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D. VIETNAM BUSINESS FORUM

The Vietnam Business Forum 2002, held in Hanoi in December, was attended by more than 300 persons, including 28 foreign and local business associations, 120 from companies, 17 Vietnamese Ministries as well as representatives from the donor community, international organizations and Non Governmental Organizations (NGOs).

The long-term outlook was overall positive - growing local market and foreseen political stability - and the majority of companies admitted they are planning to expand in the next three years.

But there were also many complaints about the poor enforcement of laws, bureaucracy and mainly corruption, and the high cost of doing business in Vietnam. In spite of this, both local and foreign companies believe that it is easier now to set up companies in Vietnam than before.

Most of the companies found political stability, location, inflation and exchange rate management somewhat satisfactory; however, they asked for better IPR protection, and find the efficiency of the civil service, infrastructure bottlenecks and the legal and regulatory framework unsatisfactory.

Both local and foreign companies agreed that the Government should take the following steps to further improve the business environment:

1. To improve the efficiency and transparency of the civil service.
2. To enforce laws evenly and strictly.
3. To further remove unnecessary permits and ease entry.
4. To accelerate the financial sector reform.
5. To lower utilities cost and improve infrastructures.
6. To overhaul the tax regime.

In spite of this, most attendants agreed that the business environment was steadily improving, and they hoped that the Government will take actions to address their concerns and to raise the confidence of investors. In this sense, businesses share a generally positive medium-term outlook on Vietnam, but with significant short-term concerns about the speed of implementation of Government reforms.

E. PROSPECTS

If the current outlook of Vietnam is widely regarded as positive and its Government generally committed to reforms, there can be no room for complacency, for the country faces important challenges in the near future. Divesture in State Owned Enterprises and effective opening of its economy to outside competition are likely to be most difficult issues during the short to medium term. And the final decisions in this respect will be influenced not only by economic considerations, but mostly by the on-going ideological debate (difficult to grasp) within the Communist Party of Vietnam.

For many investors (and not only foreign) Vietnam’s development is hampered by continued mixed signals as to the direction of reforms. Macroeconomic management is well regarded and coherent, however Ministries and the Communist Party of Vietnam tend to issue orders which contradict the spirit of reforms and put into question the commitment to reforms. Indeed, the positive scenarios portrayed by the Government and some multilaterals will only be realized if reforms are fully and effectively implemented. More often than not, they are not.

These conflicting messages (pro-market rhetoric, but sporadic and unexpected interventionism -such as the sudden restrictions in imports of car and motorbike kits, or falling way behind in SOE reforms) does not provide the necessary market stability to convince investors that Vietnam provides better prospects than other ASEAN members or China. While tradition of State interventionism dies hard, the Government has no other option. Unless reforms are given a clear mandate and effectively implemented very soon, Vietnam will fall short of fulfilling its potential and investors will move production elsewhere within the region.

Yet there is precious little time to put these reforms into place for several reasons. Changes in the trade environment for Vietnam will not be gradual, but very abrupt: the next few years will see the opening of the Vietnamese economy to ASEAN competition through its CEPT (which was due to start as of 1st January 2003, but Vietnam will postpone by six months), as well as mounting pressure from Chinese WTO membership, and maybe by Vietnam’s own future accession.
Under the terms and conditions of its accession to AFTA, Vietnam was to:

(a) extend, on a reciprocal basis, Most-Favoured Nation and National Treatment to ASEAN Member Countries;
(b) provide relevant information on her trade regime as and when requested;
(c) prepare a list for tariff reduction and begin tariff reduction effective 1 January 1996 and ending at 0-5% tariff rate on 1 January 2006;
(d) phase in products which are temporarily excluded in five equal installments beginning 1 January 1999 and ending 1 January 2003, and prepare a list of these products for their annual installment;
(e) phase in agricultural products which are temporarily excluded beginning 1 January 2000 and ending 1 January 2006, and prepare a list of these products for their annual installment.


Following its CEPT commitments, in June 2001 Vietnam issued Ordinance 28, detailing the changes in tariff lines, effective 1 January 2001:

713 Items were transferred from the Temporary Exclusion List (TEL) to the Inclusion List (IL). The remaining 1.700 products still in TEL will be moved to IL by 1/1/2003. [Now, the transfer appears to be delayed until 1/7/2003]

As for the 4.986 products of the inclusion list, 65% are subject to 0%-5% tariffs and 35% to 5%-20%. By 1/1/2006, 97% of tariff lines must be 0%-5%.

Also by the end of 2004, WTO members will phase-out textile quotas (one of Vietnam’s main foreign currency earners) and will erode Vietnamese market share in key markets such as the EU, Japan and the US (although Vietnam will benefit from the longer phasing-out period for Chinese textile exports). All in all, there are many important and sudden challenges for Vietnam within the next three to five years. Unless there is a new reform drive in the very short term, Vietnam will fail to fulfil its potential and reach its ambitious (and largely correct) targets.

