Vietnam’s membership in the Trans-Pacific Partnership (TPP) will yield economic benefits, especially to the country’s manufacturing sector. Vietnam’s textiles and apparel industry will enjoy expanded access to the US and Japan markets through reduced tariff duties as a result of TPP once it has been enacted, accelerating foreign direct investment into the country.
However, as highlighted in a white paper
, an Asia-focused management consulting firm, strategic development of supporting industries (raw materials & machinery) and accompanying infrastructure (port, construction & logistic) will be needed to fully absorb TPP’s benefits for the economy.
Drivers behind Vietnam’s benefits from TPP
Vietnam’s manufacturing environment is well-positioned to benefit from TPP’s passage due to three primary factors:
1. Large trade volumes with the US and Japan
2. Competitive manufacturing environment
3. Tariff cuts of key export and import products
As TPP signatory countries account for around 40 percent of Vietnam’s total exports, the TPP’s passage will not only accelerate Vietnam’s exports to TPP member countries, but also increase the country’s total export by an additional USD 68 billion by 2025.
In addition to Vietnam’s well performing competitive manufacturing environment, export-oriented manufacturers will be drawn to Vietnam as a result of TPP. This will further enhance the country’s attractiveness, especially in the textile &apparel supporting industries where manufacturing facilities had already be set up in Vietnam prior to the signing of TPP in anticipation of the agreement. TPP’s yarn forward regulations requires Vietnam to take full advantage of reduced tariffs, textile & apparel inputs need to be sourced in a TPP member country.
Potential impacts of TPP on Vietnam’s manufacturing
Once TPP goes into effect, current tariff rates for textile, garments, and apparel exports from Vietnam to the US (7.9 percent on average for textiles and 11.4 percent for clothing) will be gradually reduced to zero, allowing for expanded market access to the US and Japan for Vietnam-based companies.
As an advantage of this expanded market access, TPP will attract additional Foreign Direct Investment (FDI) to Vietnam and drive further investments in an increasingly competitive business environment, with FDI expected to reach around US$20 billion by 2020 as more standardized business and policy environments are part of the requirements of TPP.
When large domestic and foreign investments pour into Vietnam’s economy following major trade agreements, manufacturing facilities tend to scale-up to take advantage of economies of scale. This has the potential to benefit Vietnam’s manufacturing sector and lead to an increase in production scale and industrial deepening, which ultimately drives productivity growth.
Moreover, rising FDI will fuel the development of upstream suppliers and manufacturers in supporting industries following TPP’s implementation. To illustrate, in recent years, large electronics manufacturers have expanded their production base in Vietnam, creating potential market opportunities for local parts and component suppliers.
As the agreement is being implemented, key export manufacturing industries, like textile & garment, footwear and fishery, among others, will enjoy rapid outsized growth.
In 2015, disbursed FDI reached a record high at $14 billion, at least in part attributable to anticipation of TPP. At present, more than $1 billion of investments in garment & textile supporting industries has already been instilled in Vietnam‘s growing economy, with investors from China, Taiwan, Japan, South Korea, and India setting up specialized industrial zones for garment & textile material production, yarn factories, packaging facilities, and more.
Vietnam is one of Asia’s fastest growing economies with promising business opportunities to follow. While Vietnam’s manufacturing industry has already made impressive strides, TPP‘s impact will further boost Vietnam‘s manufacturing growth. Leading industry players need to take note of this momentum and define key strategies to capitalize on Vietnam‘s burgoening manufacturing sector.
Michael Sieburg is an Associate Partner at Solidiance Vietnam. Solidiance is a corporate strategy consulting firm focused on Asia. The firm advises CEOs on deals, define new business models and accelerate Asia growth. Solidiance’s expertise is focused on industrial applications, green technology, healthcare and technology sectors with offices in 10 different Asian countries, including Vietnam. Michael would like to thank Nadhira Ananta for her support in developing this piece.