Vietnam is likely to see near-term benefits from its membership in the Regional Comprehensive Economic Partnership, a free trade agreement to come into force in January, following the Nov. 2 ratification by Australia and New Zealand.
Fifteen Asia-Pacific nations have signed the RCEP, including China, South Korea, Japan, Australia, New Zealand, and the 10 Association of Southeast Asian Nations members – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.
It is widely considered the world’s largest free trade deal, accounting for approximately 30% of the world’s population and 30% of global gross domestic product. It is ultimately expected to remove tariffs on more than 90% of goods traded in the region.
Vietnam considers RCEP to be one of a series of successes in international economic integration, especially in the context of COVID-19 and the needs of economic recovery. Along with 14 Vietnamese free trade agreements already in effect, RCEP is expected to allow Vietnamese exports to enter more markets at lower tariff rates.
Steven Okun, senior adviser at geostrategic consultancy McLarty Associates, told VOA that RCEP is a significant agreement, especially when it comes to making trade easier and better integrating supply chains.
“In long term, if RCEP brings greater China, Japan, and Korea closer on trade, this would limit U.S. economic integration in the region but could offer opportunities for countries in Southeast Asia, including Vietnam. It would likely not impact the ongoing shift of supply chains out of China,” he said.
For Vietnam, RCEP will also pave the way for cheaper imports, especially of materials needed for production. Within ASEAN alone, Vietnam’s annual imports of raw materials and production equipment exceed $30 billion. In addition, Vietnam still has a trade deficit of several tens of billions of dollars per year with major markets such as China and South Korea, according to the Ministry of Planning and Investment’s newspaper.
Raw materials imported from RCEP countries will be considered as raw materials produced in Vietnam when products are exported to RCEP member countries. This allows the exported product to be labeled as made in Vietnam, lowering tariffs imposed by the importing country. These are also countries that provide a huge amount of raw material for Vietnam’s billion-dollar export industries, such as electronics, components, textiles, footwear, and others.
“Therefore, Vietnam enjoys many benefits from RCEP, when it has strong products such as agriculture and fishery meeting the needs of most RCEP members. Thanks to the harmonization of rules of origin within the RCEP bloc, Vietnamese goods can more easily meet conditions for enjoying preferential tariffs and increase exports in the region, especially Japan, South Korea, Australia, and New Zealand,” the newspaper said.
Phan Thi Thanh Xuan, vice president of Vietnam Leather, Footwear and Handbag Association, said that the industry will benefit from the advantage of importing raw materials from China under RCEP. Vietnam can already import the raw materials under the ASEAN-China FTA, but Vietnamese-manufactured exports to countries other than China or other ASEAN members are not considered to have been made in Vietnam. Under the RCEP, such exports to Japan or other RCEP signatories benefit from lower tariffs as products made in Vietnam.
Concerns about domestic market
From Vietnam’s perspective, participation in RCEP brings both pros and cons. While the prospect of increasing exports would lead to positive economic growth indicators for Vietnam, there are concerns over how the agreement will affect the domestic market, where small and medium-size enterprises, which account for 98% of companies, will expect a flood of goods from elsewhere, especially China.
In the footwear industry, for example, Thanh Xuan said small and medium-size companies must improve to survive as “the inner strength is very weak. In a competitive market, if they don’t improve, they are easily eliminated.”
“In fact, the share of the number of SMEs accounts for 60% [in the footwear industry] but the contribution to exports is low, at less than 20%. In contrast, foreign direct investment and big enterprises in Vietnam account only about 30 to 40%, but their proportion of exports is up to 80 to 90%,” she said.
“There are advantages as well that help Vietnam improve its capacity. In the footwear industry, Vietnam has many additional advantages, and is currently the second-largest source of footwear exports in the world. We also created a fairly long-term supply chain with major markets. Foreign investment in Vietnam is a long-term process, accounting for a fairly large proportion,” Thanh Xuan told VOA.
She added: “In general, the growth potential for this industry is still very good, still competitive, and still earning reputation within big brands – they still maintain orders in Vietnam, and foreign investors are still committed to continue manufacturing in Vietnam, at least for another 10 to 20 years.”
Okun, who is also the former chair of the American Chamber of Commerce in Singapore, said Vietnam has a major advantage over most RCEP members because it has signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, another trade agreement.
He said that agreement goes further in advancing trade in ways such as committing its parties to ensure that state-owned enterprises compete fairly with private companies, without undue advantages from governments. The CPTPP also has “high-quality digital trade rules which, if fully implemented, would strengthen Vietnam’s digital economy and open up new opportunities for the digital economy to be the next engine of growth for Vietnam.”
“Vietnam should act immediately to implement its commitments within the CPTPP and go beyond by establishing new digital trade agreements, such as with key partners such as Singapore and the United States. This would enable Vietnam to maintain its preferential position in developing a foundation for its economic recovery, being one of the few countries to benefit from both RCEP and the CPTPP and maximizing its opportunities for growth through the digital economy,” he told VOA.