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Vietnam in WTO: New Economic Calculations

Panjaj Kumar Jha was Associate Fellow at Institute for Defence Studies and Analyses, New Delhi. Click here for detail profile.
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  • November 22, 2006

    Vietnam was inducted into the World Trade Organisation (WTO) on November 8, 2006. This was approved by the General Council, the WTO's major decision-making unit, after due deliberations on October 26. One hindrance in the realisation of Vietnam's WTO membership plans has been the passing of the "Permanent Normal Trade Relation" (PNTR) bill in the US Congress. Earlier the United States Finance Committee had passed the bill on August 1, 2006 by 20 to 18 votes in favour. In fact, the US was planning to grant PNTR status to Vietnam prior to the APEC summit on November 18-19 in Hanoi, but this did not happen due to legislative wrangles. Granting PNTR status would safeguard US interests in the region by engaging an erstwhile adversary, which is also one of the most populous nations in Southeast Asia. It is expected that the PNTR status bill might face resistance in the US Congress because of some legislators harping on the issue of Vietnam's stance on religious freedom and human rights. On the other hand, the US is compelled to get the bill passed because otherwise it would be violating WTO modalities for equal trade and non-discrimination rules.

    Accession to WTO means that Vietnam has to continue talks with its current members to ensure that its trade policies are in consonance with WTO rules. It also has to assure present members that it would be in compliance of provisions in the areas of tariffs, import quotas, farm subsidies and liberalisation in the services market. WTO membership is crucial for Vietnam in terms of aligning itself with the world economic community. It would propel its economic growth and prosperity. Hanoi has been treading cautiously on this matter, though it has shown promise by contributing to the liberalised trade regime through its bilateral accord with the United States in May 2006. As part of the trade negotiations, future members have to enter bilateral arrangements with other trading nations as well. Having gained approval in the WTO General Council meeting, it would be compulsory for Vietnam to ratify the accession and then wait for a month to be confirmed as a full member.

    Vietnam would be the second most populous country after China to accede to WTO in East Asia. It has endorsed 22 out of 28 deals needed to be a member of WTO and has negotiated with its main trading partners like China, Japan and the European Union (EU), while there are still issues to be resolved with United States, New Zealand and Australia. The US and Vietnam are making headway on the issue of market access for US business, agricultural and industrial subsidies as well as financial services. Though there are contentious issues between the US and Vietnam, the former has endorsed Hanoi's full membership of the WTO because of several reasons.

    Firstly, Vietnam's economic growth is quite robust at about 8.4 per cent in 2005. It exported $6.5 billion worth of goods last year to the United States. Secondly, its relatively young population (about 80 per cent of its population is below the age of 30) means that it could be a very good manufacturing centre for US business entrepreneurs who are at a disadvantage because of low labour costs in China and India. Thirdly, from the strategic point of view, it would hurt China in a way because as of now Vietnam acts as a raw material provider to China and if industrial structures are established then Vietnam would do more second stage manufacturing thus eating into China's share of the market. Finally, in order to curb Chinese economic hegemony in the East Asian region, Vietnam is likely to attract financial support and investments from Japan and Taiwan.

    But there is also an apprehension that Vietnam might go the Mexico way. Mexico has a big trading partner in the form of the US in its neighbourhood because of which it has been unable to add value to products made domestically. This has meant that it has remained an assembly zone and supplier of raw materials, thus missing out on a huge growth potential. However, such a scenario is not inevitable with respect to Vietnam given the interest of regional economic powers and the strategy of the EU and the US to checkmate China in the world market. In fact, one of the strategic purposes of the US is to streamline its Foreign Direct Investment (FDI), which is now principally directed towards China, and divert it to Vietnam so that its short-term economic interests are not hampered. This logic is augmented by the fact that the US is willing to help Vietnam financially in setting up basic economic infrastructure to enable compliance with WTO regulations.

    In this milieu, it has been seen that owing to the sanctions on Chinese textiles India's textiles export to the European market had increased in early 2006. But with the induction of Vietnam, there would be another viable competitor for the same range of products. Vietnam might also emerge as a shadow-manufacturing base for Chinese products and so the rules of origin have to be imposed meticulously. While on the one hand India has to face major competition from China, on the other hand Vietnam's emergence in the coming years would make it imperative that India invests in that country so as to reap the benefits of economies of scale as well as low labour costs, thus emerging as a trusted economic partner of Vietnam in the process. It would be unjust to say that everything would be just fine with Vietnam's economic development and accession to WTO, though India can act as a human resource developer given its expertise and skilled workforce in English, which Vietnam lacks.

    India would face stiff competition with the emergence of Vietnam especially given that the US would be willing to locate its manufacturing facilities as well as invest in that country. In order to reap the benefits of trade liberalisation, Vietnam has to transform its centrally planned economy into a market oriented economy as well as its economic superstructure from an agriculture based economy to a more industrialised one. It has to have more effective fiscal expenditure, an upgraded banking system, real estate market reforms and a more robust capital market along with labour reforms to meet WTO requirements. In case Vietnam obtains huge foreign investments and industrial know-how, it might even surpass Chinese productivity on a smaller scale and cater to the long-term strategic calculations of the western world. Such expectations could well become a reality in the future. Vietnam's accession to WTO would not only create more competition in the world markets but also define new economic calculations in Asia.