Southeast Asia: Trends in U.S. and Chinese Economic Engagement in Indonesia and Vietnam
Published: 2015-10-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The United States and China have each sought to increase their economic engagement in Southeast Asia. U.S. agencies have identified Indonesia and Vietnam as important emerging U.S. partners that contribute to regional stability and prosperity. Indonesia has the world's 10th largest economy in terms of purchasing power, and Vietnam is one of the most dynamic economies in East Asia. Both the United States and China have established comprehensive partnerships with each country that are designed to enhance their bilateral cooperation in key areas.
GAO was asked to examine the United States' and China's economic engagement in Southeast Asia. GAO issued a report on 10 Southeast Asian countries in August 2015. In this report, GAO presents case studies for two of these countries, Indonesia and Vietnam, providing greater detail about the United States' and China's trade and investment, competition, and actions to further economic engagement in the two countries. GAO analyzed publicly available economic data and documentation from 10 U.S. agencies and the Chinese government. The data that GAO reports have varying time periods because of the data sets' limited availability and differing contexts. GAO interviewed U.S., Indonesian, and Vietnamese officials and private sector representatives.
This is the public version of a sensitive but unclassified report that is being issued concurrently. GAO is not making any recommendations in this report.
section_title: What GAO Found
paragraphs: Indonesia. In 2014, China's imports from, and exports to, Indonesia exceeded the United States' (see figure). The United States and China compete more often with other countries than with each other in goods exported to Indonesia and win contracts in different sectors. In contrast to the United States, which is not involved in a free trade agreement (FTA) with Indonesia, China is a party to a regional FTA that includes Indonesia and is negotiating the Regional Comprehensive Economic Partnership (RCEP) with Indonesia and 14 other countries. In fiscal years 2009 through 2014, U.S. agencies' financing for exports to, and investment in, Indonesia totaled about $2.5 billion, compared with at least $34 billion in Chinese financing, according to the Department of State. In 2007 through 2012, U.S. foreign direct investment (FDI) of $9.6 billion exceeded China's reported $2.7 billion, according to available data.
Vietnam. In 2014, U.S. imports from Vietnam exceeded China's, while Chinese exports to Vietnam exceeded U.S. exports (see figure). As in Indonesia, the United States and China compete more often with other countries than with each other in goods exported to Vietnam and win contracts in different sectors. The United States and Vietnam are both participants in the proposed regional Trans-Pacific Partnership, while China and Vietnam are both parties to a regional FTA and the RCEP negotiations. In fiscal years 2009 through 2014, U.S. agencies' financing for exports to, and investment in, Vietnam totaled about $205 million, compared with at least $4.5 billion in Chinese financing, according to the Department of State. In 2007 through 2012, China's reported FDI of $1.2 billion was more than twice the United States' reported FDI of $472 million, according to available data.

section_title: Letter
paragraphs: U.S. agencies have identified Indonesia and Vietnam as important  emerging Southeast Asian economic powers that contribute to regional  stability and prosperity. According to the World Bank, Indonesia is the  10th-largest economy in the world in terms of purchasing power, and  Vietnam is one of the most dynamic economies in East Asia. The United  States and China have sought to increase their economic engagement  with both countries. For example, U.S. agencies have outlined specific  goals to facilitate U.S. trade and investment in Indonesia and Vietnam,  while China has fostered trade and investment opportunities for its firms  operating in each country. The United States and China have also  established comprehensive bilateral partnerships with Indonesia and  Vietnam, designed to enhance key aspects of their respective  cooperation with the two countries.
You asked us to review the nature of the United States’ and China’s  economic engagement in Southeast Asia. In August 2015, we issued a  report examining U.S. and Chinese economic engagement with the 10  members of the Association of Southeast Asian Nations (ASEAN). In this  report, we present case studies of U.S. and Chinese trade and  investment, competition, and actions to further economic engagement in  two of these countries, Indonesia and Vietnam.
This report is a public version of a non-public sensitive but unclassified  report that we are issuing concurrently. This report does not contain  certain information, related to U.S. agency goals and characterization of  other countries’ economic activities, that the U.S. Department of State  (State) and the U.S. Department of Agriculture (USDA) regarded as  sensitive but unclassified.
To examine U.S. and Chinese trade and investment with Indonesia and  Vietnam, we analyzed available data on U.S. and Chinese trade in goods,  trade in services, and foreign direct investment (FDI). To determine the  extent to which U.S. and Chinese firms compete in Indonesia and  Vietnam, we analyzed data from the U.S. Department of Commerce  (Commerce), the World Bank, and the Asian Development Bank (ADB).  To identify actions that the U.S. and Chinese governments have taken to  further economic engagement in Indonesia and Vietnam, we reviewed  U.S., Chinese, and other countries’ trade agreements, reports, and  statements. We conducted fieldwork in both Indonesia and Vietnam and  interviewed officials from U.S. and other countries’ government agencies  and private sector representatives. We requested meetings with Chinese  government officials in Indonesia, Vietnam, and Washington, D.C.;  however, they were unable to accommodate our requests. To assess the  reliability of data, where possible, we cross-checked the data with other  sources, evaluated the data for internal consistency, and consulted with  U.S. officials and experts. Because of the limited availability of data and  the differing contexts for the sets of data we report, these data sets have  varying time periods. We consider the data we present to be reliable for  our purposes and have noted caveats as appropriate regarding limitations  of some of these data. See appendix I for additional information about our  scope and methodology.
We conducted this performance audit from April 2014 to October 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: As Southeast Asian countries, Indonesia and Vietnam are in a region of  growing economic power. ASEAN, to which both countries belong, is  seeking to form an economic community by the end of 2015 that would  deepen economic integration among the 10 ASEAN member states (see  fig. 1). World Bank data show that from 2000 through 2014, the collective  real gross domestic product (GDP) of ASEAN countries increased by  approximately 98 percent. According to International Monetary Fund  (IMF) data, if the ASEAN countries were a single nation, their collective  GDP in 2014 would represent the seventh-largest economy in the world.  ASEAN countries are also important strategically, in part because they  are located astride key sea lanes between the Persian Gulf and the  economic centers of East Asia. On the basis of a 2011 United Nations  (UN) Conference on Trade and Development Review Maritime Transport,  the U.S. Department of Energy estimated that more than half of the  world’s annual merchant fleet tonnage passed through the South China  Sea, which is bordered by Indonesia and Vietnam.
subsections: section_title: Indonesia’s Economy and Relations with the United States and China
paragraphs: According to data from the World Bank, Indonesia’s real GDP increased  by around 108 percent from 2000 to 2014. However, the World Bank  estimated that in 2011, 16 percent of Indonesians lived below the poverty  line of $1.25 per day. Indonesia is the world’s fourth-largest country by  population.
The United States established diplomatic relations with Indonesia in 1949,  after Indonesia gained independence from the Netherlands. According to  State, Indonesia’s democratization and reform process since 1998 has  increased its stability and security and resulted in strengthened U.S.-  Indonesia relations. In 2010, the United States and Indonesia officially  launched the United States–Indonesia Comprehensive Partnership to  broaden, deepen, and elevate bilateral relations between the two  countries on a variety of issues, including economic and development  cooperation. However, according to U.S. agencies, the U.S.-Indonesia  bilateral relationship continues to face significant challenges because of  Indonesia’s implementation of protectionist laws, limited infrastructure,  and unevenly applied legal structure. U.S. agencies’ stated goals for  Indonesia include supporting the facilitation of U.S. trade and investment  between the two countries. The U.S. Embassy in Indonesia is located in  Jakarta, with U.S. consulates in Surabaya and Medan and a U.S.  consular agency in Bali.
China and Indonesia have a long-standing history of trade and  interchange. The two countries established diplomatic relations in 1950, 5  years after Indonesia gained independence from the Netherlands.  Relations between China and Indonesia were suspended in 1967, after  the Indonesian government suspected China of complicity in planning a  1965 coup, but were restored in 1990. Since then, trade and economic  relations between the two countries have grown rapidly and in 2013, both  countries agreed to elevate bilateral relations to a comprehensive  strategic partnership. The partnership seeks to strengthen cooperation in  several key areas, including trade, investment, and economic  development. In 2015, the countries reaffirmed their support of the  partnership and agreed, among other things, to expand market access  and two-way investment for firms and to deepen their infrastructure and  industrial cooperation. In April 2015, the Presidents of China and  Indonesia released a statement setting a bilateral trade target of $150  billion by 2020—an increase of $70 billion from the 2015 target of $80  billion. The two Presidents stated that they will work toward the reduction  of tariff and nontariff trade barriers and increase the frequency of trade  missions between the two countries. China maintains an embassy in  Jakarta and consulates in Medan, Surabaya, and Denpasar.
section_title: Vietnam’s Economy and Relations with the United States and China
paragraphs: Vietnam has experienced rapid economic growth in the past 15 years,  primarily because of economic reforms it began implementing in the late  1980s that transformed it from a centrally planned economy to a type of  socialist market economy. Data from the World Bank show that Vietnam’s  real GDP increased by around 137 percent from 2000 to 2014. Vietnam  has also made great progress in reducing poverty since the 1990s,  according to the World Bank. In 2012, the World Bank reported that about  2 percent of Vietnamese lived below the poverty line of $1.25 per day.
The United States established diplomatic relations with Vietnam in 1950,  after Vietnam achieved limited independence from France. The United  States and Vietnam suspended diplomatic relations at the end of the  Vietnam War in 1975 but restored them in 1995. Since then, common  strategic and economic interests have led Vietnam and the United States  to improve relations across a wide range of issues. In 2006, Congress  passed a comprehensive trade and tax bill that granted Vietnam  permanent normal trade relations. In July 2013, the United States and  Vietnam established the United States–Vietnam Comprehensive  Partnership, an overarching framework for advancing the bilateral  relationship in areas such as economic engagement. In October 2014,  the United States relaxed an arms embargo, which it had imposed on  Vietnam in 1984, to permit Vietnamese acquisition of maritime military  materiel. However, the United States continues to express concerns  about Vietnam’s human rights record and designates Vietnam as a  nonmarket economy in antidumping procedures. Vietnam has expressed  opposition to aspects of U.S. trade policy, including U.S. restrictions on its  export of catfish into the U.S. market. U.S. agencies’ stated goals for  Vietnam include supporting Vietnam’s economic governance. The U.S.  Embassy in Vietnam is located in Hanoi, and the U.S. Consulate General  is in Ho Chi Minh City.
For centuries, China and Vietnam have had a turbulent relationship that  continues to be affected by long-standing territorial disputes in the South  China Sea. China has claimed sovereignty over the South China Sea,  illustrating its claims by marking its maps with a “nine dash line” that  overlaps with Vietnamese claims and encircles most of the South China  Sea, including the Paracels and Spratlys. During the Vietnam War, China  served as a close ally of the North Vietnamese. In 1974, shortly before  the war ended, China seized control of the Paracel Islands from the South  Vietnamese. After the war, underlying tensions between the two countries  surfaced and China-Vietnam relations deteriorated. China opposed  Vietnam’s invasion of Cambodia in 1978, and following a series of  disputes, the Chinese army crossed the Vietnamese border in February  1979 and fought a 2-week battle before the Chinese withdrew.
