Made in the Mekong delta

As the Chinese economy cools and double-digit growth remains elusive in the near future, other countries in and around the region have the potential to become manufacturing hubs for select sectors. The country gaining cynosure today is Vietnam, another socialist economy standing by to embrace capitalism.

Vietnam is on the anvil of negotiating eight new trade agreements. Further, with the coming together of the Asean Economic Community in 2015, greater trade freedom within Southeast Asian markets is expected, prompting leading manufacturers to exercise Vietnam as a free trade export hub.

The country’s macroeconomic stability continues, while witnessing an average-GDP growth of 5.8 per cent during last five years, enabled by a benign inflation. During the same period exports have increased by 131 per cent to touch $132 billion in 2013, thereby exhibiting their competence to find markets overseas. Optimism is palpable from overseas investors as FDI touched $8.9 billion in 2013, from just $1.6 billion ten years back.

However, the country is gaining more currency due to two ensuing mega-trade agreements, involving 19 countries. The first prospects are under the Trans-Pacific Partnership Agreement (TPP) which, if signed, would present Vietnam a unique opportunity to catapult into a manufacturing hub. The TPP is a consortium of 12 countries from both sides of the Pacific with a population exceeding 805 million, and a combined GDP size of $28 trillion. The US is spearheading this initiative to get a greater foothold and threaten China’s hegemony in the Asia-Pacific region in particular, along with 11 other sovereign signatories.

The second agreement in the pipeline is the Regional Comprehensive Economic Partnership (RCEP). Under RCEP, the 10-member Asean trade bloc has hooked up with six countries in the Asia-Pacific region — Japan, South Korea, China, India, Australia and New Zealand. These 16 countries together are home to 3 billion people having a shared GDP of about $17.23 trillion. Vietnam already has existing trade agreements with these countries, but its intention is to stitch these existing agreements together beyond Asean into a comprehensive one that covers all the 16 countries.

From Vietnam’s perspective, these two agreements have the potential to change the entire business landscape as its industries get more integrated into the global value chain. A key beneficiary of this will be the manufacturing industry which would find it possible to export to places that could not participate in the past due to prohibitive duty structures.

The cumulative exports from Vietnam to the 19 members of RCEP and TPP (Brunei, Malaysia, and Singapore are a part of both) more than doubled during 2009 and 2013, with exports touching $84.3 billion, which was 63 per cent of Vietnam’s total exports. In fact, exports to TPP and RCEP countries have shown an annualised average of 20 per cent and 24 per cent respectively, during 2009 and 2013.

The existing export situation of the potentially to-be formed blocs also remains positive. Intra-exports of TPP countries have increased from $1.3 trillion in 2009 to $2 trillion in 2013, growing at an annualised average of 11 per cent. At the same time the intra-exports of RCEP countries have exhibited an increase from $1.3 trillion to $2.2 trillion during the same period, having grown at annualised average of 16 per cent.

Vietnam has globally competitive niches from textiles and footwear and coffee and rice to tourism. While Vietnam is the second largest exporter of textile and apparel products to the US, after China and ahead of India, it is keen to move from manufacturing low value products to producing high-tech products. The prospects of the automobile industry also remain high.

There is also the possibility of manufacturers getting lured to shift base from China to Vietnam. While Vietnam is much smaller than China, it stands to benefit significantly on certain parameters. The average annual income of labour in Vietnam stands at $2,364, which is one-fourth that of China’s. In terms of Doing Business Ranking, Vietnam ranks much ahead at 78 compared to China at 90. Land and utility costs are low, with corporate income tax rate standing at 22 per cent, 5 per cent lower than in China. The provincial governments in Vietnam have invested in creating numerous zones, offering a slew of incentives to overseas investors.

India does not have existing trade agreements with many of the countries negotiating in TPP or RCEP. Re-evaluating their strategies in this region to base their operations in Vietnam will help Indian entities reap the benefits of an emerging middle-income market and be amongst the first in gaining greater market access, once the free trade agreements take effect.

The writer is chief manager (research and analysis) at Exim Bank of India. The views are personal

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