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Issue No. 34
July 2000
our third year on the Internet

A Periodic Report to Our Clients

Bilateral Trade Agreement Signed

See VVG's  monthly feature on Current Economic Indicators

Bilateral Trade Agreement Signed

 U.S. Trade Representative Charlene Barshefsky and Vietnam's Trade Minister Vu Khoan signed the long-negotiated Bilateral Trade Agreement (BTA) in Washington on Thursday, 13 July 2000, five years and two days after normal diplomatic relations were opened between the two nations.

Stalled for the past nine months when the Politburo pulled the rug out from under Prime Minister Phan Van Khai, who reportedly went to the APEC meeting in Auckland, New Zealand in October 1999 in part to sign the same agreement, it is noted that the Prime Minister has still not signed this document.  As the head’s of state have not signed the agreement, which also must pass the legislative bodies of both nations, we are cautious to proclaim ”victory” for the people of Vietnam or investors, all of whom seek to prosper from this historic event.

Clearly the BTA will favor Vietnam and investors in Vietnam.  However, still needed in addition are substantial business, financial, and political reforms within Vietnam that some in the leadership of this otherwise progressive land would prefer not to see, or to put off for as long as is possible.

We expect no opposition from Vietnam’s National Assembly (NA). While there has been no word yet from the Politburo either in support of or in opposition to this agreement, if the BTA is again rejected by the Politburo, it will never see the light of day in the NA. 

We do not expect the American Congress will act with any dispatch on this agreement. As the House and Senate will recess in August, we suspect the President will put off a vote until after the November elections.

As a full vote up for the agreement is needed from both sides of Congress, we can expect a noisy outcry from the same, tired, old conservative voices arising out of the VietKieu dominated communities as before, represented as they are by staunch American conservatives. It is probable that a lame duck Congress will not be eager to vote on the bill, which will force it to wait for the new Congress that first sits in January 2001. 

The Chinese BTA, granting Permanent NTR, was voted up by the House two months ago and has not yet passed the Senate.  As PNTR has not been included in the BTA with Vietnam, we see no profit to the Clinton Administration by trying to attach the new bill to the pending Chinese bill.

Only after both nations’ legislative bodies approve the BTA will NTR come into effect.  There is no additional act or regulation that is needed, but for the fact that Customs Officials in both nations must be alerted to the new tariff schedules. Ancillary agreements, on airlines, particular tariff reductions, and the like, should proceed smoothly once the BTA in the main is brought into effect.

The major changes we expect stemming directly from NTR are few but substantial:

From the American Side:

1. Import duties will be reduced from as high as 60% to as low as 3%.  However, this 3% minimum will NOT automatically apply to all goods unless they are specifically mentioned in the body of the BTA.  Usually, smaller trade agreements on specific items are worked out between the two nations on an as needed bases.
2. American investors will feel a greater relief than ever before, but still ambivalent of their opportunities to get a fair rate of return from their existing, or from new, investments.  The Vietnamese still do not universally show an understanding that an opportunity to invest in Vietnam MUST be accompanied by a fair chance to recover a good rate of return from that investment.
3. Non-Governmental Organizations will find a fresh source of revenue from US private donors who should rightly feel a sense of actual security from the full normalization of trade relations. However, that sense will fade quickly if the rule of law is not even more quickly established in Vietnam.  To date, “lack of transparency” remains the diplomatically acceptable phrase for Vietnam’s continued refusal to publish real numbers of past, present, and future economic activities, and a means to check the published numbers to insure their accuracy.
4. Tourism will grow, but perhaps not as dramatically as Vietnam would like.  The need for affordable and dependable accommodations, communications, transportation, and health care will continue to deter traffic until those needs are more fully met.
5. National Treatment for American companies is a key element of the BTA. While we must first see how this is provided for in the full document, in concept, American companies are to be given the same opportunities to form and operate companies in Vietnam, as are Vietnamese domestic companies. This includes every aspect of business and trade to include costs and taxes.  In return, Vietnamese companies will be given the same rights to form an American business, as are American companies.

Of course, business operations for Vietnamese domestic companies are also still burdened with bureaucracy and bribes.  However, the new Enterprise Law favoring domestic reforms should apply to American owned enterprises and in general, things should improve. 

This principal is long and well established in other Southeast Asian nations.  Thailand has enjoyed National Treatment with America since the 1833 Treaty of Friendship. That is no typo. American business, for more than 160 years, has been allowed to operate outside of the restrictions imposed on other foreign investors.  This very important aspect of the BTA has not yet been fully understood by American investor, but is decried by America’s competitor nations.

From the Vietnamese Side:

1. Factories will start gearing up for greater production runs for those products that Vietnam can produce well, such as ceramics, garments, and handicrafts.
2. Imports will not grow substantially but for those products now being imported to include fruits, canned foodstuffs, and small electronic parts.  We expect that duties on luxury goods not yet manufactured in Vietnam, will remain high for several years in order to allow Vietnam’s growing industries to grow stronger.  This will include automobiles.
3. A need to enforce copyright and patent laws will increase, but will not be sufficient to stem the tide of pirated goods. We see that same problem existing throughout Asia and expect no miracles from Vietnam.

