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Unpacked: Vietnam’s Non-Market Economy Review

In 2021, it was announced that raw honey from Vietnam would be subjected to antidumping tariffs in the United States. Vietnam was not alone, Argentina, Brazil, and India were also subjected to similar orders.

What was different for Vietnam, however, was how the US Department of Commerce–the DOC–carried out its investigation. Vietnam is currently one of 11 countries in the world designated a non-market economy by the United States, and this subjects the country to different rules in US trade investigations.

Specifically, in assessing the ‘normal value’ of goods–honey, for example–the US Department of Commerce uses a comparable third country or market economy. In the case of Vietnam’s raw honey exports, that country was India. 

Also, it is assumed that all producers of a product being investigated, in a non-market economy, are subject to government influence. With this in mind, a single antidumping duty rate is applied to all of the country’s producers. The onus is then on the individual companies to prove otherwise.

These rules have been the ire of Vietnamese enterprises for some time in that the ‘normal value’ determined through a comparable market is often higher than what it would be if determined based on Vietnam input costs. As a result, antidumping and countervailing duties often turn out to be much higher than they might otherwise be.

But whereas these conditions have been in place for decades, it is only over the last year or so that Vietnam has really taken issue. This culminated in September of 2023 when it made an official request for a review to the DOC.

This request was approved on October 23 and with this investigation currently underway, this article looks at what a review entails, how Vietnam stacks up, why now, how key stakeholders are responding, and what’s next.

Review criteria

Firstly, there are six key criteria that will be considered by the DOC when it reviews Vietnam’s non-market economy status. These are outlined in the US Tariff Act of 1930.

Specifically, these criteria 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.

These criteria are somewhat vague and ambiguous and therefore open to interpretation. This gives the US DOC a lot of room to decide either way. That said, they still provide a broad framework through which a rough assessment can be made.

How does Vietnam stack up?

Whereas there have undeniably been broad reforms in Vietnam since it began to develop toward a market economy, it may be challenging to prove these have been sufficient on almost all of the key criteria.

Currency convertibility

The ability to freely convert Vietnamese dong into other currencies is questionable. On the one hand, banks and credit institutions can carry out the currency trade, from a technical perspective, relatively easily. On the other hand, the value of the currency is not free-floating but rather managed by the State Bank of Vietnam.

Notably, over the last year, the SBV has worked to arrest the devaluation of the local currency by shedding foreign currency and issuing several tranches of treasury bills. Furthermore, the SBV uses a managed peg with a 5 percent band on either side within which the currency can be traded.

With this in mind, it’s worth noting that there is an unregulated black market for foreign currencies in Vietnam which often values the Vietnamese dong at less than official rates.

With this in mind, if official prices do not reflect true market value, it can be difficult to convert the local currency for the simple fact that a currency cannot be sold if there is no one willing to buy.

In its submission to the DOC, the MoIT argues that intervention in the value of the currency is to manage inflation and the economy more broadly, not to give Vietnam an unfair advantage in international trade.

It also argues that Vietnam’s removal from the US Department of Treasuries currency manipulators watchlist supports this notion. That said, it was returned to the list in November after the MoIT had already made its DOC submission.

Wage bargaining

Vietnam has made huge strides in labour reforms in recent years. The MoIT argues that these reforms, crystalised in the Labour Code 2019, have created conditions by which wages can be freely negotiated between workers and employers.

Moreover, the Labour Code permits strike action and has provisions for collective bargaining. 

The MoIT goes on to argue that government involvement in wage negotiations is minimal. However, in Vietnam, all labour unions are a part of the Vietnam General Confederation of Labour which is an extension of the government. Furthermore, by law, all industry associations must be affiliated with a government department. This means that in wage negotiations the government has influence on both sides.

Also of note, Vietnam has yet to ratify the International Labour Organisation’s Freedom of Association and Protection of the Right to Organise Convention. However, this has reportedly been scheduled for later this year.

Foreign investment

In its letter to the DOC, the MoIT uses Vietnam’s success in attracting foreign direct investment to support its claim that its economy is sufficiently open to foreign investors.

Specifically, it says that between 2018 and June 2023 Vietnam realised US$102.24 billion in FDI from 120 countries and territories. This, however, does not necessarily prove the point.

Vietnam is very strategically located particularly for firms looking to diversify out of China. Furthermore, it has relatively low wages and has historically offered very attractive tax incentives. Investments of all types are risk versus reward and it could be that the benefits of doing business in Vietnam outweigh the costs.

Furthermore, the bulk of foreign direct investment in Vietnam is in the manufacturing and processing sector. There are a slew of restrictions on foreign firms when it comes to other sectors–foreign ownership limits applied to investments in the Ho Chi Minh City Stock Exchange have even been cited as one reason why the market has not been upgraded from frontier to emerging.

Government ownership

Whereas the MoIT argues that the significance of government ownership of the means of production should be framed in terms of the role of the private sector in the broader economy, efforts to privatise state-owned assets, and land management, its argument skips over a much more literal interpretation.

Electricity, fuel, and telecommunications in Vietnam, key means of production, are all dominated by state-owned enterprises. State-owned enterprises, reportedly, account for 87 percent of the electricity supply, 84 percent of petrol retail sales, and 90 percent of mobile phone subscriptions–all key considerations in anti-dumping investigations.

What’s more, state-owned enterprises still represent roughly 28 percent of Vietnam’s economy and, whereas MoIT points out in its request that 33 of Vietnam’s 50 largest companies were private enterprises, that still leaves 17 that were state-owned.

