The Vietnam-U.S. Bilateral Trade Agreement
Released: 2002-09-09T00:00:00

Background

On July 13, 2000, after nearly five years of bargaining, the U.S. and Vietnam announced theyhad signed a bilateral trade agreement (BTA). (1) OnJune 8, 2001, President Bush submitted theagreement, which requires congressional approval, to Congress. Following President Bush'stransmission, joint resolutions ( H.J.Res. 51 and S.J.Res. 16 ) wereintroduced in both chambers, and referred to the House Ways and Means Committee and the SenateFinance Committee. On September 6, 2001, the House approved the agreement by voice vote. TheSenate passed the agreement, by a vote of 88-12, on October 3, 2001 (Roll Call 291). On October16, 2001, President Bush signed the agreement into law ( P.L. 107-52 ). Vietnam's NationalAssembly ratified the BTA on November 28, 2001, by a vote of 278-85, and Vietnamese PresidentTran Duc Luong signed the agreement into law on December 7. It entered into force on December10, 2001 when the two countries formally exchanged notices of acceptance.

The BTA is a major step toward fully normalizing U.S.-Vietnam commercial relations, as it restores reciprocal most-favored-nation (MFN, also known as normal trade relations [NTR])treatment between the two countries, and commits Vietnam to undertake a wide range ofmarket-oriented economic reforms. (2) Extending MFNtreatment to Vietnam will significantly reduceU.S. tariffs on most imports from Vietnam.

Congress' Role in the Normalization of U.S.-Vietnam Trade Relations (3)

Following the victory of communist North Vietnam over U.S.-backed South Vietnam in 1975,the United States ended virtually all economic interchange with unified Vietnam. The commercialrestrictions included not only those that previously had been imposed only on North Vietnam (seethe following section), but also a halt to bilateral humanitarian aid, opposition to financial aid frominternational financial institutions (such as the World Bank), a ban on U.S. travel to Vietnam, andan embargo on bilateral trade.

Washington and Hanoi gradually began to normalize relations in the early 1990s, followingimprovements on the issues of Vietnam's activities in Cambodia and American prisoners of war(POWs) and missing-in-action (MIA) personnel in Vietnam. (4) In 1994, President Clinton orderedthe lifting of the trade embargo against Vietnam. The following year, the two countries establishedambassadorial-level diplomatic relations. In 1998, President Clinton granted Vietnam its first waiverfrom the requirements of the so-called Jackson-Vanik amendment (contained in the Trade Actof1974, Title IV, section 402), which prohibit the President from normalizing commercial relationswith selected socialist and formerly socialist countries if they do not meet certain requirementsregarding freedom of emigration. Presidential waivers were also granted to Vietnam in 1999, 2000,2001, and 2002. Congress may reject the annual waiver by passing a joint disapproval resolution. Each time waivers have been granted to Vietnam, the House has defeated disapproval resolutions. (See Figure 1 ), most recently on July 23, 2002, by a vote of 338-91 (roll call #329). As explainedbelow, after the BTA went into effect in December 2001, the Jackson-Vanik waiver grantedVietnam MFN status and allowed the U.S. Overseas Private Investment Corporation (OPIC) and theU.S. Export-Import Bank to support U.S. businesses exporting to and/or operating in Vietnam.

Restoration of Temporary MFN Status to Vietnam. The U.S. denied MFN treatment to communist-controlled areas ofVietnam in August of 1951. At that time, under Section 5 of the Trade Agreements Extension Actof 1951, MFN tariff rates were suspended for all countries of the Sino-Soviet bloc. (5) Whencommunist North Vietnamese forces unified the country in 1975, MFN status was suspended for theentire country.

