1

A Growing Climate for Trilateral Economic Cooperation

June 19, 2015 Topic: Economics Region: Asia Tags: JapanVietnamUnited States

A Growing Climate for Trilateral Economic Cooperation

Time for the United States, Japan and Vietnam to further increase their economic cooperation, paving the way for new trade and investment relationships.

Recent events are merging with shared strategic interests to form the basis of a strong economic partnership between the United States, Vietnam, and Japan. In July 2013, when Vietnamese president Truong Tan Sang visited Washington for the first time and signed an agreement with U.S. president Barack Obama regarding a bilateral “comprehensive partnership,” it created a strong foundation for future economic cooperation between the three nations. In 2008, Japan and Vietnam signed a bilateral economic partnership agreement (EPA)—the first such agreement for Hanoi. All three nations are also members of the World Trade Organization (WTO) and Asia-Pacific Economic Cooperation (APEC), and are all aspirants to the Trans-Pacific Partnership (TPP), which could boost their economic ties considerably.

While all three countries share various common interests, they also differ in several important points of comparison. For example, all three countries have different population sizes (Japan: 127 million, United States: 325 million, and Vietnam: 93 million). All are in different stages of economic development (See table below: GDP per capita in 2013: Japan: $38,634, United States: $53,042, and Vietnam: $1,910), urbanization, and globalization, and have distinctive political histories due to different political systems. Their dissimilar geopolitical environments affect their respective priorities for the distribution of their national resources. Yet there is a growing climate for closer economic cooperation between all three nations. A look at specific opportunities in several key areas clearly demonstrates how trilateral cooperation can be enhanced. These include: (1) stronger economic ties between Japan and Vietnam and between the United States and Vietnam in the realms of trade and investment; (2) the TPP; (3) development aid to Vietnam; (4) Mekong Delta development; and (5) nuclear energy.

Table 1

Vietnam: An Economic Opportunity for Japan and the United States

Vietnam’s Enhanced Trade Status

According to 2013 trade statistics, Japan ($25.2 billion) was the fourth-largest trading partner for Vietnam after China ($50.2 billion), the United States ($29.7 billion), and South Korea ($27.3 billion).[1] Vietnam held a large trade deficit with China and South Korea, whereas it had a large trade surplus with the United States ($24.7 billion for exports and $5.0 billion for imports). Japan had a fairly balanced trade relationship with Vietnam (See Table below: $11.6 billion in exports and $13.6 billion for imports).

Table 2

The United States entered the Vietnamese market later than Japan did. Washington and Hanoi normalized their official relations in 1995, whereas Tokyo established diplomatic relations in 1973, twenty-two years earlier. During the Vietnam War, Japan was already a large trading partner of South Vietnam. It began to extend economic aid to unified Vietnam after 1975. However, in 1978, when Vietnam invaded Cambodia, Japan imposed economic sanctions, except for humanitarian aid, until 1991 when sanctions were lifted.

The United States imposed a trade embargo on all of Vietnam in 1975 and prohibited all bilateral trade activities. It was not until 1994 that the United States lifted its trade embargo. A bilateral trade agreement (BTA) was signed in July 2000, with trade quickly growing thereafter.

 

In 2006, the U.S. government granted permanent, normal trade-relations status to Vietnam, which was part of Vietnam’s accession to the WTO. In 2007, Vietnam joined the WTO as the 159th member. Vietnam and the United States concluded a trade and investment framework agreement (TIFA) that year. The two governments’ representatives met on a regular basis under the TIFA to implement Vietnam’s WTO commitments and resolve their economic- and legal-reform issues. In 2013, trade between the United States and Vietnam totaled $29.7 billion. Vietnam was the twenty-ninth-largest trading partner for the United States, but the United States was the second-largest trading partner for Vietnam after China.

