By Michael Tatarski
From before dawn through the late evening, container trucks rumble down the Hanoi Highway to Cat Lai Port in Ho Chi Minh City’s District 2, often creating traffic jams that back up for several kilometres.
These trucks bring consumer goods such as electronics and apparel from the booming industrial parks of Binh Duong and Dong Nai to their next step in the global supply chain, a system that recently welcomed a major new trade pact.
The Regional Comprehensive Economic Partnership (RCEP) was signed in Hanoi on November 15, 2020, by 15 countries: Australia, China, Japan, South Korea, New Zealand and the 10 members of the Association of Southeast Asian Nations (ASEAN). It will eventually reduce or eliminate tariffs on most trade between member states.
This group makes up 30% of the global population and 30% of global GDP, and RCEP is also the first trade agreement between China, Indonesia, Japan and South Korea, four of Asia’s five largest economies. The most notable exception is India, which left negotiations spearheaded by China over concerns that the deal would negatively impact the national economy.
“It’s an interesting agreement because, from a Vietnam perspective, it’s not as consequential as the CPTPP, the ASEAN economic community, or its bilateral ties with Japan or other countries,” said Warrick Cleine, Chairman and CEO of KPMG in Vietnam and Cambodia. “But it is important from a regional perspective, and in fact it’s a game-changer for some of the more difficult relationships like China and Japan or South Korea and Japan.”
One issue is the timing of the agreement, which is uncertain, and RCEP has not come into force yet. Benefits are eventually expected though.
“It will take years to come into effect, but there are things in it that are important for Vietnam,” Cleine added. “For example, the standardization of the valuation methodologies and specific rules around the country of origin.”
Marco Civardi, Area Managing Director at Maersk, believes that certain industries stand to benefit most from RCEP once it comes online.
“The reduction of tariffs, which will happen over time, is expected to touch on maybe 90% of product lines,” he said. “We’re talking about a very specific impact on textiles, footwear, agriculture, and telecommunications – there is very tangible upside for Vietnam.”
However, as evidenced by the gridlocked roads leading to Cat Lai Port, some of Vietnam’s trade infrastructure is already being pushed to the limit, meaning further export growth due to RCEP could add more strain to highways, ports and airports.
“Infrastructure is a potential concern, as not every country has the same infrastructure landscape, and not every company has the same cost competitiveness when it comes to logistics,” Civardi said. “But, if we say that the goal is equal trade and more flow of goods among members, perhaps these can be a positive incentive to further speed up infrastructure improvement.”
In Vietnam’s case specifically, a perceived increase in competitiveness from peer economies within RCEP could spur further infrastructure development.
Beyond infrastructure constraints, RCEP’s hazy timeline is likely to give potential investors pause when assessing its likely impact.
“People will be sceptical of expanding at first because similar agreements have fallen flat,” Anup Dave, General Director of Kirby Southeast Asia, said. “And it is unclear in many ways – for example, it says that tariffs will drop to zero between 2022 and 2030 – but what happens in that time period? It doesn’t create confidence.”
Dave argues that Japan and South Korea may be the ultimate winners in the trade deal because they can trade their high-quality goods more easily, while China and Vietnam are both positioned well given their geographic location, relatively low labour costs and established manufacturing bases.
One prominent line of criticism aimed at RCEP is that it does not include any provisions regarding labour rights or environmental protections, which were prominent in negotiations over the doomed Trans-Pacific Partnership.
“Part of the issue is that some of the countries in this group are not advanced economies, while advanced ones like Australia and Japan have these topics covered in their bilateral agreements with ASEAN,” Cleine said. “So, it’s not like the TPP where you had a lot of countries who were new to trading with each other.”
Overall, experts agree that Vietnam is positioned well to benefit from RCEP, though it remains to be seen exactly how much.
Dave estimates that the agreement could add 1 to 1.5% to the country’s GDP if it fully comes online within four years, while Civardi also sees a bright future.
“One of the key differences between Vietnam and its neighbours is that Vietnam is very dynamic on free trade agreements, so there is opportunity to grow,” he said. “And secondly, there is a lot more business already coming into Vietnam in terms of foreign direct investment.” [C]
“One of the key differences between Vietnam and its neighbours is that Vietnam is very dynamic on free trade agreements, so there is opportunity to grow”
Anup Dave, General Director, Kirby SEA
