TRANS-PACIFIC PARTNERSHIP Archives

01/06/2018by EOS Intelligence EOS Intelligence No Comments

Commentary: USA to Re-Enter TPP but Only If It Calls the Shots

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When Donald Trump decided to pull the USA out of Trans-Pacific Partnership (TPP) in January 2017, it was a huge setback for the remaining 11 countries – we wrote about it in our article TPP 2.0 – Minus the USA in May 2017. However, after months of discussions and deliberations, the surviving members (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) planned to move the partnership ahead without the USA, finally signing the pact in March 2018 and naming it Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Soon after, while in talks over another bilateral trade deal with Japan, Trump said that he would join back TPP, if the USA was offered a deal it cannot refuse. Asserting on the fact that Trump government prefers bilateral trade agreements over multilateral, Trump made it clear, in an indirect manner though, that unless the pact brings massive benefits for the American economy, there is no way the country is joining back the TPP.

American reconsideration of getting back in the TPP is a strategic step to deal with its growing trade war with China. As per the initial outline of the pact, designed under Obama administration, it was supposed to eliminate or reduce tariffs on the ‘Made-in-America’ exports to TPP countries (e.g. automotive, ITC, agriculture products, etc.). However, by backing out of the TPP, Trump government ended up making a rod for its own back, and may have opened doors for China, if it wishes to enter the pact in the future. In order to safeguard its own interest against China, it seems that rejoining the pact would be a smart move on the USA’s part.

But the re-entry to the TPP will not be easy for the USA, and dictating its own terms for getting back into the agreement does not seem to work in favor of the Trump government either. With the member countries just signing their own trade deal very recently, setting terms and conditions for re-negotiating the pact again with the USA would be difficult and cumbersome. While some countries such as, Japan, Australia, and New Zealand appreciated the USA’s interest to return back to TPP, they are not very keen on altering the agreement, and even if the terms were to be amended again, this is unlikely to happen in the near future. Despite the fact that the American participation will make the deal stronger, member countries do not trust Trump’s trade policies and USA’s re-consideration of TPP membership again is being viewed with hostility, to a certain extent.

Taking into consideration the fact that the deal already took six years to finalize (five years prior to USA’s exit and one year to amend the agreement after its withdrawal), altering the deal again as per USA’s convenience seems unrealistic. The idea of starting negotiations from square one in order to fit in the USA, might be too much to ask for from the member countries. Now that the USA has lost an upper hand in the TPP, many countries may be in favor of the country joining back only if it accepts the existing agreement, which definitely does not seem to go down well with Trump. However, there is a slight possibility that member countries might be willing to contemplate the terms of the pact, if they are given better access to the American market (e.g. with the reduction in tariff rates), which is also unlikely to happen considering that the USA wants things to be its way.

Now that the trade agreement is already in place sans the USA, the American position to re-negotiate the terms has weakened. If this decision was made earlier, the country would have had a stronger bargaining power. Also, for the CPTPP member countries, unlike for the USA, bringing the existing agreement into force as early as possible is an immediate priority.

At this stage, the future of the USA joining TPP again is a question mark. Though both sides, the USA and the participating member countries, stand to benefit from this move – the member countries would benefit in terms of increased trade and the USA would be able to thwart China from entering the pact and to increase own exports – the current attitude and mindset of both sides seem to make the re-negotiations unlikely, at least under current circumstances. All participating countries are open to the USA re-joining the pact, provided it agrees to the terms originally negotiated, gives up wanting to call the shots, and agrees to mellow down its supremacy inclinations in the pact, none of which can be expected to be happening anytime soon, at least under the Trump administration.

06/06/2017by EOS Intelligence EOS Intelligence No Comments

Japan Hopes to Get a Slice of Mercosur Opportunity Cake as LATAM Exports to USA Decline

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In early May 2017, representatives from Japan and Mercosur, a sub-regional alliance consisting of Argentina, Brazil, Paraguay, and Uruguay, met to discuss trade and investment between the nations with the aim to promote free trade and fluid movement of goods. Over the past years, business between Mercosur and Japan has been badly affected mainly by outdated trade policies that have not been revised in a long time. To improve economic relations between Japan and member countries of Mercosur, trade policies need to be renewed and new sectors of investment should be explored.

In 2016, Japan exports to Mercosur nations reached US$3.5 billion and imports from Mercosur totaled US$7.6 billion. Both exports and imports drastically reduced since 2012, taking a hit of 52% and 42.8%, respectively.