Main Imports, Exports, and Points of Contention

 

In 2013, Japan’s main exports to Vietnam were apparel (17.5 percent) and crude oil (15.3 percent), while its main imports from Vietnam were machinery and equipment (25.5 percent), computer-related equipment and parts (15.6 percent), and iron and scrap (12.5 percent).[2] Top U.S. exports to Vietnam included agricultural products (23.2 percent), food manufactures (16.3 percent), and computer and electronic products (14.3 percent), whereas top U.S. imports from Vietnam were apparel and household goods—cotton (17 percent), apparel and other textiles (16 percent), and furniture, household items, and baskets (11 percent).[3]

Both Tokyo and Washington are concerned over the large role that state-owned enterprises still play in Vietnam over the industrial sector, such as mining and energy, and also the formal and informal control by the Vietnamese government over prices in the market. America treats Vietnam as a “nonmarket economy” under its trade law, while Hanoi wants this designation to be changed to “market economy.” Yet on the whole, the Vietnamese economy is growing quickly, providing benefits to both itself and its two partners.

Expanding Investment

Since 2006, foreign direct investment in Vietnam has been growing rapidly. The sum of investment for 2007 was $8 billion, increasing to $11.5 billion the following year. In 2013, Japan was the top investor in Vietnam. Tokyo’s investment of $5.75 billion is one quarter of the total amount of direct foreign investment ($21.63 billion) that Vietnam approved that year (see table on next page for additional information).[4] The accumulated investment ($230.16 billion) that year also placed Japan ($34.58 billion or 15.0 percent) on top. This was the result of important bilateral agreements, including the Japan-Vietnam Joint Initiative (2003), the Japan-Vietnam Investment Agreement (2004), and the bilateral EPA (2009). The Joint Initiative for investment was to formulate “an action plan” for the government and private sectors to improve Vietnam’s investment environment through five phases. The agreement was to promote the liberalization of investment and to protect investors’ rights.

In 2013, the United States was not among the top ten investors in Vietnam; however, it ranked as the seventh-largest investing country, in terms of accumulated investment, with $10.62 billion.

Vietnamese firms have begun to take interest in investing in the United States. Vietnamese furniture companies have expressed interest in investing $5 million to set up a manufacturing facility for storage furniture and kitchen cabinets.

Table 3

The Vietnamese government plans to industrialize its economy by 2020, with its electronics, agricultural-machinery, agricultural and marine-resources-processing, shipbuilding, environmental-improvement and energy-saving, and automobile and parts fields functioning as strategic industries. Prolonged labor-intensive industries and the stagnant transition to industrialization may induce foreign firms to move to other countries where labor wages are lower, as Vietnam will have to raise labor wages when supply chains enter from ASEAN countries and China.

The Trans-Pacific Partnership: Tough but Hopeful Talks

Background

The TPP was originally signed by four nations in May 2006: Brunei, Chile, New Zealand, and Singapore. Between January 2010 and July 2013, eight other nations expressed interest in signing on, including Japan, the United States, and Vietnam. While these eight countries have been negotiating to finalize an agreement, the two biggest participants are clearly Japan and the United States, whose GDPs together equal 81 percent of the total twelve possible TPP nations’ combined GDP and 29 percent of the global GDP.

As of early May 2015, negotiations between Japan and the United States have been pressing ahead. The prevailing view is that the negotiations should be settled before the end of 2015, so that the TPP will not be entangled in the upcoming U.S. presidential campaign. Yet it is difficult to see the end of negotiations in the near future, although the two sides acknowledged in late April that they are much closer to a final agreement.

Economic Benefits of the TPP

Is an enhanced partnership between Japan, the United States, and Vietnam likely to come about under the framework of the TPP? At the very least, if the TPP is adopted, the impact on all three nations could be wide reaching.

One research study estimated in 2012 that if the TPP became a reality, the United States could expect real income benefits of $77.5 billion per year and U.S. exports could increase by 124.2 billion by 2025.[5] Similarly, Japan’s GDP could increase by $119.5 billion, and Vietnam’s by $46.1 billion. The same research noted that Japan’s exports would increase by $175.7 billion, and Vietnam’s by $89.1 billion.

