Vietnam, a Prime Commercial Hub for UK Companies Operating in Asia-Pacific

Posted by Written by Bob Savic Reading Time: 8 minutes

By Bob Savic, Advisor to Dezan Shira & Associates

A new political leadership was affirmed on April 5, 2021, at Vietnam’s 13th National Party Congress. The newly elected Prime Minister Pham Minh Chinh, a career security official, but also known to favor incentives for boosting economic growth, is anticipated to build on the positive economic ties fostered by Vietnam’s outgoing PM Nguyen Xuan Phuc. Phuc will stay on in power, albeit assuming the largely ceremonial role of the country’s President. 

Chinh, who visited London a couple of years ago and held close discussions with Downing Street on governance and administration, raises the prospect of the incoming government accelerating economic reforms. These are anticipated to include the dismantling of domestic administrative barriers long considered one of the major drawbacks to UK companies operating in Vietnam. 

The outgoing foreign minister Pham Bin Minh – considered a ‘good friend of the UK’ – along with the economically-savvy outgoing finance and trade ministers, will assume positions in the Politburo, being the country’s most powerful decision-making body. These shifts will likely ensure a focus on economic liberalization and green development that would support in setting out a roadmap for UK companies doing business with Vietnam up to 2030.    

UK-Vietnam trade snapshot

Vietnam is described by the UK government as being a “significant opportunity for UK exporters” given it is progressively turning into a large market for capital goods and an expanding domestic consumer market. The UK’s Department of International Trade (DIT) has stated that the various reasons for exporting to Vietnam include:

  • one of DIT’s 20 high growth markets;
  • forecast to be one of the top 10 fastest growing economies in the next decade having already surpassed Singapore to become Southeast Asia’s fourth-largest economy in 2020;
  • continuing liberalization of its economy; and
  • member of the ten-country Association for Southeast Asian Nations (ASEAN) and its free trade area which, as a regional bloc or an influential sub-grouping of countries, has been a critical driving force in concluding broader regional trade and investment agreements.

In 2020, UK goods’ exports to Vietnam amounted to US$692 million; a decline from US$839 million and US$776 million in 2018 and 2019, respectively.  The largest export items were medical and pharmaceutical products worth US$131 million in 2020, followed by mechanical machinery and electrical equipment at around US$85 million each. Imports also fell, reaching $5 billion in 2020, down from US$5.9 and US$6 billion in the preceding two years. 

As a result, the trade balance in goods persisted to weigh heavily in favor of Vietnam reflecting its growing status as a major international production platform for companies mainly from Northeast Asia, but also from Western Europe and the US. 

Beyond goods’ exports, the UK tends to have a surplus in services. In 2018, being the year when data was last available, UK service exports were US$435 million, while imports were US$304 million.

The main service exports have been financial services alongside the presence of UK banking giants, HSBC and Standard Chartered, in the country.  But, other growing service sector exports include education, particularly higher education, technical and vocational training, support services in Vietnam’s renewable and hydrocarbon sectors, transportation and infrastructure development support, and fast-growing healthcare provision including medical training, clinical and digital health services.

Despite the fast growth and great potential in service exports, total exports are still small relative to the UK’s other trade partners across Asia, including most ASEAN economies, even though exports have grown by 66 percent over the last several years.

Still, bilateral trade ties are set to expand over the next five years, according to Heather Wheeler, the UK trade envoy to Vietnam, Cambodia, and Laos following the UK-Vietnam Free Trade Agreement (UKVFTA) signed on December 29, 2020.  

As a result, Vietnam immediately lowered tariffs accounting for about half of UK exports to the country, while about 92 percent of tariffs will reach zero percent within six years.  The new deal is also based on provisions found in modern FTAs and includes measures such as data standardization, exchange of information, conformity and cooperation in customs matters, transparency, and the removal of non-tariff barriers. 

