April 1995 U.S. VIETNAM RELATIONS Issues and Implicationspdf.usaid.gov/pdf_docs/PCAAA651.pdf · peaceful settlement in Cambodia, which Vietnam had ... issues related to emigration

United States General Accounting Office

GAO Report to Congressional Committees

April 1995 U.S. VIETNAMRELATIONS

Issues and Implications

GAO/NSIAD-95-42

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

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April 14, 1995

The Honorable Craig ThomasChairman, Subcommittee on East Asian and Pacific AffairsCommittee on Foreign RelationsUnited States Senate

The Honorable Doug BereuterChairman, Subcommittee on Asia and the PacificCommittee on International RelationsHouse of Representatives

In early 1994, the United States ended its long-standing trade embargoagainst Vietnam. This decision was attended by considerable controversy,and debate about taking additional steps toward normalizing U.S.-Vietnamrelations has continued through the January 1995 announcement that theUnited States and Vietnam were opening liaison offices in each other’scapitals. Concerns remain as to whether the Vietnamese commitment toresolving the fate of unaccounted-for U.S. service personnel is sufficient towarrant continued movement forward.

Congressional notification and/or concurrence are required for some ofthe additional steps that the United States may consider taking toward fullrelations with Vietnam. To assist you in any deliberations you may have onthese matters, this report provides information on (1) ongoing changes inVietnam’s foreign and domestic policies and the international community’sreaction to these changes, (2) changes in U.S. policy toward Vietnam andthe substance of bilateral relations between the two countries, (3) theinterests that the United States and Vietnam are pursuing in their relationswith one another, (4) prospects for Vietnam’s economic and politicaldevelopment, and (5) key factors affecting the pace of movement towardnormalized relations. We did not evaluate the efficacy of current U.S. andVietnamese efforts to resolve the prisoner of war/missing in action(POW/MIA) issue and are not making any recommendations.

Results in Brief Changes in Vietnam’s foreign and domestic policies have led to broaderacceptance of Vietnam by the international community. Vietnam’swithdrawal from Cambodia and subsequent cooperation in theU.N.-coordinated search for a peaceful settlement in that country, andVietnam’s ongoing program of market-oriented domestic reforms have

GAO/NSIAD-95-42 U.S. Vietnam RelationsPage 1

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largely removed the basis for the international community’s 1980sconsensus that Vietnam should be isolated as an outcast. Multilateralorganizations and most countries other than the United States havere-established full relations with Vietnam.

Although the United States has not established full relations with Vietnam,it has, among other things, ended its opposition to international financialinstitution (IFI) lending to Vietnam and lifted its embargo against tradewith Vietnam by Americans. As legal restrictions have lessened, U.S.private sector interests, including businesses, nongovernmentalorganizations (NGO), and Vietnamese-Americans, have established growingties with Vietnam. Government agencies, including the Departments ofDefense and State, have established limited official ties. Constraints to fullrelations remain, however. For example, U.S. government programstypically used to facilitate foreign trade are statutorily barred fromVietnam.

U.S. foreign policy interests include the promotion of human rights anddemocracy in Vietnam, as well as U.S. commercial and security interests.For its part, Vietnam has important commercial and security interests topursue with the United States.

Despite ongoing reforms and positive economic trends, Vietnam faces anuncertain future. While agreeing that Vietnam has considerable potentialfor growth and change, analysts point out that serious constraints remain.Vietnam remains one of the world’s poorest countries, and the Communistparty continues to exercise a monopoly on political power. Given itsstarting point, Vietnam is years away from developing an economy similarto those of its dynamic neighbors in Asia. Informed observers generallyagree that political change is likely to come only gradually.

Executive branch officials and other analysts stated that the pace at whichthe administration moves forward in taking additional steps toward fullbilateral ties will depend on U.S. conclusions regarding developmentswithin Vietnam, particularly with regard to progress on the POW/MIA issue.Support for additional steps will also depend on the pace of political andeconomic change in Vietnam toward greater democracy and a moreprosperous, market-oriented economy.

Background During the 1980s and early 1990s, U.S. policy focused on pressuring theVietnamese for cooperation in addressing a limited number of concerns.


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These included (1) clarifying the fate of U.S. POW/MIAs still officiallyunaccounted for; (2) obtaining Vietnam’s cooperation in bringing about apeaceful settlement in Cambodia, which Vietnam had invaded in 1978; and(3) resolving issues related to emigration from Vietnam.1

To obtain Vietnamese cooperation on these issues, the United Stateswithheld diplomatic relations, enforced a complete bilateral tradeembargo, and continued to block access to frozen Vietnamese assets heldin the United States or under U.S. jurisdiction since 1975. Other countries,including the members of the Association of Southeast Asian Nations(ASEAN),2 Japan, China, as well as the United States, cooperated in isolatingVietnam, primarily to express their opposition to Vietnamese aggression inCambodia. Among other consequences, this internationally supportedisolation policy resulted in Vietnam’s being barred from access to creditfrom IFIs. (See fig. 1 for a map of the Asia-Pacific region.)

1The United States has been concerned about (1) freedom of emigration for Vietnamese citizensstigmatized by association with the U.S. war effort in South Vietnam, including Amerasians and formerU.S. government employees and (2) the welfare of several hundred thousand people who began fleeingVietnam in the late 1970s to seek asylum in other countries.

2Indonesia, Malaysia, Singapore, Thailand, the Philippines, and Brunei.