Japan and Argentina

After a decade of slow business dealings, trade relations between Japan and Argentina are showing signs of improvement. The number of Japanese companies operating in Argentina reduced from 120 in the 1990s to 54 by the end of 2007. However, the interest of Japanese businesses in the Argentinian market has started to return since the last quarter of 2015, with 78 companies currently in operation in Argentina, and Japan aims to have a minimum of 200 Japanese companies operating in the coming years. According to Japan External Trade Organization (JETRO), in 2016, Japanese exports to Argentina stood at US$630 million, primary exports being machinery and electronics. Imports to Japan were worth US$762 million in the same year.

In order to boost Argentina’s economy, president Mauricio Macri has focused on reviving infrastructure projects in the country. Taking an advantage of this opportunity, Japanese trading companies are keeping a close watch on upcoming rail contracts. Marubeni Corporation, Mitsubishi Corporation, and Mitsui & Co., three of the largest trading companies in Japan, are interested in sales of passenger rail cars in Argentina and planning on submitting bids as part of the new proposed projects. Japanese companies plan to invest between US$6 billion and US$9 billion in Argentina during 2017-2020. The investments are likely to be made across various sectors including mining, energy, and agriculture, among others. With more sectors now open to investment, Japan hopes to boost trade in the broader Latin American market.

Japan and Brazil

Brazil is a large investment market for Japan. With close to 700 Japanese companies currently operating in Brazil, the commercial and industrial opportunities the country offers are unquestionable. In 2016, Japan imported goods worth US$6.7 billion from Brazil, a drop by 10.6% over the previous year when the imports stood at US$7.5 billion. Japan and Brazil are now partnering to strengthen trade and investment between the two countries to spur increase in trade.

Brazil offers Japan a considerable investment opportunity in infrastructure projects. After the Cooperation Agreement for the Promotion of Infrastructure Investments was signed in October 2016, investment in areas such as transportation, logistics, information technology, and energy is expected to increase. At the same time, Japan is a large market for Brazilian agricultural products such as soy, corn, and cotton, but Brazil is also interested to enter the fruit and beef market in Japan. While discussions and negotiations regarding the entry of Brazilian products in the Japanese market are still under way, issues related to hygiene and sanitary standards still need to be addressed.

Japan and Paraguay

Paraguay is one of the least explored countries in terms of trade by Japanese firms. Between 2011 and 2014, only some 10 Japanese companies established operations in Paraguay. Japanese exports to Paraguay stood at US$77.5 million in 2016 while imports from Paraguay were reported at US$41.6 million during the same year. Japanese companies plan to invest in Paraguay to improve business and generate revenue in sectors such as infrastructure, agriculture, and energy, which are seen as areas of opportunities in the future.

Japan and Uruguay

In January 2015, the countries signed a Japan-Uruguay Investment Agreement – the first investment agreement between Japan and any member of Mercosur. Uruguay has become an attractive destination for Japanese investors mainly due to the country’s economic and political stability, low level of corruption, and easy inflow of FDI in the country. Additionally, Japanese companies are provided with the same opportunities and conditions as domestic firms. Uruguay offers the benefit of being able to serve as a distribution hub and boasts of good logistical services to other Mercosur countries – Japanese companies are likely take this as an opportunity to develop an overseas base to strengthen business ties within the region. Uruguay largely depends on natural resources such as wind, water, solar, and biomass to produce energy, making the renewable energy sector in the country another attractive area for investment by Japanese companies in the coming years.

EOS Perspective

The arrival of Trump’s administration leading to USA’s withdrawal from Trans-Pacific Partnership and focus on encouraging domestic industrialization by limiting imports from countries across Latin America, have resulted in several LATAM countries’ attempts to improve and tighten friendly trade relations within their own region as well as with new partners globally, including Asia – we wrote about it in our article Trump In Action: Triumph Or Tremor For Latin America? in February 2017. Japan appears to be willing to use this situation to its advantage by renewing trade and investment policies with Mercosur nations as well.

In the past five years, exports and imports value have declined continuously between Japan and Mercosur nations, and to reverse this declining trend and to revive trade, Japan started to build new trading relationships with Mercosur countries. If successful, this initiative is likely to serve two purposes – firstly, Mercosur countries can reduce dependence on the USA and move towards new markets to look for new opportunities, and secondly, through increased investment in Mercosur, Japan can become a prominent player in the region to reap benefits from engaging in business with several emerging countries.

10/05/2017by EOS Intelligence EOS Intelligence No Comments

TPP 2.0 – Minus the USA

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The Trans-Pacific Partnership (TPP) is a regional trade agreement involving twelve countries on the Pacific Rim: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the USA, and Vietnam. TPP was to be the largest regional trade agreement as the countries involved accounted for 40% of the world’s GDP and 26% of global trade by value. TPP differed from usual trade partnerships as the agreement, along with focus on free trade, also promoted intellectual property protection, enhanced labor standards, and environmental protection, as well as took into account the needs of a digitized global economy – setting new standards for 21st-century global trading environment.

