No. 690 July 26, 2000

A TRADE PACT WITH VIETNAM:
THE FIRST STEP IN BUILDING SUBSTANTIVE RELATIONS

DANA R. DILLON
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Produced by the
Asian Studies Center

Published by
The Heritage Foundation
214 Massachusetts Ave., N.E.
Washington, D.C.
20002-4999
(202) 546-4400
http://www.heritage.org

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The United States and Vietnam recently signed their first trade agreement
since normal diplomatic relations were restored in 1995. For Hanoi, the
agreement is a welcome advance, in effect building on initial economic
reforms it made in the mid-1980s. Increasing trade will help liberalize
Vietnam's state-controlled economy and even act as a catalyst for
considerable change in the country's social and political institutions.
Congressional approval of the trade agreement and the establishment of
annual or permanent normal trade relations with the world's 12th largest
country will offer American businesses greater access to 76 million
consumers in Vietnam and help Vietnam dismantle its counterproductive wall
of trade protectionism.

Vietnam's Economic Vision. Vietnam War veterans such as Senator John McCain
(R-AZ) and U.S. Ambassador to Vietnam Douglas "Pete" Peterson led the
efforts to reestablish normal relations between Washington and Hanoi. In a
speech announcing the resumption of diplomatic relations in 1995, President
Bill Clinton referred to the hoped-for benefit of the relationship as a
"peaceful evolution." American businesses soon flooded into Vietnam, opening
offices in optimistic anticipation that it would become the next "Asian
tiger." Investors found a highly educated populace--with a 91.9 percent
literacy rate--and a strong work ethic.

Unfortunately, economic progress did not materialize, and new licensed
foreign investment in Vietnam declined from a high of $8 billion in 1996 to
$800 million in 1999. Vietnam's centrally planned economy was dominated by
state-owned enterprises that received subsidized loans from government-owned
banks. Hanoi's reluctant approach to opening the economy was symptomatic of
the deep division on economic policy in the ruling communist party; while
economic reformers sought more trade with the West, many hard-liners
remained suspicious of the West's motives. Some leaders mired in antiquated
communist ideals had even characterized the President's description of a
"peaceful evolution" as an insidious American plot to "win the peace." This
assertion demonstrates not only naivete about the world economy, but also an
anti-American frame of mind.

In September 1996, representatives of the United States and Vietnam began a
laborious three-year process of negotiations that culminated in a draft of a
comprehensive bilateral trade agreement in July 1999. Yet when the time came
to sign the agreement in September 1999 at a meeting of the Asia-Pacific
Economic Cooperation forum in New Zealand, Hanoi balked. In the end, the
manifest failure of Hanoi's economic policies, coupled with China's
negotiations with the United States on accession to the World Trade
Organization, may have triggered Hanoi's interest in avoiding economic
collapse by trading with the West.

The Benefits of Trade. The comprehensive trade agreement with Vietnam
contains a host of major concessions by Hanoi. It is a good first start, and
the changes Hanoi has agreed to will result in lower tariffs on U.S.
industrial, agricultural, and service industry products. The agreement will
enable U.S. and Vietnamese firms to import and export more freely, and will
provide greater access to Vietnam's large market. The World Bank has
estimated that Vietnam could see exports grow by $800 million a year after
the passage of a trade agreement with the United States. It should also lead
to an increase in transparency regarding Vietnam's laws and regulations,
considerably improving the climate for foreign investment in the future.
Workers in Vietnam already can be hired directly by U.S. firms, and in seven
years, American investors can own 100 percent of a company.

Normalized trade relations with the United States will help encourage the
private sector to expand, increasing the number of jobs that are free from
government control and the number of citizens who owe their livelihoods not
to government patrimony, but to a free market and an expanding economy. More
of the Vietnamese people will be able to choose where to live, what to eat,
and how their children should be educated. Thus, from a diplomatic
perspective, expanding trade with Vietnam will encourage freedom in a
country that is still nominally communist and overtly authoritarian.

Conclusion. Though the news of the trade agreement will certainly be
received well by economic reformers in Vietnam, progress toward an open
economy and democratic norms is likely to be unnervingly slow. The reformers
will still need to battle communists in Hanoi who are fighting a last-ditch
ideological battle in the back rooms of government to retain control of
Vietnam. But change must start somewhere.

Vietnam's commitments under the trade agreement will not come into force
until the agreement has been approved by Congress and by Hanoi's national
assembly. By engaging in normal trade relations with Vietnam, the United
States and other countries will help the Vietnamese people to improve their
economic and political future.

-- Dana R. Dillon is Policy Analyst for Southeast Asia in the Asian Studies
Center at The Heritage Foundation.