VIETNAM JOINS TRANS-PACIFIC PARTNERSHIP (TPP): CHALLENGES AND OPPORTUNITIES FOR AGRICULTURAL PRODUCTION

 

Oct 6 2015 in Atlanta – The United States, Trans – Pacific Partnership (TPP) was totally reached after 5 years of negotiation. This was considered as the largest regional free trade deal . A dozen countries included Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam negotiated the TPP from Mar 2010. Core negotiating issues included intellectual property rights, foreign investment law, environmental and labor standards, procurement policies, competition policies and state-owned enterprises, trade remedies. Once completed, the TPP will cover 40% of the global economy and add to the global GDP by approximately $ 300 billion per year. If the previous trade agreements often focus on reducing taxes, the TPP is seen as a comprehensive trade agreement, aiming to establish a high-standard trade regulation, addressing problems of the global economy in the 21st century, thereby boosting the economic growth, creating more high-salary jobs, promoting breakthroughs, productivity and competitiveness and improving the quality of life, reducing poverty, and increasing transparency, governance and environmental protection.

This article will analyze the opportunities and challenges for the agricultural sector and make some policy recommendations when Vietnam joined the TPP agreement.

 

Trade issues between Vietnam and TPP partnership countries

TPP countries are the important export markets of Vietnam in recent years. There was an increasing trend in the export values of major agricultural commodities to TPP market in the period 2009-2014, except for rice. The two highest export values of Vietnam are seafood and wood products with export growth of 14.7% and 17.6%, respectively. Pepper and vegetable are the two commodities that have the average growth rate of export value of 40.8% and 22.9% respectively to this market as compared to the remaining items during the period 2009-2014. Meanwhile, there was a decreasing trend in rice export during this period, the average growth rate in the period reached to -2.6%.

Regarding the commodity structure, it can be seen that the wood and wood products, seafood, cashew nuts are the main agricultural exports to the TPP. Absolute export value of wood and seafood also sharply increased in the period 2009-2014.

Figure 1. Export proportion of several major agricultural products over total export of Vietnam to TPP

Source: Calculated according to data of General Department of Customs

 

Figure 2. Export value of key commodities to TPP markets, 2009-2014 (Unit: mil. USD)

Source: Calculated according to data of General Department of Customs

For the imported agricultural products, except soybean, livestock products and animal feeds remained stable.

Figure 3. Import value of key agricultural products of Vietnam to the TPP countries,  2009-2014 (Unit: mil. USD)

 

Source: Calculated according to data of General Department of Customs 

Table 1. Import tariff of exported agricultural products in Vietnam

Source: CAP’s synthesis of trade agreements

 Table 2. Import tariff of imported agricultural products in Vietnam

Source: CAP’s synthesis of trade agreements

Opportunities for agricultural trades

Export: Opportunities for agricultural export are not really high because in fact, most of Vietnam's agricultural products export markets are experiencing tax rate nearly to 0.  Therefore, either the TPP or no agreement is not important. Vietnam's agricultural products will be received as much benefit as possible as follows: seafood, wood products, rice, fruits and vegetables. For rice, Vietnam has a great opportunity if we can export rice to Japan in the case of the tax rate decreasing from 367% to 0%. But this opportunity is very small since the rice is considered as one the most political significance in Japan. Meanwhile, Malaysia is a great potential market. Secondly, vegetables and fruits are also potential commodities to export to the United States, Canada and Mexico. Thirdly, for wood, vegetable and fruit sector, the impact is unclear as exports and imports have been affected by TPP.

Regarding the potential markets, Mexico is considered as a potential export market for many agricultural products since export and import tariffs in this country are relatively high. However, due to the geographic condition of this country close to the US and Canada as well as other TPP countries, trade opportunities between Vietnam and Mexico are not tremendous.

Import: The most challenged sectors when Vietnam joins the TPP are livestock products because these products have to compete with products from other TPP countries in the domestic market from the US and Canada (pork and chicken), Australia and New Zealand (beef, dairy products). Meanwhile, farmers may not be beneficial as much as imported animal feeds are already receiving relatively low import tax at about 5%.

Opportunities for foreign direct investment, science and technology

Another great opportunity is trans-national investment along with science and technology and improvement of labor skills. Once completed TPP, some countries do not have the advantage of agriculture, the reduction of agricultural protection barriers may be created movement of investment into Vietnam. When foreign investor is existed, in addition to create more jobs, increase income, the most important thing is that Vietnam’s agricultural sector will absorb new science and technology, transform the traditional and ineffective methods. For example, Japanese investors will invest to produce high-quality rice, ensuring food safety to export to Japan. It is  very good conditions for us to integrate into global value chains, gradually increase the export amount of agricultural products. If there are appropriate investments, Vietnam’s agricultural sector may have significant breakthroughs if Vietnam can take advantages of the strengths on “golden population structure”. Further studies are needed to make a deep quantitative assessment on the impact of this investment.

