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Last updated: Monday, November 12, 2018

 

CPTPP Accelerates Domestic Reforms

Posted: Saturday, March 24, 2018


Vietnam is currently assessing economic benefits of deepening regional integration with free trade agreements, particularly two major new agreements: Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) signed in March 2018 after the United States withdrew from the Trans-Pacific Partnership (TPP) in January 2017, and the Regional Comprehensive Economic Partnership (RCEP), which has elapsed 21 rounds of negotiations.

According to the Report on Economic and Distributional Impacts of Comprehensive and Progressive Agreement for Trans-Pacific Partnership: The Case of Vietnam, the CPTPP will yield robust economic gains for Vietnam. Multilateral trade agreements such as the CPTPP are expected to further boost Vietnam’s investment and export driven growth model.

“Even under conservative assumptions, the report estimates that CPTPP would increase Vietnam’s GDP by 1.1 per cent by 2030. Assuming a modest boost to productivity, the estimated increase of GDP would amount to 3.5 per cent from CPTPP,” said Mr Ousmane Dione, World Bank Country Director for Vietnam.

Mr Sebastian Eckardt, World Bank Lead Economist for Vietnam, said, the new agreement will bring direct benefits to Vietnam, from trade liberalisation and improved market access. Most importantly, it will help stimulate and accelerate domestic reforms in many areas. Delivering commitments under the CPTPP will contribute in promoting transparency and supporting the creation of modern institutions in Vietnam.

According to the report, with the United States, benefits could be greatly reduced. Welfare increase achieved from RCEP might be much smaller than CPTPP or TPP-12 but it is still significant. The CPTPP is likely to push up FDI increase and further expansion of service sectors although these impacts are not taken in the WB simulation because this report focuses on only market access for current flows of goods and services. Comparative results of RCEP, CPTPP and TPP are somewhat dependent on RCEP's market opening assumptions. For that reason, although gains are relatively low, they will be higher if the pact reaches greater ambitions.

For the case of Vietnam, benefits will be concentrated on some sectors. The garment sector will gain most benefits regardless of any scenario. It would grow more than in the TPP. Food, beverage and tobacco sectors will have the highest output and export value in the CPTPP. As expected, the CPTPP will be less attractive than the TPP and bring in smaller chance of output and export growth.

However, the pact will lead to greater levels of export diversity if export markets are taken into account. All income groups are expected to benefit from this new agreement although higher-skilled workers in the top 60 per cent of the income distribution may reap more. This shows the importance of investment in human capital development to make full use of benefits of the agreement.

The CPTPP is expected to stimulate reforms in areas such as competition, services (including financial services, telecommunications, and temporary entry of service providers), customs, e-commerce, environment, government procurement, intellectual property, investment, labour standards, legal issues, market access for goods, rules of origin, non-tariff measures (including SPS and TBT measures) and trade remedies. The CPTPP will help promote transparency and support for the establishment of modern institutions in Vietnam.

In the long run, the report analysed that the CPTPP will not only increase exports but also raise technological content in exports. Increased investment driven by potential benefits of the CPTPP can make exports less dependent on imported inputs but more on domestic supply chains instead to avoid rules of origin. This response will help boost export of value-added goods, encouraging domestic private companies to integrate more actively into global value chains and thus promote the development of small and medium-sized enterprises (SMEs). It is expected that there will be a shift in foreign capital inflows to upstream industries of CPTPP-benefiting sectors such as textile, apparel and leather to take advantage of the CPTPP..

Increasing FDI flows into upstream industries, however, is not free of cost. So, it is important for Vietnam to adopt smart policies to select advanced technologies and environment-friendly FDI inflows to optimise CPTPP impacts. Vietnam’s WTO entry experience shows that Vietnam cannot immediately take advantage of its WTO accession to draw huge FDI flows due to lack of capacity to facilitate globally interconnected companies to join highly-valued chains on high logistics costs and poor infrastructure like traffic, electricity, seaports and logistic services.

The challenges involve continued improvement in connectivity to enable integration into global value chains (GVCs) and keep trade costs low. Domestic private and foreign-invested firms that participate in global GVCs need to be able to move goods across borders cost-effectively and reliably. This requires both good physical and institutional infrastructure. Recent research outcomes show that most of the high compliance costs relate to non-tariff barriers. Despite the recent progress in customs reform and the implementation of the National Single Window and the ASEAN Single Window, compliance costs in terms of time and money for goods clearance before and on border remain high in Vietnam. Addressing this critical bottleneck will help deliver the commitments not only under the CPTPP but also the WTO’s Trade Facilitation Agreement.

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