Why US should recognize Vietnam's market economy status

Recognition of Vietnam's market economy status by the U.S would be consistent with the strengthening of U.S.-Vietnam ties to a Comprehensive Strategic Partnership, said RMIT associate lecturer Phan Minh Hoa.

After extending the Normal Trade Relations status with Vietnam in 2001, the U.S. classified Vietnam as a "non-market economy." This has put Vietnam at a disadvantage from anti-dumping and anti-subsidy lawsuits.

To regain competitiveness for its exports, Vietnam has made efforts to be recognized by the U.S. as a market economy. Before President Joe Biden's visit to Vietnam in September 2023, Vietnam officially asked the U.S. to remove its status as a non-market economy. One month after the visit, the U.S. Department of Commerce agreed to start a review of Vietnam’s status, with the final decision expected to be issued in late July 2024.

Let’s look at Vietnam’s progress against the following criteria for a market economy status as prescribed by the U.S.

Firstly, improving the convertibility of the Vietnamese dong is a goal stipulated in the Ordinance on Foreign Exchange Control. The State Bank of Vietnam employs a managed floating exchange rate regime, having expanded the exchange rate band from 1% to 3% in 2015, before raising it to the current 5%.

In order for the Vietnamese dong to become a freely convertible currency, Vietnam has increased its efforts to ensure macroeconomic balances, such as successfully controlling inflation in recent years, eliminating the dollarisation of the economy, and building people's confidence in the local currency. The country has also been increasing its foreign currency reserves, improving the foreign exchange management mechanism, and reforming exchange rate policies.

Secondly, Vietnam has a full set of laws to protect the rights of both parties such as the Labor Code, the Criminal Code, and the Law on Prevention and Combating of Human Trafficking. I believe that wage determination is already done by negotiation between employers and employees, although it is worth noting that opponents to Vietnam’s market economy status are still debating this point.

Vietnam has also joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in which Vietnam agrees to give independent labour unions a greater role. The country was elected to the United Nations Human Rights Council for the 2023-2025 term and will apply for candidacy in the next term, demonstrating its efforts to protect human rights and workers' rights.

Thirdly, Vietnam has clearly met this criterion. The country has attracted numerous foreign direct investors and many American businesses have been investing in Vietnam. The FDI sector contributes over 20% of Vietnam’s GDP, 50% of total industrial production value, and 70% of exports.

Fourthly, Vietnam's emphasis on state-owned enterprises’ leading role is often a point used by critics to argue that Vietnam is a non-market economy. However, according to Steptoe LLP attorney Eric Emerson, representing Vietnam's Ministry of Industry and Trade, there is less government support for state-owned firms in Vietnam than in India, and more openness to foreign investment than in Indonesia, Canada, and the Philippines – countries that have been recognised as market economies by the US.

Subsidies for state-owned enterprises have been cut, and at the recent National Party Congresses, the role of the private economy was formally affirmed and emphasised. The Party Congress has set a goal of having two million enterprises by 2030, with the private sector contributing 60-65% of GDP.

Fifthly, the extent of government control over certain resources and prices: Vietnam has abandoned price controls. The 2023 Law on Prices excludes electricity, salt, and sugar, and retains only nine essential items that need price stabilisation, i.e. petrol, diesel, liquefied petroleum gas, infant formulas, rice, livestock feed, vaccines, pesticides, and essential medicines for humans. Intervention measures are also specified to only be used for a certain time and for urgent reasons, such as natural disasters or supply chain disruptions.

Other factors depend on the U.S Department of Commerce to decide and can be affected by a number of other reasons.

Should the U.S. consider Vietnam a market economy?

We should draw on the significant efforts that Vietnam has made. We can also look at 72 countries that have recognized Vietnam as a market economy, including large and/or developed economies such as China (2004), Russia and ASEAN members (2007), Australia, New Zealand (2008), India and South Korea (2009), Japan (2011), members of the European Free Trade Association (EFTA) such as Norway and Switzerland (2012), Canada (2016), and the UK (2023).

With Vietnam’s ongoing efforts and the recognition of major partners, Vietnam has essentially operated as a market economy and should be recognized as such by the U.S. However, opposition is coming from a number of lawmakers in the US Senate and House of Representatives, the Southern Shrimp Alliance, the American Shrimp Processors Association, and United Steelworkers.

There will always be differing views in economics, stemming from the different interests of different parties. From Vietnam's side, after more than two decades of disadvantages caused by anti-dumping lawsuits, recognition by the U.S. would clear obstacles to Vietnam's exports and motivate remaining trading partners to recognise Vietnam as a market economy.

For the U.S. to decide whether to delay or officially recognise Vietnam as a market economy, it will need to consider both the for and against arguments. From an economic perspective, the government should make decisions based on total welfare and not a few interest groups.

Free trade will bring great benefits to consumers, such as lowering product prices, increasing choices, promoting cooperation, and expanding markets, although some domestic industries may no longer be protected. American businesses exporting to Vietnam and investing in production would benefit from Vietnam’s market economy designation.

The U.S. needs to take advantage of the opportunity to continue building the Comprehensive Strategic Partnership with Vietnam, especially as its competitors are also taking advantage of trade agreements signed with the Southeast Asian country.