Will the US-China trade war help Vietnam escape China’s hold?

Although international observers believe that Vietnam will be a major beneficiary of the Sino-US trade conflict initiated by US President Donald Trump, it may not be as easy as it looks despite a perception that tensions between the superpowers have created golden opportunities for Vietnamese authorities.

Foreign investment is already flowing into Vietnam as foreign companies, including China-owned ones, seek alternative production sites to avoid the American tariffs imposed on products made in China. As a nearby neighbor, Vietnam is an ideal new site for investment and production. This increase in FDI flow will help Vietnam’s export-oriented economy.

Second, as Beijing’s leaders are busy dealing with Trump’s economic sanctions, they will likely be more lax over their control of other countries in the region, especially Vietnam. This is an opportune time for Vietnamese authorities to continue efforts of diversifying their foreign relations for better security and to improve their standing in the international community.

Recognizing these opportunities, the analysts conclude that this is the moment when Vietnam can cut its assymetric ties with China and no longer be dependent upon Beijing for economic and political support.

However, can Vietnam truly escape China’s hold? According to a study by UBS, the investment banking firm, of 200 manufacturing companies with significant export business, nearly half of them exporting directly to the US, 37 percent say they have moved some production out of China and 33 percent say they plan to move in the next six to 12 months. Almost all of the respondents say they plan to diversify into non-export areas.

Trade war risk, according to UBS, is a key factor for the investment flight but not the only one. The survey shows that rising environmental standards, higher labor and land costs are among the top drivers for companies moving export production outside of China. The biggest obstacle is to get outbound investment approval.

However, the report says, the North Asian economies — Hong Kong, Korea, Japan and Taiwan,  rank higher than Southeast Asia. These economies win on easier access to supply chain, better infrastructure, closeness to market, relatively more stable exchange rate and lower political uncertainty.

According to Japan’s Nikkei, up to 35 percent of 430 foreign and Chinese companies have been looking to set up factories in Bangladesh and Vietnam for cheap labor and loose environmental protection requirements.

Thus, given the UBS report and other information, the influx of FDI into Vietnam is not as promising as presumed. Rather, the trade conflict is encouraging companies to outsource and shift their outdated manufacturing facilities from China to Vietnam. In other words, China is able to rid itself of low-tech, labor-intensive, and high-polluting industries and push the burden onto poorer countries like Vietnam.

As a destination for outsourced businesses, Vietnam and Bangladesh will still need to import raw materials for production. As a developer of cheap raw materials, China continues to be needed for items like yarn, fabric, machinery, and electronic component parts.

This means that the increase in FDI to Vietnam in the wake of the trade conflict will make Vietnam more dependent on China, not less. In other words, Vietnam will not be able to escape China’s sphere of influence.

In addition, the conflict between the United States and China is not just about trade. It is also about security and defense issues. The disputes in the South China Sea (or East Sea) will make Beijing want to hold on to Vietnam even more.

China has claimed sovereignty over 80 percent of the South China Sea via its self-proclaimed nine-dash line despite a ruling in The Hague that its claims are invalid. Nonetheless it has stated that the South China Sea is among its “core interests,” and it is willing to hold on to its claims at all costs, including engaging in war.

Moreover, Xi Jinping’s campaign to stop corruption known as “killing tigers, swatting flies” in China has also been aimed at suppressing factions against him. These efforts have resulted in an increase in internal friction; and thus, Xi Jinping must use the South China Sea conflict to defuse and divert domestic anger.

Towards this end, Xi Jinping has pressured both the Party Chief Nguyen Phu Trong and the Politburo of the Vietnamese Communist Party (VCP) not to side with the United States in regards to policies about the East Sea. On Nov. 15, the Times of India asked the Vietnamese ambassador to India, Pham Sanh Chau, his opinion on the quadrilateral relationship, or Quad, between the US-Japan-Australia-India. He responded that Vietnam opposes any military alliance that does not lead to the maintenance of peace and security in the region.

Pham Sanh Chau’s remarks are in line with the party’s long-held “Three-Nos” defense policy (no military alliance, no reliance on one country to fight against another, and no foreign military bases on Vietnamese territory). Clearly, Hanoi did not dare provoke Beijing while most other nations in Asia welcomed efforts of the Quad to curb China’s military ambitions in the South China Sea.

Lastly, with Vietnam’s own corruption campaign known as “Burn the Furnace,” Nguyen Phu Trong has been trying to eliminate members of competing factions over the past two years. Trong and his followers have sent many opponents to jail, stripped them of their rank and position, and some have even faced death. His main concern is to prevent a revolt from within the VCP and within the country. On the surface, Trong’s forces appear in control. However, below the surface, victims of the Burn the Furnace campaign are lingering embers that can threaten the stability of Trong’s reign.

At this moment, Vietnam is reaping economic gains from the US-China trade war with the increase in FDI flows. However, if the hope was that these diversified investments would help Vietnam be more independent from China, then this reality is increasingly bleak. In October 2017, Major General Truong Giang Long, Deputy General Director of the Political General Department and President of the Academy of Politics of the Ministry of Public Security, revealed that China has had its own people infiltrate the Vietnamese party network.

Two months after the general’s comments, he was forced to take “early retirement.” States in the communist bloc are no stranger to the constant attempt of restraining and overpowering the other through exploiting division and planting spies, which Beijing is accustomed to doing. The embedded nature of China’s political influence within Vietnam’s leadership reveals that even if Vietnam’s economy strengthens, it will be unable to break away from China’s hold.

In short, this analysis considers the reality of FDI inflows into Vietnam and the current Vietnam-Sino relations to conclude that the US-China trade war will only make Vietnam more dependent on China. There are still reliances in the areas of economics, trade, and military. More importantly, Nguyen Phu Trong, General Secretary of the Vietnamese Communist Party, and now also the President of Vietnam, needs China in order to maintain power.

Ly Thai Hung is a political analyst on Vietnam affairs and a leader of Viet Tan, an unsanctioned pro-democracy political party in Vietnam. With members inside Vietnam and around the world, Viet Tan aims to establish democracy and reform the country through peaceful means.

Source: Asia Sentinel