Global Insight Perspective

Significance

Given the Democrats' greater protectionist tendencies, supporters of the Vietnam deal were eager to see it pushed through before Congress changes hands from Republican to Democrat control. A wide range of economic deals was bundled together and hastily debated by the two houses.

Implications

The deals were safely approved and received a very warm welcome from U.S. exporters and the Vietnamese authorities. Had the deal not been clinched, the advantages of Vietnamese membership of the World Trade Organization (WTO) would be limited for the United States. Most of the other measures had wider bipartisan support.

Outlook

Vietnam has enjoyed remarkable economic growth over recent years, and the U.S. deal should create additional momentum—the uncertainties inherent in the current system were deterring longer-term investors. In terms of the U.S. political outlook, the deals resolve a range of controversies that could have dogged Congress next year, but this does not mean President George W. Bush is in for an easy ride.

Eleventh-Hour Drama

With the 109th Congress set to adjourn in the early hours of 11 December, there were frantic scenes as Republican leaders sought to gain approval for a broad tax and trade bill. There was considerable opposition from many Democrats to the measures, and it was consequently vital that they were approved before control of the two chambers changed hands. In the end, most of this opposition melted away as the seat arithmetic became clear and attention turned to the holiday exodus. The Senate vote was passed by 79 to 9. The House had earlier passed the measures in two separate packages. Congress will reconvene on 4 January, with a greatly changed political landscape. The mid-term elections saw the Democrats win control of both houses, even to their surprise, and President George W. Bush will have to master the art of negotiation and compromise. The House had been controlled by Republicans for 12 straight years.

The main measures were as follows, some contained in separate bills:

• Permanent Normal Trading Relations (PNTR) were introduced with Vietnam, replacing the current system of annual approvals based on human-rights assessments. The measure failed last month when it required a two-thirds majority, greatly embarrassing Bush ahead of his trip to the Asia-Pacific Economic Cooperation (APEC) summit in Vietnam.
• A landmark agreement with India was approved on sharing civilian nuclear technology, previously prohibited under U.S. nuclear non-proliferation policy. This will considerably improve wider bilateral relations between the countries.
• A range of tax breaks worth some US$38 billion won approval. Expiring tax breaks for business research and development, as well as for the hiring of people on welfare, were extended, while there was backing for a partial college tuition deduction and energy conservation tax incentives. The deduction for state and local sales taxes, introduced in 2004, was extended.
• Trade benefits were agreed for Haiti, four South American countries and a range of Sub-Saharan African countries. The Haiti deal was achieved despite strong opposition from the U.S. textile lobby.
• A cut in Medicare payments to doctors was blocked.
• Offshore oil and gas drilling opportunities were expanded in the Gulf of Mexico, intended to help revive the hurricane-battered region.
• A stopgap measure was approved earlier to maintain financing for government agencies at current or lower levels through to 15 February. This was required as Congress had failed to pass nine of 11 routine spending packages that were due on 1 October. The stopgap measure means a headache for the Democrats in Congress come February, and provoked criticism of the outgoing Senate leadership.
• Three major healthcare initiatives targeted HIV/AIDS, and an agency to centralise bioterrorism response was approved, as was the restructuring of the National Institutes of Health.
• A long-awaited overhaul of fisheries laws was approved, aimed at limiting overfishing of certain species.
• Tsunami prediction efforts are to be expanded.
• The Postal Service will be reorganised for the first time in decades. This sees the lengthy and litigious process governing the price of stamps replaced with a price cap and inflation-linked increments over a 10-year period. This means greater predictability for mass-mailers and more scope for discounts. The service will also benefit from the transfer of many pension liabilities to the Treasury. A new Postal Regulatory Commission will be created, with greater teeth than the old regulator.
• Obtaining personal telephone records without permission becomes a federal crime.
• The Generalized System of Preferences scheme, due to expire on 31 December, was extended. This provides duty-free treatment to selected imports from over 130 developing countries.

Vietnam Deal Receives Warm Welcome

The granting of PNTR to Vietnam represents a milestone in the two countries' bilateral relations, and should have considerable economic implications. Vietnam still has a communist government and memories of the Vietnam War remain fresh in many minds. The two countries only restored diplomatic relations in 1995, two decades after the fall of Saigon (as it was then known). President Bill Clinton visited the country in 2000 and a trade pact followed in 2001. Since this period, Vietnam has been changing very rapidly as it embraces the free market and witnesses huge inflows of investment. Preparations for World Trade Organization (WTO) membership have accelerated regulatory reforms and make the country considerably more attractive and predictable for investors. Vietnam would have joined the WTO on 28 December whatever the result of the U.S. vote, but its impact would have been lessened if their bilateral economic relations continued to be constrained. PNTR status means U.S. companies will have the same market access in Vietnam as those of other states once WTO membership occurs. With PNTR they can benefit from lower tariffs, greater protection, access to liberalised service and banking sectors, and a mechanism to counter government subsidies paid to Vietnamese firms.

U.S. firms are very keen to build up their presence, making the most of cheap costs and good access to other Asian and world markets. Vietnam will not be able to make so much use of greater U.S. market access, but the incoming investment will clearly bring major benefits. Not everyone will be winners, however, as many small- and medium-sized Vietnamese firms will find themselves unable to hold their own against foreign competitors. There are, moreover, certain groups in the population who are benefiting much more than others from the economic boom. Much of the opposition in Congress to PNTR was linked to concerns over human-rights violations and the political system in Vietnam. Some have argued that the deal amounts to an undeserved reward for the regime. Supporters of the deal argue that economic development is already improving the political and human rights situation. The U.S. authorities decided last month to remove Vietnam from their religious-rights blacklist in recognition of the changes.

Outlook and Implications

The United States already has heavy commercial involvement in Vietnam, and this is set to grow rapidly in the wake of the PNTR and WTO deals. As an illustration of these links, earlier this year U.S. computer chip giant Intel Corp. announced plans to invest US$1 billion in a Ho Chi Minh City plant, while Lockheed Martin Corp. was tasked with overseeing the construction and launch of Vietnam's first satellite. Bilateral trade stands at around US$7.8 billion a year, up from just US$1.2 billion in 2000. PNTR status and WTO membership will surely increase this volume still further, but it should be noted that Vietnam is still not classed as a "market economy" by the United States, and is consequently liable for stiff retaliatory measures in the event of dumping suspicions.

More widely, the package of measures approved on 11 December has prompted great relief both among Republicans and among many Democrats. It removes many potential bones of contention in the new year and should make the session somewhat less prickly. The votes also indicated that there is perhaps greater potential for bipartisanship and less protectionism than has been feared. This does not mean, however, that Bush will have an easy ride. There are many controversies ahead, not least over the future of the U.S. military presence in Iraq

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