On Monday, December, 10th, the Agreement between the United State of America and the Socialist Republic of Vietnam on Trade Relations (BTA) entered into effect when Vietnam’s Minister of Trade Vu Khoan and US Trade Representative Robert Zoellick exchanged official letters implementing the pact. Signed on July 13, 2000, this landmark agreement marks a major step forward in Vietnam’s efforts to integrate with the global economy.

Under the BTA, the US grants Vietnam “normal trade relations” status (also known as “MFN”), removing Vietnam from a small list of countries denied this, including North Korea, Afghanistan, Serbia and Cuba. With the BTA’s entry into force, U.S. tariffs on imports from Vietnam have dropped from an average of 40% to an average rate of 3%, as of December 10th, allowing Vietnamese exporters to compete on level terms in the U.S. market.

In return, Vietnam has undertaken to open its market and reform its legal system in a broad variety of areas. The BTA covers trade in goods, trade in services, investment, intellectual property, the right of appeal and transparency matters, and general business facilitation issues.

The BTA is expected to boost Vietnam’s exports and increase opportunities for foreign investors. The BTA also incorporates WTO standards by reference, providing Vietnam with a road map for prosecuting its application to join the World Trade Organization, which it submitted in 1995.

Below is a summary of the key provisions.

Chapter 1: Trade In Goods (Industrial and Agricultural)

Trading Rights: Vietnam has agreed to open up the right to import and export. The Agreement phases in these rights first to private Vietnamese enterprises, then to U.S. invested companies, and finally to all U.S. persons and companies, over a 3-6 year period (with somewhat longer periods for a limited list of sensitive products). Private Vietnamese companies are already allowed to engage in import, export and distribution activities, except in respect to certain sensitive products stipulated by the State.

MFN Treatment: Vietnam and the US will each provide the other with Most Favored Nation tariff treatment on all imports from the other country. Vietnam currently imposes a 50% tariff surcharge on countries with whom it does not have MFN relations, though it has unilaterally exempted the US and several other trading partners from this surcharge. For the US’s part, the MFN duty rates take effect as of December 10th.

Tariff Cuts: Vietnam has agreed to cut tariffs (typical cut is by one-third to one-half) on a broad range of products of interest to U.S. exporters, including toiletries, film, air conditioners and refrigerators, electrical motors, valves, mobile phones, pagers, video games, lamb, cheese, potatoes, tomatoes, onions, garlic, other vegetables, grapes, apples and pears, other fresh fruits, certain flours, soybeans, vegetable oils, prepared meats and fish, pasta, and fruit juices. The phase-in period for these additional cuts is 3 years.

Non-tariff Measures: Vietnam has agreed to eliminate all quantitative restrictions on a range of industrial and agricultural products (e.g., auto parts, citrus, beef), over a period of 3-7 years, depending on the product.

Import Licensing: Vietnam will eliminate all discretionary import licensing in accordance with WTO rules.

Customs Valuation and Customs Fees: Within 2 years, Vietnam shall comply with WTO rules using transaction value for customs valuation, and limiting customs fees to the cost of services rendered.

Technical Standards and Sanitary and Phytosanitary Measures: In accordance with WTO standards, technical regulations and sanitary and phytosanitary measures must be applied on a national treatment basis, and they may be applied only to the extent necessary to fulfill legitimate objectives (e.g., to protect human, animal or plant life).

State Trading: Trading by State enterprises must be carried out in accordance with WTO rules (e.g., State trading enterprises may only make sales and purchases in accordance with commercial considerations).

Chapter 2: Intellectual Property Rights

Vietnam agrees to full TRIPs compliance in all areas in a short time frame, including:

  • TRIPs-level Patent and Trademark protection, with compliance in 12 months; and
  • TRIPs-level Copyright and Trade Secrets Protection, compliance in 18 months.

Vietnam agrees to take further measures in several other areas, including encrypted satellite signals, patent protection for plants and animals, protection of confidential test data submitted to governments. In the case of satellite signal protection, the phase-in period is 30 months.

