A New Trade Agreement With Vietnam Could Ease the Way for U.S. Exporters

Thanks to a historic trade agreement reached earlier this year between the United States and Vietnam, U.S. exporters may one day be able to ship food products to Vietnam at a much lower tariff rate.

Under the agreement, Vietnam will sharply lower tariffs and other trade barriers on a wide range of American products that novart3a

includes food. In return, Vietnam will have access to the world’s largest market on the same terms the United States grants most other nations.

Under U.S. law, for Vietnam to receive annual normal trade relations status, a bilateral trade agreement must be approved by Congress, and the President must waive the Jackson-Vanik provision, indicating that the waiver would substantially promote freedom of emigration from Vietnam. Since 1998, the President has granted the annual Jackson-Vanik waiver for Vietnam.

Although U.S. food exports to Vietnam totaled less than $1 million last year, the Vietnamese have a strong preference for American products. Despite the fact that the agreement may not be voted on by Congress until 2001, and that the most immediate export opportunities are for bulk commodities, the time to brush up on how to navigate the high-value retail market in Vietnam is now.

The retail food sector in Vietnam has until recently been characterized almost exclusively by numerous wet markets, corner grocery and sundry shops ("mom and pop stores") and temporary stalls that are ubiquitous in Vietnamese cities and towns. Estimates are that Ho Chi Minh City alone has 6,000 small private shops selling groceries and sundries and as many as 2,000 wet markets. A similar situation prevails in Hanoi.

In both cities–although to a greater extent in Ho Chi Minh City than Hanoi–these traditional retail options are being challenged by the growth of mini-markets by the emergence of supermarkets, and by the introduction of the country’s first hypermarkets.

The still developing retail environment in Hanoi is significantly smaller than that in Ho Chi Minh City; Hanoi is as much as five years behind. The growth of mini-markets in Hanoi and Ho Chi Minh City represents the middle stage in an ongoing transition from open-air food stalls to supermarkets. The foundation for the development of the retail food sector in Vietnam has been the improving economic environment, rising consumer awareness and increase in demand for imported food products.

Over the past seven years, the Western-style mini-market has become increasingly popular in Ho Chi Minh City and Hanoi. These new mini-markets are generally somewhat larger than the typical convenience store found in the United States; they tend to be air conditioned and stock a wide range of foreign goods. There are currently around 40 mini-markets in Ho Chi Minh City and 20 in Hanoi. novart3c

Despite the advantages of cleanliness, comfort and fixed prices that these stores provide, a local market research company estimates that less than 10 percent of total food sales in Ho Chi Minh City and Hanoi take place in mini-markets or supermarkets, compared to 52 percent for the Philippines and 49 percent for Malaysia. Foreign investment in the retail sector, with some limited exceptions such as a joint venture hypermarket located 30 minutes outside of Ho Chi Minh City, is not authorized in Vietnam. This restriction has significantly hampered the development of a modern retail food sector in Vietnam. Denied foreign know-how and retail experience, local companies have been slow to adopt more modern retail methods.

However, a number of impressive Western-style supermarkets have recently been opened by Vietnamese who have received training from abroad in retail food operation.

Over the past two years, several new, larger and more diverse grocery stores similar to U.S. supermarkets have opened in Ho Chi Minh City and Hanoi.

Some have significant cold storage facilities, and are thus able to offer a greater selection of fresh seafood, meats, vegetables and bread; imported beer and wine; and a large range of imported canned goods and dry grocery items. novart3d

Vietnam’s retail food outlets are also beginning to offer ready-to-eat and ready-to-cook foods (frozen spring rolls, frozen seafood and cafeteria-style meals), which appeal to Vietnam’s growing middle class.

In addition, urban Vietnamese women are increasingly joining the work force and have less time to prepare meals from scratch.

The increasing sophistication of the Vietnamese retail environment has seen local stores beginning to emulate western retail practices. One manifestation is the relatively new practice of charging for shelf space in mini-markets and supermarkets in Ho Chi Minh City and Hanoi.

Shelf space has until recently been provided free of charge. The price of an end-of-counter stand in Ho Chi Minh City supermarkets and mini-marts now runs as high as $100-$200 per month.

Vietnamese law reserves trade and distribution rights for most products, including food, to Vietnamese entities. An exception is made for companies that manufacture products in Vietnam, often under the joint-venture format, to sell and distribute their products in the country.

