A would-be tiger: assessing Vietnam's prospects for gaining most favored nation status from the United States.

AuthorKy Tran-Trong

The United States did not remove its trade embargo against the Socialist Republic of Vietnam(1) until February 1994;(2) nevertheless, foreign investors have labeled Vietnam as "the next Asian Tiger."(3) Optimism among Vietnamese and foreign investors has increased since the lifting of the embargo, particularly in light of the 8.2% annual growth in Vietnam's Gross Domestic Product (GDP) that has occurred over the past five years.(4) In addition, exports jumped 200% between 1990 and 1995, from $1.73 billion to $5.3 billion,(5) and, during the first half of 1995, foreign investment more than doubled compared to the same period in 1994, reaching $3.6 billion.(6)

Despite this good news, it would be premature for investors to put all of their capital in Vietnam; many problems plaguing the country since the imposition of the trade embargo continue. Vietnam remains among the poorest nations in the world, with a per capita GDP of approximately $290 per year.(7) In addition, Vietnam's trade deficit soared to $3.6 billion over the first ten and a half months of 1996, up from a deficit of $2.3 billion for all of 1995.(8) Finally, Vietnam's legal system continues to befuddle potential investors because its opaqueness and lack of consistency make it difficult for investors to assess properly the potential costs and risks of doing business in Vietnam.(9) In an effort to correct these problems, the Vietnamese government has embarked on an ambitious program to transform its former state-run economy into a market-based system.(10)

Critical to Vietnam's attempts to reform its economy will be its ability to integrate itself into the international trading system. Both Vietnam's newly acquired membership in the Association of Southeast Asian Nations (ASEAN)(11) and its recent signing of a trade cooperation agreement with the European Union in July 1995(12) are viewed-by Vietnam's Communist-controlled government as stepping stones to its ultimate objective: the granting of Most Favored Nation (MFN) status by the United States.(13) Obtaining MFN trading access to the U.S. market is critical to establishing successful trade relations between the United States and Vietnam.(14) MFN status would allow Vietnam to export its products into the United States at the lowest available tariff rates and compete with similar products from other countries on an even playing field.(15)

The purpose of this Note is to assess Vietnam's prospects of gaining MFN status from the United States. This Note begins by looking at Vietnam's history since the end of the Vietnam War to familiarize the reader with the events leading to Vietnam's current situation. Next, this Note describes the primary barriers to Vietnam's realization of MFN status. In particular, this Note examines the procedural and political steps involved in attaining MFN status, which culminate in a bilateral trade agreement.(16) Finally, this Note reviews the potential obstacles, in particular Communist ideology and poor infrastructure, which may threaten Vietnam's reform program and, by extension, future MFN status. Ultimately, this Note concludes that although the attainment of MFN status certainly is within Vietnam's grasp in the near future, Vietnamese leaders cannot afford to slow Vietnam's current rate of reform, even if such reform comes at the expense of state control.

BACKGROUND

Immediate Postwar Period

After the fall of Saigon to the Communist forces of North Vietnam on April 30, 1975,(17) the United States imposed a comprehensive trade embargo against Vietnam under the authority of the Trading with the Enemy Act of 1917 (TWEA).(18) The period immediately following the imposition of the trade embargo resulted in tense relations between the two nations, particularly after President Gerald Ford denied Vietnam's request for aid from the United States pursuant to the Paris Peace Agreements of 1973.(19) President Ford cited Vietnam's untruthfulness and unfair wartime practices as the basis for his denial(20) and declared that the two countries would have no trade relationship until Vietnam fully accounted for the fates of the thousands of American soldiers lost either as prisoners of war (POWs) or missing in action (MIAs) during the war.(21)

Relations between the United States and Vietnam grew even cooler in 1978 when Vietnam announced that it would become an ally of the Soviet Union(22) and followed that announcement by invading Cambodia and establishing its own government there.(23) The Carter Administration responded to the Cambodian invasion by severing all contacts with Vietnam, effectively halting any progress toward the normalization of relations between the United States and Vietnam for the next decade.(24)