In 1991, China and Vietnam renormalized relations. Since then, China  and Vietnam have established close economic relations. In 2008, the two  countries agreed to establish a comprehensive strategic partnership that  enhanced cooperation in multiple areas, such as trade and investment.  However, in May 2014, tensions were reawakened when China placed an  oil rig near the disputed Paracel Islands, sparking widespread protests in  Vietnam; some of these protests turned violent and included attacks on  Chinese and Taiwanese individuals and firms. Despite continuing  tensions, in April 2015, the leaders of both countries pledged to  strengthen their partnership, for example, by increasing cooperation on  infrastructure development. China maintains an embassy in Hanoi and a  consulate in Ho Chi Minh City.
section_title: U.S. and Chinese Trade and Investment, Competition, and Actions to Further Economic Engagement in Indonesia
subsections: section_title: China Has Surpassed the United States in Trade in Goods with Indonesia, but U.S. Investment Has Exceeded Chinese Investment
paragraphs: The value of China’s total trade in goods with Indonesia surpassed the  United States’ in 2005 and was more than double the United States’ in  2014, when Chinese imports and exports both exceeded U.S. imports  and exports. The United States and China are Indonesia’s fifth and  second-largest trading partners, respectively, while other ASEAN  countries collectively represent Indonesia’s largest trading partner.  Available data on U.S. and Chinese FDI, although limited, indicate that  U.S. FDI greatly exceeded Chinese FDI in Indonesia from 2007 through  2012. However, Chinese FDI has significantly increased since 2010 and  nearly reached U.S. levels of FDI in 2012.
subsections: section_title: China’s Total Trade in Goods with Indonesia Has Surpassed U.S. Trade in Goods, Both Imports and Exports
paragraphs: The value of China’s total trade in goods with Indonesia surpassed the  United States’ in 2005 and was more than double the United States’ total  trade in goods—$64 billion versus $28 billion, respectively—in 2014 (see  fig. 2). China’s total goods trade in Indonesia increased in nominal terms  every year after 2001 except 2008 and 2009, when the global economic  crisis occurred, and 2013 and 2014, when Chinese imports of minerals  from Indonesia declined. From 1994 through 2014, China’s total trade in  goods in Indonesia grew much more rapidly than U.S. total trade in  goods, with a slight decline in 2014.
As figure 2 illustrates, from 1994 through 2014, China’s imports from, and  exports to, Indonesia grew to exceed the United States’. Moreover, while  the United States had a nearly continuous annual trade deficit with  Indonesia during this period, China had an increasing trade surplus  almost every year after 2007.
Chinese imports from Indonesia surpassed U.S. imports from  Indonesia in 2009 and increased significantly in 2010 and 2011.  However, in 2013 and 2014, Chinese imports declined sharply,  primarily because of a significant decrease in Chinese imports of  minerals and slowing economic growth in China, according to an IMF  report. The IMF report stated that in 2014, Indonesia implemented a  ban of Indonesia’s raw mineral ore exports, requiring all raw mineral  ores to be processed in Indonesia to increase domestic value  added.
Chinese exports to Indonesia surpassed U.S. exports in 2000 and  continued to grow through 2014.
The United States had a trade deficit with Indonesia every year from  1994 through 2014, with the deficit growing from $4.2 billion in 1994 to  $11.1 billion in 2014. China had a trade deficit with Indonesia every  year from 1994 through 2006 but, with the exception of 2011, had a  trade surplus every year from 2007 through 2014. China’s trade  surplus increased dramatically from 2012 through 2014, from $2.3  billion to $14.6 billion.
From 2000 through 2014, the composition of U.S. and Chinese trade in  goods with Indonesia remained relatively stable, except for a significant  overall increase in China’s mineral imports that peaked in 2013. In 2014,  textiles represented the largest share of U.S. imports (26 percent) while  minerals represented the largest share of Chinese imports (42 percent).  Animals, plants, and food represented the largest share of U.S. exports in  2014 (32 percent), and machinery represented the largest share of  Chinese exports (33 percent). Most of China’s, and almost half of the  United States’, trade in goods with Indonesia in 2014 consisted of goods  for industrial use (i.e., goods, such as rubber and coal, used in the  production of other goods). See appendix II for more information about  the composition and use of U.S. and Chinese trade in goods with  Indonesia.
section_title: China and the United States Are Significant Trading Partners of Indonesia, but Other ASEAN Countries Are Its Largest Partner
paragraphs: In 2013, other ASEAN countries collectively represented Indonesia’s  largest trading partner in total trade in goods, followed by China, Japan,  the European Union (EU), and the United States.
Exports. Indonesia exported $16 billion in goods to the United States,  its fifth-largest export market, and $23 billion in goods to China, its  third-largest export market, in 2013. Other ASEAN countries, Japan,  and the EU represented Indonesia’s first, second, and fourth-largest  goods export markets, respectively. The United States’ share of total  Indonesian goods exports decreased from 12.1 percent in 2003 to 8.6  percent in 2013, while China’s share of total Indonesian goods  exports increased from 6.2 percent to 12.4 percent during the same  period.
Imports. Indonesia imported $9 billion in goods from the United  States, its sixth-largest import market, and $30 billion in goods from  China, its second-largest import market, in 2013. Other ASEAN  countries, Japan, the EU, and South Korea represented Indonesia’s  first-, third-, fourth-, and fifth-largest goods import markets,  respectively. The United States’ share of total Indonesian goods  imports decreased from 8.3 percent in 2003 to 4.9 percent in 2013.  China’s share of total Indonesian goods exports increased from 9.1  percent in 2003 to 16 percent in 2013.
Figure 3 shows Indonesia’s exports and imports in 2003, 2008, and 2013,  by trading partner.
Indonesia ranks higher as an export and import partner of China than of  the United States.
Indonesia is China’s 15th-largest export market and the United States’  34th-largest by value. In 2014, China exported $39.1 billion in goods  to Indonesia, or 1.7 percent of global Chinese goods exports. In the  same year, the United States exported $8.3 billion in goods to  Indonesia—0.5 percent of global U.S. goods exports.
Indonesia is China’s 20th-largest source of imported goods and the  United States’ 24th-largest by value. In 2014, China imported $24.5  billion in goods from Indonesia, or 1 percent of global Chinese goods  imports. In the same year, the United States imported $19.4 billion in  goods from Indonesia—0.8 percent of global U.S. goods imports.
The United States’ role relative to China’s in Indonesia’s trade of goods  as well as services may be greater when the amount of intermediate U.S.  inputs to the traded goods and services is taken into account. Because of  the nature of global supply chains, for example, a consumer phone from a  U.S. company might be assembled in China but includes components  manufactured by Germany, Japan, South Korea, and other countries.  Data from the UN Commodity Trade database, which counts the full value  of the export only for the exporting country, showed that in 2011, China  exported $29.2 billion in goods to Indonesia, almost four times the $7.4  billion in goods that the United States exported to Indonesia. However,  data from the Organisation of Economic Co-operation and Development  (OECD) and the World Trade Organization (WTO), which attempt to  account for value added to a finished export by each contributing country,  show that China’s exports of value-added goods and services to  Indonesia were around 1.8 times those of the United States. The OECD- WTO data suggest that Chinese exports to Indonesia contained a higher  portion of components produced elsewhere than U.S. exports contained.
section_title: Total U.S. Trade in Services with Indonesia Was Almost $3 Billion in 2013, While Data on China’s Trade in Services Are Unavailable
paragraphs: Available data from the U.S. Bureau of Economic Analysis (BEA)  indicate that U.S. trade in services with Indonesia totaled approximately  $2.9 billion in 2013. The United States exported $2.2 billion in services to Indonesia in 2013, with travel and  business services, respectively, as the largest and second-largest  categories by value, and  imported $692 million in services from Indonesia in 2013, with travel  and business services, respectively, as the largest and second-largest  categories by value.
In 2013, total U.S.-Indonesian services trade represented 10 percent of  the value of U.S.-Indonesian goods trade.
China does not publish data on its trade in services with Indonesia.
section_title: U.S. Investment Flows to Indonesia Exceeded Chinese Investment Flows in 2007- 2012, but Available Data Have Limitations
paragraphs: Data on FDI in Indonesia from the United States and China have  limitations, in that these data may not accurately reflect the countries to  which U.S. and Chinese FDI ultimately flows. For example, U.S. and  Chinese data on FDI in Indonesia do not reflect investments by  subsidiaries that U.S. and Chinese firms may set up in other countries  and use to make investments in Indonesia. Conversely, U.S. and Chinese  firms may set up subsidiaries in Indonesia that can be used to make  investments in other countries. Given these limitations, available data  show that U.S. FDI flows to Indonesia in 2007 through 2012 totaled about  $10.2 billion, exceeding China’s reported FDI flows of about $2.7 billion.  However, annual Chinese FDI flows increased significantly during this  time, from $100 million in 2007 to $1.4 billion in 2012 in nominal terms  (see fig. 4). According to BEA, over 90 percent of total U.S. FDI flows to  Indonesia in 2007 through 2012 were concentrated in holding companies  and mining.
section_title: United States and China Compete Most Often with Other Countries in Goods Exports and Win Government Contracts in Different Sectors
paragraphs: Data on U.S. and Chinese goods exports to Indonesia indicate that from  2006 through 2014, U.S. exports of goods to Indonesia were more similar  to Japanese and EU exports than to Chinese exports, suggesting that the  United States is more likely to compete directly with Japan and EU  countries than with China. Figure 5 presents a commonly used index for  assessing the similarity of the United States’ goods exports to Indonesia  to those of China and other countries.
Data from Commerce’s Advocacy Center, the World Bank, and ADB  provide some information about Indonesian government contracts that  U.S. and Chinese firms competed for or won. Although these data  represent a small share of U.S. and Chinese economic activity in  Indonesia, they offer insights into the degree of competition between U.S.  and Chinese firms for the projects represented. These data indicate that  U.S. firms in Indonesia have competed more often with firms from other  countries than with Chinese firms and have tended to win contracts in  different sectors.
Commerce Advocacy Center. Data from Commerce’s Advocacy  Center show that U.S. firms that the center supported in fiscal years  2009 through 2014 competed for Indonesian government contracts  most often, and for highest total contract value, with French firms,  followed by Chinese firms and firms from other countries (see table  1). According to the center’s data, Chinese firms competed with the  U.S. firms for 8 of 32 contracts covering a range of sectors, including  energy and power; defense; transportation; telecommunications; and  computers, information technology, and security. The 8 contracts for  which Chinese firms competed had a total value of $3.6 billion—34  percent of the $10.4 billion in total contract value for which the U.S.  firms competed. In contrast, French firms competed against U.S. firms  for 11 contracts with a total value of about $8.3 million.
World Bank. From 2000 through 2014, U.S. and Chinese firms won a  relatively small share of World Bank-financed contracts in Indonesia  and tended to win contracts in different sectors. U.S. and Chinese  firms won a combined $33 million (1.1 percent) of the $2.94 billion in  total contract dollars that the World Bank awarded in Indonesia. Of  the $26 million that U.S. firms won, $24 million (94 percent) was for  consultant services and the remainder was for goods. In contrast, of  the $7 million contract dollars that Chinese firms won, $6.9 million (96  percent) was for goods. Indonesian firms won $2.54 billion (86  percent) of the World Bank’s total contract dollars, while Japanese,  French, Korean, and Australian firms won a combined $267 million (9  percent).
ADB. U.S. firms won a small share of ADB contracts in Indonesia in  2013 and 2014, while Chinese firms won no ADB contracts. During  this period, U.S. firms won three ADB contracts for a combined $10  million of the $410 million in total contract dollars that ADB awarded in  Indonesia. One of the three contracts was for a geothermal power  project, and the other two were consulting contracts worth less than  $0.5 million each.
section_title: U.S. Firms Face a Challenging Business Environment in Indonesia
paragraphs: U.S. agencies and private sector representatives have cited multiple  challenges to trading and investing in Indonesia.
Restrictive regulatory environment. According to officials from the  Office of the U.S. Trade Representative (USTR), Indonesia’s  regulatory environment constitutes the biggest market access barrier  for U.S. firms. In 2014 and 2015, USTR reported that Indonesia’s  trade and investment climate was characterized by, among other  things, growing protectionism toward local business interests.  According to the USTR reports, in recent years, Indonesia has  enacted numerous regulations on imports, such as those relating to  local content and domestic manufacturing requirements, which have  increased the burden for U.S. exporters. In 2013, the United States  initiated a WTO dispute settlement process with Indonesia because of  Indonesia’s import licensing restrictions on horticulture and meat  products.A representative of one U.S. firm whom we spoke with in  Indonesia said that the firm had stopped importing soybeans into  Indonesia for about a year because of Indonesian quotas, rising  import taxes, and local origination requirements. Moreover, according  to an official representing an American regional trade association,  regulations may appear without advance notice or consultations with  affected industries and may not be uniformly enforced. In addition,  USDA’s 2014 Country Strategy Statement for Indonesia states that  market access challenges for U.S. exports to Indonesia, such as  Indonesia’s import licensing requirements, have dominated the U.S.- Indonesia bilateral relationship. The World Bank’s 2015 ease of doing  business ranking of 189 economies, where a ranking of 1 indicates  the most business-friendly regulations relative to other countries in the  rankings, ranked Indonesia at 114. Indonesia ranked least favorably  in enforcing contracts (172) and most favorably in ensuring  protections for minority investors (43). In assigning the ranking, the  World Bank said that Indonesia implemented reforms that reduced the  tax burden on companies and made it easier for them to start a  business and obtain access to electricity.