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Figure 1: The Asia-Pacific Region

Pacific Ocean

United States

Mexico

Canada

Vietnam

Russia

China

Laos

Indonesia

Thailand

Papua New Guinea

Malaysia

Japan

South Korea

North Korea

Australia

Mongolia

Cambodia

Taiwan

Singapore

Vietnam Has MadeImportant Changes inIts Foreign andDomestic Policies

Several internal and external factors combined in the late 1980s to force achange in Vietnam’s foreign and domestic policies. Foremost among thesewas the failure of Vietnam’s centrally planned economic system,recognized in the Communist party’s December 1986 call for “Doi Moi”, orrenovation. Pressure for change was augmented by the continuing costs ofinvolvement in Cambodia, particularly the international community’sresulting unfriendly stance toward Vietnam. The reform movement alsogained impetus from the collapse of the Soviet Union and Communistgovernments in Eastern Europe, wherein Vietnam lost its major marketsand primary sources of economic assistance and political support.

In foreign affairs, Vietnam abandoned its goal of creating an Indochinabloc and made promoting good relations with all nations its stated guidingprinciple. Withdrawal from Cambodia in 1989 was followed by the


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conclusion in 1991 of an international accord to resolve the unsettledpolitical situation in that country. Since then, Vietnam has focused ondeveloping closer relations with its neighbors—particularly the membersof ASEAN—to promote domestic prosperity by becoming a participant inthe regional international-trade-based economic boom.

Improved relations with ASEAN members and other countries in the regionare also designed to promote economic progress indirectly by ensuringregional peace and stability. Although still a point of contention with somenearby countries, Vietnam has cooperated in working toward resolving thesituation of the thousands of Vietnamese remaining in foreign refugeecamps throughout the region through the U.N. Comprehensive Plan ofAction. Vietnam has also worked with the United Nations, the UnitedStates, and other countries to regularize emigration from Vietnam throughthe Orderly Departure Program. The program was established to provide alegal alternative to the dangers of emigration by sea—the boat peoplephenomenon.

Although Vietnam’s leaders have also worked to develop cordial relationswith China, they remain concerned about China’s intentions—particularlywith regard to sovereignty over the potentially oil-rich Spratly Islands.3

Greater integration with ASEAN is seen as strengthening Vietnam’s positionwith regard to China.

Vietnam has increased its collaboration with the United States todetermine the fate of the more than 2,200 U.S. service personnel who arestill officially unaccounted for in Indochina. After gaining initial access tocrash sites in 1988, the U.S. Department of Defense opened a POW/MIA

investigative office in Hanoi in 1991 and has since gained expanded accessto crash sites, relevant archival material, Vietnamese witnesses, and othersources of information. Vietnam’s primary contribution to this effort hasbeen cooperation with the Department of Defense Joint Task Force-FullAccounting, which conducts search activities in Vietnam, as well as inLaos and Cambodia. In July 1994, a U.S. delegation received Vietnamesecommitments to take additional steps, including unilateral actions, thatmay shed light on some unresolved cases. For example, the Ministry ofInterior appointed a team to review archival materials for relevantdocuments, and measures were taken by the government to solicit usefulinformation from the general public.

3The Spratlys are located in the South China Sea and are the object of boundary disputes amongVietnam, the People’s Republic of China, Taiwan, the Philippines, Malaysia, and Brunei.


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Domestically, Vietnam has made considerable progress in its Doi Moiprogram of market-oriented reforms. Key structural steps taken to datehave included abandoning collectivized agriculture, decontrolling mostprices and the rate of exchange for the Vietnamese currency, introducingpositive interest rates to the banking system, reducing impediments tointernational trade and investment, and increasing the autonomy ofstate-owned enterprises. A new constitution, adopted in 1992, confirms thelegitimacy of the private sector, and the government continues its effortsto create a legal framework adequate for a modern, market-orientedeconomy.

Other Countries andMultilateralInstitutions HaveResumed NormalRelations WithVietnam

Vietnam has made substantial progress toward full integration into theinternational community. Vietnamese withdrawal from Cambodia andcooperation in working toward bringing an end to the conflict in thatcountry removed the primary cause for continued antagonism betweenVietnam and its neighbors. One indication of Vietnam’s growingacceptance was the recent ASEAN decision to work toward elevatingVietnam from observer status to full membership in the near future.Vietnam was also granted observer status in the General Agreement onTariffs and Trade—now succeeded by the newly created World TradeOrganization.

During 1993, Japan and France led an international consortium thatarranged financing to settle Vietnam’s outstanding debt to IFIs so that theseinstitutions could resume lending to Vietnam. While the United Statesdelayed this consortium from clearing Vietnam’s debt for a time, U.S.objections were eventually dropped. The World Bank, Asian DevelopmentBank, and International Monetary Fund have since resumed operations inVietnam.

This resumption of operations, coupled with the end of the U.S. tradeembargo in February 1994, has brought a surge of foreign public andprivate sector interest in the Vietnamese economy. According to thegovernment of Vietnam, total foreign assistance disbursed to Vietnam in1993 approached $500 million, compared with an average of about$75 million annually during the last half of the 1980s. In the fall of 1993,multilateral and bilateral donors combined pledged nearly $1.9 billion indevelopment assistance at the first international donors conference onVietnam. The World Bank pledged to provide approximately $400 million ayear for the next 5 to 10 years, the Asian Development Bank pledged about$300 million for 1993, and the International Monetary Fund granted


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Vietnam access to credits in excess of $200 million for the initial year oflending.4

Vietnam’s international trade (imports and exports combined) increasedfrom about $3.6 billion in 1988 to $8.2 billion in 1993,5 while the stock offoreign investment commitments rose from about $364 million in 1988 tonearly $11 billion as of December 1994. In line with Vietnam’s statedforeign policy orientation, Asian countries dominate Vietnam’s trade andinvestment statistics. In addition to being by far the largest supplier offoreign assistance with over $1 billion in development loan commitments(focused primarily on infrastructure projects), Japan is Vietnam’s largesttrade partner, followed closely by Singapore. Table 1 lists Vietnam’s fivelargest trade partners for 1993. Table 2 lists Vietnam’s largest sources offoreign investment.

