Considerable focus is being given to the possibility that the TPP may never come into being and many have overlooked the fact that negotiations over other free trade agreements (FTAs) remain ongoing. 

One FTA of particular importance for Asia at this point in time is the Regional Comprehensive Economic Partnership (RCEP), according to an HSBC research report released in early December. 

The RCEP has emerged as a viable replacement for the TPP, should US President Donald Trump follow through on his previous comments and block ratification by the world’s largest economy. 

“Vietnam stands to gain from increased sourcing of production from such RCEP member countries as Japan, South Korea, and China,” said Mr. Dezan Shira from Dezan Shira & Associates. “Like Vietnam, countries involved in the TPP will have a Plan B.”

The RCEP, which links the world’s three largest consumer markets - China, India and ASEAN - creates a free trade area between 16 Asian economies generating around $22.4 trillion in GDP and about $10 trillion in global trade, according to Mr. Pham Hong Hai, CEO of HSBC Vietnam.

“The deal will be particularly advantageous for ASEAN, as it will reduce the congruity across pre-existing FTAs and thereby strengthen the appeal of the region as a production base,” he said. 

After 16 rounds of negotiations, the RCEP has seen breakthroughs in terms of tariffs. It may very well be signed this year, after the 16 RCEP members, which include the ten ASEAN members together with Japan, India, China, New Zealand, Australia and South Korea, missed two deadlines for fully concluding negotiations in 2015 and 2016. 

The RCEP would help Vietnam improve its approach to investment and export markets in ASEAN and with developed and developing partners to meet demand for diverse consumption in goods and services.

Benefits to gain

The agreement would help the annual GDP of Brunei, Vietnam, South Korea, and Malaysia increase by 3 per cent or more, according to local economists. 

It includes many key partners of Vietnam, such as China, Japan, Australia and ASEAN, which are all export markets expected to bolster the country’s trade position in the years to come. 

It aims at the creation of a high quality, comprehensive economic partnership and the drawing up of regulations for an advanced supply chain in the East Asian region. 

Vietnam would have the chance to access a huge market, as the agreement would create an economic bloc with a combined population of 3.4 billion people, or 48 per cent of the world’s population. 

In 2014, the RCEP countries attracted $366.3 billion in foreign direct investment (FDI) capital, equal to 29.8 per cent of the global total.

There would be opportunities for Vietnamese enterprises to participate in regional value and production chains. 

The RCEP aims to link ASEAN with six countries - Australia, China, India, Japan, South Korea and New Zealand - that have developed production networks. ASEAN has a deep association not only inside its large market but also with major global partners like the US and the EU, according to Mr. Nguyen Anh Duong, Deputy Director of Macro-Economic Policies Research Department under the Central Institute for Economic Management (CIEM). 

The strong associated market would attract investors both within the region and from these two large partners. 

Vietnam’s major export items would maintain their competitive capacity in the global market despite competitive pressure from regional countries and stricter requirements from import markets, according to local economists. 

“Firstly, Vietnam will possess advantages in sectors relating to investment and fuller participation in global and regional value chains,” said Mr. Vo Tri Thanh, Deputy Director of the CIEM. “Sectors relating to consumption or the connection of services and logistics will have opportunities to develop.” 

In the context of production mobility, including capital, technology and labor, many sectors in Vietnam, including startups, can utilize the opportunities presented by the RCEP. 

Sectors like agriculture, construction, textiles and garments, leather and footwear, and seafood, Mr. Duong said, would see additional opportunities for growth. 

The development of supply chains for agricultural products will lead to expanding production and trade in the region. 

The agreement will help the country import goods at lower prices, such as steel from China, plastics from South Korea and Japan, and modern machinery and equipment from RCEP members. 

Meanwhile, service liberalization in the RCEP will lead to notable growth in trade in services and FDI in the region. 

The country’s services will have more opportunities to reach RCEP members, in particular Australia, Japan and ASEAN countries. 

According to Mr. Duong, FDI capital into Vietnam is expected to increase thanks to the preferences contained within the RCEP. FDI projects have positive spill-over effects, including technology transfer and advanced business methods and capital management, which are essential for Vietnam in the context of deeper integration. 