Corruption. Although the Indonesian government investigates and  prosecutes high-profile corruption cases, many investors consider  corruption a significant barrier to doing business in Indonesia,  according to USTR’s 2015 report on foreign trade barriers. A  representative of one U.S. firm told us that after paying taxes to the  Indonesian government, the firm may be asked to pay additional fines.  U.S. firms and representatives of American regional trade  associations also noted that while U.S. firms are bound by U.S. law  not to engage in corrupt practices, some of the firms’ competitors do  not face similar restrictions. Transparency International’s 2014  Corruption Perceptions Index ranked Indonesia at 107 of 175  countries and territories, where a ranking of 1 indicates the lowest  perceived level of public sector corruption relative to other countries in  the index.
Weak infrastructure. Indonesia has weak and underdeveloped public  infrastructure, such as ports, rail, and land transport, which increases  transaction costs and inefficiencies and hampers exporters and  investors, according to a report by Commerce and State. A  representative of a private sector consulting firm operating in  Indonesia said that Indonesia has poor infrastructure for transporting  goods from factories to port. According to a State official, Indonesia’s  economic growth is not likely to increase without significant  investment in infrastructure.
Violations of intellectual property rights. In 2015, USTR reported  that Indonesia was one of 13 countries designated as a Priority Watch  List country because of particular problems with respect to intellectual  property rights protection, enforcement, or market access for persons  relying on such rights. According to the report, the United States is  concerned that, among other things, Indonesia’s efforts to enforce  intellectual property rights have not been effective in addressing  rampant piracy and counterfeiting.
Limited access to land. An absence of clear Indonesian laws  regarding the acquisition and use of land by investors has slowed  infrastructure development projects, according to a State document.  For example, the document stated that construction on a hydroelectric  dam in West Java, although nearly complete as of January 2015, had  been delayed because of land use disputes. A new regulation on land  use is scheduled to go into effect in 2015, but a State document noted  that this law is untested and that implementation may be erratic,  especially in its initial years.
section_title: United States and China Are Both Engaging Economically with Indonesia, but China Has Free Trade Agreements with Indonesia and Has Provided More Financing
paragraphs: Although the United States is engaging economically with Indonesia, the  two countries have no free trade agreement (FTA), while China has both  trade and investment agreements with Indonesia through its agreements  with ASEAN countries. Also, the United States is not negotiating any  existing or proposed regional trade agreements with Indonesia, whereas  China is engaging Indonesia through a proposed regional trade  agreement. Both the United States and China support their domestic  firms in Indonesia through financing and other means, although U.S.  agencies estimate that Chinese financing has greatly exceeded U.S.  financing. The United States and China also have provided support for  economic development, with U.S. efforts focused on capacity building and  Chinese efforts focused on physical infrastructure development.
subsections: section_title: United States Has No FTA with Indonesia, while China Has Free Trade and Investment Agreements with Indonesia
paragraphs: The United States has not established an FTA with Indonesia, although  the two countries have a limited trade framework agreement to facilitate  trade relations. The United States–Indonesia Trade and Investment  Framework Agreement (TIFA) is intended to facilitate discussions of trade  and investment issues. In contrast to FTAs, TIFAs are short agreements  that provide strategic frameworks and structure for dialogue on trade and  investment issues and prepare countries for eventual accession to high- standard trade agreements. The United States–Indonesia TIFA was  signed in 1996 by USTR and Indonesia’s Ministry of Trade. According to  USTR, U.S. officials meet regularly with Indonesian officials in both formal  TIFA meetings and informal meetings to address bilateral trade and  investment issues. The last two formal meetings that U.S. and Indonesian  officials held under the TIFA occurred in September 2015 and June 2013,  according to USTR. In the September 2015 meeting, officials discussed a  range of issues, such as policies related to the information and  communications technology sector and Indonesia’s Economic Policy  Package.
In addition, in June 2015, Congress reauthorized the Generalized System  of Preferences (GSP), which provides duty-free treatment for 3,500 tariff  lines from many developing countries, including Indonesia, through the  end of 2017. According to a report by the Congressional Research  Service, in 2012—the last full year of GSP implementation—Indonesia  ranked fourth of 127 beneficiary countries in the value of U.S. imports that  entered duty free through GSP. According to data in the report, of the  $18 billion in U.S. imports from Indonesia in 2012, about 12 percent, or  $2.2 billion, entered the United States duty free through GSP.
In contrast, China has trade and investment agreements with Indonesia  through the China-ASEAN Framework Agreement on Comprehensive  Economic Cooperation. The China-ASEAN Framework Agreement on  Comprehensive Economic Cooperation comprises a series of agreements  on trade and investment to expand access to each other’s markets.
The China-ASEAN Trade in Goods Agreement, which entered into  force in 2005, is intended to give China and Indonesia, as well as  other ASEAN countries, tariff-free access to each other’s market for  many goods and reduced most duties for Indonesia’s trade in goods  with China to zero by 2012. According to a study by the ADB, in 2010,  the average tariff on exports from six ASEAN countries, including  Indonesia, to China was 0.1 percent, while the average tariff on  Chinese exports to Indonesia was 0.6 percent.
The China-ASEAN Trade in Services Agreement, which entered into  force in 2007, is intended to provide market access in agreed-on  sectors of China and Indonesia, as well as other ASEAN countries, to  foreign companies and firms that is equivalent to domestic service  providers’ market access in their own countries.
The China-ASEAN Investment Agreement, which entered into force in  2010, committed China and Indonesia, as well as other ASEAN  countries, to treat each other’s investors as equal to their domestic  investors.
Selected studies have projected that the China-ASEAN Trade in Goods  Agreement generally increases trade for China and Indonesia and  improves Indonesia’s economy. All but one of these studies also  estimated that the agreement improves China’s economy. In addition,  one study estimated that the agreement increases investment in China  and Indonesia. In August 2014, China and Indonesia, as well as the  other ASEAN countries, announced discussions to upgrade these  agreements. In August 2015, China’s Commerce Minister announced that  China and ASEAN had agreed to the goal of finalizing negotiations to  upgrade these agreements by the end of 2015.
section_title: Unlike the United States, China Is Engaging Indonesia through a Proposed Regional Free Trade Agreement
paragraphs: Although the United States has concluded negotiations for a regional  trade agreement known as the Trans-Pacific Partnership (TPP),  Indonesia was not a party to these negotiations. In contrast, China and  Indonesia are both parties to ongoing negotiations for the Regional  Comprehensive Economic Partnership Agreement (RCEP), which  negotiating parties have said they hope to complete in 2015.  Indonesia’s trade with China and with the 14 other countries negotiating  RCEP represented 66 percent of its total trade in goods in 2013. RCEP  negotiating parties seek to expand access to trade and investment among  the parties by combining their existing FTAs into a single comprehensive  agreement. The United States is not a party to the RCEP negotiations.
section_title: U.S. Agencies Have Provided Less Financing for Investment Projects in Indonesia Than Chinese Agencies
paragraphs: Our analysis of U.S. agency data showed that in fiscal years 2009  through 2014, the Export-Import Bank of the United States (Ex-Im) and  the Overseas Private Investment Corporation (OPIC) provided about $2.5  billion in financing to support U.S. exports to, and investment in,  Indonesia (see table 2). Although China does not publish data on its  financing in Indonesia, our analysis of State data found that China has  financed at least $36.4 billion in investment projects in Indonesia since  2009.
Our analysis of Ex-Im and OPIC information for fiscal years 2009 through  2014 found the following.
Ex-Im authorized about $2.4 billion in loans, loan guarantees, and  insurance to support U.S. exports to Indonesia during this period.  Ex-Im’s authorizations in Indonesia consisted mostly of loan  guarantees. Ex-Im authorized its two largest loan guarantees in fiscal  years 2011 and 2013, when it authorized more than $1.6 billion in  guarantees for the purchase of commercial aircraft.
OPIC committed about $86 million in financing to U.S. investment  projects in Indonesia during this period.OPIC’s largest commitment  in Indonesia consisted of a $50 million investment guarantee in fiscal  year 2013 for a facility to help expand lending to small and medium- sized enterprises investing in Indonesia.
China does not publish data on its financing for exports, imports, and  investment in Indonesia by private and state-owned enterprises, but State  reported that China has made available at least $36.4 billion in financing  for investment projects in Indonesia since 2009. According to State,  Chinese financing is generally offered in the form of soft loans by China’s  Development Bank and Export-Import Bank. For example, State  reported that in 2013, China’s Export-Import Bank financed a $6 billion  coal mining infrastructure and transportation project in Papua and Central  Kalimantan. In April 2015, China’s President reiterated China’s  commitment to provide financing in support of Indonesia’s infrastructure  and connectivity development.
section_title: United States and China Provide a Variety Services to U.S. and Chinese Firms in Indonesia
paragraphs: State, Commerce, and USDA maintain staff in Indonesia to provide export  promotion services and to advocate for policies favorable to U.S. firms  operating in Indonesia.
State. State maintains an Economic and Environment Section at the  U.S. Embassy in Jakarta that is organized into three focus areas:  environment, science, technology, and health; trade and investment;  and macroeconomics and finance. According to State officials,  improving economic relations with Indonesia to facilitate greater U.S.  trade and investment is a key priority of the section.
Commerce. According to a senior Commerce official in Indonesia,  Commerce personnel based in Indonesia work to help U.S. firms find  local partners, obtain the appropriate licenses and registrations for  conducting business in Indonesia, and interpret existing or new laws  and regulations, among other duties. The officials said that they also  advocate for U.S. firms and lead or support trade missions. For  example, Commerce officials led a trade mission focused on clean  energy business practices in 2010 and led a trade mission focused on  education in 2011.
USDA. USDA personnel in Indonesia offer U.S. firms assistance with  market access and market development issues, according to a USDA  official. For example, according to the official, when Indonesia  restricted imports on all U.S. live and processed poultry in response to  an avian flu outbreak in Washington and Oregon in late 2014, USDA  personnel worked with Indonesia to lift the restriction for U.S. poultry  not affected by the outbreak. USDA also cooperates with industry  commodity groups and provides market intelligence reports to U.S.  firms, according to the official.
The Chinese government has pursued agreements with Indonesia to  support Chinese firms that do business there. For example:
Special economic zones. China’s Ministry of Commerce has worked  with Indonesia to establish at least one special economic zone to  facilitate cross-border trade and investment, according to Chinese  embassy websites. According to the Chinese Ministry of Commerce,  the government of China supports Chinese firms that establish and  invest in a zone by offering financing and facilitating movement of  materials, equipment, labor, and foreign exchange between China  and the zone. In establishing these zones, China negotiates with  Indonesia and other host governments in the areas of tax, land, and  labor policies to support firms that choose to invest in the zones.
