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The world is closely watching the developments in Hong Kong. Brave youngsters are testing the limits and patience of the Hong Kong authorities, first protesting against the extradition law, enabling Hong Kong citizens to be sent to China in case of serious allegations, and now with much broader demands for several kinds of liberties. Anybody with who cares for personal and political freedom can only watch in great sympathy, knowing that this is a modern day version of a number of small Davids against the towering power of the Chinese autocratic Goliath, with the Hong Kong authorities as its stumbling middle man.
I happened to be in Hong Kong for a few days, just for touristic purposes, in the first half of the past week. Arriving from mainland China on Monday, we encountered the protests a number of times. The protests caused major traffic jams, making it impossible to leave the train station in the regular way. Yet a small detour on the metro sufficed to reach our hotel. Later that night, we tried to reach one of the night markets, which turned out to be impossible: not only had the traders already packed their stuff, because a prominent protest location was just around the corner, students had also blocked the road and made sure our taxi returned nicely to where it came from.
In the hotel we could watch live footage from confrontations between the police and the protesters, with the latter throwing stones and rocks against a police station just a few hundred meters from our hotel in Kowloon City. At times, it seemed there were as many journalists as there were protesters, which is of course an encouraging sign from the perspective of press freedom. The next day we went to Hong Kong University, but only the Student Union was in full protest mode, there were no visible signs of other unrest at the campus.
There were lots of protests at night though, as the coverage in the main Hong Kong quality paper South China Morning Post made clear.
One of the main questions this week was whether the Chinese army or police force would interfere. The local Chinese army commander hinted at it, while about 12,000 policemen gathered in nearby Shenzhen, just across the border in the mainland. The Hong Kong authorities, notably executive leader Carrie Lam and several police commanders, emphasized they were perfectly capable of handling this situation themselves. Given the developments in the past months one can question this, but the hesitation of Beijing to interfere is comprehendible. They do not want unrest, in the wake of the 70th anniversary of the People’s Republic later this year, while they know that direct action will make it impossible to get realigned with Taiwan in the foreseeable future, which has been a main goal of any Chinese leader since Mao, current leader Xi Jinping in particular.
Lam hinted at a press conference that the protests only foster the quick termination of the ‘one country two systems’ situation, agreed as part of the handover Treaty with the British in the nineteen eighties. One of the important elements is that Hong Kong keeps its own liberal laws and regulations for the first 50 years after the transfer of sovereignty in 1997.
Earlier protests died down, without much change achieved, mainly because the protesters did not succeed in broadening their movement to the wider public in Hong Kong. Although there was a supporting demonstration of public servants last Friday, this may happen again. On Wednesday, small traders already complained about the income they lose due to all the protests. And there are the mysterious groups of men in white t-shirts who beat up the protesters.
However, in the midterm, the protests will be futile. In the end this is an internal Chinese issue. Sure enough, there will be international protests, and depending on the outcome of the current crisis, perhaps also economic sanctions against China, if it just ends the protests by police or army action. These international protests are mainly symbolic though. Economic sanctions are the instruments of the impotent, not the powerful. Never have they worked to change a regime, or to make live very miserable for the leaders of a country. They do hit the population, but his and her concerns are easily overlooked in the international arena. The sad but undeniable truth is that no foreigner is going to die for Hong Kong. The great powers will treat this an internal Chinese affair. The USA already said so. No foreign power will intervene in China if the terms of the Sino-British Treaty are tampered with. At present, it is far more likely that Hong Kong will lose its special status, perhaps also earlier than the 50 years agreed, than that China will change into the liberal direction. The world may protest, but in the end the Chinese will have their way.
There is a clear consensus with regard to the fact that Vietnam has been one of the economic success stories of recent years.
The country has witnessed robust economic growth (GDP growth rate for 2018 was estimated at 7.15%, while the growth rate for 2019 is estimated at 6.6%) and has been successful in poverty reduction. Foreign Direct Investment (FDI) for the first five months of 2019 reached a four year high of over $16 billion (a year on year increase of over 69%).
