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Vietnam eyes new economic pact

Vietnam Plus - 31 January 2024

Vietnam eyes new economic pact

Vietnam has clinched an array of bilateral trade pacts with major economic powers and joined such large regional deals as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Partnership (RCEP), providing the country with a lot of trade opportunities, including market access and tariff preferences. However, Vietnam’s ambitions go beyond mere economic gains, as evidenced by its early involvement in the discussion of the Indo-Pacific Economic Framework for Prosperity (IPEF) launched by the US in May 2022.

The idea of IPEF and its relevance to Vietnam, nevertheless, have not garnered much attention from the Vietnamese public as it is still under the negotiation process without final outcomes yet. Professor Stephen Nagy of International Christian University (Tokyo) explains the essence of IPEF in an interesting way to his students, many of whom are Vietnamese.

“It is like going to a buffet, where your friend enjoys seafood, you prefer chicken and the other friends like beef, so you can choose the part of the buffet that you would like to participate in.”

This means with IPEF, the participants can choose parts or provisions of the framework based on their own interests, objectives, and policies. The “flexible” characteristic of the mechanism makes it different from the CPTPP, which focuses on intellectual property rights, the role of state-owned enterprises, and strong labour and environmental regulations, and the RCEP, a broad regional trade agreement involving all 10 ASEAN member states, Australia, China, Japan, the Republic of Korea, and New Zealand, Nagy says.

The IPEF is designed to set rules and norms with high standards to guide trade practices and foster economic cooperation in the Indo-Pacific region. One notable feature of the IPEF is it not only involves trade but also covers emerging issues such as new energy transition, supply chain resilience, taxation, and anti-corruption.

Joining IPEF, the new high-standard economic cooperation framework with the participation of strong power like the US and other countries in the Indo-Pacific, could help Vietnam overcome numerous challenges posed by the sluggish global economy, says Carl Thayer, Emeritus Professor at the University of New South Wales (Canberra).

Vietnam will face the risk of lagging behind unless it seizes the opportunity to join the IPEF and strengthen its capabilities, especially in the context of the fourth industrial revolution, digital economy and evolving supply chain.

Professor Nagy shares Thayer’s view and also highlights further the significance of the IPEF in strengthening intra-ASEAN integration as Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand are already the signatories to this framework.

He says the new trade pact will facilitate increased trade exchanges among ASEAN member states and promote the sharing of norms for trade and economic engagement within the bloc. “The IPEF plays an important role in linking Vietnam with big economies like Japan and the US, which gives more opportunities for the exchange of green technologies.”

The clean economy pillar of IPEF will help Vietnam acquire green technologies to establish a more environmentally sustainable, efficient, and resilient economy as the country is highly vulnerable to climate change, with the hardest-hit area being the Mekong Delta.

According to the World Bank, without adequate mitigation measures, Vietnam could face significant economic losses due to climate change. By 2050, the country could experience an annual loss of approximately 12-14.5% of its GDP, while up to one million individuals could be exposed to extreme poverty by 2030.

Besides, joining the IPEF will create a platform for cooperation among signatories, which means it will offer opportunities to Vietnam as a hub of manufacturing to better engage in the global supply chain.

Amitendu Palit, Senior Research Fellow at the Institute of South Asian Studies at the National University of Singapore, says Vietnam has emerged as a highly attractive destination for businesses operating in the Indo-Pacific region, particularly those from the IPEF member countries, who are looking at Vietnam as a favourable location for expanding their supply chain activities.

“Vietnam’s ability to provide trained labour for specific industrial operations, an investor-friendly atmosphere and good foreign relations can make it a very important location for re-organisation of critical supply chains in the IPEF,” Palit assesses.

The engagement in IPEF, according to Professor Thayer, also opens up possibilities for Vietnam to progress beyond its current role of assembling and packaging computer chips into semiconductors. In the next decade, Vietnam can strive to become an innovator and leader in designing and adding values to computer chips.