In 1974, the U.S. issued strict conditions for restoring MFN status to those non-market economies (NMEs) subject to Section 5 suspension (in practice, the new conditions applied to allcountries of the former Sino-Soviet bloc). Under Title IV of the Trade Act of 1974, MFN treatmentmay be restored to NME countries after two requirements have been met:

a) The President issues a determination that the country is not in violation of the freedom-of-emigration requirements of the Jackson-Vanik amendment. (6) To date, Vietnamhas not been found to be in full compliance with Jackson-Vanik requirements.Alternatively, subject to certain conditions, the President may waive full compliance withthese requirements, as Presidents Clinton and Bush have done since 1998. Jackson-Vanikwaivers must be renewed annually, and Congress may reject them by passing a jointdisapproval resolution.

b) The completion of a bilateral trade agreement that contains certain required provisions, including a reciprocal MFN clause. (7) Such anagreement requires approval by the Congress(and by the Vietnamese National Assembly). The approval of the BTA allows thePresident to extend temporary MFN tariff treatment to Vietnam. The MFN treatment istemporary because it is contingent upon Vietnam meeting the requirements described inthe previous paragraphs - i.e. either obtaining a Presidential determination or aPresidential waiver, both of which are subject to annual congressional review anddisapproval. (8)

Congressional Procedures for Considering a U.S.-Vietnam BTA. (9) To go into effect, Title IV bilateraltrade agreements must be approved bya joint resolution of Congress. Once the President transmits the agreement to Congress, a jointresolution must be introduced in both Houses. The resolutions are subject to special expeditedprocedures, under which amendments are not permitted in either chamber.

Additionally, there are deadlines of 45 session-days for committee consideration (by the House Ways and Means and the Senate Finance Committees), and 15 session-days for floor debate in bothchambers. Because the approval resolutions are revenue measures, the Senate must vote on aHouse-passed resolution, and Congress would have a maximum of 90 session-days to act on theresolution: 45 days for consideration by the House Ways and Means Committee; followed by 15 daysfor floor debate in the House; followed by 15 days for consideration of the House-passed resolutionin the Senate Finance Committee; followed by 15 days for floor debate in the Senate.

As with most trade agreements with non-market economies, the U.S.-Vietnam BTA will remain in effect for a 3-year period and will be extended automatically unless renounced by either party. Additionally, each extension will require a presidential determination that Vietnam is satisfactorilyextending reciprocal MFN treatment to U.S. exports.

After the BTA: Extending Permanent MFN Treatment to Vietnam. Following the BTA, the next step toward normalizing U.S.-Vietnamcommercial ties is restoring permanent MFN status (also known as permanent NTR or PNTR status)to Vietnam. This process that will require Congress to terminate the application of the relevant TitleIV provisions to Vietnam, as has been done for several countries, including China, Albania, andGeorgia.

Vietnam and the World Trade Organization (WTO). Vietnam applied to join the WTO in 1995. Many observers believe thatVietnam is a number of years away from meeting the requirements for WTO membership. In March2001, Vietnam's Trade Minister expressed his government's goal of acceding to the WTO by 2004. Countries seeking to enter the WTO must negotiate bilateral agreements with current WTOmembers. Provisions of such agreements are then consolidated into the acceding country's protocolof accession and, because of the WTO's mandatory MFN requirement, apply to all WTO members. In other words, any concessions obtained by one country in a bilateral accession agreement wouldbe enjoyed by all WTO members. Typically, the bilateral accession negotiations focus on tariffconcessions and other market access issues that will govern bilateral trade relations after theapplicant becomes a member. Thus, at some point in the future, Vietnam and the U.S. are likely toengage in another set of negotiations about the changes Vietnam must make to its trade regimebefore the U.S. will support Vietnam's application for WTO membership. Upon completion of thisagreement, it is likely that the U.S. president will ask Congress to extend permanent MFN treatmentto Vietnam, much as President Clinton did after completing WTO accession negotiations with Chinain November 1999. (10)

