VietNamNet Bridge – The Pacific region stands on the verge of a historic trade agreement, in light of the Trans-Pacific Strategic Economic Partnership Agreement.

While intending to boost foreign investment and exports for member countries, the deal presents a number of difficulties for Vietnam’s fledgling capitalist system.

The Trans-Pacific Strategic Economic Partnership Agreement (TPP Agreement) is a free trade agreement that aims to further liberalise the economies of the Asia-Pacific region.

To date, 12 countries have been involved in the TPP negotiations including New Zealand, Brunei, Chile, Singapore, Australia, Peru, the US, Malaysia, Vietnam, Canada, Mexico and Japan. Negotiations under the TPP primarily involve areas of competition, co-operation and capacity building, customs, financial services, government procurement, intellectual property, investment, market access for goods, sanitary and phytosanitary standards (SPS), technical barriers to trade (TBT) and other open market packages.

The TPP Agreement and commitments relating to investment

A main focus of the TPP Agreement is committing to investment by thoroughly covering matters such as non-discriminatory treatment of investment, national treatment, most favoured nation, rules on expropriation, nationalisation, money transfer, exceptions for identified non-conforming measures and dispute settlement procedures. It differs from the bilateral/regional free trade agreement and the WTO Trade Agreement, which only cover commercial activities and services related to investment. Furthermore, greater free trade opportunities are rendered under the TPP than any other bilateral investment agreement, including the Trade Agreement on Investment. Therefore, the TPP Agreement is earmarked to be the first multilateral agreement on investment.

The TPP extends and revitalizes opportunities for investment in countries that have ratified the agreement. In regard to investment in the trade and service sectors, the agreement takes a “negative approach” as opposed to the “positive approach.” This provides investors with better prospects for liberalising investment activities.

The impact of the TPP Agreement on investment activities in Vietnam

Within the last 25 years, investments from countries that have negotiated the TPP agreement account for a significantly large proportion of both registered and implemented capital in Vietnam. Based on the investment statistics produced by the Ministry of Planning and Investment (MPI), the investments from TPP countries are ranked from the 1 to the 25 out of the total investment in Vietnam. In 2012, the investment activities of countries in the TPP Agreement contributed 49.1 per cent of the total investment in the country.

An advantage of investment from these countries, particularly the more advanced and developed economies, is access to the availability and benefits of modern technology. Many large corporations and well-known brands from TPP countries have established themselves in Vietnam, including banks such as Mizuho Bank, CitiBank and Commonwealth Bank as well as fast-food brands such as Burger King and Starbucks which have created an attractive investment environment in the country.

Despite its recent efforts to attract foreign capital through law and policy reforms, the shortcomings of policies and management have adversely impacted potential foreign direct investment (FDI) flow into Vietnam.

Therefore, the TPP Agreement has not only provided opportunities for Vietnam, but has also set challenges in attracting foreign investment.

According to research by Vietnamese and international economists, Vietnam’s involvement in the TPP is likely to boost aggregate exports, especially exports to TPP countries.

The freedom in investment facilitated by the TPP Agreement creates an ideal climate for increased investment capital in various industries and sectors in Vietnam including the value-added and technology intense industries such as the supporting and manufacturing industries. Furthermore, the “negative approach” principle of the TPP Agreement offers favourable investment opportunities in sectors such as telecommunications, banking and finance and transportation, particularly in attracting investment capital from re-investment and business expansion projects.

An additional benefit available to Vietnam under the TPP Agreement is access to the technology of developed nations. The Rule of Origin explicitly allows TPP nations to import TPP member-produced products to duty-free. This rule allows Vietnam to access modern technology as well as the equipment and machinery from developed countries in the TPP. Thus, this introduces an opportunity to revolutionise technology and competition to enhance the productivity of investors.

Vietnam’s ratification of the TPP Agreement will strengthen the position of investors in their respective industries and offer access to more markets abroad. As a direct consequence, improvements to the traditional markets will enhance international competitiveness and broaden access to overseas markets resulting in a boost to exports.

Vietnam’s domestic regulations and policies are expected to be reformed to deliver a fair and transparent legal environment and equal competition opportunities for investment activities. The principles and commitments in the TPP Agreement will be considered when these legislative changes are implemented. As a signatory to the TPP Agreement, Vietnam will receive technical support in implementing the commitments and improving its investment policies. However, in addition to the benefits expected to flow from the TPP Agreement, certain setbacks exist.

In light of the free-trade and open-market opportunities introduced with the TPP Agreement, many internal challenges exist in Vietnam. Vietnam’s domestic market will face enormous competition from global economic giants under the TPP Agreement. Tax reductions will result in an increase of imported goods from TPP countries resulting in fiercer competition from foreign products. Inevitably, without the protection afforded to the local enterprises, small to medium enterprises in particular will face increased competition in both goods and investment under this highly capitalist arrangement.

Furthermore, the weaknesses in Vietnam’s infrastructure and policy systems, including policies, laws on management and administrative reform mechanisms, are also barriers and challenges for Vietnam in attracting foreign investment.

Another setback is that while the TPP Agreement is still under negotiation, many foreign companies have already invested heavily in areas where Vietnam is perceived to have competitive advantage. Meanwhile, most Vietnamese enterprises still find the TPP Agreement ambiguous (particularly regarding franchise tendencies of major brands in recent years). This greatly impedes local enterprises from taking advantage of opportunities when Vietnam enters into the TPP Agreement.

Vietnam will ratify the TPP Agreement with the aim of liberalising its trade and investment activities and creating transparent policies on fair competition. Accordingly, it offers investment opportunities not only for member countries, but for non-member countries of the TPP Agreement as well. However, the TPP Agreement is likely to affect investment from these countries.

The Rule of Origin not only generates opportunities, but also challenges for foreign-owned enterprises, especially those who export to members of the TPP. If the input of investors from South Korea, China and Taiwan (R.O.C) does not match the amount of goods originating from TPP countries, they will not be able to enjoy the incentives under this agreement, which will create fierce competition among the products of TPP countries.

With the TPP Agreement, stronger participation and more freedom of potential and experienced service providers) may result in Vietnamese service providers facing competitive difficulties due to the limited scope of their services.

When non-TPP member countries export to TPP countries, they will be faced with higher requirements than the commitments in the WTO Trade Agreement as well as on previous agreements on investment such as regulations on environment and labour unions standards, or binding procedures of issuing and enforcing provisions on TBT, SPS and trade remedies.

LCT Lawyers

Source: VIR