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Reason to reform

Released at: 11:52, 17/08/2015 Trans-Pacific Partnership

Reason to reform

Mr. Peter Ryder, Chief Executive Officer of Indochina Capital, shares his thoughts with VET on the effect of the TPP on Vietnam's economy.

by Quynh Nguyen

Do you think the TPP will have a major effect on Vietnam’s economy?

Absolutely, the impact should be really quite remarkable and quite positive. But before I answer your question directly, let me tell you that, although I was not able to join the Party Secretary’s trip or go to any of the meetings in Washington, I did see the film clip of the meeting between Party Secretary Nguyen Phu Trong and President Obama and it really was quite amazing. I had the same wonderous feeling as the Party Secretary: 20 years ago who could have imagined that the Party Secretary of the Vietnam Communist Party would be meeting in the Oval Office with the President of the United States? As important as the TPP is, that meeting itself, for symbolic and very constructive reasons, was monumental as it relates to US-Vietnam relations. 

The TPP is an expansive agreement covering 40 per cent of the global economy. Vietnam is clearly the junior partner in the group, which includes the US, Japan, Australia and other economies that are bigger, in some cases significantly, than Vietnam, but Vietnam will outgrow many of these economies relatively quickly. It’s a great opportunity for Vietnam to become a charter member of this club. 

On the other hand, the TPP will force Vietnam to speed up its reform process, particularly as it relates to State-owned enterprises (SOEs). SOE reform is a key point and a big must for Vietnam to reach its potential from my perspective. One of the other positive things about the TPP is that it sets certain global climate, ecological, environmental, and renewable resources standards that will be critical for Vietnam to meet, not just to help the economy but to improve the quality of life in Vietnam for the Vietnamese people. 

Given that Vietnam conducts a great deal of trade with the US and that the TPP will slash major trade protections, will Vietnamese goods be more competitive post-TPP?

In the context of competitive export pricing, the TPP is much to Vietnam’s advantage. Two-way trade today between Vietnam and the US is enormous. Trade exchange, which was quite modest in 1995 at $450 million, had boomed by 2014, reaching over $36 billion. 

Vietnam’s exports to the US are much greater than US exports to Vietnam. That’s to be expected and is a typical trading relationship between a developed, established economy and an emerging market. I’m sure there are also demands within the TPP for some tariffs on US goods entering Vietnam to be lowered, but the impact on the US economy will be negligible. On the other hand, because the TPP will lower tariff barriers as it relates to a wide variety of goods that are manufactured in Vietnam, the effect will be to make Vietnamese goods even more price attractive and competitive in the US.

 The US is currently not among the leading investors in Vietnam. How will the TPP change this?

To say that the US is not a major investor in Vietnam is far off the mark and a major misconception that has existed for years. Yes, in published tables relating to investment in Vietnam the US usually ranks seventh, eighth or ninth, but the fact of the matter is that a lot of investment classified as non-US is actually of US origin but is funneled into Vietnam via a third country, such as Singapore. A number of large US multi-nationals invest in Vietnam through their Singapore subsidiaries. So if you look at these tables, the investment is registered as being Singaporean but its origin is, in fact, US. That’s one factor that distorts the overall figure. Another factor is that a number of American investors establish subsidiaries in countries that have low or no tax liabilities, like the Cayman Islands and the British Virgin Islands, etc. That’s a tax-effective way to invest, and a lot of investment comes through these channels.

So if you actually add everything up, the officially registered investment from subsidiaries of the US that are investing through other countries like Singapore and Hong Kong and the investments coming through these low tax domiciles, the total US investment is probably the largest of any country. Perhaps Japan and South Korea would still be larger. 
The official way such calculations are made gives the impression that the US is a relatively small investor, but the reality is quite the opposite. And we all know how large two-way trade is between the US and Vietnam. So the American economic presence and impact on Vietnam should not to be underestimated. 

What should Vietnam do to fully prepare for the TPP?

