The Capital Flight from China: An Opportunity for Vietnam?

Introduction 

President Trump’s trade and technology wars against China were aimed at compelling Beijing to make structural changes to benefit American firms. However, more and more policymakers in Washington are perceiving America’s over-reliance on supply chains originating from China as a national security risk. In this sense, U.S.-China trade tensions have led to a gradual decoupling of the global supply chains from a geopolitical competitor to countries more aligned with U.S. national interests. By applying tariffs on Beijing, Washington hopes to compel multinational corporations to shift their supply chains and vendors from China to countries that align more closely with their national interests. Vietnam makes a viable candidate to achieve favorable strategic and trade balance. Yet, Vietnam’s weak industrial foundations, dearth of sophisticated infrastructures, and shortage of land are problems that Hanoi must overcome. 

Security Drives Washington’s Confrontational Policy on Trade with China

Looking at South Korean Chaebol Samsung Electronics, for example, the conglomerate has recently ended all personal computer assembling in China and shifted assembly to Vietnam. The Samsung Electronics Suzhou Computer was established in 2002, and its personal computers were mainly sold to South Korea, North America, and China. From the perspective of corporate input cost-saving, the obvious objective was to cut costs, especially since labor wages and land costs in China have been rising consistently as China moves up the industrial value chain.  

However, beyond land and labor costs, security is arguably the main driver behind the Trump administration’s push to compel multinational corporations that do business with U.S. customers to leave China. The ultimate goal of the Trump administration’s confrontational trade and technology policy toward China is to not only punish China for its practice of forced technology transfers but also to restrict the flow of American dual-use technologies to China, restructuring global supply chains by barring Chinese firms from having any chance of accessing technologies outlined in China’s Made in China 2025 (MIC 2025) industrial policy. This is because, under the Trump administration, Washington has shifted its perception of China from  trade partner to a geopolitical competitor and revisionist power. The shift is due to Beijing becoming relatively more powerful militarily, technologically, and economically without becoming a liberal democracy expected by Washington and its allies. Thus for Washington, if MIC 2025 were to become successful, an autocratic Beijing could threaten to outperform Washington in economic sectors that have traditionally been the crown-jewels of the U.S. high-tech economy and the basis of the U.S.-led post-Cold War liberal order. 

It is the downward spiral in U.S.-China relations—especially in trade—that presents new opportunities to Vietnam. Hanoi and Washington have aligned themselves in the face of perceived Chinese excessive territorial claims and military adventures. Although the two sides still clash over human rights norms, both have deepened bilateral military and economic exchanges. The Obama administration also lifted the U.S. Cold-War era arms embargo on Vietnam. Both the Obama and Trump administrations have sent U.S. naval carrier battle groups to pay friendly visits to its former nemesis. Finally, while China was booted out of the 2018 U.S.-led RIMPAC exercise for militarizing the South China Sea, Vietnam was invited to take China’s place. In other words, with the gradual improvement in U.S.-Vietnam relations, Vietnam could become the American strategic partner in which American firms could shift their supply chains with fewer geopolitical concerns. 

Vietnam’s Advantages and Disadvantages

Vietnam will be a likely beneficiary from the departure from China. This is a natural development given the many advantages that Vietnam can offer to companies seeking a viable alternative to Beijing. Geographically, Vietnam is right next to China. This proximity gives companies the flexibility to move their production chains from China without dramatic disruptions. Besides, from Vietnam, companies can branch out to other important markets in the region such as China, India, Southeast Asia. With a nominal GDP per capita of $2,566 compared with China’s $9,770, Vietnam has a much lower standard of living that would translate into lower labor costs On top of all that, the Vietnamese government has proved willing to ease the entry of businesses into the country. Such willingness is illustrative in the country’s seventieth rank in the World Bank’s Ease of Doing Business rankings. Though not up to par with more developed ASEAN peers like Malaysia or Thailand, this ranking is still better than other attractive destinations such as Indonesia and the Philippines. The Vietnamese government, realizing the opportunities that the corporate departure from China presents, is doing even more to facilitate business. For example, the government has decreased corporate tax by nearly 30 percent and has provided tax exemptions for the first four years for new businesses. The government has also streamlined land regulations to speed up the acquisition process for enterprises.   

