Vietnam and Malaysia predicted to be winners of TPP agreement

The Trans-Pacific Partnership involves 12pacific rim countries but some look set to benefit more than others from the agreement, with Vietnam and Malaysia singled out as two likely winners. The Trans-Pacific Partnership (TPP) is a trade agreement concerning a variety of matters of economic policy, which was reached on 5 October 2015 after 7 years of negotiations. 

Each of the 12 countries that signed up to the landmark Trans-Pacific Partnership (TPP) agreement expects to benefit greatly from a deal that will open up a vast new market of 800 million people for their products and spans a large portion of the globe. However, none has higher expectations than Vietnam, which experts say has emerged as the big winner of the TPP agreement, with Malaysia as the runner-up, in the struggle to boost exports and attract FDI. 

The agreement’s 30 chapters cover various trade and trade-related issues, including reducing tariff and non-tariff barriers in sectors as diverse as agriculture, industrial goods, pharmaceuticals, service industries, financial services and telecommunications. 

The agreement also deals with investment, intellectual property, labour, the environment, good governance and methods for dispute settlement. Novel features of the agreement include addressing the roles of state-sponsored enterprises and e-commerce, and its commitment to assisting small and medium-sized enterprises so that they benefit from the new trade openings. It will also work towards facilitating the development of production and supply chains and seamless trade.

FDI boost

That so many countries – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam – at such different levels of development were able to reach agreement on so many complex and domestically sensitive issues is remarkable. 

The TPP, though primarily about trade, is also expected to generate a significant increase in FDI. Indeed, its chapter on investment specifically emphasises that each country’s markets and services sector will be fully open to foreign investors – unless the country has put a specific sector on a 'negative list' that is not open to foreign investment.

“The big winners on trade are likely to be the big winners on investment, especially over a 10-year period,” says Dr Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, DC.

In percentage terms, Mr Hufbauer expects Vietnam to be a big winner in both categories because it is coming from far behind the rest of the field. In addition, its tariffs on many imports – among the highest in the TPP trade area – will be lowered or eliminated. To get the maximum benefit from the TPP, Mr Hufbauer says Vietnam will need better technology and financial services, both of which will require FDI. “If Vietnam carries through on the reforms in the TPP, it will get a ton of investment,” he says.

Vietnam’s burgeoning textile and apparel sector, which currently exports about $17.5bn-worth of goods a year, is expected to benefit most under the TPP. Its other major exports are telephones, consumer electronics, footwear and seafood.

The Nafta effect

Mr Hufbauer expects that under the TPP, Vietnam could enjoy the benefits of “the Nafta effect”, which enabled Mexico to increase the FDI it received from $3bn to $4bn a year to $15bn to $20bn annually after Mexico, the US and Canada signed the North American Free Trade Agreement. To get the full benefit of the TPP, however, both Vietnam and Malaysia will need to improve their infrastructure and tackle corruption, he says.

Dr Deborah Elms, executive director of the Asian Trade Centre in Singapore, is also bullish on Vietnam. “The consequences of the TPP for the [Vietnamese] economy are huge. A lot of the reforms they have to make are hard and challenging. By using TPP as the mechanism to get reforms done, we are more likely to see them,” she says. 

Inward FDI has already begun, she adds, with large-scale investors from China, South Korea and Indonesia already moving to Vietnam to take advantage of the TPP. Ms Elms points out that the trade benefits of the TPP are based on where the product is made, not on the country in which the corporate headquarters are located. Therefore companies with operations in other countries are likely to move those operations to locations within the TPP to benefit from zero or lowered tariff barriers on their products. 

Malaysia too has high hopes for the TPP. It sees a competitive advantage for its key exports of electrical and electronics goods, as well as chemical, palm oil, rubber, wood, textiles and automotive products. In a statement, the Malaysian government reported that a number of foreign companies in non-TPP countries were exploring Malaysia as a base for their operations to take advantage of the agreement.

