Top Stories

TPP is Dead, What’s Next for Vietnam?

By Vietnam Briefing
Posted: 9th March 2017 08:37
Following the withdrawal of the United States from the Tran-Pacific Partnership (TPP), the spotlight has shifted quickly to the future of foreign investment in members such as Vietnam – the party once projected to be the agreement’s greatest beneficiary. While TPP’s failure has and will continue to put a damper on investment and trade between Vietnam and members of the partnership, this does little to change Vietnam’s competitive advantage and may actually help the country over the long term.

The impact of TPP on existing investments in Vietnam

Without a trade agreement in place, the attractiveness of Vietnam as a destination for TPP member investments is somewhat diminished, but not in the ways that one might think. For those already invested in the country, the initial cost competitiveness analysis conducted prior to market entry may actually have remained unchanged. Even without TPP’s liberalization of tariffs and introduction of investment protections, Vietnam still presents investors with a significant cost advantage over many of its neighbors – most importantly China. Since Vietnam’s entry into the WTO, there has been a continued growth in Vietnamese exports to TPP markets, even with tariffs in place. Between 2007 and 2015, exports rose 176 percent, in nominal terms, and now constitute a 38 percent share of Vietnam’s total exports.

From the perspective of established investors, the link between tariff reductions and profitability is, however, a significant consideration. If in fact Vietnamese FDI projects have been executed with future profit margins hinging on tariff reduction, there may be an increased incentive to exit the Vietnamese market in the near future. This has already come to pass with recent announcements from the Japanese External Trade Organization which indicated that Japanese auto manufacturers may soon relocate to other ASEAN states, such as Thailand, in search of greater capacity.
Outlook for future investment

Although the exit or reduction of FDI projects from select investors may result from TPP’s failure, initial FDI statistics show that there has been little overall impact to aggregate FDI inflows. In fact, foreign direct investment figures from January of 2017 illustrate an increase of 22 percent over the same period a year prior. Within these figures, the impact of the TPP is made clear, as are the advantages that Vietnam’s integration with global markets continue to provide.

US investment figures in Vietnam show that capital inflows have fallen by more than US$14.5 billion y-o-y, however, this is more than made up for by investment from members of the European Union, which signed their first bilateral trade agreement with Vietnam in 2016 (EVFTA) and have increased investment inflows by more than 193 percent y-o-y. On top of this, fully implemented trade agreements between Vietnam, Korea (AKFTA), Japan (AJFTA), and China (ACFTA) have continued to result in strong investment flows from Korea and Japan and create a significant incentive for China-based manufacturers considering a China +1 model for cost reduction.
Tailoring supply chains and distribution networks

In light of existing trade agreements between traditional manufacturers and a newly inked agreement with the world largest importer of goods – the European Union – there are clear opportunities for investors to continue to utilize Vietnam as a production hub. Under these new dynamics, a reorientation of sourcing or distribution may be more appropriate than an exit from the Vietnamese market in light of TPP’s failure.

From a supply chain perspective, Vietnam’s trade agreements with China, Korea, and Japan allow for the import costs of higher value-add components to be significantly reduced. Once in Vietnam, assembly of these goods can be conducted with Vietnam’s cost competitive labor force and exported from a variety of ports across the country to the European Union where, given compliance with EVFTA’s Rules of Origin requirements, they may be imported at a reduced import tariff cost.

Similarly, those operations that have been building up distributions networks within the United States or other TPP member states may find that reorienting sales towards European markets as well as other states within ASEAN may allow for more profitable sales. In light of the economic downturn in the EU, there is likely to be a significant demand for lower cost alternatives for consumption – a demand that Vietnam based producers will be ready to fill.

Sustainable economic growth

In recent years, the steady growth of the Vietnamese economy has resulted in increasing employment opportunities, rising wages, and subsequently, an increased appetite for consumption on the part of the average Vietnamese citizen. Between 2007 and 2015, consumer spending within the country has grown by an astounding 150 percentage points and shows little signs of slowing.

At present, however, Vietnamese jobs are heavily dependent upon exports – which constitute nearly 89 percent of GDP – and increasingly reliant upon TPP member states, and the United States in particular, as an export destination (the US alone comprising nearly 20 percent of Vietnam’s exports). Given the size of the Vietnamese economy relative to these countries, it is quite possible that jobs and spending power of local consumers could have been put at risk in the event that conditions within purchasing markets had shifted or if the TPP had fallen apart following the reduction of tariffs.

Without the TPP however, and in light of the active reduction of trade barriers with the European Union, there is now ample room for Vietnam to diversify its export portfolio, thus safeguarding the growth of its steadily strengthening consumer class. In the near to medium term, this is likely to decrease risk for companies seeking to expand sales networks and to build up brand reputation within the Vietnamese market.

As a reminder, if you choose to publish any of our content, please include the following caption at the end of
the article:

This article was first published on <insert website name, hyperlinked to homepage>.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond.
For inquiries, please email us at Further information about our firm can be found at:

Related articles