Negotiations on the deal were concluded in October 2015 and representatives from each country signed the agreement in February 2016. TPP was to come in effect after approval of the agreement by each country’s legislature. Before the deal could materialize, the newly elected president of the USA, Donald Trump, issued an executive order in January 2017 withdrawing the country from the process – leaving remaining member-countries in a lurch.

As per the terms, TPP could come in effect only if ratified by six countries accounting for 85% of the group’s total GDP. Since the USA accounted for about 60% of the groups’ total GDP, its withdrawal killed the deal in a literal sense. However, the remaining eleven countries are still clung to the idea of TPP and are reluctant to throw away years of negotiation. This leads to a question – can TPP survive without the USA? We take a look at the countries’ take on a newly proposed TPP agreement involving the group of eleven countries, without the USA.

Japan to lead the pact

When the USA opted out from TPP, the first reaction of the prime minister of Japan reaffirmed that the trade deal was meaningless without participation of the USA – the largest market in the group. Soon Japan realized that even through eleven-member TPP it can still yield net economic gains in medium-sized markets such as Australia and Vietnam. Moreover, this deal was essential to reduce the dominance of China in the region. Since TPP has been an integral part of the Japanese government’s growth strategy, the country took a U-turn from its previous stance and took the lead in pushing forward the relaunch of TPP involving eleven member countries.

Australia, New Zealand, Singapore, and Canada still in favor of the deal

Australia and New Zealand, being advocates of trade liberalization, were among the first few countries to express their intention to continue with TPP without the USA. Through the eleven-country TPP, Australia and New Zealand aim to gain access to new markets such as Canada, Mexico, and Peru, with which these countries do not have any trade agreements. Moreover, New Zealand expects to gain about two thirds of the US$2.7 billion in estimated annual benefits (after 15 years) if the eleven-member TPP is implemented with terms similar to original deal. This indicates that TPP would result in net economic benefit for the members even without participation of the USA.

Singapore, being an export-oriented economy, strongly favors multilateral trading system especially with like-minded trading partners and thereby the country is likely to support eleven-member TPP.

In a bid to strengthen its economic ties with the pact, especially with Japan, Canada has also shown interest in renegotiating the TPP with remaining eleven countries and urges other nations to join the trade deal.

These countries believe that it would be better to have a weakened TPP without the US participation than to have no TPP at all.

Latin countries sense distinct opportunity

Mexico has enjoyed free access to markets of its largest trading partners – the USA and Canada – since 1994 through North American Free Trade Agreement (NAFTA). As Trump administration turns unfriendly and hostile towards Mexico, threatening to renegotiate or even withdraw from NAFTA, Mexico is looking to diversify its trading options to counter the effect. Under such circumstances, Mexico is more than willing to pursue an eleven-member TPP that will open new markets for the country.

Smaller countries such as Chile and Peru are also keen on going ahead with the proposed eleven-member TPP so as to gain access to Asian markets.

Some Asian countries may lack enough incentive to continue with TPP in absence of the USA

Without participation of the USA, it seems difficult to lure countries such as Malaysia and Vietnam that agreed to change rules on state-owned enterprises and deregulate key sectors such as finance, telecommunications, and retail in anticipation of gaining access to the US market. Both the countries signaled waning enthusiasm for TPP in absence of their largest target market – the USA. For instance, through the twelve-member TPP, Vietnam was expecting its textile exports to increase by 40%, primarily due to free access to the US market at 0% tariff. Thus, without the USA, the expected economic benefits of TPP would drastically reduce for Vietnam as well as Malaysia.

In such a scenario, these countries might give preference to alternative trade agreements such as Regional Comprehensive Economic Partnership (RCEP) that includes seven of the TPP members (i.e. Malaysia, Vietnam, Brunei, Singapore, Japan, Australia, and New Zealand). Launched in 2015 and backed by China, RCEP is the proposed trade agreement aimed to economically integrate 16 countries in Asia and Oceania region, however, this trade deal lacks the elements of intellectual property protection or labor and environment laws that TPP is set apart with. Brunei, the smallest economy in the pact, is actively involved in further discussions, however, its final take on eleven-member TPP is still unclear.

