The Surging Vietnamese Economy

The Surging Vietnamese Economy

Vietnam’s economy is booming as the World Trade Organization prepares to welcome the communist country as a full member after eleven years of accession negotiations.

October 30, 2006 1:35 pm (EST)

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More than three decades after a communist offensive reunified Vietnam, the party’s hold on power and civil society remains unchallenged. But twenty years of liberal economic reforms have brought sweeping changes and foreign investment to a nation characterized by increasing industrialization and a reduction in poverty. The Socialist Republic of Vietnam is poised to become a member of the World Trade Organization (WTO) in November. Despite improved relations with the United States since the two countries normalized relations during theClinton administration, a holdup in the U.S. Congress could stall Hanoi’s full accession into the WTO.

What is the current status of Vietnam’s economy?

Vietnam’s economy has thrived in recent years. Indeed, China was the only Asian country to outpace the 8.4 percent growth of Vietnamese GDP in 2005—a small spike in Hanoi’s 7.5 percent average GDP growth over the past decade. The flourishing economy has drastically improved life expectancy, and the poverty rate dropped by almost two-thirds between 1993 and 2004. Hanoi’s economic boom dates to 1995, when Vietnam normalized relations with the United States and joined the Association of Southeast Asian Nations (ASEAN). Despite the Communist Party of Vietnam’s continued grip over the country’s politics, central planning has given way to a market-based economic system and a marked decrease in the number of state-owned enterprises. After eleven years of negotiations, the WTO plans to endorse Hanoi ’s accession bid in a November 7 meeting.  

What does WTO accession mean for Vietnam?

With a population of 84 million, Vietnam is the second most populous country behind Russia not yet in the WTO. As a member, it will benefit from elimination of quotas limiting textile exports to the United States and Europe. In exchange for membership, Hanoi has agreed to certain concessions including removal of its subsidies and massive tariffs protecting certain industries, such as shoe manufacturers. The European Union imposed antidumping duties—assessed when a country exports a product at a lower price than what it charges domestically—on Vietnam’s shoe imports in October to protest Hanoi’s subsidies of that industry. Representatives of the U.S. textile industry have warned that Vietnamese WTO accession will threaten American jobs because of a flood of cheap clothes into the United States.

Are there obstacles to Vietnam’s WTO accession?

Yes. The main obstacle to full WTO membership is a U.S. Congressional delay in granting Vietnam Permanent Normal Trade Relations (PNTR) (PDF), also know as “Most-Favored Nation” (MFN) status. In May 2006, Washington and Hanoi signed a bilateral market access deal, the last of twenty-eight trade agreements Vietnam had to negotiate with the other WTO members to gain membership. Although these types of trade agreements do not normally necessitate approval from Congress, the president is currently barred from granting Vietnam PNTR status because it is a communist state prohibited from such status under a 1974 trade act.

Congress must enact legislation to remove this barrier, but U.S. lawmakers—in particular Senators Elizabeth Dole (R-NC) and Lindsay Graham (R-SC)—initially argued that granting PNTR to Vietnam could harm domestic textile manufacturers. Dole and Graham have now agreed to consent to Hanoi’s permanent status based on a promise from the U.S. Commerce department to monitor Vietnamese imports and launch antidumping measures if deemed necessary. U.S. apparel importers in turn charge that such an agreement would not only hurt American investment in Vietnam’s textile industry, but also change how antidumping cases are raised in the United States because the Commerce department does not typically initiate such actions.

Another obstacle is the detention of an American citizen,Thuong Nguyen "Cuc" Foshee, held without charge as a terrorist suspect in Vietnam. Security officials detained Foshee, a Florida resident and member of a U.S.-based activist group opposed to Hanoi’s communist government, while she was vacationing in Vietnam last year. Senator Mel Martinez (R-FL), a supporter of anti-communist campaigns, said he will block approval of Vietnam gaining PNTR because of her imprisonment.

If Congress fails to grant PNTR status, Vietnam will become a WTO member. However, WTO rules would not apply to its trade with the United States.

What is fueling the Vietnamese economic boom?