Vietnam will probably lag behind other prospective members of the TPP in terms of opening its own market, since Hanoi’s average tariff rate is the highest (10.9 percent) among the negotiating countries.[6] Nonetheless, it is speculated that if the TPP does go into effect, Vietnam will be able to compete favorably with China in exporting textiles to the U.S. market, since the United States conditions the import of Vietnamese apparel, made only from yarns of Vietnamese origin. In fact, Vietnam may be among those TPP members that benefit the most.

The TPP and the U.S. “Rebalance” to Asia

Beyond the economic realm, the TPP is an important strategic part of the U.S. “rebalance” policy—seeking to restrain China’s economic power. Japan shares with the United States the goal of promoting a regional free market along with liberal democratic principles through TPP. Yet, as of early May 2015, the two Pacific nations cannot agree on areas where important concerns remain, including automobiles and agricultural products.

Can the United States and Japan Settle Their Differences?

In order for the United States to take a strong leadership role in bringing the TPP negotiations to a successful conclusion at an early stage, it will be necessary for Washington to accept reasonable compromises, rather than demand a full free-market order. Clearly President Obama is faced with a dilemma. Should he lower certain standards that are part of the TPP, it may be accepted by Asian countries, but it may hurt the United States over the long term. Obama would clearly be in a better negotiating position if the U.S. Congress granted him Trade Promotion Authority—which it has not as of this writing.

China’s Asian Infrastructure Investment Bank Plan: A Cautionary Note

Both Japan and the United States are cautiously watching China’s ambitious plan to establish an Asian Infrastructure Investment Bank (AIIB). The proposed bank already has over fifty nations as founding members. China’s emerging leadership in financing a large amount of capital through the bank may obstruct the U.S. leadership in expanding the TPP. It should be noted that Vietnam has already applied to join the bank. However, it is too early to tell whether Vietnam’s membership in the AIIB will complicate economic cooperation with Japan and the United States.

Official Development Aid to Vietnam: U.S. and Japanese Efforts

Japan’s Contribution

After thirteen years of Japanese economic sanctions against Vietnam over the latter’s invasion of Cambodia in late December 1978, Tokyo resumed official development aid (ODA) in 1992. Today Japan is the largest aid donor to Vietnam. Since 2011, its ODA has exceeded 200 billion or $2.5 billion ($1=¥80) per year, although it consists mostly of yen-based loans (see table below). In addition, Japan has provided grants and assistance for technical cooperation. Tokyo is extensively engaged in providing ODA in various fields, including basic infrastructure, urban sewer and drainage systems, rural development, environmental management, health-care services, human-resources development, and so on.

Japan’s recent infrastructure projects in Vietnam include the new Tan Son Nhat International Airport in Ho Chi Minh City, the 1,200-meter Can Tho Bridge in the Mekong Delta, the 6.3-kilometer-long Hai Van Pass Tunnel in Danang (the longest tunnel in Southeast Asia), and railways in Hanoi and Ho Chi Minh City modeled after the Tokyo Metro.

Japanese infrastructure projects occasionally suffer from graft scandals between Vietnamese and Japanese companies. In June 2014, for instance, Japan temporarily suspended new ODA to Vietnam over a large corruption scandal between the Vietnam Railway Corporation and the Japan Transportation Consultants, although it resumed later.[7] In a 2014 survey, in terms of corruption levels, Vietnam ranked 119 out of 175 countries; Japan, 15; and the United States, 17.[8]

America’s Contribution

The United States began to provide humanitarian aid to Vietnam after 1991, when about $1 million was given to Vietnam War victims. After President Bill Clinton lifted the trade embargo in 1994, contacts became closer with more aid beginning to flow. However, U.S. aid efforts were often hampered by frustration with Vietnam’s initial slow cooperation in providing information about American prisoners of war (POWs) and soldiers missing in action (MIA). Hanoi also had its share of frustrations related to the Vietnam War. For example, there are many mines that were buried throughout the countryside during the conflict that have to be cleared before infrastructure improvements can commence.

