TPP changes face of global market

As the substance of the Trans-Pacific Partnership (TPP) will allow the participating countries to trade without most tariffs previously imposed in the normal course of business, what will be the result of the trade agreement on future investment?

The question arises whether the TPP will increase international investor interest and participation. From the standpoint of the international investor, Vietnam will further solidify its position as a favoured and viable investment destination. Simply considered, as the agreement is implemented over the medium and long term, Vietnam should experience higher and more consistent gross domestic product growth than previously expected. This will result as further manufacturing of goods shifts from higher cost countries to Vietnam, which are typically not free from tariffs. This can be expected to accelerate over the medium term, as international firms desire a lower cost structure and a higher gross margin.

Although the reduction and elimination of tariffs is only one consideration of the Trans-Pacific Partnership, it is a central consideration to the investment community. Furthermore, imported goods and services by Vietnamese companies should experience a variably lower cost structure – spurring the possibility of higher turnover and higher margins. Although Vietnamese firms will face greater competition from international sources, most firms will find an appropriate cost structure equilibrium which will allow them to compete favourably. In short, Vietnam should experience an economic boom from the implementation of the TPP.

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The Trans-Pacific Partnership will grant foreign investors greater access to Vietnam Photo: Duc Thanh

Witnessing the development of the NAFTA (North American Free Trade Agreement) in the 1990’s between the United States and its surrounding neighbours resulted in manufacturing investment by American firms in lower-cost Canada and Mexico. Overall, the NAFTA caused a shift in investor confidence to these areas not existent prior to the agreement. Direct investment, therefore, increased into the developing countries involved in the trade agreement. Furthermore, intellectual property and advanced manufacturing equipment, for example, were implemented and utilised in Canada and Mexico, making firms generally more competitive. These developing countries involved in the NAFTA experienced greater investment, a higher gross domestic product and a more stable economy. Additionally, the developing countries involved in the NAFTA also experienced greater indirect investment. International interest, which previously would not consider those countries, suddenly found a new investment opportunity. Lastly, the developing countries involved experienced a greater per capita gross domestic product which ultimately raised the standard of living in each country.

As the NAFTA has some key similarities to the TPP, investors can expect a similar result to occur in Vietnam as the TPP matures. Since production will naturally and inevitably shift to the developing countries in the TPP, such as Vietnam, investor confidence will continue to improve and will result in more direct investment into Vietnam by international investors. More advanced production and more advanced manufacturing resulting in higher value-added production will eventually occur in Vietnam. Then, ultimately, per capita gross domestic product and a higher standard of living will also occur. From this basis alone, the trade agreement will be highly beneficial to Vietnam.

The question then arises whether there will be greater indirect investment in the stock market. This question has been highly debated recently. From the perspective of an international indirect investor, Vietnam will become an investment destination which is increasingly attractive. In the past and in most similar situations, indirect investment from international sources follows closely direct investment from international sources. As the development of direct investment occurs, therefore, indirect investment will soon follow. In essence, the correlation

between direct and indirect investment into any country is high, although indirect investment follows direct investment after a considerable period of time. If the direct investment into Vietnam increases, it can be expected indirect investment will follow.

Specifically, although the United States has not been a major indirect investor in Vietnam in the past, since the TPP involves both countries, it is likely that investors in the United States will further welcome investment in Vietnam. Other developed countries, even though previous significant investors in Vietnam (such as Japan) may form greater interest in investment in Vietnam. Investors in Vietnam will experience increased investor confidence in the opportunities in Vietnam and as the TPP gains traction, they will seek out investment opportunities not yet fully discovered. It can be expected that the international investment community will critically consider investment in Vietnam.

International indirect investors will likely be interested in investment opportunities in the stock markets as well as bond market. Further development of the bond market should occur as a result of greater investor interest. Specifically, involvement will first be in blue-chip securities and government bonds but will evolve into any significant opportunities in the stock markets. Vietnamese firms will be forced to become increasingly competitive. Further development of investment vehicles such as real estate investment trusts and other hybrid investment vehicles (including various derivatives) should occur as investment interest increases and the market further grows. There is another major probable benefit to Vietnam. Obtaining emerging market status will be an eventual and inevitable result of greater international investment and interest generated from the implementation of the TPP.

Consider the TPP to be a pass to participate in further trade with some of the most developed and highest-consumption countries in the world. Therefore, Vietnam and international investors stand to benefit greatly from the implementation of the TPP. If the implementation of the NAFTA is an indication and essentially a roadmap, all those concerned can be assured that investment will increase from international interest, both directly and indirectly. Greater awareness and interest usually results in greater confidence and therefore greater investment. If Vietnam can maintain a vibrant economy, this should certainly occur.

By Dr. Christian Kamm - President of Kamm Investment Inc, a US-backed investment firm in Ho Chi Minh City.