Vietnam's Market Economy Status Under Review by U.S.

The U.S. is deliberating whether to upgrade Vietnam’s status from a non-market economy (NME) to a market economy, a move that aligns with President Joe Biden’s goal to position Vietnam as a ‘friend-shoring’ destination amidst efforts to diversify supply chains away from China. If approved by the U.S. Department of Commerce, this status change would end high anti-dumping and countervailing duties on Vietnamese imports to the U.S.

Current Debate on Market Economy Status

President Joe Biden's efforts to strengthen ties with Vietnam face a significant decision regarding the potential upgrade of the country's market economy status. This move aims to reduce anti-dumping duties on Vietnamese imports but has sparked debate among trade experts, reflecting the delicate balance between strategic alliances and domestic interests. The U.S. Department of Commerce will conclude their review by late July this year.

Key Points of Contention

Central to this debate is whether Vietnam, governed by the Communist Party of Vietnam (CPV), has sufficiently transitioned towards a market-driven economy. Advocates, including representatives from Vietnam’s Ministry of Industry and Trade (MOIT), highlight the nation’s progress in areas like currency convertibility, labor rights, and openness to foreign investment, arguing that it meets the criteria set by the U.S. Commerce Department for a status upgrade.

However, opponents, such as U.S. steelmakers and agricultural groups like the Southern Shrimp Alliance, express concerns over the potential impact on American industries struggling with competition from Vietnamese imports. They caution against prematurely recognizing Vietnam as a market economy, citing ongoing state intervention and unfair trade practices.

The broader geopolitical implications also play a significant role in this debate. Proponents of the status upgrade see it as a strategic counterbalance to China’s influence in the region, emphasizing Biden’s efforts to elevate U.S.-Vietnam relations to a comprehensive strategic partnership during his 2023 visit to Hanoi. They also cite initiatives by U.S. Treasury Secretary Janet Yellen to promote Vietnam as an alternative manufacturing hub.

Major investors in Vietnam, like South Korea’s Samsung Electronics, stress the country’s role as a stable and reliable partner in global supply chains. Recognizing Vietnam’s market-oriented reforms is seen as beneficial for the U.S. economy by diversifying supply chains and reducing reliance on China. Since the normalization of relations in 1995, major U.S. corporations such as Intel, Cargill, Nike, AES, Murphy Oil, First Solar, Boeing, and Apple have significantly expanded their investments in Vietnam.

The decision on Vietnam’s market economy status is imminent and could be influenced by U.S. domestic political considerations, especially in an election year. For instance, Pennsylvania, a key swing state, has a significant steelworker population that Biden will want to secure. Additionally, there are concerns about Chinese firms circumventing U.S. tariffs by routing exports through Vietnam.

Importance of Market Economy Status for Vietnam

Vietnam is one of 12 countries designated as non-market economies subject to anti-dumping and countervailing duty laws under U.S. regulations. A non-market economy, as defined by U.S. law, is a country that does not adhere to market principles, leading to goods being sold below fair value. Countries currently designated with NME status include Armenia, Azerbaijan, Belarus, China, Georgia, Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan, and Vietnam.

The World Trade Organization's (WTO) Anti-Dumping Agreement requires member countries to use verified cost and price data from investigated companies to calculate margins and duties. However, alternative methods, such as using data from third countries, are allowed in specific circumstances. The U.S. applies this approach to NME countries, resulting in higher anti-dumping duties on their imports.

To determine appropriate duties, the U.S. Department of Commerce uses data from a market economy country comparable to the NME under review. For example, the U.S. might assess the value of a Vietnamese product by referencing prices in Bangladesh, using this benchmark to establish presumed production costs for Vietnamese companies without considering their actual costs.

Vietnam’s Bilateral Trade with the U.S.

Vietnamese exports to the U.S., particularly in textiles, electronics, and agriculture, have resulted in a significant trade surplus of $104 billion for Vietnam in 2023, according to U.S. data. Electronics and solar panels have seen substantial increases, with exports rising from $3.2 billion to nearly $5 billion. Meanwhile, U.S. exports to Vietnam totaled $9.81 billion that year.

In the first quarter of 2024, U.S. exports to Vietnam amounted to $2.66 billion, while imports from Vietnam reached $29.09 billion, resulting in a trade surplus of $26.42 billion for Vietnam. Key Vietnamese exports to the U.S. included high-tech products like consumer electronics and smartphones, as well as garments and footwear.

Vietnam’s ongoing infrastructural and business environment reforms present growth opportunities for U.S. firms. Foreign direct investment from the U.S. in Vietnam rose to $3.5 billion in 2022, reflecting a 26.8 percent increase from the previous year, according to the Office of the United States Trade Representative (USTR).

Conclusion

Vietnam’s potential upgrade to market economy status holds significant implications for trade relations and geopolitical dynamics in the Asia-Pacific region. The decision will influence the future of U.S.-Vietnam economic ties, with broader impacts on supply chain diversification and strategic positioning in relation to China.