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Mar. 10, 2015 - Updated 04:16 UTC

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Vietnam Opens the Door

Yuko Fukushima

Jan. 12, 2016

2016 is shaping up to be a banner year for trade in the Asia Pacific. The ASEAN Economic Community, or AEC, got the green light in December. South East Asian countries will abolish all tariffs among the 10 member states by 2018. And last October, 12 countries including Japan and the US came to a broad agreement on the Trans Pacific Partnership, or TPP. Member countries are aiming to sign the deal in February, forming the world's largest trade block.

All countries in the region will be affected by these free trade agreements, but perhaps none more than Vietnam.

Vietnam is an emerging economy that's still playing catch up. It spent decades recovering from war and revolution, while neighbors like Thailand and Malaysia were busy building factories, roads and ports.

Supporters of the TPP and AEC say Vietnam's time has come. Lower tariffs will open the door to more investment and business. But not all industries are sharing in the excitement, as I found out on a recent visit.

Vietnam shifted into the fast lane more than a decade ago. Fueled by exports and foreign investment, annual growth has averaged 6%. It's one of the best performing economies in the region. A new highway linking the capital, Hanoi, with Hai Phong, a major port used by exporters, opened in December. Now people can travel between them in just over an hour. That’s less than half the time it took before the highway was completed.

Construction of roads like this is vital if Vietnam is to take full advantage of the Free Trade Agreements.

No one has more to gain from free trade agreements than the textile and apparel industry. If the TPP goes into effect, companies will be able to export cheaply to the US, one of the world’s biggest clothing markets.

China -- the main supplier of garments to the US -- is not a member of the TPP. That gives Vietnam a critical advantage as a production base. Its lower labor costs are also attracting foreign manufacturers.

One example is Toray, a major supplier of the Uniqlo clothing chain. Executives said in November they will expand their production base in Vietnam. US apparel major Haines has announced similar plans.

Japanese garment maker Toa Boshoku is one of the multinationals gearing up for the TPP. The company's Vietnam factory used to be a limited operation, making basic fabrics.

That all changed in November. The plant is now a fully integrated garment center, starting with yarn production. That’s because in order to export clothes to the US under the TPP, the clothes have to be made from yarn in the country of origin.

The company says that by spinning, dying, and producing yarn in Vietnam, it was able to shorten delivery time and increase productivity. It says it's now ready for the TPP.

Vietnam's auto industry is another sector preparing for free trade, but the adjustment could be painful.

Right now, city roads are clogged with motorbikes. But incomes are rising, and so are aspirations. Many in this country of 90 million people are ready for an upgrade in their mode of transport.

Japan’s Mitsubishi Motors has been operating its factory in Vietnam for 20 years. Most cars on the road are assembled in the country. That’s because imported cars are hit with a 40% tariff.

But foreign car makers are now at a crossroads. Under the AEC, ASEAN members will abolish all tariffs by 2018, including those on cars. That means it may work out cheaper to import vehicles than assemble them in Vietnam.

The government has set the auto industry as one of its main pillars for economic growth. But with time running out, officials have yet to announce any measures to support local car makers.

Foreign automakers are warning they may have to shut down their assembly plants.

"The current government’s measures are not in line with the country’s long-term policy for economic growth. The auto industry as a whole is hoping the government will soon come up with a strategy for automakers to stay in the country."
Kazuhiro Yamana / General Director, Vina Star Motors

Shutting down plants will affect the entire industry supply chain. This local company has been supplying tools to automakers.

"Our company knows very well that competition will be become very fierce in the next few years. So we need to improve our skills."
Nguyen Ngoc Chung / General Director, Export Mechanical Tool

Hoping to drum up alternative business, Chung's company is now developing products for export -- a new field for Vietnam's parts makers.

Their first offering for the free trade era is an engine part made with the help of foreign engineers.

"I am really happy we are able to ship this auto part. It was really difficult to develop. I would like to expand our company’s line up in the future."
Nguyen Ngoc Chung / General Director, Export Mechanical Tool


Yuko Fukushima joins Newsroom Tokyo anchors Sho Beppu and Aki Shibuya in the studio.

Beppu: What's going to happen to the auto industry and the local suppliers we just saw in your report?

Fukushima: Automakers say it will depend on what the government does. As I said in the report, the Vietnamese government wants to grow the auto industry. Manufacturing vehicles is already one of the world's biggest businesses in terms of revenue. There are other advantages. A single car is made of 20- to 30-thousand spare parts, so it provides jobs for thousands of smaller businesses. Also, some of those parts require advanced technologies. Once they're acquired, they can be applied to other fields. That's why many countries, including Japan and Thailand, have been keen to protect their auto industry, especially during the initial stages.

Shibuya: So why isn't the Vietnamese government moving in the same direction?

Fukushima: They're running out of time. The ASEAN Economic Community calls for the abolition of all tariffs in just 2 years, by 2018. Japan and Thailand didn't have to face a free-trade environment when their car industries were growing. While in Vietnam, we filed repeated requests for an interview with government officials, but the response was that they weren't in a position to answer any questions. This shows that the government and automakers are at a critical stage in their negotiations. But one thing is for sure. The government needs to define specific policies right away if it wants the country's auto industry to have a future.

Beppu: The ASEAN Economic Community was launched this year. What will be its impact on ASEAN?

Fukushima: ASEAN countries are aiming to establish a single market for goods, services, capital and labor. That's what the AEC is all about. But we won't see any big changes from Day 1. One reason is that ASEAN doesn't have a common currency like the euro, and the model of economic integration is different from the European Union. Eliminating trade barriers within ASEAN will allow multinational companies there to procure parts or services from any country in the region, and this will allow ASEAN to compete as a single bloc against heavyweights like China or India.

Shibuya: Yuko, you've been covering Vietnam for a while. What's your perspective on the economy there?

Fukushima: I was in the capital Hanoi last summer, and when I went back for this report I could see some real changes. There were more cars are on the road, and big infrastructure like bridges and highways in full bloom. More than anything, the people I met had so much energy and vitality, whether in factories, shops or on the street. You can tell people are optimistic about the future of their economy.