I. Trade History between the U.S. and Vietnam
Many factors have contributed to reshaping and redefining Vietnam's growing dynamic economy, which had once been coined by the United States as an underdeveloped country but is aggressively emerging to a developing country status. Since the economic reforms in 1986 transitioning the country to a market-based economy and the socialist government welcoming foreign direct investment, Vietnam has experienced a high rate of economic growth over the last two decades and trade has been a major contributing factor in the structural transformation and development of the country's economy. The United States lifted its trade embargo against Vietnam in 1994, and on July 11, 1995, U.S. President Bill Clinton implemented a formal normalization and renewed diplomatic relations between the United States and Vietnam after 20 years of severed ties following the end of the Vietnam War on April 30, 1975. In 2001, the Bilateral Trade Agreement (BTA) between the United States and Vietnam entered into force, and Vietnam officially became the 150th member of the World Trade Organization (WTO) in 2007. Since 2000, Vietnam has averaged a GDP growth over 6% per year fueled by foreign investment in manufacturing. Consequently, these milestones have led the U.S. to being Vietnam's largest export market worth nearly 70 billion USD in 2020. Fast forward to the current date, Vietnam is now considered as one of the fastest growing and most robust economies in Asia due to its rise in exports and domestic activity. Contributing to that is the shift in manufacturing coming from the People's Republic of China to Vietnam in recent years due to the trade war between the U.S. and PRC, as well as its geographic proximity, lower wages, skilled labor, trade agreements, and regional connectivity. Vietnam has emerged as one of the most preferred alternatives for manufacturers seeking to outsource overseas in Asia and capitalize on reduced costs, and avoid the Section 301 tariffs when sourcing and manufacturing in China.
II. Trump and Trade War
In the history books now, but still with us to this day, the Trump Administration launched the trade war with China. Throughout the turmoil this has caused in the last few years, one of the primaries, and quite possibly, one of the only "winners" and major beneficiary of investment in the trade war between the U.S. and PRC has been Vietnam due to the transshipment of goods from China via Vietnam and replanting their operations. Vietnam has seen a surge in exports as a result, and with that, comes additional scrutiny. Vietnam's trade surplus in goods with the United States has soared from $31.98 billion in 2016 to $39.49 billion in 2018 and was up 39 percent in 2019 before the COVID pandemic. Americans were buying more from Vietnam because of the high tariffs imposed on China under Trump administration, but this was conflicting as his trade policies were supposed to bring manufacturing home to create more job opportunities for Americans instead of foreigners. The Trump administration took notice and was determined to reduce the trade deficit. In October 2020, the Trump administration started two investigations using Section 301 of the 1974 Trade Act, similarly to the same statute used to impose tariffs on more than $350 billion worth of Chinese goods. In addition to the Section 301 investigations, in May 2019, the United States also placed Vietnam on its monitoring list for currency manipulation and former President Donald Trump termed Vietnam as the "single worst abuser of everybody" at the 2019 G20 summit in Japan. Luckily, earlier last year the USTR decided to hold off on implementing tariffs against Vietnam's goods and they escaped the Section 301 tariffs. In April of last year, the Treasury Department removed the currency manipulator label from Vietnam and Katherine Tai, the USTR, will continue to monitor Vietnam's implementation on refraining from competitive devaluation of its currency.
III. Trade under Biden and COVID Pandemic
President Joe Biden came into office on January 20, 2021, succeeding former President Donald Trump. Under the Biden administration the democratic agendas have been emphasized on human rights in comparison to the Trump administration with a more transactional approach, as well as an interest in improving bilateral relations with Vietnam. As of recent, given the situation in the S. China Sea, America's relations with Vietnam have taken a backseat. Understandably, improving United States-Vietnam relations is not in the forefront of the Biden administration agendas amidst a global pandemic surrounding COVID-19 and its repercussion such as a soaring inflation, supply chain snags globally, and of course now, Russia's potential invasion of Ukraine. Worth noting, America's economy is making progress in rebuilding and recovering from COVID this past year. Vietnam on the other hand, is the most impacted country due to a surge in COVID infections and low vaccination rates. Although, the country fared well early in the outbreak, when the Delta variant emerged and made its way to Asia in spring of last year, Vietnam was hit hard as only 25% of the population was vaccinated and in the south primarily, where manufacturing is heavily concentrated. This subsequently imposed draconian measures to prevent the transmission by enforcing many factories in order to remain open having to offer on-site room and board for employees. Many workers simply pitched tents on their factory floors as their employers made it mandatory that they stay 24/7 on campus. Companies in the Asian sector of manufacturing hubs of course have many reasons to do everything they can to keep their factories open during the ongoing pandemic. Tech giants such as Apple, Samsung, and Intel that have large production bases in Vietnam, made it mandatory that their workers are subjected to strict anti-COVID 19 checks, those who have decided to remain on campus to work were compensated by an increase in their wages or have had vaccination accessible to them sooner than the rest of the Vietnamese population. Obviously, these tech giants wanted to ensure that mobile phones and tablets continue to be distributed and would arrive in the market worldwide by given deadlines, if possible, given the supply chain lags they also need to contend with. On a capitalistic angle, these tech giants are acting on consumer demand, however, the supply chain is a complex and sophisticated ecosystem that consists of many interwoven parties and COVID has posed a challenge on the efficiency and flow of supply and demand. Major changes in consumer habits driven by a global pandemic have led to high volumes of containers moving to, but not so much through, the two largest U.S. ports of Los Angeles and Long Beach, as port congestion still has a backlog of getting a berth for off-loading at around 4-5 weeks in delay.
