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Should Vietnam Be Worried About Indonesia Joining the CPTPP?

Over the past decade or so Vietnam has been on a global trade integration frenzy, signing onto 15 free trade agreements, eight as part of ASEAN and a further seven of its own volition. Among the latter is the Comprehensive and Progressive Trans-Pacific Partnership agreement or the CPTPP for short. 

With eleven member states, covering around 15 percent of the world’s economy, and a tariff reduction schedule that will see tariffs on just about everything reduced to zero, this has been a huge boon for the countries in it. It is no surprise then that a number of outsider nations have expressed an interest in signing up.

Most recently, last week, in fact, Indonesia sent an official letter to the depository in New Zealand requesting accession to the agreement. A first step, there is still some way to go with Indonesia now on a charm offensive looking to convince the existing member states that they should allow the archipelago to come on board.

For most of the existing members, this shouldn’t be a problem. Indonesia has a 300-million-strong consumer market full of potential customers ready and willing to spend their rising incomes on all manner of goods and services from abroad. This surging consumer market, however, has come about through an influx of billions of dollars of foreign direct investment on the back of Indonesia’s low-cost and abundant workforce, a very similar growth story to that of Vietnam.

In fact, the economies of Indonesia and Vietnam have a lot in common, arguably, more than any other two states in the CPTPP already. With this in mind, Indonesia’s accession to the agreement should give Vietnam pause for thought.

As it stands, Vietnam has the lowest average wages in the CPTPP grouping and the third biggest population. This has given it a distinct advantage over its regional competitors with respect to growing its manufacturing industry–not only do manufacturing firms get access to a low-cost, millions-strong workforce but, if they meet rules of origin criteria, they also get almost tariff-free access to 15 percent of the world’s economy. This puts Vietnam at an advantage over its Southeast Asian neighbours.

Indonesia’s accession to the agreement, however, could change that. 

Indonesia’s low-cost labour is even cheaper than Vietnam’s. As of February 2024, the average salary in Indonesia was US$201 a month. Conversely, in Vietnam, as of the third quarter of this year, the average salary was just shy of US$305 a month or 52 percent higher than in Indonesia. In manufacturing and construction that gap is even wider. Indonesian factory workers take home roughly US$195 a month, whereas for Vietnamese factory workers that figure is just over US$337, about 73 percent more than their Indonesian counterparts.

It’s not just with respect to wages that Indonesia may be at an advantage too.

Labour reforms are a big part of the CPTPP (much like they are a big part of EVFTA). Specifically, the agreement requires Vietnam to ratify the International Labour Organisation’s Convention 87 which would give workers the right to form independent trade unions, within five years of the agreement coming into force (a deadline now passed). However, Vietnam has been dragging its feet which at least one CPTPP member, namely Canada, has raised as an issue.

With this in mind, adding Indonesia to the mix, which has already ratified the convention, could provide a comparable alternative for investors who are concerned about the implications of non-compliance with this part of the deal. Notably, it has been reported that Vietnam could ratify Convention 87 this month, though even if it is to ratify the agreement leaked documents have suggested it will take steps to avoid compliance.

All of that said, outcomes-wise, at a bilateral trade level there is not much for either party to gain. Both members of ASEAN, they are both a part of at least eight multilateral free trade agreements that have removed most tariffs on most goods traded between member states already.

That said, on a multilateral level Indonesia stands to add to its free trade cache four countries including Canada, Mexico, the United Kingdom and Peru. This could reap huge benefits for the archipelago–Notably, Vietnam’s exports to the three original members of the CPTPP (the agreement enters into force for the UK at the end of this year) jumped 59 percent from the end of 2018 to the end of 2023.

But whereas comparable export profiles could be a point of contention, greater harmonisation with respect to quality and phytosanitary measures could make both countries more attractive as part of integrated supply chains. Moreover, in some supply chains, this could increase the rules of origin components of some goods and push them over the line to receive CPTPP-reduced tariffs, further boosting trade within the bloc.

At the end of the day, of all of the economies in the CPTPP, Vietnam would likely face the biggest disruption to its economic activity should Indonesia be approved to join. That is not to say that Vietnam should be looking to block Indonesia’s accession but rather that it faces distinct risks and therefore should be actively looking for equally distinct rewards.

That said, Indonesia’s CPTPP journey has really only just begun and there will be a myriad of reports and analyses to come out as it moves closer to accession that will shed greater light on just exactly how much of an impact it might have. With this in mind, foreign firms should make sure to keep up to date with Indonesia’s progress by subscribing to the-shiv.

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