If one were to look at a sectoral break up of the FDI, manufacturing and processing came right on top, receiving over $10 billion.
US appreciation for Vietnam’s economic achievements
Today, an opening 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.
In 2019, on the sidelines of his Summit with North Korean leader Kim Jong Un, the US President, while acknowledging Vietnam’s progress, stated that North Korea could emerge as another Vietnam if it denuclearized.
US Secretary of State Mike Pompeo had made a similar point while addressing a meeting of the US-Vietnamese business community in 2018.
Increasing FDI and factors which have contributed to it
It would be important to point out that FDI in Vietnam is also not restricted to any one particular region or city. While Hanoi (the Vietnamese capital), which drew well over $2.7 billion, and Bin Doung province in South Vietnam, are on top, North Vietnam too, is managing to draw significant investments. The shipping hub of Haiphong has witnessed significant economic growth since, after the imposition of US tariffs, a number of Chinese companies have shifted to the Shenzhen-Haiphong Economic and Trade Cooperation Zone.
Economic reforms (dubbed as Doi Moi) which began in 1986 have played a crucial role in Vietnam’s economic success. The main advantages which Vietnam has over its competitors are relatively low labor costs (though the country has witnessed a significant year on year growth in minimum wages between 2015 and 2019), increasing consumption as the result of a burgeoning middle class (currently 13% of its total population; it is estimated, by the World Bank, that in 2026 over one quarter of Vietnam’s population will be part of the middle class), and its geographical location.
Vietnam a beneficiary of the US-China Trade war and the CPTPP
Vietnam has benefited significantly from the US-China Trade war. A number of companies have shifted manufacturing operations from China to Vietnam, and others like Apple (which plans to shift anywhere between 15% and 30% of it’s iPhone production), Microsoft, Amazon, Sony, Nintendo, and Dell are likely to shift in a big way to Vietnam.
The Southeast Asian country is also gaining significantly by being part of the CPTPP. Exports to both Japan and Canada have risen significantly in the first quarter of 2019, if one were to look at the year on year figures.
In the past two decades ties between the US and Vietnam have improved significantly. The foundations were laid by Bill Clinton; during his first tenure, the Vietnam Foreign Ministry opened its office in Washington DC (1993), and the US State Department opened its office in Hanoi in the same year. Similarly, the US lifted its trade embargo on Vietnam in 1994. Vietnam also figured importantly in Obama’s ‘Pivot to Asia’ and was part of the Trans Pacific Partnership (TPP) that the US abandoned.
US President Donald Trump has given mixed signals on Vietnam. Trump has, though, referred to the geopolitical relevance of Vietnam, and it is for this reason that the US President articulated his vision for a free and open Indo-Pacific in Vietnam in 2017 (while speaking at the APEC CEO Summit at Da Nang).
In March 2018, U.S. Navy aircraft carrier USS Carl Vinson visited the port city of Da Nang for the first time since the end of the Vietnam war in 1975. Former Defence Secretary Jim Mattis visited Vietnam twice in 2018, and reiterated on both visits the increasing relevance of the Washington-Hanoi relationship.
The fact that the US President chose Hanoi for his 2nd summit with North Korean leader Kim Jong Un was significant not just in terms of symbolism, but also in sending a message that the Southeast Asian country was strategically relevant. During his visit in 2019, Trump of course praised Vietnam for its economic success, but a number of trade deals (Boeing inked a deal of over $12 billion to sell 100 planes to Vietnamese budget carrier, Viet Jet, for example) were also arranged.
Imposition of Trade Tariffs
As a result of trade wars, Vietnam’s exports to US have also witnessed a sudden rise. Exports for the period January-June 2019 rose 27.4% year on year. The US trade deficit with Vietnam for the first six months was estimated at $25.3 billion (in 2018, this was $40 billion).