Most U.S. assistance has been in the areas of food and health, such as aid for the victims of HIV-AIDS and bird flu. Aid has also been provided for demining, economic liberalization reform, counternarcotics, anticorruption, rule of law, and so on.

The Mekong Delta Development

The Mekong River Basin is inhabited by the sixty million people of Laos, Cambodia, and Vietnam—85 percent of whom are engaged in agriculture. Their lives depend upon fishery resources in the river and agricultural products that rely on rainfall and irrigated river water. The Mekong River also provides a critical means of transportation. Japan and the United States share commitments to support Mekong River Basin development, as they are concerned about the gap in economic-development levels among ASEAN members, with the Indochinese members lagging behind. The “ASEAN divide” complicates its economic integration process, a process by which ASEAN is scheduled to reach the stage of “economic community” by this year.

Japan’s Role

In December 2006, Japan introduced what was called the Japan-Mekong Partnership Program. Tokyo started a process to enhance its relations with five Southeast Asian countries that share the river—namely, Cambodia, Laos, Myanmar, Thailand, and Vietnam. In 2008 and 2009, it held foreign- and economic-ministers meetings. In November 2009, Prime Minister Yukio Hatoyama held the first summit meeting with the five heads of government from the region and issued the Tokyo Declaration, which stressed the “comprehensive development” of the Mekong region. The document referred to the need to develop hard and soft infrastructure, public-private cooperation, and the environment. Tokyo committed ¥500 billion or $6.25 billion ($1=¥80) for the following three years.

America’s Role

Similarly, the United States proposed the Lower Mekong Initiative in July 2009, when Secretary of State Hillary Clinton held a ministerial meeting with her counterparts from Cambodia, Laos, Thailand, and Vietnam in Phuket, Thailand. With respect to lower Mekong subregional economic integration and sustainable growth, they recognized their shared concern for such issues as agriculture and food security, connectivity, education, energy security, health, and the environment.

Sharing the same concern for the environment, Japan and the United States have moved to support the environmental projects of the Mekong River Commission (MRC), composed of Cambodia, Laos, Thailand, and Vietnam, with Myanmar and China as observers. The MRC had been in existence since 1995, but its presence had declined due to other competing mechanisms.

Both Washington and Tokyo are also concerned over China’s and Laos’ water dams in the upper Mekong River and their economic impact on the lower Mekong River region. This is one area where Japan and the United States can work together for the benefit of Vietnam.

Nuclear Energy: An Emerging Facet of Enhanced Trilateral Cooperation

Vietnam’s Energy Needs

As Vietnam’s economy becomes more industrialized, it will naturally demand increasing amounts of electricity. Today, over one third of its electricity comes from hydro, one third from gas, and the rest from coal or Chinese imports. Electricity demand is projected to grow from 21 GWe (gigawatt electrical) in 2010 to 64.8 GWe in 2020 and to 125 GWe in 2030.[9] By 2030, Vietnam plans to have about 10 percent of its electricity provided by nuclear energy.

Will Vietnam Really Embrace Nuclear Energy?

Vietnam’s quest to acquire nuclear energy has seen early success followed by growing challenges. Hopes ran high when construction of two nuclear reactors began in 2014, with operations to start in 2023. Reactors were to be built by Russia at Phuoc Dinh in Ninh Tuan Province in southern Vietnam. Two were supposed to be built by Japan and be operational sometime between 2024 and 2025. Prime Ministers Naoto Kan and Yoshihiko Noda visited Hanoi in October 2010 and August 2011, respectively, to promote a nuclear power plant. Despite the earthquake and tsunami that hit Fukushima Daiichi nuclear power plants in March 2011, Vietnam was still willing to go ahead with plans to build fourteen nuclear-power reactors by 2030.