The main Economic targets for the year 2003 are as follow:

GDP Growth
of which:
7.2% to 7.5%
Primary sector
5%
Secondary Sector
14.5% to 14.8%
Tertiary Sector
7% to 7.2%
Inflation Target 4%
Budget deficit 5%
Employment creation 1.5 million
Poverty rate cap 12.5% of population


F. ECONOMIC REFORMS

The Vietnamese Government is proceeding slowly but surely in the path of economic reform. The Law on Enterprise has been a success with more than 50.000 new companies registered since its promulgation, and the business environment is steadily improving. However, the reforms of State Owned Enterprises and the banking sector are proving to be harder to implement.

State Owned Enterprises

The efforts to reform of State Owned Enterprises continue, but progress is very slow.

Only 288 SOEs have been transformed in 2001 and 150 as per November 2002, of the 1700 scheduled for transformation between 2001 and 2005. Slow progress can be attributed to the fear of massive job losses in enterprises where over-staffing is pervasive, and to excessive debt burdens that may dissuade potential buyers.
The year 2002 witnessed a series of legislative changes with respect to SOE reform.

Decision 58/2002/QD-TTG further specifies the industries where SOEs are to remain under state control, equitized, handed over to employees or sold, and draws up criteria for General Corporations. In 2003 the names of the enterprises to be transformed will be published, together with a timetable for the transformation.

Decree 64/2002/ND-CP gives the right to buy shares to both Vietnamese and foreign organizations and individuals. Decree 69/2002/ND-CP instructs SOEs to settle their outstanding debts or be liquidated or declared bankrupt. To address possible resistance from insiders, a safety net for redundant workers was set up in April.

Banking Sector

Infrastructure for the local money market has improved in 2002 but reform of State Owned Banks is lagging behind.
Interest rate ceilings for lending in domestic currency were removed in June. Electronic payment systems were set up, and the State Bank improved the Open Market Operations, all of which are expected to improve liquidity and the overall efficiency of the market for short term credit.

Efforts to transform the four State Owned Commercial Banks into a commercially-based operation are still in the early stages.

Recent legislative changes include the establishment of bank-based asset management companies to resolve non-performing loans. The main difficulty in the resolution of old NPLs concerns loans without collateral, mainly to state-owned enterprises.

Regulation and supervision of the banking sector by the State Bank of Vietnam is also being reviewed to promote more commercially-oriented practices and enhance transparency. But so far inspections concentrate on the enforcement of laws on monetary and banking operations, and not on the evaluation of asset quality and other risks in the bank’s operations.

G. EU-VIETNAM RELATIONS – RECENT DEVELOPMENTS

EU Vietnam economic relations are currently going through a positive stage.
Bilateral Trade issues:

A bilateral cooperation agreement is in force between Vietnam and the EU since 1996. It provided for reciprocal MFN treatment for goods. The agreement also confirmed the application of GSP to Vietnam.

Since the entry into force of the agreement, bilateral trade between EU and Vietnam has increased threefold, with a current account balance of EUR 2.8 billion in favour of Vietnam.

A Bilateral Trade Agreement between Vietnam and the US entered into force in 2002. It gives MFN status to Vietnam in exchange for trade and investment concessions in various sectors, particularly services. Following the entry into force of this agreement, an inter-ministerial instruction was issued in January 2002 by the Ministry of Trade confirming that European companies would receive not less favourable treatment than those of any other partner. The EC Delegation and EU Member States are continually monitoring compliance with this instruction.

A textile agreement is in place between Vietnam and the European Community since 1992, last amended in 2000. This agreement provides for quotas applicable to a number of textile product categories and automatic progressive increases of quantitative limits until the end of 2003.

In late 2001 the Vietnamese Government showed its interest in improving the textile quotas in place and made an official request to initiate talks by letter from the Ministry of Trade.

The Commission indicated that Vietnam should fulfil its pending commitments on market access, derived from a previous agreement, prior to considering the possibility of additional concessions. The Commission accepted that it could satisfy part of the demands made by the Vietnamese side. In exchange for this, the Commission requested a second package with further opening of Vietnamese economy.

The European Commission and Vietnam initialled on 15 February 2003 a trade agreement. The agreement gives Vietnam increases in textile and garments quotas worth EUR 200m a year in exchange for significant tariff reductions by Vietnam for EU textile and clothing and other liberalization commitments in a number of sectors. Commissioner for Trade Pascal Lamy commented: "this agreement is evidence of the EU's commitment to strengthen trade and investment links with Vietnam. We want to do business with Vietnam. It is also a step in the direction ahead of Vietnam's accession to the WTO". The Commission has made recommendations for an early adoption and implementation of the agreement by the Council. The agreement has a duration of three years and provides for the following:

- The EU will increase its textile and garments quotas applied to Vietnam between 50% for the most sensitive categories (such as trousers or shirts) and 75% (such as brassieres). The estimated value of these concessions is EUR 200 million for 2003 and EUR 225 million for 2004 and 2005. Under this agreement, total imports from Vietnam in the sector will increase by around a quarter, with the possibility of exceeding the EUR one billion mark for the first time.

