U.S., Vietnam: Trade ties and a China buffer

June 22, 2007

Summary

The United States and Vietnam signed a trade and investment framework agreement (TIFA) June 21 ahead of a June 22 meeting between Vietnamese President Nguyen Minh Triet and U.S. President George W. Bush. By warming up its trade relationship with Vietnam, the United States is facilitating an alternative for U.S. investors and businesses that want to set up production operations outside China. It also will allow the United States to apply further pressure on the Chinese regarding trade issues and currency reform, while lessening the potential negative impacts such pressure will have on U.S. businesses.

Analysis

Vietnamese Vice Trade Minister Nguyen Cam Tu and Deputy U.S. Trade Representative Karan Bhatia signed a trade investment and framework agreement (TIFA) June 21 during a visit to the United States by Vietnamese President Ngyuen Minh Triet, the first trip by a Vietnamese head of state to the United States since the end of the Vietnam War.

Considered the prelude to a free trade agreement between the two countries, the TIFA represents a new landmark in the trade relationship between the former foes. It also highlights the active pursuit by the United States of trade relationships in Southeast Asia, which will diversify the U.S. presence in Asia and in time reduce U.S. reliance on Chinese manufacturing and production. Diversifying the U.S. trade presence in Asia will allow the United States to step up its pressure on China over trade and currency reform while reducing the impact such pressure will have on U.S. businesses.

The TIFA, which follows a bilateral trade agreement signed in 2000, stipulates that the two countries will create a bilateral cooperation council led by U.S. and Vietnamese officials. It also will create a monitoring system to track Vietnamese compliance with World Trade Organization (WTO) regulations.

Vietnam has been trying to build its image as an attractive destination for foreign investment in Southeast Asia. Alternative destinations in the region all have considerable deterrents to potential foreign investment. Thailand's post-coup government is considered impulsive with regard to the economy. Cambodia's legal system is corrupt, and arbitration is lengthy. Singapore's workforce is too expensive. Indonesia provides few incentives for foreign investment and is plagued by natural disasters. And Malaysia is saddled with ethnic Malay ownership laws.

By contrast, Vietnam has been actively pushing through new trade regulations -- both before and after its accession to the WTO in December 2006 -- to keep incoming foreign investment flowing. For example, Vietnam is considering selling equity stakes in its export-import bank, Vietnam Eximbank, to foreign investors. And although issues between the United States and Vietnam, such as the legacy of the Vietnam War and Vietnam's human rights record, have hindered their trade relationship, the Vietnamese president's visit represents a positive step in the continuing evolution of the countries' bilateral relations.

While Vietnam does not have the capacity or the expertise to replace China, a manufacturing powerhouse of both raw materials and finished products, Vietnam does present an avenue for the diversification of U.S. manufacturing and production operations in the region.