Cooperation between Washington and Hanoi seemed to cement a bright future for Vietnamese nuclear energy. In 2010, the United States and Vietnam agreed to work on a bilateral agreement for peaceful nuclear-energy cooperation, or what is known as a “123 agreement.” In 2013, Secretary of State John Kerry and Foreign Minister Pham Binh Minh reached an agreement under which America would be able to make its nuclear energy–related equipment, materials, and expertise available to Vietnam. The Nuclear Energy Institute estimated that Vietnam’s nuclear-power programs would result in $10 billion to $20 billion in business for U.S. companies.[10]

However, the Vietnamese government stated in January 2014 that it would delay the construction of both Russia- and Japan-designed nuclear reactors to 2020.[11] Vietnamese citizens’ concerns about nuclear safety were a major contributing factor. Additionally, various member of the U.S. Congress were concerned about Vietnam’s lack of human rights and fears of acquiring such technology—all factors contributing to slowing bilateral cooperation on nuclear energy. While such concerns certainly have merit, Vietnam had already signed a safeguards agreement with the International Atomic Energy Agency (IAEA) and had become a party to the Treaty on the Non-Proliferation of Nuclear Weapons (NPT). Hanoi has also promised not to engage in enriching uranium. The U.S. government fears that prolonged talks with Vietnam will deprive U.S. firms of business opportunities in this field—a field that consists of competitors such as Canada, China, France, Japan, South Korea, and Russia.

If and when the Vietnamese government becomes ready to resume nuclear-energy development, Japan and the United States may well coordinate their policies in assisting Vietnam’s civilian nuclear program.

Prospects for Trilateral Economic Cooperation

In 2013, Japan and Vietnam celebrated the 40th anniversary of their diplomatic ties. The United States and Vietnam will celebrate the 20th anniversary of their diplomatic relations this year. Both nations have had different types of relations and interactions with Vietnam during this period. Their mutual contacts have deepened the trilateral interdependency among the three countries, although it is not a balanced interdependency.

The Ghost of the Vietnam War

Since the end of the Vietnam War, a united Vietnam has built closer economic ties with Japan than with the United States. Japan has traded, invested, and “ODAed” with Vietnam more heavily than has the United States. This is mainly due to the history of conflict between the United States and Vietnam.

In terms of trilateral cooperation, one could say that Japan has been an integral strategic part of Vietnam’s economic development—particularly for its infrastructure development—compensating for the United States’ inability to play a larger role, due to strained relations between Washington and Hanoi. Several war-related issues—such as American soldiers MIA, Agent Orange, unexploded ordnance and land mines, and Vietnamese refugees who have settled in the United States demonstrating their hostility toward the rapprochement between Vietnam and America—have contributed to this tension.

Now that Washington and Hanoi have settled many wartime difficulties, overall ties between the three nations are likely to improve. It is time to reflect on how these countries can build their mutual relations, complementing each other’s interests in various strategic domains.

A Bright Future for U.S.-Vietnamese Relations

In the future, Vietnam may find the American market more attractive than the Japanese one, simply because it is larger than Japan’s. The United States has a great advantage in that English, which is quickly becoming popular in Vietnam, can facilitate communications with the Vietnamese. It also has a large group of Vietnamese Americans, who number 1.55 million people, according to the 2010 census. The group, which is the fourth-largest Asian ethnic group in the United States, has what one might consider “bridge-building ambassadors” who can serve as bridge builders between American and Vietnamese societies and who can exert influence on U.S. policies toward Vietnam.

Japan’s Important Role

Conversely, Japan has a relative advantage over the United States in terms of geographic proximity. Japan can continue to promote trade, investment, and ODA for Vietnam without worrying about the legacy of the Vietnam War. While Japan and the United States occasionally voice their concerns on issues like inefficient bureaucracy, corruption, and violation of intellectual property rights, Japan should encourage the United States to treat issues sensitive to Vietnam, like human rights, political and religious freedom, and workers’ rights, in a more cautious manner.

Conclusion

U.S.-Japanese-Vietnamese trilateral cooperation is indeed an important part of all three nations’ strategic agendas. Economic cooperation should be based on political and strategic cooperation. Today, all three nations share similar perceptions of China’s growing naval and non-naval maritime power in the South China Sea. There is no competition between Japan and the United States in seeking access to the Vietnamese market. The TPP is an essential means for all three nations to come together even more closely, although it is a step toward an eventual Asia-Pacific–wide economic integration by merging the TPP with an Asia-based Regional Comprehensive Economic Partnership (RCEP).

