Vietnam looks set to become the biggest beneficiary of the US-led Trans-Pacific Partnership trade deal out of the four Southeast Asian participants, the other three being Brunei, Malaysia and Singapore.

The 12-country pact — covering about 40 per cent of the world’s economy — will grant Vietnamese manufacturers tariff-free access to several large markets. It should also force Vietnam’s communist government to speed up the restructuring of its domestic economy and push ahead with the difficult task of privatising its influential state-owned enterprises.

Vietnam’s new leadership remains committed to the pact following the national party congress in January and it is expected to ratify the agreement this year, although the deal also requires ratification by the US Congress, where it faces a tricky passage.

Once ratified, the TPP will grant Vietnamese companies tariff-free access to the US, with which it does not presently have a free trade deal, along with other large markets such as Japan and Australia.

This will boost demand for Vietnamese exports and create a wealth of new jobs at home. The sectors that stand to benefit the most are apparel, footwear and textiles, which together accounted for 26 per cent of Vietnamese exports in 2014.

These industries have already grown rapidly over recent years.

At present, US import tariffs on Vietnamese-made footwear can be as high as 48 per cent, while certain items of clothing can face tariffs of 20 per cent, according to the World Trade Organisation.

The TPP will cut these tariffs to zero or close to zero, depending on the goods. This promises to accelerate an already steady increase in Vietnamese exports to the US of footwear, which were up 23 per cent in 2015, and apparel, which were up 14 per cent. At present, only China ships more of these goods to the US.

Moreover, the reduction of tariffs will provide further incentives for Chinese footwear and apparel producers to relocate or expand across the border to Vietnam. Over the past decade, rising labour costs in China have encouraged lower-value-added industries to move production to the Mekong region, with Vietnam receiving the lion’s share.

In combination with the tailwinds from Chinese investment and existing growth momentum, the TPP could help Vietnam’s share of apparel and footwear imports by the US double to 30 per cent by 2020, according to FT Confidential Research, an investment research service from the Financial Times.

The TPP could also prove a real boon to Vietnam’s automotive industry, potentially transforming the country into Asean’s second automotive manufacturing hub after Thailand, according to FT Confidential Research. The trade deal could trigger significant new auto manufacturing investment, as Vietnam will become a more attractive location from which to source components and manufacture, given its preferential access to other signatory markets.

By David Robinson - The Financial Times - February 24, 2016