Currency swaps. China has facilitated cross-border trade in local  currencies in Indonesia through the establishment and renewal of a  bilateral currency swap arrangement totaling 100 billion Chinese  yuan, according to the Central Bank of Indonesia’s website. The  bank’s website states that the arrangement promotes bilateral trade  and direct investment for economic development between the two  countries and helps guarantee stabilized financial markets by  ensuring the availability of short-term liquidity. The People’s Bank of  China and the Central Bank of Indonesia established the arrangement  in March 2009 and renewed it in October 2013 for 3 more years.
section_title: United States and China Generally Foster Economic Development in Different Areas
paragraphs: The United States has fostered economic development in Indonesia  through assistance to strengthen governance and energy development. In  fiscal years 2009 through 2013, U.S. agencies provided about $373  million in trade capacity building assistance—that is, development  assistance intended to improve a country’s ability to benefit from  international trade—to Indonesia. U.S. trade capacity building  assistance to Indonesia has supported initiatives aimed at, among other  things, providing economic policy advisory services to the Indonesian  government; strengthening key trade and investment institutions;  improving Indonesia’s competiveness in global supply chains; and  strengthening the capacity of the government Indonesia to analyze,  negotiate, and implement bilateral and multilateral trade agreements. The  majority of U.S. trade capacity assistance provided to Indonesia during  this period—about 90 percent—was committed as part of a 5-year, $600  million Millennium Challenge Corporation (MCC) compact with Indonesia  for a project that is designed to help the government of Indonesia to,  among other things, increase productivity and reduce reliance on fossil  fuels. (For more information about U.S. trade capacity building  assistance to Indonesia, see app. IV.) The United States has also sought  to ensure affordable, secure, and cleaner energy supplies in Indonesia  and across the Asia-Pacific region through the U.S.-Asia Pacific  Comprehensive Energy Partnership with Indonesia, which, according to  State, was launched in 2012.
China has assisted economic development in Indonesia by supporting  Indonesia’s connectivity and infrastructure development as well as its role  in regional initiatives. According to a joint statement issued by Chinese  President Xi Jinping and Indonesia’s President Widodo in April 2015,  China plans to support Indonesia’s infrastructure and connectivity  development by providing financing for railways, highways, ports, docks,  dams, airports, and bridges, among other things. According to a speech  by a senior Chinese official posted on a Chinese embassy website, the  power plants built by Chinese firms make up one-quarter of Indonesia’s  power supply, and Chinese firms have built Indonesia’s longest cross-sea  bridge to facilitate the transport and flow of commerce between the Java  and Madura Islands. State reported that between 2006 and 2015, China  undertook six power plants, including two coal-fired power plants and a  $17 billion, 7,000-megawatt hydropower plant; three rail projects; and a  coal mining infrastructure and transportation project.
China’s Foreign Minister has publicly stated that Indonesia is the most  important partner in its 21st Century Maritime Silk Road Initiative, which,  according to a document released by the Chinese government in March  2015, aims to improve maritime cooperation and regional connectivity. In  November 2014, China announced the creation of a $40 billion Silk Road  Fund to help implement this initiative. In addition, Indonesia is one of 57  prospective founding members of China’s proposed Asian Infrastructure  Investment Bank, an international institution to finance infrastructure  projects throughout the Asia-Pacific region. Under the bank’s initial  agreement, the bank’s authorized capital is $100 billion, of which China  has pledged $29.8 billion and Indonesia has pledged $3.4 billion. Bank  documents indicate that the bank anticipates beginning operations before  the end of 2015.
section_title: U.S. and Chinese Trade and Investment, Competition, and Actions to Further Economic Engagement in Vietnam
subsections: section_title: China’s Total Trade in Goods with, and Investments in, Vietnam Have Exceeded the United States’
paragraphs: The value of China’s total trade in goods with Vietnam surpassed that of  the United States in 2007 and was more than double the value of the  United States’ total trade in goods with Vietnam in 2014. However, U.S.  imports from Vietnam exceed Chinese imports, while China’s exports to  Vietnam exceed the United States’. The United States is Vietnam’s fourth  largest trading partner, and China is Vietnam’s largest trading partner.  Available data on U.S. and Chinese FDI, although limited, indicate that  Chinese FDI in Vietnam from 2007 through 2012 was more than double  U.S. FDI in Vietnam during this time.
subsections: section_title: China’s Total Goods Trade with Vietnam Has Surpassed the United States’, but U.S. Imports Exceed Chinese Imports
paragraphs: The value of China’s total trade in goods with Vietnam surpassed the  United States’ in 2007, and the gap has continued to grow. In 2014,  China’s total goods trade with Vietnam was $83.6 billion, while the United  States’ was $36.3 billion (see fig. 6). According to Vietnamese and U.S.  government officials, an unknown amount of Chinese-Vietnamese trade  occurs across the countries’ porous border and outside official channels.
Figure 6 illustrates the following:
From 1994 through 2014, the United States’ imports from Vietnam  exceeded China’s every year except 1994, 1995, and 2000.
Chinese exports grew faster than U.S. exports from 1994 through  2014.
The United States had an annual trade deficit with Vietnam from 1997  through 2014, while China had an annual trade surplus with Vietnam  from 1994 through 2014. Both the U.S. deficit and Chinese surplus  have accelerated in recent years.
From 2000 through 2014, the composition of U.S. and Chinese total trade  in goods with Vietnam shifted from predominantly raw commodities to  manufactured goods. In 2014, textiles represented the largest share of  U.S. imports from Vietnam (31 percent) and machinery represented the  largest share of Chinese imports from Vietnam (47 percent). Animals,  plants, and food represented the largest share of U.S. exports to Vietnam  (36 percent) in 2014, while machinery represented the largest share of  Chinese exports to Vietnam (31 percent). In 2014, the majority of U.S.  imports from Vietnam consisted of goods for consumer use, such as  wooden bedroom furniture. The majority of U.S. exports to Vietnam and  of Chinese imports from, and exports to, Vietnam in 2014 consisted of  goods for industrial use, which are used in the production of other goods,  such as microchips. See appendix III for more information about the  composition and use of the United States’ and China’s trade in goods with  Vietnam.
section_title: China Is Vietnam’s Largest Trading Partner, While the United States Ranks Fourth
paragraphs: China and the United States are Vietnam’s largest and fourth-largest  trading partners, respectively, in terms of their combined exports and  imports of goods. Other ASEAN countries and the EU are Vietnam’s  second and third-largest trading partners.
Exports. In 2013, Vietnam exported $24 billion in goods to the United  States and $13 billion in goods to China. After the EU, the United  States was the second-largest market for Vietnamese goods exports,  while China was the fifth-largest market for Vietnamese goods exports  in 2013. In both 2004 and 2013, the United States’ share of Vietnam’s  exports was around 18 to 19 percent. China’s share of Vietnam’s  exports was around 10 percent in both 2004 and 2013.
Imports. Vietnam imported $5 billion in goods from the United States,  its seventh-largest import market, and $37 billion in goods from China,  its largest import market, in 2013. Other ASEAN countries, South  Korea, Japan, Taiwan, and the EU represented Vietnam’s second-,  third-, fourth-, fifth-, and sixth-largest goods import markets,  respectively, in 2013. In both 2004 and 2013, the United States’  share of Vietnam’s imports was around 3 to 4 percent. China’s share  of Vietnam’s imports increased significantly during the same period,  from 14 percent in 2004 to 28 percent in 2013.
Figure 7 shows Vietnam’s exports and imports by trading partner in 2004,  2008, and 2013.
Vietnam is a larger export market for China than the United States, but is  a larger source of imported goods for the United States than it is for  China.
Vietnam was China’s seventh-largest export market by value in 2014  but the United States’ 44th-largest. In 2014, China exported $63.7  billion in goods to Vietnam, which accounted for 2.7 percent of  China’s global goods exports. In the same year, the United States  exported $5.7 billion in goods to Vietnam, which accounted for 0.4  percent of total U.S. global goods exports.
Vietnam was China’s 26th-largest source of imported goods by value  in 2014 and was the United States’ 15th-largest. In 2014, China  imported $19.9 billion in goods from Vietnam, which accounted for 1.0  percent of China’s global goods imports. In the same year, the United  States imported $30.6 billion in goods from Vietnam, which accounted  for 1.3 percent of total U.S. goods imports from the world.
The United States’ role relative to China’s in Vietnam’s trade of goods as  well as services may be greater when the amount of intermediate U.S.  inputs to the traded goods and services is taken into account. Because of  the nature of global supply chains, for example, a consumer phone from a  U.S. company might be assembled in China but include components  manufactured by Germany, Japan, South Korea, and other countries.  Data from the UN Commodity Trade database, which counts the full value  of an export for only the exporting country, showed that China exported  $29.1 billion in goods to Vietnam in 2011, almost seven times the $4.3  billion in goods that the United States exported to Vietnam that year.  However, data from the OECD and the WTO, which attempt to account  for the value added to a finished export by each contributing country,  show that China exported only about 2.5 times more in value-added  goods and services to Vietnam than the United States did. The OECD- WTO data suggest that Chinese exports to Vietnam contained a higher  portion of components produced elsewhere than did U.S. exports.
section_title: Total U.S. Trade in Services with Vietnam Was Approximately $3 Billion in 2012, but Data on China’s Trade in Services Are Unavailable
paragraphs: Our analysis of data from BEA and other sources on U.S. trade in  services in Vietnam provides broad estimates rather than precise  values. However, our calculations indicate that U.S. total trade in services  with Vietnam totaled approximately $3.1 billion in 2012. Our analysis  shows that the United States exported approximately $1.7 billion in services to Vietnam in 2012,  with (1) business, professional, and technical services and (2)  education as the largest and second-largest service categories by  value, and  imported approximately $1.4 billion in services from Vietnam in 2012,  with (1) travel and passenger fares and (2) transportation services as  the largest and second-largest service categories by value.
In 2012, the value of U.S.-Vietnamese services trade was about 12  percent of the value of U.S.-Vietnamese goods trade.
China does not publish data on its trade in services with Vietnam.
section_title: Chinese Investment Flows to Vietnam Were More Than Double U.S. Investment Flows in 2007-2012, but Available Data Have Limitations
paragraphs: Data on FDI in Vietnam from the United States and China have  limitations, in that these data may not accurately reflect the countries to  which U.S. and Chinese FDI ultimately flows. For example, U.S. and  Chinese firms may set up subsidiaries in other countries, which are then  used to make investments in Vietnam. Such investments would not be  captured by U.S. and Chinese data on FDI in Vietnam. Conversely, U.S.  and Chinese firms can set up subsidiaries in Vietnam, which can be used  to make investments in other countries. Given these limitations, available  data show that from 2007 through 2012, China’s reported FDI flows to  Vietnam totaled approximately $1.2 billion, more than twice the U.S. FDI  flows of approximately $500 million. During this period, China’s reported  annual FDI flows to Vietnam fluctuated but continued to exceed U.S. FDI  flows every year except 2009 (see fig. 8).
Although BEA does not publicly report data on U.S. FDI flows to Vietnam  by type of investment, information that BEA provided to us indicates that  from 2003 through 2013, on average, one-third of total U.S. FDI stock in  Vietnam was in mining and manufacturing. Mining increased from 22  percent of U.S. FDI stock in Vietnam in 2003 to more than 50 percent in  2013, while manufacturing’s share of total U.S. FDI stock in Vietnam fell  from a high of 60 percent in 2006 to 28 percent in 2013. According to  officials from Vietnam’s Ministry of Agriculture and Rural Development,  Chinese investment projects are mostly in the industrial, manufacturing,  and construction sectors.
section_title: United States and China Compete More Often with Other Countries in Goods Exports to Vietnam and Win Government Contracts in Different Sectors
paragraphs: Data on U.S. and Chinese goods exports to Vietnam indicate that since  2008, U.S. exports of goods to Vietnam have been more similar to  Japanese and EU exports than to Chinese exports, suggesting that the  United States is more likely to compete directly with Japan and EU  countries than with China. Figure 9 presents a commonly used index for  assessing the similarity of the United States’ goods exports to Vietnam to  those of China and other countries.
Data from Commerce’s Advocacy Center, the World Bank, and the ADB  provide some information about Vietnamese government contracts that  U.S. and Chinese firms competed for or won. Although these data  represent a small share of U.S. and Chinese economic activity in  Vietnam, they offer insights into the degree of competition between U.S.  and Chinese firms for the projects represented. These data indicate that  U.S. firms in Vietnam have competed more often with firms from other  countries than with Chinese firms and have tended to win contracts in  different sectors.
