More tariffs on Vietnam would be great news for China

08/07/201908/06/2019 Tridivesh Singh Maini Current Events, Politics China, Donald Trump, economic development, geopolitics, Indo-Pacific, southeast Asia, tariffs, trade war, Vietnam

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

US President Donald Trump, who recently imposed tariffs on steel imported from Vietnam, stated at the APEC CEO Summit in 2017 that:

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.

US-Vietnam ties

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).

Conclusion

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).

Southeast Asia, China, and Trumpian foreign policy in 2019

01/16/201901/16/2019 Tridivesh Singh Maini Current Events, Politics ASEAN, ASEAN Studies Centre, Belt and Road Initiative, China, diplomacy, hegemony, isolationism, Mahathir Mohammad, multilateralism, southeast Asia

A survey titled, ‘State of Southeast Asia: 2019’ conducted by the ASEAN Studies Centre (between November 18 and December 5, 2018 and released on January 7, 2019) at the think-tank Iseas-Yusof Ishak Institute came up with some interesting findings. The sample size of the survey was over 1,000 and consisted of policy makers, academics, business persons, and members of civil society from the region.

It would be fair to say that some of the findings of the survey were along expected lines. Some of the key points highlighted are as follows:

According to the survey, China’s economic clout and influence in South East Asia is steadily rising, and it is miles ahead of other competitors. Even in the strategic domain, Washington’s influence pales in comparison to that of Beijing’s. As far as economic influence in South East Asia is concerned, a staggering 73 percent of respondents subscribed to the view that China does not have much competition. A strong reiteration of this point is the level of bilateral trade between China and ASEAN (Association of Southeast Asian Nations), which comfortable surpassed $500 billion in 2017. After China, it is not the US, but ASEAN which has maximum economic clout in the region. If one were to look at the strategic and political sphere, 45% of respondents opined that China is the most influential player in South East Asia, followed by the US at 30 percent.

Second, China’s increasing influence does not imply that it is popular in South East Asia. In fact, a large percentage of the respondents expressed the opinion that China’s lack of integration with global institutions is not a very positive omen. South East Asian nations also have clear reservations with regard to the Belt and Road Initiative (BRI). 50% of respondents believed that the project would increase ASEAN countries dependence upon China, and there were serious apprehensions, with one third of respondents raising question marks with regard to the transparency of the project. A small percentage of respondents (16%) also felt that the BRI was bound to fail. Many ASEAN countries have been alluding to some of the shortcomings of the BRI, of course none was as vocal as Malaysian Premier Mahathir Mohammad. In the survey, respondents from Malaysia, Thailand, and the Philippines expressed the view that their countries should be cautious with regard to the BRI. Interestingly, even respondents from Cambodia, a country where China has made significant inroads, Japan is the most trusted country and not China.

Third, US isolationism, especially under Trump, has led to an increasing disillusionment with Washington DC in the region. The current administration has been aggressive on China, and it has sought to take forward former US President Barack Obama’s vision of ‘Pivot to Asia’ in the form of the Indo-Pacific Narrative. Senior voices within the Trump Administration, including current Secretary of State Mike Pompeo, have been trying to give a push to the Indo-Pacific Narrative and reaching out to South East Asian Countries. In July for instance, while addressing the Indo-Pacific Economic Forum at the US Chamber of Commerce in Washington, Pompeo said that the US was going to invest $113 million in new U.S. initiatives in areas like the digital economy, energy, and infrastructure. Pompeo also stated that these funds were a ‘down payment on a new era in U.S. economic commitment to peace and prosperity in the Indo-Pacific region’. Pompeo’s address was followed by a visit to South East Asia (Singapore and Indonesia), where he met with leaders from a number of ASEAN countries.

On December 31, 2018, the US also signed the ARIA (Asia Reassurance Initiative Act), which sought to outline increased US economic and security involvement in the Indo-Pacific region. ARIA has flagged US concerns with regard to China’s expansionist tendencies in South East Asia. Other key strategic issues, such as nuclear disarmament on the Korean Peninsula, have also been highlighted.

The Trump Administration has also earmarked $1.5 billion for a variety of programs in East and South East Asia.

Trump’s decision to pull the US out of the Trans Pacific Partnership (TPP) led to a lot of disappointment in the region, with allies like Singapore putting forward their views. Speaking at the ANZ Forum in November 2018, Former Prime Minister of Singapore, Goh Chok Thong stated:

…It is still a superpower but it has become less benign and generous. Its unilateral actions in many areas have hurt allies, friends and rivals alike […] America First is diminishing the global stature, moral leadership and influence of the US.

This view was also echoed by a number of experts who commented on the finding of the survey.

The Former Singapore PM also made the point that Asia needed to recalibrate its policies in order to adjust to the new world order.

ASEAN

What is clearly evident is that ASEAN needs to build a new vision which is in sync with the changing geopolitical situation. While Malaysian PM Mahathir Mohammad, by scrapping Chinese projects and referring to a new sort of colonialism emerging out of China’s BRI project, has taken an important step in this direction, it remains to be seen whether other countries in the region can also play their role in helping ASEAN weave its own narrative. For a long time now, countries have been dependent upon both the US and China, and have thought in terms of choices, but there has never really been a concerted effort to create an independent narrative.

What ASEAN actually needs is a narrative where it does not shy away from taking an independent stance, and where it is also willing to take a stand on issues of global relevance. One such issue is the Rohingya Issue. Apart from Malaysia and Indonesia, none of the other members of ASEAN has taken a clear stand. In the past, many ASEAN countries thought that they could refrain from commenting on contentious issues. Respondents to the survey felt that ASEAN states should be more involved in the Rohingya Issue.

The United States and other countries which are wary of Chinese influence should come up with a feasible alternative. So far, while members of the Trump Administration have repeatedly raised the red flag with regard to China’s hegemonic tendencies, and predatory economics as has been discussed earlier, it has not made the required commitment. While the Trump Administration has not been able to pose a serious challenge to Beijing, it remains to be seen if the Asia Reassurance Initiative Act is effective.

It is also important for Washington, and other countries, not to look at Chinese involvement from a zero-sum approach. Perhaps it is time to adopt a more pragmatic and far sighted approach. If Japan and China can work together in the Belt and Road Initiative, as well as other important infrastructural initiatives in South East Asia, and India and China can work together in capacity-building projects in Afghanistan, the possibility of US and China finding common ground in South East Asia should not be totally ruled out. Amidst all the bilateral tensions, recent conversation between US President Donald Trump and Chinese President Xi Jinping, and statements emanating from both sides are encouraging.

Conclusion

An isolationist Washington DC and a hegemonic Beijing are certainly not good news, not just for ASEAN, but for other regions as well. The survey has outlined some of the key challenges for ASEAN, but it is time now to look for solutions. Hopefully, countries within the region will shape an effective narrative, and be less dependent upon the outside world. The survey is important in highlighting some broad trends but policy makers in Washington as well as South East Asia need to come up with some pragmatic solutions to ensure that Beijing does not have a free run.