EOS Perspective

While the twelve-member TPP is effectively dead, the new TPP, if at all formed and implemented in future, would be very different from the original one. Being the largest economy in the group, the USA had great negotiation power in development of the original TPP. With the USA’s exit, the power dynamics have changed and the remaining member countries might want to reconsider certain terms that they agreed upon only under the pressure of the USA. For instance, Malaysia could demand change in TPP’s rules that restrict the country to offer preferential treatment to ethnic Malays in government contracts. Such difference in power dynamics might indicate that the eleven-member TPP negotiation process is unlikely to be as simple as just striking ‘the USA’ off the 5,000+ page agreement. It might take years of discussions and renegotiations before the member countries could reach a consensus.

Furthermore, increasing participation from other countries is one way to fill the void left by the USA. TPP members have extended invitation to several countries, including China and UK. China immediately rejected the proposal stating that the TPP is very complex and the country is rather focused on RCEP. In the meantime, UK is yet to confirm its intent. UK is looking to deepen ties with other countries to boost trade after Brexit, thus, joining the TPP might be a good decision, as this might possibly allow the country to have direct access to the markets of the current eleven member countries. However, UK would need to objectively weigh in the estimated benefits of joining TPP as against the stringent requirements of the deal.

At this stage, the future of TPP is uncertain. In the end, all countries act in the best interest of their own economies as well as own political aspirations. Though the ambitious TPP proposal laid out a strong vision for international rules-based trade and investment system for global digital economy, it is far from implementation unless it ensures satisfactory benefits for all the countries involved.

23/02/2017by EOS Intelligence EOS Intelligence No Comments

Trump In Action: Triumph Or Tremor For Latin America?

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Donald Trump commenced his presidency by announcing ‘America First’ policy, thus casting a dark shadow on trade and exports from other countries to the USA. Trump’s protectionist and neo-isolation policies are accepted with gritted teeth across the world, particularly by the USA’s southern neighbors. The renegotiation of trade treaties, more stringent migration policies, as well as strong focus on encouraging domestic industrialization by pruning imports might contribute to a slowdown in economic growth of a few Latin American countries. The policies set by the new president may result in economic malaise across Latin America, where people are uncertain and apprehensive towards the alarming strategies laid down by the USA.

While the degree of economic and trade impact will vary across LATAM countries, the strongest distress is likely to be witnessed across Cuba, Mexico, and Venezuela. On the other hand, Brazil might partially benefit, while the impact is unlikely to be significant on other larger economies such as Argentina or Chile.

The wall between Mexico and the USA

Mexico is facing the worst of Trump’s wrath. The country is highly dependent on the USA for trade – most importantly for duty free exports. These are likely to witness a tremendous setback with Trump imposing 20% import tax on goods from Mexico to finance a wall that he intends to build to safeguard USA’s border from illegal immigrants.

Renegotiation of the North American Free Trade Agreement (NAFTA) and withdrawal from the Trans-Pacific Partnership will further tarnish Mexico’s trade with the USA. Trump intends to renegotiate terms of NAFTA, focusing mainly on moving away from the zero trade barrier policy. By imposing tariffs on imports from Mexico, the cost of goods will increase as they enter the USA, which is likely to boost domestic production of those goods, but it will surely have a negative impact on Mexican production. Another key driver for Trump’s plans to put a break on Mexican imports is the concern over trade deficit that the USA faces with Mexico – approximately, US$ 50 billion in 2015. Hence, Trump wants to encourage domestic production to reduce imports from Mexico.

Further, Trump’s administration has also endangered billions dollars of remittances, one of the largest sources of foreign capital in Mexico, received from Mexican citizens working in the USA. Trump has threatened to tax the remittance transfers if Mexico does not support the trade and immigration limitations imposed by the USA.

Another major issue is the possibility of implementation of strict migration policies which can result in deportation of millions of undocumented migrants, most of them being Mexicans. Several other countries such as Haiti, Dominican Republic, El Salvador, Guatemala, Honduras, and Cuba also stand to suffer due to the change in migration policies. Mass deportation will increase unemployment in these migrants’ home countries and reduce remittances in foreign currency.

Amid the USA-Mexico tension, the Mexican peso has already witnessed a slump, almost nearing its all-time low – declined by 5% since the beginning of 2017 and by 20% since Trump came into power.

Trump’s crackdown on Cuba

The relationship between Cuba and the USA is predicted to get frosty under Trump’s administration. Cuba has struggled for several years under the USA-imposed isolation until president Obama negotiated to re-establish diplomatic relationship between these two countries. However, in his campaign, Trump threatened to reverse the restated diplomatic relationship – including easing of travel and remittances between Cuba and the USA – if Cuba does not agree to a “better deal” which Trump left undefined. Moreover, the US president has announced that he was against the Cuban Adjustment Act, which permits any Cuban, who reaches the USA to stay there legally and apply for residency.