Through IPEF, Vietnam can gain access to expertise, technology, training, and legal frameworks, which will contribute to the enhancement of labour skills and technological capabilities.

The fair economy pillar will create a level playing field to promote transparency and equitable competition. This aspect will facilitate increased investment and enhance the competitive edge of participants.

“Engaging in IPEF’s fair economy pillar could provide Vietnam with opportunities for transparency enhancement, information exchanges, capacity building, and technical assistance, given that Vietnam has long struggled to create an effective tax system and anti-corruption mechanisms.”

In fact, Vietnam has made significant progress in anti-corruption thanks to strong political determination. The country’s upward movement in the corruption perceptions index (CPI) report in 2022 by Transparency International indicates that Vietnam’s efforts in combating corruption have resulted in significant changes recognised by international experts. Vietnam was one of the 25 countries that saw an improvement in the ranking, gaining 3 points and moving up 10 places compared to the previous ranking.

But experts acknowledge that there is still considerable work ahead for the country to catch up with this pillar. It requires additional time and effort to implement comprehensive reforms, strengthen regulatory frameworks, enhance top-to-bottom governance, and promote a level playing field for businesses.

Taking the plunge into the big ocean

In a nut shell, the US-led economic framework is to create a mechanism that ensures a shared high-standard environment and foster mutual benefits for all members. But insiders warn interested countries that joining IPEF is like taking a plunge into the ocean where swimmers have to be strong enough to survive; to thrive in the global economy, strength and resilience are vital for all participants, and Vietnam is not alien.

Phan Cao Nhat Anh, Deputy Director General of the Vietnam Institute of India and Southwest Asian Studies (VIISAS) under the Vietnam Academy of Social Sciences (VASS) says Vietnam’s engagement in the IPEF negotiations is aimed to mobilise optimal domestic and foreign resources for national construction and development but the country must be prudent to ensure the new commitment consistent with national interests and comprehensive development strategy.

According to Nhat Anh, much progress has been made so far in the US-led economic framework, with negotiations completed on three pillars of supply chain, clean economy and fair economy. However, a number of issues remain unresolved in the trade category such as the different interests of individual economies that require further active efforts to achieve consensus.

It will also be difficult to reach consensus with the IPEF partners if Vietnam sets low standards for environment and labour issues. “It is crucial for Vietnam to keep up its efforts to enhance labour quality and refine regulatory and institutional frameworks pertaining to digital trade,” Nhat Anh says.

Regarding the trade pillar of the IPEF, Professor Thayer says it holds a lot of unsettled issues, especially labour standards, environmental standards, and compliance issues, not to mention the sensitive issue lying in determining the course of action if a member fails to fulfill their obligations.

Since the IPEF is not a multilateral free trade agreement and the US is not offering market access, the US will need to offer attractive training, capacity building, technical assistance and infrastructure investment packages as incentives for countries like Vietnam to cover the costs of domestic regulatory reform.

“Vietnam should adopt a wait-and-see policy while negotiating with other IPEF members for a clarification from the US on how developing countries will be compensated for the costs of meeting high labour and environmental standards.”
Carl Thayer, Eneritus Professor at the University of New South Wales (Canberra)

Bich Tran, Adjunct Fellow at the Center for Strategic and International Studies (CSIS) in Washington, D.C., also agrees that it is challenging for countries to negotiate the trade pillar as they have diverse priorities and capabilities, adding topics like high labour and environment standards are popular domestically but hard to sell to other countries.

“Higher standards will increase the costs for businesses. Besides, without market access to the US, many countries do not see the incentive to conform to those standards.”

Bich suggests Vietnam opt out the trade pillar but join the other three, or see higher labour and environment standards under the trade pillar as a way to attract future investment, meaning the country should join the framework either partially or fully.

As the IPEF continues to evolve, it’s high time Vietnam should study the new mechanism thoroughly, consult and share information with relevant countries to facilitate the negotiation process to speed up the formation of a framework that will bring practical benefits to its people, and contribute to peace, stability and prosperity in the region and the world./.

 source: Vietnam Plus