Financial Services in Vietnam and ASEAN

Hanoi—Li Minh Hung, the State Bank of Vietnam’s Governor, gave an interesting series of interviews here about upcoming changes for the financial services industry in Vietnam.  He was speaking in the context of an Asian Banker Summit conference aimed largely at the financial services industry in Vietnam and in the region.

A few points were worth highlighting for a wider audience. 

Vietnam, of course, is in a somewhat unique position within the region.  It is a member of the ASEAN Economic Community (AEC).  It has also signed the Trans-Pacific Partnership (TPP).  It also has a series of new bilateral free trade agreements and many of these deals come with new commitments in financial services. 

The gaps between Vietnam’s existing regulatory and competitive environment for the banking sector and what might come in the future could be substantial.  Not all ASEAN member states can boast (or have to worry about) such a constellation of changes on the horizon. 

Nevertheless, it is striking how enthusiastically the government is embracing the challenge.  The Prime Minister came to open the conference here before an audience so large they had to open another overflowing ballroom just to try to accommodate all the interested listeners.  

Governor Le tried to argue that both the AEC and the TPP will lead to a more efficient and sustainable banking sector.

This is not really the case.  The AEC promised “free movement of goods, services, investment, skilled labor, and freer movement of capital.”  The somewhat odd term “freer” came about because the original 2020 deadline for implementation of the AEC was not changed for financial services in ASEAN.  In other words, while the rest of the AEC goals were to have been met on January 1, banking sector changes are not due for another five years.

It is certainly possible that the AEC, by 2020, will include new provisions on financial services.  Or, as hopeful vendors outside the ballroom at the Hanoi Marriott suggest, new technology may create greater market access and opportunities for millions of companies and customers across Southeast Asian markets long before the AEC deadlines kick in.

At the moment, most of the ASEAN-level commitments for banking, insurance and all other financial services sectors are far from creating an open market.  Services and investment commitments, in general, are also poor. 

A trade agreement is not the only way to open markets.  Companies can invest now in some markets that are—on paper at least—not open.  Conversely, some sectors that appear to be “open” are rife with licensing requirements or manpower restrictions or various non-tariff barriers that make apparently open markets impossible to penetrate.

But a trade agreement does make it easier for companies to operate.  Regional agreements are definitely simpler for firms to use and reduce risk and uncertainty.  They can remove much of the burden for staff.

Historically, financial services and telecommunications have been viewed as essential “backbone” services.  These have always been treated differently than other service sectors with slower liberalization and significantly greater caution in rule making.

The TPP is no different.  The agreement has a specific chapter on financial services.  The interlocking nature of the deal means that some of the benefits for the banking industry can also be found elsewhere including in the investment and services chapters. 

When Governor Le talks about the importance of a trade agreement to restructure credit institutions, he really means using the TPP to help Vietnam’s domestic industry level up. 

As of May 2016, he pointed out that Vietnam was host to 50 foreign bank branches, 6 wholly owned foreign-invested banks, 52 representative offices, and 2 joint venture banks.  In the future, these numbers are clearly expected to grow.

Financial service players, however, ought not just be thinking about the potential to set up new branches.  Instead, as the TPP gets set to shift up supply chains in Vietnam, companies should be considering how to play a role across a wide range of financial services that will be needed in the near future.

Such services include finding new local partners, offering up new trade financing for companies in Vietnam (and elsewhere) who currently have no access to such financing or have had poor terms, creating markets for insurance products of all types, and financing products that have likely never been offered in the market before, including products for small and medium sized firms that make up the bulk of the companies in Vietnam. 

Banks should also be ready to finance infrastructure and to support the inbound investment of many different kinds of companies looking to Vietnam and other TPP member countries.

Firms will need to carefully read the TPP commitments, as the financial services chapter contains many country-specific rules and exceptions.  How TPP rules are implemented at the domestic level will also be important.  In Vietnam, the government is now working on a comprehensive reform of the credit institutional system. 

