Socialist Republic of Vietnam

Vietnam and the United States normalized trade and investment relations with the coming into effect of the U.S.-Vietnam Bilateral Trade Agreement (BTA) on December 10, 2001. On that day, the U.S. extended normal-trade-relations (NTR), which is more commonly known as most-favored-nations (MFN), treatment to Vietnam. This action lowered the average tariff on imports from Vietnam to the U.S. from around 40 percent to around 4 percent. This effectively opened the huge U.S. market to Vietnamese exporters on an equal footing with other foreign competitors.

In addition, the BTA required that Vietnam phase in, over a ten-year period, changes in many laws, policies, regulations, and administrative procedures that are, in large part, based on WTO standards and international best practice. The comprehensive set of obligations in the BTA for both countries was expected to stimulate not only bilateral trade between the two countries, but also to increase the attractiveness of Vietnam for U.S. and many other foreign investors.

This Report is prepared by the Foreign Investment Agency (FIA) of the Ministry of Planning and Investment (MPI), in cooperation with experts from the USAID-funded STAR-Vietnam Project. It represents the first attempt to analyze in detail the response of foreign direct investment (FDI) to the BTA. In particular, the Report presents comprehensive data on U.S. FDI sourced directly from the United States, which we call “reported U.S.” or “U.S.-based” FDI, and FDI from overseas subsidiaries of U.S. firms, the combination of which we call “U.S.-related” FDI.

In interviews conducted for this study, U.S. firms in Vietnam noted that U.S. tax laws and business considerations related to the still relatively small size of the Vietnamese domestic market encourage U.S. firms to invest in Vietnam from regional headquarters, most commonly Singapore and Hong Kong, as well as to some degree from other third countries with more favorable tax reporting requirements.

Moreover, since the BTA’s Chapter IV on the “Development of Investment Relations” covers investment by U.S. overseas subsidiaries just as strongly as it covers FDI funded directly from a home office in the United States, FDI from U.S. overseas subsidiaries should be expected to respond to the BTA. In the current statistical measure of FDI (which counts only FDI sourced directly from one country to another), this FDI from U.S. subsidiaries resident in third countries is reported as FDI from that resident country (e.g. from Singapore, not the United States). It seems clear, however, that the full response of U.S. firms to the BTA should be assessed in terms both of FDI funded directly from the U.S. and FDI funded by U.S. overseas subsidiaries. In fact, the results in this Report show that U.S. firms responded more aggressively in expanding FDI to Vietnam from their overseas subsidiaries than from home offices in the United States.

The reported U.S.-based FDI data commonly presented by MPI show that U.S. FDI has increased relatively moderately since the BTA came into effect in 2001. This fact has led many to note that although bilateral trade has boomed since the BTA came into effect, U.S. FDI has not responded significantly to the BT A reforms. The new MPI data on U.S.-related FDI developed for this Report, however, reveal a different story.

U.S.-related FDI through 2004 was USD 2.6 billion
First, accumulated U.S.-related FDI implemented through 2004 is US$2.6 billion compared to the reported FDI amount of US$730 million (see Table 7 in the text). This shows that FDI into Vietnam by U.S. firms has been considerably higher than was commonly reported for many years.

U.S.-related FDI grew by 27 percent a year over 2002-2004, top investor in 2004
Secondly, U.S.-related FDI has increased strongly since the coming into effect of the BTA, growing by an average of 27 percent a year from 2002 through 2004 compared to just around 3 percent a year from 1996 to 2001 (see Figure 1 and Table 8 in the text). In 2004, U.S.-related FDI of US$531 million was the largest type of FDI into Vietnam, above FDI sourced from Japan, Korea, Singapore and Taiwan, the countries most typically considered to be the largest investors into Vietnam (see Table 9 in the main text).

U.S.-related share of total FDI in Vietnam in 2004 was about 20 percent
This quantitative data shows that FDI from U.S. firms have responded strongly since the BTA came into effect. Though in absolute terms, the growth of U.S .-related investment in Vietnam remains modest as compared to the boom in the bilateral trade, the share of U.S.-related investment in total overall implemented FDI in 2004 is around 20 percent, almost the same percentage as Vietnamese exports to the U.S. to overall Vietnamese exports.

The strong response of U.S.-related FDI to the BTA is confirmed by the results of a survey of 81 foreign firms conducted for this Report (32 U.S-related, 47 non-U.S. and 2 unidentified). The survey shows that 49 percent of participating enterprises considered the BTA in their decision to make or expand their investment in Vietnam. This figure is 53 percent for U.S. companies and 43 percent for non-U.S. companies. In general, companies that exported to the U.S. registered higher growth in investment, export sales and employment after the BTA than those that did not export to the U.S. or those that did not consider the BTA in their investment.