Table 1: Vietnam’s Largest TradingPartners in 1993 Dollars in billions

Partner Total trade

Japan $1.72

Singapore 1.33

South Korea 0.82

Hong Kong 0.65

France 0.46

Others 3.23

Total $8.21

Source: International Monetary Fund.

Table 2: Five Largest Sources ofForeign Direct Investment in Vietnam(as of December 1994)

Dollars in billions

Source Commitments

Taiwan $1.96

Hong Kong 1.79

Singapore 1.07

South Korea 0.88

Japan 0.78

Source: Vietnam State Committee for Cooperation and Investment.

4An additional $2 billion was reported as pledged at the second annual donors conference inNovember 1994, but complete information on these pledges was not immediately available.

5The 1988 figure, including ruble-denominated trade, was provided by the Central Intelligence Agency.The 1993 number was provided by the International Monetary Fund.


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In addition to Japan, other governments in the region have resumed fulldiplomatic relations with Vietnam and are taking other steps to facilitategrowth in commercial relations. For example, during his 1994 visit,Australia’s Prime Minister announced plans to provide about $200 million(in Australian dollars) in assistance to Vietnam over the ensuing 4-yearperiod. One objective of this assistance is to promote Australian privatesector success in Vietnam. The government of Taiwan has also pledged asubstantial amount of assistance and, under its recently announcedsouthward trade and investment policy, has encouraged Taiwanesecompanies to become engaged in Vietnam, along with other SoutheastAsian countries. Countries outside of the region, most prominently France,have undertaken similar efforts. France’s President has visited Vietnam,and France is providing Vietnam economic assistance and export credits.

The United States HasTaken SignificantSteps Toward FullRelations WithVietnam, butConstraints Remain

The United States and Vietnam have not yet established full diplomaticrelations. However, since 1991 the United States has taken several stepstoward resuming full relations. In April of that year, the United Statespresented Vietnamese officials with a “road map” outlining a series ofactions to be taken by Vietnam to assist in resolving the POW/MIA issue andthe unsettled situation in Cambodia and to facilitate emigration forpersons in detention in Vietnam due to their association with the pre-1975U.S. war effort. Progress in these areas on the Vietnamese side would bemet by a series of specific U.S. steps toward expanded relations. While notspecifically embracing the road map, the Clinton administration has statedthat additional movement toward full relations would depend on tangibleprogress in specific areas of concern regarding the POW/MIA issue.

Beginning in 1991, the U.S. government permitted (1) financial institutionsto transfer remittances from Vietnamese-Americans back to their familiesin Vietnam and (2) travel service providers to arrange travel to Vietnam.During 1992, the U.S. government liberalized controls on NGO operationsand permitted U.S. companies to establish telecommunications links withVietnam, provide goods and services addressing basic human needs, andsign executory contracts, in anticipation of the end of the embargo.

In 1993, the United States ended its opposition to resumption of IFI lendingand shortly thereafter permitted U.S. companies to participate inIFI-funded projects. In February 1994, the President announced a decisionto expand the official U.S. presence in Vietnam to the level of a liaisonoffice (pending resolution of technical issues discussed later in thisreport) and to end the trade embargo.


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In practical terms, the end of the embargo meant that persons subject toU.S. jurisdiction were now free to engage in business with Vietnam. Theend of the embargo was accompanied by a downgrading of Vietnam’sclassification for export control purposes. Most U.S. exports to Vietnamcan now be made without restriction.6

The two countries announced the opening of liaison offices in each other’scapitals at the end of January 1995. These offices will have small staffs(e.g., 11 U.S. State Department personnel in Hanoi) and will be headed byofficials with the rank of consul-general, rather than ambassador. Theywill, however, conduct most consular and other functions (e.g., economicreporting) on a limited scale.

Though other legal constraints remain, the Foreign OperationsAppropriations Act for Fiscal Year 1995 removed certain of theoutstanding prohibitions on activity within Vietnam by a number of U.S.agencies, including the U.S. Agency for International Development (USAID),the Trade and Development Agency, the Overseas Private InvestmentCorporation, and the Eximbank. The act omitted language included inprior appropriations acts that specifically prohibited direct and indirectassistance to Vietnam and repealed similar language that had beenincluded as section 13 of the State Department AppropriationsAuthorization Act of 1973.7 These changes built upon the executivebranch’s existing authority to establish a diplomatic presence in Vietnamand take some other actions. Other legal constraints, discussed below,continue to limit development of U.S. relations with Vietnam.

U.S. Private Interests AreBuilding Relations WithVietnam

Even before the trade embargo was lifted, U.S. companies, NGOs, andVietnamese-Americans had begun to build relations with Vietnam, aspermitted under regulations in effect during that time. These relationshipshave continued to grow. According to the American Chamber ofCommerce in Vietnam, approximately 30 U.S. companies had establishedoffices in Vietnam by the time the embargo was lifted, and the number hasgrown steadily since that time. During 1993, U.S. companies exportedproducts valued at less than $7 million to Vietnam, but this total increasedto about $156 million for the first 11 months of 1994. The total stock of

6For export control purposes, Vietnam is now in the same country group as Russia. CommerceDepartment officials noted that restrictions may still be applied to some exports—for example,high-powered computers that may have potential for applications in nuclear weapons programs.

7In 1990, Congress repealed an explicit prohibition on Public Law-480 food assistance to communistcountries, including Vietnam.


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U.S. investment commitments rose from nothing prior to the embargo’sbeing lifted to a reported $270 million as of December 1994.

