US flags Vietnam’s bureaucratic delays, energy shortages as risks to attracting FDI

[HO CHI MINH CITY] Two months after the US and Vietnam elevated bilateral ties to the highest possible level, Washington remains concerned about bureaucratic delays in the South-east Asian nation – a problem that could affect its ability to attract more foreign direct investment (FDI).

Making this point was Susan Burns, the US consul-general based in Ho Chi Minh City, at a recent trade forum in Vietnam. She noted that the other main issue for the US was Vietnam’s lack of progress in accelerating its clean-energy transition.

Despite these hurdles, Burns stressed that the relationship between the US and Vietnam has “never been stronger”, especially after the two countries now have a comprehensive strategic partnership – the highest rung in Vietnam’s diplomatic ladder.

In the last few years, thanks to the ongoing diversification of supply chains and trade amid difficult US-China relations, Vietnam has enjoyed the largest gain in market share in the US among all countries. 

Last year, Vietnam posted a record trade surplus of US$94.9 billion with the US – its largest export market – driven by larger shipments of everything from smartphones and garments to footwear and electronics.

American tech giant Intel, which has invested US$1.5 billion in Vietnam since 2006 with a chip manufacturing and testing facility in Ho Chi Minh City, is one of the long-term investors that are betting on Vietnam’s potential.

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There was a bit of a hiccup in July, however, when the chipmaker reportedly decided to shelve plans to increase investments at its Vietnam factory, due to concerns over an unstable power supply and excessive bureaucratic red tape.

Vietnam has been plagued by major energy shortages this year, with blackouts interrupting production in the industrial zones of several northern provinces.

While Vietnam is seen as the most suitable country in South-east Asia to develop wind and solar energy, only a fraction of the installed renewable power capacity has been utilised due to delays in project approvals, prolonged discussions on tariffs, regulatory ambiguity, and overload in the power transmission system.

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In a new report, McKinsey went so far as to warn that Vietnam is “at risk” of losing the interest of foreign investors if the country cannot meet the increased demand for green energy. 

Momentous period

Speaking at the trade forum, Nguyen Hong Duong, a senior official at Vietnam’s Ministry of Industry and Trade, shared that Intel had asked the government for support in taxes and workforce training, among other requests, to incentivise it to expand its operations in Vietnam.

“Profit is the top priority of any investment plan,” said Duong, who serves as deputy director-general at the ministry’s European-American department. “The point is whether Vietnam can meet our investors’ requirements in a timely manner. If not, they will not wait and will look for other locations.”

Market watchers say Vietnam has been using tax breaks and land rental reductions as two main incentives to attract foreign investments in the past decades.

However, the nation would lose a large part of these advantages once the new cross-border tax rules, which seek a global minimum corporate tax rate of 15 per cent, take effect in 2024. Vietnam’s legislature is also debating a resolution to impose a top-up corporate income tax, while simultaneously seeking new cost-based incentives and possible handouts to retain the significant FDI inflows.

Given this high level of commitment among the political leaders, and with market conditions remaining favourable, Duong said it is a “momentous” period for US firms to shift a larger part of their production to Vietnam.

Barbara Weisel, a former assistant US trade representative, urged both nations to move quickly to build on the positive momentum of late and ensure the partnership results in concrete economic benefits.

“Both (the US and Vietnam) have many competing policy priorities, but it is critical not to let this work languish and risk missing the moment,” she said.

Exports to recover

In early 2023, consecutive interest rate hikes and accelerated inflation hit the US market, dampening Vietnam’s exports to the nation, which accounts for roughly 30 per cent of Vietnam’s exports to the world in recent years. 

According to latest data from Vietnam Customs, as at the end of October 2023, Vietnam exports turnover to the US reached US$79.2 billion, down 15.1 per cent from a year ago. The country’s total exports fell by 9.6 per cent year on year to US$558.3 billion in the first 10 months this year.

Vietnam’s Deputy Minister of Industry and Trade Do Thang Hai said he believes the bilateral trade contraction is temporary. “Exports have picked up in recent months. The interest rate tightening cycle in the US is also proceeding to the last phase, boosting US consumers’ spending and confidence,” he said at the forum.

Burns, the US consul-general, described Vietnam as a “linchpin” in supply chains that are vital to the US economy.

“We saw that (during) Covid. Our supply-chain linkages are not a one-way street. These linkages demonstrate how interconnected our two economies have become, and how important bilateral trade is for global supply chain resiliency and our collective prosperity,” she said.

“We both understand that trade must go both ways. And we must purchase each other’s goods, as well as invest in each other’s economies.”