Technical barriers and food safety

When Vietnam joins the TPP, the commercial opportunity will be opened when export and import tariff of commodities enjoy a nearly zero tax rate, however, this scope is not considerable. One of the big challenges for Vietnam's agricultural exports when the TPP signed is that the participating countries can reduce their tax rates but they will increase non-tariff barriers in terms of more stringent pathway. In order to enter and dominate the markets of high value and large scale such as the US and Japan, Vietnam’s products with competitive advantage to export such as rice, coffee, pepper, cashew, seafood, etc. should pass through the technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS) for food safety  to dominate these markets. Otherwise, though import tariffs of these markets is 0%, Vietnam's agricultural products cannot approach. In addition, other provisions of TPP on the copyright protection (seeds, plant protection chemicals, fertilizers (agrochemicals), veterinary medicine), labor issues, traceability,... are also very strict.  Vietnam is still limited in these contents. Therefore, if Vietnam fails to overcome these weaknesses, it would be very difficult for both farmers and exporters to enter international markets.

Table 3. Number of using SPS and TBT in TPP countries on 01/06/2015

http://i-tip.wto.org/goods/Forms/TableView.aspx?mode=modify

Difficulties of livestock sector

Actually, Vietnam ‘s animal feeds are extensively dependent on the external market due to the fact that domestic production of animal feeds is not enough to meet demand and not proactive in inputs. Meanwhile, demand of animal feeds of livestock sector in Vietnam is tended to increase. Vietnam‘s feed materials mainly import from raw materials to the additives. Animal feeds use two main groups including protein-rich ingredients such as dry oil, bone powder, soybean, fish powder, and energetic-rich ingredients such as corn, wheat, tapioca, etc. Meanwhile, most agricultural commodities cannot meet domestic demand. In addition, the price of Vietnam ‘s corn and soybean is much higher compared to other countries like the US, Argentina, China, Mexico…Typically, in the past 4 years (2011-2014), the average corn price and soybean price in Vietnam is 21% and over 60% higher than average corn price and soybean price in the US market, respectively.  Consequently, the import of raw materials for animal feed production in Vietnam is unavoidable. According to the latest figures by the General Department of Customs, only in 2014, Vietnam spent over 3 billion USD on imported animal feeds. In the first 3 months of 2015, according to the Department of Livestock, Vietnam imported 1.7 million tons of maize with import turnover of 401 million USD, and 857 thousand tons of dry soybean equivalent to 432 million USD.

 Source: USA: IMF, Vietnam: Agroinfo-IPSARD.

 Source: USA: IMF, Vietnam: Agroinfo-IPSARD.

Demand for imported animal feed in Vietnam in recent years gradually increases. The scale of farming household in recent years has also gradually increased, so using materials available from by-products is inappropriate to meet the demand. Demand for industrial animal feed and blending material thus increases while supply is insufficient to meet demand. Thus import of raw materials for feed production is understandable. In recent years, Vietnam imported animal feed and ingredients to more than $ 3 billion[1]. According to projection of Ministry of Industry and Trade, in the next two years the growth rate of imported feed is 20 % annually on average[2].

Source: Department of Livestock

However, according to a survey of Center for Agricultural Policy - IPSARD, feed is just one of the factors affecting the level of competitiveness of the livestock sector. Other factors such as breeding techniques (depending on the habits and practices of animal husbandry of each region); infrastructure for livestock pens (factors relevant to the epidemic prevention), good breed and good feed have significantly determined the competitiveness of livestock products. Hence, we need to consider the overall number of factors when evaluating the causes of poor competitiveness of the livestock sector. E.g.: Currently Vietnam is weak compared with other countries in techniques due to traditional husbandry practices by small scale and scattered locations,  low-graded infrastructure for livestock pens, the breed quality is not food and dependent on import of parent breeds.

 The consequences of the lack of competitiveness in livestock sector is shown during 2009-2014 period when the share of imports of meat from TPP bloc taking high proportion of the total import value of Vietnam . In particular, the share of imported chicken and pork from TPP respectively accounted 66.3 % and 65.9 % of the total import value of each commodity. The proportion of imported beef from TPP took 46.1 % of the total import value of Vietnam beef. The proportion of imported dry soybean from TPP accounted for 8.7% of the total value of imported dry soybean. 

Policy Implications

Trade development

To take advantage of the opportunities and overcome the constraints, we need to improve the quality, effectiveness and to follow the entire chain -driven by restructuring of the agricultural sector. It's the story of reorganizing production linkages between the parties, increasing level of processing, increasing levels of product quality management as well as rebranding. Doing these things will help to increase the quality of products as well as adding new value to be divided among parties in the value chain. Only after that, new stakeholders have motivation to raise awareness to do their best in every stage, to ensure quality and promote export.

To do so, we must set the standard for parties or reorganizing farmers.  For example, in the field of export of rice, we can impose conditions on firms which want to export rice to ensure as a model of joint production with farmers, ensuring input supply and provision of funds to the farmers do proper cultivation process with full-time supervision. Besides, if the company meets the conditions of warehouse, processing plants, government may provide incentives for firms to temporarily store or preferential land surface. This is how firms are motivated to change. The development perspective is government only support in initial stage, and then firms which make huge investment will lead commodity towards market, farmers follow and both parties will benefit.