U.S. companies seeking opportunities or already doing business in avariety of sectors in Vietnam include Fortune 500 companies as well assmaller firms. Petroleum products companies figure prominently becauseof interest in production from offshore oil fields, including some in or nearthe disputed territory in the South China Sea. Others include servicecompanies (e.g., consulting, construction, banking, and insurance) andcompanies selling manufactured goods ranging from aircraft topharmaceuticals and other consumer products.

Some U.S. NGOs were involved in Vietnam through the 1980s. However,their presence has grown significantly in recent years. From 1990 through1994, the number of U.S.-based NGOs reporting operations in Vietnam rosefrom 49 to 73. One official estimated the value of U.S. NGO operations inVietnam during 1993 at approximately $15 million. Overall, officials inVietnam estimated that more than 200 foreign NGOs operated programsvalued at about $50 million during 1993. U.S. NGOs formerly focused onhealth and education/exchange programs in order to comply with U.S.restrictions, but now that restrictions have been removed the focus hasalready broadened to include long-term development issues.

The Vietnamese-American community, estimated to number over 750,000people, is made up largely of refugees and others who left Vietnam underadverse circumstances. Vietnamese-Americans have maintainedsubstantial links to family and friends in Vietnam, sending back hundredsof millions of dollars each year in cash and goods and visiting with somefrequency. Estimates of both remittances and travel vary considerably.However, we were told that Vietnamese government sources estimatedthat 1993 remittances amounted to about $600 million and that about87,000 overseas Vietnamese visited Vietnam during that year.Vietnamese-Americans have also begun to sponsor NGO activities focusingon humanitarian assistance and educational and cultural exchange and aremoving in greater numbers to establish business relations with Vietnam.Although the community has generally opposed movement towardincreased official U.S. ties with Vietnam, the intensity of that oppositionhas declined to some extent in recent years. Nonetheless,Vietnamese-American leaders continue to urge the United States to seekimprovements in democracy and respect for human rights before fullynormalizing relations with Vietnam.


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U.S. GovernmentEngagement With Vietnam

Even before the embargo was lifted, the U.S. government had alreadyengaged with Vietnam in a number of discrete areas. The most prominentof these interactions have centered on POW/MIA resolution, the OrderlyDeparture Program, and bilateral assistance programs. The United Stateshas also been contributing assistance to Vietnam through its share ofsupport for multilateral organizations active in that country. Whilecontinuing to emphasize the necessity for continued progress towardresolution of outstanding POW/MIA cases, U.S. officials have sought toexpand the scope of bilateral relations.

The priority that continues to be attached to the POW/MIA issue is reflectedin U.S. search and identification activities. While exact numbers are notavailable, Department of Defense officials estimated total fiscal year 1994expenditure on such activities at about $59 million.8 According toDepartment officials, expenditures for related activities within Vietnamtotaled more than $11 million in fiscal year 1994. Among other things, thistotal includes expenditures for Vietnamese personnel assisting in jointfield activities, helicopter services provided by Vietnam, and per diem forU.S. personnel on temporary duty in Vietnam.

With congressional support, the executive branch has established anumber of bilateral assistance programs in Vietnam. In commenting on adraft of this report, State and Defense Department officials emphasizedthe linkage between U.S. humanitarian efforts in Vietnam and Vietnamesecooperation in resolving outstanding POW/MIA cases. U.S. bilateral programshave included USAID-funded assistance to victims of war and displacedchildren (valued at about $10.4 million during fiscal years 1991-94) andState Department-funded assistance to NGOs assisting refugees returning toVietnam ($4.3 million through fiscal year 1994).

The U.S. government has also supported a number of programs aimed atsuch purposes as encouraging Vietnam’s transition toward democracy ordevelopment of free markets, or building foundations for greaterU.S.-Vietnamese understanding. For example, the National Endowment forDemocracy is currently providing about $580,000 to five different granteesfor such purposes as training Vietnamese legislators and journalists. TheAsia Foundation devoted about $336,000 of its 1994 congressional grant torelevant programs, including support for grantees working to improve

8This figure includes expenditures on resolution of POW/MIA cases stemming from U.S. involvement inVietnam, as well as other conflicts such as the Korean War and World War II. It does not includeregular pay and allowances for U.S. military personnel working on these issues.


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Vietnam’s legal, financial and monetary systems.9 In addition to supportingVietnamese-language broadcasting, the United States Information Agencyalso funds Fulbright scholarships for Vietnamese students studying in theUnited States. Total funding since 1992 has been about $4.3 million,including support for the program’s recent expansion to include U.S.scholars going to Vietnam.

The United States has not actively participated in international discussionsconcerning economic assistance for Vietnam. Nonetheless, the UnitedStates is an indirect source of development assistance to Vietnam throughits contributions to the IFIs and the United Nations. In 1993, the estimatedU.S. pro-rated share of aid pledged to Vietnam by multilateralorganizations exceeded $170 million. This estimate should not be regardedas precise since it is not possible to establish a direct link between U.S.contributions to each organization and specific activities in Vietnam.

The recent opening of liaison offices came only after resolution of twotechnical issues: (1) consular access to U.S. citizens incarcerated inVietnam and (2) compensation to the Unites States for 22 diplomaticproperties expropriated by the Vietnamese.

Consular access became an issue because Vietnam officially permits itscitizens to renounce their citizenship only by approval of the government.The government therefore regards naturalized U.S. citizens of Vietnameseorigin as citizens of Vietnam. This issue was resolved through anagreement permitting U.S. officials to see U.S. passport holders within 96 hours of their being detained by Vietnamese authorities.

Regarding the diplomatic properties in Vietnam, U.S. and Vietnamesenegotiators arrived at an agreement wherein compensation will beprovided to the United States through (1) outright return of 5 properties,(2) cash compensation for 12 properties, and (3) exchange of theremaining 5 for equivalent properties in Vietnam. To ensure that theseproperties would be valued at fair market rates, the State Departmentemployed the services of valuation experts from internationallyrecognized real estate firms.

