U.S. Chooses to Retain Vietnam’s Non-Market Economy Status Despite Reforms

The U.S. has rejected Vietnam’s bid to change its non-market economy status after a year-long review, despite acknowledging reforms. The decision means that the U.S. will retain the methodology used in calculating anti-dumping duties on imports from Vietnam.

In a decision that has sparked disappointment in Hanoi, the U.S. Commerce Department announced on August 2 that it will continue to classify Vietnam as a ‘non-market economy’ (NME).

This determination, following a year-long review, comes despite Vietnam’s extensive economic reforms and its strategic importance to the United States in counterbalancing China’s growing influence in the region.

The US Commerce Department had postponed its decision by a week due to IT failures caused by a recent software update by cybersecurity firm CrowdStrike, which had impacted computer systems worldwide. 

Also read: Is Vietnam a Market Economy?

Background and implications

Vietnam has long sought an upgrade to market economy status, a change that would significantly reduce the punitive anti-dumping duties it currently faces. These duties are imposed on goods from countries classified as NMEs, where heavy state influence is seen to distort market prices. Vietnam’s Ministry of Industry and Trade (MoIT) expressed regret over the decision, stating that the move was not reflective of the substantial improvements in the Vietnamese economy and was contrary to the growing ties between the two nations.

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The U.S. currently designates 12 other economies, including China, Russia, and North Korea, as NMEs. For Vietnam, shedding this label has been a priority, especially as the country continues to grow as a key manufacturing hub.

The non-market economy designation complicates trade relations by maintaining higher tariffs and stricter trade barriers on Vietnamese goods entering the U.S. market.

Domestic and international reactions

The decision to retain Vietnam’s NME status has been met with mixed reactions in the U.S.

On one hand, U.S. steelmakers, Gulf Coast shrimpers, and honey farmers, along with their Congressional representatives, had actively opposed the upgrade throughout the Congressional review process, citing concerns over unfair competition and market distortions. These groups argued that Vietnam’s economy still operates under the heavy hand of the state, with policies that do not fully align with free-market principles. They are also key electoral groups, when keeping in mind upcoming U.S. presidential elections.

On the other hand, U.S. retailers and certain business groups had advocated for the upgrade, emphasizing Vietnam’s role in diversifying supply chains away from China.

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Meanwhile, Vietnam’s Ministry of Industry and Trade expressed regret that the United States has not yet recognized Vietnam’s market economy status, despite acknowledging positive changes in its economy. This decision means Vietnamese businesses will continue to face U.S. discrimination in anti-dumping and anti-subsidy investigations. The MoIT argued that an objective and fair assessment by the U.S. Department of Commerce would have shown that Vietnam meets the criteria for market economy status, as recognized by countries like the UK, Canada, and Japan. The ministry highlighted that it had submitted over 20,000 pages of documentation demonstrating Vietnam’s progress on all six U.S.-defined criteria for market economy recognition.

Analysts warn that failing to recognize Vietnam’s market economy status could strain U.S.-Vietnam relations. Vietnam’s government was keen to secure the upgrade as a critical milestone in their relationship with the U.S., which was further solidified last year when the two countries elevated their ties to a comprehensive strategic partnership. This will be seen as a missed opportunity by many stakeholders.

Strategic considerations

The U.S. decision is especially significant given the broader geopolitical context. As Washington intensifies its efforts to counter China’s influence in Southeast Asia, Vietnam has emerged as a crucial ally. The U.S. government has even promoted Vietnam as a “friend-shoring” destination, encouraging U.S. companies to shift supply chains away from China and towards more reliable partners like Vietnam.

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However, the timing of this decision, just months before the U.S. presidential elections, has led to speculation about its political motivations. Some analysts suggest that any potential upgrade could have been reversed by a future administration, particularly if led by former President Donald Trump, who is known for his tough stance on trade issues, triggering the US-China tariff escalation, among others, during his term in office.

Meanwhile, defending the decision, some argue that Vietnam’s economy has not transformed enough to warrant market economy status and ignoring market distortions in trading partners’ economies could be detrimental to American interests.

Vietnam’s efforts to become a market economy and reforms pursuit

Vietnam has made significant strides in its quest to be recognized as a market economy. Key efforts include:

• Signing and implementing Free Trade Agreements (FTAs): Vietnam has successfully signed and implemented 17 FTAs, facilitating greater integration into the global economy.

• Economic reforms: The country has transitioned from a centrally planned economy to a market economy by reforming state-owned enterprises, promoting the private sector, and opening its markets to foreign investment.

• Business environment improvements: Administrative barriers have been reduced, transparency has increased, and procedures have been simplified to create a more business-friendly environment.

• Legal and regulatory amendments: Vietnam has amended its legal and regulatory framework to align with international standards, focusing on protecting intellectual property rights, ensuring fair competition, and enhancing transparency in public financial management.

• State-owned enterprise (SOE) restructuring: The government has implemented equitization and restructuring programs for SOEs to improve efficiency, reduce state intervention, and encourage private sector participation.

• Corporate governance: Efforts have been made to promote international corporate governance standards, enhancing transparency and accountability in business operations.

• International cooperation: Vietnam actively participates in international economic forums and collaborates with organizations such as the World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD), and major trading partners to foster understanding and gain recognition as a market economy.

These initiatives underscore Vietnam’s commitment to building a sustainable, globally integrated market economy, meeting the criteria set by its trading partners.

Steady growth in U.S.-Vietnam trade

The trade relationship between the U.S. and Vietnam is on a steady upward trajectory. Vietnam’s goods exports to the U.S., its largest export market, have consistently increased in recent months. In June and July 2024, export turnover exceeded US$10 billion, a significant rise from the US$8.3-8.9 billion recorded in the early months of the year. Specifically, June saw an export turnover of US$10.5 billion, while July reached US$10.95 billion.

This growth has propelled Vietnam’s exports to the U.S. to US$66.09 billion in the first seven months of 2024, marking a remarkable 24.4 percent increase over the same period last year. This surge has positioned the U.S. as Vietnam’s fastest-growing export market.

Over the past seven months, American consumers have spent nearly US$9.5 billion per month on goods from Vietnamese suppliers. The U.S. market, known for its high standards, particularly in agricultural products, continues to drive demand for Vietnamese exports.

Conclusion

The U.S. decision to maintain Vietnam’s non-market economy status, despite its economic reforms and strategic importance, reflects the complex interplay of domestic interests, international relations, and geopolitical strategy. As Vietnam continues to push for recognition as a market economy, this decision may impact the trajectory of U.S.-Vietnam relations, particularly as both nations navigate the challenges posed by an increasingly assertive China.

(With inputs from Vu Nguyen Hanh.)

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