Photo: Viet Tuan
It’s very much in Vietnam’s interest to continue the reform program that was a key feature of the TPP.
To a certain extent the advantages held by Vietnam vary according to sector, but generally speaking some of the main advantages perceived by foreign investors include the fact that the country is considered to have a stable political system while there are uncertainties in neighbors such as Thailand, Malaysia, and Indonesia. Vietnam also boasts a good growth story, with relatively high rates of GDP growth since the adoption of the “Doi Moi” (renovation) policy in the late 1980s. Vietnam is again expected to have one of the highest growth rates in Asia this year.
It has a relatively well-educated workforce and high literacy rate, on par with Singapore, and a rapidly growing middle class, which is attractive to investors in the FMCG, heath, education and real estate sectors in particular. Motor car sales reached 300,000 in 2016, with motorbike sales exceeding 3 million.
Population growth is more than 1 per cent per annum and there are over 1 million people joining the workforce each year, which is also attractive to investors. However, there are still drawbacks that the government needs to address, like reducing administrative bureaucracy, improving transparency and continuing institutional reform, and attracting support industries to increase the localization rate in the supply chain.
With the likely demise of the TPP, following the withdrawal of the US from the trade pact, the big question is how this will impact Vietnam and what it means for the bilateral Vietnam - US relationship. Whether or not Vietnam will lose its attraction in terms of FDI is not in my opinion directly related to the TPP, though we did see some US investment on the back of the expected deal, but is more to do with how foreign investors perceive the investment environment in Vietnam and the ease of doing business.
It is true that Vietnam would have been a major beneficiary of the TPP, particularly in the textile, garment and footwear sectors, and while the US should continue to be a major market, without falling tariffs it will not grow at the same rate it would have done with the TPP. However, we have to realize that Vietnam has not actually lost anything; it will just forgo future projected benefits.
Vietnam’s attraction as a destination for foreign investment will not be adversely impacted by the collapse of the TPP, but the TPP did have several conditions requiring institutional reforms and the question is will the government recognize the benefits of these required reforms and implement them regardless. The TPP was the first trade agreement to subject Vietnam to enforceable labour commitments like freedom of association, collective bargaining, and minimum work conditions. Additionally, Vietnam signed a labour implementation plan with the US that identifies specific actions needed to comply with the TPP and which are subject to an additional layer of enforcement. While the government has stressed it will continue with its economic reforms regardless of the TPP, it remains to be seen how broad these will be.
We should also remember that Vietnam has signed several major trade agreements, including the EU-Vietnam FTA (scheduled to come into effect in early 2018), and the Regional Comprehensive Economic Partnership, to which Australia is a party. All of these will help stimulate trade and FDI.
It is hard to see that committed investments from US companies will be withdrawn or decrease because of the US withdrawal from the TPP, as increasingly US companies are looking at the growing consumer market and middle class in Vietnam and also see the country as an attractive contributor to their global supply chain.
One must also remember that a significant amount of US investment comes into Vietnam via Singapore and other countries hosting regional headquarters of US companies. Of course, there is a lot of uncertainty about the new US administration’s position on global free trade, but in any event not all overseas production of US companies overseas finds its way back to the US, as it is also a base for supplying regional and global markets. If the government implements its stated policies of continued economic reforms and reducing administrative bureaucracy and improving transparency, there is no reason why the level of US investment, both direct and indirect, should fall.
Vietnam and Vietnamese enterprises must understand that there is no quick fix to longer term structural issues. What Vietnam needs to do in the long term is continue with its reform program and create and build a business and regulatory environment that is attractive to foreign investors and one that promotes the development and growth of SMEs, which is what neighbors like Singapore, Hong Kong and Malaysia have achieved in the past. SMEs need to develop in a transparent way, with proper business plans and sound management techniques, to ensure their continued growth and sustainability. In order to do this, the government needs to ensure the availability of finance to well-managed and well-regulated SMEs.