WTO – Vietnam Opens Wider For Business

With new 2009 trade rules, it’s the year to invest. On Jan. 1, Vietnam opens its retail sector to wholly foreignowned investments according to its World Trade Organization obligations. Lucrative opportunities await in Asia’s new No. 1 retail market. Times are changing in Vietnam’s capital city. While tourists from all over the world are still flocking to Hanoi’s picturesque market stalls, the heart of daily life is no longer confined to the old merchant quarters. Western-style shopping malls are popping up overnight, and they are attracting high-end retailers from the U.S. and Europe. Vietnam officially joined the World Trade Organization (WTO) as its 150th member on Jan. 11, 2007. The WTO requires that tariff regulations, trade rights, national treatment and most-favored-nation treatment be incorporated into domestic law. Essentially, trade barriers must be torn down and the Vietnamese market opened to other WTO members.

Although Vietnam has taken solid steps to restructure and meet these requirements,
challenges for foreign investors remain. The economy is still in a developmental phase,
relying heavily on traditional sectors such as agriculture.

At the same time, it is leapfrogging other Asian markets in retail thanks to rapidly
growing consumer demand and low barriers to market entry. According to a 2008 ranking
by consultants AT Kearney, India has yielded its position as first in “retail investment
attractiveness” and fallen to second behind Vietnam, formerly in fourth. Russia and
China dropped to third and fourth respectively. While the retail outlook in the U.S. is
grim, Vietnam provides corporations with an alternate growth strategy.

As Vietnam strives to emulate a Western standard, transitioning from a socialist system
to an internationally integrated market economy is a bumpy process. One WTO
requirement is to end import tariffs that had been imposed to protect local businesses
against foreign competitors. The country has been reluctant to adapt this rule in the case
of agriculture, given that entire villages depend on it as a main source of income.
The 2006 Law on Intellectual Property, by comparison, has been better received. Recent
high-profile trademark infringement cases represent remarkable progress.

Harmonization of national legislation with Western corporate governance standards has
also been impressive. A 2006 National Assembly Resolution, for example, enables
shareholders to determine their own voting and quorum rules in their company charter.
A recent government draft decree implementing WTO commitments provides for further
big steps toward international standards. It expands the scope of application of the
principle of non-discrimination and makes Vietnamese and foreign enterprises equal.
While the draft remains to be finalized, it represents a crucial and progressive milestone
on the way to an internationally integrated market.

As dictated by its WTO commitments, Vietnam will allow wholly foreign-owned
distribution companies to enter the market starting in January 2009. More practical
details yet to be worked out include any changes to regulations allowing investors to
establish only one retail outlet at a time. Subsequent outlets are considered depending on
whether or not the proposed project can satisfy a so-called “economic needs test.” The
criteria for passing the test are as of yet undefined.

The obvious comparison with Vietnam and its burgeoning economic growth is its
neighbor China. Although China joined the WTO in 2001, however, the country did not
start adapting its laws until 2004. Vietnam, on the other hand, has shown tremendous
commitment by setting to work right away on changing its system.

The speed of reforms sets a new standard and is proof of Vietnam’s unrestrained will to
play an important role in worldwide trade. While China still reigns supreme economically
in the region, Vietnam is the best in the class of young WTO members. With a population
of nearly 90 million and growing disposable income, opportunities exist for small and
large players alike as the domestic distribution sector remains wildly underdeveloped.
Historic floods in Hanoi and across the Northern provinces in early November 2008
resulted in severe disruptions to supply chains for food and other essential facilities. The
lack of well-organized and reputable supermarkets and retail outlets in some areas led to
problems including food shortages, black market activity and commodity speculation.
This was a timely reminder that further investment in infrastructure and distribution is
needed urgently. The time is right for Vietnam to emerge as a major force in the global
marketplace.

Oliver Massmann and Giles T. Cooper are attorneys based in Hanoi for the U.S. law firm
Duane Morris LLC. (Forbes.com columnist Robyn Meredith is away this week.)

For more information, please contact:
Giles Cooper
gtcooper@duanemorris.com
(registered foreign attorney)

Oliver Massmann
omassmann@duanemorris.com
(registered foreign attorney)

Duane Morris Vietnam LLC
Unit V1308, 13th Floor | 83B Ly Thuong Kiet Street, Hoan Kiem District, Hanoi.