Sector winners

The TPP also opens up vast new opportunities for the services sector in member countries – an arena in which the US is extremely competitive, says Ms Elms. The agreement states that member countries’ markets must be fully open to services, except those on the 'negative list'. 'Services' include professional services such as legal and accounting, as well as retail and restaurants, travel and tourism, and telecommunications. At the same time, Ms Elms expects openings to be created for domestic companies to become competitive.

Another industry she expects to benefit from the TPP is the food and agricultural sector, where markets are traditionally very protected and closed to foreign products. Tariffs will be eliminated or reduced over time, food will not have to be repeatedly tested as it crosses borders, and special rules will expedite the processing of perishable goods through customs. Ms Elms expects these advantages to attract FDI, especially in food processing. 

“If a company can figure out how to take advantage of this agreement, the upside is great. But it takes a fair amount of effort to figure out what is in it and how to harness it,” she says.

It will also take a fair amount of effort for each of the 12 governments that signed the deal to get their parliaments to go along with it. In each country there are powerful groups that see their own special interests as being damaged, whether in the agricultural, biopharmaceutical or automotive sectors. Labour groups also worry that production will be outsourced to workers in low-wage countries. US presidential candidate Hillary Clinton has announced her opposition to TPP, even though it was negotiated by a fellow member of the Democratic Party.

Expect a fierce fight on all fronts before the dust settles.

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EU launches FTA negotiations with Singapore and Vietnam

The EU has launched and concluded FTA negotiations with Singapore (see legal texts here) and with Vietnam (see legal texts here) with the objective to create new opportunities for businesses from both sides including the building of economic foundations for further strengthening of trade ties. 

Currently the European Union is Singapore's largest trading partner and foreign investor and bilateral trade in goods and services exceeded €55 billion in 2008. Meanwhile, Singapore is the EU's foremost trading partner among the Southeast Asian countries and about one third of EU-ASEAN trade is with Singapore.

According to the new EU Trade Commissioner, Karel De Gucht besides trade, bilateral investment ties are robust and the investment relationship is two-way with Singaporeans working in the pharma business, maintaining aircraft or selling financial services benefit from the presence of European investors in Singapore, where some 3400 EU companies have set up subsidiaries. The EU Commissioner is also keen to further promote the EU to investorstof Singapore, including Sovereign Wealth Funds. For the EU, Singapore represents a growing market for exports and investments, as well as a crucial link to the wider ASEAN region.

EU-Vietnam annual bilateral trade in goods amounted to almost € 12 billion in 2008, and trade has increased 12% annually during 2004-2008. Within ASEAN, Vietnam is the EU’s fifth largest trading partner. Vietnam has seen rapid economic and social transformation over the past decade. Vietnam is a good example of an economy successfully opening up to trade and investment and lifting millions of people out of poverty. Vietnam is today one of the fastest growing and dynamic economies in ASEAN. GDP growth averaged almost 8% during 2003-2008. Even through the global economic downturn in 2009, Vietnam recorded a respectable growth rate of almost 5%.

EU’s total trade with Asia last year amounted to €730 billion, compared with €426 for the combined NAFTA countries. Notwithstanding Asia's growing economic success, today, Europe too has predominant role in the world economy. Out of a world GDP worth €41 trillion, the EU's €12.5 trillion economy (compared with China's €3 trillion) is the world's largest. The EU is also the largest importer and exporter, as well as the main source and destination of foreign direct investment. Over the last twenty years Europeans created a Single Market, a common currency and a border-free travelling area and integrated 12 mostly former communist economies, bringing the EU's total population to 500 million, a similar proportion to ASEAN. It is important to note that, last year, the EU initialed an ambitious free trade agreement with Korea.

The EU has also initialed EPAs with African and Caribbean countries. However the trade and investment flows between the EU and Africa, Caribbean and Pacific regions hardly matches those of the ASEAN- EU regions and importantly the investment flows are not necessarily two way. Furthermore Africa’s exports to Europe have been steadily declining over the past decades and it is not clear how the new agreements will stimulate increased exports from Africa. It is widely recognized that there have been many concerns about certain provisions in the EPAs and it remains to be seen if the full comprehensive agreements will substantially revise the areas of concern and hence reflect the severely asymmetric relationship.