Vietnam businesses unlikely to derive maximum benefits from TPP

Vietnam is unlikely to derive the maximum benefit from the Trans-Pacific Parternership trade pact, as few Vietnamese businesses have plans to switch from subcontracting to direct exports or reduce their heavy reliance on feedstock imports or increase exports of processed goods to improve value addition.

Nguyen Thi Thu Trang, head of the VCCI’s WTO Center, said that according to a survey conducted of 1,500 enterprises by the Vietnam Chamber of Commerce and Industry (VCCI) in April found that only 11.6 percent plan to change their production mode in the next three years to improve value addition,

Vietnamese firms are not involved in the value chains of many products and merely do outsourcing for foreign partners.

All the production stages that bring the highest value-addition to a product, such as designing or making the most important parts, are not done in Vietnam, foreign firms in Vietnam only assemble or package products. Thus, their added value remains low.

They import most feedstock for production for exports, and now the TPP’s strict rules on origin will be a hurdle.

Import taxes in many large economies like the US, Canada, Australia, and Japan, the biggest buyers of Vietnamese textiles, will be cut from 17-32 percent to zero. But there will be a “yarn-forward rule” stating that every piece of thread, button and zipper in a garment will have to come from TPP signatories to qualify for the tariff exemptions.

But most of Vietnam’s yarn and components are sourced from China and South Korea, both non-TPP countries, making much of Vietnam’s products ineligible for the exemptions.

According to Luong Van Thu, director of a garment firm in the northern Hung Yen Province, there will not be many changes after the TPP comes into effect; they will continue to implement outsourcing contracts.

It is difficult for them to do free-on-board exports because of the weak supporting industries.They have to rely on foreign supply of materials, which could mean great price fluctuations and unstable supply.

However, Vietnamese garment manufacturers can do little since they lack the financial strength to invest in their own yarn and textile facilities. A garment company requires an investment of millions of dollars, which increases to billions of dollars for a textile and dying firm, industry insiders said.

In the agricultural sector too, businesses are not keen on investing in processing technologies, which are expensive, and focus on exporting raw materials with low added value.

Bui Chi Buu, former head of the Southern Institute for Agricultural Technology, blamed this on enterprises’ lack of long-term business strategies.

Besides shallow pockets and lack of long-term business strategies, poor infrastructure and low skills are also barriers to enterprises increasing output, Trang of VCCI said. However, enterprises have made some preparations, including offering more training to employees and expanding markets, to tap opportunities brought by the trade pact.

The VCCI’s survey found that 88.6 percent of local firms know about the TPP, and nearly 96 percent said free trade agreements like the TPP would help local firms participate more in the global value chain.

The TPP is expected to boost exports within the bloc of 12 Pacific-rim nations, which account for 40 percent of the global economy.
Negotiations have been recently completed and the pact is now awaiting ratification by the member countries’ legislatures.

Many foreign-owned and large corporations based in Hanoi and Ho Chi Minh City plan to improve their production capacity to capitalize on export opportunities offered by the deal, which scraps tariffs in many markets, including the US, the world’s biggest economy.

More than 47 percent of the firms polled plan to improve their executives’ management skills, 56 percent hope to improve their workers’ vocational skills and 57.2 percent will try to access new markets.

Malaysian apparel company United Sweethearts is already planning a second factory in Vietnam, and the TPP would accelerate its plans, its managing director Tang Chong Chin said. The company, which exports more than two-thirds of the clothing it makes to the US, said revenues could double within five years if tariffs are scrapped.

Currently, countries without free trade agreements with the US face tariffs of 10 percent or higher depending on the type of apparel.