Another promising area of focus for financial service firms that we have been working on is cross border mobile payments as part of the e-commerce negotiations for RCEP.  These talks will bring together 16 countries in Asia, including Vietnam with the rest of ASEAN, China, Korea, Japan, India, Australia and New Zealand.

It is not possible to get smaller firms to participate in e-commerce if they cannot be paid for their goods and services.  Mobile payments provisions were not well developed in the TPP, as the agreement closed some time ago (substantive work on most chapters finished as long ago as two years).  In the world of fintech, two years ago is a lifetime.  Hence, there is ample scope for RCEP countries to consider new provisions to let smaller firms buy and sell goods and services across borders using mobile devices.

We are working on a position paper on the subject now for the next round of RCEP negotiations in New Zealand in mid-June.  If you would like to participate in our efforts, please let us know.  We would very much like to hear from a wider array of companies.

Financial services are a vital part of trade, as Vietnam’s top leadership has recognized.  Building and sustaining a competitive industry is a laudable goal.  Hopefully, other governments across the region will also embrace this challenge in the future.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Who Writes the Rules for Trade?

President Obama had an op-ed published in yesterday’s Washington Post with a headline that read, “The TPP would let America, not China, lead the way on global trade.”  This article contains three deeply problematic arguments.

Few people are likely to be more enthusiastic supporters of the Trans-Pacific Partnership (TPP) trade agreement than I am.  The TPP stands as a critically important avenue for unleashing domestic reforms to unlock new sources of economic growth and competitiveness across the region. 

The deal is not perfect, of course, but on balance, it represents an important achievement that should be promoted, approved and implemented as quickly as possible.

To that end, I am delighted to see leaders use whatever arguments might push the ball forward towards ratification.  But three lines of thought contained in the President’s piece are quite troubling.

First, 12 member countries wrote the TPP agreement—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam.  The United States, by virtue of its overwhelming economic size and strength within this grouping, had an outsized influence in the negotiations, but it should not forget that the other 11 members also played key roles. 

Many of these partners stepped up to the plate and agreed to take on significantly harder, deeper and more substantial domestic reforms than anything the Americans have agreed to do in the TPP.  The most challenging elements of the agreement for many TPP members came about because the United States insisted on including these provisions.

A negotiation, after all, is a compromise and no country ever gets everything that it wants in an agreement.  The US got most of what it asked for, but not all.

The TPP agreement cannot take effect until the other members agree to continue to participate and to implement the agreement fully.  Unnecessarily antagonizing partners will make it harder for TPP members to convince their own domestic constituents that these reforms are worth doing.

Even if the US wants to argue that it played the critical leadership role in the TPP, it is always worth remembering that members of Congress have repeatedly complained about a lack of sufficient enthusiasm by past trade agreement partners at the implementation phase (see, for example, Korea, Columbia, and Panama).  It is important to keep TPP members motivated across the longer term.

Second, and perhaps more important, bringing China into the equation as the “bad guy” is going to do substantial long-term harm.  This is damaging to the United States, to China, to the TPP and to the global economy. 

The long-term objective is to connect China and the United States together in a trade agreement that meets the high standards that Obama discusses in his article.   Such an outcome will never be met if China is painted from the outset as somehow “outside” the bounds of such behavior. 

This is a particular shame, since there have been many signals in the past few years that many Chinese have begun to realize that TPP membership may be in China’s own interest in the medium term.  China’s economic growth is also faltering.  For China to push through domestic reforms, it too may need to hook to an external agreement like the TPP.

For global trade, it certainly does no good at all for the United States and China to build competing trade blocks.  In an increasingly interconnected world of value or supply chains, this makes even less sense. 

Finally, the President’s characterization of what he seems to term China’s rival trade deal, the Regional Comprehensive Economic Partnership (RCEP), is inaccurate on many levels. 

