25 Years of Economic Relations Between the US and Vietnam

July 2020 marked the 25^th anniversary of diplomatic relations between the US and Vietnam. Once enemies, the two countries have now become strategic and economic partners. Amid the US – China trade tensions since mid-2018, Vietnam’s importance to the US’s economy has been rising, especially as an alternative for supply from China.

After the US – Vietnam war ended in 1975, Vietnam’s economy was isolated until the major economic reforms of 1986, which aimed to build a market economy and to prioritize private-sector competition. Nine years into the reforms, in 1995, the US and Vietnam normalized their bilateral relations, and the relations have become increasingly cooperative and comprehensive ever since.

After almost five years of working on the first bilateral trade agreement (BTA) between the US and Vietnam, both countries signed the pact in 2001, covering trade in goods, protection of intellectual property rights, trade in services, investment protection, as well as business facilitation and transparency. When the trade agreement came into effect in December 2001, the US immediately provided access to Vietnamese goods on the American market – the global leading economy – on the same basis that the US offers to other countries with normal trade relations. The average tariff rates for Vietnam’s products dropped significantly from 40% to 3%. In return, Vietnam would reform its trade and investment regime towards a fair environment for American businesses in Vietnam.

Despite the normalization since 1995, not until the BTA was in place did the trade between the US and Vietnam begin to expand dramatically. This growth was accelerated after Vietnam became a member of WTO in December 2006, which granted Vietnam a permanent normal trade relations (NTR) status. During the 2007-2019 period, the value of US-Vietnam bilateral trade increased by more than six times, from 12.5 billion USD to 77.5 billion USD. Especially in 2019, the bilateral trade rocketed by 31.7% from the year before, partly because of the spillover impact from the US-China trade tensions, which have urged companies to relocate part of their manufacturing to Vietnam. Due to this growth, Vietnam has become the 7^th largest source of US imports and the 27^th largest destination of US exports. In the first seven months of 2020, although the coronavirus pandemic has affected global businesses, trade between US and Vietnam still recorded a growth of 10.8% date-to-date from last year.

At the beginning of the trade relations between the two countries, clothing was Vietnam’s largest export to the US. Then footwear and furniture became major exports, each topping one billion USD in 2007; and in recent years, Vietnam has transformed into a major exporter of electrical machinery to the US. On the other hand, the leading American export to Vietnam are electrical machinery, cotton, aircraft, plastic articles and oil seeds.

In conclusion, the economic relations between the US and Vietnam are relatively new but have become more and more cooperative over the last two decades. Especially from Vietnam’s side, the country is endeavoring to build a more comprehensive and favorable economic connection with the world’s largest economy. Under the pressure of the US-China trade war, many companies on the American market have been forced to diversify the production that is traditionally rooted in China – the world’s greatest manufacturing hub. Now Vietnam – with advantages of cheap labor, strategic location, and well-built supply chains – appears to be a promising alternative producer, chiefly for electrical machinery.

Read more about our consulting services.