Venezuela, not far from Trump’s radar

Trump has already turned hostile towards Venezuela considering the recent sanction imposed by his administration in February 2017 on the Vice President Tareck El Aissami, accusing him of playing a significant role in international drug trafficking. Relationship between these two countries has already turned sour amidst the deep economic and political crisis that exists in Venezuela.

Further, Venezuela’s oil exports to the USA might suffer due to Trump’s decision to revive the Dakota Access Pipeline – an oil pipeline project that can reduce country’s need to import crude oil. Presently, Venezuela exports 792,000 barrels a day of its crude oil or 38% of total crude exports to the USA, and any additional access to oil for the USA could have a deep impact on Venezuela’s oil exports.

Trump could be good news for Brazil

It appears that the only silver lining for Latin America, while Trump hovers with his protectionist policies, is Brazil’s opportunity to strengthen its ties with Pacific and European nations. Brazil’s Minister of Foreign Trade predicts new trade opportunities for Brazil, as the country aims to expand trading relations with other countries, while the USA withdraws and renegotiates key trade agreements. Moreover, Brazil (as a member of Mercosur – consisting of Argentina, Brazil, Paraguay, and Uruguay) is already pursuing free trade agreement with the European Union, with next round of negotiations lined up for March 2017.

However, a few setbacks that Brazil could suffer include deportation of many of the 1.3 million Brazilians immigrants living in the USA, whose stay in the USA remains undocumented. The deportation is likely to adversely impact the remittances received by Brazil. Further, Trump’s focus on implementing higher import tariffs is likely to impact the Brazilian exports to the USA – approximately 13% of Brazilian exports are directed to the USA.

EOS Perspective

USA’s withdrawal from Trans-Pacific Partnership and aim to renegotiate NAFTA is driving Latin American countries to break dependence on the USA, establishing friendly trade relations with other countries and strengthening intra-regional ties. Latin American countries are focusing to redirect trade and investment towards countries such as China and Russia, as well as Europe and Africa.

China is already a key trading partner for Latin America – with trade between the two regions growing from US$ 13 billion in 2000 to US$ 262 billion in 2013 – and USA’s withdrawal from Trans-Pacific Partnership is likely to further deepen the ties between them. China aims to increase investment and trade in LATAM to US$ 250 billion and US$ 500 billion, respectively, by 2025.

China is moving swiftly to strengthen relationship with Latin American countries. Soon after Trump’s win, the Chinese President visited LATAM aiming to deepen economic cooperation, and to promote social and economic development in the region. During the visit, Ecuador and China agreed to a new economic Free Trade Agreement, focused to grow production and investment across energy, infrastructure, and agriculture sectors. An extension of China-Peru free trade agreement was also signed to promote bilateral trade and investment between the two countries. A closer association between China and Latin America is likely to reduce USA’s dominance and supremacy in the region.

Further, with USA’s plans to increase import tariffs, Latin American countries are slowly focusing on expanding intra-regional trading relationships, which till now have not been developed to their full potential due to dependence on the USA for trade and exports. Present circumstances are optimal to slowly start building an intra-regional trade force in Latin America, and the region’s countries should work towards strengthening existing trade and integration blocs, such as the Union of South American Nations (UNASUR) and the Community of Latin American and Caribbean States (CELAC).

Trump’s policies are likely to have a diverse impact on different Latin American countries. The region has already slowly started forging new trading relationships to reduce dependence on the USA, which proves that LATAM might be able to divert the negative repercussions of USA’s new policies and turn them into new opportunities (at least to some extent).

05/06/2015by EOS Intelligence EOS Intelligence No Comments

Garments and Textiles In Vietnam – Is The Future As Bright As The Past?

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Recording a positive growth year after year since 2001, Vietnam’s garment and textile industry is now banking on a potential TPP and some FTAs to continue its journey on the success path. However, as some of the already existing problems, such as heavy reliance on imported raw materials, become a bigger concern, and new problems such as increase in production cost and threatened interest of domestic players come to surface, will the industry be able to secure its future?

Vietnam’s garment and textile industry has been one of the country’s leading sectors, recording growth of more than 15% annually between 2001 and 2014, remaining the chief contributor to Vietnam’s economy. 18% year-on-year growth was registered by Vietnam’s textile and garment exports in 2013, which took exports value to a whopping US$20 billion.

Garment and textile exports also accounted for a significant proportion of Vietnam’s GDP (approximately 15%) and total exports (about 18%), in the same year. The industry provides jobs and salaries to over 4.5 million workers, out of which approximately 2.5 million are direct workers in 4,000 textile and garment enterprises. Products of the industry get shipped to more than 180 countries across the world.