COVID Pandemic and Supply Chain
The reality is that COVID continues to put pressure on the U.S. workforce and the supply chain. During the early outbreak of the pandemic, there was a colossal shift to e-commerce and consumers needed more goods delivered than ever before such as plastic packaging, plastic wrapping, personal protective equipment etc. On the demand aspect, we have a growing e-commerce and economic stimulus packages that have put additional pressure on carriers, ports, and intermodal transport providers. On the supply aspect, the pandemic has slowed down operations at all levels with the rolling lockdowns, storms and material shortages that are disrupting major manufacturing hubs in Asia, creating delays. Shipping containers capacity can't meet skyrocketing demand, causing bottlenecks between factories, ships, and warehouses, as well as an influx of ships, trailers, and containers that are colliding with pandemic-related labor shortages, thus causing port congestion. Port congestion occurs when ships arrive at port but cannot load or unload because of the already full port capacity and the shipping companies and ports were not equipped to handle the flood of containers. This has caused growing backlogs and a serious problem as ports are critical to the global economy and our livelihoods, such as food, jobs, energy are dependent on a functioning and resilient global supply chains. Moving product into the ports of Los Angeles and Long Beach, the two busiest container ports in the United States has become problematic and port terminals had no room for containers as ships were left idling in San Pedro Bay. In mid-October of last year, President Biden wanted to alleviate the supply-chain crisis that has left ports all over the world congested. He called on private companies to take the initiative to address the bottleneck problems because the crisis has not only caused congested ports, but also to address the longstanding weaknesses in our transportation supply chain that this pandemic has exposed. Following President Biden's signed federal infrastructure bill on November 15, 2021, California Governor Gavin Newsom and Port Envoy John D. Porcari visited the Port of Long Beach on November 17, 2021, to discuss state and federal measures to alleviate the congestion at the San Pedro Bay Port Complex. Although there have been some improvements to the port congestion affecting the supply chain, the Omicron variant is threatening to make the historic backlog persist. Infection rates at the ports are already stalling efforts to clear a backlog of over 100 cargo ships. The supply chain crisis most certainly will continue into 2022, negatively affecting trade and reshaping trade flows across the world.
IV. Vietnam Investment Climate
Despite the hardship facing COVID-19, Vietnam's economic recovery is predicted to likely accelerate in 2022 as GDP growth is expected to rise to 5.5% from 2.6% in the year just ended according to the World Bank's economic update for Vietnam from the Taking Stock report. Not only that, based on the report from KPMG regarding investment in Vietnam in year 2021, the GDP growth rate is nearly two times higher than in 2020. Vietnam is one of the countries with the highest economic growth rates in the world due to its stability of the economic market as well as the promotion of investment and development by the government. Also noteworthy, on November 15, 2020, Vietnam and fourteen other countries signed the Regional Comprehensive Economic Partnership (RCEP), which is considered the largest free trade agreement in history among the Asia-Pacific nations that account for about 30% of the world's population and 30% of global GDP, thus making it the largest trade bloc to have ever transpired. As of 17 January 2022, seven of the ten ASEAN, and all five of the non-ASEAN, signatories have deposited their instruments of RCEP ratification with the Secretary-General of ASEAN. For the first ten ratifying countries, the trade pact took effect on January 1, 2022. The purpose of the RCEP is to eliminate about 90% of the tariffs on imports between the fifteen signatory countries for the next twenty years and to establish common rules for e-commerce, trade, and intellectual property which will benefit Vietnam in the post-pandemic economic recovery process, as well as paving the way for countless Vietnam investment opportunities in many fields and industries. Aside from the RCEP, the European Union-Vietnam Free Trade Agreement (EVFTA) and the Investment Protection Agreement (EVIPA) were officially passed in Vietnam on June 8, 2020, in the Vietnamese National Assembly and officially implemented and entered into full force on August 1, 2020. According to the U.S. Department of State, based on the overview of the year 2020 investments, 48% went into manufacturing, primarily in the electronics, textiles, footwear, and automobile parts industries. Other sectors including utilities and energy consist of 18%; 15% is in real estate; and smaller percentages in assorted industries. There are also garments, furniture, and agricultural products on the list of top exports to the United States from Vietnam as well. We must not overlook that many of our American entities such as Williams-Sonoma, Restoration Hardware, West Elm, Nike, Adidas, Puma, Lululemon, and Gap have manufacturers in Vietnam. In 2020, Vietnam ranked eleventh as an electronics exporter to the world. Aside from those tech giants previously mentioned such as Apple, Samsung, and Intel, we also have Microsoft, Nintendo, LG, and Canon currently manufacturing in Vietnam.
