By amassing political power, Vietnamese General Secretary Nguyen Phu Trong has effectively overturned the collective leadership in his country's political system, but questions remain as to whether such a model can continue after a leadership transition in 2021. The trade war between China and the United States could persuade some companies to relocate their high-end factories to Vietnam, yet the country's unskilled workforce and lower technological capacity will be a major weakness. Vietnam has been relying on a diversification strategy to reduce its economic reliance on China, but heightened competition between Beijing and Washington could complicate Hanoi's balancing act.
Nguyen Phu Trong has emerged as an unlikely strongman. Widely regarded as a compromise figure when he became Vietnam's general secretary in 2011, the 74-year-old ideological hard-liner has quickly reshaped the balance of Vietnam politics since assuming the post of Communist Party chief. On Oct. 22, Vietnam's parliament will formally approve Trong's presidency, effectively breaking his long-espoused model of collective leadership to become the most powerful Vietnamese leader in recent decades. But unlike Chinese President Xi Jinping, Trong is far from a supreme leader; his advanced age almost certainly guarantees his retirement at the next party congress in 2021 — a factor that also raises questions about his plan for succession and the sustainability of a more individualistic rule in what remains a factional political scene. For the moment, however, maintaining a mere grip on power is only half of Trong's task. Beyond that, Vietnam's leader will strive to mobilize the country through an era of rapid external shifts to sustain the high growth that has granted legitimacy to the Communist Party.
The Big Picture
Over the past decade, Vietnam has become a dynamic emerging economy in Southeast Asia thanks to its vast and cheap labor pool, stable political environment and favorable investment policy. Like China before it, Vietnam is now striving to climb the industrial value chain, but its ability to do so will depend on a number of factors.
Critically, changes in the flows of global trade and investment provide unprecedented opportunities for Vietnam to upgrade its economy, which has posted growth rates of 7 percent since 2000 and enjoys a vast pool of young labor and an advantageous location between China and the Pacific sea lane. At the same time, Vietnam's economy occupies the low end of the supply chain and relies heavily on foreign investment. Because of these global changes, Hanoi is in a race against time so that it does not fall prey to its Southeast Asian rivals and the inevitable middle-income trap. And while balanced relations with external powers and trading partners will be critical to Vietnam's transition, its task is increasingly complicated by the escalating competition between China and the United States, obliging the country — like other emerging economies — to pick its way through the battlefield at minimum risk to itself.
Upgrading a Foreign Investment Strategy
For the better part of the past three decades since 1986, when the Doi Moi economic reforms began transforming Vietnam into a "socialist-oriented market economy," foreign direct investment has been indispensable to the country's economy — and made it perhaps the most successful regional development story after China. Foreign investments contribute roughly 50 percent of the country's total production value and 70 percent of its export revenues, while directly employing 3.6 million people, as well as another 5 million indirectly. This influx of money has made Vietnam attractive for producers of lower-end garments, leather, shoes and accessories, but Hanoi is ultimately searching for something else. The government is currently drafting a plan to upgrade the country's foreign investment strategy by abandoning the simplistic pursuit of quantity in favor of value-added investments in high-tech, information and communication technology, electronics, processing and other related industries. At the same time, it is aiming to strengthen domestic sectors that have not previously enjoyed the benefits of foreign direct investment.
That's in part because Vietnam has yet to reap the benefits of more value-added in the economy because largely foreign-owned companies are responsible for most of the country's exports and because it must still import most of its raw materials. Indeed, as long as it fails to establish adequate supporting industries, Vietnam will have to import much of the machinery, electronics and fabrics that help it to manufacture smartphones, garments and electronic products, thereby contributing to perennial trade deficits.
At the same time, strong competition at a provincial level for foreign investments sometimes hurts domestic companies in the long term. Stronger foreign competitors and politically powerful state-owned sectors continue to squeeze domestic manufacturers, who have not yet developed sufficient capacity and benefited from technological know-how. And as the race to capture the lower-end manufacturing supply chain intensifies with competition from Bangladesh, Sri Lanka and Myanmar, Vietnam — whose labor costs already have risen to the level of the Philippines and Indonesia — must upgrade its industrial value chain before its competitive advantage erodes.
To further strengthen Vietnam's position in an era of growing competition among emerging Southeast Asian economies, Hanoi has pursued free trade agreements in recent years. The country now boasts 12 free trade deals — among the most of any regional country. Vietnam is also unique in that it is the least-developed economy to become a signatory to such free trade deals as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and other similar agreements with the European Union — both at a time when it faces the challenges of restructuring its state-owned enterprises, the main drivers of its economy, and enforcing more stringent labor and environmental standards.
An influx of money has made Vietnam attractive for producers of lower-end garments, leather, shoes and accessories, but Hanoi is ultimately searching for something else.
Emerging Opportunities
In recent years, Hanoi has also made some headway in attracting higher-end foreign investment. The country now hosts several facilities for Intel, LG and Microsoft, and is the largest overseas production base for Samsung, which alone contributed to a quarter of Vietnam's total exports in 2017 (even if that figure represents a degree of reliance that Hanoi would prefer to avoid by attracting companies that have a similar stature to Samsung). The country has also made positive progress in fostering more research and development and supporting industries in southern industrial parks, but the process remains slow, leading the government to prioritize real estate investments as a quicker way to rectify the shortfall in the government budget, which stands at around 6 percent of gross domestic product.
With the exception of Samsung, major brands have previously come to Vietnam under a so-called China Plus mechanism in which the Southeast Asian country became a relative afterthought in comparison to China, where such companies directed most of their energy, automation efforts and research and development investment. But because of the long-term effects that a U.S.-Chinese trade war could have on the tech supply chain, companies already sensitive to China's rising costs could rethink their strategy and expansion plans. The China Plus mechanism puts Vietnam in an advantageous position if manufacturers for products like auto parts and price-sensitive electronic components begin shifting production away from the mainland. As an enticement, Hanoi will likely offer strong tax and land incentives to lure Chinese-owned companies, as well as big multinationals from Japan, South Korea and the West. Nevertheless, Vietnam's dearth of skilled labor and high-end infrastructure means the country will face strong competition from Malaysia, Thailand and even the Philippines in drawing more sophisticated manufacturing.
Maintaining a Delicate Balance
Like China, Vietnam cannot overhaul its industry overnight. Such a transition requires a strong investment in infrastructure, technological capacity and a greater development of domestic industrial capabilities. Vietnam's close geographic proximity to China and longtime maritime disputes with the northern power leave it in the most delicate position of any nation in Southeast Asia. As a consequence, Hanoi has focused on diversifying its economic and strategic partnership with major powers such as the United States, Japan, South Korea and Russia, while avoiding any disruption to its relations with China and the trade and economic benefits which that relationship yields. Indeed, Hanoi's willingness to suffer through the pain of reform to proceed with all of its free trade agreements speaks volumes about its strategy to diversify not only its investments but also its strategic partnerships.
Heightened competition between Beijing and Washington, however, will complicate Hanoi's balancing act. The United States has identified Vietnam as a key regional partner in its broader strategic competition with China, and bilateral security relations have increased markedly through a series of high-level official exchanges and port calls. For Hanoi, increased security cooperation with external partners is essential in its quest to balance against China. But choosing between U.S.-led and Chinese-led initiatives in trade and security has not been an option since the Cold War ended. The emerging power competition is upsetting Vietnam's carefully maintained balances and risks forcing it to choose between China's economic gains and the United States' efforts to counter the East Asian giant.
Editor's Note: The charts accompanying this analysis have been replaced with updated versions.
No comments:
Post a Comment