Vietnam primed for revival

Vietnam primed for revival

Vietnam is now racing to control a new coronavirus outbreak, which resurfaced late last month after three months of no domestic cases. Prime Minister Nguyen Xuan Phuc said last Wednesday that the next 10 days would be "critical" in a country that has been widely praised for its earlier containment success.

The new outbreak began on July 25 in Danang, raising fears that tourism and many other activities could take a severe hit just as the economy was developing momentum.

But it is not all the bad news for Vietnam, which is one of the few countries forecast to register gross domestic product (GDP) growth this year. That will depend partly on a revival of global trade, but it is well positioned.

For a start, a new free-trade agreement with the European Union (EU) came into force this month and is expected to provide a much needed post-pandemic boost.

The European Union-Vietnam Free Trade Agreement (EVFTA), according to Reuters, will eliminate 99% of tariffs on goods traded between the two, giving Vietnam's exporters an access to an US$18-trillion market.

The Hanoi government forecasts exports to the EU will grow by 42.7% over the next five years. The World Bank says the deal has the potential to lift Vietnam's GDP by 2.4% and its total exports by 12% by 2030.

Vietnam already enjoys preferential tariffs in the EU under the Generalized Scheme of Preferences (GSP). The EU is one of the largest foreign investors in Vietnam, accounting for about half of the country's total foreign direct investment (FDI).

Among the major beneficiaries of the pact will be garments, which make up about 10% of the country's exports. The EU is Vietnam's second largest garment market after the United States, accounting for 15% of the country's total garment exports last year. Backed by more than a dozen FTAs, Vietnam has emerged as a key link in the global manufacturing supply chain.

The EVFTA is the second FTA between the EU and an Asean country, after Singapore. As a region, Southeast Asia is the EU's third-largest international trading partner, after the US and China. With cumulative FDI of $374 billion in Asean by the end of 2017, the EU has expressed a desire to pursue an FTA with Asean as a whole, but little progress has been made. Negotiations began in 2007 but ended in 2009 when individual countries started to push for bilateral talks.

On one hand, the EU pacts with Vietnam and Singapore could disadvantage other Asean countries if the EU increases its investment in Singapore and Vietnam in sectors like the automotive industry, in which Thailand is the regional leader.

However, the EVFTA illustrates that the EU sees growing opportunities in Southeast Asia, and the pact has the potential to be a catalyst for fresh EU-Asean talks.

The garment industry, meanwhile, has a highly integrated regional supply chain, and growing exports of clothing labelled "Made in Vietnam" could also benefit related factories in Cambodia, where the garment industry is one of the few job creators, and Bangladesh -- the world's second-largest apparel exporter after China.

Asia is still the single largest apparel sourcing base for Western fashion brands. They have diversified sourcing away from China, but their orders have largely been filled by other Asian countries -- mainly to the benefit of Bangladesh, Vietnam and elsewhere in Asean.

Besides garments, Vietnam also benefits from China-plus-one strategies as rising wages on the mainland and US-China tensions accelerate a trend toward relocation. Multinationals including Apple, Samsung and Nintendo have moved some capacity from China to Vietnam. Major export clusters for electronic equipment and textiles have emerged in Vietnam to attract global manufacturers, and industrial zones are booming.

Nonetheless, Vietnam's major challenges lie in port and transport infrastructure that are still less developed than regional peers, while stable electricity supply is a recurrent problem. Also, highly skilled workers are in short supply, though this provides opportunities for higher-skilled personnel from neighbouring countries including Thailand to help Vietnamese industries move up the global value chain.

As the post-pandemic economy takes shape, some countries in Southeast Asia could emerge from the crisis faster and with better opportunities than others.

But as we look forward to the reopening of economies and borders, interdependency among Asean members will be even more important, and progress toward deeper integration should be a priority. Looking beyond the challenges we are facing, how Asean responds collectively will help each country and the region as a whole. We should survive stronger together, shouldn't we?

Nareerat Wiriyapong

Acting Asia Focus Editor

Acting Asia Focus Editor

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