A lot of optimism is budding around the industry’s performance for the year 2015 and ahead, part of which is arising from the market’s consistent positive growth trajectory traced during the past several years.

Another reason for the optimism is Vietnam’s potential Trans-Pacific Partnership (TPP) with 11 countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the USA) and FTAs with the EU, South Korea, and the Eurasian Customs Union of Belarus, Kazakhstan, Armenia, Kyrgyzstan, and Russia.

The TPP and the FTA with the EU are in last stage of negotiations, while the FTAs with Eurasian Customs Union and South Korea were signed in December 2014 and May 2015, respectively. Industry stakeholders are relying on the TPP and the FTAs to steer the sector into the future.

Completion of the TPP is estimated to increase Vietnam’s garment and textile exports to the USA to US$30 billion by 2020, as compared with US$8.6 billion exports recorded in 2013, recording growth of approximately 250%.

With the EU being the second largest importer of Vietnam’s textiles and garments, a FTA between the two would further boost Vietnam’s garment and textile industry. It is expected that exports from Vietnam to the EU would increase by 20% during 2013-2020 as the value of textiles and garments exports is projected to increase from US$2.7 billion to US$3.2 billion.

Vietnam’s FTA with South Korea is expected to almost triple bilateral trade value during 2015-2020, to reach US$20 billion by 2020. Garment and textile industry is expected to be amongst several Vietnamese industries, which are likely to be positively impacted by the FTA. Also under the FTA between Vietnam and the Eurasian Customs Union, Vietnam’s exports, including textiles and garments, as well as seafood, wooden furniture, and agricultural products, are benefiting from preferential tariffs and are expected to increase by 30% during 2013-2020.

Opportunities for Vietnam’s Garment and Textile Industry from the TPP and the FTAs

Further expansion of the industry’s exports share in the USA

Even though the USA has been Vietnam’s largest garment and textile exports market (as of 2014), the industry’s exports account for only 8-9% of total textile and garment imports in USA. TPP offers a chance to increase Vietnam’s textile and garment’s share to 12-13% in the US market as the tariff would be reduced from 17% to 0%

Increase in the number of foreign direct investments in the industry

Number of foreign investments is likely to increase in Vietnam’s garment and textile industry with the completion of the TPP and the FTAs with the EU, the Eurasian Customs Union, and South Korea. The industry might further develop (e.g. in terms of infrastructure) through utilization of additional revenue generated from increased exports. This can perhaps become a key reason for foreign investors to initiate new investments in the industry

Becoming one of leading nations in global garment and textile production chain

Vietnam has a chance of becoming a truly global player in the world garment and textile industry if it starts manufacturing high-quality textiles and garments by upgrading and maintaining its production standards and adopting advanced production technologies with the help of FTAs

Boosting Vietnam’s local garment and textile players’ position in the market

FTAs can boost restructuring process among Vietnam’s garment and textile companies and offer a new array of opportunities arising from preferential or 0% tariffs, cheaper supplies, and loosening of other trade barriers. Vietnam’s government can also promote local players further by offering garment and textile industry related subsidies (for example, charging lower taxes on garment and textile manufacturing plants). Such subsidies would further encourage Vietnam’s local garment and textile industry players to expand their operations and help the industry in a positive way

Roadblocks for Vietnam’s Garment and Textile Industry Growth

Heavy Dependence on Imported Raw Materials

According to VINATEX (Vietnam National Textile and Garment Group, Vietnam’s state-owned largest garment and textile corporation which manages Vietnam Textile Garment Group), in 2013, the country’s domestic cotton production satisfied only 1% of the industry demand while domestic fabric production fulfilled 12-13% of the demand. Materials from China account for almost 50% of the total raw materials imported by the industry. As of 2013, cotton worth US$7.5 million, yarn worth US$350 million, and fabric worth US$3 billion were imported from China to Vietnam.

Raw material development in Vietnam is challenged by environmental protection laws implemented by Ho Chi Minh City Garment and Textile Association (HCMC, a government association) wherein limited licenses have been awarded to Vietnam’s garment and textile dyeing and weaving plants as they cause heavy pollution. Moreover, farmers have been earning higher profits through plantation of crops other than cotton which further hampers local cotton production.

Vietnam - Garment and Textile Raw Material Imports

The potential TPP is likely to be based on the yarn-forward principle. The principle mandates every stage of garment and textile production (such as sourcing/developing of raw materials, weaving, dyeing, finishing, and sewing) to be executed in Vietnam or 11 other TPP member countries. Only if this requirement is met, the products will be eligible for a duty-free export to other TPP member countries. Since China accounts for almost 50% of the total raw materials imported by Vietnam’s garment and textile industry, the yarn-forward principle would further compel Vietnam to locally produce raw materials to manufacture garments and textiles to be exported to other TPP member countries.

