On March 8, 11 countries signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP in Chile. The agreement represents 13.5 percent of the global economy, a total of US$10 trillion dollars and 15 percent of the global trade revenue, equal to US$5 trillion.
Members include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Without the US, the overall gains have reduced to a third, but it still caters to around 500 million people. CPTPP will come into effect once six of its 11 members ratify the agreement.
The agreement not only focuses on reducing trade tariffs between its members but also on reducing non-tariff measures by easing the existing regulations and making them more transparent, along with reforms in labor and environmental regulations. It also includes an investor-state dispute settlement (ISDS) mechanism that allows firms to sue governments under certain conditions.
Economic impact on member countries
According to a study by Peterson Institute for International Economics, GDP for Malaysia, Singapore, Brunei, and Vietnam will each achieve close to 2 percent growth by 2030 due to CPTPP. However, New Zealand, Japan, Canada, Mexico, Chile, and Australia will only grow by 1 percent or less.
With the US backing out of TPP, the previous version of CPTPP, the country stands to lose a 0.5 percent growth in its GDP, which would have been worth US$131 billion. In addition, as per the study, US can lose an additional US$2 billion, as more firms will prefer trading with member countries to take advantage of tariff reductions rather than the US.
Economic impact on Vietnam
According to a recent study by the World Bank about the economic impacts of CPTPP on Vietnam, the country’s GDP can grow by 3.5 percent by 2030, assuming there is an increase in production.
Imports and Exports
Under CPTPP, imports and exports are predicted to grow by 5.3 and 4.2 percent respectively. If productivity increases, the gain could be much higher at 7.6 and 6.9 percent for imports and exports respectively.
The average trade-weighted tariffs under CPTPP will fall from 1.7 percent to 0.2 percent for Vietnamese exporters.
The non-tariff measures are predicted to reduce by 3.6 percentage points in terms of ad valorem tariff equivalent.
The F&B, tobacco, clothing and leather, and textile sectors will have the largest output growth under CPTPP. Other manufacturing sub-sectors along with services are also predicted to grow under the agreement.
F&B and tobacco, clothing and leather, leather products, chemicals, plastic products, transport equipment and machinery are expected to see a boost in exports, while imports will grow for almost all the sectors.
CPTPP can lead to a reduction in poverty by 0.6 million at poverty line $5.50 a day relative to baseline conditions in 2030. All income groups will benefit to a certain extent from CPTPP; however, the higher-skilled workers will see the highest gains.
Opportunities and Challenges
As market access increases and tariff commitments come into effect, industries such as textiles, footwear, electronics, and equipment have an opportunity to increase their exports to the member countries. As exports increase and the industries expand, the income growth generated from domestic production will continue to grow, leading to an increase in overall demand. However, with strict rules of origin conditions, domestic firms and investors will have to develop the sourcing industries to benefit from the free trade agreement.
In addition to exports, CPTPP can also lead to an increase in FDI. However, Vietnam should continue to focus on the investment environment and protect intellectual property rights to create a conducive environment for investors who are looking to access markets such as Canada, Mexico, Chile, and Peru.
It’s not only the domestic sector which needs to reform under the CPTPP, but also the government institutions and administrative systems. The non-tariff measures of CPTPP focus on market reforms, transparency, and labor reforms, and Vietnam has an opportunity to make institutional changes to further align itself with member countries.
The major challenge facing domestic firms is the lack of preparedness to take advantage of the CPTPP. The support industries are weak and with strict rules of origin conditions, it will difficult for firms to fully realize the benefits of CPTPP.
Secondly, CPTPP provides a greater market access to domestic firms in Vietnam, but it also opens up the domestic market for foreign goods, which can increase competition. Analyzing the agreement, we can see that industries such as automobile and agriculture will face intense competition from member countries.
Need to do
Vietnam has to focus on comprehensive institutional reforms, which should include government institutions as well as administrative reforms. Making such changes can be disruptive and costly in the short-term, but in the longer run, it will help firms to take full advantage of such trade agreements and will eventually benefit the economy.
Lastly, SME development and reform of State-owned enterprises (SOE) are key for Vietnam. SMEs account for a majority of the economy and labor market, and the government should support them if it wants the SMEs to align themselves further with the global supply chains. As for the SOEs, which has been suffering from corruption and lack of accountability, the government should continue with its divestments as it will lead to foreign investments, better management and efficiency.
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