Table 1. Vietnam's Path to Commercial Normalization with the United States

U.S. and Vietnamese Interests in a Bilateral Trade Agreement

U.S. Interests in a Bilateral BTA. U.S.-Vietnamtrade and investment flows are extremely low. Although Vietnam is the world's 13th most populouscountry, with nearly 80 million people, for the past several years annual U.S. exports have hoveredin the $200-$400 million range (see Table 2 below), a figure roughly equivalent to three days' worthof exports to Japan, and roughly one-fifth the amount the U.S. exported to South Vietnam in 1970. (12) Major U.S. exports to Vietnam include aircraft, fertilizer, telecommunications equipment, andgeneral machinery. Cumulative foreign direct investment (FDI) by U.S. companies in Vietnam isalso low, valued at about $1 billion, making the United States the ninth-largest source of investmentin Vietnam.

To boost U.S. exports and investment, U.S. negotiators demanded that Vietnam provide more comprehensive and detailed concessions in the areas of services, investment, and market access thanhad been obtained in previous bilateral trade pacts with other Jackson-Vanik countries. As discussedin the following section, it appears the U.S. successfully obtained most of these negotiatingobjectives.

Following the signing of the agreement, Clinton Administration officials and business representatives were careful not to argue that the BTA will significantly boost U.S. exports andinvestment to Vietnam in the short term. Rather, they stressed that U.S. exporters and investors willbenefit most in the medium to long-term, as Vietnam continues market-oriented reforms, becomesmore developed and integrated into the global economy, and as Vietnam phases in more and moreof the BTA's requirements. Moreover, exports to and investment in Vietnam are expected toincrease as Hanoi and other members of the Association of Southeast Asian Nations (ASEAN) - a10-country, 500-million person market - follow through on commitments to reduce trade barriersby 2006. Ultimately, U.S. trade and investment opportunities in the future will depend on a) Hanoi'simplementation of the BTA; b) Vietnam's progress on moving toward a more market-orientedeconomy; and c) Vietnam's rate of economic growth.

Table 2. U.S.-Vietnam Trade, 1994-2002 (millions of dollars)

Source: U.S. International Trade Commission. Data are for merchandise trade on a customsbasis.

In the short- to medium-term, the BTA will require Vietnam to improve the climate for foreign investors. U.S. businesses in Vietnam will receive legal protections that are unavailable today. Moresectors will be open to U.S. multinationals. Additionally, the BTA will help make the Vietnamesebusiness environment more predictable and transparent. Currently, a frequent complaint fromforeign executives in Vietnam is the lengthy delay in obtaining investment licenses from thegovernment. To make matters more difficult, foreign investors often are not aware of all theregulatory requirements for obtaining licenses, leading to complaints of arbitrary treatment by localand central government authorities.

Many of the agreement's proponents also contended that the bilateral trade pact will nudge Vietnam toward a more democratic society by committing the government to enact market-orientedreforms, weakening the government's tight political controls, solidifying the rule of law, integratingVietnamese enterprises more fully into the global economy, and economically empoweringindividuals. BTA proponents also pointed out that the agreement will help to bring Vietnam closerto compliance with WTO rules, facilitating Hanoi's eventual WTO accession. Once Vietnam joinsthe WTO, its trade policies will be subject to even greater international scrutiny and disciplines. Strategically, BTA backers argued that the U.S.-Vietnam BTA, together with BTAs recentlycompleted with Cambodia and Laos, will promote regional stability by smoothing the integration ofIndochina into the regional and global community. (13)

