|Senior Australian economist Raymond Mallon |
Vietnam’s economic transformation in recent decades has been enabled by a transition towards market-based allocation of resources, increasing access to international markets, and the relatively equitable distribution of factors of production. Vietnam’s geographic proximity to rapidly growing economies, combined with political and economic stability, a steadily improving regulatory environment for business investment and trade, and a strong commitment to human development and innovation have also helped.
Large flows of international investment, trade and tech have been facilitated by Vietnam’s increasing engagement in bilateral and international economic cooperation institutions, notably the World Trade Organization, the ASEAN Economic Community, and the Regional Comprehensive Economic Partnership (RCEP), and the CPTPP.
The latter was signed by the remaining eleven members (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore, and Vietnam) of the original Trans-Pacific Partnership, after the US withdrew from negotiations in 2017. It is an ambitious economic cooperation agreement, aiming for a transparent, rules-based regional trading system.
The agreement includes provision for enlargement. In addition to China, the UK, and Taiwan (and possible renewed interest from the US), other markets expressing an interest in joining an enlarged CPTPP include South Korea, Indonesia, Thailand, and Colombia.
Vietnam is already benefiting from the agreement through easier access to markets, increased trade in higher value goods and services, and increased flows of investment, technology, and know-how.
The enlargement of the CPTPP membership would be expected to increase the potential gains for all members. Any decision to add China or the US would have the greatest impact because of their size and their importance in terms of global trade, investment, and technology flows. However, negotiations by these countries to join the pact are likely to be more complicated and time-consuming. It may well be that other ASEAN economies, or South Korea, will join the CPTPP before either the US or China.
Several factors are likely to slow China’s request to join the CPTPP. China would have to implement substantive reforms to comply with the terms of the existing agreement, and especially provisions in the chapter on state-owned enterprises (SOEs). Chinese SOEs continue to dominate key sectors such as finance, telecommunications, and energy, and receive subsidies and other preferential treatment from the government. Some conditions relating to trade in services and data and information flows may also be difficult for China to accept.
On the other hand, China is already a member of the RCEP, and existing CPTPP members might argue that joining membership could help China to commit to a market-orientated rule-of-law agreement that requires greater transparency, a level playing field, limits on subsidies to SOEs, stronger labour rights, higher environmental standards, free flow of data, and opening government procurement to foreign competition. It could be a useful tool for Chinese reformers pushing domestic reforms to ensure increased competition and productivity growth. And the private sector already dominates employment, innovation, and exports from China.
Existing members are likely to welcome a US return to the agreement because of its economic importance. However, the US has not made any formal decision to reopen discussions on membership. Some of the more controversial measures pushed hard by the US, for example, on investor-state dispute resolution and intellectual property, were dropped or weakened after the US withdrew from negotiations on the original agreement.
In addition to resistance from US interest groups opposed to globalisation, well-connected US firms will likely lobby hard for the reinstatement of earlier provisions. Several current CPTPP members are expected to resist the types of changes that the US may request. The UK formally applied to join the agreement earlier in 2021 and initial negotiations commenced in June. It is possible negotiations with the UK could be concluded relatively quickly because it would have to make fewer policy changes, and/or institutional reforms to comply with conditions.
Taiwan formally asked to join the CPTPP just a couple of days after China applied. Taiwan may need to change some sensitive agricultural trade policies but should otherwise find it relatively easy to accept conditions.
|The CPTPP is opening up opportunities for Vietnamese enterprises to expand exports. Photo: Le Toan |
Ups and down for Vietnam
As noted, global and regional economic integration has played a pivotal role in boosting Vietnam’s economic performance and living standards. Vietnam should welcome expanded membership of economic cooperation agreements, while also carefully reviewing any proposals to extend commitments that undermine the government’s capacity to regulate social protection measures in the national interest.
The resulting reductions in tariffs and other trade and investment barriers will provide new economic opportunities for Vietnam. The shift to harmonised regional rules of origin and efforts to harmonise standards and to streamline trade compliance mechanisms are likely to be particularly beneficial to small- and medium-sized enterprises that lack the research and compliance expertise to readily understand the currently diverse requirements of each market.
Expected increased inflows of investment and technology will help Vietnam to move up the value-added chain and boost productivity and incomes. This will be critical in helping Vietnam achieve its aspirations of transitioning to an upper middle-income country.
Some of the biggest challenges to realising economic benefits from increased integration are global factors beyond Vietnam’s direct control. These risks include a slow global recovery from the pandemic, the impacts of climate change, the potential negative impacts of international anti-globalisation campaigns and growing protectionism in some countries, and potential instability in major markets.
The pandemic-generated global economic recession and rising unemployment have exacerbated global concerns about the impacts of climate change, technology, automation/job loss, digital economy, low returns on savings, economic inequality, and rising debt. These developments could undermine consumer and investor confidence.
While most consumers will benefit from increased competition associated with integration, some industry groups and their workers may struggle to compete. Regardless of any extension of membership, Vietnam should continue monitoring the distributional impacts of regional economic integration on employment, income, and business investment.
Further reforms and/or public support may be needed to: facilitate the movement of workers out of industries adversely affected by economic restructuring; continue improving the business environment to encourage sustained and equitable employment and income growth; continue efforts to reduce corruption; and to build on recent success in reducing bottlenecks to efficient public expenditure to further help stimulate business investment and employment growth.
Regardless of whether the CPTPP is enlarged, Vietnam is likely to continue to remain an attractive destination for trade and foreign investment. While the current pandemic has adversely impacted many businesses, especially smaller ones, as well as many workers and their families, the net economic impact on Vietnam has been less than in most countries.
Domestic support policies should aim to continue to target those worst affected, and continue to implement the priorities outlined in its latest development plans to help businesses, especially domestic businesses, to grow and compete on a level playing field with their foreign counterparts. Efforts to roll out the vaccination programme and facilitate the movement of people should remain a high short-term priority.
Despite recent difficulties and COVID-19 related disruptions to some export orders, many of Vietnam’s most significant foreign investors continue to expand business operations, deepening the country’s links with regional production chains. Links between these firms and domestic producers are likely to continue to strengthen as Vietnam begins moving to a post-pandemic economic recovery phase, hopefully by early 2022. The expected implementation of the RCEP from 2022, and the possible future expansion of CPTPP, could help strengthen the expected economic recovery.