From the side of Asian Investors:

Far less cautious than their American or European competitors, we expect to see a substantial growth in the light manufacturing for export industries: appliances, ceramics, clothing, electronics, and handicrafts.  Singapore, South Korea, Taiwan and Thailand can be expected to take advantage of Vietnam’s strong, vast, and well-educated work force that will produce quality goods at a very favorable rate of return.

Unlike the out-of control quality problems still suffered with Latin American production, American markets favor the Made In Vietnam label and will pay more for these goods. The labor rates are less than the Latin American nations, even after accounting for the costs of shipping, and the rate of rejection is less as well.  Profits will be considerably higher for goods made in Vietnam, provided the Vietnamese government does not interfere with higher rates of taxation (or hidden costs) for goods manufactured in foreign owned shops.

From the side of European Investors:

We have already heard the complaints: the BTA requires National Treatment for US companies in Vietnam that will not be passed on to their European competitors.  Of course, the EU nations have been enjoying free trade with Vietnam for nearly 10 years already, but they often forget their advantages when they see American progress, and hide behind the American umbrella when there are problems to be solved.

Should the progressive elements of the government of Vietnam win the day and prevail upon their more reluctant associates to either change their practices or retire, and if this is accomplished before the start of the 9^th Party Congress in March – April 2001, we look forward to a rapid and substantial change in the business environment of all of Vietnam. 

Vietnam Must Not Relax It's Actual Reforms.

True reforms in the rule of law, in trade practices, in transparency, in eliminating corruption at all levels, the opening of the stock market, and the influx of hard currency, will transform the nation and bring it to the forefront of the 21^st century global economy. WTO membership is yet years away, as will be PNTR, but Vietnam should be able to strut its stuff on the American Market is short order.

This will not come too soon.  With reportedly 1 million new youths entering the labor market every year and the market now in its 3^rd year of downsizing, the failure to seize this perhaps last opportunity could encourage instabilities seen in neighboring lands.  A few new projects and some old, long stalled ones already are showing new signs of life in both Ho Chi Minh City and Hanoi.  Concrete trucks are rolling, not yet in fleets, but at least they are not idle and rusting. 

There have been many windows of opportunity that closed due only to the inaction or misdirection of many in leadership positions in Vietnam. The leadership must not allow that to happen again.

Based upon serious complaints made to us by foreign investors, we caution the good leaders of Vietnam to pay attention: fool the foreign investors once and shame on you.  Fool them twice and shame on them. 

Many foreign investors have been fooled at least once by Vietnam since 1994. Some now say that they will not give Vietnam another chance to fool them again.  While we hope that the bad old days will soon disappear for good, we sympathize with investors who came as friends with a desire to develop the nation, and were welcomed by the government and many domestic vendors merely as "resources" from whom only their technology and hard currency were sought.

However, we also urge investors to pay attention: Vietnam as place to invest in has advantages not found elsewhere in the world.

Vietnam is filled with nearly 80 million people who are hard working and industrious.  By way of example, their rice farmers are able to grow three crops annually against Thailand’s single crop. This is only because the industrious Vietnamese long ago built an extensive, national system of irrigation canals.  

In the same way, 150 years ago Vietnam moved away from Chinese-style print to a romanized alphabet. As a result, with a 92%+ literacy rate, there is a near universal desire by Vietnamese to learn to the level available and beyond.  Walk the city streets and find youth under 25 (who comprise the vast majority of the population), mostly all speaking some English.  The Vietnamese workers, in contradistinction to many in neighboring lands are loyal to their jobs, provided of course they have a fair employer.  

The strategic location of the Vietnam, the natural beauty of the land, the physical beauty of the people (who really do smile), and the nearly perfect year-round weather, makes Vietnam a place everyone should visit for holidays, and families are always welcome.

For our clients and friends, we continue to urge, as always, a conservative optimism on all matters in Vietnam. However, as this is a nation that for nearly 2000 years has longed for its own chance to shine, that time now seems to be upon them. 

Based upon our 30 year-long experience with the people of Vietnam, and particularly our past seven consecutive years in this region, we believe that the next 12 months will be an extraordinarily exciting time for growth in Vietnam, provided the nation’s leaders and foreign investors both have the courage and the foresight to move forward. 

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Current Dispatches

TALK ON TRADE.  The mood in Hanoi is once more expectant - but only among the few die-hard domestic business leaders who felt strong enough to talk openly.  Attending the celebration of the American 4th of July (on Saturday the 2nd) in Hanoi was a unique experience.  Old hands and new alike were there to enjoy the day, but not to celebrate their business success.

