Vietnam reduces reliance on China, ratifies new Trans-Pacific Partnership trade deal

  • Becomes seventh nation to formally adopt the renewed Trans-Pacific Partnership
  • Hopes to reduce economic reliance on China and mitigate fall out of trade war
PUBLISHED : Tuesday, 13 November, 2018, 2:44pm
UPDATED : Tuesday, 13 November, 2018, 10:36pm

Vietnam has moved to reduce its economic reliance on China and mitigate the risk of the US-China trade war by ratifying an 11-country trade deal.

The nation’s lawmaking body approved the Comprehensive and Progressive Agreement for Trans-Pacific Partnership on Monday, following Australia’s ratification on October 31.

Japan, Canada, Mexico, Singapore and New Zealand have also formally ratified the agreement.

The CPTPP – also known as TPP-11 – is the revamped Trans-Pacific Partnership which crumbled when US president Donald Trump pulled Washington out of the deal shortly after taking office in early 2017.

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It is expected to reduce tariffs between the 11 participating economies that together add up to US$10 trillion.

Vietnamese Prime Minister Nguyen Xuan Phuc said Hanoi would use a combination of trade deals and domestic reforms to survive the US-China trade war.

For Vietnam, the CPTPP gives its highly export-dependent economy more avenues for mitigating the fallout of the trade tensions between its two biggest trading partners, Washington and Beijing, which are not part of the deal.

About a quarter of Vietnam’s total trade is with China, which is facing potential tariffs on all of its exports to the US amid the trade war.

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Pham Quang Minh, dean of social sciences and humanities at the Vietnam National University in Hanoi, said there were fears in the country that demand from China would fall, particularly for goods that are re-exported to the US and are now subject to tariffs.

“Vietnam wants to have new markets because the trade war between the US and China … can have a bad influence on Vietnam’s economy,” he said.

“When the US was part of TPP, Vietnam hoped the deal would help it rely less on China, its biggest trading partner.

“Vietnam was disappointed when the US withdrew from TPP, but it would welcome the US back [if it reconsidered the deal]”, Minh said.

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Trump has suggested the US may rejoin the deal if it were “substantially better” than the deal negotiated under his predecessor, Barack Obama.

“The original TPP was about US market access, and [of] great benefit to Vietnam,” said Adam McCarty, chief economist at Mekong Economics in Hanoi.

McCarty explained that China’s exclusion from the original TPP negotiations, combined with strict rules of origin, would have meant greater diversification for Vietnam away from its reliance on China.

The CPTPP’s sourcing rules will help Vietnam to reduce its reliance on China for a range of raw materials and components – such as yarns and textiles for its garment industry – by requiring them to come from member countries in order to enjoy tariff-free trade.

Many of these production inputs have traditionally come from China and have seen a big increase in investment in Vietnam over the past 3-4 years, according to Hanoi-based economist Raymond Mallon.

“That trend will increase, [pushed by] the trade war as well – there will be some continued relocation of basic inputs that Vietnam is using that are currently made in China to move into Vietnam or other CPTPP member countries,” Mallon said.

Tu Xinquan, a trade expert at the University of International Business and Economics in Beijing, cautioned that a shift away from Vietnam's heavy reliance on China for production inputs would not be simple.

“Vietnam depends on China for intermediate goods, but it depends on the US for consumption,” Tu said.

“It would be difficult for Vietnam to find another source [for some products] in the short term.

Chinese enterprises might invest in Vietnam to produce these intermediate goods.”