US has recently imposed tariffs of 456% on certain steel products which were imported from Vietnam. According to the US Commerce Department, certain corrosion resistant steel products and cold-rolled steel which were supposed to be manufactured in Vietnam actually underwent only minor processing in the Southeast Asian country, but used substrate of Taiwanese and South Korean origin (duties on these South Korean and Taiwanese products had been imposed in 2015 and 2016 respectively).
Imposition of tariffs by the US is not likely to end here. There are strong indicators that the US could impose further tariffs on Vietnam, citing the reason that a number of Chinese goods are rebranded there to avoid tariffs (this is dubbed as transshipment). Trump had made some harsh remarks, including in an interview with Fox News:
Vietnam is almost the single worst — that’s much smaller than China, much — but it’s almost the single worst abuser of everybody.
It remains to be seen as to what impact the imposition of tariffs will have not just on Vietnam’s economy (the increase in bilateral trade and exports), but also on the bilateral relationship which has witnessed significant improvement due to the efforts of successive US Presidents. Vietnam’s growth and prosperity is also important from a strategic perspective, as it is one of the countries which has been strengthening defense ties with the US, Japan, and India. While Vietnam does have robust economic ties with China, it also has serious differences over the South China Sea (only recently, tensions between both countries had escalated when a Chinese survey ship and coastguard vessels had entered disputed waters near the Spratly Islands).
Vietnam provides a good lesson for many other countries. It has stuck to the basics, and so far has been very astute in balancing out economic relationships between China and other countries. Vietnam’s real test lies in how it deals with Trump’s unpredictability, and deals with the turbulence resulting out of Trump’s brash decisions. If the US President actually slaps more tariffs on Vietnam, not only will it have an adverse impact on bilateral ties and undo all the good work of previous US and Vietnamese administrations, but fissures between Hanoi and Washington will also have an adverse impact on efforts towards promoting a Free and Open Indo Pacific. On the other hand, Beijing, the biggest loser of the China-US trade war, would certainly not mind tensions between Washington and Hanoi (which has been a big beneficiary of the trade war).
For the time being, it is highly unlikely that the Trade war between Beijing and Washington will be resolved. In May 2019, Trump increased tariffs on Chinese commodities (worth $200 billion) from 10% to a whopping 25%. So far, the US has imposed tariffs worth about $250 billion on China, while China has retaliated with tariffs on US goods estimated at well over $100 billion.
It would be pertinent to point out that trade disputes have not been restricted only to Washington and Beijing. Imposition of tariffs has been a bone of contention with numerous US allies, including Japan.
Of late, trade issues have resulted in major differences between New Delhi and Washington. Even though there are convergences between both countries on numerous strategic issues, resolving the differences between both sides on trade-related matters is likely to be an onerous responsibility.
In response to tariffs imposed by Washington, New Delhi retaliated, and has imposed tariffs, estimated at $200 million, on 29 commodities (including apples, almonds, and chickpeas). India’s decision was a response to Washington’s decision to impose tariffs, of 10% and 25% on aluminium and steel, in May 2018. Last year, New Delhi refrained from imposing tariffs, but did raise import taxes on a number of US goods to 120% after Washington declined to exempt New Delhi from higher steel and aluminium tariffs. The key propelling factor for India’s recent imposition of tariffs was the US decision to scrap the Generalized System of Preferences (GSP) for India from June 5, 2019. India benefited immensely from this scheme, as it allowed duty-free exports of up to $5.6 billion from the country.
Pressure on Trump
Even though no solution is in sight, there are a number of lobbies in the US, especially trade groups and US businesses, which have been repeatedly urging the Trump Administration to find a solution to the current impasse with China.
Only recently for instance, 600 companies, including Walmart, in a letter to the U.S. President, urged him to resolve trade disputes with China, stating that tariffs were detrimental to the interests of American businesses and consumers. The letter was sent as part of the ‘Tariffs Hurt the Heartland’ campaign.