  • A shift from agriculture to manufacturing. Agriculture’s role in the economic output of an increasingly industrialized Vietnam decreased from 25 percent in 2000 to 21 percent in 2005. But exports of coffee, tea, and pepper have soared in recent years. And Vietnamese fish exports grew by 12 percent in the past year, despite antidumping actions taken by the U.S. and Japanese fishing industries. Aside from making shoes and apparel, Vietnamese manufacturing of electronic goods is on the rise because of large investments from companies such as Intel and Canon, the latter of which built the world’s largest laser printer factory in northernVietnam. The result is a growing number of high-end goods. “Vietnam’s not producing things you’re going to find in dollar stores,” says Robert K. Brigham, a Vietnam expert at Vassar College.
  • Foreign direct investment (FDI). The government has eased limits on foreign ownership of businesses, and Vietnam’s cheap land and low wages, even in comparison to China’s, attract foreign investors. As FDI rises—it increased by 41 percent to $5.8 billion in 2005—the number of state-owned enterprises shrinks, down from 5,600 in 2001 to 3,200 in 2005. The United States accounted for about $3.9 billion in FDI in 2005, up from $2.1 the previous year.
  • Remittances. Some 3 million Vietnamese live outside the country, and they sent a record number or remittances—over $4 billion—home in 2005. As much as 70 percent of these resources flow from the United States.

What is the history of economic reform in Vietnam?

Vietnam’s economic transformation results in large part from a policy initiated twenty years ago called Doi Moi, which roughly translates as “renovation” and involved agricultural decollectivization and liberalization of the economy, even as the country remained under one-party, communist rule. Adam J. Fforde, director of Asian studies at the University of Melbourne, says “the central planning project never really worked” and economic shocks in the late 1970s drove the country toward commercialization. Nguyen Van Linh initiated reform in 1986 when he took power as party leader, marking a departure from the Soviet-style economic policies under the previous leader, Le Duan. Doi Moi had little effect initially because “until Vietnam was out of Cambodia there was no way they were going to get access to the international economic community,” says Frederick Z. Brown, a Southeast Asia expert at Johns Hopkins University’s School of Advanced International Studies. Hanoi withdrew from Cambodia in 1989, ten years after it invaded and toppled the Khmer Rouge, and in 1992 adopted a new constitutionreaffirming the market-oriented goals of Doi Moi. Washington lifted its trade embargo against the communist country in 1994, more than two decades after U.S. troops pulled out of Vietnam at the end of their Cold War-era conflict there. It established normal diplomatic relations a year later, which Brown describes as “key” to opening up Vietnam’s economy.

How are U.S.-Vietnam trade relations?

Strong, despite the U.S. delay in approving Vietnam’s PNTR status. In the past five years, trade has grown between Washington and Hanoi by 400 percent, and the United States is Vietnam ’s biggest importer, accounting for over 20 percent of Hanoi’s exports. U.S. imports of Vietnamese goods increased by 25 percent between 2004 and 2005. Economic relations have grown concurrently with improved political relations. President Bill Clinton paid a historic visit to Vietnam in 2000, and the two countries signed a trade agreement in 2001 to normalize their bilateral trade status.

How are Vietnam’s relations with China?

Beijing and Hanoi had a diplomatic falling out in the 1970s, when they fought a brief warwith one other. Their relations, normalized since 1991, continue to recover, despite a continuing territorial dispute over the Spratly Islands. While the United States is Vietnam’s largest importer, China is its largest exporter, accounting for over 12 percent of its imports in 2003 and holding a $2.8 billion trade surplus with Hanoi in 2005.

The current state of Vietnam’s trade with China and the United States places it in a somewhat delicate triangular relationship. “The Vietnamese government needs to have the capacity to run around that triangle,” says Fforde, explaining that Hanoi getting too cozy to either country makes the other one uncomfortable.

What barriers exist for Vietnam’s economic growth?

“The elephant in the room is corruption,” says Brown. Vietnam was rocked by corruption scandals in early 2006, when senior officials were investigated for involvement in the alleged embezzlement of millions of dollars of state funds from the transport ministry. Nong Duc Manh, the communist party’s secretary general and most powerful Vietnamese official, retained control despite his son-in-law’s position as a boss at the agency. By June, a power shake-up brought in Nguyen Tan Dung as prime minister and Nguyen Minh Triet as president. Dung was brought in partially because of his tough stance on corruption.

The fact that senior officials were exposed in a corruption scandal is an arguably positive result of a new law passed in 2005, which holds state agency directors responsible for corruption control and which allows for monitoring of civil servants’ assets. WTO accession could also help fight corruption and loosen state control in Vietnam because state firms will have greater difficulty getting loans from local banks to support state enterprises as a result of WTO bans on subsidies and monopolies.

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