4 Factors to Consider When Relocating Your Production
By Pritesh Samuel Vietnam is experiencing continued and unprecedented […]MORE
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Since pulling out of the Trans-Pacific Partnership (TPP), a massive 12-country trade agreement, US President Donald Trump has engaged in bilateral trade talks with allies and competitors alike.
So far, the US has begun or completed trade negotiations with Canada, Mexico, South Korea, Japan, and the EU, among others, and entered into a large-scale trade war with China.
With the recent agreement with Canada and Mexico to replace NAFTA, the US has now set its sights on Vietnam. Given the concerns the US and Vietnam share over China’s regional ambitions, a strengthened relationship is mutually beneficial.
In a symbolic step towards strengthening relations before trade negotiations begin in earnest, the US has recently issued a massive cleanup of Agent Orange in Vietnam.
However, the US has also shown its willingness to deploy aggressive negotiating tactics on close allies to gain maximum trade concessions, even if doing so might strain broader geopolitical considerations.
Both the US and Vietnam have voiced concerns about the other’s trade policies. Now, in order to achieve a bilateral trade agreement, three main issues will have to be resolved: the US trade deficit with Vietnam, the dispute over Vietnamese catfish exports, and Vietnam’s ongoing aspiration to be considered a market economy.
Trump has made concerns over US trade deficits a key issue in trade discussions with various countries, and this is also true for Vietnam. The major concern has been raised regarding the rising bilateral trade imbalance.
The US runs a substantial deficit in the relationship with Vietnam. Over a decade ago, the US trade deficit was US$10.11 billion in 2008. Through the first eight months of 2018, Vietnam currently runs a bilateral trade surplus with the US, at more than US$25.74 billion.
The disparate trade flow between the countries has led to controversy in regards to anti-dumping laws imposed on Vietnam by the US and have prevented a bilateral investment treaty to date. Trump has suggested measures to refocus US arms sales to Vietnam, where Vietnamese purchases on US equipment remains low, as a way to reduce the trade gap.
One nagging issue that re-emerged during the TPP negotiations was Vietnamese catfish exports to the US.
Controversy over trade rules emerged following a bilateral trade agreement signed between the US and Vietnam in 2001, which prompted a 17-year trade dispute over catfish. Vietnam viewed US regulations governing catfish imports as protectionist, while the US argued that Vietnam was dumping its catfish products on the US and damaging US producers.
Vietnamese officials have taken this concern to the World Trade Organization (WTO), filing its first complaint in February 2018; however, several procedural hurdles have followed since then. Therefore, this issue will most likely impede a straightforward agreement during negotiations.
There is hope for this issue to be resolved, however, if Vietnam can attain “market economy status.” Current trade regulation features, such as anti-dumping duties on Vietnam’s catfish, could change under this upgraded designation and favor Vietnam under WTO rulings for such disputes.
Market economy status
Vietnamese officials have vocalized the country’s aim to change the current status from “non-market economy” to “market economy.”
Vietnam is constricted to its “non-market economy” status until it fulfills its accreditation under US law, or until 2019 when it will be re-evaluated by the WTO. Vietnam’s “non-market economy” status under US qualification applies to its interventionist outlook, which provides for greater regulation, like higher tariffs, as well as preventing the opening of trade and investment options.
For Vietnam to attain the desired status, it will need to loosen its state-run economic policy, however, it is still up to the discretion of US authorities to decide if the catfish controversy should be upheld.
If Vietnam can achieve market-economy status, it would also reveal the country’s evolution as an increasingly open economy, and free the country from the application of protectionist policies, such as countervailing duty cases, including in relation to the ongoing catfish dispute.
With a revived political and economic focus from the US towards Vietnam, new bilateral trading terms will most likely focus on increasing US exports and to reduce certain technical barriers to trade.
That being said, US-Vietnam relations were dealt a blow when the US backed out of the TPP. While Vietnam is a member of the resurrected Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which resulted from the failure of the TPP, the US has not shown serious consideration of rejoining the pact on new terms.
Further, Vietnam is in negotiations to join the Regional Comprehensive Economic Partnership (RCEP), an ambitious trade group led by China. Without the participation of the US, trade flows will likely grow less quickly, as participating country’s become more accessible for trade and investment.
With its close proximity to China, the US incentive to deepen relations with Vietnam can be seen in the newly dealt USMCA deal with Canada and Mexico, with a particular focus on Article 32.10 – that acts as a window of control if either country arranges a trade deal with China.
On the other hand, Vietnam’s interest in signing a bilateral investment treaty (BIT) to secure access in the US market represents its desire to cooperate to enhance economic activity. However, serious issues remain to be resolved in regards to the trade discrepancy, and Vietnam’s formal advancement to be recognized as a “market economy” need to be ironed out to reach an agreement.
Despite these political challenges, the private sector is likely to push ahead: the combination of trade uncertainty from the US-China trade war and Vietnam’s low-cost and steadily opening economy make Vietnam increasingly attractive for US businesses.