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Uniquely positioned

Released at: 11:30, 04/08/2015 Trans-Pacific Partnership

Uniquely positioned

Mr. Sandeep Mahajan, Lead Economist at the World Bank in Vietnam, spoke with VET's Quynh Nguyen about what may be expected from the TPP.

by Quynh Nguyen

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

The TPP includes the world’s largest and third-largest economies (the US and Japan) and, collectively, the eleven member countries account for 40 per cent of global GDP. Vietnam, being the only lower to middle-income country in the group, is uniquely positioned to benefit from the agreement in terms of expanding market access for its exports and sourcing new external investment and technology inflows. According to our assessment, implementation of the TPP could potentially add a cumulative 8 per cent to Vietnam’s GDP by 2030; many times larger than for any other TPP member.

The principal source of these gains would be tariff reductions in the TPP region, for textiles and apparel in particular, where US tariffs remain high, at over 17 per cent ad valorem. Reductions in non-tariff measures related to goods and services trade also promise to contribute significantly. Foreign investment in Vietnam is projected to increase by over 20 per cent under the TPP, providing a substantial boost to capital stocks and long-term growth. 

What should Vietnam do to fully prepare for the TPP?

While the exact details of the TPP are still being worked out, indications from ongoing negotiations are that the rules of origin requirements could be a key challenge. For Vietnam, the restrictive “yarn forward” rule, likely to be applied at the product level, will require careful attention, since a vast share of the textiles in Vietnam are imported, mostly from China. The rules of origin restrictions may even be seen as an opportunity for Vietnam to extend its value contribution in global value chains, in particular by promoting a more viable domestic textiles industry and attracting foreign investment into the sector.

Since the TPP negotiations encompass broad-ranging issues such as e-commerce, labor, environmental standards, and intellectual property rights, these policy areas will also need strong action by Vietnamese authorities to fulfill likely TPP commitments. This challenge also presents an opportunity: in this case an opportunity to lock in complex policy and institutional reforms that might otherwise be politically harder to carry out. Ultimately, strong and decisive action in these areas would serve to strengthen Vietnam’s competitiveness and its ability to continue to attract FDI across a broader range of economic sectors.  

Preparations by Vietnamese firms for participating in future TPP production networks are also important. The government can help by keeping domestic firms informed about the underlying TPP process and the outcomes of the various rounds of negotiations, which would help them better understand the associated opportunities and challenges and plan and prepare accordingly.

How will the TPP impact on FDI in Vietnam?

As noted above, Vietnam should benefit from increased foreign investment, from the US and other countries, as a result of the TPP, although any pick-up in investment would only be gradual. Sectors involved in labor-intensive manufacturing (garments, footwear, furniture, food processing, and electronics assembly), where Vietnam enjoys a comparative advantage, appear to have the most potential for drawing additional investment. However, I must add that it is always hard to predict the sectors that will succeed in the future. In this case the prediction is rendered even more difficult by the fact that TPP negotiations are still ongoing. There is a good likelihood that sectors that are currently a blind spot may spring up in Vietnam as a result of the TPP and other external trade agreements, just as the success of the electronics industry could not have been predicted by many ten years ago. 

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  • Mr. Sandeep Mahajan
  • TPP

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