Recommendations

1. Japan, the United States, and Vietnam should consider forming an intergovernmental committee at the ministerial level to discuss ways of strengthening economic interdependency in the areas of trade and investment.

2. Tokyo and Washington should help fortify Hanoi’s economic base through trade, investment, and ODA so that it can resist China’s efforts to weaken its economy through coercive means now and in the future.

3. Japan and the United States should settle their TPP negotiations at the earliest opportunity so that they can exert a positive impact on the remaining negotiations. Recognizing that joining any FTA is at the expense of substantial adjustment costs, Tokyo and Washington should also offer economic and technical support for Vietnam’s transition process.

4. America should encourage Japan to improve its foreign direct investment environment.

5. Tokyo should urge Washington to treat Hanoi as a market economy, rather than a nonmarket economy.

6. Both Japan and the United States should call on Vietnam to modernize its bureaucracy and speed up paperwork regarding trade, investment, and ODA.

7. Tokyo and Washington should coordinate their approaches to supporting Mekong Delta development, as well as Hanoi’s civilian nuclear program with respect to training nuclear specialists.

Masashi Nishihara is the president of the Research Institute for Peace and Security based in Tokyo, Japan. This article is part of the report, “Tackling Asia’s Greatest Challenges,” which can be read in its entirety, here. The Center for a National Interest would like to thank the Center for Global Progress for its important support of this initiative, and would also like to thank the Research Institute for Peace and Security and the Diplomatic Academy of Vietnam for participating in the project.

Footnotes

[1] For more information please see: http://www.customs.gov.vn/Lists/EnglishStatistics/Default. Accessed on April 10, 2015.

[2] For more information, please see: http://b-company.jp/uploads/NI. Accessed on April 10, 2015.

[3] Murray Hiebert, et al, A New Era in U.S.-Vietnam Relations; Deepening Ties Two Decades after Normalization, Washington, DC, CSIS, 2014, pp. 25-26.

[4] Japanese Foreign Ministry: “Current Vietnamese Situations and Japan-Vietnam Relations” in http://www.mofa.go.jp/mofaj/area/vietnam/kantei.html. Accessed on March 25, 2015.

[5] Peter A. Petri and Michael G. Plummer, “The Trans-Pacific Partnership and Asia-Pacific Integration: Policy Implications,” Policy Brief No.PB12-16, pp. 6-7, Peterson Institute for International Economics, 2012. http://www.iie.com/publications/pb/pb12-16, pdf. Accessed on April 10, 2015.

[6] Takashi Okae, “Betonamu: TPP sanka hyoomei no rekishiteki haikei” (Vietnam: historical background of its announcement of participation in TPP), Heisei 22nendo kantori repooto: Kankoku, Betonamu (Country report for fiscal 22nd year of Heisei: Korea and Vietnam), Policy Research Institute, Ministry of Agriculture, Forestry, and Fisheries, 2011, p.59. http://www.maff.go.jp/primaff/kenkyu/kenkyuin_syokai/pd. Accessed on April 10, 2015.

[7] “Japan resumes ODA to Vietnam” in http://english.vietnamnet.vn/fms/business/107863/japan-resumes-oda-to-vi.... Accessed on April 10, 2015.

[8] Please see “Corruption Perceptions Index” in http://www.transparency.org/cpi2014. Accessed on April 10, 2015.

[9] “Emerging Nuclear Energy Countries” in http://www.world-nuclear.org/info/Country-Profiles/. Accessed on April 10, 2015.

[10] Murray Hiebert, et al, A New Era in U.S.-Vietnam Relations; Deepening Ties Two Decades after Normalization, Washington, DC, CSIS, 2014, p.35.

[11] “Vietnamese delay confirmed” in http://www.world-nucleaqr-news.org/NP-Vietnamese-delay-confirmed/. Accessed on April 10, 2015.