Vietnam's Strategic Position in the New Global Trade Landscape

Vietnam's Emerging Role in Global Trade

As trade tensions between major powers continue to reshape the global economic landscape, Vietnam finds itself in a unique and potentially advantageous position. With its strategic location, growing manufacturing capabilities, and pragmatic foreign policy approach, Vietnam is poised to play an increasingly important role in international trade and supply chains.

Historical Context

Vietnam's current position on the global stage is shaped by its complex history of foreign relations and conflicts. As Rob Med, head of Asia for Muddy Waters Asia, explains:

"Vietnam sits in a very interesting place because geographically it's next to China, but it's actually ended up in the middle of a sort of China-US trading relationship. Vietnam has been attacked by four out of the five members of the UN Security Council, which I think is an all-time record."

This history has made Vietnam wary of becoming overly dependent on any single foreign power. Instead, the country has adopted what Med calls a "bamboo policy" - flexible and adaptable, but firmly rooted.

"They have what I would describe as the two big brothers. So they've got China on one hand, America on the other, and then they've got the two uncles. So they were very friendly with the Soviet Union, so they've got Russia there, and they've got Ukraine there as well. And they really work hard to keep everybody slightly at a distance but on equal footing."

This balanced approach has allowed Vietnam to maintain positive relations with a diverse range of countries while preserving its independence and sovereignty.

Economic Transformation

Vietnam's economy has undergone a dramatic transformation since the adoption of market-oriented reforms in the 1980s. The country has moved away from a centrally planned economic model and embraced foreign investment and export-oriented growth.

Med notes that Vietnam came to communism relatively late compared to countries like China and Russia:

"It came to communism 1975, whereas you look at China, look at Russia, it was a generation or two generations more. So even when I arrived here in 2021, there were people who saw it go from capitalism to communism and now back."

This more recent transition has allowed Vietnam to retain some of its entrepreneurial spirit, particularly in the southern part of the country. The government has actively courted foreign direct investment to drive economic development:

"They didn't have the capital to rebuild the country. So they opened up to foreign investment, and they were reasonably close for historic reasons with the Japanese and the Koreans, who came in and said, 'Look, we've got aging, expensive [labor].' The Japanese had gone to Thailand for cars, and so Vietnam's sort of on the way, and they started building factories and that started upscaling and taking the country forward."

This influx of foreign investment and manufacturing has helped drive rapid economic growth in Vietnam over the past few decades.

Current Trade Dynamics

Vietnam has become deeply integrated into global supply chains, particularly as an export manufacturing hub. However, its trade relationships have come under scrutiny recently, particularly its trade surplus with the United States.

Med explains that Vietnam's exports to the US have risen dramatically in recent years:

"What's interesting since particularly 2019 is you've seen imports from the US have stayed pretty much the same level, but exports from Vietnam have just gone through the roof, and it's been a really dramatic change."

This surge in exports has raised concerns about potential circumvention of trade restrictions on China through transshipment via Vietnam. Med describes transshipment as:

"Getting round what I would describe as the rules of origin. So in other words, you come along and you say, 'Right, we buy all our raw materials in China. We manufacture the product in China. We then put it into a very large cardboard box. We then send it over to Vietnam.' In Vietnam, we stick it in a factory, we take out 100 items out of that very big cardboard box, put it into individual cardboard boxes, and then send it on and we say 'Made in Vietnam.'"

Addressing these concerns around transshipment and rebalancing trade flows will be a key challenge for Vietnam going forward.

Navigating Trade Tensions

The ongoing trade tensions between the United States and China have created both challenges and opportunities for Vietnam. While increased tariffs on Chinese goods have driven some manufacturing to shift to Vietnam, the country now faces the prospect of punitive tariffs from the US as well.

Potential US Tariffs

The Trump administration has proposed tariffs of up to 46% on Vietnamese goods, which would have a significant impact on the country's export-oriented economy. However, Med views this high initial tariff proposal as a negotiating tactic rather than a final policy:

"If Trump sits down and says it's 46% and there is no negotiation, then that is a real problem because FDI will stop and exports will, if not collapse, they will drop a remarkable amount. That's the bad news. The good news is the rate was so arguably ridiculously high and so stupid, and the government's like, 'Oh my god, the economy is going to collapse. So we need to do something about this.'"

He expects that negotiations will ultimately lead to a more moderate tariff level:

"The assumption we're making, and I think just about every other Vietnamese person is making, including the government, is there is a middle range. Now it's not zero, but it's equally not 46%."

