TPP: Opportunities and challenges for Vietnam

10/10/2015


The Trans-Pacific Partnership (TPP) is a trade agreement between twelve Pacific Rim countries concerning a variety of matters of economic policy which has been secretly negotiated and was signed 5 October 2015 after 5 years of negotiations. Among other things, the TPP seeks to lower trade barriers such as tariffs, establish a common framework for intellectual property, enforce standards for labour law and environmental law, and establish an investor-state dispute settlement mechanism. As of 2011, the agreements goal had been to "enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs."[5] The United States government has considered the TPP as the companion agreement to the Transatlantic Trade and Investment Partnership (TTIP), a broadly similar agreement between the United States and the European Union
Historically, the TPP is an expansion of the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP or P4), which was signed by Brunei, Chile, New Zealand, and Singapore in 2006. Beginning in 2008, additional countries joined the discussion for a broader agreement: Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States, and Vietnam, bringing the total number of participating countries in the negotiations to twelve.
The TPP involves 12 Pacific Rim nations - Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam - which account for 40 percent of the global economic output and 26 percent of world trade. The far-reaching deal aims to dismantle tariff and non-tariff barriers to trade and investment between the participant countries.
It also foresees streamlining regulations, and the implementation of common standards for the protection of foreign investment and intellectual property, among other things. After its successful conclusion and ratification, the deal is expected to serve as a model for future trade pacts. Many countries negotiating the TPP such as Australia, Singapore and Canada already have free trade agreements with the US.
The broad goal of the TPP is to create a trade and investment bloc that covers approximately 40 percent of the world economy. The hope is that the removal of trade and investment barriers will entice countries to join the partnership, despite the high standard of rules the countries are expected to follow.
Furthermore, there will be a unified set of rules for state owned enterprises, intellectual property rights and labor and environmental standards. The ambitious partnership is far more expansive than the World Trade Organization's (WTO) system, but falls well short of achieving the same institutional framework found in the European Union. It is important to note that full implementation of the trade agreement will take a considerable amount of time, perhaps even a decade.
The Trans Pacific Partnership is expected to lower trade and investment barriers that will enable competitive firms to move into new markets, hire workers at better wages, cut prices and improve the range of quality of goods and services available to households and firms.
According to some analysts, Vietnam would be the largest beneficiary on the TPP track and of an Asia-Pacific-wide Agreement. Five factors explain this result are: (1) strong trade with the United States; (2) high protection abroad against apparel and footwear, which are Vietnam’s principal exports; (3) strong competitive positions in these and other manufacturing industries where China’s comparative advantage is fading; (4) high initial domestic protection; and (5) powerful scale effects in Vietnam’s principal production clusters. The first three factors boost Vietnam’s exports and terms of trade under the TPP. The last two amplify these benefits by stimulating productivity gains. Higher incomes in turn enable Vietnam to invest more and grow more rapidly.
The TPP will benefit the economy of Vietnam thanks to import tax incentives pledged by TPP members for the major exports of Vietnam, including garments and textiles. The garment and textile sector has become Vietnam’s spearhead industry with a large amount of export revenue among other export items. With nearly 4,000 businesses, which generate jobs for about 2.5 million people, the sector created revenue of nearly US$20 billion and registered over US$17 billion from exports in 2012. In which, the US has become the largest importer of Vietnamese garments and textiles, accounting for about 50% of the country’s total exports. However, in order to benefit from such incentives, Vietnamese garment and textile products have to satisfy the “Yarn Forward” ROO (Rule of Origin), which requires TPP nations to use TPP member-produced yarn in their textiles to have duty-free access. This greatly affects Vietnam’s garment and textile industry as 90% of materials used in the sector are imported from foreign countries, with most being non-TPP members. So, Vietnam ought to boost support industries to ensure local supply of materials and reduce dependence on imports while improving the quality of the design sector, in a bid to ensure the stable and sustainable development of the garment and textile industry. Also, the Government should build exclusive policies for the industry and zone off industrial zones specializing in garments and textiles, with a focus on the dyeing sector.
The pact, which still needs ratification from individual countries, aims to liberalize commerce and tighten labour and environmental standards across member nations that account for two-fifths of the world economy.
Many of the benefits of the free trade deal will flow to Vietnam, where the economy has been growing at a decent clip as manufacturers beef up their presence.
“This is really transformational for Vietnam,” said Rajiv Biswas, Asia Pacific chief economist at IHS Global Insight. “They’re going to get a very big advantage over many other exporters of garments into the U.S. market,” which currently imposes a 17 per cent duty on clothing imports, he said.
