The United States must axe Vietnam’s ‘non-market economy’ status

On 2 August 2024, following an almost year-long review, the United States decided to retain Vietnam’s classification as a ‘non-market economy’. While framed as a procedural decision based on economic criteria, this move overlooks the broader strategic imperative and is a clear misstep that Washington must reconsider.

Vietnam has emerged as a crucial player in the United States’ efforts to diversify manufacturing and trade away from China towards trusted allies — a strategy known as ‘friendshoring’. With cheap labour and a relatively stable political environment, Vietnam is increasingly attractive for Western companies looking to relocate manufacturing and reconfigure supply chains. 

As a result, US–Vietnam bilateral ties have strengthened significantly, with the United States being Vietnam’s largest export market and a key source of foreign direct investment. This growing economic alignment has coincided with deepening diplomatic ties, culminating in the recent upgrade of US–Vietnam relations to a ‘comprehensive strategic partnership’ following US President Joe Biden’s visit to Hanoi in September 2023. Hanoi had pressed for a revaluation of Vietnam’s non-market status ahead of this historic visit last year, seeing it as the natural next step in this partnership. 

But the decision to continue classifying Vietnam as a ‘non-market economy’ risks undermining this strategic alignment. Under this classification, the US Department of Commerce will continue to calculate anti-dumping duties using third-country market-based prices rather than Vietnam’s actual production costs. This leads to punitive tariffs on Vietnamese goods, potentially making them less competitive in the US market. 

The economic impact of this shouldn’t be overstated. The anti-dumping duty on shrimp exports is only 2.84 per cent and Vietnam’s exports continue to perform well — with total exports reaching US$226.98 billion in the first seven months of this year, a 15.7 per cent increase from the previous year. Vietnam will also continue to remain a magnet for foreign investors, with inflows expected to reach US$39–40 billion this year. Despite its non-market designation, Vietnam’s export sector has thrived and will continue to do so. 

Still, the diplomatic and political repercussions are significant. The refusal to grant Vietnam market economy status sends a contradictory message to Hanoi and undermines the spirit of growing partnership and goodwill built through prior diplomacy. 

The United States must not take Vietnam’s cooperation for granted. Vietnam is delicately balancing its ties with Washington while avoiding antagonising Beijing. Any US actions perceived as unfair or dismissive of Vietnam’s strategic needs could complicate this balance. Washington must remain sensitive to Vietnam’s priorities and adopt a flexible approach, ensuring Hanoi sees continued value in aligning closely with the United States.

Since first receiving its non-market economy classification in 2002, Vietnam has undergone significant economic transformation — curtailing the role of the state, reducing the level of subsidies to state-owned enterprises and abandoning price controls. Vietnam has since achieved impressive growth and integration in the global economy. Today, over 70 countries, including the United Kingdom, Japan and Australia, recognise Vietnam as a market economy. 

The US Department of Commerce’s decision appears to be driven partly by domestic lobbying rather than a balanced assessment of Vietnam’s economic progress. Groups like the US steel industry, Gulf Coast shrimpers and US honey farmers all opposed reclassification and successfully secured congressional support. 

If the United States wants to compete with China, it must be prepared to assuage such domestic pressures. Recognising Vietnam’s market economy status is not just about trade tariffs or boosting exports, but acknowledges Vietnam’s potential as a reliable partner in shifting away from China-centric supply chains.

During the Cold War, the United States supported key allies to strengthen its broader geopolitical competition with the Soviet Union, despite those allies following state-guided policies far from free market standards. The United States still provided significant financial and political support because it understood that the eventual liberalisation of these economies could be nurtured over time. By fostering development in these nations, Washington secured its allies and set the stage for the gradual transition to free-market policies that aligned with broader democratic and capitalist ideals.

Today, Washington faces a similar opportunity with Vietnam, a crucial partner in the broader Indo-Pacific strategy. By supporting Vietnam’s continued development, the United States can facilitate a transition to a more market-oriented economy while securing a vital partner in the region.

Retaining Vietnam’s non-market status is a shortsighted move that risks undermining Washington’s broader strategic goals. If the United States is serious about reconfiguring global supply chains, deepening alliances in Southeast Asia and countering China, recognising Vietnam’s market economy status is a necessary step. Just as Cold War pragmatism guided US alliances, it must guide the US approach to Vietnam today.

Hanoi has already signalled its intentions to reapply for market status. When this happens, Washington should make the right call and classify Vietnam as a market economy. 

By Harry Horsfield – EastAsiaForum.org – October 10, 2024