U.S. OK's Vietnam's WTO entry -- Good for Asia funds

January 3, 2007

The final step to allow Vietnam to formally enter the World Trade Organization (WTO) on January 11, 2007 occurred last week. President Bush signed the proclamation to extend Permanent Normal Trade Relations (PNTR) with Vietnam on December 29, 2006. Congress had withheld approval of PNTR status until December over concerns about competition from Vietnam's textile exporters.

What the Vietnam's WTO entry means:
PNTR status means that Vietnam will be able to enjoy the same trade preferences as all other WTO members. Without this approval, Vietnam would have had the burdens of WTO membership without the benefits. In other words, they would have had to remove trade tariffs for imports, but would have had to pay other countries' tariffs on their exports.

WTO membership is expected to boost Foreign Direct Investment (FDI), doubling it to $8 billion in 2007 according to the U.S. Ambassador to Vietnam, Michael Marine. Even without PNTR, Vietnam’s exports to the U.S. were $7.2 billion through October 2006, a 30% increase over the first 10 months of 2005. Its GDP growth for 2005 was 8.5%, according to the CIA World Factbook, and many experts are expecting the same growth rate for 2006.

Some local Vietnamese business are concerned that they will no longer enjoy the protection of high import tariffs, which automatically increase the cost of competitive products from other countries. In addition, Vietnam will need to incur additional taxes, possibly income taxes, to make up for the revenue formerly made on tariffs. Over time, however, increased business tax revenues from agricultural exports to Europe (primarily rice) and expanded garment and textile exports to the U.S. should make up for the lost tariff revenue.

Action steps:

Review the emerging market allocations in your portfolio. Emerging markets have increased 29% this year, based on the MSCI Emerging Markets Funds, so you might be over weighted. Now would be a good time to take some profits.

If, however, you do not have sufficient allocation, then consider adding a good emerging markets fund or index to your portfolio. With the U.S. GDP growth projected at around 2.9%, the 7-8% growth Vietnam will experience with WTO membership will provide the stimulus your portfolio needs to outpace inflation.

Source: The White House web site; U.S. Vietnam Trade Council web site; World Trade Organization website; Vietnam Development Gateway website; U.S. Census Bureau, Foreign Trade Division; ThanhNien News, December 16, 2006.

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