In the latter case, the UK’s DIT has identified the existence of up to 40 market access barriers which have been recently prioritized for resolution in joint committee discussions with Vietnam’s trade authorities.

Inter-government commitments boost economic ties

In 2010, the UK and Vietnam agreed on a strategic partnership that elevated commercial relations in several key areas including trade and investment, sustainable development, science and technology, and education and training.

A further strategic partnership setting the course for the coming decade was agreed in 2020. The 2020 partnership places greater emphasis on sustainable development through its inclusion of dealing with challenges presented by climate change.

To this extent, it advances sustainable urbanization, water resources management, environmental protection, ocean governance, hydro-meteorology services, healthcare, and innovation including cooperation on digital economies, smart cities, infrastructure, and construction, in line with UN Sustainable Development Goals.

It also focuses more on the development of green energy, through the UK’s support of Vietnam’s low-carbon growth strategy and transitioning to renewable energy. This involves developing wind and solar power through trade and investment that contributes to reducing greenhouse gas emissions, supported by the UK’s green financing resources.

The new partnership also looks to enhance relations through the annual Joint Economic and Trade Committee (JETCO). JETCO will therefore become a venue for developing economic, trade, and investment cooperation, including the promotion of Vietnam’s Industry 4.0 program, and the country’s financial and capital markets, at both ministerial and official diplomatic levels.

The new partnership also promises more open trade through the expansion of relations in global and regional forums of economic cooperation. One such example is Vietnam’s support for the UK’s joining the Comprehensive Progressive Trans-Pacific Partnership (CPTPP).  Moreover, Vietnam has been a principal backer for the UK becoming an ASEAN Dialogue partner.

The UK and Vietnam have a bilateral investment treaty (BIT) which entered into force in 2002.  It is a basic level BIT reflective of the period, nonetheless providing for prohibitions of unreasonable, arbitrary, or discriminatory measures. It also includes investor-state dispute settlement mechanisms where consent for arbitration can be express or implied, while arbitration options include international forums of ICSID and UNCITRAL.

The BIT does not contain the more detailed protections and modern provisioning of the combined EU-Vietnam FTA (EVFTA) and Investor Protection Agreement (IPA), which was ratified during the UK’s EU transition period in 2020. This is because, unlike the EVFTA which essentially constituted the new UKVFTA, the IPA was not transitioned into an equivalent bilateral investment treaty.

The UK-Vietnam double tax agreement (DTA) became effective for UK taxes in 1995. As such, it applies an older version of the OECD model tax convention, which both countries’ tax authorities are looking to revise and update. Even so, key to note is that taxing rights on capital gains are predominantly made available to the state where the assets are situated, rather than the resident state of the seller. 

This may be significant for UK corporate investors in Vietnam given its CGT rate, being the corporate income tax rate, is 20 percent, whereas the UK corporation tax rate will rise from 19 percent to 25 percent, for most companies, from 2023 onwards.

Vietnam also applies a relatively low 7 percent withholding tax rate on dividends, subject to conditions including ownership of no less than 50 percent in a paying subsidiary. Lastly, the DTA contains a tax sparing provision, available in DTAs between the UK and select developing countries, meaning a UK tax credit is available, equivalent to the standard rate of Vietnamese corporate tax, even where a Vietnamese tax incentive applies.

The UK’s growing corporate presence in Vietnam

By 2020, the UK had about 400 investment projects scattered throughout the country, amounting to US$3.7 billion in registered capital and making it Vietnam’s third-largest foreign investment source. Large UK companies such as Dragon Capital, Standard Chartered, Diageo, Prudential, AstraZeneca, HSBC, and Jardines have played important roles in developing certain sectors of the economy, including in finance, culture, medicine, and education.

In particular, many large UK companies, as well as SME players, stand to gain significantly from the UK’s potential future accession of the CPTPP amid its ongoing upgrade of Vietnam’s labor and environmental standards, while expanding government procurement opportunities.