Commerce’s Advocacy Center. Data from Commerce’s Advocacy  Center show that U.S. firms that the center supported in fiscal years  2009 through 2014 competed for Vietnamese government contracts  more often, and for higher total contract value, with firms from Japan,  South Korea, and several other countries than with Chinese firms (see  table 3). According to the center’s data, Chinese firms competed  with U.S. firms for 3 of 29 contracts, in the areas of energy and power,  infrastructure, and services. These 3 contracts’ total value was $92  million—3 percent of the $28.8 billion in total contract value for which  the U.S. firms competed. In contrast, Japanese and South Korean  firms competed against U.S. firms for 10 and 6 contracts, respectively,  with a combined value of more than $11 billion for each country.
World Bank. From 2000 through 2014, U.S. and Chinese firms  generally won World Bank-financed contracts in Vietnam in different  sectors. Vietnamese firms received about $4.3 billion (70 percent) of  the $6.1 billion in total contract value. Among firms from other  countries, Chinese firms won the highest total contract value—$531  million—almost 9 percent of the total World Bank-financed contract  value. The United States won $133 million, about 2 percent of the  total World Bank-financed contract value. Most of the contract dollars  won by Chinese firms were for civil works (71 percent) and goods (28  percent). In contrast, most of the contract dollars won by U.S. firms— $118 million (89 percent)—were for consultant services. Electrical  equipment was the only category of procurement in which both U.S.  and Chinese firms won more than $2 million in contract value.  Chinese firms won $140 million, and U.S. firms won $14 million, in  contract value for electrical equipment for World Bank projects in  Vietnam.
ADB. U.S. firms won one ADB contract in Vietnam in 2013 and  2014—a $130,000 contract for consulting services related to water  conservation. During this period, Chinese firms won 15 contracts  valued at more than $250 million. The Chinese firms’ contracts  included about $207 million for the construction of roads and a  hydropower plant, with the remainder for goods for electricity  transmission, distribution, and renewable energy.
section_title: U.S. Firms Face a Challenging Business Environment in Vietnam
paragraphs: U.S. agencies and private sector representatives have articulated multiple  challenges to trading and investing in Vietnam.
Restrictive regulatory environment. A lack of transparency in the  Vietnamese government’s policies and decisions and slowness of  government action are creating challenges for U.S. firms, according to  State and Commerce. In addition, one U.S. business owner we spoke  with in Vietnam described the regulatory environment he dealt with as  “arcane, corrupt, and labyrinthine.” According to a State and  Commerce report, Vietnam has established regulations that limit the  operations of foreign companies in the Vietnamese market. For  example, unless a foreign company has an investment license  permitting it to directly distribute goods in Vietnam, the company must  appoint a local authorized agent or distributor. USTR also reports that  Vietnamese government restrictions on certain types of imports, such  as used consumer goods, machinery and parts, and some agricultural  commodities, affect U.S. firms’ ability to operate in Vietnam. The  World Bank’s 2015 Ease of Doing Business Index ranked Vietnam at  78 of 189 economies, where a ranking of 1 indicates the most  business-friendly regulations relative to those of other countries in the  index. The 2015 index ranked Vietnam most favorably on dealing  with construction permits (22) and least favorably on paying taxes  (173). In 2015, according to the World Bank, Vietnam implemented  reforms that made paying taxes less costly for companies and  improved its credit information system.
Corruption. Reports by USTR, Commerce, and State cite corruption  as a significant barrier faced by U.S. and other foreign firms in  Vietnam. In addition, the owner of one small U.S. enterprise whom  we spoke with in Vietnam said that onerous audit requirements and  paperwork, such as the thick dossier required for obtaining an  investment license, created barriers to trading and investing in  Vietnam as well as opportunities for corruption. Transparency  International’s 2014 Corruption Perceptions Index ranked Vietnam at  119 of 175 countries and territories, where a ranking of 1 indicates the  lowest perceived level of public sector corruption relative to other  countries in the index.
Weak infrastructure. State and Commerce reports cite poorly  developed infrastructure, such as electrical and Internet infrastructure,  as a challenge for U.S. firms doing business in Vietnam. In 2015,  State reported that Vietnam needs an estimated $170 billion in  additional infrastructure development in areas such as power  generation, roads, railways, and water treatment to meet growing  economic demand. According to a representative of one U.S. firm  whom we spoke with in Vietnam, the capacity of Haiphong Harbor, a  port near Hanoi, was so poor that the firm chose to ship goods to  other Vietnamese ports and reload them onto smaller coastal vessels  at an increased cost to avoid Haiphong. In addition, a representative  of a U.S. clothing manufacturer in Vietnam noted that the capacity of  Vietnam’s electrical grid is weak. As a result, the Vietnamese  government occasionally institutes controlled brownouts—generally  on days when the garment manufacturing plants are not operating—to  try to alleviate strain on the electrical grid. According to the clothing  manufacturer’s representative, any expansion of the garment industry  could be limited without additional electrical capacity.
Violations of intellectual property rights. In 2015, USTR reported  that Vietnam remained designated as a Watch List country because of  concerns about intellectual property rights violations and theft.  According to USTR, online piracy and sales of counterfeit goods are  common; in addition, Vietnamese firms manufacture counterfeit  goods. Moreover, Vietnam’s capacity to enforce criminal penalties  against counterfeiters is limited. Commerce similarly cited ineffective  protection of intellectual property as a significant challenge. In  addition, a representative of a technology company whom we spoke  with in Vietnam stated that only 1 in 20 users of the company’s  software were paying for its use and that Vietnamese consumers  knowingly purchase counterfeits.
Predominance of state-owned enterprises. According to a  Commerce and State report about Vietnam’s business environment,  state-owned enterprises dominate some sectors of the Vietnamese  economy and receive some trade advantages over foreign firms. For  example, according to the report, state-owned enterprises dominate  the oil and gas, electricity, mining, and banking sectors, among  others. The top three telecommunications companies in Vietnam are  also state-owned enterprises and control nearly 95 percent of the  Vietnam telecommunications market. Similarly, a private sector  representative we spoke with in Vietnam stated that the Vietnamese  government controls approximately 80 percent of Vietnam’s insurance  market. Moreover, according to a 2015 USTR National Trade  Estimates Report on Foreign Trade Barriers, Vietnam’s state-owned  trading enterprises have been given the exclusive right to import  certain products, including tobacco products; crude oil; newspapers,  journals, and periodicals; and recorded media. In addition, since  U.S. and other foreign firms are restricted from majority ownership in  some sectors, including telecommunications and banking, they must  partner with a domestic firm—generally a state-owned enterprise—to  conduct business in these sectors. However, Commerce and State  have reported that few Vietnamese firms, including state-owned  enterprises, are audited against international standards and, as a  result, U.S. firms have difficulty verifying the financial information of  prospective partners.
Shortages of skilled labor. Commerce and State reporting cited  shortages of skilled labor as constraints to U.S. firms. In addition, a  representative of one firm whom we interviewed in Vietnam noted that  a lack of skilled labor in engineering limited the firm’s ability to support  the modernization of factory equipment.
section_title: U.S. and China Are Engaging Economically with Vietnam in Similar Ways, but Chinese Financing Has Exceeded U.S. Financing
paragraphs: The United States has no FTA with Vietnam but both are participants in  the proposed regional TPP agreement, along with other countries. In  contrast, China has free trade and investment agreements with Vietnam  through its agreements with ASEAN countries and is negotiating the  proposed RCEP agreement with Vietnam and other countries. Both  countries support their domestic firms in Vietnam through financing and  other means, but U.S. agencies estimate that China has provided a larger  amount of financing than the United States. In addition, the United States  and China have each supported economic development in Vietnam, with  U.S. efforts focused on capacity building to improve Vietnam’s economic  governance and Chinese efforts focused on improving physical  infrastructure and connectivity.
subsections: section_title: Unlike the United States, China Has Free Trade and Investment Agreements with Vietnam
paragraphs: While the United States does not have an FTA with Vietnam, the two  countries have a bilateral trade agreement (BTA) to facilitate their trade  relations. The United States–Vietnam BTA, which the United States  signed in 2000, enabled the establishment of normal trade relations with  Vietnam—significantly reducing tariffs for many Vietnamese exports—and  incorporated elements modeled on WTO agreements. As a result of the  BTA, according to a 2014 study, the average U.S. tariff for Vietnamese  manufacturing exports, such as textiles, fell from 33.8 percent to 3.4  percent. According to the U.S.-Vietnam Trade Council, under the BTA,  Vietnam agreed to reduce tariffs, typically by one-third to one-half, on a  broad range of products of interest to U.S. businesses, including toiletries,  film, mobile phones, tomatoes, and grapes. USTR officials stated that the  BTA remains in effect and contains some provisions beyond those  required by the WTO. Since Vietnam joined the WTO, the majority of U.S.  exports of manufactured and agricultural goods have faced Vietnamese  tariffs of 15 percent of less, according to a USTR Trade Fact Sheet.  However, according to a report by Commerce and State, U.S. businesses  have noted that eliminating high tariffs on certain agricultural and  manufactured goods, including fresh food, fresh and frozen meats, and  materials and machinery, would create significant new opportunities.
In contrast, China has free trade and investment agreements with  Vietnam through the ASEAN-China Comprehensive Economic  Cooperation Agreement. The China-ASEAN Framework Agreement on  Comprehensive Economic Cooperation comprises a series of  agreements, on trade in goods, trade in services, and investment, to  expand China’s and ASEAN countries’ access to each other’s markets.
The China-ASEAN Trade in Goods Agreement, which entered into  force in 2005, is intended to give China and Vietnam, as well as other  ASEAN countries, tariff-free access to each other’s markets for many  goods and will reduce most duties for Vietnam’s trade in goods with  China to zero by 2018. According to a study by the ADB, the average  tariff on ASEAN countries’ exports to China was 0.1 percent in 2010,  and 90 percent of Chinese exports are expected to face no tariffs in  Vietnam by 2015. In January 2015, Vietnam’s Ministry of Finance  stated that it had implemented the commitments it had made in the  agreement to reduce tariffs.
The China-ASEAN Trade in Services Agreement, which entered into  force in 2007, is intended to provide market access in agreed-on  sectors of China and Vietnam, as well as other ASEAN countries, to  foreign companies and firms located in participant countries that is  equivalent to domestic service providers’ market access in their own  countries.
The China-ASEAN Investment Agreement, which entered into force in  2010, is intended to commit China and Vietnam, as well as other  ASEAN countries, to treat each other’s investors as equal to domestic  investors.
Selected studies have projected that the China-ASEAN Trade in Goods  Agreement generally increases trade for China and Vietnam. All but two  of these studies also estimated that the agreement improves the  economies of both China and Vietnam. In addition, one study estimated  that the agreement increases investment in China and Vietnam. In  August 2014, China and Vietnam, as well as the other ASEAN countries,  announced discussions to upgrade these agreements. The second round  of discussions, held in February 2015, focused on investment, economic  cooperation, and other areas. In August 2015, China’s Commerce  Minister announced that China and ASEAN had agreed to the goal of  finalizing negotiations on the upgrade by the end of 2015.
section_title: United States and China Are Engaging Vietnam through Separate Regional Trade Agreement Negotiations
paragraphs: The United States and Vietnam are participants in the proposed TPP,  while China and Vietnam are participants in the ongoing RCEP  negotiations.
TPP. The United States, Vietnam, and 10 other countries have  negotiated the TPP, with an agreement announced in October 2015.  TPP negotiating parties agreed in 2011 that the TPP would address  ensuring a competitive business environment and protecting the  environment, labor rights, and intellectual property rights, among other  issues. China is not a party to the TPP negotiations.
RCEP. China, Vietnam, and 14 other countries are parties to the  RCEP negotiations, which negotiating partners have said they hope to  complete in 2015. Vietnam’s trade with the other countries  negotiating RCEP, including China, represented 58 percent of its total  trade in goods for 2013. RCEP negotiating parties seek to expand  access to trade and investment among the parties by combining their  existing FTAs into a single comprehensive agreement. The United  States is not a party to the RCEP negotiations.
Vietnam has embraced TPP as part of its overall efforts to increase trade  and access to foreign markets, particularly in the United States, according  to State officials. State officials noted that Vietnam will need to overcome  several challenges to meeting TPP requirements. In addition, according  to State officials, TPP’s labor and alternative dispute resolution  requirements may be challenging for Vietnam to implement. However,  State officials noted that Vietnam has shown a commitment to improving  its economic governance.
