ASEAN’s Winners and Losers under TPP

By: Dezan Shira & Associates
Editor: Fernando Vidaurri

Earlier this month, 12 countries in the Asia Pacific region signed the Trans-Pacific Partnership (TPP) which ranks as the biggest trade agreement in history – signatory countries account for 40% of total global output. While the treaty still must be ratified by each and every party to it, its initial passage represents a monumental moment in the integration of economies on each side of the Pacific.

Four countries in the ASEAN region are among the signatories of the agreement; Brunei, Malaysia, Singapore and Vietnam, with additional member countries interested in joining the free trade area in the future. In this article we will look at who are the biggest beneficiaries in the region, the effects the treaty will have on intra-regional trade, as well as the impact on investment opportunities in non-TPP signatory ASEAN states because of this landmark trade deal.

Singapore

Businesses in Singapore have welcomed the agreement, as they see it creating new opportunities for investment and boosting trade. Singapore already has FTA with almost every other TTP signatory, with the notable exceptions of Mexico and Canada. However, the TPP will extend tariff reductions to areas previously not to cover areas that had not been previously covered by the TPP covered by bilateral arrangements.

One such way the TPP will expand upon the city state’s existing FTA network is through its provisions allowing the country to participate in the bidding process of government procurement projects for TPP member states. Still, it is important to note that there could be opposition to Singaporean involvement in such projects in Southeast Asia, a region susceptible to suspicions of undue foreign intervention in public sector works.

Among regional watchers, there is general agreement that Singapore’s gains from the agreement will be more strategic than a short term economic payoff. While many companies see opportunities through having better access to Latin American markets such as Chile or Mexico, Singapore’s GDP is still only expected to increase by 1.4 percent per annum over the next decade. However, the general opinion is that Singapore gains from just being at the negotiating table, as free trade is crucial for the country and the TPP is seen as way for ASEAN trade flows to heat up as China cools down.

Vietnam

Vietnam is being touted by many as the overall “winner” of the TPP agreement. The opening of US and Japanese markets presents enormous opportunities for the country’s booming garment and apparel industry, which has the potential to act as a major magnet for FDI into the economy. Most of this investment would likely be diverted from other countries, such as China and Cambodia.

The fishing industry will also benefit from the elimination of import taxes on shrimp, squid and tuna. In fact, with 18,000 tariffs being slashed across the 12 TPP participating countries, exports are expected to increase by 38 percent within a decade. The increased exports coming out of an overall low wage economy will boost the country’s GDP by 11 percent, or US $36 billion, as more factories move to the country.

Meanwhile, the elimination of import taxes on pharmaceutical products could hurt local players. The current average import tax stands at 25 percent, and eliminating them would lead to stiffer competition between domestic and foreign pharmaceutical players. While this could hurt local players, it could also benefit local consumers.  The agriculture and livestock industries could also struggle to compete against the TPP’s industry behemoths, such as the United States or Canada.

However, sentiment among investors has been highly positive. After the signing of the agreement was made, Vietnam’s benchmark index increased by 3 percent, and foreign investors made moves to invest in logistics, industrial parks, fisheries and garments. For the government it is crucail that the agreement is ratified – not only will it increase exports, but it will also ease the country’s dependence on trade with China at a time of slowing growth and brewing political tensions.

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Malaysia

Authorities in Malaysia have cautiously welcomed the TPP – it is believed that the agreement will provide some gains and some losses. Moreover, not all of the details of the agreement have been made public yet. Among the industries that stand to benefit from the TPP are electronics, chemical products, palm oil, and rubber exporters. On the other hand, the TPP may hurt state-owned enterprises which benefit from weak competition for government contracts. This legacy has the potential to create opposition to the agreement both within the business community and interest groups within the government – tension which the country can ill afford given ongoing political protests.

However, according to Credit Suisse, a global bank, Malaysia will become the second largest beneficiary of the treaty after Vietnam. Malaysia could see an additional five percent increase in GDP by 2025 through being part of the TPP. As a highly export-oriented economy, where goods and services account for 80 percent of GDP, Malaysia stands to gain much from lower tariffs and increased access to larger markets. This preferential access to partner markets could present the country with a competitive advantage over those ASEAN members not party to the TPP.

Thailand

Thailand is one of the countries that could see its exports affected if it remains excluded from the TPP. A new study by the Trade Negotiations Department within the Commerce Ministry concluded that the country should join the pact, while carefully considering the areas in which the country needs to improve its competitiveness. While the treaty has not yet been ratified, Thailand in fact already has incentives to join given that its signatories include Thailand’s main competitors in the region. This incentive is compounded by the given that the country has seen its slow growth trail other countries in the region.

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The ministry has also commissioned a report into the implications of joining the TPP. If Thailand chooses to take part of the TPP, it is estimated it would take two years for its application to be approved. This timeframe is seen as enough time for Thailand to prepare and improve certain areas that may not be up to par with treaty requirement.

Some of the areas in which the country could see benefits are trade in goods, increased FDI and improvements in e-commerce and IP rights. While there will also be challenges and more improvement is needed in sectors such as agriculture, the consensus is that the country stands to lose more by staying out of the TPP than by joining the treaty.

Cambodia

One of the biggest losers in the region would likely be Cambodia. Industry insiders in the country worry that the TPP would mean more businesses will choose to invest in Vietnam over Cambodia, since the investing in the former would give them access to the TPP market. The country has seen trade with the US decline in the apparel industry, due to rising labor costs and logistical deficiencies. The decrease in industry tariffs brought on by the TPP could serve as another blow.

Another area where the Cambodian economy would be affected would be rice exports. Through at the moment Cambodian exports only represent 2 to 3 of the US market; business leaders recognize increased ease of Vietnamese access to the US market would limit Cambodian potential for growth. The combination of the TPP and Vietnam’s recent FTA announced with Europe thus potentially puts its developing economy in a precarious position.

Given these strains the country will now seek to consolidate the preferential trade agreements in already enjoys, and make the most of the benefits to be achieved under the ASEAN Economic Community (AEC) framework. However, despite concerns regarding a decrease in inward FDI, the country still serves as an intriguing frontier market play – a viewpoint which would only become more commonplace should the country make strides to eventually apply for TPP membership.

Further Support from Dezan Shira & Associates

While the TPP is a boon for investment in ASEAN, understanding its complexities and how investors can best take advantage of newly emerged opportunities under it requires professional guidance. Through their 23 years of experience facilitating FDI throughout Asia, the experts at Dezan Shira & Associates and its business intelligence subsidiary Asia Briefing can help your business best adapt to the new playing field brought about by TPP, and identify future risks and opportunities across the region.

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