The implementation of the RCEP commitments will also help the country build a competitive and transparent investment environment that would bolster human resources, local analysts wrote in the “Assessing the Impacts of the RCEP on Vietnam’s Economy” report released by the EU-MUTRAP project in 2015.

Vietnam and Thailand would benefit the most from the RCEP, according to a 2015 report from ANZ Bank. Vietnam’s GDP growth is estimated at 8 per cent and Thailand’s 13 per cent in the five years after the RCEP comes into being. 

Hurdles to overcome

The challenges for Vietnam in the RCEP are similar to those in other FTAs. 

It would face difficulties due to its vulnerabilities and narrow trade structure with RCEP countries, while its participation in the services sector is low. 

With further integration, the country would be subject to greater competition from China in textile and garment exports and from Japan in footwear and rice exports. 

China is also a major rival in textile and garment exports, as is South Korea in foodstuffs. 

Under the framework of ASEAN+1 with Japan and the Japan-Vietnam Bilateral FTA, Vietnam can export garments to Japan duty free while exports of the same products from China to Japan bear a duty of 10, 15 or 20 per cent, according to Mr. Claudio Dordi, the technical assistance team leader at EU-MUTRAP. 

Vietnamese footwear exported to Japan bears a limited tariff of less than 5 per cent, while those on Chinese footwear imports are 20-30 per cent. 

Under the RCEP, Chinese exports would benefit from preferential duties. “This is quite a big issue for Vietnamese exports, so this challenge should be taken into consideration during negotiations,” he said. 

The quality and value-added content of Vietnamese products remains low, production scale small, and capacity limited. Local economists have commented that the country’s trade focuses on a relatively tiny number of key partners and goods, which are easily influenced by changes in supply and demand.  

Another challenge for Vietnam is banking services, as other RCEP countries such as Singapore, Japan, South Korea and Australia have highly developed banking sectors. 

The agreement also focuses much attention on reforms, since foreign investors will see the region as a relatively integrated market. They will choose countries that they feel are more attractive investment-wise. 

This requires greater efforts from Vietnam to reform itself to attract foreign investors. Vietnam should also approach new markets and promote trade and opportunities for exports and other activities, Mr. Thanh said. 

To do this, the government needs to change the interaction with markets and the public, adopting an attitude of openness, friendliness, and transparency, and facilitate information provision and training to promote competitive capacity. 

Raising awareness

As the RCEP is still under negotiation, there is still not much information on how the 16 members would open up their markets. 

Vietnamese enterprises must therefore be fully informed about the progress of the agreement. “This is an obstacle for enterprises,” said Ms. Nguyen Thi Thu Trang, Director of the WTO and Integration Center under the Vietnam Chamber of Commerce and Industry (VCCI). 

“Only a few enterprises are aware of the agreement and the remainder have no idea.” Sadly, a VET pocket survey on awareness among Vietnamese enterprises about the RCEP found the most responses from local associations and large groups fell into either “Have no idea” or “Never heard of it”. 

With some two years before the earliest time the RCEP may come into effect, Vietnamese small and medium-sized enterprises (SMEs) could lose out on many of the opportunities presented by market integration as they may be hit hard by the high level of competition from enterprises in other RCEP member countries. 

Only about half of Vietnamese enterprises understand and use the opportunities from existing FTAs, while most foreign-invested enterprises have taken full advantage, according to a 2015 report from the National Committee for International Economic Cooperation Office. 

Mr. Thanh, though, is confident that Vietnamese enterprises have matured after being involved in or witnessing many anti-dumping lawsuits but their weaknesses remain capital, technology, management skills, and vision. 

“They have not only learned about competition but also about linking in chains from production to distribution,” he said. “But they also need to learn about sustainable development and legal issues to protect their interests, and should join with the government in trade negotiations.”

The agreement will create new opportunities and industries as well as severe competition, and Vietnamese enterprises must have better knowledge on the commitments made and their effects in order to be fully prepared to cope with the challenges. 

VN Economic Times