These restrictions are problematic for U.S. exporters of food products; there is a shortage of Vietnamese distribution companies with the experience and expertise to effectively market U.S. products and the financial resources to ensure prompt payment.

In Focus: Vietnam

Vietnam is a country filled with captivating natural beauty and tranquil village life. Its highlands and rainforest regions, far from being devastated, continue to yield new species and teem with exotic wildlife.

Located in southeastern Asia, Vietnam’s land mass is slightly larger than the state of New Mexico. Like only a few other countries of similar size, it extends across two climatic zones--with a moderate climate in the north, comparable to that of southern Europe, and a tropical climate in the south.

Vietnam has a population estimated at around 77 million, which makes it the second most populous country in Southeast Asia. Eighty percent of the population is ethnic Vietnamese, while the remaining 20 percent is comprised of more than 50 separate ethnic groups.

Among the many languages spoken are Vietnamese, Chinese, English, French and Russian.

Although rice is the foundation of the Vietnamese diet, the country’s cuisine is far from bland. Vietnamese cooking is highly innovative and makes extensive use of fresh herbs, including lemon grass, basil, coriander, parsley, laksa leaf, lime and chili. Soup is served at almost every meal, and snacks include spring rolls and rice pancakes.

The national condiment is nuoc mam, a piquant fermented fish sauce served with every meal. Indigenous tropical fruits include bananas, pineapple, coconuts, lychees, melons, mandarin oranges, grapes and exotic varieties such as the three-seeded cherry and the green dragon fruit.

The most important festival of the year is Tet, a week-long event in late January or early February that heralds the new lunar year and the advent of Spring. Celebration consists of both exuberant festivity and quiet meditation.

Each year, more than 200,000 Americans visit Vietnam as tourists, businesspeople and students.

This makes it essential for U.S. exporters to conduct background checks and ask for references on potential local agents and distributors to ensure that they possess the necessary licenses, adequate facilities (warehouses and cold storage, if needed), sufficient capital, creditworthiness, staff and transportation to fulfill their contractual obligations.

To analyze the competitive situation in the retail food industry in Vietnam, it is useful to divide products into three categories: imported products; products produced locally by foreign entities; and products produced locally by domestic companies.

Of total food sales for the whole country, imported products make up less than 5 percent. When the market is limited to the Ho Chi Minh City and Hanoi urban areas, imported food products still make up less than 10 percent of total retail food sales. Of the remaining 90 percent, approximately 15 percent are products produced in Vietnam by foreign companies (joint ventures and 100-percent foreign-owned companies), with the remaining 75 percent of sales going to domestic companies.

Despite their market domination, domestic food products are for the most part of inferior quality. With a few notable exceptions, these products are attractive to Vietnamese consumers because of price.

U.S.-Vietnam Bilateral Trade Agreement
Benefits for U.S. Agriculture

This agreement will significantly open the Vietnamese market to U.S. agriculture by cutting tariffs by as much as 30 percent on a wide range of U.S. farm products. These cuts will be fully implemented three years after the agreement is approved by the U.S. Congress and the Vietnamese National Assembly. The trade pact, which is subject to the Jackson-Vanik provision, would cover reciprocal Normal Trade Relations (NTR) treatment on an annual basis.
Two-way trade in agricultural, fish, and forest products will likely double in value to approximately $700 million when this agreement is fully implemented, while sales of U.S. bulk commodities such as corn, soybeans, and wheat are expected to triple by then to more than $30 million.

This agreement, which is a first step in opening Vietnam to the world, requires Vietnam to base its decisions on the rule of law and the international trading system and accelerates its transition to a free market economy. The agreement will also provide Vietnam with a stepping stone toward accession to the World Trade Organization.

"...From the bitter past, we plant the seeds of a better future."

President Clinton at the White House Rose Garden Signing Ceremony on

July 13, 2000.

Products produced locally by foreign-invested companies are generally considered superior to local products.

Imported products are generally far superior to the other two categories--a fact which is duly recognized by the Vietnamese consumer.

Currently, Australian and French food products are the most serious competitors for U.S. food products in Vietnam. French and Australian products have gained market share as a result of their earlier entry into the market and the strong support they have received from their government commercial services in Vietnam.

In addition, a number of foreign manufacturers of food products are now attempting to sell products produced in other ASEAN countries to Vietnam. These products benefit from relatively low duties and are gaining increasing credibility in the eyes of Vietnamese consumers because of their quality.

The author is the former agricultural attaché at the American Embassy in Hanoi. He is now assigned to Washington, D.C.