V. Future of Vietnam Trade
It is no surprise that electric machinery and equipment are currently the top export from Vietnam to the U.S. and is also Vietnam's No. 1 export worldwide. For example, Vinfast, a car company in Vietnam aspires to become a global brand selling the electric SUVs in the U.S. market following the successful footsteps of other Asian countries such as Japan that produces brands like Lexus, Toyota, Honda, and Subaru, as well as South Korea with Hyundai and Kia. Currently, Vinfast does have a U.S. headquarters based in Los Angeles, but for now, the company will continue to build these SUVs in Vietnam with a plan in 2024 to move production to a U.S. factory. With the possibility of Vinfast successfully competing in the automotive market in the United States, it is likely that this endeavor would further strengthen trade between the two nations. Only time will tell with what is to unfold with the post-pandemic economic recovery process in Vietnam, but at this rate, there are many variables pointing to a successful ongoing U.S.-Vietnam trade relations. As of January 26, 2022, over 70% of the Vietnamese population has been fully vaccinated, and what this means is that the economy in Vietnam is projected to grow by about 5.5% in 2022, assuming that COVID will be contained both domestically and internationally, it is safe to presume that the economy will stabilize at around 6.5% at this rate. Contributing to the growth is manufacturing exports responding to the United States, Europe, and Chinese demand for Vietnamese exports. With Vietnam's latest venture into producing electric cars, it appears that the country has jumped on the bandwagon to go green and to decarbonize activity surrounding trade with its commitment to reach its net-zero carbon emission target by 2050. From October 31 to November 12, 2021, in Glasgow, Scotland, the twenty-sixth Conference of the Parties (COP26) to the United Nations Framework Convention on Climate Change (UNFCCC) took place to discuss actions against climate change and Vietnam's Prime Minister, Pham Minh Chinh was in attendance where he touted once again that the country would be part of the global climate change solution. Vietnam has every reason to be concerned with climate change, after all, 13.2% of exports belong to Vietnam's agriculture sector and mainly produced in coastal lowlands and deltas making it vulnerable to climate change, especially with rising temperatures and extreme weather conditions that would put the region at risk of flooding and tropical storms. Rice specifically, is grown in the Mekong and Red River deltas, and its production which accounts as the second-largest exporter worldwide is not only important to the food supply in the country considering it being the staple of the native's diet, but also to the national economy. Geographically, Vietnam has an impressive and extensive coastline facing the South China Sea and has reaped many economic benefits as it is a prime location for maritime trade, as well as an abundance in wind resources promoting offshore wind not just domestically, but also a competitive offshore wind supply chain internationally as today's renewable power equipment and components are mainly imported from Europe, and Vietnam recognizes the strong export potential. It is also worth noting that the Biden administration has been in office for a year now, but many of the trade policies started under the Trump Administration will continue as the impending position on the trade war remains vague with little information provided. In the meantime, until we have further clarity and know for certain what Biden's agendas are on U.S.-China trade relations, it appears thar Vietnam will continue to benefit from the shift of operations of American factories moving production from China to Vietnam. With the projected growth of Vietnam exports and transplants of factories from China to Vietnam trying to avoid Section 301 tariffs, it is worth bearing in mind on how important it is for manufacturers in Vietnam to understand the complexity and intricacies of international trade law, especially the rules of origin that determine the preferential tariff rates on imported goods. For example, how do we determine whether the goods are "Made in Vietnam" as opposed to "Made in China"? Although the imported goods may have been manufactured in Vietnam, if the sourcing of the raw materials were imported from China, and if the imported goods did not go through a substantial transformation in the manufacturing process, it is still after all, "Made in China" and subject to Section 301 duties. Therefore, it is extremely important that manufacturers in Vietnam familiarize themselves with the rules of origin and consult with their trade attorneys and advisers to ensure that their imported goods would be legitimate and not subject to additional 15%-25% tariffs under Section 301, as the determination of country of origin evaluated by the U.S. Customs and Border Protection (CPB) is a very specific process and adheres to a complex and extensive body of court decisions, regulations, and agency interpretations.
Check out our new Digital Magazine Get the inside scoop on the Braumiller Law Group & Braumiller Consulting Group "peeps." Expertise in International Trade Compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.