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Vietnam as a Manufacturing Base for Sales to China

By Dezan Shira & Associates
Posted: 4th February 2013 08:44
One of the great enigma’s concerning managers across Asia today is Vietnam’s trade relationship with China, its massive northern neighbor with which it shares an 840-mile border.
This is a timely question to examine, not least because Vietnam is one of Asia’s “Tiger Economies” and, although it has suffered over the past three years like everyone else in the wake of the Global Financial Crisis, the country has proven remarkably resilient.
The addition of an ASEAN-China free trade agreement in 2015 will likely mean that ASEAN, with Vietnam as a core member, will become China’s largest trade partner that same year, with total trade worth some US$500 billion. To contrast the enormity of this figure, the entire United States sold just one-fifth of that in exports to China in 2011.
Vietnam can easily link with China’s supply chain infrastructure – there are already extensive rail connections between Hanoi, Kunming and Nanning, and the northern Hai Phong Port is undergoing substantial development. Yet Vietnam’s relationship with China is both economic and political, and the manner in which these play out that will provide clues as to the true nature of the stresses and opportunities within the trade gap. Despite both countries being officially communist regimes, Vietnam has offered a cool hand to China, wary of getting too close due to the 1979 war and ongoing territorial disputes still fresh in many people’s minds.
While other Asian nations – including nearby Myanmar and Cambodia – have fully embraced China in the past in terms of economic assistance, Vietnam has remained and continues to remain aloof. That is not to say that bilateral trade between Vietnam and China is not booming, because it is, reaching US$35.7 billion last year.
Yet Vietnam remains politically cautious towards China. Ongoing territorial disputes between the two in the South China Sea certainly are not helping the situation, and Vietnam has recently refused to endorse the new Chinese passports which depict the entirety of the contested territory as Chinese.
This lack of trust over longer-term Chinese intentions has steered Vietnam to look in multiple directions – north and east towards China, but also to the south and west towards Asia. Vietnam’s trade with fellow ASEAN member countries is currently some US$27 billion and, unlike countries such as Cambodia, the country has been active in using ASEAN free trade agreements with other countries such as India, Japan and Australia to widen its economic base and lessen dependence upon trade with China.
Of the ASEAN members, Singapore, Thailand and Malaysia are Vietnam’s largest partners, while outside of the group trade is also growing significantly with India and Japan. Vietnam is spreading its trade wings further afield at least partly due to its belief that China has not always proven particularly sensitive to other nations within the region. Vietnam has past experience of being treated as a de facto vassal state, and until recently even Myanmar was treated in this manner through China’s support of their military regime for many years. Yet even the hard-line Burmese generals began to feel enough was enough.
Additionally, Vietnam, while communist, is still largely Buddhist in its beliefs, and quietly, the Dalai Lama is a respected figure among many Vietnamese. The typical Chinese rhetoric towards the Buddhist leader makes many Vietnamese uncomfortable. Meanwhile, while Cambodia is still close to China, it too is being wooed by President Obama, who visited shortly after his reelection. Such American moves fit in with Vietnam’s China policy; trade is healthy, but Vietnam remains cautious in terms of the political ramifications of an overreliance on China’s economy – a necessary caution with a powerful neighbor that has been well-observed in Hanoi.
Vietnam’s policy of enlarging its multilateral trade space is also about to pay dividends. With the 2015 ASEAN free trade agreements with China, India, Japan, South Korea and Australasia coming into effect, the country is poised to offer a manufacturing base for many companies wishing to sell to the entire region.
Wage increases in China are a matter of national policy, and although this is creating a much-needed and fast-growing consumer market, it is also having the effect of raising salary levels at an average rate of some 22 percent per year. While prices in Vietnam have also risen – and its economy is not immune to inflationary shocks – Vietnamese wages are about one-third of those seen in South China.
This means that Vietnam is developing as an export-driven manufacturing base, just as China was in the late 1990s to mid-2000s. The free trade agreements coming into force mean that Vietnamese-made products (or those from anywhere else in ASEAN) will, for the most part, be able to be sold to the China market at zero tariffs.
Add to that an array of free trade and bonded zones (just like China used to have) that minimize taxes on products assembled and then exported, plus commitments to improve the nation’s ports (especially those at Haiphong and HCMC), the tax and operational infrastructure to push Vietnam forward as a credible manufacturing destination for China consumption is already taking place. Vietnam also offers a lower wage base compared to China, whose own labor costs are increasing at an average rate of 22 percent per annum.
This trend has been duly noted, not least by American companies already extant in Vietnam. As Christopher Towmey, current Chairman of the American Chamber of Commerce in Hanoi mentioned in the Chamber’s annual end of year 2012 Vietnam Business Forum address:
“AmCham cooperation with and support of Vietnam’s government and business has led to a substantial increase in bilateral trade over the last twelve years: from only US$1.5 billion in 2001 when the BTA went into effect (December 2001); to US$9.7 billion in 2006 when Vietnam achieved WTO Accession and Permanent Normal Trade Relations with the U.S. (December 2006); to more than US$22 billion in 2011.”
“Based on trade data for the first nine months of 2012, we expect that Vietnam-U.S. bilateral trade will have been US$24.5 billion in 2012, and will reach nearly US$50 billion by 2020, if present trends continue.”
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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