Vietnam's Time Is Running Out

It's racing to gain WTO entry, but can it get its act together?

It had been 30 years since a U.S. Navy vessel last plowed its way up the Saigon River and pulled into port in Ho Chi Minh City. Yet when the USS Vandergrift made the serpentine journey on Nov. 19, the sailors passed scenes little changed from what those aboard the last U.S. Navy ship saw as they set sail in 1973: Sure, in the city billboards advertise the likes of Coke (KO ) and Siemens (SI ), but downriver, men still cast fishing nets from tiny wooden boats. Women in conical hats tend rice paddies. And water buffaloes graze beneath the steamy sun.

That landscape may soon start to change if Vietnam is successful in its bid to join the World Trade Organization. Even as their countrymen sweat it out on the river, Vietnamese officials hoping to drag their economy into the 21st century are preparing to return to negotiations at the WTO's imposing stone headquarters on Geneva's lakefront.

For most of the past decade, progress toward that goal has been as slow as the Saigon River's muddy waters. Vietnam has held six rounds of talks with the WTO since 1995, but has been reluctant to open its markets enough to qualify for membership. Finally, at a Geneva meeting in May, the WTO got tough. Seung Ho, the Korean chairman of the WTO's team, said it would take "a quantum jump" by Vietnam to win membership by Hanoi's self-imposed deadline of 2005.

Since then, Hanoi has been scrambling to get things moving. In September, it came up with a schedule of tariff reductions on imported goods that negotiators could actually work with, and it has presented a new batch of proposals for a fresh round of talks in December. "They realize that now is the time for them to either make it or break it," says Susan J. Adams, the International Monetary Fund's representative in Hanoi.


Any further delay could cost Vietnam big-time. On Jan. 1, 2005, the U.S. and European Union will drop all textile quotas for WTO members, but keep them for countries that aren't part of the group. If Vietnam hasn't joined by then, its numerous clothing manufacturers would lose out as countries such as Bangladesh, the Philippines, and China -- all WTO signatories -- flood the developed world's markets with shirts, skirts, and suits. "Vietnam will have a big competitiveness problem if we are still under the quota system," says Le Quoc An, chairman of the Vietnam Textile Garment Assn. A Ho Chi Minh City-based buyer for a major U.S. retail chain puts it more bluntly: "If Vietnam doesn't get its act together, we will leave." That's because without quotas, China's more efficient factories could entirely undercut Vietnamese producers.

That would hurt. This year, garments overtook oil as Vietnam's chief export. They are expected to earn the country more than $3.6 billion, up from $2.8 billion in 2002. The increase is due largely to a bilateral trade agreement with the U.S. that came into effect in December, 2001. Although Vietnam still faces U.S. quotas, tariffs on apparel purchases by the likes of J.C. Penney and Nike were slashed to 17% from 51%. Last year, Vietnam's clothing exports to the U.S. jumped twentyfold, to $952 million, and this year will likely top $1.7 billion.

Staying out of the WTO could make it harder for Vietnam to attract foreign investment. Back in the early 1990s, foreigners scrambled to get a foothold in what they saw as the next Asian Tiger. But by the end of the decade, euphoria had given way to frustration over Vietnam's rampant corruption, labyrinthine bureaucracy, opaque laws, and a playing field overwhelmingly tilted in favor of local companies. Foreign companies, for instance, are charged higher utility rates and face more stringent investment laws than locals do. After peaking at $8.64 billion in 1996, approved foreign investment had fallen to $2.06 billion by last year.


Joining the WTO might kick-start interest in Vietnam again: Members are required to offer foreigners equal treatment with local companies. "If Vietnam isn't a member of the WTO, who would want to invest here?" asks Le Dang Doanh, an economist and adviser to the Planning & Investment Minister.

Auto makers might ask the same question. Between 1990 and 1996, Vietnam granted l4 licenses to carmakers such as Toyota Motor (TOY ), PSA Peugeot Citroën, and Mercedes-Benz (DCX ). They dug up stretches of paddies and jungle to build gleaming factories in hopes of flooding Vietnam with shiny new cars and trucks. But in a country with annual per capita income of just $400, automobiles are still a relatively rare sight on streets that teem with motorcycles and bicycles burdened with everything from crates of live chickens to TV sets. The 11 auto assemblers that still remained last year sold just 32,000 vehicles -- though they have the capacity to build 146,000.

Now the government is making it even harder for the carmakers. Desperate for revenue, in September it raised tariffs to 25% from 20% on foreign-made parts used by assemblers. By 2007, those duties are expected to climb to 40% -- ostensibly to encourage greater use of local content. If Vietnam were a WTO member, it wouldn't be able to impose local content requirements on carmakers. "New regulations and taxes on car parts and cars just create new obstacles" to WTO membership, says U.S. Ambassador Raymond F. Burghardt. "This is a big mistake." The changes will push Ford's (F ) $100 million factory in the verdant flatlands outside Hanoi from profitability to a loss next year. "It's a big blow," says Barry Ashton, Ford Vietnam Ltd.'s finance director.

In spite of its trade pact with Washington, Vietnam could also face trade trouble with the U.S. if it doesn't join the WTO. In July, Washington slapped punitive tariffs of up to 64% on Vietnamese catfish, claiming that Vietnam was selling the fish below market cost. That's expected to cut catfish exports to $20 million in 2003, from $55 million last year. Now, Louisiana shrimp farmers are lobbying for similar sanctions against Vietnamese shrimp. WTO membership would let Vietnam settle these quarrels multilaterally -- boosting its chances of a favorable outcome. That benefit "is a huge reason why Vietnam is accelerating its efforts to join the WTO," says Demetrios Marantis, chief legal adviser to the U.S. Vietnam Trade Council in Hanoi.

The question is whether, despite all the movement, Vietnam will finally make the concessions needed to get into the WTO. It's not encouraging that Vietnam's current proposals to the WTO in banking and telecom are tougher than those already granted to the U.S. American companies can make joint-venture investments in telecoms starting in 2007, but other WTO members would have to wait until six years after Vietnam joins the group. U.S. banks, meanwhile, enjoy higher ceilings on local currency deposits and will see restrictions lifted on the number of ATMs they can build sooner than other WTO members. "Discrimination in financial services is a big obstacle for Vietnam's entry into WTO," says Alain Cany, chief executive of HSBC Vietnam (HBC ).

Indeed, Vietnam's position flies in the face of the WTO's doctrine of equal treatment, which requires countries to grant all members trade terms that are as advantageous as those offered to any single trading partner. That means the U.S. deal should serve as a starting point for concessions by Vietnam -- not as a goal that remains tantalizingly out of reach for other WTO members. "It just doesn't fit with their public statements that they want to join by 2005," says one Western diplomat. Will Vietnam make its own deadline? Perhaps, but only if its leaders give up the notion that they can join the global trade club and at the same time go their own way.

By Frederik Balfour in Ho Chi Minh City

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