Vietnam’s Quest for “Market Economy” Status

After Vietnam upgraded its relations with the United States to a Comprehensive Strategic Partnership (CSP) in September 2023, one of the changes that Vietnam wanted the most was the designation of the country as a “market economy.” Beyond symbolic meanings, the status of the market economy will deliver concrete trade benefits to Vietnam as it will incentivize U.S. imports of goods from Vietnam and foreign investment into the country.

As the Department of Commerce is set to deliver its ultimate decision on July 26, 2024, this article strives to explain why Vietnam is spending considerable resources and efforts to gain recognition as a market economy. It also emphasizes why the issue has ramifications for Vietnam’s human rights records.

Why a Market Economy?

Two days before President Joe Biden visited Vietnam in 2023, the Ministry of Trade and Industry filed a request to the U.S. Department of Commerce to initiate a “Change Circumstances Review” to upgrade Vietnam’s non-market economy status. Since the upgrade to CSP status, representatives of the Vietnamese government in Washington, D.C., have worked tirelessly to lobby for the “market economy” designation.

Why spend much effort on becoming recognized as a “market economy,” if Vietnam is a self-proclaimed socialist state?

Vietnam is extremely persistent in being seen as a market economy because of the trade benefits of such a designation. A country being designated as a “non-market economy” means it will be subjected to more scrutiny over its government’s intervention in the market. This concern is especially prominent in currency manipulation and import pricing.

One problem that Vietnam consistently faces is U.S. anti-dumping duties - a type of tax imposed on products that are determined to be sold at a lower price in the U.S. market than the production cost in Vietnam. Anti-dumping duties protect U.S. businesses from unfair competition from foreign imports whose costs are potentially manipulated by a foreign government. 

For example, Vietnam currently faces almost 26% tariffs on its exports of frozen farmed shrimp to the United States, while Thailand—a recognized market economy—only faces 5%. The market economy designation will enable Vietnam to avoid the excess tariffs, thus enhancing U.S. imports of Vietnamese goods.

Vietnam gaining market economy status will also enhance foreign investment, as U.S. investors might feel more comfortable investing in a country without enhanced scrutiny from the U.S. government.

What is Vietnam Saying?

Without getting into the technical arguments in Vietnam’s Congressional hearing in May, their general argument is simple: Vietnam is “already a market economy,” and the U.S. government needs to recognize this status to “respect each other’s differences in political institutions.” Additionally, more than 70 countries - including many U.S. allies such as Canada, the United Kingdom, Australia, Japan, and South Korea - have recognized Vietnam as a market economy. Why shouldn’t the U.S.?

Historically, the “non-market economy” status has been given to countries affiliated with the Soviet Union. Vietnam argued that it has made significant economic progress in the last few decades and has introduced more economic liberalization measures than many market economy countries. It highlighted Vietnam’s currency convertibility, labor rights, and foreign investment. 

However, some U.S. trade and labor organizations are not convinced that the U.S. will benefit from recognizing Vietnam as a market economy due to evidence of unfair competition. Additionally, Human Rights Watch challenged Vietnam’s argument that workers can freely unionize, pointing out that the government only allows state-controlled unions.

In this case, Eric Emerson, the lawyer representing Vietnam, also argued that denying the country's market economy status would only push it closer to China. Similarly, international relations scholar Hai Hong Nguyen emphasized that trust between the two countries is on the table.

Beijing seemingly chose to ignore the persistent effort from Hanoi’s side to be recognized as a market economy and spun this as a criticism of the U.S. system. China Daily, the Chinese Communist Party’s mouthpiece, criticized the market economy list as Washington’s “geopolitical tool.” It further argued that if the Biden administration recognized Vietnam as a market economy, it would essentially be a political tactic during the presidential election season to seem like it is “decoupling” from China. 

Of course, it would be humiliating to China if Vietnam is recognized as a market economy first, so we can expect more cries from Beijing about how this status is mere anti-China propaganda.

The Human Rights Implications

Writing for the Center on Strategic and International Studies (CSIS) in Washington, Murray Hiebert wrote that the Department of Commerce’s review of the market economy status could be “arbitrary” when considering human rights issues. 

While it is true that the market economy designation is mostly an economic issue, it is unwise to ignore the human rights implications of giving Vietnam this status.

Like other authoritarian regimes, the Vietnamese government derives its governing legitimacy from its performance in economic and social issues (“performance-based legitimacy”). 

As I have previously argued, the regime decided to open up through the “Doi Moi” reforms in the 1980s because it realized the importance of regime stability through stable economic development. The regime’s ability to deliver economic development became a leading reason for its survival, especially as the younger generation of Vietnamese people was less convinced by wartime rhetoric on the necessity of Communism.

Similarly, the modern Vietnamese state promotes “bamboo diplomacy” as its leading foreign policy direction mainly because it hopes to generate as much foreign direct investment as possible. It recognized that a practical foreign policy cannot co-exist with a Cold War ideology-based foreign policy. Vietnam became a U.S. leading partner in the Indo-Pacific region for this reason, despite the regime’s unwillingness to embrace a liberal democratic system of government.

There is evidence to suggest that Vietnam pretends to treat human rights activists better whenever there is an important event coming up that involves a Western country (mostly the United States). However, the government returns to its repressive ways when such an event has passed. 

The signing of the European Union-Vietnam Free Trade Agreement (EVFTA) is a prime example of this practice. A year after the signing, the Vietnamese authorities arrested Dang Dinh Bach and Mai Phan Loi on arbitrary tax evasion charges - most likely because they were serving on a panel of nonprofit organizations attempting to monitor the implementation of EVFTA.

The United States graduating Vietnam from its non-market economy status might result in a similar situation, where the Vietnamese authorities feel emboldened enough to repress non-governmental actors and activists further.

Until Washington can ensure that there is an effective monitoring body or countermeasure for Vietnam’s human rights violations, giving the country the “market economy” recognition might backfire on any minimal human rights progress that it has made.