A foreign trade war, a collection of new trade alliances and a raft of pending legislation have placed Vietnam in a fortunate position for a major windfall. Can it capitalize? Mithun Varkey reports
Vietnam is an ambitious nation that is slowly but surely turning itself into a major economic hub in the region, and building a place for itself in global trade. The country is buzzing and the economy is upbeat. Many tout Vietnam to be the next China, a global manufacturing powerhouse, especially in light of the US-China trade war, which seems far from reaching détente.
Because of its proven manufacturing expertise and proximity to China, with which it shares a border, Vietnam is expected to be the biggest beneficiary of a protracted trade war. Media reports have suggested that a lot of Chinese manufacturers are considering moving their factories to south of the border.
While acknowledging that Vietnam is among the nations best prepared to benefit from the ongoing US-China trade tussle, market practitioners remain circumspect about a trade war bonanza.
On the other hand, there is palpable excitement about the prospects of the various free trade agreements that Vietnam has been signing. The European Union-Vietnam Free Trade Agreement (EVFTA) in particular is expected to be one of the biggest game changers for the country’s economy.
There is also a lot of expectation around the impact of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the new version of the now-defunct Trans-Pacific Partnership, which was called off after President Donald Trump decided to pull the US from the pact after coming to power.
“Given that Vietnam has political and economic stability, an economy that is growing consistently at 5-6% per year and a large population, it is a good alternative manufacturing destination,” says Dang Duong Anh, managing partner at VILAF in Hanoi.
“Some of the manufacturing from China will move to Vietnam, and there has been a small increase in interest in the first eight months of the year,” he says. “However, there are pros and cons to the trade war for Vietnam.”
“The trade war is good for Vietnam in the short term, but can be bad in the long term. The EVFTA, however, will be good for the country in the short term and long term,” says Tony Foster, Managing Partner for Freshfields Bruckhaus Deringer’s Vietnam offices.
The trade war has opened up opportunities for many countries in Asia, which see this as an opportunity to attract more foreign investment and build their manufacturing bases. There is healthy competition within Southeast Asia, especially among Thailand, Indonesia, Vietnam and Cambodia, as well as countries like Bangladesh.
“Macroeconomic stability, low inflation [under 4%], and a lower than 5% unemployment rate helps Vietnam benefit from the trade war, especially in certain sectors in which it has strengths, such as furniture, textiles or electronics,” says Investconsult Group vice chairman Ngo Sy Anh.
“There are some signals and approaches from Chinese companies to set up in Vietnam,” adds Tuan Anh Nguyen, partner and chairman of Bizconsult in Hanoi. However, these enquiries are not all from “manufacturers, but also from sectors like construction services, telecommunications and renewable energy”, he says.
Truong Trong Nghia, a partner at YKVN in Ho Chi Minh City, says Vietnam has a good track record in attracting FDI and is likely to benefit further from the trade war. “The country has received US$300 billion in FDI in the last 20 years,” he says. “The industrial zones, especially the high-tech parks, have already seen investments from companies such as Intel and Japan’s Nidec Corporation, making them an attractive investment destination for foreign investors.”
Phuoc & Associates’ director and managing partner based in Ho Chi Minh City, Nguyen Huu Phuoc, believes there will be plentiful foreign investment in Vietnam due to the trade war and the EVFTA. “A lot of the foreign investment is likely to come from Europe and Southeast Asia, apart from the US and China.”
Trade war conundrum
While there is a lot of talk about Chinese manufacturers flocking south across the border, most practitioners say they have yet to see a drastic impact in Chinese investments or enquries.
“There has been a slow uptick in enquires [from Chineses investors], but there is no flood,” says Michael Lee, a partner at Dilinh Legal in Ho Chi Minh City. “Relocating manufacturing operations is not an instant thing that you can just close China and move to Vietnam.”
Meanwhile, some are also concerned about fallout from the trade war, especially regarding Vietnam’s relationship with the US.
“The increased visibility for Vietnam due to the trade war could bring Vietnam into the cross-hairs of the US,” cautions Foster.
There are three major issues with the trade war that the Vietnamese are wary of – first is the risk of Chinese manufacturers relabelling and repackaging goods and routing them through Vietnam; second is that an increase in exports may force the US to impose tariffs on Vietnamese goods; and third is that the government may have to devalue the currency [Vietnamese dong] to stay competitive with a cheaper yuan.
While the last two are problems that can be pre-empted, the rerouting of Chinese products is already creating trouble for Vietnam.
“One of the things that has backfired for Vietnam is the relabelling of Chinese goods,” says Jerome Buzenet, DFDL’s managing director for Vietnam, based in Ho Chi Minh City.
“There is a government directive to crackdown on relabelling,” adds Son Doan, patent and trademark attorney at IPMax Law firm. “The ministry of industry and trade is working on determining what constitutes goods made in Vietnam, and creating guidelines for the classification of goods by customs and indication of the source of goods.”
