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Vietnam Today

Forced to act

Released at: 11:12, 05/01/2015

Forced  to act

The TPP will push Vietnam to address a number of pressing issues if it is to gain maximum benefit from the agreement.

by Huyen Thanh

Vietnam, along with eleven other members of the Trans-Pacific Partnership (TPP), is entering the final rounds of negotiations after concluding more than 20 rounds in the last five years, with a general expectation that the agreement will be finalized with the next six months. Many member countries are complementary to the Vietnamese market, particularly the US and Japan, which are expected to step up their demand for products that are Vietnam’s strengths, including footwear, textiles and garments, and fishery and agricultural products. 

Local authorities have said that joining the TPP will help Vietnam balance its trade relations with key markets and avoid any over-dependence on one particular market, allow it to participate in regional and international production chains, create favorable conditions for economic restructuring and reforming the development model, perfect its legislative environment, improve its attractiveness for foreign and local investors, and create new production capabilities and more employment. However, according to Deputy Minister of Industry and Trade Tran Quoc Khanh the TPP presents many challenges, including competitive pressure and social impacts and pressure to adjust the legal system and improve management capacity.

In order to effectively take advantage of the TPP, Mr. Vu Tien Loc, Chairman of the Vietnam Chamber of Commerce and Industry, said that it is necessary to review the economy’s strengths, identify investment targets, and attract foreign investment. “The agreement will impact on Vietnam’s economy and its markets,” he said. “It will influence institutional reorganization and reforms to the business environment. The combined impact will create new momentum for economic growth. Vietnam can seize opportunities if it has effective internal reform at the macro level and if enterprises can improve their competitiveness.” 

Opportunities & challenges

The agreement will undoubtedly open up a huge market for Vietnam’s exports, said Professor Peter A. Petri from the US-based Brandeis University. The country will enjoy the most benefits in terms of trade performance, foreign investment flows, and closer ties with international production chains, he added. Of all the industries in Vietnam, the textile and garment sector will benefit the most when the country becomes a signatory of TPP agreement. Within the TPP agreement, Vietnam’s textile and garment sector can enjoy zero tariffs for their exports to the US, a key market, instead of the current 17.2 per cent. According to Mr. Le Tien Truong, Vice Chairman of the Vietnam Textile and Apparel Association (Vitas), exports in the industry to the US are expected to increase annually by 13-20 per cent until 2017, fetching total export turnover of $25-30 billion. The US market will then account for 55 per cent of all exports by the sector, against the current 49 per cent. By 2025, the sector’s overall export turnover may reach $50-55 billion. Vitas also acknowledges that Vietnam still imports most of its raw materials for textiles and garments and most of these imports are from China. However, the TPP agreement would help stimulate investment in raw material production, helping to increase the rate of localization. 

Similarly, the footwear industry also stands to benefit a great deal from the TPP agreement, especially foreign-invested enterprises. According to the Vietnam Leather and Footwear Association (Lefaso), about half of current leather and footwear exports by local enterprises are produced under subcontracts, meaning that enterprises only enjoy 10-15 per cent of product value. For the other 50 per cent of exports they earn 25-30 per cent of the total value. As such, the largest proportion goes to large foreign brands and distributors.
Local economists believe that if Vietnam joins the TPP the value of its agricultural exports will double. Vietnam is currently one of the 15 largest exporters of farm produce to the US. But the TPP will also bring challenges. For instance, the sector will have to open up its domestic markets and remove all import tariffs on agricultural products. Highly competitive foreign agricultural products will flood into the domestic market, such as cooking oil, cattle feed, and fruit and vegetables. 

Although import duties are to be completely eliminated, the quarantine and antibiotic residue testing, packaging and labeling requirements of TPP member countries still limit the exportability of Vietnamese products and may even pose more risks than tariffs. “It is impossible to expect a double-digit increase in agricultural exports,” said Dr. Dang Kim Son, Director of the Institute of Policy and Strategy for Agriculture and Rural Development (IPSARD) under the Ministry of Agriculture and Rural Development. “Unless there are fundamental changes in infrastructure, technology, management, and agriculture development policies, the sector will have a hard time taking advantage of the opportunities and overcoming the challenges of the TPP.”

Regarding wood and handicraft exports, local producers have been urged to focus on improving workforce skills and productivity in order to enjoy the benefits of the TPP agreement. The majority of Vietnamese products are produced and exported following the designs of foreign buyers and do not have high added value. Mr. Nguyen Quoc Khanh, Chairman of the Handicraft and Wood Industry Association of Ho Chi Minh City, said that only 3 to 5 per cent of Vietnamese enterprises make products as ODM (Original Design Manufacturer), instead designing and manufacturing products branded by foreign companies. More than 80 per cent of materials, which Vietnamese wood processing firms need, are imported, with the country importing an average of nearly 3.5 million cubic meters of materials every year. Under TPP regulations, wood producers must achieve a localization rate of 55 per cent, which will present a major obstacle for local wood producers.

Internal changes

Negotiations are scheduled to finish in early 2015 and the TPP should come into effect shortly after. TPP member countries will comprise one of the world’s largest trade blocs, making up 40 per cent of the world’s GDP and one-third of global trade revenue. Besides expectations on what the TPP can bring to Vietnam, some analysts point to the negatives. According to Ms. Virginia Foote, Chairwoman and CEO of Bay Global Strategy, the TPP agreement is very different from bilateral trade agreements and WTO membership. “The agreement might be signed but Vietnam hardly meets the requirements,” she told the 2014 Vietnam Business Forum. “The agreement will only bring benefits to those who meet the requirements.” Of a similar mind, Dr. Vu Thanh Tu Anh from the Fulbright Economics Teaching Program said that Vietnam joining the TPP will result in less benefits than expected. The way out for the country’s economy comes from its internal capacity, but there needs to be a will to change. 

Tariffs among the 12 member countries will reduce under the TPP but requirements on standards will increase. Vietnam’s economy is currently at a lower level than other members so it must improve its internal capacity to meet the standards set. The TPP will not resolve the greatest difficulties facing Vietnam’s economy and its investment attraction, or help it reform its administrative procedures, Ms. Foote added. “It’s important for the Vietnamese Government to reform administrative procedures and address existing issues,” she said. 
Mr. Glenn B. Maguire, Chief Economist of ANZ in South Asia, ASEAN and Asia Pacific, believes that Vietnam should make great efforts to overcome the obstacles in global economic integration before signing the TPP agreement. He also said that signing free trade agreements with fewer countries would bring more advantages than agreements with a large number of members. 

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