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November 01, 2016

TPP and Its Effect on Manufacturing in Vietnam

You’ve decided you want to manufacture offshore and you’re looking to nail down the location. China’s become a little too expensive for you and you’re looking further south – Vietnam, perhaps. You wouldn't be alone. The country's manufacturing sector is growing by leaps and bounds for good reason.

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You’ve also probably heard the phrase “TPP” tossed around a lot during the last 18 months (yikes!) of the current election cycle. The TPP (or Trans-Pacific Partnership) turned into a contentious campaign issue as the two major candidates for President bafflingly repudiated the regional trade pact agreed to by 12 countries – the U.S., Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru.

Much has been written about the framework and specifics of TPP; we’re not going into that here. The purpose of this blog post is to address one specific topic: How TPP will benefit the manufacturing sector in Vietnam.

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Fortunately, in researching the subject, I ran across an excellent white paper written by the good folks at Solidiance, a corporate strategy consulting firm that focuses on the Asia Pacific region. The entire paper is a comprehensive must-read. I’m going to hit a few of the highlights.

In short, three drivers from TPP are expected to generate maximum impact in this important sector:

VOLUME

  • Since TPP signatories account for 40 percent of the nation's exports, the trade agreement will further enhance the Vietnam's standing, increasing total imports by an additional $68 billion by 2025.

LABOR

  • Low labor costs become an even more important point of arbitrage for manufacturing companies, especially in the fast-growing textile & apparel and electronics sectors.

LOWER TARIFFS

  • TPP will significantly lower tariffs on imports and exports. For example, exports tariffs from Vietnam to the U.S. will be gradually be lowered from 7.9 percent on textiles and 11.4 percent on clothing to zero.

The results of these drivers will be felt immediately, says the Solidiance report. Between TPP and other trade agreements, foreign direct investment into the manufacturing sector is expected to reach $20 billion by 2020. The positive ripples of increased financing will undoubtedly lead to companies ramping up production as they hire more workers at more advanced skill levels. And these lofty outcomes will be reflected in investment up and down the supply chain.

“The scale of both domestic and foreign enterprises following TPP’s implementation will also drive the development of upstream suppliers as well as manufacturers in supporting industries,” the report reads. “To illustrate, in recent years, large electronics manufacturers have expanded their production base in Vietnam, creating potential market opportunities for local parts and components suppliers.”

Though all 12 countries have agreed to the TPP deal, it still needs to be ratified. Today – one week out from the U.S. presidential election – there’s no telling what will happen. It’s difficult to know whether Secretary Clinton or Donald Trump would maintain their distaste for the agreement once they were elected given their willingness to change their previous stances on trade. This much is certain; Vietnam continues to grow its manufacturing sector and will only strengthen with the agreement’s ratification and implementation.

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Filed Under: Vietnam