At the time the liaison offices were opened, the Department of State alsoannounced the successful conclusion of negotiations aimed at obtaining

9The East-West Center, a think-tank associated with the University of Hawaii, also receives substantialsupport from the U.S. government, and is currently working with Vietnamese scholars on a variety ofdevelopment issues. According to the Center, however, all of its work with Vietnam is supported bygrants from private foundations.


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compensation for about $209 million in claims (including interest) by U.S.private sector claimants and the Overseas Private Investment Corporationfor losses incurred due to Vietnamese expropriation. The private claims,amounting to about $204 million of this total, were adjudicated by the U.S.Foreign Claims Settlement Commission under a statutory program thatended in 1985. Payment to claimants came from more than $350 million(including interest) in blocked Vietnamese assets held in U.S. financialinstitutions since 1975. Vietnam took possession of the assets thatremained after U.S. claims were satisfied.

Negotiations are still ongoing concerning agreement on a repayment planfor more than $150 million in official debt owed to the U.S. government bythe former Republic of Vietnam. While Vietnam recognized its obligationto pay the official debt of the former Republic of Vietnam in Paris Clubnegotiations during 1993, these negotiations have proceeded slowly, andmatters are not yet resolved. The United States has also initiated adialogue on human rights with Vietnam.

In addition, State and Transportation Department officials are pursuingthe establishment of civil aviation links between the United States andVietnam. However, differing views on market access seem likely to delaythe initiation of regularly scheduled service between the two countries forsome time. U.S. negotiators are seeking to establish a bilateral relationshipbased on open competition, while Vietnamese negotiators seek to strictlylimit market access.

Statutory ConstraintsRemain

A complex set of statutory constraints continues to bar U.S. foreignassistance and trade support agencies (USAID, the Trade and DevelopmentAgency, the Overseas Private Investment Corporation, and the Eximbank)from operating in Vietnam and otherwise restrict expansion ofU.S.-Vietnamese relations.10 Many of these constraints may be overcome ifthe executive branch determines that certain conditions have been met.Congressional notification and/or concurrence is required in someinstances—including for any proposals for USAID activity in Vietnam.

The most well-known of the remaining constraints is the Jackson-Vanikamendment (section 402 of the Trade Act of 1974, as amended). Under thisprovision, the United States cannot award most-favored nation (MFN) trade

10USAID programs in Vietnam to date have been limited to categories wherein successiveappropriations acts have permitted assistance to be provided “notwithstanding any other provision oflaw.”


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status, extend official credits or investment guarantees,11 or concludecommercial agreements with nonmarket economies unless they are foundto provide their citizens with the freedom to emigrate. The President canovercome this provision either by issuing a report to Congress indicatingthat the conditions listed in the law have been satisfied or by waivingapplication of the conditions on the basis of his determination that thewaiver will substantially promote the amendment’s objectives.Determinations of full compliance must be renewed every 6 months, while waivers must be renewed annually. The waiver authorityprovided by the amendment has been used on several occasions—forexample, for the People’s Republic of China. Provision is made in the lawfor Congress to disapprove determinations of compliance or waivers byjoint resolution. In addition, MFN status cannot be granted until the UnitedStates and Vietnam conclude a trade agreement approved by both housesof Congress. Such an agreement must include a reciprocal grant of MFN

status and other specified provisions (e.g., protection for intellectualproperty). Even if Vietnam becomes a full member of the World TradeOrganization, the United States cannot accord MFN status to Vietnameseexports until the requirements of Jackson-Vanik are met.

In addition to Vietnam’s ineligibility for MFN status, Vietnamese access tothe U.S. market is further limited by Vietnam’s ineligibility for participationin the Generalized System of Preferences. This program provides duty-freeaccess to the U.S. market for developing country products. Countries’participation in the program is conditioned on a variety of factors. Some,including progress toward adequate worker rights protection, may bewaived by the President if he determines that this is in the nationaleconomic interest of the United States. Other factors, however, includingsome that apply specifically to Communist countries, cannot be waived.These include the precondition that a country have MFN status with theUnited States and be a member of the General Agreement on Tariffs andTrade (now succeeded by the World Trade Organization).

Section 620(f) of the Foreign Assistance Act prohibits assistance(including through the Trade and Development Agency and the OverseasPrivate Investment Corporation) to Communist countries (includingVietnam) unless the President makes certain determinations or exempts acountry from application of this provision on the grounds that such a

11Affected credit programs include those provided through Eximbank and the Department ofAgriculture. However, Agriculture officials pointed out that legal restrictions on credit do not apply toa number of programs in which food is donated or otherwise provided to other countries throughoutright subsidization. This includes the USDA’s Export Enhancement Program and others aimed atpromoting exports of particular commodities.


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move is important to U.S. national interests. The matters to be determinedare that (a) the assistance is vital to U.S. security, (b) the country is notcontrolled by the international Communist conspiracy, and (c) assistancewill promote independence from international Communism. The law alsosuggests that progress in fostering democracy and respect for humanrights be one of the factors weighed in considering assistance to countriesthat the President has exempted from application of this section. Actionhas been taken under this provision on several occasions—for example,for China during 1985 and for certain Eastern European countries and theSoviet Union during 1989-91. In addition, the Eximbank is specificallyprohibited by its authorizing legislation from doing business inMarxist-Leninist countries, but this restriction may also be waived by thePresident if it is determined that proposed transactions are in the U.S.national interest.

Foreign assistance legislation also prohibits assistance to countries withwhich the United States has severed diplomatic relations or that have(1) expropriated U.S. property without just compensation or (2) defaultedon loan repayments.12 While the United States and Vietnam have reachedan agreement with regard to expropriated U.S. property, the two countriesstill do not have full diplomatic relations, and, as already noted,negotiations aimed at addressing outstanding Vietnamese debt to theUnited States have not yet been concluded.

