On March 8, Vietnam and ten other Pacific Rim countries signed the Trans-Pacific Partnership 11 (TPP-11) minus the US.
America had initiated the free trade pact under former US president Barack Obama, but current leader Donald Trump nixed US participation on his first day in office in fulfillment of his “America First” campaign promises.
The TPP-11 will phase in tariff cuts over a 15-year period on various vital sectors for Vietnam, including its exported-oriented garment and shoe industries, while opening Vietnamese markets to more agricultural and consumer goods imports.
US Commerce Secretary Wilbur Ross, a business tycoon whose International Textile Group had invested in a cotton manufacturing joint venture in Vietnam more than a decade ago but pulled out in 2013 amid disputes, is intimately aware of the country’s economic potential.
“The growth of the middle class and the increasing purchasing power in Vietnam are further incentives to strengthening our long-term trade and investment relationship,” Ross said on the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit Trump attended last year in Da Nang.
Ross noted then that Vietnam was the “fastest growing” market worldwide for US exports, which reached US$4.4 billion in 2016. Of that amount, US$2.7 billion were agricultural products, making Vietnam the 10th largest importer of US farm goods.
Despite a meeting with Prime Minister Nguyen Xuan Phuc at the White House, Trump is expected to focus more on the US’ sizeable trade deficit with Vietnam (US$32 billion in 2016) given his administration’s recent lurch towards protectionism, seen in the tariffs slapped on steel and aluminum imports.
A global trade war would bode ill for Vietnam, which has recently emerged as one of Asia’s star economic performers.
Last year gross domestic product (GDP) rose 6.8%, the stock market index jumped 48% and exports rose 21% to US$214 billion. Inflation was subdued and the dong currency stable, even as capital disbursed from foreign direct investments (FDI) reached US$17.5 billion, compared with US$15.8 billion in 2016.
Registered capital on FDI certificates issued last year reached US$35.6 billion, led by investments from Japan, South Korea, Singapore and China. Most of Vietnam’s FDI is concentrated in export industries such as electronics, garments and shoes.
FDI companies accounted for 73% of Vietnam’s total exports last year, with South Korea’s Samsung Electronics alone accounting for 23%.
The country’s export competitiveness is still based on relatively cheap labor when compared with neighboring China, and favorable tariffs abroad thanks in part to Vietnam’s status as a developing country and the numerous free trade agreements Hanoi has signed over the years.
Vietnam is a signatory to the ASEAN Free Trade Area (AFTA), which includes the ten Southeast Asian nations, China, Japan, South Korea, India, Australia, New Zealand, and Hong Kong and has bilateral FTAs with Chile, Japan, South Korea and the Eurasia Economic Union (EAEU).
An additional European Union-Vietnam FTA is expected to go into force next year, making Vietnam and Singapore the only two Asean members to have such a trade-promoting pact with the EU.
The TPP-11, meanwhile, includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Trump has recently suggested he might reconsider the TPP if the US got a “substantially better deal”, but analysts are skeptical that could happen any time soon.
“I can’t imagine after all the blood and sweat that went into negotiating what is now the TPP-11 that the remaining countries would be interested in reopening talks with Washington when they have no idea about [Trump’s] bottom line,” said Murray Hiebert, Southeast Asia specialist at the Washington-based Center for Strategic and International Studies (CSIS).
“Vietnam is disappointed the US pulled out of TPP because they saw the US as serving an economic hedge against a rising China,” Hiebert said.
The US may still serve as a military hedge against China, as demonstrated with the recent visit by the US 7th Fleet’s USS Carl Vinson aircraft carrier to Da Nang earlier this month. But on the economic front, the real loser from Trump’s TPP pullout will be the US, Vietnam-based observers say.
“The US is shooting itself in the foot,” said Frederick Burke, managing director of Baker & McKenzie (Vietnam) Ltd, a law firm.
“It’s bad news for the US and particularly for US exporters of agricultural products because as the phases kick in, both for the TPP and EU-FTA, Canada and Australia and Europe and everyone else is going to have a lower duty rate coming in than the US and there is no sign yet of any solution for the US to catch up,” Burke said.
Burke and others think the chances of Vietnam signing a bilateral FTA with the US are miniscule.
“The guys in the USTR (United States Trade Representative) think we can do it on a bilateral basis because we’re the biggest market in the world, but nobody has time for a bilateral and Vietnam is not going to give away in a bilateral what they already gave away in the TPP-11 because it’s more politically acceptable to do it on a multilateral basis, not just for the Americans because they beat you up,” Burke said.
The US has traditionally been Vietnam’s biggest export market, but even that may be changing. In the first two months of this year, Vietnam’s exports to China reached US$6.2 billion, just pipping the US$6 billion sent to the US.
Total exports in the first two months of 2018 reached US$33.6 billion, up 23% year-on-year, with FDI-oriented exports accounting for US$23.9 billion, or 71%, according to the government’s General Statistics Office (GSO).
To be sure, Vietnam pays a heavy price for its FDI, both in terms of pursuing FTAs that make FDI exports more competitive and in terms of subsidies to manufacturers.
“The reality check here is that Vietnam has financial challenges and the opportunities on the revenue side are diminishing as Vietnam has signed more and more trade agreements,” said Dennis Hussey, chief executive officer of ANZ Bank. “They used to get a lot of tax from import revenue. That is largely diminishing in the context of AFTA and all the other free trade agreements.”
Vietnam’s public debt hit 61.2% of GDP in 2017, just below the 65% ceiling the government has set. The government hopes to supplement its revenues by selling stakes in state owned enterprises (SOEs) in a privatization push that picked up steam on December 18 with the US$5 billion sale of a 53.6% stake in Saigon Alcohol and Beer Beverages Corp (Sabeco).
Another fiscal challenge Vietnam faces is the need to hike currently heavily subsidized electricity rates, partly as a bid to attract more FDI.
“They are in a bit of a devil’s bargain there because they have got some big electronics manufacturers in Vietnam doing very well, and they all like cheap electricity, but the government is not going to be able to give them electricity at the same price because it’s too much of a burden on the economy,” Burke said.
One of those bid manufacturers is US-based Intel, which invested US$1 billion in 2010 inn a chip testing and assembly plant in Vietnam and is now considering a substantial expansion. While Intel’s decision to establish a base in Vietnam was seen at the time as a breakthrough for US-Vietnam business relations, things are looking less rosy today.
“Vietnam is cranking,” CSIS’s Hiebert said. “They’re not going to wait around for the Americans.”