Another Vietnam Quagmire.

Hanoi will move slowly toward market reforms despite a new U.S. trade pact.

President Clinton didn't visit Hanoi last November to hobnob with communists. He traveled to Vietnam hoping to exorcise the demons from the relationship between the most powerful country on earth and the Third World nation that dealt them a humiliating military defeat. Relations between Washington and Hanoi have been haunted by that war for twenty-five years, a period much longer than the time it took the United States to establish amity with Germany and Japan, against whom wars were fought at the expense of far more American lives. By visiting Vietnam, Clinton hoped to raise the diplomatic bar so that subsequent visits by American business executives and politicians will no longer be groundbreaking, but routine. For Vietnam, a visit from the sitting President of the United States was more than just a symbolic gesture; it was an attempt to make a historic agreement genuine.

There were, however, deeply symbolic gestures to be made in Vietnam. Clinton visited the site where the Joint Task Force Full Accounting (JTFA), the Pentagon team responsible for recovering the remains Of missing Americans, was investigating a possible American plane crash. Recovering Americans still missing from the war is a process that the United States must complete for its own sense of closure. Another objective was to bring to bear the symbolic power of the President of the United States as the fountainhead of freedom and democracy. Using Ronald Reagan's trip to the Soviet Union in 1988 as a model, Clinton gave a speech live on Vietnamese television. Unfiltered by state propaganda, Clinton imparted his message of freedom and hope for the future directly to the people of Vietnam. Although his remarks may appear insignificant, Ronald Reagan delivered a similar speech in May 1988, and a year later the Soviet Union was no more. Though words alone were not enough to conquer communism, it served to inspire the forces that led to the demise of the Iron Curtain. Clinton's success in bringing his message was evident from the thousands of people who crowded the streets with the fervor reserved for pop icons just to catch a glimpse of the American President.

The most important objective, however, was to open up a communist economy fearful of American trade. In July 2000, the United States and Vietnam signed the first trade agreement since normal diplomatic relations were restored in 1995. For Hanoi, the agreement is a welcome advance, in effect building on initial economic reforms it made in the mid-1980's. Increasing trade will help liberalize Vietnam's state-controlled economy and possibly act as a catalyst for considerable change in the country's social and political institutions. Furthermore, congressional approval of the trade agreement and the establishment of annual or permanent normal trade relations with the world's twelfth largest country will offer American businesses greater access to seventy-six million consumers in Vietnam.

Many Americans felt that Clinton was unacceptable as the initial harbinger of good will to communist Vietnam because of his record of dodging military service during the war. That is why Clinton used surrogate messengers, Vietnam War veterans such as Senator John McCain (R-Az.) and U.S. Ambassador to Vietnam Douglas "Pete" Peterson, to lead the efforts to reestablish normal relations between Washington and Hanoi. In a speech announcing the resumption of diplomatic relations in 1995, Clinton referred to the hoped-for benefit of the relationship as a "peaceful evolution." It took no time for American businesses to flood into Vietnam, setting up local offices in anticipation that it would become the next "Asian tiger." Investors looked towards a highly educated populace--with a 91.9 percent literacy rate--and a strong work ethic as reasons to be optimistic.

Unfortunately, economic progress did not materialize because the Vietnamese government was extremely reluctant to open its country to forces that it feared would corrode its hold on power. The result was a drop-off in new licensed foreign investment in Vietnam from a high of $8 billion in 1996 to $800 million in 1999. Consequently, Vietnam's centrally planned economy remained reliant on profligate state-owned enterprises that received subsidized loans from government-owned banks. Just as Clinton's efforts to normalize relations with Vietnam were criticized by some veterans groups in the United States, north Vietnamese veterans of the war are the staunchest conservatives and fear economic reform the most. Hanoi's haphazard approach to opening the economy was symptomatic of the deep division on economic policy within the ruling communist party. While economic reformers sought more trade with the West, many hardliners remained suspicious of the West's motives. Some leaders mired in antiquated communist ideals had even characterized the President's description of a "peaceful evolution" as an insidious American plot to "win the peace." This assertion demonstrates not only a harmful naivete about the world economy, but also an anti-American frame of mind.

