The nature of the China-US-Vietnam economic triangle

While addressing a joint press conference in Hanoi, after his summit with North Korean Leader Kim Jong Un, US President Donald Trump spoke not just about the Summit, but also the current state of US-China relations. Trump criticised his predecessors for not doing enough to address the trade imbalance with China, while also making the point that he was all for China’s economic progress and growth, but not at the cost of the US.

If one were to look beyond the Summit in terms of the US-Vietnam economic relations, top US companies – Boeing and General Electric – sealed some important deals.

Given the focus of Trump’s visit (which was the Summit with Kim), perhaps these deals did not draw the attention they ought to have. The fact is that the US has begun to recognise Vietnam’s economic potential, as well as its geopolitical significance in Asia. This long note will give a backgrounder to Vietnam’s economic growth story in recent years, highlight some of it’s key strategic relationships, and then examine the nature of the China-US-Vietnam economic triangle.

Vietnam’s growth story: The key reasons

There is absolutely no denying the fact that Vietnam has emerged as an important engine of economic growth within the Association of South East Asian Nations (ASEAN) region in general, and has been able to emerge as a top performer within the Cambodia, Myanmar, Laos, and Vietnam (CMLV) bloc in particular. Economic reforms (doi moi) began over three decades ago in 1986. In recent years, some of the key factors which have driven Vietnam’s growth story, especially its success in drawing FDI are; a large labour force (57.5 million), and lower wages for workers (there are varying estimates, but the wages of production workers are estimated at around $216, monthly, and this is half of what labour would charge in China). Electricity too is way cheaper in Vietnam than other competitors in the ASEAN region. As of June 2018, Vietnam charged 7 U.S. cents per kilowatt hour, while the cost of electricity in Indonesia was 10 U.S. Cents, and Philippines charged nearly thrice the amount — 19 U.S. Cents.

If one were to look at the growth and FDI figures, they are a clear reflection of Vietnam’s success. In 2018, Vietnam’s growth rate was estimated at a little over 7% (7.08), and this was the highest in 11 years. Disbursed FDI into Vietnam was estimated at $19.1 billion for the year 2018 (disbursed FDI for three years was estimated at well over $50 billion). Total FDI for the year 2018 was estimated at $35 billion. Japan with over $8 billion was the single largest investor in 2018. Other countries which have a strong presence in Vietnam are South Korea and Singapore. China is the 7th largest investor in Vietnam. One of the major attractions apart from the economic potential is the country’s location (it is easier to expand to other countries like Myanmar, Laos, and Cambodia).

As a result of growing consumer demand and increased tourism, revenues from retail sales & consumer services and travel & tourism also witnessed a significant increase in 2018. Revenue from retail services was estimated at over $190 billion, while travel & tourism’s revenue was nearly $2 billion. The increased revenue from travel & tourism is driven by the rise in tourism in 2018 (almost 20 percent).

Vietnam has close trade relations with both China (Vietnam is China’s largest trade partner in ASEAN) and the United States. Bilateral trade between both countries for the period January-November 2018 was estimated at $97 billion, though this was heavily skewed in favour of Beijing (the total trade deficit was over $20 billion). In the case of US-Vietnam trade, it is heavily skewed in favour of Vietnam (the US runs a trade deficit of over $25 billion).

Strategic Importance

Vietnam’s strategic importance is also increasing. Even before the recent Trump-Kim UN Summit, Vietnam has hosted a number of important events in recent years, such as the Asia Pacific Economic Cooperation meeting in 2008 (in Hanoi) and in 2017 (in Danang), the high-powered World Economic Forum in 2018, and frequent ASEAN summits.

It has been strengthening defense and security ties with Japan, the US, and India in recent years. One of the key reasons for this pro-active strategic outreach is the China factor.

During former Vietnam President Truong Tan Sang’s visit to Japan, both sides issued a joint statement which referred to the need for upgrading the bilateral relationship to an ‘Extensive Strategic Partnership for Peace and Prosperity in Asia’. The joint statement made references to closer security cooperation, and made mention of Japanese assistance for capacity-building of Vietnam’s maritime enforcement agencies. Both sides also reiterated their shared opinion on the South China Sea issue, as well as de-nuclearization in North Korea. In July 2018, Japan and Vietnam held the 6th Defence Policy Dialogue (this was co-chaired by Deputy Defense Ministers of both countries). In September 2018, a Japanese Maritime Self-Defense Force (JMSDF) submarine, Kuroshio, docked at Cam Ranh International Port in Kham Hoa. While security cooperation has been increasing in recent years, this development has emphasized the increasing convergence of both sides on important geopolitical issues. Japan has also been batting for greater Japan-Vietnam cooperation in the context of the Indo-Pacific. The Japanese Prime Minister, in an interview in February 2019, reiterated the need for a stronger Japan-Vietnam partnership for pushing forward the idea of a ‘Free and Fair’ and ‘Open’ Indo-Pacific.