In the International Monetary Fund and the World and Asian DevelopmentBanks, the United States abstains from voting on proposals for assistanceto Vietnam—except for projects addressing basic human needs. In thecase of the Fund, this policy was adopted in compliance with the Grammamendment (section 43 of the Bretton Woods Agreement Act, asamended), which requires the United States to actively oppose Fund creditfacilities for Communist dictatorships. However, the amendment containsa mechanism that allows U.S. support for individual proposed loans if theexecutive branch certifies to Congress that such loans meet certaincriteria. These criteria are that loans (1) assist in correcting balance ofpayments difficulties, (2) advance market-oriented forces, and (3) are inthe best economic interests of the majority of the population. This votingpattern was extended to the banks as well as a matter of policy.

12Regarding countries with which the United States has severed diplomatic relations, see section 620(t)of the Foreign Assistance Act of 1961, as amended. Regarding expropriated property, see section620(e) of the Foreign Assistance Act of 1961 as amended (the Hickenlooper Amendment) and section527 of the Foreign Relations Authorization Act for Fiscal Years 1994 and 1995 (the HelmsAmendment). Regarding delinquent loans, see section 620(q) of the Foreign Assistance Act of 1961 andsection 512 of the Foreign Operations Appropriations Act for Fiscal Year 1995 (the BrookeAmendment).


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A number of other constraints also exist. For example, Eximbank and theDepartment of Agriculture can only provide credit to countries that theydeem to be acceptable credit risks—an uncertain issue for Vietnam at thepresent. In addition, the Overseas Private Investment Corporation can onlyoperate in countries where it has determined that substantial progress isbeing made toward providing adequate protection for internationallyrecognized workers rights unless the President waives this restriction inthe national economic interest.

Several Features of NormalU.S. Relations WithDeveloping Countries AreAbsent With Vietnam

The United States and its trading partners typically seek to protect theircommercial interests in each other’s territories through multilateral andbilateral agreements regulating trade, investment, and taxation practices.Because Vietnam does not belong to the World Trade Organization and hasconcluded no bilateral agreements with the United States in these areas,there is no international mechanism in place to regulate or protect U.S.business interaction with Vietnam.

U.S. businesses in other countries can also typically benefit from (1) theinformation and advocacy services provided by the U.S. Foreign andCommercial Service and the Foreign Agricultural Service, (2) the creditfacilities of the Eximbank and the Department of Agriculture,(3) investment insurance and other services through the Overseas PrivateInvestment Corporation, (4) feasibility studies and other activities by theTrade and Development Agency, and (5) a number of types of activitiesundertaken by USAID. However, legal restrictions and administration policykeep these other agencies inactive in Vietnam for the most part. Forexample, the U.S. and Foreign Commercial Service and the ForeignAgricultural Service do not have personnel permanently assigned toVietnam. However, current policy does permit them to assist U.S.businesses in a more limited fashion—for example through written andelectronic communications with Vietnam and ad hoc travel.

The U.S. policy of abstaining on most IFI votes on assistance to Vietnamlimits U.S. influence on the courses of action recommended to Vietnam bythese agencies. Since USAID is not active in Vietnam, the United States alsodoes not contribute to dialogue on Vietnamese policy making through thisagency’s operations.


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U.S. and VietnameseInterests in BilateralRelations

Relations between the United States and Vietnam continue to be troubledby the aftermath of the armed conflict between the two countries thatended 20 years ago. U.S. decisionmakers continue to agree that highestemphasis should be placed on obtaining tangible progress towardobtaining the fullest possible accounting for U.S. service personnel stillunaccounted for as an underlying requirement for forward progress inU.S.-Vietnamese relations. Executive branch officials, for example, statedthat the decisions to end the embargo and open liaison offices were madeonly after concluding that significant tangible progress was being made onthis issue. Similarly, executive branch officials concluded that theseactions would contribute to further progress being obtained.

Although this issue remains the focal point of official U.S.-Vietnameseinteraction, the United States and Vietnam each have a number of otherinterests in pursuing improved bilateral relations. Both have commercialand security interests, while the U.S. agenda also includes promotion ofdemocracy and respect for human rights.

In the commercial area, a number of U.S. companies and businessorganizations have pointed to opportunities in the Vietnamese market. In asurvey by the U.S.-ASEAN Business Council, 110 companies estimated thatthey expected more than $8 billion in trade and investment opportunitiesin Vietnam over the next 5 years. The projected points of concentration inthis universe reflect portions of Vietnam’s national agenda for investmentfor development. They include the power sector, transportation, roadconstruction, and telecommunications, as well as the oil and gas sector.Services and consumer goods are also expected to offer opportunities.While name brand recognition is often already high for U.S. products,private sector representatives pointed out that firms that successfullyestablish themselves in this new market at an early date may have anadvantage over their later-arriving competitors. Vietnamese officials haveindicated that American products are welcome, while adding that U.S.capital, technology, and management expertise are highly valued inVietnam. Aviation, oil and gas, and telecommunications are singled out assectors where access to superior U.S. technology is highly desired.

For their part, Vietnamese officials believe that the United States can be alucrative market for Vietnam’s exporters, just as it has proven to be a keymarket for other developing countries in Asia. This will be especially trueif the United States grants Vietnam MFN status. U.S. imports from Vietnamwere reported to amount to about $48 million during the first 11 months of1994, with coffee accounting for nearly 60 percent of this total. However,


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the Vietnamese garment industry is growing, and, if the example set byother Asian success stories is followed, Vietnamese exports of apparel,electronics, and other labor-intensive products can be expected to riserapidly. In addition, while retaining, to a degree, the suspicions held overfrom a prior era, Vietnamese authorities are anxious to benefit from theassistance that can be provided by Vietnamese expatriates, especiallytechnical and managerial skills that are lacking in Vietnam. Improvedrelations with the United States may facilitate Vietnamese access to thisexpertise.

