What is the Transpacific Partnership?
The Transpacific Partnership (TPP) is a regional trade agreement between the countries of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US, and Vietnam. Together, these countries account for $28 trillion of GDP, nearly 40% of the world’s GDP and 40% of the US’s total trade each year. While the US has several bilateral trade agreements in the region, this is the first multilateral trade agreement between the US and Asia. The agreement is notable as much as for whom it involves, as who it does not – China. While both China and the US have expressed their openness to China’s involvement, many see the agreement as a means of curbing Chinese influence in the region. In response, China has begun negotiating a separate agreement with the Pacific Rim countries that excludes the US.
The expressed intent of the TPP is to “enhance trade and investment among the partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.” The TPP has been the cornerstone of the Obama Administration’s economic “pivot” to the Asia Pacific region. The US is driving the drafting of the agreement, and is able to bring the others up to US or global standards. While much of the negotiations have proceeded in secret (typical in trade negotiation), it is expected that the agreement will eliminate tariffs on goods and services, remove barriers and harmonize a host of regulations, including those regarding governmental procurement and the right of companies to sue governments. Global standards in labor rights, intellectual property, environmental practices, as well as financial regulation and government procurement are also included.
Negotiations have proceeded during the more than twenty rounds over the last decade. While great progress has been made toward reaching an agreement, delays have mired the process. The primary cause of disagreement has been the shift away from more traditional trade agreements (the import/export of a certain number of goods for a certain price), to an agreement that encompasses more legal and regulatory issues. Rather than simply removing tariffs and deregulating the export of goods, the US in particular has been under domestic pressure from lawmakers and advocacy groups to push a policy that protects American businesses, intellectual property and jobs. Critics have concerned themselves primarily with the secrecy with which the negotiations have been conducted and the clauses regarding intellectual property rights and currency manipulation.
With the recent electoral success in the US by the “business friendly” Republican Party, there is a good chance that President Obama will be granted Fast Track authority. With this authority, President Obama will be able to finalize the agreement by July 2015 and ratify it by the end of 2015. There are strong supports from the US business community for the TPP as this agreement will help to increase export and create jobs. There is great reason to assume the deal will be enacted within the next year, as predicted.
What does the TPP mean for Vietnam?
In the 1990’s, Vietnam became the manufacturing hub for the garment and footwear industry. The shift of manufacturing capacity from Chinese manufacturers to Vietnam was due to lower labor costs and strict US and European import quota schemes. Since then, the market continued to move to other low cost locations such as Bangladesh and Cambodia.
As a result of a stiffer increase in competition, Vietnam companies were under pressure to hold wages down even as demand for higher pay increased. For this reason, Vietnam sees the TPP as a means by which Vietnam can move beyond garment and footwear manufacturing and tap into the vast global markets of services and electronics manufacturing.
The TPP will remove certain tariff-barriers for member countries, which will provide Vietnamese companies the ability to compete with Chinese companies in the American and Japanese markets. One can see signs of this shift happening as over the last three years, investment in manufacturing capacity in Vietnam from major global companies (e.g. Samsung, LG, Microsoft and Intel) has increased. For example, Microsoft recently moved the majority of Nokia’s handset manufacturing from China and Hungary to Vietnam. Samsung is also a major investor in Vietnam. Its total investment in the country may reach $20 billion by 2017. In 2014 alone, Samsung invested an additional $5.4 billion into Vietnam. This has made Samsung the biggest foreign investor in Vietnam with a total registered capital reaching $12.6 billion and counting.
In addition to a more competitive export-oriented private sector, the TPP will result in a more robust and dynamic Vietnam economy. One of the major TPP requirements is the reduction of state-owned enterprises. The TPP will foster an ideal incubating environment for growth in Vietnam. Some key elements worth mentioning are: an increased investment into the private sector, a young educated workforce, a stable economy and a western-oriented culture.
What does the TPP mean for US companies seeking to conduct business in Vietnam?
In short, for the United States, the TPP would increase competition in the Asia Pacific region. In an area increasingly dominated by Chinese exports, the US will need agreements with each country to make its products more valuable and competitive. This is primarily an issue in regards to agricultural, textile and manufactured products – all of which currently see tariffs as high as 30%-40%. With the participation of the existing members, US firms will have access to tariff-free trade with over 40% of the world’s economy (by GDP). Therefore, American products will be more competitive both domestically and internationally.
US companies, as a whole, are likely to see export market increase after the TPP is passed. Based on its estimates of what the agreement will include, the Peterson Institute for International Economics estimates that the U.S. will realize an additional $78 billion per year in exports.
For the last two decades, US firms have poured investment into China. However, China’s cost advantage has diminished with a rise in labor cost. The wage comparison between Vietnam and China is about 50%. A recent wave of nationalism has seen China’s domestic market becoming more dominated by domestic Chinese firms and more hostile towards American products. Furthermore, tax incentives that have previously attracted foreign companies have become more difficult to obtain. Firms have become more incentivized to diversify their investments to reduce over-dependency in China.
Vietnam is, in particular, has become an increasingly safe option for US firms. As a result of the increase in production disruptions and costs in China, producers need to spread across various markets to hedge their investments. The adoption of the TPP will make Vietnam a front-runner for companies seeking to diversify risk exposure as it will improve transparency, protect intellectual property and increase the rights of foreign companies.
With labor still cheap in Vietnam, the benefits to US companies go beyond simply outsourcing basic production. Vietnam’s focus on education has yielded great results in math and science. Vietnam is ranked 17th in the world, ahead of the US and the UK in the Program for International Student Assessment (PISA) – an international assessment that measures 15-year-old students’ reading, mathematics, and science literacy. The increase in skilled labor has resulted in a robust service sector expansion and the growth of Vietnam’s high-tech industry. The skilled labor factor, coupled with a focus on growing US economic ties, is good news for US companies in all sectors. Vietnam’s high-tech and service economy seem poised for rapid growth. As such, it will be advantageous to become established in the country early.
Written in collaboration with B. Jahner MA Candidate, at Thunderbird School