The TPP’s announced aim is to promote trade cooperation among its eight disparate members (Brunei, Singapore, Peru, Chile, the US, Vietnam, New Zealand and Australia).

Economists point out the majority of so-called Free Trade Agreements (FTAs) are in fact PTAs as they give tariff preferences to participating countries to the exclusion of other countries. There are potential costs associated with diverting trade away from non-participating countries towards the countries with preferential tariff arrangements. Furthermore, Vietnam is in the assembly and simple component manufacturing stages of the East Asian production networks. These tariff arrangements could be detrimental, as often it is not possible within these networks to determine where a product or component is made.  This ‘establishment of origin’, so as to satisfy the ‘rules of origin’, is generally stipulated in such preferential trade agreements. Accordingly, there is a risk such arrangements may prevent participation in cross-national supply chain systems.

There can be little doubt that PTAs involve trade diversion. Vietnam is a signatory to the IT Agreement under the WTO and, given this agreement covers some 60 per cent of the trade in parts and components in East Asia, the impact of PTAs on Vietnam may not be significant as concerns these networks. However, there are other sectors in which production networks are important to Vietnam, including garments, footwear, furniture, and automotive parts. A PTA between Vietnam and the EU could well mean that these industries would need to move to export processing zones where producers might be protected from the rules of origin problem.

Trade diversion costs notwithstanding, Vietnam is likely to conclude a PTA with the EU for the following reasons:-

Firstly, it would mean that the EU confers ‘market economy’ status to Vietnam. Vietnam joined the WTO in 2007 under the status of a ‘non-market economy’. Subsequently, other members of ASEAN, as well as Australia, New Zealand and India accorded Vietnam market economy status, yet the EU, US and Japan still maintain that Vietnam is a non-market economy. A PTA between the EU and Vietnam would reverse that situation, at least as far as the EU is concerned and could strengthen Vietnam’s case vis-a-vis the US and Japan. In practice, this would mean that anti-dumping suits become more difficult. With market economy status, only the production costs within Vietnam can be considered in anti-dumping cases, whereas under a non-market economy status, Vietnam’s production costs could be compared unfavourably with those of an arbitrarily-chosen third country. In the more protectionist post-GFC era, where anti-dumping suits against Vietnam have tripled in the past year, the benefits of being awarded ‘market economy’ status could be very real.

Secondly, the PTA talks with the EU include investment agreements which would give better protection to foreign investors, improve dispute resolutions and court procedures, and facilitate investment in general. All these are likely to promote foreign direct investment inflows and have a consequently positive effect on economic growth. These highly significant structural changes would potentially meet fewer domestic political difficulties when presented as part of an EU-PTA.

Finally, a continuing consideration is the perception of Vietnam as a small country that needs to consider the balance of its strategic interests between the EU, US, China and Japan.

So long as the PTA talks are seen to be more than just trade agreements, Vietnam is likely to add to the proliferation of this particular ‘noodle bowl‘ in the region.