This week, Vietnamese leaders welcomed a business delegation led by U.S. Secretary of Commerce Penny Pritzker. Vietnam is a negotiating partner in the Trans-Pacific Partnership (TPP) trade talks, and meetings with the Vietnamese president and prime minister focused on the progress of negotiations that have dragged on for six years now.
As negotiations continue on a range of issues—including state-owned enterprises, intellectual property, and even catfish—both countries need to focus on creating a high-standards agreement that actually liberalizes trade by reducing barriers and increasing market access.
One way a strong TPP agreement can help Vietnam is by increasing labor productivity. Currently, Vietnam ranks second to last among the TPP nations in trade freedom, according the Index of Economic Freedom, co-published by The Heritage Foundation and The Wall Street Journal. High tariff and non-tariff barriers, along with presence of a large state sector, have helped shield Vietnamese industries from foreign competition, allowing them to get by with less productive workers despite rapid catch-up growth that has averaged 7 percent of gross domestic product (GDP) since 1990.
This is particularly pronounced when compared to regional peers. Labor productivity growth in the manufacturing sector is low. This is significant because manufacturing makes up a large portion of the traded economy. According to research from Singapore National University, Vietnam’s labor productivity trailed both Indonesia and China in 2000, which was understandable at the time, since Vietnam’s GDP per capita was well below that of those two countries. But between 2000 and 2008, labor productivity growth increased at a slower rate than both Indonesia and China despite a GDP growth rate that far surpassed Indonesia’s and was competitive with China’s.
This low productivity, coupled with high tariffs, has limited Vietnam’s participation in the increasingly complex East Asian value chains, which feature high degrees of production sharing and large trade volume of intermediate goods. According to MIT and Harvard University, economic complexity (which measures “how diversified and complex a country’s export basket is”) in Vietnam is substantially lower than most of the other countries that share value chains along the South China Sea, including Thailand, Indonesia, China, the Philippines, and Malaysia. As a result, Vietnam exports products such as apparel, which are much simpler and don’t come with the high value-added and wages that more competitive regional peers receive.
A first step to increasing Vietnam’s regional competitiveness and integrating into markets should be lowering tariffs and increasing market access, a goal that can be achieved with a liberalizing TPP agreement. Research from the University of Adelaide shows that a 10 percent cut in Vietnam’s tariff rates could increase productivity by 0.2 percent. Second, Vietnam should further integrate into regional production networks by upgrading investment rules and streamlining customs procedures and business start-up regulations.
TPP’s value to Vietnam will be measured by the agreement’s ability to liberalize markets. If it can help enhance competitiveness and increase labor productivity, then it will truly be the high-standards agreement negotiators are promising.