Vietnam’s gains are likely to come at the expense of jobs in Mexico’s apparel and footwear industry as well as the last outposts of those industries in Canada and the U.S. Proponents of the deal say those three countries will see benefits in other industries such as agriculture, machinery and electrical equipment.
The trade pact, combined with a recently signed European Union free trade agreement, is expected to accelerate foreign investment into Vietnam. Manufacturers such as Samsung Electronics have been setting up new factories in Vietnam for several years, underscoring its rising attractiveness over China, a longtime global manufacturing powerhouse that’s been hit by surging labour costs.
Biswas and other analysts say Vietnam’s economy will get the biggest proportionate boost because of its relatively small per-capita GDP. Other countries signing up to the deal include Australia, Brunei, Canada, Chile, Mexico, New Zealand, Peru and Singapore.
By 2025, Vietnam’s economy will be 11 per cent, or $36 billion, bigger than without the trade deal while exports will be 28 per cent larger, according to a Eurasia Group report released in July.
“This percentage increase dwarfs the gains made by any other country,” the report said. Vietnam will become the “preferred destination” for low-cost manufacturers looking to stay competitive, with industries relying on cheap labour, chiefly clothing, shoes and textiles, set to reap the biggest gains, it said.
Manufacturers, especially garment makers, are scrambling to move part of their production to Vietnam in anticipation that the deal will require sourcing materials from participating countries.
Hong Kong-based contract garment maker Lever Style, whose clients include Hugo Boss and J. Crew, has been shifting production from southern China to Vietnam in recent years. The trade pact “will encourage us to migrate even more production,” Chairman Stanley Szeto said.
However, he said its effect on the company’s bottom line would be neutral and “possibly negative.”
“We will try to gain volume in Vietnam but we won’t be most competitive on foreign soil, while we’ll for sure lose volume on our home turf in China. Buyers will probably insist on capturing all the duty savings, so I don’t expect much margin benefit for suppliers,” Szeto said.
Of course, Vietnam would also face significant challenges in implementing an agreement that requires stringent disciplines in areas such as labor and government procurement. It also faces tough challenges in maintaining a macroeconomic environment that permits adjustment and encourages long-term investments.
Firstly, Vietnam should develop an effective and efficient physical infrastructure in terms of roads, railways, ports, airports, electric, water supply system, etc. This creates convenient conditions for tradeby reducing time and costs in both transportation and transactions. Good infrastructure may also induce FDI that has taken an important role in diversifying Vietnam’s exports and in improving the quality and competitiveness of Vietnam’s merchandises in international markets.
Secondly, the country should speed up the changes of export structure by taking it to the next levelin the global value chain.
Particularly, Vietnam’s political system differs from that of the United States but domestic issues will also have a large impact there. State-owned enterprises play an important role in the economy and could face significant adjustments under the competition policy chapter. Labor provisions calling for “freedom of association” would be difficult to reconcile with Vietnam’s single, state-sponsored labor union. Producers in several industries worry that the TPP’s environmental provisions could raise costs. As the country with the lowest per capita income in the TPP, Vietnam hopes for “special and differential treatment”, but the TPP is unlikely to include such provisions. Much will depend on whether provisions affecting its critical textile and apparel exports are favorable enough to justify hard concessions.
In the regards to the structure of Vietnam’s exports, it has been still constructed by a focus on traditional products with the country’s comparative advantages in natural resources like raw materials (e.g., crude oil, coal, and iron ore, etc.), agriculture, forestry and aquatic products (e.g., rice, coffee, cashew nut, pepper, cash fish, etc.) and some light industry products (e.g., garment, textile, and footwear, etc.) with low added value. Low competitiveness and disadvantageous export structure can hinder or prevent Vietnam from reaping the possible benefits of trade liberalization under the TPP.
The proposed Trans-Pacific Partnership FTA would be a significant FTA for Vietnam and could eventually become the platform for an Asia-Pacific free trade area, an area that encompasses 40% of the world’s people and over half of global production. It would be the largest Vietnam’s FTA based on trade flows. Due to the great diversity among the TPP participants, there may be challenges in achieving a comprehensive and high standard agreement. TPP countries vary in terms of population, economic development, and geography.
To this end, what are the implications for Vietnam? It must be noted that to facilitate the competitive ability of Vietnam’s merchandises in TPP member’s markets and sustain an effective paradigm of foreign trade is not a simple task. It requires a careful analysis of related information (e.g., information on each industry, each merchandise, etc.) that the author could not cover in a short time. Generally, the followings are some recommendations to allow Vietnam to achieve sustainable development and enjoy the benefits in the coming years when the TPP enters into force./.
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All comments [ 15 ]


