Vietnam and the “Non-Market Economy” Issue

1. Vietnam and the “Non-Market Economy” Issue By Dr. Adam McCarty

2. Today • A fishy story (background) • What is the issue? (“unfair”?) • Where did it come from (the definition)? • Does it matter? • What should Vietnam do? • When will Vietnam succeed? • Does it really matter?

3. A fishy story

4. A fishy story • June 28, 2002: Catfish Farmers of America petition for anti-dumping investigation. • July 18, 2002: investigation by US Department of Commerce (DoC) begins. • August 14, 2002: Vietnam “non-market economy” (NME) inquiry begins. • November 8, 2002: US DoC concludes that Vietnam is a NME.

5. What is the issue? • Vietnam is, by any reasonable standards, clearly a market economy! • “The issue” is therefore the definition.

6. So what is a “market economy”?

7. A “market economy” is… • A market is where supply and demand for a particular good or service is principally directed by price movements. • In competitive markets, consumers are “sovereign” (leading). • A market economy is where most resource allocation decisions are decided through competitive markets.

8. According to the US DoC • A NME is one where “prices are not, as a general rule, meaningful measures of value because they do not sufficiently reflect demand conditions or the relative scarcity of resources used in production…The problem …is the price generation process in NMEs”.

9. The US DoC follow six criteria: • Currency convertibility • Free bargaining of wage rates • Scope for foreign investment • Extent of Government ownership/control • Privatisation; land use rights • Extent of Government influence on firms • Price liberalisation; bank reform; scope of private businesses • Other factors

10. Where did the US DoC definition come from? • Legitimate measurement concerns in the 1980s (prices under central planning): GATT concern. • Slipping to apply to “transitional economies” in 1990s • Now twisted into a narrow definition of “highly distorted market economies” • Now a “non-tariff barrier” (NTB) to trade, and an abuse of WTO principles.

11. GATT, 1986 • “It is recognized that, in the case of imports from a country which has complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability…[and] a strict comparison with domestic prices in such a country may not always be appropriate”

12. The 2003 US DoC definition: • Has nothing in common with the centrally planned economies the GATT was worried about. • Has nothing to do with the existence or scope of markets in an economy. • Looks only at some distortions in some markets.

13. The US is not the only one: • NME concept embraced by: • Brazil; Egypt; EC; India; Israel; South Korea; Malaysia; Mexico; Peru; Poland; Singapore; South Africa; Thailand; Turkey; United States. • Similar definitions to US DoC, or follow others, or none specified.

14. Does it matter? YES, because: • Easier for US interests to win anti-dumping cases and leads to higher duties. • Which will mean more anti-dumping accusations than otherwise. • Could be tied to WTO accession (like China: 15 years), causing “second class” WTO member.

15. So what should Vietnam do? • Attack the definition. • Given definition, attack methodology. • Given all, make policy reforms • Negotiate smallest time period for WTO accession. • Get market economy status into bilateral trade agreements • Retain industry-specific defences concerning NM economy status.

16. Attack the definition • Write to US DoC • Seek action to evaluate the issue at WTO (through other members) • Raise in public forum (this paper, The Economist newspaper, etc.) • “Do not mourn, organise!”

17. Attack the Methodology • Write to US DoC • Raise in public debate/forum • Use AMCHAM Vietnam (?) • Raise in American journals/newspapers • Lobby!

18. Make reforms (a) • Currency convertibility • Liberalise inter-bank FOREX market; assume IMF Article VIII obligations; remove profit remittance tax and FOREX surrender requirement. • Bargained wages • Allow SOEs full wage setting autonomy • Scope for FDI • Remove dual prices; same employment regulations and taxes as domestic firms

19. Make reforms (b) • Privatisation and land-use rights • Implement 2002 reforms and apply to large SOEs; further strengthen, simplify and reduce regulations controlling land-use rights. • Prices and banks • Remove price controls; introduce competition law; more bank competition; independent and public SOCB audits.

20. Make reforms (c) • Business freedom • Continue with private/SOE/FDI “level playing field”; implement Enterprise Law; reduce regulations/permissions. • Other factors • Meet AFTA and US BTA commitments; continue “rule by law”; increase public transparency and reduce corruption.

21. Will Vietnam succeed? • Probably not, BUT must try! • Petition US DoC to review again in 2005/6. • Focus on stimulating debate about the issue in all possible forums => strategic approach. • Work through other countries, gain support, mobilise NMEs, complain through WTO. • Try not to have explicitly linked to WTO accession.

22. Does it really matter? Well, not really: • You can live with export losses in some industries. • Much more important are ongoing dynamic gains from unilateral trade liberalisation. • Worst thing to do is to respond to NTBs with your own NTBs (“lose-lose”).

23. American or Vietnamese?