According to U.S. officials, the dispute between Vietnam and China over  China’s placement of an oil rig near the disputed Paracel Islands in May  through July 2014 briefly disrupted Chinese and Vietnamese trade. The  officials noted that the incident also highlighted for Vietnamese officials  the importance of their economic relationship with China and the need to  diversify Vietnam’s trade. According to State officials, China responded to  Vietnamese riots and attacks on Chinese firms and individuals by slowing  customs procedures and tightening controls at the typically porous China- Vietnam border.
According to U.S. officials, after the riots, Vietnam reviewed its economic  relationship with China but found that it could not afford to reduce its  reliance on China. For example, according to the U.S. officials,  Vietnamese officials had not known exactly how intertwined Vietnam’s  economy was with China’s because of the amount of undocumented  cross-border trade. According to testimony before the U.S.-China  Economic and Security Review Commission in May 2015, Vietnam relies  on China for a number of intermediate goods as inputs for its exports;  therefore, any disruptions to trade flows could spread throughout the  Vietnamese economy.
section_title: U.S. Agencies Have Provided Less Financing in Vietnam Than Chinese Agencies
paragraphs: Our analysis of U.S. agency data showed that in fiscal years 2009  through 2014, Ex-Im and OPIC provided approximately $205 million in  financing for exports to, and investment in, Vietnam (see table 4).  Although China does not publish data on its financing in Vietnam, our  analysis of State-reported data found that China has financed at least  $4.5 billion in investment projects in Vietnam since 2008.
Our analysis of Ex-Im and OPIC information for fiscal years 2009 through  2014 found the following.
Ex-Im authorized about $148.9 million in loans, loan guarantees, and  insurance to support U.S. exports in Vietnam. In fiscal year 2012,  Ex-Im’s largest authorization in Vietnam consisted of a $118 million  direct loan to the government of Vietnam to purchase a  telecommunications satellite. In fiscal year 2013, Ex-Im authorized  $16.7 million for a long-term loan to Vietnam’s National Power  Transmission Corporation to purchase electricity transmission  equipment.
OPIC committed about $55.6 million in financing to U.S. investment  projects in Vietnam.In 2014, OPIC committed to provide an  investment guarantee of up to $50 million for the Mekong Renewable  Resources Fund, which will invest in the environmental services and  infrastructure sector, the renewable energy sector, and the energy  efficiency sector in Vietnam, Cambodia, and Laos.
China does not publish data on its financing for exports, imports, and  investment in Vietnam by private and state-owned enterprises. However,  according to information provided by the U.S. Embassy in Hanoi, China  made available approximately $4.5 billion in financing from 2008 to 2013  for coal-fired power plants and for part of the Hanoi rail transit system, all  constructed by Chinese firms. China’s Export-Import Bank has also  published brief summaries of major projects for some countries, such as  Vietnam. One such summary indicates that the bank provided a  concessional loan in 2013 to support the construction of a chemical plant  in Vietnam to manufacture fertilizer.
In addition, China provides financing and labor in support of projects in  Vietnam. According to State officials, Vietnam’s importation of Chinese  labor for technical positions enhances China’s role in the Vietnam  economy because the Vietnamese labor market lacks the capacity to fill  midlevel technical positions. However, according to testimony before the  U.S.-China Security Review Commission in May 2015, local Vietnamese  have sometimes resented the importation of Chinese labor. According  to State officials, such resentment contributed to the riots and violence in  Vietnam after China placed the oil rig in the disputed Paracel waters.
section_title: United States and China Provide a Variety of Services to U.S. and Chinese Firms in Vietnam
paragraphs: State, Commerce, and USDA maintain staff in Vietnam to provide export  promotion services and policy advocacy for U.S. firms operating in  Vietnam. For example:
State. State’s Economic Section at the U.S. Embassy in Hanoi  advocates for U.S. investors and for trade and investment policies  favored by the United States, according to a senior State official. The  official said that the section also supports the negotiation of U.S. trade  agreements, such as TPP, and other types of economic agreements,  including a United States–Vietnam agreement related to taxation.
Commerce. According to Commerce officials in Vietnam, Commerce  personnel based in the country assist U.S. firms by, among other  things, matching them with local partners, organizing trade missions,  and providing advocacy. For example, the Commerce officials said  that they organized a trade mission and provided advocacy for U.S.  civil nuclear firms. Another Commerce official told us that Commerce  officials had worked with the Vietnamese government to remove an  illegal duty on goods that a U.S. company was importing into Vietnam.
USDA. USDA personnel help address market access and  development issues in Vietnam for U.S. agricultural products,  according to a USDA official in Vietnam. For example, according to  the official, USDA personnel track Vietnamese government  regulations that would affect U.S. agricultural products and provide  comments to the Vietnamese government as needed. The official  noted that USDA personnel also work directly with the Vietnamese  government to help U.S. firms retrieve stranded cargo, particularly  perishable goods, from Vietnamese customs. For instance, one firm’s  product was delayed in customs because it lacked a plant quarantine  certificate that is not required in the United States.
The Chinese government has also acted to support Chinese firms that do  business in Vietnam. For example, according China’s Ministry of Foreign  Affairs, China and Vietnam have established two economic cooperation  zones in Vietnam, near Ho Chi Minh City and in Haiphong City, to  facilitate trade and investment by offering tax and other advantages for  Chinese firms that invest in the zone.
section_title: United States and China Are Fostering Different Aspects of Vietnam’s Economic Development
paragraphs: U.S. agencies have assisted Vietnam in increasing economic openness  and integration and improving economic governance. In fiscal years 2009  through 2013, the U.S. agencies provided a total of $32 million in trade  capacity building assistance—that is, development assistance intended to  improve a country’s ability to benefit from international trade—to  Vietnam. U.S. trade capacity building assistance to Vietnam has  supported initiatives aimed at, among other things, modernizing  Vietnam’s commercial laws and legal system, providing assistance to  Vietnam relevant to its trade agreement commitments, improving the  country’s customs and border control, and supporting potential U.S.  investment opportunities. The majority of U.S. trade capacity building  assistance to Vietnam during this period—about 64 percent—was  provided by the U.S. Agency for International Development (USAID) to,  for example, improve Vietnam’s regulatory environment to support  economic growth and a better business and trade environment. For more  information about U.S. trade capacity building assistance to Vietnam, see  appendix IV.
China has assisted Vietnam’s economic development through  infrastructure construction as well as efforts to develop connectivity  between China and Southeast Asian countries. According to the U.S.  Embassy in Hanoi, China provided about $4.5 billion of approximately  $10.8 billion in large infrastructure construction projects awarded to  Chinese firms in Vietnam from 2008 to 2014. These infrastructure  projects included power plants, processing plants, and a railway (see fig.  10). The report noted that the remaining funding for infrastructure  construction was provided by Australia, ADB, and the World Bank and  through joint ventures. In addition, according to the U.S. Embassy in  Hanoi, as of 2014, Chinese firms had won contracts to build 15 of 24 new  thermal power plants in Vietnam. In late 2013, China and Vietnam agreed  to the implementation of the Shenzhen-Haiphong trade corridor to link the  Vietnamese port city of Haiphong to Shenzhen in China. According to  testimony before the U.S.-China Security Review Commission in May  2015, China has also announced that it will help upgrade the Haiphong  port to accommodate large container ships.
In addition, through the ADB-supported Greater Mekong Subregion  (GMS) Economic Cooperation program, Vietnam and China are  participating in a plan to connect Vietnam and other mainland Southeast  Asian countries with each other and with China through a series of  economic corridors that include improving transportation infrastructure.  ADB’s GMS Strategic Framework identifies corridors, including an  eastern corridor running north-to-south and connecting China and  Vietnam; an east-west corridor connecting Burma, Thailand, Laos, and  central Vietnam; and a southern corridor connecting Burma, Thailand,  Cambodia, and southern Vietnam. For example, according to Chinese  government reporting, the $952 million Hanoi to Lao Cai freeway, which a  Chinese contractor is building, is part of the GMS strategic framework.
Similarly, the Master Plan on ASEAN Connectivity envisions a rail link  through Vietnam connecting the interior of China with Singapore and  connecting the capital cities in Vietnam, Cambodia, and Thailand with a  spur line to the capital of Laos. This rail link would complement the  various transport corridors under the GMS and other existing transport  networks, with the aim of creating an integrated transport network  throughout Southeast Asia and Asia as a whole. The railway running from  China to Ho Chi Minh City in the south of Vietnam is already complete.  The Master Plan on ASEAN Connectivity also calls for a network of  highways meeting certain quality standards and connecting Vietnam with  all of its neighbors, including China. Vietnam has constructed its portions  of the highway network.
Vietnam is one of 57 prospective founding members of China’s proposed  Asian Infrastructure Investment Bank, an international institution to  finance infrastructure projects throughout the Asia-Pacific region.  Under the bank’s initial agreement, the bank’s authorized capital is $100  billion, of which China has pledged $29.8 billion and Vietnam has pledged  $663 million. Bank documents indicate that the bank anticipates  beginning operations before the end of 2015.
section_title: Agency Comments
paragraphs: We provided a draft of this report for review and comment to the  Departments of Agriculture, Commerce, State, and the Treasury and to  MCC, OPIC, USAID, Ex-Im, the U.S. Trade and Development Agency,  and USTR. We received technical comments from Commerce, State,  Treasury, MCC, OPIC, Ex-Im, USTR, which we incorporated as  appropriate.
We are sending copies of this report to the Secretaries of Agriculture,  Commerce, State, and the Treasury; the Chairman of Ex-Im; the  Administrator of USAID; the U.S. Trade Representative; the Director of  the U.S. Trade and Development Agency; the Chief Executive Officers of  OPIC and MCC; and other interested parties. In addition, the report is  available at no charge on the GAO website at www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points for  our Offices of Public Affairs and Congressional Relations may be found  on the last page of this report. GAO staff members who made key  contributions to this report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: We examined available information about U.S. and Chinese trade and  investment, competition, and actions to further economic engagement in  Indonesia and Vietnam. This report is a public version of a sensitive but  unclassified report that we are issuing concurrently. This report addresses  the same objectives, and employs the same methodology, as the  sensitive report.
We conducted fieldwork in Jakarta, Indonesia, and in Hanoi and Ho Chi  Minh City, Vietnam. We based our selection of these two countries,  among the 10 members of the Association of Southeast Asian Nations  (ASEAN), on the amounts of U.S. and Chinese exports to, and imports  from, each country; foreign direct investment (FDI) in each country; and  development assistance in each country. We also considered whether (1)  a country participated in U.S. and Chinese trade agreements or was a  negotiating partner in the Trans-Pacific Partnership, (2) any regional  institutions were located in the country, (3) the country was an emerging  partner based on gross domestic product, and (4) the country was a  South China Sea claimant.
subsections: section_title: U.S. and Chinese Trade and Investment in Indonesia and Vietnam
paragraphs: To describe U.S. and Chinese trade and investment in Indonesia and  Vietnam, we analyzed data on U.S. and Chinese trade in goods, trade in  services, and FDI. To assess the reliability of these data, we cross- checked the data on trade in goods and FDI for internal consistency, and  consulted with U.S. officials on the data on trade in goods and the U.S.  data on trade in services and FDI. Because of the limited availability of  data and the differing contexts for the data sets we report, the time period  for each of these data sets varied. We determined that the data were  sufficiently reliable for the purposes of our report and have noted caveats,  where appropriate, to indicate limitations in the data.
To obtain data on U.S. and Chinese trade in goods from 1994 through  2014, we accessed the United Nations’ Commodity Trade Statistics (UN  Comtrade) database through the U.S. Department of Commerce’s  (Commerce) Trade Policy Information System. The UN Comtrade  database provides data for comparable categories of exports and imports  of goods for the United States and China. Because, according to a  Commerce official, the goods exports data that China reports to the UN  Comtrade database do not distinguish total exports from re-exports (i.e.,  goods that are first imported and then exported in substantially the same  condition), we used data on total goods exports, which include re-exports,  to ensure the comparability of U.S. and Chinese data on goods exports.  The data on goods exports from the UN Comtrade database show the  free-on-board prices of the goods, which exclude transportation and  insurance charges. For imports, we used data on general imports, which  include goods that clear customs as well as goods that enter bonded  warehouses or foreign trade zones. The data on goods imports show the  prices paid for the goods, including the cost of freight and insurance. We  determined that the UN Comtrade data on trade in goods for the United  States and China were generally reliable for comparing trends over time  and the composition of trade.
