Vietnam: Assessing RCEP benefits and linkages
- Within ASEAN, Vietnam is likely a key beneficiary of RCEP
- Modest gains from tariffs reduction, while single rules of origin to propel regional integration
- Vietnam remains an attractive FDI destination; RCEP partners are already key FDI investors
- Goods trade integration between Vietnam and RCEP peers is already high, and set to grow further
- China-Vietnam trade ties are flourishing, with key dependencies within the supply chain
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The massive Regional Economic Comprehensive Partnership (RCEP) that has now entered into force for 11 out of 15 member economies is an overall positive, in an environment of continued pandemic uncertainty and lingering US-China tensions. RCEP is set to promote greater regional trade, supply chain integration, and investment, boosting incomes in Asia Pacific over the coming years. We expect Vietnam to be a key beneficiary within ASEAN, beyond the biggest winners in North Asia (China, Japan, and South Korea).
Modest goods tariff reductions for ASEAN
Goods tariff reduction is a key benefit under RCEP, which will see ~90% of the goods traded eventually achieve zero tariffs over a 20-year implementation period. Studies quantifying the impact through a terms of trade gain see a positive impact on RCEP members’ annual incomes by 2030 (ADB: USD245bn; PIIE: USD174bn). Gains are likely to be modest for many ASEAN member economies, given existing bilateral free trade agreements and already very low tariffs for intra-RCEP trade.
Vietnam’s average effectively applied tariffs on intra-RCEP trade are middle of the pack at 1.2%, according to UNCTAD calculations. These compared to much higher levels for South Korea at 4.8% or China at 2.8%. Nevertheless, Vietnam is among the ASEAN economies likely to benefit somewhat from tariff reduction, given its high trade openness. Vietnam’s gains would be lesser than that experienced by North Asian peers, with Japan not having bilateral agreements with China and South Korea prior to the RCEP.
Single rules of origin to boost supply chains
Under RCEP, the streamlined and single rule of origins for all goods trade across member economies, coupled with simplified customs procedures, will likely advance the efficiency and regionalisation of supply chains, and help boost market access in an already well integrated region. RCEP streamlines differing rules of origins in the different FTAs that ASEAN have with other RCEP partner countries. Products can be traded among RCEP countries with a single certificate of origin and enjoy preferential advantages as long as 40% of value-added are produced in those countries.
This should propel the existing trend of increasing foreign direct investment (FDI) into the region, as investors look to tap on the benefits and use ASEAN as a manufacturing production base. Six ASEAN economies have received increasing FDI inflows over the past couple of years, rivalling that of China. Even though Singapore continues to receive the lion share of FDI inflows, inflows into Vietnam have been trending higher, and have ranked among the top three recipients within ASEAN-6. We think that Vietnam continues to boast multiple advantages to attract foreign investors.
Vietnam-RCEP members trade dynamics
Trade integration between Vietnam and the RCEP members is already high, and should grow tighter as companies tap RCEP benefits. Vietnam consistently imported a significant amount of goods from RCEP partners. In contrast, Vietnam’s export share to RCEP partners while still high at ~40% has been declining over the years. US, which is Vietnam’s single largest trading partner currently, has taken RCEP’s market share, rising to almost 30% of Vietnam’s total exports.
Untangling China’s importance
China has been growing in importance for the region, which is also the case for Vietnam, when we look into its goods trade breakdown with RCEP members. Vietnam has been shipping a rising share of Chinese imports over the years, rising to a high of 33% of the total in 2021, while that of South Korea, the rest of ASEAN, and Japan have fallen. Vietnam imports several key products from China, such as ‘textile, garment, and footwear’, electronics, and ‘machinery and transport equipment’. China is somewhat dependent on Vietnam in two key product areas: ‘textile, garment, and footwear’ and electronics.
With the RCEP agreement, Vietnamese products made from Chinese inputs can potentially increase trade. For instance, Vietnamese ‘textile, garment, and footwear’ made from Chinese materials can enjoy favourable tariffs when shipped to Japan. Electronics is another area, where China and emerging players like Vietnam are set to benefit from RCEP’s trade facilitation, given an increasingly integrated regional electronics supply chain, seen from their trade dynamics.
Opportunities and challenges for local firms
Vietnamese domestic firms’ participation in RCEP can offer opportunities to raise their exports and be more active in regional value chains, if they can gain access to cheaper inputs and adapt to increased competition.
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