For the state of fragmented land holdings as at present, we need move agricultural labor to non-agricultural sector. The rest then can be organized into farmers' groups and cooperatives. Government can consider to support and remake fields, irrigation investment, particularly investment in machinery so they can standardize cultivation process.

Besides, the government should implement the commitments to help the investment climate and government spending more transparent, to create opportunities for foreign direct investment (FDI). Vietnam also needs a strategy to promote cooperation with countries that do not have advantages in agriculture and under pressure to reduce protectionism as Japan. Besides, we can also find out what market segments can combine strengths of the country. E.g. Australian firms invest in Vietnam to use Vietnam employers and raw materials from Australia for export to third countries.

 Removing obstacles in livestock husbandry

First of all, the livestock sector must build a vision based on comparative advantages, competitive advantages and market potential. We should clarify some major orientations: egg, focusing on the domestic market or export? Whether livestock industry should be towards export key or simply a blanket to cover negative impacts, avoiding causing too big shock for the production of the farmers in the process of agricultural restructuring? On this basis, we can build strategic planning for specific product, to form the key product for breakthrough, to form high quality value chain which is sustainable and highly competitive.

Based on the vision and the strategy of the livestock industry, feed industry will have the appropriate adjustment. Among them, the most important is the study to determine the material and food processing technologies suited to maximize the advantage of Vietnam's agricultural, e.g. increased use of scrap parts from seafood processing to replace fish powder from imports...; Since then, we can build regional planning and process raw agricultural products into materials used directly for the production of animal feed. For important inputs which is irreplaceable and Vietnam do not have strength like soybeans, we need to form intimate relationships and reduce the cost of imports from foreign producers to have cheapest materials possible.

Below are some specific measurements:

No	Policy	Specific measurements
1	Science and technology	· Study on the structure and processing technologies for feed which is suitable to substitute ingredients which Vietnam doesn’t have strengths and take advantage of Vietnam's agricultural products which have advantages · Promote the application of genetically modified maize · A combination of firms of producing animal feed in the country with firms of seafood processing to reduce the importation of fish powder
2	Organizing of production	· Zoning the large production areas concentrated to form highly-connected chain of key livestock products
3	Support for domestic firms	· Strict controls on the transfer price of the FDI firms · Added support for domestic manufacturing enterprises, such as supporting in registration procedures for new firms. · Support the development of local enterprises in the model of a closed chain of some successful FDI enterprises as CP group
4	Market management	· Check and strict sanctions against the feed product which is not registered

Attracting and improving investment efficiency

In fact, regarding the incentives, the Government issued the Decree No. 210/2013 / ND-CP on policies to encourage enterprises to invest in agriculture and rural development. Ministry of Planning and Investment also issued the Circular No.05/2014 / TT-BKH on guidance of the implementation of this Decree. However, the progress of guidance is still very slow; the accessibility of businesses incentives is poor.

The most important thing is that the State must have clear commitment, transparency in strategic orientations and long-term policies for enterprises to invest confidently. There should be no discrimination between domestic enterprises and foreign enterprises. The main objective is to develop enterprises for openly, beneficial to the people and the country. The development perspective must rely on following major points. Firstly, there is no discriminatory policy between enterprises; bias on policy incentives for foreign enterprises should be eliminated. Secondly, lead enterprises should be developed to boost the formation of globally agricultural value chains. The problem is the need to take advantages of TPP to adjust strategy in FDI into Vietnam reasonably in order to focus on absolute advantage of Vietnam's labor force – “golden population structure”

The State is advised to consider the enterprise as the key point to formulate the value chain with higher added value and sustainability. The policies to attract enterprises may include:

v Firstly, identify the Vietnam's key agricultural commodities with high value, environmental sustainability based on the market potential in the future and based on comparative advantage and competitive advantage of Vietnam.

v Secondly, on the basis of key agricultural commodities, launch planning of agricultural production area with modern technology and based on advantages and characteristics of each region. In these regions, the commodity chains with high value will be self-contained including intensive production areas and industrial zones associated with nuclear services. All stages from production, processing and packaging will be implemented in this production area. In order to do so, overall planning, layout arrangement should be carried out to match with the strategic development of other economic sectors. Enterprises operating in the agricultural production areas with modern technology should be received the especially preferential regime, particularly, land resources, capital resources, infrastructure and risk sharing.

v Evaluate enterprise capacity to participate in these agricultural planning areas to eliminate enterprises do not have the enough capacity to participate in order to reduce potential risks.

v Enterprises engaged in these agricultural production areas should be supported as follows:

o   Land resources: (i) facilitate enterprises to rent public land area (e.g. ​​forestry land in cases of ineffective usage in long term), (ii) local governments represent to support and facilitate enterprises to rent land from local people, (iii) promote other forms of land support as farmers contributing to land to be shareholders in the company

o   Infrastructure: Local authorities should have appropriate support of basic infrastructure such as electricity, water, road system,... according to public-private partnership (PPP)     

o   Capital resources: Reduce the procedures so that enterprises have access to preferential capital resources

o   Risk sharing: Promote agricultural insurance with clear sanctions on binding contract between enterprises and farmers