In the security area, the United States shares Vietnamese interest inmaintaining stability in the region. The United States has increased itsoverall foreign policy emphasis on the Asia-Pacific region, largely becauseof the United States’ increased stake in the area’s economic growth. In thiscontext, the United States has renewed its commitment to maintainingpeace and stability in the region. While maintaining a military presence inthe region, the United States has supported development of new regionalmechanisms to avoid conflict. These include the ASEAN Regional SecurityForum, which includes the United States and Vietnam, as well as Chinaand others in the region. Peaceful settlement of the regional dispute overthe Spratly Islands and other issues involving Vietnam that may arise is inthe interest of the United States. One motivating factor behind Vietnam’sefforts to develop better relations with the United States is the balancingeffect that a U.S. presence can have on Chinese and Japanese influence inSoutheast Asia.

Promoting progress toward democracy and protection for human rights inother countries is an established U.S. foreign policy goal. Vietnameseofficials have indicated that they will discuss these issues with U.S.representatives, although their concepts in these areas differ from thoseheld in the United States. U.S. government and other analysts commentedthat part of the rationale for moving forward with Vietnam is that openingVietnam to the world community generally, and U.S. involvementspecifically, will foster the spread of more democratic political thought.

As stated in the Foreign Assistance Act and related legislation, concern forthe welfare of the poor is also a traditional element in U.S. foreign policy.International organizations as well as Vietnamese sources report thatpoverty continues to be a severe problem in Vietnam. For example,malnutrition rates among children are very high. Vietnam already has thethirteenth largest population in the world, and current population growthis adding about 1 million new Vietnamese to the population each year,


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while the quality of social services, including health care and education,has declined.

U.S. officials also share with their Vietnamese counterparts concern aboutpotential growth in drug trafficking both within and through Vietnam fromthe nearby golden triangle opium-producing region. Finally, Vietnamcurrently lacks the capacity to address major environmental problems thathave national and international implications, including ongoingdeforestation and destruction of fertile soils.

Vietnam Faces anUncertain Future

Prospects for EconomicProgress

Many U.S. and foreign analysts believe that Vietnam has the potential tobecome the next dynamic Asian economy. Among other considerations,these analysts cite (1) continued progress in the Doi Moi reform program;(2) steady 6 to 8 percent rates of gross domestic product growth in recentyears while keeping inflation under control;13 (3) the relatively high qualityof Vietnam’s plentiful, low-cost labor force; and (4) the geographiclocation of Vietnam, surrounded by others that have achieved remarkableeconomic successes in recent years, such as Malaysia, Indonesia,Thailand, and southern China.

While economic trends suggest that Vietnam is on course to accomplish itsgoal of doubling its gross domestic product during the 1990s, this is not aforegone conclusion. While noting positive aspects of the situation inVietnam, U.S. and foreign analysts also point out that the country is stillplagued by problems that developed during decades of war andcommunist economic policies. These include an inadequate physicalinfrastructure; legal and financial systems that, despite recent reformmeasures, cannot support a modern market economy; and bureaucraticobstacles that include unclear lines of authority and corruption. WhileVietnam will continue to require substantial infusions of foreign capitalfrom both private and official sources to accomplish its goals, actualcommitments from both sources have lagged behind announced pledges.One Vietnamese official commented that less than one-quarter ofannounced private foreign investments have been realized so far.

13Inflation has become a problem recently, however. For example, prices reportedly increased by morethan 7 percent during the first 2 months of 1995.


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Even if Vietnam does achieve its goals, it will remain a relatively smallmarket in the near term. Table 3 provides a basis for comparing Vietnam’spotential economic significance to the United States with the relativesignificance of some other countries in the region. The table also givessome indication of the importance that Vietnam might someday assume.As the table shows, the United States has a trade deficit with all of thesecountries.

Table 3: Vietnam’s Trade With theUnited States Compared With That ofOther Asian Countries (1993)

Dollars in billions

CountryPopulation in

millions Total tradeExports to

U.S.Imports

from U.S.

Vietnam 72 $ 8.2 • •

Indonesia 191 65.2 $ 5.2 $ 3.3

Philippines 64 29.2 4.3 3.6

Thailand 58 83.2 8.0 5.4

Malaysia 19 92.6 9.6 7.7

Hong Kong 6 273.7 31.2 10.3

China 1,188 195.5 17.0a 10.6

Singapore 3 159.5 15.1 14.0

South Korea 44 167.9 18.1 17.9aU.S. figures show a much higher volume of Chinese exports to the United States, largelybecause China counts many goods shipped to the United States through Hong Kong as exportsto Hong Kong. In 1993, the United States reported receiving about $31.2 billion in exports fromChina and $10 billion from Hong Kong.

Sources: International Monetary Fund and, for Vietnam and Hong Kong populations, the CentralIntelligence Agency. Population figures for countries other than Hong Kong and Vietnam are for1992.

Status of Human Rightsand DemocraticDevelopment

According to academic studies and reports by human rights advocates,Vietnam has stated that it is committed to the rule of law, and thegovernment allows some latitude for criticism of its policies. Among otherreported improvements, the revised labor code recognizes the right ofworkers to go on strike. However, human rights advocates and U.S.officials point out that implementation of improved legal systems has beeninadequate, the country remains a one-party state, and basic challenges tothe leadership role of the Communist party are not tolerated. Thegovernment has been criticized for undue interference with the exercise ofreligious freedom within Vietnam and for other violations of human rights.


