TPP: Great news for Vietnam

With the US Congress having recently given President Obama the “fast-track authority” he needs for his administration to be a credible negotiator, suddenly the Trans-Pacific Partnership free trade agreement seems likely to come into being, pending its final stages of negotiations between its 12 signatory nations. Thus, implementation by some point in 2016 seems a good bet. So why is this such good news for Vietnam? Three reasons, broadly:

1) Enhanced position as an export manufacturing location

With an export-manufacturing-based economy that has already been appreciated by many global investors for several reasons – cheap and plentiful workers, good basic education, political stability, growth-friendly government, and good physical location probably being the five most important – TPP’s free trade provisions will give a shot in the arm to further strong development in this regard. With only Singapore, Malaysia, Brunei, and Japan as other Asian signatories (at least at the initial stage of the treaty’s life – China has been putting out feelers about possibly being invited to join at some stage), Vietnam is very well placed as the only Asian member offering an attractive, cost-competitive manufacturing hub. The prospect of complete removal of tariff barriers for exports into other member nations, especially the US, is a very attractive prospect for Vietnam-based manufacturers. A study on the overall macroeconomic impact of the treaty by three academics (Petri, Plummer and Zhai) estimates that Vietnam is by far the greatest beneficiary, with a 14% uplift in its baseline GDP, versus no more than a 2% uplift for any of the other 11 countries.

In garments, Vietnam is already the third largest exporter (USD 17bn in 2013) out of all emerging markets (and sixth largest in the world), but is still ten times smaller in this regard than China; suddenly, import tariffs for Vietnam, but not for current #1 China and #2 Bangladesh, will fall from 15-20% to zero into the giant US market. Meanwhile, in TPP member Mexico, hourly wages in this sector are over 6x higher than in Vietnam. Thus, Vietnam’s global textile export market share should rise over the coming decade from its current 4%, by 2-3x or even more. The precise finally agreed “rules of origin” for the source of inputs will determine the exact shape of how and how much Vietnam benefits. Although a likely “yarn forward” rule on input origin would dampen the near term benefit to yarn-importing Vietnam, this rule would actually be better for Vietnam long-term in order to encourage an already-begun boom in yarn-spinning FDI in the country.

In steel, a similar boost from lower import duties and fewer anti-dumping cases should occur, though perhaps less than in textiles given the lesser tradability of this relatively high volume/ high weight/ low value item. Hoa Sen Group (HSG VN), for one, sees great prospects to lift its exports to other TPP nations. Time will tell whether its chairman’s past bold declarations of a quantum leap in its exports of even 10x is too optimistic, but nevertheless a good rise in its exports is likely.

In seafood, Vietnam has for years been subject to a varying modest level of US anti-dumping duties, and also to strict food safety testing by certain countries such as Japan. Here, it is less clear whether the sector will benefit from TPP: it already has good export business into TPP nations, and also into the EU, suggesting less scope for upside; also, TPP will likely not prevent continued import restrictions based on food safety testing, nor completely rule out anti-dumping cases against fellow members.

In pharmaceuticals, over two thirds of the Vietnamese market by value is already controlled by mostly western pharma majors, and our provisional assessment is that the leading local listed companies in the sector are not going to be affected by TPP intellectual property and patent provisions, already being compliant operators. However, the locally owned generics industry faces strong competitive pressure from abroad – eg India, Korea (neither of which are in TPP, but are part of other free trade deals with Vietnam) – and it is looking unlikely, at least so far, that this will be a leading export-competitive sector for the country (akin to the auto sector).

2) Foreign direct investment boom will be accelerated and improved

The investment chapter of the TPP focuses on fair, equal treatment for foreign investors compared to local ones, and being subject to this will further help Vietnam’s record as an attractive FDI destination – which has totaled $10-12bn disbursed for seven straight years now, and amounts to the highest inward FDI-to-GDP ratio of any country in Asia over this period. An important element of this chapter is, as with other major free trade agreements signed over the last 25 years, the provision of investor-state dispute arbitration, under which a corporate investor can sue the host nation at an international court or arbiter if it thinks its rights to equal treatment have been violated. The history of such disputes emanating from past free trade agreements suggests that the suing corporates have a pretty good track record of winning such cases – nearly 60% of some 500 cases seen in this form of public international law through 2012 resulted in either the investor winning or a settlement. For this reason, such investment chapters have attracted criticism for favoring “big business” over society’s other interest groups, but there are increasingly higher transparency and affected-third-party submission provisions in such cases these days, to address this criticism.

Vietnam has in general been a very welcoming host to FDI over the past 10-15 years, so has nothing to fear from the TPP’s investment chapter. The new rules could be of help in pushing Vietnam away from ad-hoc provincial level deals with foreign investors, thus levelling the playing field with perhaps beneficial long term impact on tax receipts.

3) Vietnam becoming a household name – with improved governance imposed

There will be a general but important reputational benefit to Vietnam from joining the TPP, as the least developed of the 12 countries. Perceptions of investability into Vietnam will surely rise, both for direct and portfolio investors. Combined with the recently announced moves to raise foreign investment limits in the stock market, a strong case is now forming for Vietnam to graduate to emerging market status in the MSCI indices, which is starting to look inevitable by 2017 if not next year.

As a one party state formed in the name of a defunct ideology, the governance implications of the TPP will be of particular long term importance to Vietnam, effectively pushing it in the right direction in policy making fields including labor rights, environmental protection, intellectual property protection, and – most crucially of all – state owned enterprises. It is the latter that remains the biggest millstone around the Vietnamese economy’s neck, and TPP rules against favoring them will help Vietnam speed up on the road it has already chosen, of reducing their presence in the economy. In a country where economic policy making is often right-minded but far too slow, this would be a welcome beneficial impact indeed.

Mekong Man

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