TPP is Dead, What’s Next for Vietnam?

Posted by Reading Time: 6 minutes

By: Maxfield Brown 

Following the withdrawal of the United States from the Tran-Pacific Partnership (TPP), the spotlight has shifted quickly to the future of foreign investment in members such as Vietnam – the party once projected to be the agreement’s greatest beneficiary. While TPP’s failure has and will continue to put a damper on investment and trade between Vietnam and members of the partnership, this does little to change Vietnam’s competitive advantage and may actually help the country over the long term.

DZS RELATED: Pre-Investment Advisory Services from Dezan Shira & Associates

The impact of TPP on existing investments in Vietnam

Without a trade agreement in place, the attractiveness of Vietnam as a destination for TPP member investments is somewhat diminished, but not in the ways that one might think. For those already invested in the country, the initial cost competitiveness analysis conducted prior to market entry may actually have remained unchanged. Even without TPP’s liberalization of tariffs and introduction of investment protections, Vietnam still presents investors with a significant cost advantage over many of its neighbors – most importantly China. Since Vietnam’s entry into the WTO, there has been a continued growth in Vietnamese exports to TPP markets, even with tariffs in place. Between 2007 and 2015, exports rose  176 percent, in nominal terms, and now constitute a 38 percent share of Vietnam’s total exports.

From the perspective of established investors, the link between tariff reductions and profitability is, however, a significant consideration. If in fact Vietnamese FDI projects have been executed with future profit margins hinging on tariff reduction, there may be an increased incentive to exit the Vietnamese market in the near future. This has already come to pass with recent announcements from the Japanese External Trade Organization which indicated that Japanese auto manufacturers may soon relocate to other ASEAN states, such as Thailand, in search of greater capacity.

Outlook for future investment

Although the exit or reduction of FDI projects from select investors may result from TPP’s failure, initial FDI statistics show that there has been little overall impact to aggregate FDI inflows. In fact, foreign direct investment figures from January of 2017 illustrate an increase of 22 percent over the same period a year prior. Within these figures, the impact of the TPP is made clear, as are the advantages that Vietnam’s integration with global markets continue to provide.

US investment figures in Vietnam show that capital inflows have fallen by more than US$14.5 billion y-o-y, however, this is more than made up for by investment from members of the European Union, which signed their first bilateral trade agreement with Vietnam in 2016 (EVFTA) and have increased investment inflows by more than 193 percent y-o-y. On top of this, fully implemented trade agreements between Vietnam, Korea (AKFTA), Japan (AJFTA), and China (ACFTA) have continued to result in strong investment flows from Korea and Japan and create a significant incentive for China-based manufacturers considering a China +1 model for cost reduction.

Related Link Icon-VB RELATED: Vietnam in 2017: Spotting Opportunities for FDI

Tailoring supply chains and distribution networks

In light of existing trade agreements between traditional manufacturers and a newly inked agreement with the world largest importer of goods – the European Union – there are clear opportunities for investors to continue to utilize Vietnam as a production hub. Under these new dynamics, a reorientation of sourcing or distribution may be more appropriate than an exit from the Vietnamese market in light of TPP’s failure.

From a supply chain perspective, Vietnam’s trade agreements with China, Korea, and Japan allow for the import costs of higher value-add components to be significantly reduced. Once in Vietnam, assembly of these goods can be conducted with Vietnam’s cost competitive labor force and exported from a variety of ports across the country to the European Union where, given compliance with EVFTA’s Rules of Origin requirements, they may be imported at a reduced import tariff cost.

Similarly, those operations that have been building up distributions networks within the United States or other TPP member states may find that reorienting sales towards European markets as well as other states within ASEAN may allow for more profitable sales. In light of the economic downturn in the EU, there is likely to be a significant demand for lower cost alternatives for consumption – a demand that Vietnam based producers will be ready to fill. 

Sustainable economic growth

In recent years, the steady growth of the Vietnamese economy has resulted in increasing employment opportunities, rising wages, and subsequently, an increased appetite for consumption on the part of the average Vietnamese citizen. Between 2007 and 2015, consumer spending within the country has grown by an astounding 150 percentage points and shows little signs of slowing. 

At present, however, Vietnamese jobs are heavily dependent upon exports – which constitute nearly 89 percent of GDP – and increasingly reliant upon TPP member states, and the United States in particular, as an export destination (the US alone comprising nearly 20 percent of Vietnam’s exports). Given the size of the Vietnamese economy relative to these countries, it is quite possible that jobs and spending power of local consumers could have been put at risk in the event that conditions within purchasing markets had shifted or if the TPP had fallen apart following the reduction of tariffs.

Without the TPP however, and in light of the active reduction of trade barriers with the European Union, there is now ample room for Vietnam to diversify its export portfolio, thus safeguarding the growth of its steadily strengthening consumer class. In the near to medium term, this is likely to decrease risk for companies seeking to expand sales networks and to build up brand reputation within the Vietnamese market.


About
 Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email vietnam@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Related Reading Icon-VB

dsa brochureDezan Shira & Associates Brochure
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.

DSA_Doing Business in Vietnam 2017_cover_126x90px

An Introduction to Doing Business in Vietnam 2017
An Introduction to Doing Business in Vietnam 2017 will provide readers with an overview of the fundamentals of investing and conducting business in Vietnam. Compiled by Dezan Shira & Associates, a specialist foreign direct investment practice, this guide explains the basics of company establishment, annual compliance, taxation, human resources, payroll, and social insurance in this dynamic country.

VB_2016_12_en_Managing_Contracts_and_Severance_in_Vietnam_-_Cover (1)

Managing Contracts and Severance in Vietnam
In this issue of Vietnam Briefing, we discuss the prevailing state of labor pools in Vietnam and outline key considerations for those seeking to staff and retain workers in the country. We highlight the increasing demand for skilled labor, provide in depth coverage of existing contract options, and showcase severance liabilities that may arise if workers or employers choose to terminate their contracts.

 

Leave a Reply

Your email address will not be published. Required fields are marked *