ANALYSIS OF THE IMPACTS OF TPP AND AEC ON VIET NAM'S ECONOMY

1. Real GDP:
- Given the fact that scenario d and e of AEC result in positive but small gain in real GDP, it can be
reasonably understood that liberalization components of TPP are the driving forces generating
gains in real GDP.
- As the liberalization of TPP extended from the removal of import tariff (scenario a) to the
reduction in non-tariff barriers (scenario b and c), the gains accrued to real GDP are increasing
for all TPP partner countries.
- However, similar to Viet Nam, countries joining both blocs such as Brunei, Malaysia and
Singapore gains significant increases in real GDP in all scenarios.
- Though remarkable, it should be noted that as Viet Nam's GDP level is small compared to some
other members and thus the gain in GDPvalue is much smaller as measured in dollars, about one
eighthof Japan's and one third of Canada's in most scenarios.

- Large increases in investment and consumption (9.2 and 5.1 percent, respectively) in Viet Nam
explain the total increase of 1.32 percent in real GDP, offsetting the small decline in export
(negative 1.9 percent) and the large increase in imports (11.2 percent) in scenario b.
 Simulation results show that components of GDP change increase in almost all TPP countries
after TPP being in effect.
- Meanwhile, results for scenario e reveals that Viet Nam gains the largest increases in
GDPcomponents, albeit smaller than in TPPcase. However, while imports increase, exports drop
 slightly and investment increase by a small amount, leading to the small improvement of Viet

Nam's GDP
2. Investment:
- It is clearly seen that the increase in investment in Viet Nam is the most outstanding as
compared to other countries in both percentage change and in value terms.
- The results indicate that TPP will stimulate Viet Nam's fixed capital formation that is defined as
investment in the model.
- For AEC (scenario d and e) investment in Viet Nam grows at a lesser extent, partially reflecting
the fact that share of AEC partners in Viet Nam's total trade is less than half of TPP partners.

3. Trade:
- Change in import volume to Viet Nam is notably large in terms of percent change.
- About one fourth of Viet Nam's imports are from TPP partner and imports to GDP ratio is high as
compared to the other countries.
 Given these facts, large responses of import volume to TPP's liberalization are not
surprising.
- Tariff removal in case of AEC improves the intra-region import of ASEAN.
- Viet Nam shows negative export volume changes, albeit by a small amount, ranging from 1.2 to
3.5 billion USD depending on scenarios. These negative results can be explained by the shift in
Viet Nam's export destination.
- This results in overall export volume change to be negative as observed. As relatively high
sectoral import tariffs imposed on Viet Nam's exports are removed by TPP, the exports of
Textile, Apparel, and LSMnfc destined for TPP partner countries increase significantly by 5.8, 4.3
and 1.5 billion USD, respectively. These increases in export volume are attributed to
corresponding output increases.
- Given the fixed amount of endowments for production activities, sectors compete over the
endowments such as labor and capital for production by offering higher wage rates and rental
rates.
- Viet Nam's sectoral export volume of other manufacturing decreased by 0.85 and 1.26 billion
USD with respect to TPP member and non-TPP countries. Other TPP members increase their
export to Viet Nam (3.8 billion USD) and other TPP (31 billion USD), diverting from
nonTPPcountries ( negative 22 billion USD).

- There are a few other possible explanations for the decline in total export value by Viet Nam in
addition to changes in trade direction:
+ First, some of Viet Nam's currently main exports, agricultural products and mining, show
decline after TPP due to competition in both input and output markets.
 + Second, even though Viet Nam gains substantially in investment (including FDI), this
investment is likely to go into the three major expanding export sectors of Viet Nam and non-
tradable sectors such as utilities and construction rather than into the declining sectors.
+ Third, regarding the decline in exports of electronics equipment which is currently one of the
key exports of Viet Nam, it is possible that because in 2011 (the base year of current GTAP
database), electronics export was still small and the database does not incorporate the current
change and that potential competition from Japan and other TPP members when TPP comes
into effect might be the reasons for the decline in electronics equipment export in the
simulation results.
 This implies no growth in labor (skilled and unskilled) , land, capital and natural resources
which may not be true in reality.
- Sooner than later, Viet Nam will not be able to sustain the advantage of cheap labor due to the
increase in demand for skilled labor in particular and economic growth in general like what is
happening in China.
- These efforts in the labor market can help boost the restructuring process of the economy but
also improve export growth and economic growth.

