Vietnam–U.S. Economic Relations and the Bilateral Trade Agreement

Vietnam's Economic Stagnation and the Doi Moi Reforms

Vietnam's economy stagnated for ten years after the war ended in 1975. In 1986, the Sixth Party Congress approved a broad economic reform package called Doi Moi — meaning "renovation" — designed to dramatically alter and improve Vietnam's business climate, both at home and abroad. The reforms proved transformative: Vietnam became one of the fastest-growing economies in the world, averaging around 8% annual GDP growth from 1990 to 1997 (Bureau of Public Affairs).

Vietnam's inflation rate stood at more than 300% annually in 1987 and fell below 4% by 1997. Investments and domestic savings grew, and agricultural production doubled, propelling the country to become the second-largest exporter of rice in the world.

Throughout the 1990s, Vietnam began to recognize that global economic interdependence was key to growth and stability. The country stepped up its efforts to attract foreign capital from the West and normalize relations with the world financial system. In the mid-1990s, the United States lifted its veto on multilateral loans to Vietnam. Vietnam, in turn, became a member of the World Bank, the International Monetary Fund, and the Asian Development Bank.

Virginia Foote, president of the U.S.-Vietnam Trade Council — which represents American companies doing business in Vietnam — spoke about the state of bilateral relations in 1997. At that time, Foote said American businesses were "looking for economic normalization and the support system of the U.S. government on full trade relations" (May 15, 1997). American companies had excellent reputations in Vietnam, and the Vietnamese were looking to American management skills, capital, and technology to bolster their own economic viability. The economic system the Vietnamese government had followed from 1975 to 1985 had not worked: the country was not developing technologically and was not getting richer, while production in the state-run manufacturing sector had declined.

In the new process of Doi Moi, the economic reform policy was structured to build a free-market society piece by piece. As Foote observed: "The development of a private sector in Vietnam will be important for American companies. There are still restrictions on who can trade and how to invest. There is the problem of bureaucracy, which is very much there. But there's also the problem that they're in transition… Every country has made this transition in quite different ways and they are still seeking out what models, what transitions, and in what order they should proceed." (Foote, 1997)

Diplomatic Normalization and the Road to Trade Relations

On July 11, 1995, President Bill Clinton announced the formal normalization of diplomatic relations with Vietnam after 20 years of severed ties. This announcement followed several years of steady diplomatic talks between the two countries. In July 1993, the U.S. dropped its objections to bilateral and multilateral lending to Vietnam, and seven months later Clinton removed the trade embargo.

By 1997, the United States was committed to full normalization of diplomatic, political, and economic relations with Vietnam. Then-Secretary of State Madeleine Albright visited Ho Chi Minh City and told business and political leaders that she was "encouraged by commitments from Vietnamese officials concerning the progress of the refugee resettlement program" (June 28, 1997).

The refugee resettlement program had stemmed from the mass exodus of Vietnamese peoples due to the stagnant economy and growing tensions involving Cambodia, China, and Vietnam. To address poor economic conditions, the Sixth Party Congress approved a new state constitution in April 1992 that reaffirmed the central role of the Communist Party in politics and society, outlined government reorganization, and increased economic freedom throughout the country. Economic development became the primary focus of the government.

Vietnam War veterans Senator John McCain and U.S. Ambassador to Vietnam Douglas "Pete" Peterson led the efforts to reestablish normal relations between Washington and Hanoi. After the two countries signed their first trade agreement in 1995, American businesses flooded into Vietnam, opening offices in anticipation that the country would become the next "Asian tiger." Investors found a highly educated populace with a 91.9% literacy rate and a strong work ethic (Dillon, 2000).

For Vietnam, the agreement was a welcomed development that would build on the economic reforms of the 1980s. The consensus in the United States was that establishing normal trade relations with the world's twelfth-largest country would offer American businesses greater access to 76 million consumers in Vietnam, while helping Vietnam dismantle its wall of trade protectionism.

Negotiating the Bilateral Trade Agreement

Despite early optimism, the expected economic revitalization in Vietnam did not materialize. New licensed foreign investment declined from a high of $8 billion in 1996 to $800 million in 1999 (Dillon, 2000). Hanoi had shown reluctance to open an economy dominated by state-owned enterprises. Some Vietnamese leaders claimed that Clinton aspired merely to win over the Communist-led government rather than pursue genuine economic partnership.

For three years, representatives from Vietnam and the United States negotiated a comprehensive bilateral trade agreement. Despite steady progress, Hanoi's leaders hesitated when it came time to sign. However, the pressure of avoiding complete economic collapse — combined with China's concurrent negotiations for accession to the World Trade Organization — ultimately changed the minds of Hanoi's leaders. They signed the agreement, although it contained significant concessions for Vietnam.

Hanoi's leaders agreed to lower tariffs on U.S. industrial, agricultural, and service-sector products. The agreement also provided for free imports and exports between the two countries. The World Bank estimated that Vietnam could see exports grow by $800 million per year following passage of a trade agreement with the United States (Dillon, 2000).

Terms and Impact of the Trade Agreement

The Vietnam–U.S. Trade Agreement was approved by Vietnam's National Assembly on November 26, 2001. The growth rate of annual bilateral trade continued to average between 15% and 20%. Approximately 90 Vietnamese export items began entering U.S. markets, and "the United States now tops the list among Vietnamese sea-product importers. Coffee, tea, and spice are the second-largest export categories of Vietnam to the United States" (People's Daily, 2001).

The agreement, approved by the U.S. Congress and ratified by President George W. Bush on October 17, 2001, covers four economic domains: commodity trade, service trade, intellectual property, and investment relations. Under the agreement, both sides committed to opening their markets and reducing tariffs, meaning that Most Favored Nation status would govern trade between the United States and Vietnam (People's Daily, 2001). As a result, U.S. tariffs on Vietnamese products average about 3% — compared to the 40% rate that previously applied, which was more than ten times the level imposed on most other trading partners.

When the United States lifted its embargo on Vietnam in 1994, the country earned only $50.4 million from U.S. markets. By 2001, Vietnamese exporters earned between $900 million and $1 billion from those same markets. In 2000 alone, Vietnamese exporters earned $827 million in U.S. markets, reflecting the rapid expansion of trade ties over less than a decade.

A year before the trade agreement was formally ratified, private U.S. industries had already committed more than $120 million to Vietnam, making the United States the seventh-largest foreign investor in the country.

Works Cited

Albright, Madeleine. "U.S. Committed to Full Normalization of Relations." U.S. State Department, Remarks made to the American Business Community in Ho Chi Minh City, Vietnam, June 29, 1997.

Dillon, Dana R. "A Trade Pact with Vietnam: The First Step in Building Substantive Relations." The Heritage Foundation, Executive Memorandum, July 26, 2000.

Dy Nien, Nguyen. "The World Last Year and Vietnam's External Relations." Nhandan newspaper article, December 2, 2001.

Foote, Virginia. "Normalized Relations." PBS NewsHour, May 15, 1997.

The People's Daily. "Vietnam–U.S. Trade Agreement: Great Opportunities, Big Challenges for Vietnam." November 28, 2001.

U.S. Department of State, Bureau of East Asian and Pacific Affairs. "Vietnam, A Study." July 2001.