Increasing Production Costs

Growing prices of electricity and transportation, along with an increase in minimum wages are also becoming new causes of headache to the industry players. In Vietnam, minimum wages witnessed a hike of 15.2% in 2014 (while it is generally assumed that already a 10% increase in minimum wages pushes up a company’s salary costs by almost 17% due to increased allowances and other social benefits).

For the year 2015, Vietnam’s garment and textile manufacturers believed that if the increase in minimum wages goes beyond 12%, the impact of the increase will be noticed in terms of higher market selling prices of Vietnam’s garments and textiles. Such a situation would reduce total revenue generated by the industry as higher selling prices might adversely affect exports and thereby, take away some FTA-related potential revenue. In order to avoid the situation, Vietnam’s garment and textile manufacturers attempted to cap the increase in minimum wages by a maximum of 12%, in 2015. However, Vietnam’s government decided the hike for the year 2015 to be 13-15%, which is bound to adversely affect selling prices of the industry’s products.

Interest of Domestic Market Players at Risk

FTAs such as those with the Eurasian Customs Union, the EU, South Korea, and the TPP would open doors of Vietnam’s garment and textile industry for foreign players. Foreign companies have already accelerated their investments in the industry. This is leading to higher number of foreign firms, which are usually technologically advanced and capital rich, sidelining local industry players (as per Viet Nam Chamber of Commerce and Industry report published in 2014, as of 2013, 96% Vietnamese companies operated on small scale and lagged behind on capital and technology fronts).

Some examples of foreign players planning to enter the industry include Kyung Bang Vietnam (a 100% South Korean invested enterprise), which is in the process of establishing a spinning plant with a capacity of 6,000 tons per annum in Vietnam’s Binh Duong province. Another example is a Hong-Kong based company, Texhong, which is also planning to build a spinning plant in the country’s Quang Ninh province. The entry of foreign players in the industry is likely to intensify competition among all the industry players (both local and foreign).

Future Outlook

For the period 2015-2020, Vietnam’s garment and textile industry targets a production growth of 12-14% on an annual basis, 3 million people additionally employed in the industry, and export revenues valued at US$25 billion by end of 2020.

In the light of challenges faced by the market, the industry has started to take efforts in order to have a roadblock-free path ahead to achieve its targets.

Reduce heavy dependence on imported raw material

After realizing the importance of localizing raw material production for the industry, initiatives to increase domestic raw material production are being undertaken. A cotton manufacturing plant, known as “Rang Dong Industrial Park” (infrastructure development expected to complete by end of 2015), at a size of 1,500 hectares and worth US$400 million is being established in Vietnam’s Ninh Thuan province. The park is expected to record production value of US$3 billion on an annual basis.

In addition to this, Vietnam is urging for inclusion of “weak rule of origin” or “single transformation rule” in the TPP agreement. Inclusion of the rule will mandate only cutting and sewing aspects of garment and textile manufacturing process to be performed in one of the TPP member countries. This would allow Vietnam to export garments and textiles manufactured with imported raw material to other TPP members.

Lower production cost

Since the production cost is bound to increase due to growth in minimum wages, it is of paramount importance for Vietnam’s garment and textile manufacturers to look for ways to control and minimize the overall production cost hikes. This might be possible through adoption of more efficient and advanced technologies.

To make the adoption possible, the government in channeling its efforts to attract higher number of FDIs in the industry.

The industry plans to host “Vietnam Garment and Textile Forum – 2015 edition” in June 2015 in Hanoi. Major garment and textile companies such as H&M, Adidas, Puma, and Li & Fung are expected to participate in the forum.

Protect the interest of domestic market players

The government undertook attempts to help domestic raw materials producers as it noticed that certain raw materials utilized by the Vietnamese industry are being imported without any tax.

As such imports tend to hurt domestic producers, in May 2015, Vietnam’s Ministry of Textile and Garment proposed a 2% import tax on polyester staple fibre, which is presently enjoying no import tax.

Objective of the proposal is to safeguard the interest of domestic fibre producers, who were found not to be running at full capacity while imports of the fibre were being recorded at around 150,000 tonnes on an annual basis

All these initiatives will have to stand the test of time, and whether they prove themselves to be sufficient to help Vietnam’s garment and textile industry grow while deriving maximum benefit from the potential of the TPP and various other FTAs, is to be seen.