To categorize the goods traded by the United States and China, we  assigned each good recorded in the UN Comtrade database to one of the  UN’s three Broad Economic Categories—capital, intermediate, or  consumer. For goods that the UN does not classify as capital,  intermediate, or consumer, we created an unclassified category. For  example, the UN does not classify passenger motorcars as capital or  consumer goods.
To examine each country’s trade in goods with its trading partners over  time, we analyzed data from the ASEANstats database for 2003, 2008,  and 2013 for Indonesia and 2004, 2008, and 2013 for Vietnam. Because  some of Indonesia’s and Vietnam’s trading partners do not report data to  the UN Comtrade database, we used data from the ASEANstats  database as a comprehensive set of data on trade in goods for all of  Indonesia’s and Vietnam’s trading partners. We compared trade data  from the ASEANstats and the UN Comtrade databases and found some  differences in values of bilateral trade between Indonesia and Vietnam  and their trading partners. Reasons for the differences include differences  in the valuation of goods, differences in data quality, and the omission of  some Indonesia and Vietnam trading partners from UN Comtrade data.
We determined that the data from the ASEANstats database for  Indonesia and Vietnam were generally reliable for comparing each  country’s trade in goods with its trading partners over time. We  determined that the data from the ASEANstats database for Indonesia  and Vietnam were generally reliable for comparing each country’s trade in  goods with its trading partners over time.
To illustrate the importance of accounting of a country’s exports that  originate in other countries, we analyzed data from the Organisation for  Economic Co-operation and Development (OECD) and the World Trade  Organization (WTO) on trade in value-added goods and services.
For U.S. trade in services with Indonesia, we used publicly available data  from Commerce’s Bureau of Economic Analysis (BEA). BEA’s data on  trade in services with Vietnam for several categories—travel and  passenger fares, transportation, education, and “other” private services— are based on data from various sources. According to BEA, its survey  data are from mandatory surveys of primarily U.S. businesses with  services trade that exceeds certain thresholds. BEA does not survey a  random sample of U.S. businesses and therefore does not report the data  with margins of error. We calculated the value of U.S. trade in services  with Vietnam for 2012 based on tabulations prepared for us by BEA and  other sources, including the U.S. Census Bureau. Our estimates of U.S.  trade in services with Vietnam represent broad estimates rather than  precise values. We extrapolated values for certain services at the country  level from broader data (e.g., we calculated values for travel services by  multiplying the number of travelers for Vietnam by the average traveler  expenditure for the region). We calculated values for other services (e.g.,  business, professional, and technical services) from a range of estimates  based on survey data. When the volume of trade for a service was  presented as a range, we used the midpoint value to estimate the volume  of trade for that service. When the volume of trade for a service was  presented as a range and described by BEA as trending upward, we used  the lowest value for the earlier years and the highest value for the later  years.
For data on U.S. firms’ investments in Indonesia and Vietnam from 2007  through 2012, we used data that we obtained directly from BEA. For  Chinese firms’ investments, we used data from the UN Conference on  Trade and Development as reported by China’s Ministry of Commerce.  To identify patterns in, and to compare, U.S. and Chinese FDI, we used  U.S. and Chinese data on FDI and noted in our report the following  limitations.
As we have previously reported, both U.S. and Chinese FDI may be  underreported, and experts have expressed particular concern  regarding China’s data. U.S. and Chinese firms set up subsidiaries in  places such as the Netherlands and the British Virgin Islands, which  can be used to make investments that are not captured by U.S. and  Chinese data on FDI. Experts state that this could be a significant  source of underreporting of China’s FDI. According to BEA, data on  U.S. FDI are based on quarterly, annual, and benchmark surveys.  BEA’s benchmark survey is the most comprehensive survey of such  investment and covers the universe of U.S. FDI. BEA notes that its  quarterly and annual surveys cover samples of businesses with FDI  that exceed certain thresholds. Because BEA does not survey a  random sample of businesses, and therefore does not report the data  with margins of error, our report does not include margins of error for  BEA data.
China does not provide a definition of FDI when reporting FDI data.
However, the types of data included in Chinese FDI data (e.g., equity  investment data and reinvested earnings data) appear similar to data  reported for U.S. FDI, for which the United States uses OECD’s  definition.
Despite the limitations of China’s FDI data, various reports, including  those published by international organizations such as the International  Monetary Fund (IMF), government agencies, academic experts, and other  research institutions, use China’s reported investment data to describe  China’s FDI activities. In addition, despite some potential underreporting  of FDI data, we determined that the FDI data were reliable for reporting  general patterns when limitations are noted.
Because of challenges in determining appropriate deflators for some  data, we used nominal rather than inflation-adjusted values for U.S. and  Chinese trade and investments in Indonesia and Vietnam. However, we  first tested the impact of deflating these values and found a limited impact  for descriptions of the overall trends. For example, using the U.S. gross  domestic product deflator to remove inflation in the goods trade values  included in this report would cause total Chinese trade in goods with  Indonesia to surpass total U.S. trade in goods in 2005, similar to trends  shown for nominal trade values. U.S. total trade in goods in Indonesia  increased by a factor of 2.8 from 1994 through 2014 if not adjusted for  inflation and by a factor of 1.9 if adjusted for inflation. Over the same  period, Chinese total trade in goods increased by a factor of 24.1 in  Indonesia if not adjusted for inflation and by a factor of 16.3 if adjusted for  inflation.
section_title: U.S. and Chinese Competition in Indonesia and Vietnam
paragraphs: To assess the extent of competition between exporters from the United  States, China, and other countries, we calculated an export similarity  index to compare U.S., Chinese, and other countries’ exports to  Indonesia and Vietnam in 2006 through 2014. The export similarity index  is a measure of the similarity of exports from two countries to a third  country. For example, to calculate the index for U.S. and Chinese exports  to Indonesia and Vietnam, we first calculated, for each type of good that  the United States and China exports, the share of that good in the United  States’ and China’s total exports to Indonesia and Vietnam. We then took  the minimum of the United States’ and China’s shares. The index is the  sum of the minimum shares for all types of goods that the United States  and China export to Indonesia and Vietnam. We used data on goods  exports from the UN Commodity Trade database at the four-digit level  and calculated each country’s export of a particular good as a share of  that country’s total exports to Indonesia and Vietnam.
We also analyzed data from Commerce’s Advocacy Center on host- government contracts and data for contracts funded by the Asian  Development Bank (ADB) and World Bank. Although these data  represent a small share of activity in Indonesia and Vietnam, they provide  insights into the degree of competition between U.S. and Chinese firms  for the projects represented.
Commerce’s Advocacy Center data comprised cases where U.S.  firms requested the agency’s assistance in bidding for host- government contracts in either Indonesia or Vietnam from 2009  through 2014. Because these data included the nationality of other  firms bidding on a host-government contract, we used this information  to determine the extent to which Chinese firms or firms of other  nations were competing with U.S. firms for these contracts. We  counted the numbers of contracts and summed the value of contracts  for which each foreign country’s firms competed against U.S. firms.  For Vietnam, we excluded five contracts for which the nationalities of  competitors were not identified. In cases where foreign competitors  comprised a consortium of firms from different countries, we counted  the whole value of the contract in each competing nationality’s total.  We also used the Advocacy Center’s classification of contracts by  sector to determine the sectors in which Chinese firms competed for  the highest proportion of contracts. To determine the reliability of  these data, we manually checked the data for missing values and also  reviewed information about the data’s collection. In addition, we  interviewed Advocacy Center staff about the data. Advocacy Center  staff told us that data from before 2010, when the center began using  a new database, may be incomplete because data for some contracts  that were closed before 2010 may not have been transferred to the  new database. Overall, we found the Advocacy Center data to be  reliable for reporting on competition between U.S. and other firms,  including Chinese firms, in Indonesia and Vietnam.
The World Bank publishes data on the value, sector, and suppliers of  its contracts in Indonesia and Vietnam. We used the World Bank’s  classification of contracts into procurement categories (goods, civil  works, consultant services, and nonconsultant services) to compare  the value and types of contracts that U.S. and Chinese firms won from  2001 through 2014. However, we combined the consultant services  and nonconsultant services categories into one category, “consultant  and other services.” The World Bank data include contracts that were  reviewed by World Bank staff before they were awarded. To  determine the reliability of these data, we electronically checked the  data for missing values and possible errors. We also contacted World  Bank personnel to learn how the data were collected and identify any  limitations of the data. We found that the data for contracts funded by  the World Bank were generally reliable for the purpose of  demonstrating U.S. and Chinese competition in Indonesia and  Vietnam over time.
We used ADB’s published data on the value, sector, and recipient of  its contracts for consulting services, goods, and civil works provided  as technical assistance or funded by loans and grants to Indonesia  and Vietnam in 2013 and 2014 to compare the value and types of  contracts won by U.S. and Chinese firms. ADB only publishes data for  consulting contracts over $0.1 million in value and other contracts  over $1.0 million, so our analysis of ADB contracts does not include  some smaller ADB contracts. In addition, a portion of the ADB data  did not have the contracts classified according to the nature of the  contract (construction, consulting services, goods, turnkey, and  others). Therefore, we classified contracts won by U.S. and Chinese  firms that were missing these categories according to those used in  the rest of the data. To determine the reliability of these data, we  checked the data for missing values and other types of discrepancies.  We found that the ADB data were generally reliable for our purpose of  reporting on U.S. and Chinese competition in Indonesia and Vietnam  in 2013 and 2014.
To identify the challenges that U.S. firms face when conducting business  in Indonesia and Vietnam, we reviewed the Office of the United States  Trade Representative’s (USTR) 2014 and 2015 National Trade Estimate  Reports on Foreign Trade Barriers and its 2015 Special 301 Report on  intellectual property rights protections. We reviewed the U.S. Department  of Agriculture’s (USDA) country strategies for Indonesia and Vietnam,  Department of State (State) cables, and Commerce and State’s 2014  reports on doing business in Indonesia and Vietnam. We also interviewed  representatives of 12 U.S. firms in Indonesia and Vietnam, in sectors  such as agriculture and manufacturing, as well as representatives of five  private sector and research organizations, such as the American  Chamber of Commerce-Vietnam and the Center for Strategic and  International Studies. The views expressed in these interviews are not  generalizable.
section_title: U.S. and Chinese Actions to Further Economic Engagement in Indonesia and Vietnam
paragraphs: To examine the actions that the U.S. and Chinese governments have  taken to further economic engagement in Indonesia and Vietnam, we  reviewed regional and country studies and U.S. and Chinese agency  documents and interviewed U.S. and third-country officials, officials from  private sector business associations, and experts from research  institutes. We tried to arrange visits with Chinese government officials in  Indonesia and Vietnam and in Washington, D.C.; however, they were  unable to accommodate our requests for a meeting. U.S. agencies  included in the scope of our study were USDA, Commerce, State, the  Department of the Treasury, USTR, the Millennium Challenge  Corporation, the U.S. Agency for International Development (USAID), the  Export-Import Bank of the United States (Ex-Im), the Overseas Private  Investment Corporation (OPIC), and the U.S. Trade and Development  Agency.
To obtain information about U.S. and Chinese trade agreements with  Indonesia and Vietnam, we reviewed the trade agreements; U.S. and  Chinese government documents; studies from research institutions;  prior GAO reports; and documents from multilateral organizations,  such as WTO. We identified studies assessing the effect of the China- ASEAN free trade agreement on China’s, Indonesia’s, and Vietnam’s  economies by searching the ProQuest database (which includes the  EconLit database) and the studies of international organizations such  as ADB, and we selected and reviewed studies that estimated the  impact of the agreement on these three economies. We also  interviewed U.S. officials in Indonesia and Vietnam, officials from  private sector business associations, and experts from research  institutes.
