This study presents an empirical assessment of the long term economic effects of Vietnam’s bilateral trade agreement with the United States (USBTA). Generally speaking, our results indicate that, if this agreement were adhered to by both parties, Vietnam would benefit from accelerating trade and attendant domestic growth effects. However, it is also clear from our analysis that these benefits will remain modest in the absence of comprehensive and complementary domestic economic reforms. Passive external liberalization, even when coupled with determined domestic reform, implying that the domestic economic agenda is as important as the external one for realizing the country’s economic potential. Finally, our analysis shows that capital insufficiency is a very serious constraint on Vietnamese economic growth and diversification. Capital market reform and other policies to promote foreign direct investment can play an essential role in dynamic and sustained economic development for the country, in agriculture and elsewhere.

Using a dynamic forecasting model, our estimates indicate that, while agreements like the USBTA are essential to fuller Vietnamese participation in the global economy and economic modernization generally, they are only a partial step toward realizing the country’s great economic potential. In particular, we offer the following salient observations:

1. The combined effect of Vietnam’s WTO offer and the USBTA agreement represents a substantial reduction in nominal import protection and other barriers to trade, but the gains the country could enjoy from external liberalization will be seriously limited unless they coincide with comprehensive and sustained domestic economic reform.

2. In the absence of other measures, the WTO offer will lead to intensification of Vietnam’s traditional comparative advantages. This would narrow the basis for development, modernization, and productivity growth, and not be in the economy’s best long term interest. It can be avoided by complementary policies that promote economic diversification and negotiated external market access. Particular attention should be paid to intensifying bilateral and regional arrangements with prominent trade partners.

3. The single most important example of such a negotiated agreement is the the USBTA. Our results indicate that this agreement has the potential to nearly double the gains from Vietnam’s existing trade initiatives (including WTO accession), significantly diversifying its export demand and making important contributions to capital formation and technology transfer.

4. Our results also indicate the importance of policies that will leverage foreign savings for domestic growth in Vietnam, i.e. policies to promote foreign direct investment (FDI). In this context, it is essential to recognize the importance of capital market reform to allow more efficient allocation of investment across the economy and greater foreign capital inflows.

5. The most important insight emerging from this analysis is the essential complementarity between domestic and external economic reform. Both are necessary, but neither is sufficient, to realize the great economic potential of Vietnam. To put it another way, the effort to reform internally cannot be fully rewarded without external reform and, conversely, external efforts to liberalize economic relations, like the US bilateral agreement, cannot be fully rewarded without commitment to complementary domestic reforms.