- Vietnam commits to reduce its customs duties for EU imports of textile and garment products, progressively, to 20% for clothing, 12% for fabrics, 7% for yarns and 5 % for fibres in 2005 - or less than half the duties it applies at present. It has also agreed to improve the management of the granting of licenses for exports of the interest to EU textile and clothing industry.

- Maximum duties to be applied by Vietnam

  2003 2004 2005
Clothing 30% 25% 20%
Fabrics and made-up articles 20% 25% 20%
Yarns 12% 10% 7%
Fibres 7% 6% 5%

- Vietnam and the EU commit not apply any non-tariff barriers in the sectors covered by the agreement.
- Vietnam will introduce a number of liberalization measures in other sectors:


o From 1.1.2004 it will allow EU operators to undertake through joint ventures a list of sea cargo transport agency activities currently not permitted to non-Vietnamese firms.
o It will issue without delay an additional insurance brokerage license to an EU firm.
o It will introduce from 1.1.2004 a tariff quota for the import of motorbikes and scooters of EU origin.
o It will reduce import tariffs on wines and spirits of EU origin to 80% on 1.1.2004 and 70 % on 1.1.2005.
o It will take concrete and immediate steps to fulfill its commitments undertaken earlier regarding the elimination of minimum import prices for wines and spirits and ceramic tiles, the elimination of additional duties for ceramic tile imports and an expansion of the list of pharmaceutical products allowed for imports.
o It will apply a "non-discrimination" provision in particular in the banking and telecommunications sectors.
o The agreement contains precise implementation provisions that subject the increase of EU textile quotas to prior fulfilment by Vietnam of its obligations under the agreement, and for the withdrawal of concessions in case Vietnam did not comply with its obligations.

Although the agreement contains obligations for both the EU and Vietnam, it is intended to be economically more favourable to Vietnam than it is to EU, in recognition of Vietnam's developing country status. In elaborating its quota increase concessions, the Commission has also taken into consideration the flagging consumption in the textile and clothing sector in the EU.

In addition, Vietnam requested the European Commission to explore the possibility of initiating negotiations on a bilateral trade agreement between EU-Vietnam.

WTO accession process:

A WTO Working Party on the accession of Vietnam was established on 31 January 1995. The last session (5th) of the Working Party was held on 10 April 2002. The sixth session took place in May 2003.


Bilateral market access contacts between Vietnam and WTO members have been initiated. Topics under discussion in the Working Party include: agriculture, the customs system, import licensing, national treatment, SPS and TBT, State trading, trading rights and TRIPS.


On the accession to the WTO itself, Commissioner Lamy has encouraged the Vietnamese Government to speed up the process of negotiation in accordance also with the views expressed by WTO Director General Mike Moore during his visit to Vietnam in April 2002.


The EC has consistently suggested that an ambitious first offer would be necessary to catch the attention of WTO’s 144 members, particularly when 27 other countries are in negotiations to join in.

In January 2002, Vietnam officially submitted to the EC its initial offers on tariffs and services for WTO accession. In April, after the meeting of the Working Party, the Commission put forward to the Vietnamese Ministry of Trade its detailed comments on the Vietnamese offer, suggesting a number of changes to be considered for a revised market access offer.


On 22 October 2002, Vietnam submitted the following documents: 1) Action Plans to implement WTO Agreements; 2) Revised Offer on Services and 3) Revised Offer on Tariff and Schedule of Non-Tariff Measures. These documents were initially discussed during the 2nd bilateral negotiation session between Vietnam and the EU in November 2002 in Hanoi. The following meeting took place in parallel with the 6th session of the Working Party.

Doha development agenda:

Vietnam’s Government expresses its support for a new round on multilateral trade. It insists WTO strictly to observe the commitment of Uruguay round by reserving special and differential treatment for the developing countries. They intend to insist in being considered a LDC to further benefit from special and differential treatment.

Trade defense instruments:

Vietnam is currently developing its legislation on subsidies, safeguards and anti-dumping. They seem to be following the EU rather than the US model.

An anti-dumping case on lighters has been initiated in July 2002 against a number of countries, among which Vietnam. The early reaction of the Vietnamese authorities has been to claim that the market share of Vietnamese imports into the EU is negligible and therefore the case should be terminated. Subsequently, they requested the Commission to consider Vietnam as a market economy for the purpose of calculation of normal value.

Suspected Fraud

Following allegations of suspected fraud two investigations are currently being conducted by OLAF, the anti fraud office of the European Commission, in respect of textiles and zinc oxyde.

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