Arguments Against the BTA. The agreement's critics argued that Vietnam's government is likely to fall short on implementing the agreementand/or is likely to erect new, hidden barriers to imports and foreign investment, while low-costVietnamese exports - particularly textiles - to the U.S. will increase. Some U.S. trade unionscriticized the pact's lack of provisions on minimum labor standards and environmental protection. Vowing to fight the agreement in Congress, AFL-CIO President John Sweeney in July 2000 arguedthat "it [the BTA] is missing what we've been championing - core labor standards, human rights andenvironmental protection." Textile manufacturers and other groups said they would lobby Congressand the Administration for changes to safeguard their industries from low-priced Vietnameseimports. (14) Many observers, including laborgroups, also opposed the pact on human rights grounds,arguing that human rights considerations should take priority over trade ties and/or that Hanoi'sruling elite would capture most of the gains from increased globalization. Indeed, on the same daythe House approved the BTA, it also passed the Vietnam Human Rights Act, ( H.R. 2833 , by a vote of 410 - 1), which would ban increases (over FY2001 levels) in non-humanitarianaid to the Vietnamese government if the President does not certify that Vietnam is making"substantial progress" in human rights. The act allows the President to waive the cap on aidincreases. In its most recent annual review of Vietnam's human rights situation, the U.S. StateDepartment reported that Hanoi continues "to repress basic political and some religious freedomsand to commit numerous abuses," notably "not tolerating most types of public dissent." (15)

Vietnam's Interests in a BTA. After recording impressive growth for much of the 1990s following Hanoi's launch of the doi moi (economicrenovation) reforms, Vietnam's economy has slowed since the 1997-99 Asian financial crisis, whichoriginated in nearby Thailand. Annual economic growth declined from a peak of 9.5% in 1995 to4.8% in 1999 and 6% in 2000. Foreign direct investment - a major stimulus for the country's growth- dwindled from over $8 billion in 1996 to $600 million in 1999, the lowest level since 1992. (16)

It is likely that the deterioration in Vietnam's economic fortunes played a major role in jump-starting the BTA talks with the U.S. in the spring of 1999, as a significant portion of Vietnam'sleadership came to see increased U.S. investment and MFN access to the U.S. market as major waysfor Vietnam to reverse its declining growth rates. As of December 2000, the United States was onlythe ninth largest source of foreign investment in Vietnam and absorbed less than 5% of Vietnam'sexports. The bilateral trade agreement presumably will increase these levels considerably byconferring to Vietnamese exporters the same tariff rates that are applied to other MFN-recipientcountries. The World Bank has estimated that Vietnam's exports to the U.S. will rise to $1.3 billion- more than 60% over 2000 levels - in the first year of MFN status, as U.S. tariff rates onVietnamese exports would fall from their non-MFN average of 40% to less than 3%. (17)

Obtaining MFN status is likely to dramatically transform the product mix of Vietnam's exports to the U.S. Since the trade embargo was lifted in 1994, most of Vietnam's exports to the U.S. havebeen in items that either receive duty-free treatment (zero tariffs) or that have identical tariffs forMFN and non-MFN countries. In the short term, the BTA is likely to increase Vietnam's exportsof labor-intensive manufacturing with large differences between the MFN and non-MFN tariff rates. Judging by Vietnam's leading exports to the European Union and Japan (see Figure 2 below),exports of the following items are likely to increase substantially: garments, leather products,footwear, household plastic products and processed foods. (18)

Vietnam's Clothing Exports. In particular, Vietnam's clothing exports are expected to increase dramatically. Vietnam currently exports fewapparel products to the U.S. - less than $40 million in 1999 - because of the higher, non-MFN, tariffrates it faces. In contrast, Vietnamese garment exports to Japan and the 15 countries of the EuropeanUnion in 1999 totaled more than $500 million and $640 million, respectively (see Figure 2 ). Basedon the experience of Cambodia, which was granted MFN status by the United States in 1996, theWorld Bank estimates Vietnamese apparel exports will increase nearly tenfold - to $384 million -in the first year after receiving MFN status. (19)

The BTA agreement contains no provisions on Vietnamese textile exports to the U.S., but the safeguard provision would allow the U.S. to impose quotas on textile imports in the event of a surgeof imports. In private, U.S. and Vietnamese officials have said they expect to begin negotiating abilateral textile agreement, which presumably would set quotas for Vietnamese textile exports, soonafter a Congressional vote on the BTA. Some Members of Congress have called for the BushAdministration to publicly commit to negotiating a textile agreement, and have pressed for acommitment that such an agreement would include provisions that would link the size of Vietnam'squotas to progress in its labor rights. (20)