04/02/2014by EOS Intelligence EOS Intelligence No Comments

Vietnam’s Macroeconomic Environment: FDI Paving the Way for Growth

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2013 was the sixth consecutive year since Vietnam first witnessed macroeconomic instability. With high inflation levels, a collapse of the banking system, and relatively lower growth levels compared with its Asia-Pacific peers, the economy faced immense pressures. However, thanks to continuous efforts by the government to uplift the economy as well as the presence of several inherent benefits that Vietnam offers to foreign corporations, the economy has been resurging, largely on the back of soaring FDI.

Vietnam has faced several economic pressures since 2008, which resulted in high levels of inflation, stagnated growth, and a crumbling financial system primarily led by rising bad debts and loss of liquidity. This also brought a negative impact on the real estate sector and its periphery industries. Over the past few years, the country has struggled to find its ground and has undertaken several policy measures to instigate investor interests. In fact, the Vietnamese government is largely focusing on increasing FDI investment levels and exports as the key tools to pull its economy out of stagnation.

The government made substantial moves with regards to economic policies. These initiatives, which led to a boost in the country’s FDI in 2013, included:

Equitization of 573 state-owned enterprises (SOEs), wherein foreign investors are eligible to hold stake in SOEs with few conditions
Tax allowance that reduces corporate income tax from 25% to 22% from January 2014 and further to 20% in January 2016
The approval of a scheme to enhance FDI management in Vietnam

These efforts by the government appear to have started yielding results, as the registered FDI rose by 95.8% to US$13.1 billion during the first 10 months of 2013, and the disbursed FDI rose by 6.4% year-over-year to $9.6 billion for the first 10 months of the year.

In addition to these initiatives, the government has stepped up to strengthen the country’s banking sector since 2012. Over the past two years it has significantly reduced average lending rates, equitized four state-owned commercial banks, and set up Vietnam Asset Management Company, a state-owned company created solely to purchase bad debt from existing banks in order to clear their books. This company purchased bad loans worth about US$1.6 billion in 2013. In an effort to further speed up the restructuring of the banking system, the government announced that it would increase the allowed limit for foreign strategic investors to invest in a domestic financial institution from 15% to 20% in February 2014.

The government efforts to stimulate FDI have also been supplemented by the existence of several positive intrinsic factors that Vietnam boasts off. The country remains an attractive investment destination thanks to its abundance of natural resources and cheap labor availability (according to JETRO report, monthly pay for general workers in Vietnam is about 32% of levels in China, 43% of that in Malaysia and Thailand, and 62% of that in Indonesia). The country also offers a young and dynamic consumer base domestically, as well as favorable conditions and location to supply within the subcontinent. It also enjoys a stable political environment, a significant advantage over several of its neighbors.

The resurfacing of negotiation talks regarding Vietnam becoming a member of The Trans-Pacific Partnership (TPP) is also positive news for the export sector, which is expected to receive a significant boost with the signing of the agreement (especially in the area of garments, footwear, and wooden furniture). This will also ease investment inflow in Vietnam from other TPP members.

Backed by the aforementioned factors and a robust young population, several sectors in the country are registering a double digit growth and intensified attention from foreign investors.

Vietnam’s aviation sector, for instance, is expected to be the third-fastest growing sector globally with regards to international travel and freight, and the second-fastest with respect to domestic travel in 2014.
The electronics sector has also witnessed keen interest from foreign players. Nokia, a leading telecom handset player, opened its first factory in Vietnam in 2013. Samsung and LG have announced plans to build factories in the country primarily for export purposes.
Retail, consumer goods, and tourism are some of the other best performing sectors with strong growth potential in the near future.
Moreover, in anticipation of the TPP agreement, Wal-Mart is also exploring investment opportunities in Vietnam that would entail sourcing of several products, such as clothing and footwear, entertainment, home appliances, toys and seasonal goods.

It is clearly visible that Vietnam is on the right path of growth and expansion, nevertheless, there is still a long way to go. While the FDI levels rise, the government has to channelize this investment to develop support industries and high-quality workforce to sustain growth. Moreover, while Vietnam enjoys abundant natural resources and cheap labor that attracts FDI, these factors remain exhaustible, especially in the light of new investment hotspots (such as Myanmar) emerging. Therefore, in addition to just focusing on economic policies, Vietnam must work towards creating better investment climate to lure FDI. The country’s legal framework still presents several hurdles to foreign investment and the country ranks very poorly on the global corruption index (114 out of 177 countries). While it is almost certain that Vietnam will continue to see an inflow of foreign investments, it is to be seen if it can use this to achieve sustainable growth for its economy.

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