Ambassador Peterson's printed remarks are telling. In part he stated: "While much as been accomplished, much remains to be done."

About the meeting this month between Ambassador Barshefsky and Trade Minister Vu Khoan, Pete's office wrote: " In July 1999, the US and Vietnam initialed an agreement in principal concerning all outstanding substantive issues.... The minister has agreed to (Ambassador Barshefsky's ) invitation" to conclude the agreement.

The American side has no reason to re-open discussions already agreed to.  While non- substantive matters may be discussed, the Vietnamese side in Washington should not be expecting more than a simple signing ceremony. 

Even then, the course of the BTA's passage through Congress will most likely have to wait the conclusion of the US Presidential election this November, and possibly a new Congress in January.

With so much at stake for the people of Vietnam, talk at the celebration by concerned domestic and foreign investors was serious.  We heard from quite a few in essence that if the leadership of this wonderful land, blessed with an abundance of  hard-working, skilled labor and natural resources, cannot now authorize the BTA and open its doors to trade with the largest consuming public in the world, the old guard should then gracefully retire.

Many said the old guard, failing the people once more, should be (after the IXth party congress next March) made senior advisors, be granted sea-side villas or mountain retreats to enjoy their life, be given a large pension to care for their families, and allow the younger generation who have enjoyed more than a decade of real peace,  to take the steering wheel of the ship of state and sail it to the shores of real prosperity.

The author's of a recent flurry of foreign press reports to the effect that Vietnam reneged on the BTA back in October to favor China's going first, should study their history lessons.  Vietnam is wary of China and jealous of little.  Vietnam has its own reasons to seek strategic security of all of its borders, including trade, and yield little if anything to China.

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DUNG QUAT - Progress?  Recent reports are that the work on this US$ 1.5 billion + refinery will be accelerated with the infusion of VND 3.187 trillion (US$ 227.6 million) of which VND 2.909 billion (US$ 297.8 million) will come from the Russian and Vietnamese (50/50) joint venture. Photos released show land fill or waste being carted over bull-dozed land, and carry the caption: " Materials being transported to the site of Dung Quat Port that will, in turn, facilitate the building of the nation's first [major] oil refinery."

No explanation is offered as to where the Joint Venture will source its funds, or where the "materials" are to be used.  Many are watching this closely, some with more skepticism than others.

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ENTERPRISE LAW - Doubts remain on the current viability of Vietnam to sustain internal growth and foreign investment. Recent reports could be more encouraging but are not yet.   The local media state that 5,000 new domestic enterprises have be founded in the opening half of this year, but no one can state if the number, or the businesses claimed, are for real. 

As there is no accessible and reliable data on registrations, the number may be understated but there is no such suspicion written in the local press.  Some of the new enterprises may be replacements for established business, or exit on paper alone.  Complaints are reported that legal business owners have recently received summons from tax authorities for business formed using their names as a founder of new enterprises.  

This is yet another example of the need for a comprehensive review of not just drafting new laws, but regulations and enforcement procedures to insure the proper conduct of and accounting for businesses.

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BOURSE REPORT -    With two companies [REE - refrigeration and Bao Viet - insurance] on the verge of opening the new trading expected soon in Vietnam, the gray market is reportedly flourishing.  Individual owners of recently equitized companies that do not yet have financial credentials strong enough to support legal trading on the Stock Exchange, are making due with the apparent open but not official consent of the Securities authorities.  Reports of such matters now appear daily in the local domestic and foreign language press, all of which are State controlled.

Daily reports on the gray or black market trading of up to 20 companies appear each morning, such as " Five hundred shares issued by Ha Long Canned Food Company have just been listed at Index House," the unofficial but seemingly sanctioned trading floor of the unofficial bourse.

It is added that prices will increase on such shares as holders will be "reluctant to sell until the HCM City Securities Transaction Centre [the official stock market] opens."

No doubt other holders of recently equitized companies will also seek to sell at Index House. Consider lucky owners of shares from the five of eleven subsidiary companies of Vietnam Posts and Telecom (VNPT) already equitized.  No doubt they will want to unload their shares quickly, before the public reads the published reports such as:

"But VNPT experts in charge of the equitization process admit most of these enterprises are experiencing financial difficulties.  Some of them are completely reliant on capital loaned to them by [VNPT] and others can only manage very sluggish business performances." 

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CONSTRUCTION REPORT -  The cement trucks are out and working.  This is the first time in nearly two years that several major projects are seen making progress in both Hanoi and HCMC.

The air is not filled with cement as in the heady days of 1995-98, but there are major sites that have seen no work in progress that are now building.

Office buildings, trade centers, amusement parks, even sites of hotels and apartments are seeing trucks pull in daily to drop loads of cement as the construction cycle seems to be once more beginning to move forward.

We are in the process of updating our photo essay section, Photos of Saigon, to show this amazing development.  When the photos are ready we will offer a more detailed report.

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