Overcoming this deep distrust will be very difficult, but the dismal reality of an economic stagnation forced even the most intransigent of Vietnam's bureaucrats to compromise. In September 1996, representatives of the United States and Vietnam began a laborious three-year process of negotiations that culminated in a draft of a comprehensive bilateral trade agreement in July 1999. When the time came to sign the agreement in September 1999 at a meeting of the Asia-Pacific Economic Cooperation forum in New Zealand, Hanoi balked. The Vietnamese explained the delay as a need for more time to fully understand the trade agreement. In the end, however, the manifest failure of Hanoi's economic policies, coupled with China's successful negotiations with the United States for accession to the World Trade Organization, triggered Hanoi's reluctant capitulation to capitalism. Congressional ratification of the trade agreement should further heighten the sense that an evolution towards free market capitalism is as inevitable as it is beneficial.

The comprehensive trade agreement with Vietnam contains a host of major concessions by Hanoi: a good first step. The changes Hanoi has agreed to will result in lower tariffs on U.S. goods and services, improved protection of intellectual property rights, and the relaxation of foreign investment regulations among others. U.S. firms will have greater access to a potentially massive Vietnamese market with the capacity for rapid growth. Workers in Vietnam already can be hired directly by U.S. firms, and in seven years, American investors can own 100 percent of a company. Increased competition will also lead to greater demand for transparency regarding Vietnam's laws and regulations, considerably improving the climate for foreign investment in the future.

On the other hand, average U.S. tariffs on Vietnamese goods are also expected to fall from 40 percent to 3 percent. This would no doubt increase the incentive for Vietnamese exporters to increase production. The World Bank has estimated that Vietnam could see exports grow by $800 million a year after the passage of a trade agreement with the United States. Growth in Vietnam's export industries coupled with a relaxation of foreign investment regulations should decrease the country's dependence on the state-owned sector. This will help encourage the private sector to expand, increasing the number of jobs free from government control and the number of citizens who do not owe their livelihoods to government patrimony. More of the Vietnamese people will be able to choose where to live, what to eat, and how to educate their children. A burgeoning middle class that can appreciate the value of free markets will help bolster the political position of moderate reformers within the government. Thus, from a diplomatic perspective, expanding trade with Vietnam will encourage freedom in a country that is still nominally communist and overtly authoritarian.

Though the news of the trade agreement was well received by economic reformers in Vietnam, progress towards an open economy and democratic norms will likely be unnervingly slow. The reformers are in an inferior position in their battle against hard-line communists in Hanoi who still exercise a great deal of influence in the backrooms of government. The reluctance exhibited by the Communist Party of Vietnam (CPV) to loosen its grip on political power is a clear demonstration that a true democracy is still beyond the horizon. The Vietnamese government has to look no further than Indonesia or the Philippines to see what it considers to be unbridled democracy causing political and social disorder. Although Taiwan, Korea, and Thailand offer positive role models equally suitable to Vietnam's situation, it is highly unlikely that the CPV will look to them for developmental inspiration.

Vietnam was a colony of China for a thousand years and the residual animosity is very evident in the relationship today. Nevertheless, the CPV faces many of the same challenges to its rule as China's communist party and it will most likely attempt to follow China's brand of development. That means that the CPV will cling strongly to all levers of political power and suppress any political dissension. In addition, Vietnam will continue to prop up state-owned enterprises rather than face the political repercussions of massive layoffs. However, like China, moderate reformers will begin to assert their influence through economic reforms that favor greater competition and openness to foreign participation in the economy. The only place where the Vietnamese will be permitted a degree of liberty will be in the private sector of the economy. Here lies Vietnam's greatest challenge: fulfilling their obligations of the agreement. If they can somehow muster the political will necessary to live up to their commitments, they should be well on their way to eventual accession into the WTO.

Vietnam's commitments under the trade agreement will not come into force until the agreement is approved by the U.S. Congress and by Vietnam's national assembly. Furthermore, Vietnam can take advantage of phase-in periods to stall much-needed economic reforms. However, engaging in normal trade relations with Vietnam is the only way that the United States and other countries can encourage the Vietnamese people to improve their economic and political future. One can only hope that free market capitalism is as contagious as it is rumored to be.

Dana R. Dillon is Policy Analyst for Southeast Asia in the Asian Studies Center at The Heritage Foundation.