BTA significantly improved the business environment in Vietnam
Key commitments in the BTA highlighted by foreign firms, and especially U.S. firms, as being most important to improve the investment climate in Vietnam include improving transparency, removing discrimination between foreign and local firms, using a registration system for investment licensing, improving IPR protection and opening more sectors for foreign investment. U.S. firms also considered effective commercial dispute settlement procedures to be important.

When all considerations for improving the business and investment environment are taken into account, not just those emphasized by the BTA, foreign-invested firms stressed the importance of enforcing laws evenly and effectively, of joining the WTO and of improving the tax and investment licensing systems. U.S. firms compared to non -U.S. foreign firms stressed the importance of tax, trade and investment agreements. Although firms resp onding to the survey noted that the investment environment in Vietnam had clearly improved recently, importantly in part as a result of the BTA, they clearly stress the importance of continuing to develop a more transparent legal system with more effective, uniform and predictable enforcement of laws and policies.

However, Vietnam has a very low share of total U.S.-related FDI in ASEAN countries
Despite the significant increase of U.S.-related investment, the room for further development is great. Total U.S.-related FDI in Vietnam is less than 1 percent of the total U.S. investment in the region, and equal only to 28 percent of U.S. FDI in Thailand and 20 percent of U.S. FDI in Indonesia in 2003.

The Report also examines the impact of the BTA on overall FDI, which includes FDI from all countries including the United States. Why would we expect that overall FDI would increase in response to the BTA, since the BTA is a bilateral not a multilateral agreement?

First, the BTA was viewed by many Vietnamese and foreigners alike as a path-breaking and irreversible commitment by Vietnam’s leadership to develop a market-based economy that would integrate strongly into the world economy.

Second, even though the BTA was a bilateral agreement that included obligations only directly for Vietnam and the U.S., both countries promoted that the BTA was a key “stepping stone” toward acceding to the WTO, where a broad range of commitments would be applied on a most-favored-nations (MFN) basis to all WTO members trading and investing with Vietnam. Vietnam’s solid progress over the last several years toward meeting the requirements to accede to the WTO reinforces all the more this perspective.

Third, many of the reforms required for BTA implementation were done by Vietnam on an MFN basis, so that all foreign and domestic parties benefited. And, fourth, the BTA -related provision of NTR/MFN treatment to Vietnam served to open up overnight the huge, receptive U.S. market for Vietnamese exports, which greatly increased incentives for many countries other than the U.S. (especially East Asian neighbors) to invest in Vietnam to produce typically labor-intensive exports for the U.S. market.

After a spike in the mid-1990s, overall FDI into Vietnam has grown quite modestly (see Figure 3 in the text). When compared to general, large declines in FDI worldwide from 2000 to 2003, however, Vietnam’s moderate growth in FDI over this period actually looks relatively robust (see Table 1 in the main text).

Other FDI in apparel, furniture, seafood also increased, thanks to the BTA
There is little indication from the aggregate FDI data into Vietnam, nevertheless, that the BTA has had an important impact on foreign investment into Vietnam. A closer look at the sectors widely perceived as having the greatest potential for exports to the U.S. market, however, reveals a stronger response to the BT A.6 Figure 2 shows that after the BTA was signed in 2000, overall FDI in clothing,furniture and fishery grew substantially. The share of these sectors in total registered FDI rose from 3 percent in 1998 to 25 percent in 2001, and then stabilized at 16 percent in 2003 and 2004.

In summary, from our analysis of newly developed quantitative data and firm survey results, we can conclude that the signing and implementation of the BTA have play ed an important role in promoting FDI into Vietnam, particularly for U.S.-related FDI, and for improving the business environment in Vietnam.

• U.S.-related FDI through 2004 was USD 2.6 billion, more than three times the “official figures.”

• “U.S.-related” FDI includes investment from U.S. subsidiaries in Singapore, Hong Kong, and other countries. “Official figures” count this investment as being Singaporean, Hong Kong, or other countries’ FDI.

• It grew at 27 percent a year over the three year period 2002-2004, after the BTA went into effect.

• The U.S.-related share of total FDI in Vietnam in 2004 was about 20 percent.

• The BTA significantly improved Vietnam’s business environment, encouraging more US-related FDI.

• Vietnam still has a very low share of total U.S.-related FDI in ASEAN.

• The BTA also encouraged non-U.S. FDI, especially in factories to produce apparel, footwear, furniture, seafood, and other products to be exported to the huge U.S. market.

BTA went into effect on December 10, 2001

© 2002-2005, American Chamber of Commerce in Vietnam, Ho Chi Minh City.