The Trade Outlook with Vietnam

Following

Approval of the Bilateral Trade Agreement

With action by Vietnam’s National Assembly in December to approve the new bilateral trade agreement with the U.S., the agreement is now expected to come into effect early in 2001. The agreement, which has been under discussions since shortly following the lifting of the Embargo by President Clinton caps years of effort on both sides and should lead to increased trade volume between the two countries. With that said, the question now is what next and are U.S. and Vietnamese companies on the fast track to increased sales? The answers to these questions is that U.S.-Vietnam trade will increase but from a very low number and yes, there will be benefit but much of it will not necessarily go to Vietnam and U.S. companies.

To answer the question of what next and how extensive will the benefits be, it is necessary first to note that U.S.-Vietnam trade is currently at a very low level. In the period Jan-Jun 2000, U.S. imports from Vietnam totaled 370 million dollars according to the U.S. Department of Commerce. For the same period in 2001, the figure increased by 16 percent to 428 million. By way of comparison, during the same Jan-June period in 2000, Cambodia, which has a population of a tenth of Vietnam, sent 403 million dollars of goods in 2000 to the U.S. and 477 million in the first six months of 2001. Thailand during the same period of Jan-Jun 2000 sent the U.S. 7,183 million of goods, nearly 20 times Vietnam’s figure. Vietnam will no doubt be able to greatly increase their import figure in 2002 but coming off such a low starting point, the amount of goods sent to the U.S. will still take conservatively a decade or more to reach up to rival those of Thailand.

The Bilateral Trade Agreement (BTA) will make Vietnamese goods cheaper in the U.S. because of reductions in U.S. Customs Duties required under the BTA. Under the Bilateral Trade Agreement, the average U.S. rate of duty on imports from Vietnam will drop from an average of nearly 40% to 3%. Most of the expected growth in exports from Vietnam to the U.S. will come as a result of this reduction in tariffs. Exports of footwear and textile and apparel products (garments) should show the biggest gains in the initial period. 

Examples of U.S. Customs Duty cuts: 

• Men’s Cotton Shirts: Reduced from 45% to 20.4% 
• Women’s underwear: Reduced from 60% to 0 
• Ski Jackets: Reduced from 65% to 7.4% 
• Tennis Shoes: Reduced from 35% to 20% 
• Basketball Shoes: Reduced from 35% to 8.5%

As can be seen from the figures above, the landed price of Vietnamese goods offered for export to the U.S. will decrease substantially. Vietnamese exports to the U.S. will thus definitely increase. The Bilateral Trade Agreement is thus a great opportunity to Vietnamese State Owned Enterprises (SOEs) and to emerging private companies in the export sector. It will also open up an opportunity for U.S. companies looking to source materials in Vietnam. However, the truth is that the primary foreign beneficiaries of the Trade Agreement will be the Taiwanese and Koreans, who have been doing business in Vietnam for a long time. These nationalities in particular have been adept at benefiting in the less transparent business environment that has characterized Vietnam to this point.

These predominantly Korean and Taiwanese companies have existing factories in Vietnam primarily in the South currently producing running shoes for Nike, Addidas and others and/or sports clothes for many brand-name manufacturers. The quality of goods produced by these Korean and Taiwanese owned factories is not necessarily higher than most Vietnam State Owned Enterprises (SOEs) and fledgling private companies. However, their business experience, access to capital and ability to quickly take advantage of new opportunities makes them first in line for most of the benefits that the new treaty will offer. Most of them are currently not working at peak capacity. They therefore can quickly increase hours and or hiring to immediately take advantage of the Bilateral Trade Agreement.

Benefits to U.S. companies in increased sourcing opportunities for Vietnamese-made products mentioned earlier will be initially small and mostly "indirect". U.S. businesses will see much more modest growth in post BTA sales. The reason is that Vietnam’s requirement to reduce customs duties on U.S. goods is to be phased in over 3 years and generally is not as great as that on the U.S. side. Where the average of U.S. customs duties will reduce to 3 percent, Vietnamese customs duties on U.S. products will not drop below 20 percent on average even after the phase in period. Because of this lesser drop in Customs duties imposed on U.S. products by Vietnam, the products will not suddenly become significantly cheaper for Vietnamese consumers.

Additionally, the second factor restraining increased exports is the overall low level of development and wealth in Vietnam. Vietnam is expected to achieve GNP growth of 6 percent in 2001, one of the best figures in the region. Despite this, GDP per capita, a key measure of a country’s prosperity remains low in Vietnam. Vietnam GDP per capita in 2000 is estimated at $1,950 according to The U.S. Government Factbook . By way of comparison, the estimate of GDP per capita in Thailand for 2000 was estimated at $6,700 or more than three and half times more prosperous.

As these figures indicate, the reality is that despite recent increases in the Vietnamese economy in recent years, Vietnam remains a very poor country and much of the people outside the major cities do not posses the buying power to afford most U.S. goods. In this environment, U.S. exports to Vietnam will undoubtedly show growth but given the low buying power of the majority of the population, opportunities for sales will grow slowly and as a result of the continued improvement in standards of living over time. The Trade agreement by permitting increased exports to the U.S., which is the World’s largest market, will promote new jobs but the effects of this will be slow. U.S. companies will see opportunities to source products in Vietnam and those looking to the mid and long-term will see slow steady increases in sales as increased production and jobs leads to improved spending power for Vietnamese workers. This result was confirmed by a veteran U.S. businessman in Vietnam who noted that as the BTA moved toward final implementation, he has seen steady but slow, conservative increases in his business based on anticipated improved opportunities for export.

The likely reality of the effect of implementation of the U.S.-Vietnam Bilateral Trade Agreement is that Vietnam has improved as a potential site for investment. The caveat however, is keep a mid to long-term focus and don’t expect rapid sales increases nor rapid market penetration.