After four arduous years, the trade agreement between the United States and Vietnam has finally been signed. If approved by the US Congress, the agreement will pave the way for the normalization of trade relations between the former warring states.
The agreement will provide Vietnam with access to the US market on the same terms granted to most other nations. US tariffs are on average 40% of the cost of Vietnamese exports, but on certain garments and textiles the tariff is as high as 93%. All the tariffs are expected to be gradually lowered to less than 3%. As a result, the World Bank estimates, Vietnamese exports to the US will increase by approximately $800 million annually.
This, naturally, has trade financiers in Vietnam excited. "We are quite happy with this," says Asim Shrivastava, HSBC commercial banking manager in Vietnam. "We expect that trade with the US will increase, which will provide opportunities for importers and exporters in Vietnam. And increased import and export turnover means more demand for trade finance and trade services."
Shrivastava believes the agreement, once ratified, will have an immediate impact on the garment, textile, footwear, aquaculture and furniture industries. Increased demand for their exports will, in turn, boost demand for imported raw materials by Vietnamese manufacturers and traders. Shrivastava notes that a number of foreign companies had already set up manufacturing centres in Vietnam in recent years, in anticipation of the agreement. "For example, with the shoe industry, a lot of companies set up offices here hoping that [the trade pact] would have happened earlier," says Shrivastava. "The duties currently are very high...the footwear industry should become attractive as exports from Vietnam." Under the agreement, tariffs on running shoes, for example, are expected to fall from about 35% to about 10%.
Traditional letters of credit will continue to be the main trade finance instrument used and accepted by exporters and importers in Vietnam. "Not many sophisticated products are used, like forfaiting or factoring...those instruments are not common here," says Shrivastava. The US dollar is the predominant currency used for the loans, although some trades have been financed with the euro.
US conditions
The United States has set out conditions, though. It expects Vietnam to open up its telecommunications, banking and agricultural industries. But, according to a report in the Washington Post, the Vietnamese negotiated delays to the implementation of certain provisions, in order to allow domestic companies time to adjust to foreign competition. For example, US banks will only be allowed to issue credits cards eight years after the agreement takes effect.
US companies looking to invest or trade in Vietnam may, therefore, have to wait some time before the full benefits of the agreement take effect. Given the lack of sophisticated infrastructure and the fact that US goods are probably still unaffordable to the average Vietnamese citizen, US companies may not choose to invest in the country immediately.
Moody's Investors Service recently stated that the agreement means greater internationalization via trade. The rating agency also says that the revival of investment flow will provide the impetus for structural reform of the economy.