Cut off from the United States and non-Communist nations, who feared jeopardizing their own trading relationships with the United States,(25) Vietnam had little choice but to rely almost completely on the Soviet Union and the Communist satellite nations of Eastern Europe as trading partners.(26) The Vietnamese government subsequently structured its newly unified economy based on the principles of communism and central planning.(27) The transition was not successful, however, and Vietnam began to experience economic problems almost immediately.(28) Once-prosperous industries began to fail under centralized state planning, and Vietnam's average per capita income fell to less than $200 per annum, making Vietnam one of the poorest countries worldwide.(29) By the mid-1980s, the Vietnamese government realized that its socialist economy was failing.(30) When the Soviet Union, suffering its own economic problems, drastically reduced its aid to Vietnam, the Vietnamese government was forced to begin reforming its economy by implementing measures aimed at bringing market forces into its economic system.(31)

Doi Moi Reform Period

Technically, Vietnam's reform process began before the mid-1980s because the Vietnamese government introduced economic reforms as early as 1979.(32) Reforms had no significant effect, however, until the Communist Party's Congresses of 1986 and 1991.(33) The most dramatic reforms began during the Communist Party's Seventh Congress in 1986, when the government instituted the economic policy of doi moi, which means "`economic renovation' or `change for the new'."(34) The central principle of doi moi is "rapid industrial growth and development through increased foreign investment."(35) Under doi moi, the Vietnamese government allowed market forces to operate subject to close state supervision.(36) By 1989, the government had eliminated the last vestiges of central planning(37) by decollectivizing agricultural land and removing price controls on most commodities.(38)

At the core of doi moi is the Law of Foreign Investment of 1987 (FIL), which reflects the Communist Party's recognition that expanding Vietnam's economy will require the support and capital of foreign investors.(39) "With a view to expanding economic cooperation with foreign countries, developing the national economy, [and] stepping up export on the basis of effective exploitation of natural resources, labour and other potentialities,"(40) the FIL sets forth general guidelines for foreign investment, allowing various investment vehicles,(41) and guaranteeing the investments against expropriation.(42) The implementation of the 1987 FIL evidenced "a firm commitment by the Vietnamese [g]overnment to build a strong and stable Vietnamese economy."(43) Other nations were quick to invest their capital in Vietnam with the hope to profit from Vietnam's enormous economic potential.(44) The Vietnamese government approved $7.8 billion in foreign investment projects between 1988 and 1994.(45) Despite Vietnam's success in attracting new investors, however, the U.S. embargo still loomed large over the developing country, diminishing the luster of the government's achievements. Without the support of the United States, it appeared unlikely that Vietnam could attain its goal of becoming the next "Asian tiger."(47)

U.S.-Vietnam Relations

Under the terms of the trade embargo, U.S. citizens and businesses were prohibited from Conducting most financial and business-related activities with Vietnam or its nationals.(48) Included in the prohibition were the import and export of goods, all financial and commercial dealings, and any transaction incident to transportation or shipping entered into by persons subject to U.S. jurisdiction.(49) The Office of Foreign Assets Control froze Vietnamese assets by prohibiting all transactions involving those assets within U.S. jurisdiction.(50) The embargo originally was intended to isolate Vietnam from "Western economic trade, aid, and investment,"(51) but, in later years, the embargo became a means to maintain bargaining power over the Vietnamese in an effort to resolve the issue of American MIAs.(52)

Initially the embargo effectively cut Vietnam off from the West and forced the Communist government to turn to the Soviet Union and its Eastern European allies.(53) In addition to enforcing the embargo, the United States discouraged other countries from providing international aid to Vietnam following Vietnam's invasion of Cambodia in 1979, further increasing Vietnam's isolation.(54)

After Vietnam began to implement its reform program in the mid-1980s,(55) however, foreign corporations and private investors began to take advantage of the economic opportunities offered by Vietnam.(56) As they watched foreign investors seize prime investment opportunities, American businessmen became increasingly frustrated with their inability to participate.(57) The American business community thus began to pressure the U.S. government to lift the embargo.(58) In response to this mounting pressure, President George Bush proposed in April 1991 that the United States commence normalizing relations with Vietnam, including an eventual lifting of the trade embargo.(59)

President Bush's proposal...

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