CPTPP to shape future direction for businesses
Vietnam’s National Assembly is scheduled to adopt the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on November 12. Raymond Mallon, economic advisor from the Australia-Vietnam economic reform programme, provides in-depth analysis on the deal and what it means to businesses in Vietnam.
The Comprehensive Agreement for Trans-Pacific Partnership (CPTPP), or TPP-11, is an economic integration treaty signed by 11 countries in March following 10 years of negotiations. After the withdrawal of the US from the original TPP in 2017, the remaining members are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Together, they account for nearly 15 per cent of global trade, and just over 13 per cent of global GDP. The agreement is expected to come into force by the end of this year, 60 days after at least half of the original signatories confirm the completion of national treaty-making procedures.
The deal allows for more economies to join the CPTPP in the future. Within the Asian region, Bangladesh, India, Indonesia, the Philippines, South Korea, Taiwan, and Thailand have indicated an interest in joining. Columbia and the United Kingdom have also expressed interest.
The CPTPP includes chapters that go beyond the scope of traditional free trade agreement (FTAs) to include policy issues related to state-owned enterprises, competition, trade in services, public procurement, transparency and anti-corruption, environment, labour, the digital economy, gender and small- and medium-d enterprises (SMEs).
Future reform direction for Vietnam
Some observers argue that external institutions play a pivotal role in Vietnam’s reform agenda. While Vietnam actively studies international experience when formulating its development plans and policies, my experience has been that few reforms have been introduced without broad national consensus on the need for those reforms. And even fewer reforms have been successfully implemented in Vietnam without a national consensus.
Participation in the CPTPP is just another step in a reform process that has broad-based national support. Past reforms have resulted in Vietnam’s transformation from a closed country, with little movement of goods, capital and people in the mid-1980s, to an open economy with one of the highest ratios of trade and foreign direct investment to GDP in the world.
This transformation has brought dramatic benefits to Vietnamese businesses, improving their access to export markets, technology, capital and ideas from all over the world, and building links with global production networks. Employment and income-generating opportunities have expanded. The decline in poverty over the last three decades has been unprecedented internationally. Enhanced economic integration under the CPTPP should help sustain progress towards broad-based improvements in living standards.
While there will be direct benefits from reduced tariff rates, the impact of reductions will be relatively modest for most sectors which already face modest rates. Some of the more significant benefits are an expected result from reducing non-tariff barriers to trade and investment in all CPTPP countries ensuring competitive neutrality, meaning a level playing field for all investors, and transparency and anti-corruption measures.
These reforms should help reduce the costs and risks of engaging in business and trade in Vietnam, and provide increased opportunities for companies to access new markets and diversify export markets and sources of foreign investment. Reforms should also ensure that business success will be less dependent on access to bureaucratic decision-makers.
Easier access to capital and technology should stimulate innovation and productivity growth and facilitate deeper business integration into global production chains. This will help create new, higher income, and more interesting employment opportunities. Harmonisation and simplification of rules of origin and other trade facilitation measures will help reduce the transaction costs faced by businesses in trying to understand a multitude of individual bilateral free trade agreements. This should be particularly beneficial in making regional trade and investment more accessible to smaller firms.
Increased and lower cost market access, public procurement reforms, and regional cooperation to address barriers to competition are expected to increase the range and competitiveness of goods and services available to Vietnamese consumers. The quality of goods and services should also improve as a result of increased competition and innovation.
The CPTPP also requires that countries consider supporting activities to enhance the ability of women, including workers and business owners, to access and benefit from CPTPP opportunities.
Realisation of the potential gains from the treaty will depend on Vietnam continuing its efforts to develop market institutions, property rights and improve economic regulations and regulatory processes. Renewed efforts are also needed to strengthen labour force skills, to develop national infrastructure and services, and to better manage the environment. The CPTPP should provide additional national incentives to progress implementation of such reforms.
Will the benefits from the new treaty be equally distributed?
No. Some sectors will face increased competition, some businesses may have to close, and some people may lose their jobs. Some of those adversely impact by integration will require support, for example training or relocation support, to move into higher productivity, employment or economic opportunities.
Trade and investment-related economic growth can also exacerbate environmental problems, adding to urban congestion and pollution that negatively impacts on living standards. Given these social and environmental challenges, Vietnamese people sometimes question whether the benefits of international economic integration outweigh the costs.
Societies require assurances that social and environmental costs can be better managed, and that development will generate equitable outcomes.
The impact of the US withdrawal on Vietnam
The withdrawal of the US reduces the potential economic benefits to Vietnam. The US was, by far, the largest economy in the original TPP and is one of Vietnam’s major trading partners.
Easier access to the US market would have been particularly beneficial for Vietnamese companies, especially those engaged in the garment, footwear, furniture and agriculture industries. Nevertheless, CPTPP membership will still help improve Vietnam’s access to a large number of important markets.
Moreover, Vietnam may benefit from the relaxation of contentious provisions on intellectual property and investor state dispute resolution following the US withdrawal.
One challenge will be providing information on, and facilitating business access to, the preferential access provisions of the treaty.
Difficulties in accessing information, a lack of clarity in requirements, high cost of learning, and adapting to new procedures are typical barriers to business utilisation of FTAs. Close consultation with businesses will be important in identifying and addressing these bottlenecks.
Another key challenge will be building the national institutional capacity needed to effectively implement the agreed commitments. For example, the recently amended Competition Law ensures that this legislation is more consistent with CPTPP commitments.
But, the bigger challenge will be building the capacity of the Vietnam Competition Authority to effectively implement the strengthened law. Sharing experiences and skills with development partners, including Australia, can help build this capacity.
It will be important for policymakers to identify groups that are adversely affected by the CPTPP, and then work with these groups to identify options to ameliorate adverse impacts. Evidence-based research on distribution costs and benefits of globalisation can help create policies to ensure more equitable impacts from integration.
The Australia-Vietnam economic reform programme (Aus4Reform) supports actions needed to effectively implement the CPTPP in Vietnam, including support for the development of an equitable playing field for all enterprises (competitive neutrality), regulatory reforms, state enterprise reform, and competition policy and law reforms.
Aus4Reform plans to support the Vietnam Chamber of Commerce and Industry’s efforts to disseminate information to business about the opportunities presented by the CPTPP and on steps needed to realise these opportunities. Finally, Aus4Reform is supporting studies to better understand the impacts of the economic integration on different groups of society and sub-sectors in the economy, and to help identify and assess options for mitigating adverse impacts.