Intangible benefits from the CPTPP and trade war

By Tran Vinh Du Partner, Transaction Advisory Services, Ernst & Young Vietnam Ltd

SMEs should understand what the CPTPP is and how the agreement will impact their industries

While businesses involved in export-import will benefit directly from lowering tariffs both in Vietnam and in other CPTPP partners, indirect benefits will reach all via higher GDP growth. Other benefits, which are harder to quantify, include the lowering of regulatory requirements in CPTPP countries, and the required reform of state governance and legal framework applied to countries like Vietnam. These “intangible” benefits are perceived as more critical than numerical benefits by many experts in Vietnam.

As per small- to medium-sized enterprises (SMEs), Chapter 24 of the CPTPP agreement outlines how to help SMEs to engage in trade between CPTPP countries. I will not repeat the content of the chapter here, however, in general, there are key benefits which SMEs can achieve besides obvious numerical ones like lowering tariffs (which can take years to fully take effect). For example, there will be lower risk and uncertainty in doing business in CPTPP countries. The process of getting goods through customs will get easier. The CPTPP also helps better protect business transactions, intellectual property, and copyrights. Moving staff, technicians, and salespeople from our country to other CPTPP countries will also be better facilitated under the agreement.

For SMEs in Vietnam to capitalise better on the agreement, I think it is critical that they understand the agreement and understand how the CPTPP will impact their industries. They could discuss with tax consultants and trade experts, for example, to get deeper information. After obtaining a deep understanding of the impacts, SMEs need to recalibrate their business plan based on their updated information. Such recalibration may simply be searching for different business partners within the CPTPP to better take advantage of lowering tariffs or may be more complicated means, such as forming a new Capital Expenditure (CAPEX) investment strategy to expand capacity, and so on. It will really depend on each SME’s situation and there will be no one-size-fit-all formula in this type of context.

Vietnam’s agriculture will be substantially affected

In general, the common rule with free trade is: industries in which Vietnam has a competitive advantage will benefit from the trade pact, while industries in which Vietnam does not have a competitive advantage (but still operates) will be harmed.

In the case of the CPTPP, lowering tariffs from importing countries will significantly benefit Vietnamese companies doing businesses in industries like garment, textile, leather, processed food, beverages, tobacco, and the like. Industries like agriculture (especially livestock farming, poultry farming, and plantation) will be substantially impacted. Vietnamese companies will be able to expand their exports to some of the world’s largest markets, as well as boost exports of high-value processed produce, making it easier to join the global supply chain. Despite some advantages in low-cost manufacturing, low-cost workforce, along with an abundance of supply, Vietnamese agriculture still heavily depends on imported materials and does not have an advantage over other powerful economies within the CPTPP in terms of production efficiency. Therefore, the industry must step up restructuring by improving added value and sustainability, and limiting reliance on imported materials.

The CPTPP’s stricter compliance requirements in terms of intellectual property may impact some industries which benefits from certain grey intellectual ­property areas, especially pharmaceuticals and high tech-related industries.

Vietnam’s financial market will witness more push for regulatory reform

The financial sector will certainly be impacted by a greater push for regulatory reform. However, I do not think there will be an identifiable impact on the financial market which could be singled out from the integration into the CPTPP. Integration into the CPTPP is a process which will take years for partner countries to fully realise. It will not happen in a week or a month. As such, the benefits and the impacts will take time to be reflected in the financial market. However, as I already said, we will see a gradual impact in companies’ earnings performance on the stock market in hotly-impacted industries.

Similarly, on the investment side, we have already observed a surge in interest in certain industries which are expected to benefit the most from the CPTPP. These trends will continue in the years to come, unless there are significant shocks from global trade such as a continuing trade war between major countries which could overshadow the impacts from the CPTPP.

More investment from ­private equity funds to pour into Vietnam Offshore investors did not wait to start searching for opportunities to invest in Vietnam. Since a few years back when the TPP was under discussion, they already began looking into opportunities in benefiting industries and ramped up their investments where possible. However, these “early movers” were mostly investment funds.

Now with the CPTPP in effect, we will continue to observe more investment from private equity funds pouring money in these sectors, but we will observe a gradual increase in strategic players relocating and building up their manufacturing capacity in Vietnam.

Ultimate winner will be ­decided by technology

While the inception of the CPTPP is a positive happenstance, the ongoing trade war between the US and China is one of the key risks going forward for the global economy, not just Vietnam. The initial impact of this war is starting to show on US corporate earnings reports. The prospect of the trade war ending soon is slim, while deepening seems likely.

Looking a bit further into the future, the technological revolution and the subsequent structural shifts in the global economy will continue to provide more ammunition for the trade war. It will not so much be about how many per cent tariffs are imposed on soybean or car parts. It will be about who will win the technological race. And the trade war will be a useful tool (and likely become a more favoured tool overtime) to combat and slow down the opponents’ technological progress. Recent arrests of some key executives of Chinese corporates and the West’s consensus on barring some Chinese technology firms are just the initial shots fired.

Vietnam will be impacted by the continuing trade war. Some of the impacts may initially seem positive, such as manufacturing operations shifting from China to countries like Vietnam. However, personally I do not think this benefit will be substantial. Ultimately, the trade war will undermine global economic growth and as an integrated economy, our growth will be negatively impacted as well.

The application and improvement of technologies along with training high-quality human resources are key factors for Vietnam to attain success in the new context brought by the CPTPP and many other FTAs, as well as the US-China trade war.