Passing a trade agreement would also bring Vietnam one step closer to receiving U.S. trade benefits under the generalized system of preferences (GSP), which allows many imports fromless-developed countries to enter the U.S. market duty-free. (21) Furthermore, Vietnamese officials seethe bilateral trade agreement as an important stepping stone to joining the WTO, providing themwith non-discriminatory access to all WTO members. Not only do they regard the BTA as necessaryto obtaining U.S. support for Vietnam's application for WTO membership, but they also see theprocesses of negotiating and implementing the agreement as useful for raising Vietnam's legal,regulatory, and economic systems to the WTO's standards.

Source:

Overview of the Vietnam-U.S. Bilateral Trade Agreement (22)

The trade agreement consists of four parts: market access, trade in services, intellectual propertyrights, and investment.

1) Market Access

Vietnam has agreed to take the following steps to open its markets:

guarantee most-favored-nation (MFN) treatment to U.S. goods;

treat imports the same as domestically produced products (also known as"national treatment");

eliminate quotas on all imports over a period of 3 to 7 years;

make its government procurement process more transparent;

allow for the first time all Vietnamese enterprises to trade all products;

allow for the first time U.S. companies and U.S.-invested companies to importand export most products (to be phased in 3-6 years). (Presently, foreign companies have to rely onlicensed Vietnamese importers, most of which are state-owned enterprises.)

ensure that state enterprises comply with WTO rules;

adhere to WTO rules in applying customs, import licensing, technicalstandards, and sanitary and phytosanitary measures

Tariff Concessions. The U.S.-Vietnam BTA is unique in that, in contrast to previously negotiated Title IV bilateral trade agreements between theU.S. and Jackson-Vanik countries, it includes specific commitments by Vietnam to reduce tariffs onapproximately 250 products, about four-fifths of which are agricultural goods. Typically, the cutsrange from 33% to 50% and are to be phased in over a three-year period. Vietnam's tariffs are notconsidered to be extremely high for a developing country (the U.S. Foreign Commercial Serviceestimates that Vietnam's average tariff line is 15%-20%).

Also in the area of market access, the agreement includes a safeguard provision that will alloweither side to raise tariffs temporarily if it encounters a surge of imports.

2) Intellectual Property Rights

Vietnam has pledged to phase in the World Trade Organization Agreement on Trade-Related Intellectual Property Rights (TRIPs) over 18 months. The bilateral TRIPs agreement goes above andbeyond the WTO's TRIPs agreement by including Vietnamese commitments to protect satellitesignals within 30 months.

3) Trade in Services

In the area of services, Vietnam has committed to uphold WTO rules such as MFN, national treatment, and disciplines on domestic regulation. Additionally, Vietnam has agreed to allow U.S.companies and individuals to invest in markets in a wide range of service sectors, includingaccounting, advertising, banking, computer, distribution, education, insurance, legal andtelecommunications. Most sector-specific commitments are phased in over three to five years. Vietnam's commitments in three of the largest U.S. service sectors - banking, insurance, andtelecommunications - are highlighted below.

Banking Services. Vietnam agreed to the following liberalization measures: For the first nine years after the agreement goes into effect, U.S.banks may form joint ventures with Vietnamese partners, with U.S. equity between 30% and 49%. After nine years, 100% subsidiaries are permitted.

Insurance. Under the BTA, for "mandatory" insurance sectors (such as automobile and construction-related insurance), after three years Vietnamwill allow U.S. companies to form joint ventures, with no limit on the U.S. equity share. After sixyears, 100% subsidiaries are permitted. For life insurance and other "non-mandatory" insurancesectors, after three years joint ventures are permitted, with a limit of 50% U.S. equity. After fiveyears, 100% subsidiaries are allowed.

