TPP Exporters will have Big Preferences in Vietnam

Caroline Freund (PIIE) and Sarah Oliver (PIIE)
November 12, 2015

Vietnam started with a higher level of protection than most of the countries in the Trans-Pacific Partnership (TPP). Vietnam has over one third of its tariff lines at high levels (10 percent or higher), compared to less than 10 percent for the United States and Japan. More than 15 percent of Vietnam’s tariff lines are very high (20 percent or higher). In the TPP, the majority of Vietnamese tariffs in the 10-20 percent range will become duty-free immediately. Over 60 percent of very high tariffs (20+ percent) will be eliminated for all TPP members within five years of the agreement going into force, with nearly 15 percent phased out immediately. Specifically, products such as cement, shoes, rice, and fruit, with tariffs currently between 30 and 40 percent will enter Vietnam duty-free from TPP exporters as soon as the agreement enters into force.

Vietnam’s broader tariff coverage provides more opportunities to gain from the TPP but also greater risks. To the extent Vietnamese consumers switch from high-cost domestic producers to low-cost TPP producers, there will be trade creation, which will benefit consumers with lower prices and steer resources to their most productive uses in Vietnam. But to the extent tariff preferences cause TPP imports to displace imports from outside the TPP, the gains from trade will be absent. In addition to hurting exporters from non-member countries, this so-called trade diversion could hurt Vietnam because tariff revenue disappears but consumer prices don’t fall. The best response for Vietnam to ensure trade creation would be to reduce external tariffs on a most favored nation (MFN) basis, and thus compress preferences and the potential for trade diversion. Vietnam stands to gain a lot from the TPP, but the best way to reap the full benefit is to liberalize tariffs more broadly.

Vietnamese tariffs eliminated immediately for TPP countries

Note: Export value is for 2014. Sources: TPP tariff schedules; trade data from UN Comtrade.

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