US rejects Vietnam’s bid for ‘market economy’ status in blow to trade ties

Classification would have boosted exports and reduced tariffs on goods from country that is rising supply chain alternative to China.

The US has rejected Vietnam’s bid to be designated as a “market economy”, thwarting Hanoi’s diplomatic push to deepen trade ties with its most important export market as it grows in clout as a manufacturing alternative to China. The upgrade from Vietnam’s current designation as a “non-market economy” would have further boosted exports and reduced punitive tariffs on products such as shrimp from the south-east Asian country.

The US has labelled Vietnam a “non-market economy” since 2002 due to state interventions in trade, pricing and currency, a status that ranks the country alongside China, Russia and North Korea. The EU also designates Vietnam as a non-market economy. But as Vietnam has emerged as a critical link in the global manufacturing supply chain for western companies seeking to diversify their operations away from China, it has increased its efforts to be upgraded.

In a September 2023 request filed to the US commerce department, Vietnam asked Washington to reconsider its status, citing “economic reforms made in recent years”. The US commerce department said on Friday that the decision to retain Vietnam’s non-market economy status had been made after a thorough evaluation of comments from US domestic industries and the Vietnamese government. “Despite Vietnam’s substantive reforms made over the past 20 years, the extensive government involvement in Vietnam’s economy distorts Vietnamese prices and costs,” the department said in a statement.

Vietnam’s ministry of industry and trade said in a statement that it “regrets” the US decision, adding: “If the Department of Commerce had examined the records and practices in Vietnam objectively and fairly, they would have been able to acknowledge the fact that Vietnam is already a market economy.”  The ministry said it would submit another request to the US to review its status, but it did not say when it would do so.  Vietnam has emerged as one of the biggest beneficiaries of escalating trade tensions between the US and China, with companies shifting production facilities to the south-east Asian country in an effort to avoid geopolitical disruption. 

It has also strengthened its relationship with the US, a realignment that it has sought to leverage to pursue market economy status. Its request to the commerce department came just days before a visit by President Joe Biden, during which the two countries upgraded their ties to a “comprehensive strategic partnership”, the highest level of diplomatic ties accorded by Hanoi. Senior Vietnamese officials, including the prime minister, have also made the request. Nguyen Quoc Dzung, Vietnam’s ambassador to the US, said earlier this year that if Washington did not grant the country market economy status, “it would be very, very bad for the two countries”. Vietnam’s push, however, ran into opposition from some US senators, steelmakers and other manufacturers, as well as producers of shrimp and honey over what they call unfair trade practices and extensive government intervention.  

In July, Republican senator Tom Cotton urged commerce secretary Gina Raimondo not to grant Vietnam’s request, citing its “controlled currency, lack of labour rights, and extensive state intervention”. Six other Republican senators co-signed the letter. “There is no doubt that the country’s non-market economic practices already violate fair competition and lawful trade,” the senators wrote.

Earlier this year, another group of senators including Democrats Elizabeth Warren and Bernie Sanders also opposed the market economy status, citing more than two dozen anti-dumping orders against Vietnam by the US and pending dumping investigations. 

Thuy Anh Nguyen, of Vietnam-focused asset manager Dragon Capital, said the failure would disappoint Hanoi, and was surprising given Washington’s “intense courtship of Vietnam in recent years, the high-level visits and the accompanying rhetoric”. An upgrade would have boosted Vietnamese exports to the US, which would have benefited from lower prices of those goods, she said. “The US has made no secret of its desire to cultivate Vietnam as a strategic counterbalance to China’s influence in the region, and we do not believe that Vietnam not being upgraded to ‘market economy’ status will affect this.”

By Anantha Lakshmi – The Financial Times – August 3, 2024