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While the economies of China, Japan and other ASEAN countries have slowed down considerably, Vietnam has stood out as one of the countries in Southeast Asia with a growing economy above expectation. Over the past several years, it has emerged as an attractive destination for foreign businesses, especially in the sectors of manufacturing and capital investment. Today, its economy not only has quickly grown beyond projections but also looks to continue to do so with participation in the Trans-Pacific Partnership and other free trade agreements

By Leon Lee

Thirty years ago, Vietnam was one of the poorest and least developed countries in the world. In 1986, the government introduced a set of economic reforms and policies called Doi Moi to turn the nation’s economy from a centrally planned one to a market-oriented one in order to stimulate growth.

“Over the past 30 years, we have reached some achievements. The economy has been growing at almost six to seven percent per year. It has grown 30 or 40 times since three decades ago. It is much bigger now than in the 1980s when Vietnam began to open its economy and move towards a market economy,” Hoang Chi Trung, Vietnam’s Consul General in Hong Kong, highlights while speaking at a recent AmCham event.

“For the last few years in particular, Vietnam has enjoyed growth. Especially last year, it grew higher than expected. For this year and the next few to come, we expect the economy to grow at higher rates than before.”

Vietnam’s GDP in 2015 reached US$198.8 billion – a growth of 6.68 percent, surpassing the government’s target of 6.2 percent. In the first three months of 2016, its economy rose 5.46 percent compared with the same period from a year earlier. The Vietnamese economy depends greatly on exports and, in 2015, exports went up by 8.1 percent from 2014 to US$162.1 billion. In the first quarter of 2016, exports rose 4.1 percent compared with the year before.

TPP and other free trade agreements

Vietnam’s continuing economic growth will be given a big boost if the Trans-Pacific Partnership (TPP) gets passed by the 12 participating countries. Experts have projected that, because of the agreement, the country’s GDP could grow 11 percent by 2025 while exports have the potential to grow 28 to 30 percent.

“Vietnam has an open economy which focuses greatly on exports and investments, and we’ll benefit immensely from the TPP,” Trung says.

If passed, the agreement would remove an estimate of 18,000 tariffs amongst the 12 countries. It would make Vietnam an even more attractive trade partner with countries with bigger economies such as the United States, Australia and Japan while also attracting more investments from other countries.

The country is particularly strong in the apparel, footwear, textile and garment industries. The manufacturing sector makes up 24 percent of Vietnam’s GDP. According to the Eurasia Group, apparel and footwear exports may see a 50 percent increase in 10 years. Vietnam is also the world’s second largest export of coffee and rice, and is one of the biggest exporters of fruits, seafood, rubber and cashew nuts.

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Besides tariff reductions, the agreement would also bring stronger enforcement of intellectual property and patent protection. Dispute settlement provisions would improve as international arbitration institutions could be used to resolute legal disputes among international investors.

However, there are several challenges that comes with the TPP. There are strict rules-of-origin on materials to follow in order to qualify for the tariff reductions as per the agreement. It has a yarn-forward provision, meaning everything from the yarn in any product must be produced in one of the countries within the agreement in order to be eligible for duty-free status.

The privatization of state-owned companies is another requirement as it ensures fair competition for businesses – it is one that Vietnam is working hard to meet. Trung says that it is, in fact, one of the major targets of the government.

Perhaps the biggest challenge is whether the TPP will ultimately be passed. Although all 12 participating countries have signed the agreement in February after five years of negotiation, they must all agree to ratify it. If this doesn’t happen before February 4, 2018, it’ll only be put into force if at least six countries, which must have a combined GDP of more than 85 percent of the total GDP of the 12 nations, agree to ratify the trade agreement.

Currently, it seems like the United States as the largest economy among all TPP participating countries, won’t come to a decision until after the presidential elections in November. However, Vietnam is not just waiting idly for that to happen. They are moving forward with the preparation of the provisions of the TPP requirements which can take some time to apprehend.

