Last week, the United States Department of Commerce–the DOC–rejected Vietnam’s application to have its status as a non-market economy overturned. The DOC had determined that “extensive government involvement in Vietnam’s economy distorts Vietnamese prices and costs and ultimately renders them unusable for the purpose of calculating U.S. antidumping duties.” Ergo, no change.
This came after a months-long review including thousands of pages of evidence and arguments, from both Vietnam and the United States, culminating in not just the aforementioned adverse findings but also a 284-page memorandum explaining the decision.
This article breaks down the key points in said document.
DOC non-market economy review framework
Firstly, the memorandum is broken down into the six key assessment criteria outlined in the US Tariff Act of 1930. These are:
- The extent to which the currency of the foreign country is convertible into the currency of other countries;
- The extent to which wage rates in the foreign country are determined by free bargaining between labour and management,
- The extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country,
- The extent of government ownership or control of the means of production,
- The extent of government control over the allocation of resources and over the price and output decisions of enterprises, and
- Such other factors as the administering authority considers appropriate.
On each of these points, the DOC outlines a number of key findings.
Currency convertibility
Firstly, on currency convertibility, the DOC noted that the State Bank of Vietnam does not operate independently of the government but instead follows government directives. It also found that although it claims to operate a floating peg it’s actually more of a crawling peg. Said peg is then set each day based on a set of criteria that are public but a methodology that is not, making it challenging to understand exactly how free the dong is to move.
Furthermore, it notes, that Vietnam doesn’t publish details of its foreign currency reserves and therefore the extent of exchange rate interventions is not clear.
Wages and wage bargaining
The Vietnam General Confederation of Labour, as the only labour union in the country, and with its ties to the government was identified as a key factor limiting wage negotiations. This along with minimum wages in Vietnam being set by the government were identified as ‘significant structural deficiencies’.
Furthermore, the DOC found that dispute resolution mechanisms were insufficient and that the complicated requirements in order to launch strike action were cumbersome and made it difficult for workers to take industrial action.
It also noted that a significant portion of the economy was informal–about 25 percent of the workforce—and that these workers were not protected by Vietnam’s Labour Code.
The DOC also made mention of the Ho Khau system, through which Vietnamese must register their residency, and found that this system limited labour mobility.
Foreign investment
Whereas the DOC acknowledged the huge growth in foreign direct investment in Vietnam it also noted that the breadth of Vietnam’s foreign ownership restrictions is extensive. It also noted that the review process for foreign-invested projects by the Ministry of Planning and Investment and/or the Prime Minister complicated and delayed foreign-invested projects.
It also found that the Law on Investment 2020 lacked clarity, particularly around defining what national defence and security is. This can be a reason to knock back a foreign-invested project and therfore the ambiguity undermines ‘the predictability and stability of the investment environment.’
Furthermore, the lack of enforcement around intellectual property protections and the need to take on local partners in some sectors were also ‘significant barriers’ to foreign investment.
Government ownership
With regard to government ownership and control over the means of production, the DOC found that there were a lot of state-owned enterprises operating in Vietnam in fields where there wasn’t really a good reason why.
Possibly one of the more interesting findings, however, was that as a percentage of GDP, since 2002, the private sector has failed to grow substantially. Where the role of state-owned enterprises has diminished, the slack has been picked up by the foreign-invested sector rather than local firms.
Finally, government ownership of land and planning for the development of said land means that land use is not determined by market forces. Not only that, but this has also distorted land values and made it difficult to develop market-based valuations on the secondary land market.
Resource allocation and price controls
On the government’s role in resource allocation and price controls, the DOC found that Vietnamese banks favour lending to state-owned enterprises over private businesses. This is problematic, it said, in that state-owned enterprises are generally less efficient than private businesses and therefore this practice may result in a misallocation of resources.
Furthermore, it was found that government pricing policies were artificially suppressing prices. It pulled out land prices as an example but also referenced the Law on Prices from last year and the 66 items in the law that were subject to price controls. Moreover, it also pointed to the government’s penchant for setting maximum lending rates at banks on some loan products.
Other factors
With respect to other factors the DOC considered, the memorandum looks at two key areas: the rule of law and corruption in Vietnam.
On the former, it notes that there have been reforms made and laws have been strengthened. Specifically, it cites the Enterprise Law, the Vietnam Constitution, and the Anti-Corruption Law. However, it also notes that a lack of independence in the judiciary from the government is obstructing their successful implementation.
On corruption, it found that there were big gaps between what was written in law and what was actually playing out in practice. It also noted that companies often received preferential treatment in exchange for bribes, ultimately finding that Vietnam ‘has yet to develop the robust legal and institutional framework required for the efficient and effective functioning of market activity.’
What does all this mean?
Despite broad speculation that US foreign policy might influence the DOC’s decision, it does not appear to have done so. Rather the DOC has provided a very detailed analysis of Vietnam’s economy that is difficult to argue with (though some have tried).
All in all, what is clear is that Vietnam still has a long way to go for the US to consider it a market economy. But that’s not to say that it was all for nothing. On the contrary, Vietnam now has a comprehensive blueprint for the reforms that it needs to undergo in order to meet US market economy requirements.
That said, how Vietnam will react to this decision on a tangible and practical level remains to be seen and as an emerging market economy things can change quickly. With this in mind, the best way to keep up to date with how Vietnam is tracking the necessary reforms is by subscribing to the-shiv.