To calculate the percentage of Indonesia’s and Vietnam’s total goods  trade represented by their trade with the participants in the Regional  Comprehensive Economic Partnership Agreement, we used data on  trade in goods from the ASEANstats database. To determine the  reliability of these data, we compared trade data from the ASEANstats  and the UN Comtrade databases and found some differences in  values of bilateral trade between ASEAN countries and their trading  partners. Reasons for the differences include differences in the  valuation of goods, differences in data quality, and the omission of  some ASEAN trading partners from UN Comtrade data. We  determined that the data from the ASEANstats database for Indonesia  and Vietnam were generally reliable for comparing each country’s  trade in goods with its trading partners.
To obtain information about U.S. financing in Indonesia and Vietnam,  we compiled Ex-Im and OPIC data from these agencies’ annual  reports and congressional budget justifications and interviewed  agency officials to provide additional context and to clarify elements of  the data. Where relevant, we note that additional Ex-Im insurance  may include Indonesia and Vietnam but do not include these data in  our totals. To determine the reliability of these data, we interviewed  agency officials and checked their published annual reports against  agency-provided summary data to determine any limitations or  discrepancies in the data. We determined that data from Ex-Im and  OPIC were generally reliable for presenting trends and aggregate  amounts by year.
To document U.S. efforts to provide export promotion services in  Indonesia and Vietnam, we reviewed information on State’s Economic  Sections at the U.S. Embassy in Indonesia and Vietnam and  interviewed State, Commerce, and USDA officials in Washington,  D.C., and in Vietnam and Indonesia.
To describe Chinese financing in Indonesia and Vietnam, we used  information reported by State and China’s Export-Import Bank. We  also interviewed private sector and research institute representatives.  To document Chinese support for firms in Indonesia and Vietnam, we  used publicly available information from a variety of sources, including  Chinese embassy websites; the Bank of Indonesia’s website; China’s  Ministry of Commerce; and Xinhua, China’s state press agency.
To document U.S. support for economic development and integration  in Indonesia and Vietnam, we used the USAID trade capacity building  database to capture U.S. development assistance efforts related to  trade in Indonesia and Vietnam. USAID collects data to identify and  quantify the U.S. government’s trade capacity building activities in  developing countries through an annual survey of agencies on behalf  of USTR. We also reviewed agency project summaries and  interviewed agency officials in Washington, D.C., and in Indonesia  and Vietnam. To determine the reliability of these data, we  interviewed agency officials regarding their methods for compiling and  reviewing the data. We determined that data from USAID’s trade  capacity building database were sufficiently reliable for our purposes.
To describe China’s support for regional integration in Indonesia, we  assessed public statements from Chinese and Indonesian officials  and information reported by U.S. agencies, including State, and we  interviewed U.S. and Indonesian officials. To describe China’s support  for regional integration in Vietnam, we assessed information reported  by U.S. agencies, including State and USAID, and interviewed U.S.  and Vietnamese officials. We also reviewed publicly available  information on the Asian Infrastructure Investment Bank’s website.
We conducted this performance audit from April 2014 to October 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Composition and Use of U.S. and Chinese Trade in Goods with Indonesia
paragraphs: From 2000 through 2014, the composition of U.S. and Chinese trade in  goods with Indonesia, in terms of value, remained relatively stable except  for a significant increase in China’s mineral imports (see figs. 11 and 12).  Textiles represented the largest share of U.S. imports from Indonesia  since 2005. China’s mineral imports increased from 25 percent of its total  imports from Indonesia in 2000 to a peak of 58 percent in 2013 before  declining to 42 percent in 2014. Animals, plants, and food generally  represented the largest share of U.S. exports to Indonesia from 2005  through 2014, and machinery represented the largest share of Chinese  exports to Indonesia from 2000 through 2014.
In 2014, almost half of the United States’ and most of China’s goods trade  with Indonesia consisted of goods for industrial use, most of which are  intermediate goods (see fig. 13). Among the industrial goods that the  United States traded with Indonesia, rubber was the top U.S. industrial  import and cotton was the top U.S. industrial export in 2014. Among the  industrial goods that China traded with Indonesia in 2014, coal was the  top Chinese industrial import and phones for cellular and other networks  were the top Chinese industrial export. In 2014, the United States  exported $1.9 billion of civilian aircraft, aircraft engines, and aircraft  parts—the overall top U.S. export to Indonesia, which represents 23  percent of U.S. exports to Indonesia and includes capital, intermediate,  and consumer goods.
section_title: Appendix III: Composition and Use of U.S. and Chinese Trade in Goods with Vietnam
paragraphs: From 2000 through 2014, the composition of U.S. and Chinese trade in  goods with Vietnam generally shifted, in terms of value, from  predominantly raw commodities to manufactured goods (see figs. 14 and  15). In 2000, the largest share of U.S. imports from Vietnam consisted of  animals, plants, and food, while the largest share of Chinese imports from  Vietnam consisted of minerals. However, by 2014, the largest share of  U.S. imports from Vietnam consisted of textiles, which rose from 6  percent of U.S. imports in 2000 to 31 percent in 2014, while the largest  share of Chinese imports consisted of machinery, which rose from 1  percent in 2000 to 47 percent in 2014. From 2000 through 2014, animals,  plants, and food grew to represent the largest share of U.S. exports to  Vietnam, while machinery grew to represent the largest share of Chinese  exports to Vietnam.
In 2014, the majority of U.S. imports from Vietnam consisted of goods for  consumer use, while the majority of U.S. exports to Vietnam—as well as  Chinese imports from, and exports to, Vietnam—consisted of goods for  industrial use (see fig. 16). Among the consumer goods that the United  States and China traded with Vietnam, wooden bedroom furniture was  the top U.S. import and nuts were the top U.S. export, while cameras  were the top Chinese import and women’s and girl’s cotton jackets and  blazers were the top Chinese export. Among the industrial goods that the  United States and China traded with Vietnam, portable digital automatic  data processing machines were the top U.S. import and cotton was the  top U.S. export, while microchips were the top Chinese import and phone- set parts were the top Chinese export.
section_title: Appendix IV: U.S. Trade Capacity Building Assistance to Indonesia and Vietnam
paragraphs: U.S. agencies have identified certain official development assistance to  Indonesia and Vietnam as trade capacity building assistance. This  assistance addresses, for example, the countries’ regulatory environment  for business, trade, and investment; constraints such as low capacity for  production and entrepreneurship; and inadequate physical infrastructure,  such as poor transport and storage facilities.
subsections: section_title: Indonesia
paragraphs: In fiscal years 2009 through 2013, U.S. agencies provided about $373  million in trade capacity building assistance to Indonesia (see table 5).
As table 5 shows, three agencies—the Millennium Challenge Corporation  (MCC), the U.S. Agency for International Development (USAID), and the  Department of Labor (Labor)—provided the largest amounts of U.S. trade  capacity building assistance to Indonesia in fiscal years 2009 through  2013.
MCC provided about $333 million—about 90 percent of U.S. trade  capacity building assistance to Indonesia during this period—as part  of a 5-year, $600 million compact with Indonesia. One of the  compact’s three projects, the Green Prosperity Project, provides  technical and financial assistance for projects in renewable energy  and natural resource management to help raise rural household  incomes. A second project, the Procurement Modernization Project, is  designed to help the government of Indonesia develop a more  efficient and effective process for the procurement of goods and  services. MCC obligates compact funds when a compact enters into  force, disbursing the funds over the 5 years of the compact. As of  March 2015, MCC had expended $2.3 million of its $333 million  commitment for the Green Prosperity Project and $6 million of its $50  million commitment for the Procurement Modernization Project.
USAID provided about $19 million in trade capacity building  assistance, among other things, to provide economic policy advisory  services to the Indonesian government; strengthen key trade and  investment institutions by contributing to a World Bank Fund; and  strengthen the Indonesian Ministry of Trade’s capacity to analyze,  negotiate, and implement bilateral and multilateral trade agreements.  In addition, USAID officials told us that they are working to build and  sustain a culture of accountability in Indonesia at the national and  subnational levels by, for example, working with the U.S. Department  of Justice to train investigators to support Indonesia’s Corruption  Eradication Commission. However, according to agency officials, after  consultations with Indonesian officials and others knowledgeable  about the Indonesian economy, USAID stopped providing direct  support for economic and trade policy issues. USAID officials also  said that the Indonesian government did not view the support as a  priority.
Labor provided about $11 million in trade capacity building assistance  to improve Indonesia’s compliance with labor standards and its  competitiveness in global supply chains, to combat child labor, and to  build the capacity of domestic labor organizations.
section_title: Vietnam
paragraphs: In fiscal years 2009 through 2013, U.S. agencies provided about $32  million in trade capacity building assistance to Vietnam (see table 6).
As table 6 shows, four agencies—USAID, the Departments of the  Treasury (Treasury) and State (State), and the U.S. Trade and  Development Agency (USTDA)—provided the majority of U.S. trade  capacity building assistance to Vietnam in fiscal year 2009 through 2013.
USAID provided approximately $20.4 million—about 64 percent of  U.S. trade capacity building assistance to Vietnam during this  period—to enhance the country’s economic governance. From 2001  through 2010, USAID’s Support for Trade Acceleration projects  sought to modernize Vietnam’s commercial laws and legal system to  help the country meet its bilateral trade agreement commitments and  prepare it to join the World Trade Organization. In addition, the  Vietnam Competitiveness Initiative, which began in 2003 and ended in  2013, sought to strengthen Vietnam’s regulatory system and  regulatory framework and models for infrastructure development. The  Provincial Competitiveness Index, which began in 2013 and is  scheduled to end in 2016, assesses and reports on barriers to  economic development and doing business in Vietnam. Moreover,  USAID’s Governance for Inclusive Growth project—which began in  2013 and is scheduled to end in 2018—seeks to provide assistance  relevant to Vietnam’s Trans-Pacific Partnership commitments, among  other things. Finally, the Lower Mekong Initiative, encompassing  Thailand, Cambodia, Laos, Burma, and Vietnam, supports, among  many development efforts, reduction of the development gap between  the more economically developed Association of Southeast Asian  Nations countries and less developed countries, such as Vietnam,  and also supports regional efforts toward economic integration.
Treasury provided, through its Office of Technical Assistance, about  $5.9 million in trade capacity assistance for several projects to  improve Vietnam’s government operations. For example, OTA is  currently assisting Vietnam with implementation of International Public  Sector Accounting Standards. Previously, OTA provided assistance in  the areas of banking supervision, strengthening of tax administration,  and debt management.
State provided about $2.6 million in trade capacity assistance,  primarily for improving Vietnam’s customs and border control. State’s  Export and Border Security Assistance program promotes border  security and customs operations by providing training, equipment,  vehicles, spare parts, infrastructure, travel to workshops and  conferences, translations of key documents such as control lists, and  other exchanges. State has provided equipment and training to  Vietnamese officials in support of these efforts.
USTDA provided about $2 million in U.S. trade capacity building  assistance for projects to support potential U.S. investment  opportunities. In 2014, USTDA provided $900,000 for a feasibility  study—the largest USTDA-funded project in Vietnam that year—for  an integrated telecommunications control center for the Ho Chi Minh  City urban rail system. In August 2014, Vietnam became the second  country to sign a memorandum of understanding with USTDA, under  which USTDA will provide training and technical assistance to public  procurement officials to implement Vietnam’s revised procurement  law. In July 2015, USTDA signed two additional grant agreements  with Vietnam for (1) technical assistance and training in support of  Vietnam’s efforts to meet civil aviation safety standards and (2) a  feasibility study to support the efforts of a Vietnamese private firm to  develop an offshore wind power project.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Emil Friberg (Assistant Director),  Charles Culverwell, Fang He, Kira Self, Michael Simon, and Eddie W.  Uyekawa made key contributions to this report. Benjamin A. Bolitzer,  Lynn A. Cothern, Mark B. Dowling, Justin Fisher, Michael E. Hoffman,  Reid Lowe, and Oziel A. Trevino provided technical assistance.