Will the TPP give Vietnam a nasty case of the ‘Dutch disease’?
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Will the TPP give Vietnam a nasty case of the ‘Dutch disease’?

POLITICIANS on both sides of the political divide have challenged the Trans-Pacific Partnership (TPP) in the U.S., raising doubt as to whether the 12-nation Pacific Rim trade agreement will even be passed in the near future. Heralded as the trade deal to end all trade deals, the TPP’s fate has never looked so grim. In the presidential election, domestic concerns among both Democrats and Republicans have rendered the deal a poisonous pill, with both Republican nominee Donald Trump and Democratic candidate Hillary Clinton opposing it. Trump has gone so far as to say he would withdraw the U.S. entirely from the agreement if the other 11 countries don’t renegotiate a deal he found acceptable. Hopes the TPP would pass under Obama’s “lame duck” presidency were dashed as well after Senate Majority Leader Mitch McConnell shot it down.

All of this ferocious anti-trade sentiment in the U.S., which has also been echoed in some Asian countries, leaves the potential big winners of the TPP deal uncertain of whether the deal would even pass. For countries such as Vietnam, the deal offers significant benefits. Credit Suisse predicted that Vietnam would see a 10 percent increase in GDP in the next 10 years. Thanks to the gradual elimination of tariffs, the Peterson Institute estimated that exports from Vietnam’s footwear and garment industries could be boosted by a as much as 46 percent by 2025.

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Republican presidential candidate Donald Trump has threatened to pull the U.S. out of the partnership. Pic: AP.

The TPP comes at a pivotal moment for Vietnam, when the country is already rising to the forefront of Asian markets. The nation has seized several opportunities, such as a chance to take over part of Thailand’s massive rice export market after Yingluck Shinawatra’s rice subsidy scheme backfired spectacularly. Vietnam quickly filled in the gap, climbing to third place in global rice exports, behind just India and Thailand. Above all else, however, Vietnam’s main comparative advantage is in its booming garment sector, which stands to gain the most from the TPP. In the face of rising labor prices in China, Vietnam is angling to replace the Middle Kingdom as the key producer of low-cost garments. As recently as 2013, the think-tank Stratfor counted Vietnam in a list of 16 countries poised to succeed China as a global center for low-end manufacturing.

However, despite the optimistic outlook for Vietnam’s economic future, this economic mirage is not without its pitfalls. While the country’s weak human rights record and potential for further abuse once the industry takes off has been amply documented, the biggest threat to Hanoi’s economy has yet to crawl out of the woodwork: the ‘Dutch disease’. Coined in the late ’70s by the Economist after the Dutch started tapping gas fields, the concept sought to explain why instead of getting richer, the Netherlands lost thousands of jobs and saw its manufacturing sector almost wiped off the map. As the faceless Economist journalists explained, the collapse was due to the sudden influx of foreign currency (since oil is priced in dollars), which boosted the value of the nation’s currency in response to demand, rendering other parts of the domestic economy less competitive in international markets.

“The country is already poorly placed to face the massive influx of revenue that would accompany the passing of the TPP.”

While the Dutch disease is most commonly associated with countries over reliant on commodity exports such as mining and oil, textiles are by no means excluded. Both India and Bangladesh are examples in which booming garment exports led to the Dutch disease, to varying degrees. India’s case is particularly relevant: after the influx of dollars sent the rupee up against the currencies of the country’s main export partners, competitiveness dropped sharply across the board, thereby cutting at least half a million jobs in 2007 alone.

And Vietnam’s economy could be next. The country is already poorly placed to face the massive influx of revenue that would accompany the passing of the TPP. One of the best ways to immunize an economy from the Dutch disease is to maintain a healthy level of economic complexity – in short, to produce a bit of everything. Vietnam’s economy is rated by Harvard’s key index of economic complexity barely above Saudi Arabia’s – a Kingdom most easily associated with bottomless oilfields. With thousands of jobs expected to be created in a booming textiles sector that already employs over 2 million, Vietnam’s economic complexity could shrink even further.

SEE ALSO: Will the TPP Free Trade Agreement have a negative effect on Thailand?

As such, Vietnam should learn from the steps taken by other countries that have already been stricken by the Dutch disease. Norway, for example, managed to avert negative effects in the wake of its own oil boom by establishing a ‘pension fund’ and by limiting wage increases and exchange rate appreciation. Saudi Arabia is now taking cues from the likes of Norway by starting an aggressive diversification and privatization program earlier this year. The Kingdom’s sovereign wealth fund is expected to eventually reach $2 trillion in value, by courting a vast network of foreign investors: from the British (which are active in most Saudi economic sectors and operate hundreds of businesses worth upwards of £18 billion) to the Americans (where the Deputy Crown Prince went recently in a bid to charm Silicon Valley investors).

Understandably, Vietnam’s policymakers are rightfully worried about the South China Sea and their own petty power struggles, but should not assume that signing the TPP means endless rivers of milk and honey will descend upon Hanoi. Only if the country manages to avoid the Dutch disease by managing its new income properly, and if the TPP manages to pass despite mounting resistance in the U.S., only then would the deal help make Vietnam one of the Asia’s rising stars of the 21st century.