Sesto E Vecchi, the managing partner of Russin & Vecchi Law Offices in Ho Chi Minh City, says: “The trade war is good for Vietnam, but could be bad for perception. More attention to Vietnam risks US tariffs, especially because of the huge trade surplus that Vietnam has with the US.
“Vietnam should consider taking measures to offset the trade imbalance.”
Investconsult’s Sy Anh, while upbeat about the country’s prospects, is quick to point out that the trade war has its cons, too. “The devaluation of the yuan by China is putting pressure on the dong as it risks losing competitive advantage vis-à-vis the Chinese currency, and a devaluation of the dong may not go down well with the US.
“Vietnam is already on the US watchlist, especially given that there is an annual trade surplus of US$30 billion with the US, and they are closely watching whether Vietnam is manipulating its currency.”
As for the risk of relabelling of goods and other unfair trade practices, Sy Anh says: “The government is tightening control on imports from China, as well as taking steps to prevent dumping and other such practices.”
Beyond the risk of inviting the wrath of US authorities, Vietnam also has its own problems to deal with. While it is among the most favoured investment destinations in the region, as with many developing nations Vietnam also has constraints such as infrastructure, corruption, a weak judicial system and lack of trained manpower.
ZICO Law’s co-executive partner in its Ho Chi Minh City office, Kevin Hawkins, says: “Vietnam is a likely choice for manufacturing, and US and Chinese companies will come to the country through JVs and alliances. However, foreign investors are often frustrated with shortcomings in Vietnam’s infrastructure such as in warehousing, shipping, road improvement, as well as lack of a deep labour market.”
Dilinh Legals’ Lee says: “Vietnam offers an educated workforce and good labour laws. However, there is a high incidence of white-collar crime and contract issues, which is something that investors will have to navigate.”
“One of the major issues facing foreign investors in the country is the weak judicial system,” says Bernadette Fahy, a partner at Audier & Partners in Hanoi. “The courts are not of international standard, there is a need to improve the skills of judges, as well as the civil procedure code in the country.”
With regard to arbitration, “Vietnam has a poor record in recognizing international arbitral awards”, says Fahy.
This remains a major concern for international investors as most international arbitrations are seated in Singapore or Hong Kong, in the absence of a robust alternate dispute resolution mechanism in Vietnam.
Cutting a deal
Trade deals have played an important role in building the Vietnamese economy. The once war-ravaged country saw its fortunes turn after it joined the World Trade Organization (WTO) in 2007. In the 12 years since opening up to the world, Vietnam has transformed itself into a successful manufacturing hub.
While the WTO may itself be struggling to retain its relevance, the Southeast Asian country has used various bilateral and multilateral trade agreements to forge a path for itself. Apart from the EVFTA and CPTPP, Vietnam has signed several FTAs with neighbouring countries such as South Korea.
“While it is too early to talk about the importance of CPTPP, EVFTA will have a positive impact for Vietnam, at least regulatorily, leading to stricter intellectual property (IP) rules, for example,” says Vecchi.
With Europe, Vietnam has a trade agreement (FTA) and an investment protection agreement (IPA). While the FTA includes only exclusive EU competences, the IPA requires ratification by individual EU member states, and is currently being negotiated.
“The EVFTA will take about another 18 months to ratification. EU is Vietnam’s third-largest trade partner after the US and China. A 10-12% increase in trade with the EU will help the local economy immensely,” notes Sy Anh of Investconsult.
“The EVTA will have a huge impact on Vietnam, especially on promoting innovation, putting in place better dispute resolution mechanisms,” adds DFDL’s Buzenet, while Fahy of Audier believes that the EVFTA will have a much bigger impact on the Vietnamese economy than the trade war.
Vietnam has over the years used trade agreements to steer and update its regulation and domestic laws, and the EVFTA will play an important role in fixing some of the issues with the country’s current legal and regulatory environment.
“With the opening up to international trade, following the country joining ASEAN and then the World Trade Organization, there have been lots of changes in domestic laws as it tries to be more internationally compliant, says Luu Tien Ngoc, partner at Vision & Associates,” says Luu Tien Ngoc, a partner at Vision & Associates in Hanoi.
Ngoc illustrates the change, pointing to the fact that, “[In Vietnam], over 10 years ago you were only permitted to do what the law says, now the law tends to allow you to do what is not prohibited.
“The CPTPP and EVFTA will further the push for reform, especially in areas such as labour, dispute resolution and IP enforcement as the Trans-Pacific and European deals have have higher requirements on these fronts.”
“One of the most important developments of the FTA would be the constitution of an independent dispute resolution body to deal with trade disputes and create an alternative dispute resolution framework to deal with bilateral investment treaty (BIT) disputes,” says Fahy.
“The new investment court, as part of the EVFTA, will be huge in remedying some of these issues, as far as foreign investors are concerned.”