Vietnam has already taken many steps in the right direction in terms of economic reforms, opening up the economy, and creating a level playing field between the foreign sector, the private sector, and the State-owned sector. But, unfortunately, the State-owned sector is still the “gorilla in the room” so to speak, despite the fact that the foreign sector has proven to be very effective and efficient and the domestic private sector has grown enormously over the last 20 years. The State-owned sector still dominates so many core industries and has so many advantages in being able to tap into the banking system for capital and access other preferential treatment. For the TPP to really have a positive impact on the private sector, and I don’t think anyone disputes that the private sector will be the key component of Vietnam’s economy in the future, there has to be more and more reform in the State-owned sector.

That means equitization and really leveling the playing field. Officials here love to talk about leveling the playing field and the playing field is much more level today than 20 years ago. So congratulations to Vietnam for taking so many steps, but so many more steps need to be taken. And it is important not to take two steps forward then one step to the side and one step back. Bite the bullet and move on!

Which sectors will attract the largest investment from the US in terms of both project numbers and capital?

I think the sectors that will benefit the greatest are going to be value-added sectors, exactly those sectors that Vietnam is now entering into in a big way. Of course, textiles will benefit, footwear will benefit, and the types of low-tech manufacturing that still dominate the Vietnamese economy will benefit. But where Vietnam wants to go, obviously, is value-added, and you’ve already seen that in enormously increasing amounts of electronics, components as well as fully-assembled and even manufactured items. You’re seeing it now big time in smartphones, both manufactured components and fully-assembled end products. 

In the long run, the TPP will have the greatest impact on these value-added sectors. Vietnam is already very competitive in textiles, garments and footwear. The TPP will make it even more competitive in these but the bigger upside is for the TPP to make Vietnam even more competitive in value-added sectors and service-oriented manufacturing sectors. Higher paying jobs and more profitable enterprises is obviously where Vietnam wants to go, and here there is also the added benefit of a less negative impact on the physical environment as well.

What advice would you give Vietnamese enterprises seeking investment opportunities from the TPP?

There are multiple components to that. On the one hand, there are laws and regulations that affect foreign investment and the average Vietnamese company can’t do anything to really affect that. So for foreign investment to continue to flow into Vietnam in significant amounts the overall environment, the regulatory environment, is critical. That needs to continue to be improved. It never ceases to amaze me how bureaucratic the domestic investment process is, even after being here as an active investor for 23 years. 

The single most important thing for attracting investment from anywhere (US, Japanese, European or even Brazilian) is to continue to reform and simplify that process. Decentralization has helped an enormous amount, with so many decisions being made at the local level. It’s a very big plus that should be expanded.

Vietnamese companies clearly need to hire a better and more educated workforce, including people with experience in working abroad who possess good language skills and are familiar with international business practice. The more “internationalized” and “fluent” the domestic workforce becomes, the more two-way business will occur as the two sides will speak the same language.

What are the major challenges facing Vietnam’s economy at present?

The world is so dynamic, things are changing so quickly. The need to stay nimble and adaptive is critical. When it comes to technological applications, for example, every week somebody is coming up with a better way to do things. So really staying totally plugged in is an essential, and generally speaking I think the Vietnamese do a really good job at that. It is amazing to me how “wired” Vietnam and the Vietnamese people are as it relates to understanding technology, technological changes, communications, etc.

What are the prospects for the US and Vietnam after the TPP is signed?

From my point of view, the US should be moving closer and closer to Asia as a whole. Yes, Europe is important to the US, and of course we can’t ignore the Middle East, or US-Russian relations, or relations within the Western hemisphere. I’ve been living in Asia for the last 30 years so I’ve long believed that Asia is the global future. The greatest benefit for America is to become more and more socio-economically and geopolitically integrated with Asia and Asia-Pacific. That’s the big picture. And then, within Asia, in my mind, the three most critical relationships for the US are Japan, China, and Vietnam. 

Call me biased, but I believe that of all the ASEAN countries, Vietnam has the greatest potential, from a people perspective, from a cultural perspective, from a geographical perspective, and from a natural resources perspective. Obviously Vietnam and America have a complex relationship born of conflict that is only now becoming a close relationship as both countries and their people have taken enormous steps to heal the wounds and build a special relationship. To my mind, again, Asia is critically important to the US, and within Southeast Asia the most important relationship for the US is with Vietnam. And I would argue that the most important relationship for Vietnam, within the Western world, is with the US.

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