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In commenting on the future in Vietnam, some analysts observed that theCommunist party enjoys a high degree of legitimacy as the party that ledVietnam to independence and national unity and that no other force islikely to mount a serious challenge to party leadership in the foreseeablefuture. Vietnamese and outside observers commented that the governmentand the party have adopted a pragmatic approach to managing change thatis aimed at achieving economic growth while maintaining the party inpower. Vietnamese officials refer to the free-market, single-partydevelopment paths followed by states like Singapore and Taiwan forobject lessons for Vietnam. However, the Communist party’s commitmentto development of a market economy cannot be viewed as unequivocalbecause the party is concerned with the potential consequences, includingdemands for greater political and personal freedom.

Role in Regional Affairs Though it traditionally played a dominant role in Indochina, Vietnam’scurrent poverty severely limits its ability to exert influence in regionalaffairs, militarily or otherwise. Its most threatening potential adversary,China, possesses overwhelming military and economic resources. Vietnammay eventually establish a leadership role within an expanded andstrengthened ASEAN but is not currently in a position to exercisesubstantial influence on its own accord.

Pace of ForwardMovement

Executive branch officials and other analysts commented that the pace atwhich the administration moves toward expanded bilateral ties willdepend largely on U.S. conclusions regarding developments withinVietnam.

Administration officials emphasized that progress on the POW/MIA issueremains the foremost consideration in evaluating possible additional stepsforward. The administration has predicated further progress toward fullrelations on progress in specific areas of concern within this general issue,including recovery and repatriation of American remains, resolution ofoutstanding last-known-alive discrepancy cases,14 trilateral investigationsalong the Lao-Vietnamese border, and recovery of relevant documentationfrom sources inside Vietnam. Increased respect for human rights and

14These are individuals whose fate remains unknown, but who were alive when last in contact withU.S. forces, and with regard to whom intelligence indicates that the government of Vietnam should beable to either provide substantial information concerning their fate or recover their remains. Oneexample would be an individual who parachuted from a disabled aircraft in the immediate vicinity ofNorth Vietnamese ground troops but was never officially reported as killed or captured by NorthVietnam.


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movement toward democracy within Vietnam are also viewed as keyconcerns when considering additional steps, such as granting MFN status orinaugurating activity by Eximbank and other agencies. While not at thecenter of current discussions, U.S. commercial and security concerns arealso factors in the debate on the future of U.S.-Vietnam relations.

Agency Commentsand Our Evaluation

We discussed a draft of this report with representatives from theDepartments of State and Defense, and both Departments providedwritten comments, reproduced in their entirety in appendixes I and II,along with our specific evaluations of individual comments. Both agenciesemphasized that progress on the POW/MIA issue has been the foremostconsideration in U.S. diplomatic initiatives regarding Vietnam. We believethat the report makes clear the linkage between executive branch actionsand the POW/MIA issue. The agencies also suggested some clarifications andprovided additional details, particularly with regard to the recent historyof U.S.-Vietnamese negotiations. These suggestions have beenincorporated into the report where appropriate.

Scope andMethodology

To obtain information for the report, we interviewed and collecteddocumentation from officials of the U.S. and Vietnamese governments inWashington, D.C., and New York, and from the embassies of Japan, Korea,Australia, France, Indonesia, and Malaysia, and the Taipei Economic andCultural Relations Office. We spoke with representatives of U.S.companies doing business, or interested in doing business, in Vietnam. Wealso spoke with officials of business groups, IFIs and the U.N., NGOs withoperations in Vietnam, individuals and groups concerned with the POW/MIA

issue, representatives of the Vietnamese-American community, andacademics who have studied Vietnam and international affairs inSoutheast Asia in general. We did not evaluate the efficacy of U.S. andVietnamese efforts toward resolution of the POW/MIA issue.

We conducted this review from February 1994 through January 1995, inaccordance with generally accepted government auditing standards.

We are sending copies of this report to the Secretaries of State andDefense. We will also make copies available to others upon request.


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If you or your staff have any questions concerning this report, I can bereached on (202) 512-4128. Major contributors to this report are listed inappendix III.

Joseph E. KelleyDirector-in-ChargeInternational Affairs Issues


Contents

Letter 1

Appendix I Comments From theDepartment of State

26

Appendix II Comments From theDepartment ofDefense

29

Appendix III Major Contributors toThis Report

33

Tables Table 1: Vietnam’s Largest Trading Partners in 1993 7Table 2: Five Largest Sources of Foreign Direct Investment in

Vietnam7

Table 3: Vietnam’s Trade With the United States Compared WithThat of Other Asian Countries

20

Figure Figure 1: The Asia-Pacific Region 4

Abbreviations

ASEAN Association of Southeast Asian NationsIFI international financial institutionNGO nongovernmental organizationsMFN most-favored nationPOW/MIA prisoner of war/missing in actionUSAID U.S. Agency for International Development



Appendix I

Comments From the Department of State


Appendix I



Appendix I



Appendix II

Comments From the Department of Defense

Note: GAO commentssupplementing those in thereport text appear at theend of this appendix.

See comment 1.

See comment 1.


Appendix II


See comment 2.

See comment 1.

See comment 3.


Appendix II



Appendix II


The following are GAO’s comments on the Department of Defense’s letterdated December 20, 1994.

GAO Comments 1. Report text was modified to reflect this comment.

2. We agree that Vietnamese-American leaders continue to opposenormalization of U.S.-Vietnamese relations on democracy and humanrights grounds. In the community at large, however, there has been somereduction in the intensity of opposition to taking steps toward normalizedrelations.

3. This statement has been deleted from the final report.


Appendix III

Major Contributors to This Report

National Security andInternational AffairsDivision, Washington,D.C.

Benjamin NelsonLawrence SudaMichael McAteeDorena RodriguezRichard Kelley

(711070) GAO/NSIAD-95-42 U.S. Vietnam RelationsPage 33

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