only agents’ services and franchising services are provided in the 2005 Commercial Law.

Since its accession, the Vietnamese Government has promulgated a number of regulations on distribution services to materialize its commitments. On February 12, 2007, it promulgated Decree No. 23/2007/ND-CP detailing the Commercial Law’s provisions on goods purchase and sale activities and activities directly related to the purchase and sale of goods by foreign-invested enterprises in Vietnam. This Decree set conditions for foreign-invested enterprises to be licensed to trade in goods and conduct other related activities in Vietnam.

In May 2007, the Trade Minister issued Decision No. 10/2007/QD-BTM announcing the roadmap for implementing the WTO commitments on goods purchase and sale activities.

In July 2007, the Trade Ministry issued Circular No. 09/2007/TT-BTM guiding Decree No. 23/2007/ND-CP, which was later amended by Circular No. 05/2008/TT-BTC. This Circular clearly stipulates that foreign investors or foreign-invested enterprises in Vietnam which satisfy the conditions specified in Decree No. 23/2007/ND-CP may carry out purchase and sale activities and directly related activities in the forms and according to the roadmap provided in Decision No. 10/QD-BTM.

However, there remain some inadequacies in the above regulations.

First, regarding the licensing procedures for foreign investors to carry out distribution-related activities, the provisions of Articles 4 and 5 of Government Decree No. 23/2003/ND-CP and its guiding circular stipulating licensing conditions and agencies remain unclear. There are no provisions on the appraisal of investors’ capacity while the procedures are applicable to all investment projects without distinction between small and big investors.

To close this loophole, Vietnam should learn from China’s experience in setting minimum capital requirements for wholesalers and retailers. In addition, licensing must also comply with local planning.

Second, as analyzed above, Vietnam undertakes to permit the establishment of retail outlets (beyond the first one) on the condition of satisfaction of ENT.  However, the provisions of Decree No. 23/2007/ND-CP and Circular No. 09/2007/TT-BTM on this issue are still vague, especially on the application and explanation of the three criteria of ENT. Therefore, it is necessary to issue specific regulations to clarify these issues.

Opening the distribution service market is inevitable in the process of international integration. As this process has both positive and negative impacts, domestic distributors cannot rely on state protectionism. In order to survive and develop, they should bring into play their own strengths in goods sources and costs, etc.-

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