Strategic Opportunity

Rather than viewing potential tariffs solely as a threat, Med sees them as an opportunity for Vietnam to accelerate its economic development and move up the value chain:

"This new opportunity is Vietnam is going to be forced to turn around and get rid of transshipment. It is going to be encouraged to expand value-added business. So less of this 'we buy in for 98, send it out for 100.' More of 'we buy stuff in for 50, we play around with it, we do all sorts of [value-add], we sell it on for 100.' That is all going to upskill and benefit the country."

He argues that by pushing Vietnam to focus on higher-value manufacturing and services, trade pressures could actually help the country achieve greater economic independence and development:

"At which point, they will achieve economic independence, which is really the sort of end of Ho Chi Minh's legacy, and that if [current leader] Trong does achieve that, he will stand out as one of the greatest leaders Vietnam has had."

Strategies for Economic Development

To navigate the changing trade landscape and continue its economic ascent, Vietnam will need to pursue several key strategies:

Reducing Reliance on Transshipment

Addressing concerns around transshipment and rules of origin violations will be critical for Vietnam to maintain positive trade relations, particularly with the United States. Med suggests the government could use its licensing powers to discourage low-margin transshipment activities:

"You literally turn around to your exporters and say, 'Well, what's the margin you're making on the business you're doing? If it's a low margin business, you're not paying as much tax. No, sorry, no export license.' And you basically get rid of all your low margin exports."

Diversifying Trade Relationships

Vietnam can leverage its pragmatic foreign policy to balance its trade relationships and reduce dependence on any single market. This could involve shifting some imports to the US to help rebalance bilateral trade:

"They're currently importing a bunch of stuff like oil and gas and beers, and one of the biggest suppliers for that is Qatar. So you turn around to the Qataris and, okay, it's not so great for them, but you say, 'Well, we're just going to buy everything from America now.'"

Investing in Education and Productivity

To move up the value chain and compete for higher-skill manufacturing and services, Vietnam will need to invest heavily in education and workforce development. Med sees this as a key priority:

"What we really want to see is those education levels skilled up. Now, some are going to go, 'Well, typical Asians,' but there's a big focus on STEM subjects here. They do their maths and all the rest of it. If you can push that and make sure the average level lifts all the way through the country, that would be great. But I'd like to see the real sort of push on science, skill level, as say robotics, modern pharmaceuticals, and all sort of things like that."

Improving Infrastructure

Continued investment in physical and digital infrastructure will be crucial for improving productivity and attracting higher-value industries. Med notes that Vietnam still has significant infrastructure needs:

"Vietnam is still at the stage where build a bridge, people are going to use it, going to be full the next day. Our new metro, which is great news, you know, it needs to be tripled, quadrupled, add more routes. So there's lots of projects that could be invested in to build the economy and keep it going."

Protecting Intellectual Property

Vietnam's relatively strong intellectual property protections compared to some regional competitors could be a key advantage in attracting high-tech manufacturing and R&D activities:

"One of the great things Vietnam has because of its size is it's a much greater respecter of intellectual property than its big brother overseas. So you can come here and bring your pharmaceutical manufacturing, your computer manufacturing, and not actually suddenly find the factory next door is ripping you off."

Outlook and Opportunities

Despite the challenges posed by global trade tensions, Vietnam appears well-positioned to benefit from ongoing shifts in manufacturing and supply chains. Its strategic location, pragmatic foreign policy, and focus on economic development create a strong foundation for continued growth.

Key areas to watch going forward include:

1. Outcome of trade negotiations with the US and final tariff levels
2. Government initiatives to promote higher-value manufacturing and services
3. Investments in education, particularly in STEM fields
4. Infrastructure development projects
5. Efforts to improve government efficiency through digitization

For investors and businesses, Vietnam offers significant opportunities as it continues its economic ascent. However, navigating the complex regulatory environment and geopolitical dynamics will require careful analysis and on-the-ground expertise.

As global supply chains continue to evolve, Vietnam's role as a manufacturing hub and emerging market is likely to grow. By leveraging its strengths and addressing key challenges, the country has the potential to emerge as a major economic player in the coming decades.

The ongoing shifts in global trade patterns and Vietnam's response to these changes will be a crucial story to watch in the coming years. As Rob Med and the team at Muddy Waters Asia continue to monitor developments on the ground, their insights will provide valuable perspective on the opportunities and risks in this dynamic market.

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