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. Currently, China's size and skill greatly surpass those of Vietnam as a center of production. Yet the incentives currently offered by the Vietnamese government to increase incoming foreign direct investment show an intense focus on the economy, not unlike China's actions in the 1980s. Asian countries, including Taiwan and Japan, also have actively increased their investment in Vietnam, in their case out of fears their respective political tensions with Beijing could harm their economic relationships with China. As more sophisticated manufacturing operations begin to open in Vietnam from the likes of IBM, Intel Corp., Panasonic and Samsung, the country will only increase its manufacturing and production acumen and its competitiveness with China. During President Triet's visit to the United States, a number of new corporate deals are expected to be confirmed. These will include deals between Chevron Corp. and Vietnam Petrochemical, Microsoft Corp. and the Bank for Agriculture and Rural Development of Vietnam (Agribank), and a possible order for Boeing Co. aircraft by Vietnam Airlines. Increased trade ties with Vietnam also will give the United States additional bargaining power in its trade relationship with China, since as major businesses begin to diversify their production locations, they will slowly become less reliant on Chinese manufacturing. Washington thus can apply more pressure on Beijing regarding trade issues such as intellectual property rights and currency reform. At the same time, increased ties with Vietnam will help shield Washington from any backlash from U.S. businesses either based in or producing in China. While not replacing China, the existence of a supplemental avenue for foreign investment in Vietnam provides an added measure of security to investors should Chinese political or economic tensions -- either domestic or international -- get out of hand. Source: Stratfor, VentureOutsource.com