Telecommunications. Under the BTA, for higher-end telecommunications services (such as Internet, e-mail, and voice mail services), Vietnamwill permit joint ventures after two years, with a 50% cap on U.S. equity participation. Internetservices have a three-year phase in period. For basic telecommunications services (such as facsimile,cellular mobile, and satellite services), joint ventures are permitted after four years, with U.S.companies limited to a 49% stake. For local, long distance, and international voice telephoneservices, joint ventures are permitted after six years, with a 49% cap on U.S. ownership. Vietnamagreed that it will consider increasing the U.S. equity limits when the agreement is reviewed in threeyears.

4) Investment

Regarding investment , the U.S.-Vietnam trade agreement includes guarantees of MFN treatment, national treatment, transparency, and protection against expropriation. Additionally,Vietnam pledged to implement the following changes in its investment regime:

Investment screening: Currently, foreign businesses must obtain government approval to invest in Vietnam. Under the BTA, investment screening will be phased out for mostsectors within two, six, or nine years, depending on the sector involved.

Profit repatriation: Presently, Vietnamese enterprises have greater freedom than foreign multinationals to convert their Vietnam-earned profits into hard currency. The StateBank of Vietnam must approve the conversion of currency on behalf of foreign businesses, and theBank does not give permission to convert currency to foreign-invested companies. (23) Under the BTA,foreign multinationals will receive the same rights for profit repatriation as Vietnamese firms;however, Vietnam's currency is still not fully convertible.

Capital contribution floors: Currently, the U.S. stake in a joint venture must be at least 30%. This requirement will be eliminated in three years.

Personnel requirements for joint ventures: Presently, Vietnam requires that certain board members of joint ventures be Vietnamese and requires that certain types of decisionsbe made by consensus (thereby granting veto power to the Vietnamese board members). Under theBTA, within three years Vietnam will allow U.S. multinationals to select top executives withoutregard to nationality.

Trade-related investment measures (TRIMs): Vietnam has agreed to eliminate within five years all TRIMs that are inconsistent with the WTO, such as local content requirements.

5) Transparency

Vietnam has agreed to adopt a fully transparent commercial regime by allowing comment on draft laws and regulations by ensuring that advance public notice is given for all such laws andregulations; by publishing these documents; and by allowing U.S. citizens and corporations the rightto appeal rulings.

Vietnam's Implementation of the BTA

It is an open question whether the Vietnamese government has the will or the wherewithal to implement the pervasive reforms required by the U.S.-Vietnam bilateral trade agreement. Implementing the agreement will require cooperation at the local government level, where centralcontrol often is weak and corruption is rampant. An unprecedented level of cooperation amonggovernmental ministries will also be required. Powerful vested interests - particularly thestate-owned enterprises and the Vietnamese People's Army - undoubtedly will put pressure on localand central government officials to erect new barriers to foreign competition.

Most of Vietnam's concessions in the BTA are due to be phased in within three to five years. However, a number of reforms took effect upon the BTA's entry into force in December 2001. These include according national treatment (i.e. not discriminating between foreign and domesticenterprises) business activities, allowing all enterprises to import and export, eliminating mostnon-tariff barriers, streamlining the process for foreign investors to obtain licenses and approval, andpublicizing laws, regulations and administrative procedures pertaining to any matter covered by theTrade Agreement. Thus far, according to one group monitoring the situation, Hanoi appears to havetaken steps to implement nearly all of these initial commitments. (24)

In May 2002, senior officialsfrom Washington and Hanoi launched a Joint Committee on Development of Economic and TradeRelations, a consultative body called for in the BTA.