The EVFTA will help create a change in promoting intellectual property services,” says Doan of IPMax. “The Inspectorate of the Ministry of Science and Technology is pushing for further changes in administrative procedures,” he says. “The IP law is being amended in 2020, which will be in compliance with Vietnam’s international obligations. It is intended to promote the domestic economy, competition, and innovation.
“There needs to be a change in perception among authorities, who now think that they are doing a favour to IP owners by taking action. And there is a need for stronger remedies, especially for repeat infringers, including penalties.”
“The agriculture sector will be one of the biggest beneficiaries of the FTA,” says Dang The Duc, the managing partner of Indochine Counsel, based in Ho Chi Minh City. “Vietnam is a major exporter of rice, pepper, dragon fruit, coffee, seafood and rubber, which could all benefit from the FTA.”
The FTA comes at a time when Vietnam is looking to expand its market, not only to Chinese and US investors, but also to companies from Europe, the Association of Southeast Asian Nations (ASEAN), South Korea and Japan, says Ngoc.
“In the past six months, Vietnam has seen a decrease in exports to China and an increase in imports from China. Vietnam has also seen a lower inflow of new FDI as compared to about US$12 billion in the previous year. And the trade deal will help bring in more investors, and, more importantly, a diverse set of investors.”
“The EVFTA will bring European investors and there are lots of opportunities for them, especially in sectors like infrastructure and renewable energy,” says Hawkins of ZICO.
“Vietnam needs a lot of private investment in the infrastructure sector,” adds Duong Anh of VILAF. “There are US$2 billion worth of build-operate-transfer (BOT) roadways planned, there is a new airport project for Ho Chi Minh city, and underground metros in Hanoi and Ho Chi Minh City. In the energy sector, the feed-in tariffs are some of the highest in the region, and make it very attractive for foreign investors.”
Nguyen, of Bizconsult, believes the trade deal bringing more European investors could bring more than just capital. “European companies can help clean the system”, he says.
“Japanese and European investors are better for Vietnam because they have a better track record in terms of environmental issues and they invest in skilling the local population.”
However, the flood of foreign investment and the EVFTA excitement aren’t without their sceptics.
Nghia, of YKVN, says: “The government should be careful when there is a wave of investors. There is intense competition between local authorities to attract investors, but they should also be strict in selecting only good projects, and all businesses should compulsorily be made to comply with international practices.”
“Cutting duties may have a negative effect on the local economy in the longer term,” notes Vecchi. He points to the fact that “duties for luxury goods and high-end machinery, sectors which the Europeans have an edge in, are very low”.
Duc, of IndoChine, thinks there may be a case for putting in place some protectionist measures. “With the FTAs, there is little protection for local industries, and there isn’t enough support for domestic firms. This raises the question: Is Vietnam opening too soon?”
Nghia, however, doesn’t think there is a case for protectionism, and says that the country cannot go back on its commitments as part of the WTO and the FTAs. He believes the solution lies in drafting a “comprehensive investment policy to screen investors”.
The government, meanwhile, is working on important legislation to make the country more business-friendly and more modern. A New Law on Enterprises, a New Law on Investment, a New Competition Law, and data protection regulations are some of the legal changes in the works.
The New Law on Enterprises is being keenly watched and is expected to make regulations for business friendlier and internationally compliant, but details on the proposal are still sketchy.
ZICO Law partner in Hanoi, Phuc Nguyen says, “The New Law on Enterprises will look to accommodate and implement international practices.”
Nguyen of Phuoc & Associates notes that, “The amended Law on Enterprises will help give more freedom to businesses as well as control flow of investments. However, there are issues such as overlap and certain conflicts with the proposed the New Law on Investment. These issues will have to be sorted out.”
Another immediate legislative change due to a trade agreement has been the amendments to the Law on IP, which has been adopted by the National Assembly of Vietnam to comply with the CPTPP agreement that came in to effect in January this year.
“The new IP law introduces an online filing system and extends the grace period for the novelty of invention from six months to 12,” says Pham Hong Nhung, vice director and attorney at Banca Intellectual Property Law firm.
“The new law also establishes geographical indication (GI) rights in compliance with international treaties, which allows for the recognition of more than 100 GIs from the EU and more than 20 from Vietnam.”
The government is also expected to introduce a cybersecurity law that will give them more control over data, allow for censorship and data localization.
“There are plans to tax big international online businesses like Google and Facebook on their Vietnam business,” says Buzenet. “It would be a sort of a withholding tax. This is a source of concern for businesses.”
Another important development is the plans to move the courts towards a precedent-based system.
“Vietnamese courts are also to move towards a system of case precedents. A judgment can be accepted as precedence after the Supreme Court first approves the precedent. This is a good step towards improving the country’s judicial system,” ZICO’s Nguyen says.
The government is also working on a draft labour law, which is expected to increase the minimum wage to about US$50 a month, and the retirement age to 62 years for men and 60 for women, up from 60 and 55 now, respectively. It also proposes to increase the overtime hours allowed for employees from 300 hours a year to 400 hours.