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TPP to drive manufacturing

Released at: 14:40, 23/04/2016

TPP to drive manufacturing

The TPP will be yet another boost to Vietnam's manufacturing growth, according to Mr. Michael Sieburg, Associate Partner at Solidiance Vietnam.

Vietnam, the second-smallest economy among the TPP member countries after Brunei, is set to be a major beneficiary as the agreement will increase investment in its manufacturing sector, deepen the supply chain, and accelerate export growth. Textile and apparel industries will continue to be a main driver of Vietnam’s economic growth in light of the agreement being signed.

The TPP, a regional trade agreement among 12 countries that comprise ~40 per cent of global GDP and ~11 per cent of the world’s population, taps into a number of new areas such e-commerce, supply chains, and State-owned enterprises. A recent white paper from Solidiance, an Asia-focused management consultancy firm, highlights a number of growth opportunities in Vietnam’s manufacturing sector in relation to the agreement.

Further market access to already large trade partners such as the US and Japan will be central to driving the benefits for Vietnam’s manufacturing sector. As TPP signatories account for ~40 per cent of Vietnam's total exports, the agreement’s passage will accelerate its exports to member countries as well as increase its total exports by an estimated additional $68 billion by 2025.

Export-oriented manufacturers will be drawn to Vietnam as a result of the TPP, though in fact Vietnam’s competitive manufacturing environment has already been performing well. The TPP will only further enhance the country’s attractiveness, especially in textile and apparel support industries, which were already expanding their manufacturing facilities in Vietnam in anticipation of its signing. The TPP’s “yarn forward” regulations stipulate that to take full advantage of reduced tariffs, textile and apparel inputs need to be sourced from a TPP member country.

Current tariff rates for textile, garments, and apparel exports from Vietnam to the US (7.9 per cent on average for textiles and 11.4 per cent for clothing) will be gradually reduced to zero once the TPP comes into effect, expanding market access to the US and Japan for Vietnam-based companies.

To take advantage of expanded market access the TPP will drive additional foreign direct investment (FDI) to Vietnam, where investors will find an increasingly competitive business environment as more standardized business and policy environments are part of the requirements of the TPP. Vietnam’s FDI absorption rate - an indicator of the economy’s ability to realize its potential - has improved since Vietnam’s ascension to the WTO and the TPP is expected to have a similar impact. 

When large domestic and foreign investments pour into Vietnam’s economy following major trade agreements, manufacturing facilities tend to scale up to take advantage of economies of scale. This will benefit Vietnam’s manufacturing sector as it will lead to an increase in production scale and industrial deepening, thus driving productivity growth.

Rising FDI and the increasing scale of both domestic and foreign enterprises following the TPP’s implementation will also drive the development of upstream suppliers and manufacturers in support industries. To illustrate, in recent years large electronics manufacturers have expanded their production base in Vietnam, creating potential market opportunities for local parts and component suppliers. The TPP in this case would accelerate this development. 

The TPP’s impact on Vietnam was already being felt on the ground even prior to its signing, with manufacturers in support industries already making investments. As the agreement is being implemented, key export manufacturers like textiles and garment, footwear, and fisheries, among others, will enjoy rapid outsized growth.

Disbursed FDI reached a record high in 2015 of ~$14 billion, at least in part attributable to anticipation over the TPP. More than $1 billion in investments in garment and textile support industries has already been committed to Vietnam, with investors from China, Taiwan, Japan, South Korea, and India setting up specialized industrial zones for garment and textile material production, yarn factories, packaging facilities, and more.

With Vietnam’s manufacturing set to build on its already impressive groundwork, leading industry players need to take note and define a strategy to capitalize on these opportunities. 

Solidiance is a corporate strategy consulting firm focused on Asia. It advises CEOs on deals, defines new business models and accelerates Asia growth. Solidiance’s expertise is focused on industrial applications, green technology, healthcare, and technology, with offices in ten different Asian countries, including Vietnam.

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