As I have noted before, one of RCEP’s biggest problems, quite frankly, is that it is not lead by anyone in particular.  The trade ministers from the 16 countries in Asia have said that the agreement must be done this year and have given broad outlines of what it must contain, but no specific country is driving the agenda.  ASEAN is officially in charge and having 10 countries lead is difficult.

RCEP will not, as the President notes, address state-owned enterprises. It will likely not cover worker rights or the environment. 

He also says it will not cover the internet nor will it respect intellectual property rights.  I think this is wrong.  We do not yet know where RCEP will end up, but I can say that officials in the agreement are wrestling hard with these issues.  Of course, if there were more information and more coverage of what is happening in RCEP, we all might know better.

So what arguments could President Obama use instead?  To promote passage of the TPP within the United States and avoid the three mistakes above a future article should say, “The TPP lets America show leadership on trade.” 

The article could highlight the critical role that trade plays in providing jobs, growth and economic opportunities.  Since the piece is intended for an American audience, the statistics should, of course, highlight the connected nature of these jobs for American workers to markets in TPP countries. 

The article should discuss how important it is to keep these markets open in an economic downturn and how Asian economic growth remains a bright spot.  It could highlight the important provisions of the TPP and show how and why these elements matter to Americans.

The TPP is intended to be a building block to further, bigger trade agreements.  It is meant to bring in more countries in the future.  By adding additional members to the TPP, the prospects for more jobs and economic growth in the United States will be brighter.

In addition, some of the parts of the TPP might become elements of larger, global trade arrangements in the future.  They could be part of a future Free Trade Area of the Asia Pacific (FTAAP) within APEC or be transferred to the World Trade Organization (WTO) with more than 160 members.

It would be forward-looking and visionary.  Not defensive, reactionary and setting up long-term problems that need not be stoked.

That would show American leadership on trade.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Advice to RCEP Officials

Perth:  The talks in Perth between the 16 governments negotiating a free trade agreement, the Regional Comprehensive Economic Partnership (RCEP), across Asia represent a curious mixture of building momentum for closure at the end of the year and a growing realization of the distance that has to be crossed to reach the finish line. 

On issue after issue, officials said that they were working towards ambitious goals but then went on the discuss the diversity of members, the complexity of the issues, the challenges of building a suitably enabling environment and so on. 

Each qualifying statement is both true, of course, and disheartening.  There is not much point in crafting yet another trade agreement in Asia that does not really respond to the needs of the business community. 

In Perth, the East Asian Business Council (EABC) got to present their recommendations to the Trade Negotiating Committee (TNC).  This is the top-level negotiating group for RCEP.  EABC also offered up a survey done by JETRO of businesses across the region that highlighted many of the problems companies currently have using existing FTAs.  These challenges will be familiar to any business operating in Asia—uncertain information, lack of benefits, hard to use, and so forth.

For RCEP to avoid making the same mistakes, it has got to involve more businesses into the process.  Allowing the EABC to present recommendations on behalf of companies is a good start.  Australia also included a number of what it terms “stakeholder” events for Perth.  At these sessions, a handful of companies were allowed to present information to different groups of officials. 

The total number of companies represented, however, remained microscopic.  Given the difficulties that businesses often have in getting information exchanged at the domestic level with government officials, it is not good enough to say that officials in the room already know what businesses need or want or do not need or do not want. 

RCEP is meant to close by the end of this year.  Leaders have said it shall be so and have already extended the deadline once.  To do so again would, apparently, be unacceptable.  

This is the truly difficult part of RCEP.  Negotiations are, apparently, accelerating.  But the gaps are still wide and the business community as a whole is going to be very disappointed in the outcomes if the agreement closes without crafting an agreement that is helpful in making it easier to do business across Asia for companies both large and small. 

Officials may decide to hive off a portion of the agreement and do an “early harvest” for 2016.  This is a time honored ASEAN tradition.  It would allow leaders to declare a partial victory in RCEP, meet the deadline, and continue negotiating. 

