Vietnam and the United States now have a very different relationship since the Vietnam War ended four decades ago. On July 11, 1995, the United States and Vietnam announced the end of the Vietnam War. In July of this year, the US and Vietnam celebrated their 27-year diplomatic relationship. The US reaffirmed its support for Vietnam, including its commitment to the rule of law, freedom of navigation, and unrestricted trade, among other things.
The US and Vietnam have improved their ties since they established diplomatic ties, with bilateral trade rising from US$450 million in 1994 to US$77 billion in 2019. Vietnam had overtaken the US as the country with the greatest export market, while the US had the fastest-growing export market in Vietnam.
In 1986, Vietnam began a series of significant economic changes known as “Doi Moi,” with the goals of establishing a market economy and fostering competition in the private sector. This created a large investment opportunity for global corporations due to the expanding population. A bilateral trade agreement between the US and Vietnam was negotiated for several years before it became effective in 2001.
The agreement assisted in removing a number of non-tariff obstacles and reduced tariffs on a range of products, including electronics, agricultural, and animal products, by an average of three to forty percent. Additionally, Vietnam received the most-favorable-nation (MFN) designation, which was necessary to join the World Trade Organization (WTO).
The Trans-Pacific Partnership (TPP), a free trade deal (FTA) involving the US, Australia, and ASEAN nations, was promoted by former US President Barack Obama. As a result of this FTA, Vietnam gained access to the US market, making it one of the largest winners. All of this, however, came to an end in 2017 when former US President Trump cancelled the agreement, alleging it would harm US companies and employment.
But in March 2018, Vietnam and ten other nations signed the Comprehensive Agreement for Trans-Pacific Partnership (CPTPP) without the US. Although there has been a setback, analysts believe that bilateral trade between the US and Vietnam will continue to expand and prosper.
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Positive relationship but not without its setbacks
Investors worried that Vietnam’s good relations with the US were finished after Trump claimed in an interview that Vietnam was “almost the single worst abuser of everybody” in 2019. Trump has also expressed dissatisfaction with the US-Vietnam trade deficit. According to a Bank of America Merrill Lynch report, Vietnam’s trade surplus with the US has increased to US$600 million.
Additionally, the US Department of Commerce (DOC) disclosed a preliminary anti-dumping tax on honey imports from Vietnam of 412.49 percent, nearly tripling the earlier suggested amount of 207 percent. Other trade impediments cited by the US include insufficient safeguards for intellectual property and food safety, limitations on the internet and digital economy, and other governance difficulties.
Security relationship adds stability to improving bilateral ties
A historic port of call in Vietnam was made by the USS Carl Vinson, an aircraft carrier of the US Navy, in 2018. Vietnam also took part in Rim of the Pacific (RIMPAC), a maritime military exercise held by the US twice a year, for the first time that year. In 2016, the US overturned a restriction on legitimate arms sales to Vietnam, and since then, both nations’ militaries have grown closer and engaged in high-level military exchanges.
Vietnam has done this in order to counter China’s aggressive behaviour in the area, especially in the South China Sea. Building on this alliance, Hanoi was chosen to host the US-North Korea summit in February 2019, enhancing Vietnam’s standing internationally.
According to US Defense Department Institute’s Asia security expert Alexander Vuving, “Vietnam holds a key to the regional balance of power.” If the US holds the same opinion, it will maintain its promising and growing relationship with Vietnam, especially if Vietnam is considered as a rival to China.
More recently, Pham Minh Chinh, the prime minister of Vietnam, travelled to the US for one week to attend the ASEAN-US Special Summit. The productive visit also demonstrates the parties’ shared commitment to expanding bilateral cooperation.
It’s ‘advantage Vietnam’ while US-China trade dispute lingers
Vietnam has been impacted by the US-China trade war in a domino effect. Vietnamese exporters have noticed a rise in demand for their goods, particularly clothing and textiles. For investors profiting from the “China plus one” approach, which entails transferring or expanding operations to other nations to improve market access, Vietnam has emerged as a viable alternative to China.
