U.S. trade officials and their Vietnamese counterparts signed the agreement on Wednesday in Ho Chi Minh City, a day before trade ministers of the Asia Pacific Economic Cooperation or APEC meet there.
The trade deal will greatly boost the access of U.S. companies to Southeast Asia's fastest growing economy, which last year expanded by more than eight percent. The agreement lowers tariffs on U.S. industrial and farm products and makes it easier for U.S. service providers such as banks and telecom companies to enter the Vietnamese market.
The signing of the trade pact removes one of the last hurdles in Vietnam's bid to join the World Trade Organization. The communist country hopes to become a member before it hosts the APEC summit in November.
Carl Thayer, Vietnam-expert at the Australian Defense Academy in Sydney says joining the WTO is vital for Vietnam.
"It can enter anybody's markets and by joining, its kind of overall rating improves and foreign investors looking at Vietnam will know that its regime has to become WTO compliant and for many foreign countries, they are used to the WTO rules and if Vietnam complies it means it will be a more attractive place to do business," he said.
The U.S. is the last of 28 countries with which Vietnam had to sign a trade pact in order to join the WTO. But Hanoi faces two more hurdles. It has to finish multilateral discussions with the WTO and Wednesday's agreement needs to be approved by the U.S. Congress. Some senators have expressed concerns because of Vietnam's human rights record, but Thayer believes Congress will pass the deal.
"All the signs, all the indications are it will pass through Congress and Vietnam will be granted a permanent, normal trade relation status which will be a huge relief for Vietnam," he said. "The human rights issues won't go away but they'll no longer be subject to annual review with all the acrimony, so it actually places the political relationship on a new plane."
Hanoi signed a previous trade agreement with Washington in 2001, six years after the two former enemies renewed diplomatic relations. Vietnamese exports to the United States have since jumped dramatically. Last year, Hanoi earned $6.5 billion from selling goods such as textiles, coffee and seafood to the United States.