1. Vietnam’s TPP Challenge I
I. Introduction
On October 5th 2015, the negotiation for Trans-Pacific Partnership (TPP), to which
Vietnam is a founding member, was concluded at Atlanta, Georgia. Because of its small but
rapidly growing export-oriented economy, Vietnam is usually projected to be the greatest
winner from TPP. Yet, while there is no doubt that Vietnam stands to gain much from TPP,
there also exists many challenges that may hinder Vietnam’s benefits.
II. Vietnam’s benefits
There are many predictions on Vietnam’s GDP growth. According to the World Bank,
by 2030 Vietnam will add about 8% to its GDP from joining TPP. Export will contribute
much to this growth. The chief Vietnamese negotiator for the TPP, Mr. Tran Quoc Khanh,
announced that “by 2026, export will increase by 68 billion USD”. To a country that has a
GDP of $186.2 billion in 2014, such an addition is an enormous boost.
As textile is one of the prime export of Vietnam, its benefit from TPP is widely
mentioned. Currently, in American market, tariff on Vietnamese textile averages 17%. With
this rate reducing to 0% within 12 years, it will greatly increase the profitability of the sector,
and the value of Vietnamese textile export to the US is estimated to increase to $30 billion by
2020. Textile is not the only sector that will grow through TPP. Vietnam hopes to move up the
value chain and has already attracted hi-tech companies such as Samsung and Foxconn. TPP
will further reinforce this trend.
While export expands the most from TPP, there are advances in other sectors as well.
The flow of foreign direct investment (FDI) into Vietnam will increase by $13 billion, twice the
flow into Australia and Malaysia, as estimated by Vietnam Institute for Economic and Policy
Research. Vietnam also enjoys benefits in pharmaceutical. According to the leak of the final
TPP deal, while developed countries have to implement drug data protection upon entry into
force, Vietnam has at most 18 years before having to oblige. The decision to reduce the amount
of time from the date of marketing to when biosimilars can be approved to 5 years will further
assist the Vietnamese population, whose reliance on generic drug stands at 86% of the total
value of pharmaceutical consumption. Thus, one may say that the TPP will have a positive
effect on all levels of society in Vietnam as a whole.
III. Challenges
One of the greatest problems is that of FDI firms. Vietnam has been moving away from
joint ventures toward 100% foreign capital firms. As a result, although the amount of FDI

2. Vietnam’s TPP Challenge II
increases, Vietnamese firms are not the primary beneficiary at all. This deficiency extends
toward FTAs as well. While Vietnam’s best FTA has been that with Korea (through ASEAN)
and 73% of all Vietnamese export to Korea enjoys reduced tariffs, the majority of firms reaping
this profit are Korean. If nothing is changed, the upcoming inflow of FDI that follows the
passage of TPP will provide little benefit to Vietnam.
The gain from textile is neither as profitable under the current circumstances as it is
purported to be. The TPP’s Yarn-forward Rule stipulates that only textile products made from
yarn produced in a TPP-member country are eligible for tariff reduction. This is a problem for
Vietnamese textile firms because most (70%) of the yarn comes from China, a non-TPP
country. To counter this problem, Vietnamese firms have been trying to increase their own
yarn-producing capability. However, these measures are long-term ones that may require years.
One short-term solution has been foreign yarn producers opening their own factories in
Vietnam. However, in this situation the questions of who get the FDI and to whom the profit
goes proposed in the above paragraph resurface. Thus, it is crucial for Vietnam to be self-
sufficient in the production of yarn to reap all the benefits of TPP.
Vietnam’s indigenous pharmaceutical industry may not be competitive in a more
opened market if there is no reform. Vietnam’s pharmaceutical industry is lowly-developed,
being unable to self-produce pharmaceutical ingredients and having to import them. With
TPP, foreign drugs will flood into Vietnam and decrease domestic firms’ profitability.
Additionally, the bidding of drug production is opened to all domestic and foreign firms under
TPP, where the weak domestic drug companies will not be able to compete with foreign firms.
Without reform initiatives from the producers, drug companies in Vietnam will miss this
opportunity to grow out of its current state.
Last but not least are the crucial institutional challenges and reforms that create a more
favorable atmosphere for firms.
One challenge is that of graft and corruption. For every 1 dong of profit is gained, 1.02
dong is lost to corruption. When firms lose more to corruption than they gain from business,
they have no incentive to invest and expand. This corruption has also angered foreign partners,
shown by the Japanese’s exasperation when a second corruption scandal involving Japanese
funding was exposed in 2015. Consequently, this makes Vietnam a less welcoming destination
for FDI. If this problem persists, it is highly likely that a large percentage of FDI will be lost to
corruption or withdrawn, hindering Vietnam’s growth.

3. Vietnam’s TPP Challenge III
Another crucial challenge is reforming the state-owned enterprises (SOEs) so as to make
them competitive. At the start of 2014, there are a total of 3198 SOEs in Vietnam. Even though
that is only 0.9% of all enterprises in Vietnam, they contribute a total of around one third of
Vietnam’s GDP. However, the great inefficiency of SOEs, coupled with an opaque
bureaucracies that usually lead to graft and mismanagement, has created a strain on the
national economy. Furthermore, because of the mismanagement and the easy access to credit,
SOEs account for most of the non-performing loans, which in turn make banks unable to lend
to SMEs. Due to this problem, Vietnam’s economic growth rate is slower than it should be.
The SOE sector needs to be reformed in order to make them competitive and transform them
into leading firms, pulling the economy forward.
IV. Recommendation
An important policy is to support the SMEs in Vietnam so that they can fully exploit
the favorable condition provided by TPP.
- Promote the establishments of joint-venture companies and reverse the trend toward
100%-foreign capital firms to support indigenous industries.
- Reserve funding for supporting and promoting SMEs, similar to what Canada and
Australia are doing for their own firms.
- Support the domestic yarn producers so that they can self-produce the necessary raw
material. This serves not only to satisfy TPP yarn-forward rule but also to prepare for
future trade agreements.
- Provide funding and support for pharmaceutical manufacturers for them to be able to
be competitive versus foreign firms. Encourage pharmaceutical companies to invest into
biological drugs, which are much more profitable than generic drugs.
The Vietnamese government also needs to undergo crucial institutional reforms to
improve its standing among foreign investors and create an environment more conducive to
investment and production.
- Reduce graft and corruption by all means. Pursue corruption-eradication policies.
- Quicken the equitization of SOEs, and pressure SOEs to divest from risky businesses.