“Vietnam might be the first to ratify it,” states Trung. Delegates have already discussed and agreed to the ratification of the agreement at the 11th Party Central Committee in January 2016.

The TPP is actually just one of the many free trade agreements that Vietnam is a part of. According to the Consul General, the country has free trade agreements with about 55 countries. Among those include the European Union in the EU-Vietnam Free Trade Agreement, the EEU (Eurasian Economic Union) which consists of Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan, and VKFTA with South Korea when it was signed in May 2015.

Increasing investments

The economic reforms and free trade agreements have collectively helped open Vietnam to enormous waves of foreign direct investments which the government welcomes in all sectors including the prominent industry of apparel and footwear. Some of the other sectors include telecommunications, air and sea transportations and infrastructure.

Trung points out that while in addition to a great deal of infrastructure built in the last 20 years, there are still many on-going large projects such as the construction of the new Long Thanh International Airport near Ho Chi Minh City. It is scheduled to be operational by 2020 and is estimated to cost US$7.8 billion.

According to a report from Vietnam’s Foreign Investment Department, FDI into the country reached a record high of US$14.5 billion, up 17.4 percent year-on-year. In the first two months of 2016, there was an 80 percent increase in FDI compared with the same period a year ago. Seventy percent of the new foreign investments come are directed to the manufacturing industry.

Due to rising wages and increasing costs in China, businesses have become more reluctant to rely on the country as the only manufacturing and have instead set up facilities in Vietnam in a “one-plus-one” strategy. According to the International Labour Organization, the average monthly wage in Vietnam in 2013 was US$197, while it was US$391 in Thailand and US$613 in China. Besides lower labor cost, Vietnam’s population also ranks the second youngest in Asia, with seven percent of its people over 65 years old.

Besides garment, apparel and footwear manufacturing, Vietnam has also attracted investments from high-tech and electronic companies including Samsung, Intel and Hewlett-Packard (HP). In 2012, HP built its first R&D center in Southeast Asia in Ho Chi Minh City. In the same year, Samsung established one in Hanoi and has recently announced plans to build a US$300 million replacement in the city, the company’s largest R&D project in Southeast Asia. And according to Vietnam News Agency, Apple is looking to invest up to US$1 billion to build an Asia-focused database center and R&D center in the country.

Challenges ahead

For 2016, Credit Suisse projects FDI into Vietnam at US$13 billion and its GDP to grow 6.3 percent. While both of these figures are below the numbers from 2015 because of sluggish global growth, plenty of foreign businesses remain interested in entering the country.

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Although the future certainly looks bright for Vietnam, Trung sees several challenges for the government to tackle in order to manage its growth over the next five to 10 years.

“The first challenge is to enhance competitive capacity of local enterprises. There will be a lot of competition as we further open the economy to foreign companies,” he says. Two particular industries that are most likely to be affected by this are the retail and agricultural industries as they lag behind their foreign counterparts in efficiency and technology.

Another challenge is the privatization of state-owned enterprises – an essential step that if not done correctly and fairly it would create monopolies which could hurt the competitiveness of the market.

While it is beneficial that the economy is growing, Trung says it is also important to pay attention to social issues such as education and healthcare. “They also need a lot of capital. On the one hand, you want to invest in economic growth but, on the other, you still have to care about the lives of more than 90 million people.”

There is also a growing gap between the urban centers and the mountainous areas when it comes to economic development, partly because businesses are not particularly interested in the mountainous regions for an apparent lack of people, resources and existing infrastructure.

But, regardless of the challenges, Vietnam’s goals for the future are quite clear. “Vietnam’s target is to build the country into an industrialized country. With the TPP and other free trade agreements, we hope that we will enjoy the best and favorable conditions to complete our industrialization process within 10 to 20 years,” Trung says. “And then Vietnam will reach its target of becoming a middle-income country by that time.”