Vietnam and Canada: CPTPP to Inspire More Trade

Vietnam is Canada’s largest trade partner in ASEAN. Despite the establishment of diplomatic ties in 1973, relations between the two countries have only recently strengthened.

Last March, Canadian Prime Minister Justin Trudeau signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), representing a step towards greater engagement with ten other economies across the Pacific, including Vietnam.

As one of the largest free trade agreements in the world, businesspeople in Canada will find greater transparency in emerging markets, along with a wider array of competitive investment and trade options across the Asia-Pacific.

With Vietnam already Canada’s largest trading partner in the region, the CPTPP changed the scope of Canada-Vietnam relations, particularly for Canadian businesses that want to participate in Vietnam’s current growth trajectory.

The CPTPP and Canada

Canada’s chief economist predicted a positive economic impact for the country’s involvement in the CPTPP. Canada is likely to benefit from overall tariff savings as a result of preferential market access with new FTA economies, with respect to calculated changes with existing FTA country’s.

A predicted boost of US $4.2 billion in Canada’s long-term economy is the projected outcome. Indeed, when the current agreement enters into force, Canada will be the only G7 nation to have free trade access in North America, Europe, and the Asia Pacific.

The terms and conditions outlined in the CPTPP create a framework for trade that enables greater market access between member states. Once the agreement is ratified, the elimination of tariffs abroad have the potential to stimulate Canadian foreign business activity, if strategically acted upon.

The Canadian government estimates exporters will save US $428 million per year under the full execution of the CPTPP. Vietnam is listed as one of the three countries where Canadian exporters will save the most. With time, an increase in exports is likely to occur once market access becomes more predictable and transparent.

Duty-free access for trade in goods between Canada and Vietnam will be implemented with the new agreement in force, along with the elimination of tariffs for Canada in crucial export areas. Agricultural goods, like beef products, will slash tariffs of up to 34 percent within seven years, accompanying pork products that will benefit from the elimination of tariffs of up to 31 percent within nine years.

Similarly, industrial products like industrial machinery will eliminate tariffs of up to 25 percent within eight years, chemicals and plastics will eliminate tariffs of up to 31 percent within ten years, and metals and minerals will see the elimination of tariffs of up to 40 percent within ten years.

Canada’s trade with Vietnam in comparison

While the potential for increased Canadian trade and investment in Vietnam is strong, Canada is starting from a low base.

Canada’s recent trade with Vietnam are significantly lower in comparison to Vietnam’s largest trading partners, China and South Korea. Canada accounts for just 0.2 percent or US $395 million of Vietnam’s imports, while Chinaaccounts for 31 percent or US $60 billion of Vietnam’s imports, and South Korea 17 percent or US $32.6 billion of Vietnam’s imports.

Canada’s top five exports to Vietnam in 2016 were animal products (23 percent, US $89.2 million), vegetable products (19 percent, US $74.1 million), chemical products (13 percent, US $50.5 million), machines (12 percent, US $46.6 million), and animal hides (5.4 percent, US $21.2 million).

China’s top five exports to Vietnam in 2016 were machines (31 percent, US $18.8 billion), textiles (20 percent, US $12.1 billion), metals (16 percent, US $9.32 billion), chemical products (5.1 percent, US $3.03 billion), and vegetable products (4.8 percent, US $2.87 billion).

South Korea’s top five exports to Vietnam 2016 were machines (56 percent, US $18.3 billion), textiles (8.6 percent, US $2.8 billion), metals (8.6 percent, US $2.8 billion), plastics and rubbers (6.9 percent, US $2.25 billion), and instruments (4.5 percent, US $1.48 billion).

China and South Korea’s top exports – machinery, textiles, and metals – are important to economic development in Vietnam. Currently, Vietnam’s top imports include machines, metals, and integrated circuits that all feed into the construction boom.

In comparison, Canada’s top exports to Vietnam do not contribute directly to Vietnam’s growing infrastructure. Although machines are among Canada’s top exports, it represents only a fraction of the amount that China and South Korea export into the country.

Canadian businesses that specialize in infrastructure and construction will find a market in Vietnam, with competition from China and South Korea.

However, the Canadian industry is competitive in some of Vietnam’s top import areas, such as telecommunication equipment, wood products, and agro-fishery products. These products represent new opportunities for Canadian businesses.

Opportunities for Canadian investors

Investors that target sectors that align with Vietnam’s development goals, such as the recent shift towards sustainability, are most viable long-term investment projects. For example, Prime Minister Nguyen Xuan Phuc publicly requested Canadian support in solar energy to develop clean technology, where investment from Canada remains quite low, despite is competitiveness in the sector.

On similar grounds, the government of Canada has brought attention to emerging opportunities in Vietnam. In the education sector, Vietnam spends US$3 billion per year on overseas study; this shows that Canadian investors can find opportunities for partnership or investment in Vietnam.

Similarly, information and communications technology (ICT) has become the foundation of Vietnam’s modern development: the 4G network was established in 2017, leading to the growth of big data and analytics, as well as finance technology. Meanwhile, development continues to create opportunities for Canadian businesses in infrastructure; planning and design, new materials, construction, operation and project management will be required.

Canadian businesses will obtain a competitive advantage once the CPTPP is ratified. While Vietnam holds a prominent place among other ASEAN countries in relation to Canada, exploring the opportunities that already exist in Vietnam is worthwhile given the progress already made.

However, a successful integration into the market requires a strategic approach to Vietnam’s low costs, young and growing population, and an increasingly open economy. In addition to identifying key industries, Canadian investors should become familiar with the current legal and tax environment. Canadian business leaders can play a key part in the development of the modern economy in Vietnam if they become more proactive.