Price controls

Price controls are common in Vietnam. Both electricity and petrol prices, two of the most important inputs in manufacturing, are set by the authorities. Though it has been argued that these prices are set based on market mechanisms, the reality is that fuel shortages last year and blackouts in the summer would suggest otherwise.

Specifically, when petrol prices spiked at the outset of the Ukraine War, retailers were required to sell petrol at prices determined by the MoIT. These were below what it cost to purchase fuel and therefore Vietnam’s petrol retailers were in many cases required to sell fuel at a loss.

Similarly, when input costs spiked for the electricity industry, retail price caps were quickly surpassed by production costs. This forced the state power provider to sell electricity at a loss to the point it reported a US$1.5 billion loss over 2022 and 2023. This led to under-investment in the sector and subsequently blackouts last summer. Of note, as recently as January electricity was still being sold at below cost price

Other factors

This final criterion that needs to be satisfied really leaves the door open to just about anything the DOC might want to add in. 

Of note, in a 2017 review of China’s non-market economy status, the DOC wrote at length, in response to this criteria, about China’s political system and political decision-making process. With the similarities between China’s and Vietnam’s political apparatus readily apparent, something similar for Vietnam would not be a surprise.

Why now?

All of that said, there are several non-technical factors at play in the timing of this request, some of which may just help to get Vietnam over the line.

A growing number of anti-dumping investigations

Firstly, the use of non-trade barriers, specifically antidumping and countervailing duties has proliferated in recent years. About 117 antidumping investigations have been opened against Vietnamese exports since 2004. Whereas this saw an average of 3.5 investigations per year between 2004 and 2013, from 2014 to 2023 that average more than doubled to 8.2. With this in mind, the impact of being labelled a non-market economy has increased significantly, relatively speaking.

Geopolitics

Vietnam’s letter to the DOC requesting a review came just weeks after the President of the United States visited Hanoi and just weeks before the President of China was scheduled to visit Vietnam. The timing of these visits and the obvious geopolitical jostling for Vietnam’s affection has been well documented. Suffice it to say, that Vietnam has found itself in demand by the world’s two key superpowers and subsequently empowered to make certain requests–said status review, for example.

Legitimacy

Vietnam has embarked on a multitude of economic reforms over the past two decades. These reforms have seen Vietnam become a manufacturing powerhouse creating millions of jobs and lifting millions of people out of poverty. However, over the past year or so the economy has struggled. A fall in global demand for Vietnam’s exports has seen production cuts and workers laid off. In this context, market economy status could be framed as a much-needed vote of confidence in the country’s economic management.

12 years have passed

In 2006, in the lead-up to Vietnam’s ascension to the World Trade Organisation–the WTO–the Office of the US Trade Representative suggested that Vietnam would continue to be treated as a non-market economy until it proved otherwise or for 12 years after the country officially joined the WTO. Vietnam’s status, however, had still not changed by 2019, according to the USTR, because Vietnam had not yet asked to have it removed. That being the case, the simple fact that Vietnam has officially made a request, may be enough in and of itself.

How are key stakeholders responding?

Earlier this year, US Under Secretary of State Jose Fernandez, made clear in a press briefing that politics would not be a factor in Vietnam’s non-market economy status review. He went on to stress that the review would be based on the six criteria in the Tariff Act.

But this has not stopped a healthy dose of advocacy from being added to the mix.

In favour, the Vietnamese ambassador to the United States back in January weighed in suggesting a failure to approve the request would be ‘very, very bad’.

Groups like the National Retailers Association which have suggested their boots-on-the-ground understanding of Vietnam’s economy adds value to their position, have also joined the pro-market economy for Vietnam chorus.

On the flip side, former presidential hopefuls Bernie Sanders and Elizabeth Warren have put their signatures on a strongly worded letter to the head of DOC that argues:

“Granting Vietnam market economy status before it addresses its clear non-market behaviour and the severe deficiencies in its labour law will worsen ongoing trade distortions, erode the U.S. manufacturing base, threaten American workers and industries, and reinforce Vietnam’s role as a conduit for goods produced in China with forced labour.” 

The American Shrimpers Association, which has a pending antidumping investigation currently under review with the DOC, has also expressed its objection to the request, which currently has the scales weighted in its favour.

All of that is to say, that firms that manufacture in Vietnam for export to the US are all for it, whereas US manufacturers are strongly opposed.

There will likely be more opinions to come, too.

Where does that leave it?

Ultimately, whether Vietnam’s non-market economy status will be lifted is anybody’s guess.  Whereas Vietnam’s arguments centre around the improvements it has made over the past two decades, the reality is that, on the facts alone, being redesignated as a market economy may be a stretch.

There are, however, other factors at play here that should not be overlooked–US efforts to shore up geopolitical support in Southeast Asia, for example.

All of that said, it’s important to remember that an upgrade to a market economy for Vietnam will not exempt the country from trade remedies. Rather it will only work to bring these trade remedies to be more in line with actual market value in Vietnam and limit the number of firms to which they are applied.

In this context, whatever is eventually decided will likely have limited immediate impact.

Moving forward, firms looking to engage in import and export activities in Vietnam should make sure they are well aware of any trade remedies in their industry and familiarise themselves with Vietnam’s trade practices. In this respect, reach out and let us connect you with a Vietnam import-export expert.

Or if you have an expert opinion to add, let us know via→Letters to the editor.

Also, to keep up with the latest developments in Vietnam’s pursuit of market-economy status, make sure to subscribe to the-shiv.

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