Visitors at a furniture and woodwork trade fair in Ho Chi Minh City. While the Trans-Pacific Partnership can help local woodwork firms import raw materials at lower prices, industry insiders fear that they may lose market shares in the domestic market.
Despite all the rhetoric about how Vietnam will benefit from the Trans-Pacific Partnership (TPP) agreement when it takes effect in 2015, Vietnamese firms are more worried than upbeat.
The government is hoping that talks on the proposed TPP pact between 12 countries the United States, Canada, Mexico, Australia, New Zealand, Chile, Peru, Malaysia, Brunei, Singapore, Japan and Vietnam, will be completed by the end of this year.
The 18th round of regional free-trade talks among the US, Vietnam and nine other countries wrapped up in Malaysia last week. Japan joined in July as the 12th country in the TPP talks.
The TPP is seen as key to ensuring the US helps write the rules for trade in the Asia-Pacific region and is not left on the outside as countries organize manufacturing, agriculture and service sectors around China.
It aims to phase out tariffs on most goods traded between the countries over 10 years and tackle "21st century issues" such as the role of state-owned enterprises in trade, government innovation policies, cross-border data flows, and supply chain management.
Vietnam, in principle, could boost its exports and attract more foreign investment from the TPP's members as its exports would enjoy zero-percent tariffs.
Peter Petri of the Brandeis University in the US said at a recent conference that Vietnam is likely to enjoy the maximum benefits from TPP compared to 11 other negotiators of the trade pact.
He said the country's GDP could increase by US$37.5 billion after the TPP comes into effect. He estimated that Vietnam's exports could rise to $307 billion by 2025 if the TTP is signed, compared to only $239 billion if the trade pact is not implemented.
However, these projections have failed to enthuse Vietnamese exporters.
Nguyen Xuan Thai, director of coffee production and export firm Thang Loi, said: "I am not interested in the trade pact. The tariff reduction is not of great significance to us. Our main issue is how to improve our product quality."
Vietnam, which exports coffee beans worth some $3.6 billion each year, already enjoys zero-percent tariffs when shipping to main markets like the United States and Japan, Thai said. "Thus, TPP will not benefit coffee shipments."
He said the most important issue for local coffee exporters is to ensure high quality of products, not high prices. As of now, Vietnamese coffee export prices are 15-20 percent lower than the world average.
Furthermore, local observers say that benefits from increasing exports to TPP members because of zero percent tariffs are likely to be offset by foreign firms dominating the domestic market. They say the agreement will also force Vietnam to remove tariffs on products originating from these countries.
Chicken meat, beef and milk from the United States, Australia and New Zealand are likely to flood the Vietnamese market after the country opens up under TPP commitments.
Although Vietnam now imposes tariffs on such products to limit their imports, domestic products are still not able to compete with imports, and local farmers are already struggling to survive.
Nguyen Ton Quyen, general secretary of the Vietnam Timber and Forest Product Association, said the TPP could bring big benefits to local woodwork firms as they could import raw materials at lower prices. Vietnam imports the materials mainly from the United States, Japan and Chile.
However, what they gain may be smaller than what they lose, he said. "Our biggest concern is that local woodwork firms could lose market shares in the domestic market itself."
With 90 million consumers and consumption of goods worth $1-2 billion each year, the local woodwork market has great potential for producers, Quyen said.
With small distribution channels and lower quality products, local firms have been able to compete in the domestic market only because of low prices. However, after the TPP comes into effect, they could be defeated by stronger foreign firms offering products of higher quality at low prices.
Meanwhile, it is not easy for the local farm products to enjoy zero-percent tariffs under TPP because Vietnam's end of the bargain involves implementing strict rules for trading activities of state-owned enterprises, better protection for US intellectual property, enforceable labor and environmental provisions and more foreign participation in Vietnam's government procurement market.
The China factor
The garment sector, Vietnam's key exporter with a turnover of $17 billion last year, hopes to enjoy great benefits from the country's participation in the TPP as tariffs on local garment exports to the United States would be reduced to zero percent from the current average of 17.2 percent.
Lower tariffs would help raise the annual growth of Vietnam's garment exports to the United States to 12-13 percent each year from the current 6-7 percent, according to the Vietnam Textile and Apparel Association (Vitas).
With this growth, garment exports to the United States would leap to $30 billion by 2020 and $55 billion by 2025, generating jobs for nearly six million people, Vitas has said.
Shipments to the US are expected to account for 55 percent of Vietnam's total garment export revenues from the current 49 percent, thanks to the TPP.
However, observers say it would be very difficult for Vietnamese garments to meet requirements and enjoy tax incentives offered by the TPP agreement.
In most US deals dating back to the 1992 North American Free Trade Agreement, Washington has insisted on a strict "yarn forward" rule of origin for clothing imports to ensure that third countries, such as China, do not benefit.
The rule requires clothing to be made from yarn and fabric manufactured in one of the free trade partner nations to qualify for duty-free treatment.
Meanwhile, most Vietnamese garment firms implement outsourcing contracts for foreign partners, and the rest depend on materials mainly imported from China.
A report on the government website in April said 70 percent of Vietnam's garment materials are imported. Industry insiders say they are highly dependent on Chinese materials, which accounted for 30.2 percent of the country's import expenditure last year.
The rule means Vietnam will have to import yarn and fabric mainly from the United States for local production because other TPP partners are not strong exporters of these materials, said Diep Thanh Kiet, vice chairman of the Ho Chi Minh City Association of Garment Textile Embroidery"”Knitting.
However, import of US material at prices higher than China and other import markets, will make local garment products less competitive, he said.
Meanwhile, cotton production seems to be impossible in Vietnam, he said. The country has failed to cultivate the crop because Vietnam's soil and climate conditions are not suitable, he added.
Thus, if the United States does not give any concessions to Vietnam in this case, the local garment industry will not benefit from the TPP, Kiet said.
Nguyen Van Nam, former head of the Institute for Trade Research, said Vietnam should not much worry about challenges posed by the TPP, as economic integration is indispensable for development.
Moreover, it will create pressure for local firms to reform and perform better, he said.
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