How Vietnam should ride the new foreign investment wave that comes with TPP

By Thanh Nien Staff, TN News

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A man works at a foreign-owned company which produces car and motorcycle parts in Vinh Yen, outside Hanoi. Photo: Reuters A man works at a foreign-owned company which produces car and motorcycle parts in Vinh Yen, outside Hanoi. Photo: Reuters

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Even as the debate surrounding the pros and cons of the Trans-Pacific Partnership (TPP) continues, there appears to be a consensus that the massive trade pact will bring strong inflows of foreign investment into Vietnam. 
In its latest forecast about the TPP's impacts on Vietnam, the Hanoi-based Vietnam Institute for Economic and Policy Research said the country will see the biggest increase in foreign direct investment (FDI) thanks to the agreement, compared to the other 10 member economies. 
Nguyen Mai, chairman of the Vietnam Association of Foreign Investment Enterprises, said he strongly believes that FDI will surge, possibly with the strongest inflows into the sectors of manufacturing, textile, electronics, and software outsourcing. 
Mai said of all the TPP participants, the US seems to be the most eager to boost its investment in the country, considering that many of its businesses have recently come here to learn about local business environment.
"US investors will definitely rise to the top in Vietnam," he said. 
With 761 projects registered with more than $11 billion by August 20, the US is currently the seventh largest investor, according to the latest figures by the Foreign Investment Agency under the Ministry of Planning and Investment.
On the other hand, Mai expected an "unremarkable" rise in FDI flows from Japan, which is now already the second biggest investor after South Korea, with nearly $38 billion pledged for 2,725 projects.
Vietnam and Japan signed an economic partnership agreement in 2010, but since then investment from Japan has fluctuated, which means the new TPP may or may not help, he said.
"US investors will definitely rise to the top in Vietnam" -- Nguyen Mai, Vietnam Association of Foreign Investment Enterprises
Many experts also expected increased interest among non-TPP participants such as China, Taiwan and South Korea which will seek to build factories in Vietnam to produce exports destined for TPP members in order to enjoy tax cuts.
Even when the members were negotiating the terms of TPP, nearly $4.2 billion was registered for textile factories in the first half year, Mai said.
Negotiations of the secretive trade pact completed last week. The 11 members of the pact make up for 40 percent of the global economy. They are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, the US, Singapore, and Vietnam.
Each of the countries will now have to go through their own process, sometimes complicated, to approve the deal. 
In Vietnam, the TPP will be submitted to the National Assembly for a vote next June at the earliest, local media recently reportedly.
Caution
But what should Vietnam do with this coming investment wave?
Regardless of their positive forecast, local economists urged the government to take caution.
Economist Bui Trinh said Vietnam needs to look at the lessons from the bad situation it was caught in after joining the World Trade Organization in 2007.
At the time, Vietnam allowed a free and strong flow of FDI and ended up putting its environment at risk, giving land to many projects that never got completed, he said.
Trinh pointed out that even though foreign investors pledged to transfer technology to local businesses in exchange for referential policies, such commitment has not been fulfilled over the years.
Without scale and technology, Vietnamese producers will likely be dominated by foreign rivals, he said, asking the government to have better strategies to make better use of FDI this time.
Vietnam needs to be stricter about licensing FDI projects, and enhance the capacity of local businesses so they can join the value chain of foreign investors, Trinh said.
Similarly, Mai advised the government against encouraging foreign investment in dyeing and weaving sectors, saying local businesses are capable of doing the jobs, and the industries, when overcrowded, impose huge threats to the environment.
Vietnam should license select projects only, to reduce its reliance on Chinese-imported raw materials, he said.
Exports by foreign-owned companies hit $85.2 billion in the January-September period, up 15.8 percent, accounting for 70.6 percent of Vietnam's total exports, according to the General Statistics Office's latest figures.
A total of $17.16 billion was registered for both existing and newly-licensed foreign projects in the first nine months, up 53.4 percent from the period last year, it said.
                                         Vietnam's GDP to grow 13.6 pct by 2025: Fitch
Fitch Ratings recently quoted a study as saying that the Trans-Pacific Partnership (TPP) will help Vietnam's gross domestic product soar by 13.6 percent over the next 10 years, almost twice the current growth.
The study estimated that the trade pact will also create a rise of more than 37 percent in the country's exports by 2025.
TPP participants accounted for 39 percent of Vietnam's exports and 23 percent of imports last year.
Besides impact on Vietnam's trade thanks to low tariff barriers, the agreement was also expected to considerably affect its domestic economic policy.
Fitch said the TPP aims to address wide-ranging barriers to trade by setting rules governing intellectual property rights, business competition policies including those related to state-owned enterprises, public procurement policies, supra-national dispute resolution, and labor standards. So, it has the potential to act as a key policy anchor for structural reforms and economic liberalization that could bolster productivity and foreign investment for Vietnam, it said.
However, Fitch warned that Vietnam could face difficulties in implementing some areas of structural reform, although its legislature is more likely ratify the agreement compared to other members such as the United States.

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