Vietnam Won’t Live or Die by the TPP

When President Barack Obama visited Hanoi in May, he vowed to seek closer relations by pursuing a free-trade deal among the U.S., Vietnam and ten other Pacific nations. But the Trans-Pacific Partnership, the president’s cherished trade deal that was signed in February after eight years of negotiations, may be stillborn. Few in Congress support the deal, and both leading presidential candidates, Hillary Clinton and Donald Trump, have pledged to oppose it. Would the pact’s demise damage Vietnam’s economy?

“There’s one country that’s usually singled out as benefiting most from TPP, and that’s Vietnam,” says Paul Gruenwald, S&P Global Ratings’ chief Asia-Pacific economist. The International Monetary Fund forecasts the country’s economy will grow by 6.3 percent in 2016, just below the government’s target of 6.7 percent. Ratification of the TPP would give a fresh boost to growth.

Even without the pact, though, foreign direct investment has been pouring into Vietnam. Companies such as Foxconn Technology Group, Intel Corp., LG Electronics and Samsung Electronics Co. have built factories there, and FDI by multinationals produces some 70 percent of the nation’s exports, says Sean Wilson, Hanoi-based chief investment officer of LR Global Partners. Vietnam’s young, literate population is promising for global businesses seeking low-cost labor to produce electronic goods previously made in China. Low inflation, rising urbanization rates and a banking crisis fading in the rearview mirror also contribute to the country’s impressive growth and ability to attract FDI.

In addition to opening up the Vietnamese market, TPP would encourage Vietnam to pursue economic reforms such as privatization, greater openness in monetary policy and reduced red tape for exporters, says Arthur Lau, co-head of emerging-markets fixed income and head of Asia ex-Japan fixed income at PineBridge Investments. “I think they need to do a lot more in terms of communicating with the international investor; monetary policy is not transparent,” says Lau. “TPP is just one of the many recent positive catalysts. It’s not the one that can resolve everything.”

A TPP failure would be a negative shock and cause a sell-off in the Vietnamese market, says Wilson, but it shouldn’t derail the economy. “Vietnam is going to continue chugging along,” he says. “FDI has always been a key part of their economy. They need that money. They can’t survive without it.”

If TPP isn’t ratified by the U.S., Vietnam still has the benefit of several other trade pacts, including six free-trade agreements with various members of the Association of Southeast Asian Nations as well as individual deals with Chile, Japan and South Korea. A bilateral trade and investment partnership with the European Union has been agreed on and awaits resolution. A customs union with Russia, Belarus and Kazakhstan has been signed but is not yet in effect.

China remains the country’s largest trading partner. “We have a $30 billion deficit with China, but that deficit is more than offset by what we export to the U.S. and to Europe,” says Khanh Vu, investment director at VinaCapital, Vietnam’s largest asset manager. A 2,000-mile coastline and improving infrastructure support Vietnam’s ability to trade worldwide.

China also poses a big geopolitical risk. Beijing is asserting its claim to the South China Sea (or the East Sea, depending on who’s talking) by building artificial islands in the waters offshore Vietnam. Strongly disputing that claim, the governments of Vietnam and the Philippines won a victory in July when an international tribunal in the Hague rejected China’s claims. But analysts don’t see China giving up any time soon. “They want to control those shipping lanes,” Wilson says.