Chapter 3: Trade In Services

  • For American service providers, Vietnam has agreed to extend MFN treatment, meaning that all service sectors that are open to companies form other countries are also open to US service providers.
  • In addition, Vietnam has undertaken to open a number of specific service fields to US participation on a National Treatment basis. For example, US law firms can employ Vietnamese lawyers to advise on Vietnamese law as soon as the BTA enters into force. Other services are phased in over a period of years, with the longest phase in periods reserved for national treatment of banking and financial services (9 years for full local treatment).
  • The GATS framework of rules will apply to regulation of service industries (including MFN, national treatment, and disciplines on domestic regulation).
  • Existing licenses are protected by a Grandfathering Provision, so that even if a specific area is not slated for opening until the future, service providers who already have licenses in that are can continue to do their business as licensed.
  • Top managers and sales people employed by US service providers are allowed to enter and work in Vietnam.
  • Specific commitments are outlined below:

Sectors:

Legal

  • 100% US equity allowed, including branches; branches receive 5 year, renewable license.
  • May consult on Vietnamese laws.

Accounting

  • 100% US equity allowed; licenses granted on case-by-case basis for 3 years, no limits thereafter.
  • May provide services to foreign invested firms for first 2 years, no limits thereafter.

Architectural

  • 100% US equity allowed.
  • May provide services to foreign invested companies for first 2 years, no limits thereafter.

Engineering

  • 100% US equity allowed.
    • May provide services to foreign invested companies for first 2 years, no limits thereafter.

Computer and related

  • 100% US equity allowed.
  • May provide services to foreign invested companies for first 2 years, no limits thereafter.

Advertising

  • Joint ventures allowed, with initial limit on US equity share at 49%. In 5 years, limit on US equity increases to 51%; in 7 years, no limit on US equity in JV.

Market Research

  • Joint ventures allowed, with initial limit on US equity share at 49%. In 5 years, limit on US equity increases to 51%; in 7 years, 100% US equity allowed.

Management Consulting

  • Joint ventures allowed (no limits on US equity in JV); in 5 years, 100% US equity allowed.

(In cases where there is "no limit" on U.S. equity in a joint venture, it means any equity share less than 100%.)

Telecommunications

  • Vietnam agrees to the WTO Basic Telecom Reference paper (requiring a pro-competitive regulatory regime and cost-based interconnection fees).

    • Value-added Telecom:

    • Joint ventures allowed after 2 years (3 years for Internet services), with 50% limit on US equity.

    Basic Telecom (including mobile cellular and satellite):

    • Joint ventures allowed after 4 years, with 49% US equity limit.

    Voice Telephone services:

    • Joint ventures allowed after 6 years, with 49% US equity limit.
    • Vietnam shall consider increasing the U.S. equity requirements when the agreement is reviewed in three years.

Audio Visual

  • Joint ventures with 49% US equity limit allowed; in 5 years, limit raised to 51%.
  • Includes film production and distribution, and motion picture projection services.

Construction and related

  • 100% equity allowed.
  • May provide services to foreign invested companies for first 3 years, no limits thereafter.

Distribution

  • Wholesale distribution: Joint ventures allowed after 3 years, with 49% US equity limit. After 6 years, no limit on US equity in JV's. Longer phase-ins for limited list of sensitive items.

  • Retail
    • : One outlet automatically allowed for each retailer; beyond that, on a case by case basis.

Educational

  • Joint ventures allowed, no limits on US equity.
  • In 7 years, schools with 100% US capital allowed.

Financial Services

  • GATS financial services annex agreed to.

Insurance

  • Life and other "non-mandatory" sectors: Joint ventures, with 50% US equity limit, allowed after 3 years; after 5 years 100% US equity allowed.

  • “Mandatory" sectors (motor vehicle, construction related): Joint ventures allowed after 3 years (no limit on US equity share), 100% US equity allowed after 6 years.

Banking and related financial services

Non-bank and leasing company providers:

  • Joint ventures allowed (no US equity limit); in 3 years, 100% US equity allowed.

Banks:

  • US branches allowed.
  • Joint ventures allowed with US equity between 30% and 49%.
  • After 9 years, 100% US subsidiary banks allowed.
  • US equity in privatized Vietnamese banks allowed at same level as participation allowed to Vietnamese investors.

The following financial services rights are also granted:

  • U.S. banks may accept deposits in local currency, according to a phase-in schedule which ultimately allows acceptance of local currency deposits on the same basis as Vietnamese banks.

