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Vietnam turns on diplomatic charm in Washington

Hanoi looks outward despite US withdrawal from TPP pact

| China

Vietnamese Prime Minister Nguyen Xuan Phuc's recent visit to the U.S. surprised many observers, as the leader of a small, lower middle income, communist country became the first Southeast Asian leader to visit President Donald Trump's Washington. Beyond showcasing Vietnam's savvy diplomacy, Phuc's visit also showed how Vietnamese efforts to look outward and boost economic integration are important for future global economic integration.

The stakes were high: Vietnam was named in a March 2017 executive order in which Trump called for a comprehensive 90-day investigation of 16 trade "cheaters." For Vietnam, which sells more than 20% of its exports to the U.S., the potential threat posed by a mercurial and mercantilist U.S. president was clear.

The U.S. runs a $32 billion trade deficit, its sixth-largest, with Vietnam, importing apparel and garments, electronics, and footwear. Although the terms of trade are unbalanced, Vietnam, a rapidly growing market of more than 90 million people, has emerged as a growing destination for largely high-end U.S. exports such as power plants, aluminum, aircraft and cotton. U.S. exports to Vietnam are up more than 800% in 10 years to more than $10 billion. During Phuc's visit, sales valued at $8 billion to $15 billion from companies including General Electric, Honeywell and Caterpillar were signed or reaffirmed.

Armed with such goodies, Vietnam's deputy foreign minister and foreign minister both went to Washington ahead of the visit to lay the foundation for a joint statement with concrete proposals for further engagement. Save some light-touch remarks from the U.S. trade representative at a forum in New York, trade issues were largely set aside, artfully avoiding opportunities for inflammatory Trump rhetoric.

With that threat parried, Vietnam was free to offer constructive suggestions on how U.S. companies could expand in the country. It also schooled its hosts on its objective of recasting its economy; it wants to be seen as a dynamic and attractive middle-class market, as well as a base for low-skilled manufacturing. The standout image was Phuc brandishing a chart showing a sneaker broken into colorful slices representing the various components of its sale price.

From Vietnam's perspective, only about 20% of total costs accrue in the production phase. In reality, because many Vietnamese manufacturers are foreign-owned companies operating under agreements laden with generous tax and investment breaks, the ultimate domestic slice might be less than 10% of the shoe.

Most importantly, Trump committed to a bilateral visit to Vietnam later in 2017, and also agreed to attend the Asia-Pacific Economic Cooperation forum, which Vietnam will host in Danang in November. Given Trump's track record of radically revising his positions on the basis of positive face-to-face interactions, this is surely an opportunity for Vietnam's creative economic diplomacy.

Trade liberalization

That is a good thing, as Vietnam must further the cause of trade liberalization with the president. The country was heavily invested in the Trans-Pacific Partnership pact -- both to deepen bilateral ties and to balance Chinese engagement in the region. Preferential access to the U.S. market would have given a massive boost to its garments and electronics manufacturers. Analysts therefore tagged Vietnam as one of the TPP's prime beneficiaries.

As a consequence, Trump's January 2017 withdrawal from the TPP came as not only a grave disappointment, but also a shock to the domestic body politic, already steeled for the thoroughgoing concessions required for Vietnam to join. Many of these, such as measures to permit labor unions outside the Vietnamese Communist Party, were remarkable given the country's political history. Others, such as strict chapters on intellectual property, government procurement and competition policy, contained elements that few developing countries could accept.

Vietnam's leaders insist that the reforms, many already in legislative train, will continue regardless. The country's exports represent 90% of its gross domestic product, and there is still some promise in the TPP even without the U.S., especially after the remaining "TPP-11" met in the margins of a May 2017 APEC ministerial meeting in Hanoi and issued a statement affirming their desire to search for a path forward. Vietnam could quickly implement the relevant legislation should the TPP-11 conclude a new framework for the agreement to come into effect.

Vietnam's willingness to accept such rigorous conditions is impressive from a developing economy -- even more so since it is the lowest income country among 12 TPP signatories. Its embrace of openness is the continuation of a longstanding strategy, during a two-decade journey from a planned economy to a system with significant and growing market characteristics, of using international and multilateral commitments as a tool for advancing economic reforms.

Leaders have not always felt they had a choice, and changes have brought both pain as well as benefits. For example, its 2007 ascension to the World Trade Organization threw Vietnam open to the forces of global capital amid the crest of an approaching financial cataclysm. Some effects are still apparent today.

Nevertheless, Vietnam must again embrace economic integration to move the economy beyond the "export platform" model of using concessionary foreign investment and low-skilled labor to assemble inputs sourced elsewhere. The TPP, with its focus on global value chains, was seen as ammunition for addressing challenges such as legacy state-owned enterprises, low-quality public investment, and a "missing middle" -- the near complete lack of medium-sized private domestic firms.

The flipside of the trade surplus with the U.S. is an even larger trade deficit with China, on which Vietnam's manufacturing industry depends for inputs, capital, and even production lines. With the TPP, upstream industries would have moved to Vietnam, as its rules of origin would have dramatically increased the intra-TPP competitiveness of inputs sourced within the bloc.

As one official told me on a recent visit, the TPP would have been great for exports, but its primary benefit, as with the WTO, was the "attitude change" it would force officials to embrace. Phuc's trip to Washington did provide a path for bilateral progress with the U.S., namely via their joint Trade and Investment Framework, whose council met earlier this year for the first time since 2011.

Vietnam is realistic, however, accepting that it lies well down the list of U.S. trade priorities, including behind the renegotiation of the North American Free Trade Agreement and deals with the European Union and the U.K. With its leaders seeking ammunition and an attitude change, Vietnam must continue its creative diplomacy to support new, or, in the case of the TPP-11, repurposed, avenues for liberalization and reform.

Matthew Busch is a research fellow in the East Asia Program at the Lowy Institute of International Policy in Sydney, Australia.

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