Vietnam’s “export nation” has a dead end

International Business News – In Vietnam, where the economy continues to grow at a high rate, the internal affairs, which had been dominated by stability, are faltering. In a change of presidency, the number two figure in the Communist Party of Vietnam, Vu Van Huong (52), who was the executive secretary of the Central Committee of the Communist Party of Vietnam, has been promoted to the presidency of Vietnam. Vu Van Huong, the youngest of the 16 Politburo members, is considered close to Vietnam’s top leader Nguyen Phu Trong (78), and there are voices concerned about tighter regulation of the economy.

But there is a need to pay more attention to the structural problems that underlie Vietnam’s current economic growth.

Former Vietnamese President Nguyen Xuan Phuc (68), who was forced to resign midway through his term in early 2023, was an active promoter of Vietnam’s economic opening, including through his participation in the Trans-Pacific Partnership (TPP) (translation: renamed CPTPP “Comprehensive and Progressive Trans-Pacific Partnership” after the U.S. withdrew from the TPP in 2017). In his 2020-2021 term as prime minister, Vietnam was held accountable for his oversight duties in the wake of the corruption surrounding the new crown epidemic.

Of concern is the shrinking of Vietnam’s central government and local governments. Vietnam has a unique criminal penalty of “damage to state property,” and there are sporadic cases of accountability for what is considered broad malfeasance if there is an unforeseen loss of infrastructure operations, etc. However, there are concerns that the “one punishment, one warning” is too strong and will further exacerbate delays in decision-making.

Vietnam’s economy itself is gaining momentum. In recent years, gross domestic product (GDP) has been growing at around 7 percent per year, holding on to a growth rate of nearly 3 percent even in the face of the new crown epidemic. 2022 is the highest growth rate in 25 years, at more than 8 percent. The International Monetary Fund (IMF) still predicts that Vietnam will grow at 6.2 percent this year, the highest in Southeast Asia.

What drives Vietnam’s economy is trade. According to the United Nations Conference on Trade and Development (UNCTAD), Vietnam’s trade dependency (trade as a percentage of GDP) is 230 percent in 2021. It is ranked 3rd in the world after Hong Kong and Singapore among 207 countries and territories. Data from Vietnam’s General Department of Customs show that the trade balance achieves a surplus of $12.4 billion in 2022.

However, an analysis of Vietnam’s trade structure reveals one major feature. That is, China accounts for 33% of Vietnam’s imports and the US accounts for 30% of Vietnam’s exports. Vietnam buys intermediate products from China, assembles them and then sells the final product to the U.S. for a profit, which is Vietnam’s “winning formula”.

Vietnam has been catching up with China in terms of economic openness. The “Doi Moi” (economic innovation), which is modeled on China’s “reform and opening up”, began in 1986, while it joined the World Trade Organization (WTO) in 2007. This was eight and six years later than China. To make up for the time gap, the construction of a network of Free Trade Agreements (FTAs) has been actively promoted. The number of FTAs in force is 15. Unlike China, which has reached 18 and more, Vietnam has also actively signed trade agreements with developed countries with demanding liberalization requirements such as the European Union (EU).

Vietnam did not benefit from lower tariffs on exports to the U.S. due to the U.S. withdrawal from the TPP, but the rich and diverse FTAs have contributed to an improved investment climate that has helped Vietnam attract foreign investment, surpassing Thailand, known as “Asia’s factory,” in terms of inward direct investment in 2014 and exports in 2018. This is the achievement of Vietnam.

Vietnam has received further attention as a place to take off China in the wake of the Sino-US confrontation and the new epidemic, with most of its top export categories, such as electronics and electronic equipment and textiles, overlapping with China. But this is thanks to the intermediate products made in China.

“Vietnam inadvertently benefited from Spillover due to its geographical proximity and low labor costs.The Vietnamese government is worried about how long industrialization will last. If labor costs continue to rise, the competitive advantage of the assembly industry will disappear within 10 years. If intermediate products are not localized to a certain extent, the sustainable development will be increasingly difficult,” said Ryo Ikebe, a professor at a Japanese university.

The “Pacific Triangle”, with the world’s largest U.S. economy as the destination, also emerged in the 1980s. Korea and Taiwan imported intermediate products from Japan and exported final products to the United States. The current situation is that Japan has been replaced by China, and South Korea and Taiwan by Vietnam.

South Korea and Taiwan have since industrialized and developed into exporters of intermediate goods, and are among the developed countries and regions, as symbolized by the semiconductor industry. On the other hand, Malaysia and Thailand, which joined the “triangle” a little later, are obviously dependent on imports of intermediate products and have not yet escaped the “middle-income country trap”.

Where will Vietnam go from here? Tran Van Tho, professor emeritus at Waseda University in Japan, said, “At present, due to the confrontation between China and the United States, the supply chain is diversifying, which constitutes an opportunity for Vietnam. Effective trade-off choices and positioning are needed by strengthening the domestic private sector and promoting human resource development.”

The anti-corruption push by Nguyen Phu Trong’s regime is increasing transparency. However, today’s Vietnam should not have the luxury of allowing its rule to be strengthened in the name of anti-corruption while allowing economic reforms to stagnate.