Comparison with the 1999 "Agreement in Principle"

In July 1999 the U.S. and Vietnam announced an "agreement in principle" on a BTA, but for nearly a year Vietnam delayed finalizing the deal because of intense divisions among the VietnameseCommunist Party (VCP) leadership (see the following section for an analysis of the reasons forVietnam's hesitation). The Clinton Administration did not release the full terms of the July 1999agreement in principle. According to one negotiator, the only significant differences between thefinal BTA and the 1999 agreement lie in the area of trade in services (Chapter III and Annex G),specifically in the area of telecommunications. (25)

Telecommunications. In general, the 1999 agreement in principle would have allowed U.S. companies the right to obtain a majority (51%)stake in certain Vietnamese telecommunications sectors after a certain number of years (oftenreferred to as the "phase-in" period). Following the November 1999 U.S.-China agreement onChina's WTO accession - which granted U.S. companies the right to a 49% maximum stake inChinese telecommunications enterprises - the Vietnamese negotiators demanded that they receivesimilar equity caps. The U.S. agreed to this concession, but in exchange received significantlyshorter phase-in periods. Vietnam also agreed to consider increasing the U.S. equity limits when theagreement is reviewed in three years.

Two telecommunications sectors, wireless and basic voice services, illustrate the differences between the 1999 and 2000 documents. In wireless telecommunications, under the 1999 agreementVietnam would have allowed U.S. companies the right to set up joint ventures after three years, witha 51% maximum stake for U.S. companies. Under the 2000 BTA, Vietnam is to grant U.S.companies the right to set up wireless joint ventures after two years (three years for internetservices), with a 50% cap on U.S. equity participation.

In the area of basic voice telecommunication services (local, long distance and international phone service), press reports indicate that the 1999 agreement would have phased-in a right to investafter 11 years, with a 51% maximum stake for U.S. companies. Under the 2000 BTA, Vietnam isto allow U.S. companies to set up joint ventures after six years, with a 49% cap on U.S. ownership.

Insurance. According to press reports, under the 1999 agreement Vietnam would have permitted U.S. companies to invest in its insurance sector intwo to six years. The phase-in period varied by insurance sector. Details are unavailable on foreignequity caps. (26) Under the July 2000 BTA, Vietnamis to grant U.S. companies the right to set up50-50 joint ventures in its insurance sector after three years, and wholly owned (100% stake)ventures after five years.

Market Access. The final BTA includes commitments by Vietnam to reduce tariffs on approximately 250 products, about four-fifths of whichare agricultural goods. 1999 press reports implied that the agreement in principle contained 330tariff items scheduled for tariff reduction. A U.S. official involved in negotiating the agreement,however, has argued that this number is incorrect, stating that the tariff changes in Annex E of thefinal BTA are essentially the same as those agreed upon in 1999.

Comparison with Past BTAs

In negotiating bilateral trade deals with Jackson-Vanik countries, U.S. negotiators generally have tried to break new ground with each successive agreement. As one indication of that policy,the 1979 agreement China was less than 10 pages, while the far more comprehensive U.S.-VietnamBTA is more than ten times that length. The Vietnam-U.S. BTA goes beyond past agreements inits more detailed commitments in the areas of services and investment. Furthermore, Vietnam'stariff concessions represent a new development. Previous Jackson-Vanik BTAs contained few orno market access commitments because in those negotiations the U.S. proposed to carry out tariffdiscussions at a future date, not as part of the final BTA itself. (27)

Vietnam's Ambivalence toward Economic Integration

Though the U.S. and Vietnam reached an agreement in principle on the BTA in July 1999, fornearly a year Vietnam delayed signing the deal. What were the reasons for Vietnam's hesitancy?

Internal Factors

Consensus-Based Decision-Making. Vietnam's official reason for the delay was that it needed time to vet the agreement among decision-makers inVietnam. Vietnam's consensus-style of decision-making and the weakness of the country's currentleadership probably extended this vetting process: The BTA is the most extensive agreementVietnam has ever negotiated, and the assent of virtually all officials involved in implementing thedeal was required before Hanoi would take such a radical step. Furthermore, the weakness of thecountry's current top leaders - VCP General Secretary Le Kha Phieu, Prime Minister Phan VanKhai, and President Tran Duc Luong - made it difficult for them to forge a consensus on such acontroversial issue. (28)

Questions from Vietnamese Conservatives. Ever since the Vietnamese Communist Party's (VCP) 8th Party Congress in 1996, disagreements betweenreformers and conservatives in Vietnam's 19-member Politburo - the country's supreme ruling body- have paralyzed economic decision-making. As the bilateral trade agreement with the U.S. requiresVietnam to jump-start its reforms and deepen its integration into the global economy, it is notsurprising that the Politburo also has been divided over whether to finalize the deal.

