What ails US-Vietnam trade relationship

VIETNAM'S strategic relationship with the United States has progressed but it is being held hostage to various sticking points over trade and the economy, many of which are expected to be negotiated in the coming weeks and months of 2018.

These obstacles include a US$32 billion trade deficit that the US has with Vietnam, and a dispute over Vietnamese catfish exports. Unless these two issues are properly and expeditiously addressed, they may delay the conclusion of a bilateral investment treaty. It may also hold up the granting by the US to Vietnam of "Market Economy Status."

It irks the Hanoi leadership that the US designates Vietnam as a "Non Market Economy" (NME) which often leads to the imposition of higher customs duties on Vietnamese exports.

In a nutshell, US-Vietnam economic relations are not fully normal as yet. The US wants Hanoi to reduce its trade deficit, and Hanoi would like to move rapidly towards a normal trading relationship.

According to the US Congressional Research Service, the main vehicle for discussing trade issues is the Trade and Investment Council, established under the 2007 bilateral Trade and Investment Framework Agreement. At a Council meeting in March 2017 in Hanoi, the US urged Vietnam to address some of the contentious topics.

In May 2017, Vietnam's Minister of Trade and Investment, Tran Tuan Anh, met US Trade Representative Robert Lighthizer and requested that the US recognise Vietnam as a market economy and lift stringent new inspection regulations for Vietnamese catfish.

To take each issue separately, first, President Donald Trump is personally concerned about the bilateral trade deficit. US-Vietnam trade has grown from US$1.5 billion in 2001 to US$52.2 billion in 2016, transforming Vietnam into the 12th largest source of American imports and 27th largest destination for US exports.

For the Trump administration, a major imbalance is that the US trade deficit with Vietnam rose from US$592 million in 2001 to nearly US$32 billion in 2016, the sixth largest US bilateral trade deficit (after China, Japan, Germany, Mexico, and Ireland). The US, however, had a US$1 billion surplus in services trade with Vietnam in 2016.

When President Trump hosted Prime Minister Nguyen Xuan Phuc in May 2017 they talked about the trade deficit, and the topic reappeared in the conversation again when President Tran Dai Quang met President Trump in Hanoi in November 2017.

Vietnam must be prepared to face a protectionist America: Although the Trump administration is preoccupied with renegotiating trade agreements with Canada, Mexico, and South Korea, it is possible that the administration will turn its focus increasingly on Vietnam this year.

MARKET ECONOMY STATUS

Secondly, Vietnam will come under pressure to make concessions in some areas because the Vietnamese leaders wish the US to change Vietnam's official designation under American law from "Non-Market Economy" (NME) to "Market Economy (ME)" It is crucial for Hanoi to gain ME status which will help Vietnam if it faces anti-dumping and countervailing duty cases because without ME status higher tariffs may be imposed.

The Vietnamese government is also keen to get designated as a "Market Economy" in order to fully normalise relations with the US. The US position is an aberration because several of Vietnam's trading partners have already designated Vietnam as a market economy, such as Asean, Australia, India, Japan, and New Zealand. The US must review Vietnam's status because for more than 20 years, Vietnam has been functioning as a market economy with flourishing and unfettered private enterprise in a competitive environment.

Vietnam must remain a NME under US law for up to 12 years after its accession, that is until 2019, or until it meets US criteria for a "Market Economy" designation, under the terms of the US-Vietnam accession agreement to the World Trade Organization. Under American law, NME is defined as "any foreign country that the administering authority determines does not operate on market principles of cost or pricing structures, so that sales of merchandise in such country do not reflect the fair value of the merchandise".

There may be a future sticking point here because although Vietnam has deregulated most prices, the government still retains some formal and informal methods to manage the economy. Yet, Vietnam is expected to increase its efforts to obtain Market Economy status in 2018, or before 2019.

Thirdly, if the US chooses to get vindictive, it can hold up "Market Economy" status because of what it considers is a dispute over Vietnamese exports to the US of its frozen catfish, known in Vietnamese as basa, swai, and tra. The US imported over US$390 million of catfish from Vietnam in 2016, much to the alarm of a lobby of American catfish farmers who are trying to block the imports because the cheaply priced Vietnamese fish was lowering their profits.

US Congress, under pressure from the Catfish Farmers of America, passed legislation in 2002 prohibiting the labelling of basa, swai, and tra as "catfish" in the US. In 2003, the US government imposed anti-dumping duties on basa, swai, and tra. Tensions over catfish boiled over in 2008 when a US Farm Bill transferred inspection of catfish from the Food and Drug Administration to the US Department of Agriculture, whose inspections are much more stringent than those of the FDA.

In response, the Vietnamese Ministry of Foreign Affairs has stated that these new regulations could constitute a non-tariff trade barrier which harms the livelihood of Vietnamese catfish farmers. In March 2016, Vietnam told the WTO that American catfish regulations violated the WTO rules.

So far, Vietnam has not filed a WTO case challenging US catfish inspection rules, but it may make a legal challenge this year if US Congress and the Trump administration prove to be unrelenting.

DELAYED TREATY

Fourthly, in the middle of these differences, talks have stalled over reaching a US-Vietnam Bilateral Investment Treaty, under negotiations launched in June 2008. It is expected that these negotiations may resume this year, although neither side has made any announcements as yet.

Before investing abroad, American and other foreign investors want to know if a bilateral investment treaty exists because it provides important legal protections for nationals and companies of one country when investing in another country.

Vietnam has a packed trade and economic agenda with the US this year. Hanoi's challenge is that it must deal with an increasingly protectionist Trump administration.