Nonetheless, some significant problems confound Vietnam’s potential. First of all, Vietnam lacks the industrial foundations that China has acquired over the past four decades. The country’s much-vaulted wish to become an industrialized nation in 2020 floundered  due to a lack of real progress, especially in manufacturing. Only in 2018 did Vietnam start to take some tentative steps into advanced manufacturing with the emergence of VINFAST, an indigenous automaker. Overall, in 2019, the non-extractive industrial sector only contributed about 18 percent of the country’s GDP. This slow pace of industrialization means that companies relocating from China will find it challenging to acquire suitable supply chains in Vietnam. As companies have problems in finding the necessary parts for their products, many have to import from China at great costs. Generally speaking, while China’s share of global manufacturing output was more than 28 percent, Vietnam accounted for only 0.27 percent. The total value added by China’s manufacturing sector was around $4 trillion in 2018, over 100 times greater than that of Vietnam. 

Complicating this problem is Vietnam’s infrastructure deficit, especially in ports and railroads. Vietnam’s largest port, Ho Chi Minh City, has a lower capacity than China’s eleventh largest port. With railroads, China boasts the world’s most extensive high-speed rail network that crisscrosses the country’s economic centers. While China has 131,000 kilometers of railway and 136,000 kilometers of highways, Vietnam only has 2,600 kilometers of railroads. With regards to highways, although Vietnam has plans to construct more than 7,000 kilometers of new roads by 2030, its major land and seaports have yet to be fully connected by one national highway system like those in the U.S. and China. Finally, due to the country’s small size of only 331,231 square kilometers, Vietnam is facing a dwindling supply of unoccupied land. This shortage will potentially push land prices high enough to offset the advantage of lower labor costs. As a result, while Vietnam could benefit from U.S.-China trade tensions, Hanoi must first overcome many of its industrial foundation and infrastructure weaknesses, as well as shortages of land. 

Policy Recommendations for Vietnam

In the short term, to address these problems, the Vietnamese government should provide more tax benefits for foreign firms. At the same time, the government must decrease the amount of red tape that companies must go through in order to do business in the country. This could be achieved by streamlining inter-agency communication and reducing customs procedures. In the medium to long-term, the government must upgrade its infrastructure, especially ports, highways, and railroads. Furthermore, as the global economy is entering the Fourth Industrial Revolution, which emphasizes advanced knowledge, improving education is pivotal. The government can provide Vietnam’s labor force with a competitive edge by completing its unfulfilled reform programs and providing better tertiary education in both quantity and quality. 

Finally, with regards to infrastructure, while Vietnam may not need 350 kilometer-per-hour bullet trains, Hanoi would be better off prioritizing connectivity. This means all sea and land ports would have to be connected with the national highway and railway system to facilitate the efficient movement of goods. Then, the government could prioritize settling foreign-invested assembly plants on lands adjacent to newly constructed roads and railyards. In fact, infrastructure modernization is something Hanoi could take some advice from China in the period immediately after the 2008 financial crisis, when Beijing unveiled a Keynesian economic stimulus that resulted in the world’s most extensive highway, high-speed rail, and smart grid networks connecting nearly all port cities with with population and industrial hubs deep inside China.

Vietnam is in a prime position to take advantage of the corporate departure from China. However, the country still has obstacles  preventing it from taking full advantage of this development. Only with significant and profound changes in administration, infrastructure, and education can the country seize this opportunity. Therefore, as Hanoi offers multinational investors with its affordable labor pool, Vietnamese economic planners should simultaneously enhance its own infrastructural connectivity and administrative reforms.