Asia's second-fastest-growing economy is surging ahead - and taking its place on the global stage, reports Fortune's Clay Chandler
(Fortune Magazine) -- As daylight fades from a musty conference room at the Government Guest House in Hanoi, Ton Nu Thi Ninh, the elegant vice chairwoman of the National Assembly's foreign-affairs committee, leans forward in her chair. "Tell me," she demands, "how is it possible that a judge in Florida can order police in Belgium to arrest the deputy director of a catfish company from Vietnam?"
The question comes out of the blue, at the tail end of a conversation about Vietnam's booming economy, its rising export prowess, and its imminent accession to the World Trade Organization. But what Ninh really wants to talk about is catfish. Her voice rising, she recounts the travails of Nguyen Buu Huy, a catfish exporter arrested in May at a seafood industry trade fair in Belgium.
Police said they were acting in response to a Florida indictment naming Huy as a co-conspirator in a bait-and-switch scheme to smuggle thousands of pounds of catfish into the U.S. fraudulently labeled as grouper. Authorities detained Huy for 133 days, until Belgium's Justice Minister, besieged by complaints from Hanoi, ordered his release. To Ninh, the affair - if not the entire tangled mess of global trade rules - smells fishy.
Huy's detention is among the multiplying flashpoints in Vietnam's pitched battle to secure its place in the global economy. The battle was joined six years ago when Vietnam's Soviet-trained leaders, overcoming decades of disdain for markets, signed an agreement rolling back trade barriers with the U.S. That accord, combined with reforms slashing government restrictions on Vietnamese businesses, brought a moribund economy roaring to life. Exports, led by big gains in textiles, seafood, and furniture, surged threefold, to $32 billion, generating millions of new jobs and sucking in billions of dollars in foreign investment.
In the past five years, Vietnam has clocked average GDP growth of 7.4%, better than any Asian economy except China's. Indeed, as Vietnam welcomed leaders of the Asia-Pacific economies to Hanoi last month for their annual summit, investors were hailing this communist bastion as Southeast Asia's most dynamic tiger and clambering to its fledgling stock exchange. Declares Credit Suisse Asia vice chairman Jose Isidoro Camacho: "Vietnam has arrived."
Yet for all that success, Vietnam's leaders say the rough-and-tumble of the global marketplace has left them a little shell-shocked. Mutual benefit may be the foundation of commerce, but for a small late developer like Vietnam - forced to slug it out with China, its historical nemesis to the north, and to skirmish constantly with producers in the U.S. and Europe - the modern trading system can feel more like war by other means.
Consider: The trade deal with Washington lowered the average tariff on Vietnamese exports to the U.S. from 40% to 4%. But since then the U.S. has slapped Vietnam with antidumping duties of 26% on frozen shrimp and up to 64% on catfish.
In November, days before President Bush visited Hanoi for a summit with leaders from the Asia-Pacific economies, the U.S. congress rejected a bill to extend permanent normal trade relations to Vietnam, denying it - at least for now - the benefits of WTO membership in the world's most lucrative market. Meanwhile, the EU has imposed 10% antidumping duties on Vietnamese shoes, and Brazil has accused Vietnamese farmers of disrupting the global coffee market.
The dogfight over catfish highlights the potential for conflict. After the trade deal, catfish, a staple of the Vietnamese diet, seemed like an obvious export winner. Farmers up and down the Mekong River ramped up production, partly by investing in huge floating cages. By 2002 the U.S. market was awash in Vietnamese catfish filets, prompting the U.S. catfish lobby - yes, there is one - to launch a counterattack. A band of Southern lawmakers tacked onto an appropriations bill an amendment directing the Food and Drug Administration to block imports of all non-native fish species identified as "catfish." Vietnamese producers were free to export their fish to the U.S. as long as they called it something else.
