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Dr Binh Tran-Nam
The overwhelming ratification of the US-Vietnam bilateral trade agreement (BTA) by Vietnam's National Assembly on 28 November 2001 represented a significant political and economic milestone in the modern history of Vietnam. Politically, the Agreement, when it became effective on 10 December 2001, signalled the end of Vietnam's long, often tortuous, path to full normalised relations with its former adversary. The Agreement will pave the way for Vietnam's eventual accession to the WTO and further reinforce its efforts to be integrated into the global economy. Its long and short-term consequences are worth considering. The BTA is important to Vietnam for several reasons. Firstly, the significance of the US market to Asian nations, both developing and developed, is undeniable. This is more so in the case of Vietnam, not only because the size of the US economy, but also because the US and Vietnamese economies are substantially different and therefore highly complementary. According to World Bank research done prior to the current economic down turn in the US, the lower tariffs (from an average of 40 per cent to 3-4 per cent) could eventually double Vietnam's exports to the US. In addition, and perhaps more importantly, Vietnam can now expect a steady increase in FDI flows from the US, which currently ranks as only the 12th biggest foreign investor in Vietnam.
Secondly, in the short term, the BTA comes at a very opportune time to the Vietnamese government as global economic slowdown has begun to threaten Vietnam's growth plan of an average of 7-7.5 per cent per annum. The access to the US market as a normal trading partner will provide a more than welcome boost to Vietnamese exporters, especially farmers, at this difficult time. Thirdly, there is still a greater benefit in the longer run. As a condition of the BTA, Vietnam's domestic market will, among other things, have to be opened to greater UK participation in sectors like telecommunications, banking and energy. This will provide a stimulus to a much needed new wave of reforms. However, this Doi Moi (renovation) mark II will be essentially external-driven rather than internal-driven as Doi Moi mark I was in the 1990s.
However, it is important not to overestimate the short-term benefits of the BTA to Vietnam. Firstly and obviously, the US economy is now in recession and this may adversely affect Vietnam's exports to the US. Secondly, while tariffs will fall significantly across the board, more subtle forms of trade restriction will come into play. One long-established form of non-tariff barriers is product standards, and the successful move by some southern US states to restrict Vietnamese exports of catfish is a typical example of this approach. Thirdly, Vietnam has not yet convincingly demonstrated its ability to supply much larger quantities of a variety of exported products at uniform quality and on time. This will be a serious challenge facing Vietnamese exporters in the next few years.
In order to maximise the opportunities arising from the BTA, the Vietnamese authorities will find it necessary to accelerate their own reform efforts. This basically involves state sector reform, including the equitisation of state-owned enterprises (SOEs), administrative simplification and the establishment of special economic zones. Professor Chi Do Pham of American University further proposes a sharp and decisive devaluation of the Vietnamese dong to encourage exports, particularly in agricultural and aqua products. In the longer term, the Vietnamese government will also need to assist exporters to penetrate the US market in a more systematic and effective manner.
WATCHPOINT: Look out for a new round of SOE reform.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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