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Vietnam: the last dragon - 1/2: International Openness: A Guide to Vietnam's Economic Policy

Vietnam has opted for international openness since 1986 to create a “socialist market economy”, which has allowed it to experience vigorous economic expansion. Its integration into the world economy has made it an important link in international value chains, massively importing components from China and Asia in general, and exporting, as massively, finished products to the United States and Europe.
Par Michel Fouquin, Jean-Raphaël Chaponnière
 Billet du 14 février 2020

International openness guides Vietnam's economic policy

As a result of detrimental economic policies pursued after reunification, the Vietnamese Government, inspired by the Chinese example, undertook in 1986 the building of a socialist market economy open internationally. This opening was crowned with success with its accession to the WTO in 2007. Since then, the government has intensified its policy of openness, including by signing free trade agreements with the European Union[1], ASEAN[2] and the Republic of Korea[3]  In January 2019, it joins the "Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)" already adopted at the end of 2018 by Canada, Australia, Mexico, New Zealand, Japan and Singapore[4].

With exports of goods and services over 110% of GDP in 2019 (46% in 1996), Vietnam is, after Singapore, the most open country in Southeast Asia. Similarly, foreign investment accounted by 2018 for nearly 30% of its fixed capital formation. International Trade and foreign investment play a crucial role in Vietnam's growth dynamics. They are at the origin of profound changes in the structures of its trade in terms of both partners and products.

Main export partners (% of total)
  1997 2007 2018
First ten months
First ten months change compared to 2018 period
United States 3.1 20.8 19.5 23.0 +26.6
European Union 17.5 18.7 17.2 15.8 -1.9
China 5.2 7.5 17.0 14.9 -2.9
ASEAN 20.8 16.7 10.2 9.8 +2.6
Japan 18.2 12.5 7.7 7.6 +7.5
South Korea 4.5 2.6 7.5 7.6 +9
Total millions $ 9,185 48,561 243,700 217,000 +7.4
Source: General Statistics Office of Vietnam, November 2019.

On the export side, after the signing of a bilateral trade agreement in 2002, the United States gradually became Vietnam's top export destination, accounting for nearly 20% of total exports in 2018 (up from 3% in 1997). China, which for a long time has been on the sidelines, is not far with 17% and, if we take into account the goods passing through Hong Kong, it is now, in fact, the top destination. On the other hand, the share of ASEAN and Japan fell by 10 points each between 1997 and 2018, while that of the EU remained around 18% of exports.

For now, the analysis of trade flows shows Vietnam's resilience to the sino-American trade war. Total export growth is 7.4% in the first ten months of 2019 compared to the same period of the previous year; in general, exports to developed countries remain the most dynamic. Exports to the United States rose by 26.6%, 9% to Korea and 7.5% to Japan, but fell by 2.9% to China and 1.9% to Europe. Analysis of US Trade Statistics shows that imports of Vietnamese products in the categories the most affected by measures against China are increasing by 34%, three times faster than imports of other products[5].

Main import partners (% of total)
            1997 2007 2018
First ten months
First ten months change compared to 2018 period
United States 2.2 2.7 5.4 5.9 +12.6
European Union 11.5 8.2 5.9 5.8 +7.8
China 3.5 20.3 27.6 29.5 +16.1
ASEAN 27.8 25.3 13.4 12.6 +1.0
Japan 13.0 9.9 8.1 7.6 +2.1
South Korea 13.5 8.5 20.1 18.8 +0.6
Total millions $ 11,592 62,764 237,200 210,000 +7.8
Source: General Statistics Office of Vietnam, November 2019.

In order to understand the direction of these developments, it is necessary to look at imports. In total, 70% of Vietnam's imports come from Asia (compared with 58% in 1997), and only 19% from developed countries, 11.7% from outside Japan. China, with 29% of the total, dominates by far all the other partners of Vietnam, which thus became a crucial element of the value chain that connects trade between China and the United States. China, which is upscale and whose wage costs are at least double those of Vietnam, uses its neighbor as a relay for part of its production. Another development is that of South Korea, which is relocating part of its telecom (smartphones) and computer production from China to Vietnam. As a result, Korea is exporting an increasing share of components which, when assembled in Vietnam, are shipped to the United States.

Vietnam's trade relations with China and the United States have been further strengthened by the trade war. Vietnam appears to be the main beneficiary, with the risk that the United States will accuse it of serving as a mere transit point for Vietnamese naturalized Chinese products[6], which then access almost zero tariffs to the American market.

[1] Negotiated in 2015, it came into force in June 2019.

[2] Vietnam has been a member of ASEAN since 1995 and has participated in the tariff reduction process since 2007; it also actively participates in the ASEAN negotiations with Hong Kong, which took place around 2019.

[3] Since 2015, it has helped to accelerate Korean investment in Vietnam.

[4] They should be joined soon by Brunei, Chile, Malaysia and Peru.

[5] The UNCTAD study "Trade and trade diversion effects of United States tariffs on China" Unctad Research Paper n°37, November 2019, indicates that Taiwan is the main beneficiary for computer equipment and Vietnam for telecommunication equipment, however neither of them participate in offsetting the decline in U.S. imports, resulting in a dry loss of trade. 

[6] "Vietnam is under increasing pressure from the United States to stop transhipping non-duty-paid goods manufactured in China," said David Hutt. Vietnam is fighting to remain a winner of the trade war. Asia Times, December 10, 2019.

Jean-Raphaël Chaponnière is an associate researcher at Asia Centre and the Asia21.


Commerce & Mondialisation  | Economies émergentes 
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