The conservatives fear that economic reform will undermine the "socialist foundations" of the country's economic and political systems, and thereby erode the VCP's legitimacy and monopolyon power. They also fear that Vietnam's sovereignty will be eroded by increasing Vietnam'seconomic dependence on the West and by increasing Vietnam's vulnerability to regional economicdownturns such as the 1997-99 Asian financial crisis. Among their specific concerns, conservativesworry that shifting to a more market-oriented economy will force the Politburo to curtail subsidiesto the country's state-owned enterprises, the backbone of the socialist economic system. Manyconservatives are understandably worried that further rationalization will raise unemployment rates,which already exceed 10%, according to some estimates. Social and political pressures on the Partyhave already been heightened in recent years by peasant uprisings and widespread accusations ofgovernment corruption. High level U.S. pressure on Vietnam for its human rights record, appliedduring Secretary of State Madeleine Albright's September 1999 trip to Vietnam, is said to havefurther rankled conservative forces opposed to the trade agreement.

In January 2000, a group of reform-minded leaders were transferred to key economic and political posts. These moves, combined with the BTA signing, the unveiling of a new EnterpriseLaw, the passage of new amendments to the Foreign Investment Law, and the opening of Vietnam'sfirst stock market on July 20, 2000, may be signs that Hanoi's policy logjam is breaking up in thereformers' favor.

Opposition from Vested Interests. Parochial interests also may have played a role in Vietnam's deliberations. According to many sources,Vietnam's military leaders have been among the staunchest opponents of the BTA. Many argue thatthe military - known as the People's Army of Vietnam - is worried that the trade deal will threatenits vast commercial interests. According to one estimate, the business enterprises of the People'sArmy of Vietnam generated over $600 million in revenue in 1998, a figure equivalent to nearly 60%of the entire military budget. (29) Evidence of themilitary's influence can be seen in Vietnam'sbargaining position on telecommunications liberalization during the BTA negotiations. Hanoidemanded an eleven-year phase-in period for FDI liberalization in cable communications, a sectorin which the People's Army has invested heavily since 1995. In contrast, Vietnam's negotiatorswere willing to accept a four-year phase in for cellular communications, an area in which theMinistry of Defense has few investments. (30)

External Factors - Balancing China and the U.S.

Yet another hypothesis is that Hanoi was concerned that a trade deal with the United States would antagonize China. Beijing and Hanoi recently have strengthened their ties, and conservativeelements in Hanoi may be wary of upsetting Beijing by appearing too closely aligned with the U.S. In particular, the Vietnamese leadership may have wished to avoid jeopardizing negotiations withChina over a land-border treaty, negotiations that were not concluded until December 1999. Thereare also reports that Chinese leaders warned the Vietnamese not to conclude the BTA before Beijinghad finalized its own WTO accession negotiations with the U.S., talks that were concluded inNovember 1999. However, some analysts and Administration officials reject this reasoning as astalling tactic by the Vietnamese, who are said to often use the Chinese as an excuse for delayingforeign policy moves about which they are uncertain. As one observer has pointed out, Chineseopposition did not prevent Vietnam from joining the Association of Southeast Asian Nations(ASEAN) in 1995. (31)

Most observers agree that, apart from the issue of unsubstantiated Chinese pressure, the China factor played a positive role in spurring the Vietnamese to move forward, due to Hanoi's fears ofincreased economic competition with Beijing following China's accession to the WTO.