Vietnam will also soon serve as a major trade and investment hub for accessing the 15-member Regional Comprehensive Economic Partnership (RCEP), expected to come into force in 2021. Through this accord, UK companies based in Vietnam will be able to export on preferential terms to not only other ASEAN economies but to the giant northeast Asian markets of China, Japan, and South Korea, among others.

In this vein, Vietnam may be perfectly placed to act as a geopolitical hedge against ongoing US-China trade tensions and other frictions. Indeed, “geopolitics” is a factor corporate boardrooms are increasingly factoring into decision-making given that manufacturers are relocating from China in order to lessen uncertainties surrounding international supply chains.

Consequently, Vietnam, amid the burgeoning regional trade deals of which it is a member, is beginning to play an important role in many UK companies’ diversification strategies as a so-called “China+1” strategy.

In so doing, Vietnam is beating out its main regional production platform rivals such as Malaysia, Thailand, and Indonesia as it tops the global primary cost index for land, utilities, hourly compensation, corporate tax, and other inputs, ahead of China, Mexico, and Malaysia in the top four places.

As a result, UK manufacturers from fashion shoemaker Ecco, to cosmetics producer Unilever, and medical products manufacturer AstraZeneca, have set up operations in Vietnam, in addition to several large UK tech firms with outsourcing centers in Vietnam.

Investment opportunities in Vietnam

The new UKVFTA introduces a range of sectors presenting opportunities for UK investors. For instance, the reduction in technical barriers to the provision of services should open the field for UK professional services firms in engineering, architecture, and financial services among others.

The envisaged expansion for UK services would be supported by Vietnam’s plans for mass infrastructure development including ports, airports, roads, and other forms of transportation and logistics. The UK’s IT services would also be supported by the trade accord’s provisions for Intellectual Property protection, particularly in the area of software development which could find prospects across a wide swathe of business and consumer-led opportunities.

Another area the UKVFTA affords support for UK investors is in the protection of consumer brands, such as Scotch Whiskey, which has already found a strong niche in Vietnam’s growing middle class. 

Indeed, the Vietnamese consumer market is becoming increasingly important as economic growth from exports and foreign investment expands households’ wealth and purchasing power which UK companies may consider capitalizing on, at a strategic stage, through physical and online retailing platforms.

Other sectors promising opportunities for UK manufacturers include Vietnam’s defense and security infrastructure, as the country seeks to upgrade these capabilities.  In this regard, the UKVFTA’s open government procurement provisions should prove useful, in addition to those arising out of future accession to the CPTPP. 

Educational services are also a significant area of potential development for UK providers, being a sector that DIT has been actively promoting in both Hanoi and Ho Chi Minh City.  This support has included the establishment of a virtual business model to promote UK brands in education, which otherwise faces stiff competition from similar US and Australian institutions.

Lastly, renewable energy (RE) is a sector that can be potentially developed by sizeable UK investment and experienced know-how. This is especially so if Vietnam’s highly anticipated Power Development Plan VIII, likely to be announced in May 2021, shifts Vietnam’s energy resources towards RE.

If so, such an outcome could account for as much as 30 percent to 40 percent of the total energy mix by 2030.  In achieving this, the total value of investments in the country’s RE projects are expected to be in the region of US$25 billion over the next 10 years. 

Most of the new capacity will be in the form of onshore and offshore wind – areas of specialism that UK companies have particular expertise in, especially in the North Sea off the coast of Scotland. 

According to UK Export Finance, the government’s overseas trade funding body, it stands ready to provide up to £4 billion of largely unutilized finance for Vietnam, while having gained recent experience in supporting large-scale power projects in East Asia, including the US$316 million Formosa 2 offshore wind project in Taiwan.

Should Vietnam’s new government push ahead with what can be described as a visionary scale of investment in RE, it can only consolidate the already vibrant trade and investment ties with the UK.

About Us

Vietnam Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in HanoiHo Chi Minh City, and Da Nang. Readers may write to for more support on doing business in Vietnam.

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