Deck Hero14 10/10/15 13:16

Vietnam’s gains are likely to come at the expense of jobs in Mexico’s apparel and footwear industry as well as the last outposts of those industries in Canada and the U.S.

Only Solidar 10/10/15 13:17

There will be a unified set of rules for state owned enterprises, intellectual property rights and labor and environmental standards.

MaskOf Zero 10/10/15 13:20

As the TPP negotiations near conclusion, both domestic and foreign businesses have begun making upstream investments in Vietnam to take advantage of the preferential treatment that Vietnamese apparel exporters will enjoy under the TPP.

Pack Cassiopian 10/10/15 13:21

Not only will Vietnam’s garment sector gain preferential access to the U.S. market, it will also be able to capture greater added value in the supply chain.

Love Peace 10/10/15 13:23

The TPP — which seeks to govern exchange of not only traditional goods and services, but also intellectual property and foreign investment — would promote trade in knowledge-intensive services in which companies exert a strong comparative advantage.

yobro yobro 10/10/15 13:51

Although China is not part of the TPP, enacting the agreement would raise regulatory rules and standards for several of China’s key trading partners.

Jane smartnic 10/10/15 13:53

There are fears over the impact TPP may have on certain products and services in member countries and some campaign groups have raised concerns about the impact such a wide-ranging agreement may have on intellectual property laws and patent enforcement.

LawrenceSamuels 10/10/15 13:54

Vietnam will become the “preferred destination” for low-cost manufacturers looking to stay competitive, with industries relying on cheap labour, chiefly clothing, shoes and textiles, set to reap the biggest gains.

John Smith 10/10/15 13:55

A major criticism is that it is currently being negotiated behind closed doors by officials from the United States and 11 the other countries.

Gentle Moon 10/10/15 13:56

The lack of transparency and accountability in these highly important negotiations makes very difficult for some stakeholders and experts to provide any input in the process.

Dennis White 11/10/15 00:58

some countries, especially Vietnam will benefit from TPP such as lower export tarriffs, expanding the export markets, attracting the foreign investment,...

Elizabeth Green 11/10/15 01:01

it means that Vietnam's economic dependence on China will reduce. It's very good

Jack Walker 11/10/15 01:09

joining TPP, Vietnam will have chances to more strengthen it's relationship with the US, Japan, which is very neccessary for protecting Vietnam's sovereignty in the East Sea

erica black 11/10/15 01:16

China doesn't join TPP beacause it's afraid that TPP is against this country

Evans David 11/10/15 01:19

thats why many countries have welcome TPP except China. It is easy to understand

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