To underscore the detrimental impact of trade wars on the American economy some important estimates were provided. The letter stated that tariffs of up to 25% on $300 billion worth of goods could lead to the loss of two million jobs. Costs for an average American family of 4 would also increase an estimated $2000 if such tariffs were to be imposed.
Reports indicating the challenges to the US economy and FDI from Chinese companies in US
A number of surveys and reports illustrate the profound challenges which the US economy is facing, as well as a drop in FDI from China.
The University of Michigan’s consumer sentiment index also revealed a drop in consumer sentiment from 100 in May to 97.9 in June. This was attributed to trade wars between China and the US.
According to a survey released by the China General Chamber of Commerce USA, investment by Chinese companies in the United States has witnessed a significant decline since 2016 (including a sharp drop in 2018 and early 2019).
A number of important events have been held recently, where efforts were made to draw more Chinese investments to the US. One such event was the Select USA Summit. Speaking at the Summit, US Commerce Secretary Wilbur Ross stated:
We welcome investment from any place as long as it’s investment that poses no challenges for national security.
US states and FDI
What was clearly visible at the Select USA Summit was the fact that a number of US states pitched for expanding economic ties with China, and drawing greater Foreign Direct Investment.
The state of North Carolina sought to attract investments in areas like IT, aviation, and biotech. The US headquarters of Lenovo are in the state of North Carolina. Trump’s trade wars have hit the state in a big way, and one of the sufferers has been soy bean farmers. As a result of a 25 percent imposition of tariffs, the price of a bushel of soy beans has dropped to $8, from $10 in 2018.
Other US states brought to the fore the impact of tariffs on their respective economies. According to a senior official from the state of Louisiana for instance, it has suffered immensely as a consequence of the imposition of tariffs. Agricultural commodities from Middle America to China are imported through export terminals in Louisiana. Don Pierson, the senior official from Louisiana, said that the agricultural economy of the state, as well as the logistics economy of the state, have taken a hard hit as a consequence of the trade wars. Pierson also spoke about the possibility of exporting LNG from Louisiana to China. Chinese companies in the state of Louisiana, which include Yuhuang Chemical Group (Shandong’s), have made major investments. Shangdong’s decided to invest $1.85 billion in a methanol production complex (this was one of the largest Chinese direct investments in US). Wanhua Chemical Group invested over $1 billion (1.2) in a chemical manufacturing complex in southeastern Louisiana.
A number of Chinese companies have also begun to realise that there is need to adopt a nuanced approach, and are still tapping certain US states for investment.
Another important event was the Select LA Summit. The Los Angeles Mayor Eric Garcetti, and Lenny Mendonca, chief economic adviser to the California governor, assured overseas investors of all possible support from the town of LA, as well as the state of California.
Impact of trade disputes and Washington’s stance vis-à-vis Huawei
US states and Chinese provinces have been at the forefront of improving economic ties between both countries. Both are likely to suffer as a consequence of not just the trade war between both countries, but also the US ban on Huawei. The tech company, according to a report published in 2016, contributes 7% of the GDP of the town of Shenzhen (Guangdong province). Affiliates of Huawei provide employment to an estimated 80,000 people, while a research facility in a nearby city of Dongguan, provides employment to well over 3,000.
In conclusion, it is important for all stakeholders, not just businesses from both countries, to play their role in resolving economic and technological disputes between China and the US. It is also important for Chinese provinces as well as US states to play a pro-active role in reducing tensions. Both governments, while realising the importance of federating units, have set up official dialogues and set up other mechanisms for sub-national exchanges. It is important that these platforms now contribute towards reducing the divergences between both countries. While all eyes are on the political leadership of both countries, it is important to realise that the stakeholders in the US-China relationship are not restricted to Beijing and Washington DC.
- Modern China: From the Great Qing to Xi Jinping Connor Gahre, Origins
- Modern America: Flirting with isolation Henry Nau, Claremont Review of Books
- Modern Britain: Success and failure with inequality Chris Dillow, Stumbling & Mumbling
- Can American dads have it all? Ross Douthat, New York Times