Senator John McCain, who spent five years as a POW in a Hanoi prison but has become a tireless advocate of expanded U.S.-Vietnam trade, denounced this exercise in splitting fish whiskers as "scurrilous." The bill passed all the same. After dumping penalties were enacted in 2003, Vietnam's catfish exports plunged, and many farmers were wiped out.
Some denounced the U.S. for extolling the virtues of free markets to poor countries like Vietnam while shamelessly protecting its own. But a few - including Nguyen Buu Huy - argued that the Vietnamese government was at fault. "The government should encourage different ownership and more private investment," he told the Washington Times in 2004.
Many government officials agree. Gradually Vietnam is learning to court foreign capital and technology - and not just in shoes and textiles. In November, Intel (Charts) announced it would invest more than $1 billion, triple its initial plans, to build a chip assembly and testing plant north of Ho Chi Minh City. Japanese manufacturers such as Panasonic and Yamaha have piled into industrial parks outside Hanoi. Further north, Canon is building the largest inkjet-printer factory in the world.
Equity investors are just as keen. Vietnam's main stock exchange, launched in Ho Chi Minh City six years ago, is still embryonic, with 50 firms and a market capitalization of only $3 billion. But daily trading volume now tops $10 million, a twentyfold gain since January. At least 30 new stock offerings are expected before year-end, and as Hanoi pushes forward with plans to list shares of large state-owned enterprises in banking, telecommunications, and mining, market capitalization is forecast to clear $10 billion, years ahead of the official 2010 timetable.
In recent months global investment firms have issued glowing assessments of Vietnam, and most analysts anticipate that the economy, which grew 8.4% in 2005, will maintain that pace through next year. But living up to those expectations won't be easy. Vietnam shares India's paucity of roads and bridges and China's penchant for cosseting money-losing state-owned firms. The Political and Economic Risk Consultancy in Hong Kong ranks Vietnam second only to Indonesia as Asia's most corrupt economy. And despite a 90% literacy rate and a culture that prizes scholarship, Vietnam lacks a single world-class university.
Had President Bush ventured beyond the confines of his hotel and official schedule while in Vietnam last month for the Asia Pacific Economic Cooperation forum, he would have discovered a nation that has traveled far down the capitalist road since his predecessor, Bill Clinton, visited in 2000. In Ho Chi Minh City, clubbers in Gucci and Prada sip $6 cocktails at the Q Bar in the basement of the old French opera house. On sidewalks in downtown Hanoi, salesmen tout the virtues of Korean plasma TVs costing thousands of dollars. At the Hanoi Sofitel Plaza Hotel, models strut across a catwalk stretched over a pool for Vietnam Fashion Week, flaunting locally designed creations of silk, velvet, and lace as Donna Summer's "Hot Stuff" pulses through the muggy evening air.
Perhaps the most visible - and certainly the most audible - manifestation of Vietnam's new middle-class wealth is the swarm of motorcycles that drone ceaselessly on city streets. As recently as five years ago, motorcycles were beyond the reach of all but the most affluent Vietnamese. The bestselling model, the Honda (Charts) Dream, cost nearly $3,000. But cheap imports from China flooded across the border, dragging the price as low as $400.
The result has been an urban planner's nightmare, says Tran Du Lich, president of the Institute for Economic Research in Ho Chi Minh City, who estimates that there are at least two motorcycles for every household in his city. Traffic injuries and fatalities have soared, but authorities have given up trying to get riders to wear helmets. And the real nightmare may loom just over the horizon: Ho Chi Minh City and Hanoi are only a few years from the tipping point at which middle-income households can trade their bikes and scooters for cars.
Over the past 15 years, Vietnam has reduced the percentage of its population living below the poverty rate of less than $1 a day to 8% from 51% - a feat not even China can match. But the depth of the regime's commitment to markets and free trade is hard to parse. In downtown Hanoi, Lenin's statue still stands tall. Yet in April, Vietnam's Communist leaders interrupted a meeting of the National Assembly on the anniversary of his birth to have their photographs taken with Bill Gates.