To be frank, however, it is not really clear what might be harvested.  Of course it is only April and there is still time to conclude more chapters.  At the moment, it looks like only the economic and technical cooperation chapter might be sufficiently teed up for finish by the next round in New Zealand in June.  Probably an SME chapter could be concluded, as such chapters are mostly arm waving around the importance of helping smaller companies with limited commitments for member governments. 

To make the package of benefits better, some tariff reductions will probably be announced.  My favorite examples, of course, of snow removal equipment, will undoubtedly be included in the tariff lines for early harvest.  Makers of snowshoes, snowplows and snow skis will be delighted with the zero tariffs coming from RCEP. 

Given the concentrated levels of trade between member countries, as shown in a new Policy Brief we have just drafted, limited tariff reductions in RCEP (below 90%) will deliver no new net benefits for most businesses.  Market access negotiations will need to continue—and industry will have push hard—before sectors like textiles can expect to see any benefits from this new deal.

The services negotiations are proceeding on the basis of a positive list (except for Australia).  This means that only sectors listed for opening will actually be opened for RCEP member firms.  It could be possible to find a handful of service subsectors that might be gathered up for the early harvest package. 

Positive lists also come with the modes of supply drawn from the World Trade Organization, so RCEP members can open up sectors like travel and tourism, but do so only, for example, for mode 2—for their own citizens to travel to other RCEP countries to use travel and tourism services.  In any case, it would be possible to craft an early harvest list for services that replicate commitments made already at the WTO or within existing ASEAN + 1 deals for most members. 

Investment, by contrast, is done on a negative list basis.  All sectors will be opened for investment, except for those listed.  This is generally more challenging for officials to do the first time, as they have to think more carefully about what specific reservations they might have.  Hence, an early harvest package may have extremely limited investment provisions.  (And, if companies do not push, the final agreement may also be quite modest.)

In short, an early harvest would likely offer up only the most limited benefits for companies while officials continue to wrestle with the hardest issues. 

However, this might actually be a desirable outcome for businesses and certainly, it should be seen as better than a race to conclude the entire agreement by the end of this year given the current status of talks.  As of now, negotiations are not at the point where most companies will be satisfied with the RCEP outcomes.

Recall again that officials are only going to meet once to craft an Asian trade agreement for a good long time—once RCEP is concluded, they will not meet again to have wholesale revisions.  (They might, some people fantasize, turn RCEP/TPP into the Free Trade Area of the Asia Pacific.)  So this is the trade deal that will stick in the region for at least a decade.  It very much matters that they get it right the first time.

We have, as usual, been heavily focused on e-commerce.  We believe this is the most important area for RCEP as the countries involved have a novel opportunity to be innovative and forward looking, especially for mobile.  An ambitious outcome here will unleash new opportunities for smaller firms across the region.

But e-commerce is also challenging as it is cross-cutting and requires sustained attention across different chapters.  We recommend giving responsibility to the e-commerce working group for the topic and letting them ensure that e-commerce provisions are included at the end of the day in various specific chapters, like intellectual property rights or customs or services, that facilitate trade for smaller firms in the e-commerce space. 

To really push RCEP officials to be more ambitious, however, businesses will have to urge governments in and across the region to take the entire project seriously.  This is an important opportunity for companies.  It should not be wasted. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

In A Globally Connected World—What Happens in Britain Doesn’t Just Stay in Britain

It is a struggle to stay on top of important information.  The deluge of news never stops and bigger networks often just mean more sources for materials.  In the triage and sorting phase, some items get dropped off the list entirely, and analysis of the impact for some news is not done.

One solution that companies often pursue to cut through the clutter is to focus on the immediate and surrounding area.  Distant places are left off the radar screen entirely.  News from elsewhere is either assumed to be handled by some other division or department or is simply not picked up and followed at all.

