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Foreign Firms Eye Investment in Post-TPP Vietnam

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In anticipation of the competitive advantages it will likely gain as a result of the conclusion of the Trans-Pacific Partnership (TPP) negotiations, Vietnam is fast becoming an attractive destination for foreign investment.

Vietnam stands to gain significantly from the TPP’s considerable plans for tariff and duty reduction. Most experts forecast that Vietnam’s garment export industry is soon to balloon in growth, especially following the conclusion of the TPP which is expected to conclude in the proximate future. Vietnam has been a central seat of controversy for nations embroiled in TPP negotiations, especially regarding the “yarn forward rule” of origin. The U.S.-proposed rule stipulates that any garment must be made of either fabric or yarn supplied by the U.S. or any signatory TPP nations to be eligible for duty free benefits when shipped back to the U.S. For obvious reasons, many importers have strenuously objected to the rule. Conversely, many American textile producers declaim that it is absolutely necessary for them to remain competitive in the future.

Foreign firms have been queuing up to position themselves within Vietnam in preparation for a post-TPP business climate. According to Saigon Online, the Jiangsu Yulun Textile Group of China just received a license to build a $68 million textile plant near Hanoi. Also, Sheico, a Taiwanese corporation, has announced plans to construct $50 million factory for the manufacturing of apparel. And China-based Shenzou International, which produced athletic apparel for brands like Nike and Adidas, just pledged $140 million to build a massive factory in Ho Chi Minh City. Footwear promises to be a huge part of Vietnam’s economy. According to the Vietnam Leather and Footwear Association (LEFASO), footwear exports totaled $8.4 billion in 2013, a 15 percent improvement in comparison to 2012. The U.S. is the primary importer of Vietnamese footwear, taking in $2.62 billion worth of shoes and sneakers. With respect to both leather and footwear, the U.S. accounts for 33.6% of Vietnam’s exports.

The textile and garment industries are central to Vietnam’s economy. Last year, its more than 4,000 companies earned in excess of $20 billion, accounting for about 15 percent of its GDP. In 2013, it exported more than $700 million worth of the goods, according to the Vinatex.

In addition to the TPP, Vietnam is also in the process of negotiating a sweeping free trade agreement with the European Union (E.U.) which will radically usher in market liberalization, eliminating tariffs on more than 90 percent of its goods and reducing high duties on its imports. The E.U. is Vietnam’s largest export market and second largest trading partner. Vietnam is the E.U.’s fifth largest trading partner, reaching $30 billion in bilateral trade in 2012.

Vietnam’s exports jumped an impressive 15.4%, defying the global trend toward slackening demand. According to the HSBC study, the garment and textile sectors are disproportionately responsible for that growth. Vietnam’s exports are expected to leap another 20 percent in 2014 on the strength of surging demand from both the U.S. and the E.U., which account for 18 percent and 14 percent of its exports, respectively.

As Western demand continues to balloon, especially with respect to the garment industry, orders will increase while inventories shrivel, making it likely that output will be forced to rise to meet the new levels of demand. The HSBC Purchasing Managers’ Index, an important bellwether of future growth, demonstrated a considerable increase in Vietnam’s manufacturing output for the month of December, achieving the highest level since April of 2011.

Currently, very few of Vietnam’s garment manufacturers are financially well-heeled enough to invest heavily in their own yarn and textile facilities so, at least in the short-term, the bulk of the country’s capital expansion will be fueled by foreign firms.

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