- When tariffs among AEC countries are removed completely and NTBs are partly reduced. In this
scenario, except for Rice and OthMnfc (transportation, motor vehicles, machinery, etc.), almost
all sectors of Viet Nam have the tendency of contracting exports, in small size though (about
100-350 million USD).
- On the other hand, for Textile, Viet Nam will continue to do mainly processing in the production
chain. Thus, both the import and export volumes for this sector will increase after TPP comes
into effect. However, import volume increases faster than export volume.
4. Output:
- Sectoral output change in Viet Nam is reported in Table 2.13. Corresponding to the larger
increases in sectoral export volume, Apparel, LSMnfc, and Textile expand its production
approximately by 5 billion USD (around 44% increase), 3.5 billion USD (28% increase), and 1.3
billion USD (12% increase) for TPP (scenarios a, b, c and f).
- In contrast, under AEC scenarios d and e, services sectors such as utility and construction
(Util_Cons), and transportation and communication (TransComm) expand slightly, whereas
other sector outputs contract.
- Rice production also increases under AEC scenarios by almost 6%, equivalent to nearly 1.2 billion
USD.
- Largest output decline can be seen most prominently in agriculture, forestry and wood
products, electronics equipment, mining and manufacturing.

5. Labor Demand:
- Changes in production are translated into demand for primary factor inputs that include labor,
land, capital and natural resources.
- In terms of percentage change, Apparel shows more than 40 percent change in demand for both
un-skilled and skilled labor, TPPscenarios.
- Note that the sum of the absolute changes across sectors will become zero.
- It should also be noted that as the changes in labor demand are measured in monetary term
rather than quantity (such as number of working hours or number of labor).
- Also for the case of Viet Nam where underemployment is an issue especially in informal sector,
particular attention need to be made to labor absorption.
6. Economic Welfare:
- Most countries participating in either TPP or AEC have economic welfare gains, while welfare
loss is reported in those not removing tariffs.
- In percent change term, Viet Nam's gain in economic welfare is the largest.
- Once TPP and AEC extend their liberalization to non-tariff barriers, then these cases disappear.
- Given the fact that TPP and AEC have ambitious liberalization targets beyond the tariff cuts, it
can be expected that all participating countries will gain in economic welfare.
- It is obvious that Viet Nam is among the countries benefiting most thanks to the advantage of
belonging to both trade blocs (the figures for Viet Nam is 6.56% increase in welfare)
7. Tariff Revenue Reduction:
- Table 2.17 shows that State budget revenue will decline by almost 1.9 billion USD (roughly 1.4%
of GDP in 2011) due to tariff removals of TPP and AEC.
- The loss of revenue due to tariff reduction may lead to effort in raising taxes revenues from
other sources by the government which is not advisable.
*In summary, the followings can be concluded from the analysis of GE model's results:
+ In almost all simulation scenarios, Viet Nam is shown to be the member achieving the largest
GDP change in percentage term. However, the economic impact of AEC is insignificant
compared to that of TPP. When decomposing the GDP change, it is observed that the increase in
GDP, thanks to trade liberalization, comes primarily from the increases in consumption and
investment, surpassing the surge in import after tariff cut. Moreover, Viet Nam also gains the
most in economic welfare in percentage change.
+ With regard to investment, the increase in investment is the most impressive figure compared
to other countries.
+ The structure of the Vietnamese economy will experience the contraction of less advantaged
or eroding industries (i.e. other meat, dairy, forestry, wood products, mining and other
manufactures).
+ In contrast, advantaged industries and those with negligible trade will show expansion in both
output and labor demand, especially in textiles, apparel, leather and footwear, utilities and
construction.
+ Examining the scenarios assessing TPP's impacts, results show that Viet Nam's trade value with
other TPP countries increases in all cases.
+ The possible reasons for this decrease include the contraction of a number of domestic
industries due to the competition from other countries, the competition (and constraint) in
primary factors and the change in trade directions from outside TPP to TPP.