Why the US could regret not Lifting Vietnam’s ‘Non-Market Economy’ status
Hanoi hoped that its reclassification would help cement the two nation’s new Comprehensive Strategic Partnership.
After almost a year of review, the Biden administration finally released its verdict on Vietnam’s “Non-Market Economy” (NME) status. The U.S. Department of Commerce concluded that it would not lift Vietnam’s NME status because the Vietnamese government still heavily intervenes in the economy despite its recent economic reforms. Some U.S. lawmakers from both sides of the aisle expressed support for Commerce’s decision on the grounds that Hanoi still lacks labor rights and manipulates its currency. The verdict means that Vietnam, along with U.S. competitors Russia and China, will face higher tariffs on Vietnamese exports compared to states with a market economy status.
The verdict also marks the first significant setback of the U.S.-Vietnam Comprehensive Strategic Partnership (CSP), as Vietnam had been lobbying and reaching out to U.S. officials directly to have their country’s NME status lifted. Importantly, it directly undermines one of the pillars of the CSP, under which Vietnam and the United States pledged to expand economic ties, of which Vietnam’s market economy status is a vital element, and downplay the security aspect to avoid antagonizing China.
The Vietnamese government voiced its regret at the verdict, stating that “despite several positive improvements in the Vietnamese economy recently, the U.S. Department of Commerce still has not recognized Vietnam as a market economy country.” From the Vietnamese government perspective, an upgrade would have been “objective and fair” considering Vietnam’s many free trade agreements, the fact that its market economy status has been recognized by U.S. allies such as Japan and Australia, and its participation in the U.S.-led Indo-Pacific Economic Framework. Vietnam was already disappointed with the U.S. decision to withdraw from the Trans-Pacific Partnership in 2017.
Putting aside the economic aspects of the verdict, the U.S. decision is poised to have significant repercussions on U.S.-Vietnam security cooperation. Economics and security are deeply intertwined due to their mutually reinforcing nature. An economically strong state will have more resources to spend on defense, which ultimately will ensure a peaceful geopolitical environment for economic development. The United States knows this lesson best: during the Cold War, it tolerated Japanese and South Korean protectionism in order to ensure that they would grow militarily capable. The United States ignored those countries’ heavy-handed interventions into the economy as well as their poor labor rights and even resisted protectionist demands from U.S. interest groups to serve its security objective of keeping Japan and South Korea away from the communist bloc. The United States lost in economic terms, but in terms of political and military terms, its gains were tremendous. Economic cooperation is rarely just about economics but about the political signal of U.S. commitment to its allies and partners.
Although U.S.-Vietnam relations have not yet reached the level of an alliance, U.S. policy toward Vietnam is not much different in terms of logic. First, the United States wants to build a resilient Vietnam, one that is economically viable and militarily strong enough to balance against China. Second, the United States sees Vietnam as a way of “friend-shoring” vital supply chains away from China. Both objectives serve one coherent goal: to contain the rise of China. It is not a coincidence that the United States has so far tolerated a $114 billion trade deficit with Vietnam while it is looking to increase tariffs and restrictions on Chinese companies to prepare itself for a possible war with China.
However, unlike the U.S. determination to sideline protectionist demands from its constituents during the Cold War, the U.S. failure to curb these demands this time is hurting its Vietnam policy. Growing economic inequality, in which domestic “losers” have not been properly compensated by the “winners” for their losses of jobs and incomes due to free trade agreements, mean that U.S. lawmakers would bend to their constituents’ isolationist pressure to say no to free trade agreements purely on economic terms, even if those free trade agreements matter to improving the U.S. ability to politically influence allies and partners.
In other words, U.S. domestic polarization as a result of income inequality is hindering the U.S. power to convince its allies and partners of its ability to lead. In addition to populism, parochial interests, such as the U.S. catfish industry or steel industry, do not see U.S.-Vietnam ties from a security perspective but from a purely business profit perspective. And that explains why despite tolerating massive trade deficits with Hanoi, the United States cannot lift its NME status. The United States cannot put aside short-term interests in service of a long-term goal, which is to support a resilient Vietnam.
The United States also cannot gather enough domestic support for a coherent political purpose vis-à-vis Vietnam because Hanoi is still a communist country, unlike Japan and South Korea. Ideological differences continue playing a major role in limiting the growth of U.S.-Vietnam ties, despite Washington’s repeated assurances that it would not overthrow Vietnam’s communist regime. U.S. lawmakers representing the anti-communist Vietnamese American community have emphasized the Vietnamese government’s poor human rights record in opposing market economy status for Hanoi. This opposition is born not of humanistic ideals but from electoral calculations, since the United States has shown that it does not care about human rights when itself violating those rights or tolerating allied violations is in its national interests.
Vietnam also has legitimate reasons to suspect that the U.S. is still harboring bad intentions toward communist countries, as Vietnam, despite the friendly relationship with the United States, is still classified alongside the likes of Russia and China. From the Vietnamese perspective, U.S. actions do not match its words. A day after he was elected as the new CPV general secretary, To Lam warned that Vietnam would have to stay vigilant about hostile forces’ growingly sophisticated efforts to sabotage the CPV from within by exploiting Vietnam’s international integration.
The failure to lift the NME status will also deprive the United States and Vietnam of opportunities to add substance to the CSP, which has been lacking so far. Vietnam has not made any major arms purchases from the United States since the lifting of the lethal arms embargo in 2016 due to the high cost of U.S weapons. Opening more of the U.S. market to Vietnamese exports would first and foremost give Vietnam more resources to buy U.S. arms and open more venues for military exchanges. The United States will have a bigger say in Vietnam’s defense strategy if Vietnam procures U.S. arms.
Second, expanding U.S.-Vietnam economic cooperation would make Vietnam conceptualize its national interests on more U.S.-friendly terms. Vietnamese businesses and policymakers with vested interests in U.S.-Vietnam trade will be more likely to advocate for a more U.S.-leaning policy when they have the numbers to show for it. Finally, while the United States cannot replace China as Vietnam’s most important trading partner, an increase in exports from Vietnam would help the communist government maintain domestic stability thanks to continued economic growth and confirm the U.S. commitment to a politically stable Vietnam. This is a strategy that China has been enacting, and the United States should follow the Chinese playbook.
All is not yet lost in U.S.-Vietnam relations, and this will be an occasion for the United States and Vietnam to reevaluate the country’s importance in the U.S. Indo-Pacific strategy. The negative optics of Secretary of State Antony Blinken missing Trong’s funeral have not been lost on Vietnamese audiences, because it shows where U.S. priorities truly lie. Vietnam will not trust a U.S. security commitment because the United States is not a continental Asian power. However, the United States can and should demonstrate to Vietnam that it can put aside parochial interests to bring about a substantial relationship and build toward a truly mutual respect partnership. And that starts with treating Vietnam as not just another communist country.
By Khang Vu – The Diplomat – August 5, 2024