Vietnam and the TPP Traverse Rough Seas Towards Promised Land

February 11, 2014 Posted by Vietnam Briefing Reading Time: 5 minutes

HANOI – The Trans-Pacific Partnership (TPP) is a U.S. led global trade pact that seeks to create a free trade area among the signatory countries. The TPP’s progress has been fraught with complications and controversy, but it is edging ever closer to completion. Vietnam believes that it has much to benefit from a completed agreement but roadblocks still lie ahead.

There are 12 countries negotiating the TPP agreement: the United States, Vietnam, Japan, Malaysia, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile, and Peru. These countries spread across three continents, account for about 40 percent of global GDP, and about 30 percent of international trade.

RELATED: Dezan Shira & Associates’ International Tax Planning Services

As part of his “Pacific Pivot” policy, President Obama has made a point of trying to strengthen the United States’ relationship with Vietnam, as well as other countries in Asia. The TPP is seen by the U.S. administration as a way to continue strengthening Asian relationships and balance China in the region. Of course, as with most grand plans, not everything has gone smoothly along the way.

If the TPP is successfully implemented, tariffs will be removed on almost US$2 trillion in goods and services exchanged between the signatory countries.

According to the New York Times, the TPP will require signatory countries to “maintain compatible regulatory regimes, facilitate corporate financial transactions, and establish copyright and patent protections to govern intellectual property rights and to safeguard foreign investors.”

Good Times Ahead

Vietnam believes that the TPP will allow it to gain access to new markets, promote exports to new markets, and to hold on to its traditional markets.

In the previous few years, 50 percent of Vietnam’s foreign investment flow has come from TPP member countries. This amount is expected to grow after the agreement is finalized.

According to Vietnam’s Central Institute for Economic Management, “investment capital flow in support industries, value added services and the technology sector will be easier to attract due to the free investment rule regulated by the TPP agreement. Reinvestment in the fields of communication, finance, banking and transportation will also be made easier.”

Nguyen Dang Liem, the Director of Gia Dinh Information Technology College, has predicted that Vietnamese garments, footwear and wooden furniture will be able to enter new export markets once the TPP lowers the import tariff to zero percent.

The TPP is expected to help many of Vietnam’s industries. For example, the agreement will increase the number of tariff advantages for the wood products industry since Vietnam’s major export locations are all signatories to the TPP. This would make the Vietnamese products more competitive than similar Chinese made products since China will not be part of the TPP.

Furthermore, it is predicted that the TPP will help Vietnam create a more transparent legal environment. In order to prepare for the TPP and attract more investors, the country has been building a revised program on investment, land and bidding laws. Additionally, the TPP is expected to strengthen the role of foreign investors who will be able to help improve the country’s technology, management skills, and the development of value-added services.

Where’s the Love?

However, it is not all smooth sailing for Vietnam. The TPP could have a number of negative consequences for the country. In particular, the increased stiff competition from other countries could result in the failure of a number of poorly managed Vietnamese businesses. Furthermore, in some areas where Vietnam holds a comparative advantage, like agricultural products, the country will not be able to take advantage of tariff reductions.

Even in the U.S. the TPP is not universally loved. A pitched battle has arisen between organized labor and the international corporations who the TPP will primarily benefit. Opponents of the trade pact call it, among other things, “secretive,” “undemocratic,” and “job-killing.”

However, looking at other free trade agreements throughout history, it can be argued that there tends to be more economic benefits than costs arising from agreements such as the TPP.

The recently passed U.S. farm bill has created much controversy both domestically and internationally. In particular, the mandatory country-of-origin-labeling (COOL) law has added much expense to the importation of foreign food products.

Further complicating matters, the U.S. farm bill has a provision for a USDA administered catfish inspection program. Vietnam feels that the inspection program is a protectionist trade barrier. The program requires catfish dealers to have their fish inspected by the USDA if they come from places like Vietnam. Additionally, countries that export catfish must implement food safety inspections in their own countries before sending their produce to the U.S. This thus raises the cost and time involved in using non-U.S. fish.

Proponents of the program say that it increases food safety; however, even the United States’ own Government Accountability Office has called the inspection program “wasteful and unnecessary.” Vietnam is mulling possible retaliatory moves to protect its local catfish industry. Many analysts believe that the country may take this issue to the World Trade Organization and that there is a possibility that implementation of the TPP may be delayed.

Total imports of catfish average around 19 million pounds a month. The main exporters are Vietnam, Thailand, the Philippines, China, Bangladesh and Brazil.

Despite such complications to trade between the two countries, during 2013 Vietnamese exports to the U.S. jumped by 21.3 percent over the previous year for a total of US$23.87 billion. This amounts to 18 percent of Vietnam’s total export value.

The most valuable exports to the United States in 2013 were:

Garments and textiles ($8.61 billion, up 15.5 percent),
Footwear ($2.63 billion, up 17.3 percent)
Wood products ($1.98 billion, up 12.2 percent).
Computers, electronic products and spare parts ($1.47 billion, up 57.6 percent);
Aquatic products ($1.46 billion, up 25.5 percent);
Machinery, tools and spare parts ($1.01 billion, up 7.1 percent).

Vietnam imported US$5.23 billion worth of goods from the U.S. during 2013 – an increase of 8.3 percent over 2012.

Let’s Get the Ball Rolling

Both Vietnam and Japan have called on the U.S. to complete the TPP framework before President Obama’s intended visit to Asia in April. Both countries are worried that the more time the U.S. takes to finalize the process, the higher the potential for the country to begin demanding additional changes to the TPP agreement.

The good news, as reported by the Japan Times newspaper, is that as of now both countries remain strongly supportive of the U.S. role in Asia and view it as “a stabilizing influence in a region beset by territorial disputes.”

You can stay up to date with the latest business and investment trends across Vietnam by subscribing to Asia Briefing’s complimentary update service featuring news, commentary, guides, and multimedia resources.

Related Reading

A Guide to Understanding Vietnam’s VAT
In this issue of Vietnam Briefing, we clarify the entire VAT process by taking you through an introduction as to what VAT is, who and what is liable, and how to pay it properly. We first take you through the basics of VAT in Vietnam before taking you deeper into the topic. Additionally, we provide updates on the new changes to the VAT process and explain how they will impact your business. The magazine is out now and will be temporarily available as a complimentary PDF download on the Asia Briefing Bookstore until the end of April.

Vietnam Moves Closer to Ratification of Trans-Pacific Partnership

TPP Negotiations Conclude with No Deal in Sight

Trans-Pacific Partnership Agreement to Boost Vietnam–U.S. Textile Trade

China Set to Lose Out to Vietnam as U.S. TPP Deal Looms

Vietnam-U.S. to Promote Trans-Pacific Partnership Agreement

Viet–U.S. Pacific Free Trade Talks could Impact on China SOEs