Hence, in Singapore, firms are often keenly aware of policy changes in Indonesia.  They may be tracking, for example, an upcoming law that will require potentially complicated new handling and labeling for all imported products to indicate halal and non-halal compliance.  (More on this law likely in a later blog post.) 

There is a lot of awareness and activity by firms across the region over Indonesia’s new regulatory structures for mobile phones.  Given the importance of the sector and the impact of some of the regulations that require extensive domestic content in manufacturing, firms are paying attention.

Some news from further away also commands notice.  The slowdown in economic activity from China, of course, also occupies the minds of many company staff in Southeast Asia.  Many ASEAN-based firms buy and sell to China and have supply chains that are deeply integrated across China.   

The corporate structures of firms in ASEAN may, however, make it difficult for companies in this region to fully appreciate the impact of changing circumstances in China on ASEAN production, sales, workplans and so forth.  This is because many companies put China into a different division or department from ASEAN or the rest of Asia Pacific. 

However, getting internal alignment within Asia looks a doodle compared with trying to get staff based in the region to pay attention to events outside of Asia. 

Case in point—the impending referendum in Britain on the EU.  At first glance, this may appear to have nothing whatsoever to do with a company’s sales or production in Southeast Asia.  After all, whether the British vote to stay or leave the European Union is a purely internal matter to be decided on June 23.

But perhaps not quite so fast.  The EU is the largest investor in Southeast Asia.  ASEAN is Europe’s third largest trading partner (outside of Europe), behind the U.S. and China, and Europe is also ASEAN’s third largest partner.  

Most of this trade runs through Singapore where a good chunk of this investment is British, including a substantial amount of British financial services.  Services, overall, are critically important for Britain. 

If Britain opts out of the EU, the trade and investment implications could be important.  It is not just that the stock markets in Europe (and elsewhere) would gyrate.  It is quite unclear what would happen to trade policies in both the EU and in Britain.

The EU has been very supportive of trade agreement and trade liberalization.  Not all of this, of course, has been at the request of the British.  But certainly Britain’s centuries of promoting freer trade has pushed the continent to engage more on a liberalizing agenda than might have, perhaps, otherwise been the case.  Without British persuasion, how likely will it be that the EU will continue to press for freer trade in the future?

Will an EU without Britain continue to advocate for robust, liberalizing trade agreements in this region with Malaysia?  Philippines?  Indonesia?  India?

One of the important arguments, for example, for believing that Vietnam will implement commitments in the Trans-Pacific Partnership (TPP) is that the TPP rules are also backed up by many similar pledges made in the EU-Vietnam trade agreement.  Vietnam’s government therefore is taking on difficult domestic level reforms in various areas like customs not just because the TPP requires new changes, but because EU-Vietnam also will.  The TPP and EU agreements are, in this sense, mutually reinforcing.

Britain and the EU will have to sort out their own trade arrangements between them.  While many of the Brits voting to leave the EU may want to continue to enjoy the benefits of the EU market without change, this is a highly unlikely outcome.  The two sides will apparently have just two short years to negotiate a mutually satisfactory bilateral trade deal that covers goods, services, investment and all the other types of deep integration issues that Britain covets and the EU is probably going to be less enthusiastic about signing with a country that has voted to leave. 

At the same time, a departing Britain will not have access to the same global trade deals the EU has received.  Instead, the British will have to renegotiate trade agreements on their own (with substantially less leverage and power than it had when it was part of the EU).  This includes multilateral, regional and bilateral deals. 

The British would, therefore, have to conclude new trade agreements with countries like Singapore and Vietnam.  These deals might (or might not) repeat the EU commitments in the recently completed agreements. 

In short, the British vote on a possible Brexit June 23 is the sort of news that should be followed (at least a little) in Asia, even by individuals with extremely cluttered inboxes and short attention spans.  In a globally connected world, what happens in Britain may not stay in Britain.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***