Vietnamese enterprises take proactive steps as TPP nears

Tuesday, 2015-08-04 10:42:58
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NDO - The Trans-Pacific Partnership (TPP) negotiations remained deadlocked with the latest round in Hawaii failing to reach a final agreement as expected. The 12 member countries will continue to conduct bilateral negotiations to remove key barriers to market access.

At home Vietnamese enterprises have been proactively preparing for an upcoming major game shift without waiting until the deal is signed.

An opportunity not easy to seize

With high expectations for the TPP, Nguyen Hong Anh - personnel manager at Binh Duong Garment Company - hopes that the trade pact will bring many opportunities to his company in terms of tariff cuts, given the fact that exports to the United States account for more than 70% of its 2014 revenues of VND1.3 trillion (US$59.8 million). The TPP is expected to gradually eliminate the tariffs on Vietnam’s garments sold to the United States from the current 17-18%. Anh says an understanding of the TPP is necessary although negotiations have not concluded because the trade agreement is not only about the removal of tariffs, and tariff cuts will apply to not only garments but also other products.

As many Vietnamese enterprises are still struggling in both domestic and foreign markets, their expectations of the pact are understandable. With its greater duty preferences, the TPP will help Vietnam gain better access to major markets such as the United States, Japan and Australia. Foreign-invested companies in Vietnam are also eager for this trade agreement. According to AIA Vietnam’s chief executive officer Wayne Besant, Vietnam’s membership in the TPP, WTO and other free trade agreements (FTAs) will bring many benefits to foreign investors. The opening of the financial market will offer foreign investors opportunities for increased participation in the domestic market, helping enhance service quality and competitiveness.

In addition Vietnam can attract more investment in the financial sector and increase foreign indirect investment through the capital market. Transparency in the TPP will also help create a friendly, open, stable and predictable investment climate, which will facilitate foreign enterprises’ access to information and make them feel more comfortable with doing business in Vietnam.

It is undeniable that opportunities abound from the TPP, but most enterprises are aware that it is not easy to seize those opportunities. A representative of a garment company says preferential tax treatment cannot come easy because enterprises must meet the rule of origin. The yarn-forward rule, for example, requires a TPP country to use a TPP member-produced yarn in textiles in order to receive duty-free access. If local enterprises cannot secure materials from Vietnam or other TPP members, they will not only fail to take advantage of opportunities from the TPP, but will also face numerous challenges as their customers could shift orders to more competitive companies. Therefore besides the potential advantage of more orders and trading partners, Vietnamese enterprises are faced with the probability of falling profits and heightened competition, especially in terms of wages and workers.

The leather and footwear industry faces a similar situation. Nguyen Quang Vu, Chairman of the Binh Duong Leather and Footwear Association (Binh Duong Lefaso) and General Director of Nam Binh Company, says that free trade agreements in general and the TPP in particular, present great challenges to domestic companies. Vietnam’s footwear industry still mainly involves manual work; if the country wants to benefit from the TPP, materials must be sourced domestically or from other TPP members. Tied by the yarn-forward rule of origin, many foreign enterprises in the garment industry, with significantly larger resources, will build large factories to take control of the entire process from material supply to product manufacturing. Given this situation, the TPP presents domestic enterprises with more challenges than opportunities because their source of materials is heavily reliant on China and the Republic of Korea.

Early actions required

It is obvious that the opportunities are tremendous but the challenges are also of similar magnitude and enterprises should take action immediately to take advantage of opportunities and overcome challenges. Chairman of the Vietnam Chamber of Commerce and Industry (VCCI) Vu Tien Loc says in order to take full advantage of the preferential duties of FTAs, including the TPP, what matters is not only changing to access markets of TPP member countries but also re-organising the production process to meet the rule of origin and other requirements of quality.

For enterprises, their preparedness and a proactive attitude for a fierce competition ahead is a decisive factor in their TPP journey and actions must be taken as soon as possible without waiting until the TPP comes into effect. Binh Duong Lefaso’s chairman Nguyen Quang Vu says enterprises should consider moves, like merging to become larger enterprises, since they will face difficulties if they act separately.

Enterprises should also think of plans to build their own brands and develop the domestic market before being swept away by waves of investment from multi-national companies. Vietnam’s footwear industry is now free from worries thanks to many orders abroad, but the domestic market is also lucrative with more than 90 million people. The weakness of domestic enterprises lies in distribution; except for some large brands, the majority of them rely on small retail shops rather than dedicated big shops. Meanwhile fake goods are also a major threat to domestic production. What is even more worrying is the supply of materials for footwear manufacturing. Domestic enterprises, if they want to compete successfully, need to make strong investments in machinery, enhance their governance and human capacity, and expand production activities, among others. Only when these actions are taken can Vietnamese enterprises take advantage of opportunities from the TPP.

According to VCCI Chairman Vu Tien Loc, enterprises are looking forward to support from the government with detailed information about the TPP and necessary preparations before the trade pact comes into force. It is currently a challenge and urgent need to push through institutional reform, and enhance the capacity of government workers in order to meet requirements for development and the implementation of new FTAs, including the TPP.

The implementation of the government’s Resolution 19 on reforming the business climate and enhancing competitiveness should be accelerated so that enterprises can take advantage of opportunities from international economic integration. Director of the Central Institute of Economic Management Nguyen Dinh Cung says “The TPP is a big opportunity but it does not mean the opportunity will come automatically. The TPP or any FTA is essentially market liberalisation. We must be proactive in institutional reform without waiting to be forced to do, otherwise, we will fail.”
State-owned enterprises must be the first ones to undertake reform. The State management apparatus must also change to be more supportive of enterprises in their competition against foreign enterprises. What is needed now is proactive internal reform to take advantage of opportunities and bring benefits to the country and domestic enterprises.