A cabinet reshuffle weeks later affirmed the party's intention to stay the course of economic liberalization. Legislators named Nguyen Minh Triet, a corruption fighter and former Ho Chi Minh City party chief, as President, and Nguyen Tan Dung, a former head of the central bank, as Prime Minister. Western investors hailed the fact that both men come from Vietnam's commercially minded south, and some interpreted the appointments as a welcome response to revelations earlier this year that the Transportation Ministry official responsible for road construction had embezzled $7 million to gamble on European soccer matches.
But Jonathan Pincus, a UN economist in Hanoi, warns against reading too much into the leadership changes. "When leaders here say they want a socialist market economy, they really mean it," Pincus says. "Inside the party no one with any influence is arguing that the state should surrender the economy's commanding heights."
In years past, Vietnam's Communist leaders loosened their grip on the economy only when compelled by crisis. The regime's 1986 departure from Soviet-style central planning came after years of famine and hyperinflation. Those reforms, which allowed farmers to lease land from state collectives, make their own choices about what crops to raise, and sell their output at market rates, brought immediate surpluses - until the state stymied growth again by raising taxes.
The collapse of the Soviet Union, a big aid donor, helped prod Hanoi to normalize relations with the U.S. in 1994, sparking a boom in foreign investment. But the party wasn't ready to party. Within a year foreign executives were grousing about graft and red tape. Hotel projects languished, and big investors eventually withdrew.
The turning point came after the Asian fiscal crisis of the late 1990s, and after Clinton challenged Vietnam's leaders in 2000 to "liberate" their children by opening their economy to competition and foreign trade. In the months that followed, party leaders appeared to do just that. In addition to signing the bilateral trade agreement, they rolled out a new law simplifying requirements for registering companies and launched the stock market.
Over the next year, Vietnamese formed hundreds of thousands of private businesses. Foreign manufacturers flocked back to open factories. The trade agreement "made a huge difference," says a senior U.S. diplomat. "Vietnam was absolutely convinced we'd overwhelm their markets with U.S. imports, that they'd be unable to compete. In fact, what's happened has been exactly the reverse."
Trade featured prominently in Bush's meetings with Vietnamese leaders in Hanoi last month. The White House, dismissing the November defeat of the Vietnam trade bill as a procedural screw-up, offered assurances that Congress would endorse permanent normal trade status for Vietnam soon, perhaps before the end of the year. But it also echoed complaints of U.S. executives in Vietnam that Hanoi has refused foreign businesses permission to sell and distribute their products directly, thus cheating on its promise to open markets.
WTO membership would help shield Vietnam from duties on its garment exports, which soared to more than $3 billion last year and trail only petroleum as the nation's largest foreign-currency earner. Economists contend that U.S. textile workers face little threat from Vietnam, because its clothing exports tend to be inexpensive, low-value-added items like T-shirts and underwear, and thus far more likely to compete with exports from other low-wage countries like China, Bangladesh, and Mexico.
But as it gains in export might, Vietnam is roiling other markets. It has benefited from foreign investors' fears about putting too much capacity in China, where monthly wages in some areas are double those in Vietnam. Yet if China has created opportunities for Vietnam, it also limits Vietnam's development options. Nguyen Mai Thanh, general director of privately owned Refrigeration Electrical Engineering, says her company must transition out of air conditioners and white goods and find other sources of growth. "Chinese air conditioners are too cheap," she says.
Certainly the notion that Vietnam has been a victor in the global trade contest can take some getting used to in a nation long accustomed to seeing itself as an underdog and steeped in the zero-sum logic of military and diplomatic confrontation.
Vice chairwoman Ninh offers a guarded assessment of the 2000 trade pact that helped kick-start Vietnam's growth. "All in all, no one would say it hasn't been a good thing," she allows. "Still, we wonder: Did we give too much away? If we had negotiated a little harder, could we have gotten a better deal? This is how it feels, you know, to a small developing country moving into the big, cold world."
Research Associate Joan L. Levinstein contributed to this article.