Vietnam TPP agreement: what the signing means for firms

Vietnam TPP agreement talks ended in October 2015, and the deal was signed in February 2016, but it is not yet in force. For firms in Vietnam, that means planning for a likely change without counting on it. Twelve countries signed the pact. Each one must still approve it at home before it starts.

Where the deal stands today

The Trans-Pacific Partnership, or TPP, is a trade pact between 12 Pacific Rim countries. They are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.

Negotiators finished the talks on 4 October 2015. The ministers signed the agreement on 4 February 2016 in Auckland, New Zealand. Signing is not the same as the deal taking effect. Each government must first pass the pact through its own process, and that is still pending in every country.

The rules for starting are clear. If all 12 countries approve it within two years of signing, it starts then. If not, it can start once at least six countries have approved it, and those six must make up more than 85 percent of the group's combined economy. That limit means the United States and Japan both have to say yes.

Sources: World Bank, Global Economic Prospects, January 2016, chapter on the TPP, for the member list and the 4 October 2015 conclusion; Wikipedia, "Trans-Pacific Partnership", for the signing date and the start rules.

What exporters could gain

Vietnam is often named as one of the countries with the most to gain. The World Bank studied the pact in January 2016. It estimates that the TPP could lift the size of Vietnam's economy by up to 10 percent over about 14 years, compared with a world without the deal. That is a forecast, not a promise, and it assumes the deal takes effect.

Clothing and textiles are a big part of the story. The World Bank expects Vietnam's textile and garment exports to grow 28 percent over that time. It links this to tariff cuts of up to 8.7 percentage points in export markets such as the United States.

The same study says real wages for unskilled workers in Vietnam could rise by more than 14 percent over that time. The reason is that work which needs many workers, such as sewing, would move toward Vietnam. If your firm makes labour-heavy goods, the tariff cuts could improve your prices in partner markets.

The study also says most of the gains would come from cutting rules and red tape, not from tariffs. It puts tariffs at only 15 percent of the total gain for members. The rest comes from easier trade in goods and services. These gains arrive slowly, because many of the rule changes are phased in.

Source: World Bank, Global Economic Prospects, January 2016, "Potential Macroeconomic Implications of the Trans-Pacific Partnership".

What it could mean for foreign investors

The TPP is about more than tariffs. It also sets shared rules on trade in services, product standards and the way governments treat firms. The World Bank says that cutting these rules and standards gaps would account for most of the expected gain.

For a foreign investor, a larger market and clearer shared rules could make Vietnam a more attractive base for exports to the other 11 countries. A plant in Vietnam could sell into partner markets on better terms. Check which of your products would qualify, because the pact has its own rules on what counts as made in a member country.

Do not assume the benefit is automatic. The terms depend on the final text and on the approval of each country. Planning for the deal is wise. Spending against it before it is in force is a risk.

Source: World Bank, Global Economic Prospects, January 2016, chapter on the TPP.

Why the gains come slowly

The deal does not pay off all at once. The World Bank notes that the changes to non-tariff rules and the common regulatory practices are back-loaded. That means they are phased in over time, and so are the gains.

For a firm, this means the biggest changes may arrive years after the pact starts. Build your plan in stages. Good records on costs, origin of inputs and shipments will help any exporter that wants to sell into partner markets.

Source: World Bank, Global Economic Prospects, January 2016, chapter on the TPP.

What to do now

First, read the official text. It is public, and New Zealand holds the signed agreement as depositary. Second, list your export products and find the tariff each faces today in the US, Japan and other partner markets. Third, work out whether your supply chain would meet the rules on origin. Fourth, build two plans: one if the pact starts, and one if it does not.

Last, watch for news on approval in the United States and Japan. Their decisions matter most, because of the 85 percent rule. Until then, treat the Vietnam TPP agreement as a possible opening, not a sure thing.

This article is general information, not legal or investment advice.

Sources

World Bank, Global Economic Prospects, January 2016: http://www.worldbank.org/content/dam/Worldbank/GEP/GEP2016a/Global-Economic-Prospects-January-2016-Implications-Trans-Pacific-Partnership-Agreement.pdf. Trans-Pacific Partnership, signing and entry-into-force provisions (en.wikipedia.org).