Vietnam has also been bolstering strategic ties with the US. In July 2017, Washington and Hanoi conducted the 8th Naval Engagement Activity. The United States is also providing support for Vietnam’s participation in UN peacekeeping operations. In 2018, more than four decades after the end of the Vietnam War, US Navy aircraft carrier USS Carl Vinson arrived in the port city of Danang, a key battleground during the war. This was an important step in the context of strategic cooperation between both countries, but also to send a message to China that the latter’s militarization and aggression over the South China Sea issue will not be taken lying down.

Vietnam is also enhancing security ties with Japan and India. During his visit to Vietnam in 2016, Indian Prime Minister Narendra Modi had offered a credit line of $500 million for defense cooperation. During Vietnamese President Tran Dai Quang’s visit both sides resolved to work jointly for a ‘free and prosperous’ Indo-Pacific.

While Vietnam has been strengthening it’s strategic ties with the above countries, it has been a tad cautious with regard to the Indo-Pacific narrative and has said that it was against any military alliance as this would have an adverse impact on security in the region.

US-Vietnam Relations

The trajectory of US-Vietnam relations (which were influenced by the baggage of the war) have steadily increased over the past two decades. Both sides have made efforts to put behind the acrimony arising out of the Vietnam War – though this is extremely tough given the fact that it was amongst the bloodiest conflicts of the 20th century. Some important steps were taken in the 1990s during the Presidency of Bill Clinton. In 1994, the US lifted the trade embargo against Vietnam. A bilateral trade agreement between both countries came into being in 2001 after it was approved by the US Congress as well as the Vietnamese National Assembly.

During the Obama Presidency again crucial steps were taken to strengthen the economic relationship between the US and Vietnam. The Trans Pacific Partnership (TPP), signed in 2015 and for which Obama pushed, would have benefited Vietnam immensely as the Southeast Asian country would have gained preferential access to US markets.

President Trump did make the massive trade deficit with Vietnam an election issue, and the US exit from the TPP was a setback, but a number of important developments have taken place in the context of US-Vietnam bilateral ties. In May 2017, during Vietnam President Nguyen Xuan Phuc’s visit to the US, deals worth $8 billion were signed between both sides (two major US companies were Caterpillar and General Electric). Trump mentioned the US’ trade deficit and hoped to balance that over a period of time.

While addressing the APEC Summit in November 2017, the US President had a word of praise for Vietnam’s economic progress:

…Vietnamese economy is one of the fastest-growing economies on Earth. It has already increased more than 30 times over, and the Vietnamese students rank among the best students in the world.

China-US-Vietnam Triangle

After the China-US trade wars, many argued that Vietnam could be the biggest beneficiary. So far, Vietnam has benefited (export orders to certain sectors have witnessed a rise) but not in a dramatic way (some companies are likely to relocate from China with Vietnam being a possible choice, but current evidence suggests that this has not happened on a large scale).

Deals signed during Trump’s Vietnam visit: How China has sensed an opportunity

As mentioned earlier, during the US President’s Vietnam visit a number of significant deals were signed. VietJet will buy 100 Boeing 737-Max jets and 215 GE/CFM joint venture engines, and Bamboo Airways (a start up owned by Hanoi-based conglomerate FLC Group) is buying 10 Boeing 787-9 jets.

U.S.-based aviation technology company Sabre also inked a deal with Vietnam’s flagship carrier, Vietnam Airlines. The deal, estimated at $300 million, is supposed to help Vietnam Airlines in upgrading its digital abilities and to achieve its aim of becoming a digital airline by 2020. Total deals signed during Trump’s visit were estimated at $20 billion.

The China-US-Vietnam triangle is interesting not just from a historical perspective, but also an economic dimension. What is significant is that while there is talk of US-China trade wars, and the likely benefit for Vietnam, Beijing kept a close eye not just on Trump’s statements with regard to North Korea, but also the deals signed during his Vietnam visit.

An article in Global Times makes a mention of how China can be part of the global production chain through a “completion and delivery center” in Zhoushan, East China’s Zhejiang Province. According to the article, interior work on over 700 planes can be completed in this centre.

The focus of the Trump visit was North Korea, but the deals signed will give a boost not just to economic ties between Vietnam and the US. These deals are also a clear illustration of how much importance Trump gives to big ticket business deals.

It is interesting to see the approach of China towards these deals. While keeping a close watch on the outcomes of the summit with Kim Jong Un, China also closely watched the economic outcomes of the visit and analysed how it could benefit from the same.

The conclusion of the Global Times article is especially interesting:

China has no reason to be jealous of Trump’s economic gain in Vietnam. In contrast, we hope the US can increase economic interaction with enterprises in Southeast Asian countries. Hopefully, everyone can learn that economic engagement is not a zero-sum game.

Conclusion

The China-US-Vietnam triangle is important for several reasons, including the strategic context —especially with regard to the South China Sea issue as well as the aim of achieving a ‘Free and Fair Indo-Pacific’. As for the economic context, both Trump and the Chinese are equally transactionalist and it is interesting to see Beijing de-hyphenate the North American republic’s strategic ties with Vietnam from the economic relationship.

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