It’s crucial to remember that this was already taking place, but the trade war sped up the process. According to Kyle Freeman, Partner and Head of the North American Desk at Dezan Shira & Associates, “Vietnam represented the most cost-competitive China alternative for general manufacturing in Asia before the US-China trade war started and more recently before the COVID-19 pandemic broke out.
Vietnam was recommended for foreign investors because of factors like its relatively effective and stable political system, regulatory familiarity for businesses used to conducting business in China, highly competitive labour costs, a business-friendly tax profile with generous incentives, and proximity to existing Asian supply chains. These benefits, along with important advances this year, have increased Vietnam’s competitive appeal for FDI, particularly for US businesses.
US companies operating in China have gradually relocated their manufacturing operations to Southeast Asia, particularly Vietnam, due to rising labour costs, the need for diversification, and the government’s priority moving from labor-intensive sectors to high-tech industries.
Vietnam has been one of the manufacturers’ top options due to its proximity, lower wages, skilled workforce, trade agreements, and regional connections. Due to the costs involved with the trade war, major US companies like Apple, Intel, Qualcomm, Universal Alloy Corporation (UAC), Nike, and Key Tronic EMS have already transferred production lines to Vietnam.
Since the normalisation of diplomatic relations, all of these reasons have contributed to a rise in trade between the two nations. Surprisingly, according to the General Department of Customs, bilateral trade between Vietnam and the US reached a record-high of US$111.56 billion in 2021, up about US$21 billion from the year before.
As a result of this number, the US is now Vietnam’s second-largest trading partner behind China in terms of import-export volume. Given the epidemic and the disruptions to the global supply chain and logistics operations, reaching the US$100 billion milestone for the first time was a significant accomplishment for both nations.
Top imports: computers, electronics and components, machinery, equipment, and parts.
Top exports to the US from Vietnam include:
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Along with enhancing their commercial relations, the two nations have extended their cooperation in other areas including as investment, research, high-tech development, transportation, education, telecommunications, and energy. In Dong Province, 70 km from Ho Chi Minh City, for instance, the US-based GE secured a power plant contract this year to deliver power generation equipment packages for Petro Vietnam’s gas power plants.
According to the Deputy Minister of Industry and Trade, with careful planning and investment, sectors like textiles, footwear, aquatic products, electronics, components, and furniture are expected to increase exports to the US to a new level in the near future.
US businesses seek alternative production locations
Cargill, a US-based company, also runs 12 facilities across the nation that employ roughly 1,600 people. Similar companies with operations there include Apple, Qualcomm, Nike, Morgan Stanley, ACORN International, General Dynamics, Hue Capital LLC, Intel, Lockheed Martin International, Google, and USTelecom.
A $170 million investment has been made at the Da Nang Hi-Tech Park by the US-based Universal Alloy Corporation (UAC), which produces electronics for aircraft constructed by Boeing and Airbus. In the upcoming years, the business aims on growing even more. With its latest US$59 million project at the Da Nang Hi-Tech Park, Vector Fabrication Inc. and other US investors have also made financial investments in Vietnam.
All of these elements combine to make Vietnam a “trade war winner,” a prime location for business and investment. Foreign investors will be more forced to look for other locations to relocate their manufacturing production if the majority of US tariffs on Chinese goods remain in place. Vietnam has recently emerged as an attractive China plus one destination.
However, Vietnam’s successes are not only attributable to the deterioration of US-China relations. US investors are seeking for Vietnam’s skilled and reasonably priced labour force, infrastructure, stable administration, secure environment, and free trade agreements in this uncertain time. This pattern is most likely to persist in the near future. And Vietnam is ideally situated to benefit from supply networks that are interrupted elsewhere as a result of the pandemic.
Vietnam’s biggest difficulty now will be how to manage its growth sustainably, even though the trade war and epidemic have generated enough push forces to entice manufacturing enterprises to relocate. Additionally, US investors must conduct their due diligence and take into account a number of aspects, including geography, raw materials, sourcing partners, and supply chain logistics, before evaluating Vietnam as a prospective location for migration.