  • Mortgage holding rights: After three years financial institutions with 100% US equity may take mortgage interest in land use rights of foreign invested firms. (Note: Recent amendments to the Law on Foreign Investment should make this possible sooner.)

  • 100% US equity financial leasing companies or joint ventures allowed.

  • In three years, will provide national treatment with respect to central bank discounting, swap, and forward facilities.

  • In 8 years, US financial institutions may issue credit cards on a national treatment basis, and US banks may place ATM machines at locations other than branches when Vietnamese banks are allowed to do so.

Securities-related services

  • Representative offices allowed.

Health and related social services

  • 100% US equity allowed;
  • Minimum investment for hospital: $20 million; Minimum for clinic: $2 million; Minimum for specialty unit: $1 million.

Tourism and travel related

  • Hotel and restaurants: 100% equity allowed, in parallel with investment to build a hotel.

  • Travel agencies & tour operators: Joint ventures allowed, with 49% U.S. equity limit; in 3 years, equity limit is 51%; in 5 years, no limit on US equity in joint ventures.

Chapter 4: Investment Commitments

  • Assures U.S. Companies Protection Against Expropriation for their investments in Vietnam.

  • Financial Transfers. Permits repatriation of profits and other financial transfers on a national treatment basis.

  • Trade-Related Investment Measures (TRIMs): Vietnam will phase out all WTO inconsistent TRIMs (e.g., local content requirements) in 5 years, and other TRIMs like practices (export performance requirements), over a similar timeframe.

  • National Treatment. Vietnam makes a general commitment to treat foreign-invested companies at least as well as domestic ones, with some exceptions.

  • Investment screening will be phased out for most sectors over a 2, 6 or 9 year period (depending on the type of sector, e.g., investment in industrial zones or in the manufacturing sector), but Vietnam reserves the right to apply screening in certain excepted sectors.

  • Eliminates capital contribution limits in Joint Ventures: Current requirement that US share of a JV must be at least 30% is eliminated in 3 years, eliminates requirement to sell US share in the JV to the Vietnamese partner and replaces it with right of first refusal.

  • Functioning of Joint-Ventures: Eliminates within three years the requirement that certain board members be Vietnamese, sharply limits the types of issues on which board "consensus" must be reached (i.e., on which Vietnamese members have veto power); allows U.S. investors to select top managerial personnel without regard to nationality. (Again, the amended Law on Foreign Investment has already gone farther than this on the “consensus” principle, but unrelated laws will have to be brought into line, such as technology transfer requirements that impose unanimity requirements for intellectual property licenses.)

  • Phases out all discriminatory pricing to U.S. investors or persons (utilities, transportation fees, rents, etc.), immediately or over 2-4 year period depending on type of fee.

Chapter 5: Business Facilitation

Ensures that U.S. persons can conduct routine business practices, such as setting up offices, advertising, and conducting market studies.

Chapter 6: Transparency and Right to Appeal

  • The BTA includes extensive transparency provisions, requiring Vietnam provide advance notice of all laws, regulations and other administrative procedures relating to any matter covered in the agreement, and requiring their publication, and an indication therein of effective dates and government contact points.

  • It requires all laws governing issues covered in the agreement that have not been published to be made public and readily available.

  • It requires designation of an official journal where all such measures will be published. This will most likely be the Official Gazette (Gong Bao) already published by the Government.

  • It requires uniform, impartial, and reasonable application of all laws, regulations and administrative procedures.

  • It requires formation of administrative or judicial tribunals for review and correction (at the request of an affected person) of all matters covered in the agreement, and affords the right to appeal the relevant decisions. Notice of decisions upon appeal and reasons for decisions appealed shall be provided in writing.

Conclusion

In sum, the BTA marks a profoundly significant step forward in Vietnam’s renovation program and in its efforts to harmonize its commercial laws with those of the international community, especially the principles of the WTO. While many of Vietnam’s commitments under the BTA remain to be implemented through domestic legislation, and delays may be expected in this area, others are effective upon entry into force of the BTA itself. Moreover, the legal changes that Vietnam has already introduced in many areas, which go beyond what the BTA requires in terms of scope or timing of reforms, provides a basis for confidence that Vietnam is approaching the commitments it has undertaken in good faith. This will be important for Vietnam as it continues to prosecute its application to join the WTO.