How Vietnam Went from American Foe to American Friend

American vice president Joe Biden listens as Nguyễn Phú Trọng, the general secretary of the Communist Party of Vietnam, makes a speech in Washington DC, July 7, 2015
American vice president Joe Biden listens as Nguyễn Phú Trọng, the general secretary of the Communist Party of Vietnam, makes a speech in Washington DC, July 7, 2015 (State Department)

It’s easy to hold grudges; it envelopes one in a sense of superiority, a feeling of wronged righteousness, that allows irrational behavior to feel very, very good. When someone hurts you, it can be wonderful to lord that over them forever.

Few wars in American history involve as many hurt feelings as the Vietnam War. Depending on when you chart it, the war lasted anywhere from the late 40s to 1975, when North Vietnam conquered the South. For the US, earnest combat began in 1965 and lasted until 1973, when the Nixon Administration washed its hands of Southeast Asia.

The toll was hefty: 58,000 Americans and anywhere from 1.4 to 3.8 million Vietnamese died. On the American side of the Pacific, the war gave counterculturalism a salient boost in the body politic and for decades much of American foreign and domestic policy hung on the legacy of those years. In Vietnam, the regime used fear of another American invasion to build legitimacy — and support war in Cambodia — up until the 1990s.

So it would be rather easy for both sides to neither forgive nor forget. Whole careers could be made off holding a grudge.

And yet the Americans are about to start arming the Vietnamese.

What the hell just happened here? Read more

China, Vietnam Trade Blows Over South China Sea Oil

Policemen in the streets of Hanoi, Vietnam, March 6, 2009
Policemen in the streets of Hanoi, Vietnam, March 6, 2009 (Flickr/Likeyesterday)

China’s state media and Vietnam’s Foreign Ministry traded harsh words this week. The exchange came after the Vietnamese issued a strong protest over Chinese plans to search for oil in a disputed area of the South China Sea.

It would be the first time that China has moved its massive and mobile deepwater drilling rig into the disputed area.

Both nations have claims over the islands in questions, which Vietnam calls the Paracel and China the Xisha Islands. They waters around them are believed to contain vast quantities of oil and natural gas deposits.

The row came just days after President Barack Obama wrapped up a trip to Asia. Visiting Japan, Malaysia, the Philippines and South Korea, the American leader reaffirmed his country’s commitments to maintaining security in the region. Japan, Malaysia and the Philippines all have disputes with China over islands in the East and South China Seas.

In an editorial in The Global Times, considered a mouthpiece for the ruling Communist Party, there were fiery words directed toward Vietnam. It said the Southeast Asian country lacked will; that it didn’t have “the guts to attack” China’s rig directly. It warned Vietnam that if it became more aggressive, “China should give Hanoi the lesson it deserves.”

China’s Maritime Safety Administration on Monday barred ships from coming within three nautical miles of the oil rig which will be conducting explorations until August.

Vietnam claims the Paracel islands as its own and are within its exclusive economic zone. The Foreign Ministry said China’s action is illegal and that the rig will be operating on Vietnam’s continental shelf within 120 nautical miles off its coast.

Tensions in the area have been steadily rising since China’s assertion of sovereignty over almost the entire South China Sea in 2010. A year later, China warned Vietnam that it would not hesitate to use military force to back up its claims. Since then there have been tit for tat responses by both sides and numerous provocations by Chinese maritime and fishing vessels.

In 2012, Vietnam partnered with Russia’s Gazprom to develop two offshore gasfields in the sea and it has issued a license to ExxonMobil as well.

Vietnam Expected to Loosen State Controls, If Carefully

The Vietnamese flag flies over the walls of the Imperial City in Huế, September 9
The Vietnamese flag flies over the walls of the Imperial City in Huế, September 9 (Greg Willis)

The international community is keeping a close watch on Vietnam’s National Assembly as it is convening a month long session to decide the extent to which it will amend the Constitution. The session is expected to end next week with lawmakers believed ready to give the go ahead on loosening the communist country’s economy, finance and investment laws.

The big question is: will the government take on its vested interests and reform the heavily indebted state-owned enterprises?

Determined to participate in the Trans Pacific Partnership trade talks, Vietnam is likely to continue opening up its economy to outside investment, lifting limits on foreign ownership of companies and reforming the banking sector.

But the economy has been slowing over the last three years largely because its state-owned companies, which account for some 40 percent of gross domestic product, are increasingly burdened with bad debt. Mandated by the government to play a leading role in the economy, they have had access to easy credit and invested in areas outside their expertise, leading to heavy losses.

These losses also imperiled the state’s banks that lent them the money. The banks are carrying the largest amount of nonperforming loans among the six Southeast Asian nations covered by the Fitch rating agency. The government has dismantled almost one in ten state-owned enterprises, according to the Center for Strategic and International Studies in Washington DC, but there is more to be done as growth came in below the government’s own 7 percent target during the last three years. Last year’s 5.25 percent growth rate even was the lowest in thirteen years’ time.

The central bank has been able to get inflation under control somewhat. It was 9.1 percent in 2012, down from 18.7 percent in 2011.

The prospect of the economy stalling further has perhaps spurred the government to be more aggressive in confronting the debt problem.

In July, the central bank created the Vietnam Asset Management Company as a vehicle for buying nonperforming loans from its banks. This “bad debt bank” has so far purchased $709 million in assets. It is expected to buy up to $6.6 billion in total.

The central bank has also vowed to prosecute officials who are involved in corruption. This week, a former general director of Agribank Financial Leasing as well as the former chairman of a building firm were sentenced to death after they were convicted of embezzling more than $25 million from state companies. Nine other executives were put in prison for up to fourteen years each.

The impetus behind the crackdown is the growing realization that the current model has outgrown its usefulness. With the economy slowing, the public’s angst is growing. The Communist Party is intent on reforming the economy in order to keep growth intact and to attract foreign direct investment. Moreover, it wants to avoid a meltdown in the banking system and being blamed for driving the economy into the ground if that happens. Above all, the party intends to stay in power.

However, reforming the state-owned enterprises and embracing greater economic openness is a risky move. State companies are the party’s means to control the economy. The more control it relinquishes, the greater the loss of its influence politically.

It is commonly held that greater economic freedom ultimately leads to people demanding greater political freedom as well. Vietnam’s ruling party party no doubt realizes this and is surely balancing its decisions carefully.

Vietnam Addresses Trade Deficit with China

A street in Hanoi, Vietnam, June 9
A street in Hanoi, Vietnam, June 9 (Oscar Hermawan)

Bilateral trade between China and Vietnam has seen exponential growth in recent years following the establishment of the ASEAN-China Free Trade Area. In 2001, trade between the two countries stood at $3 billion but has since climbed to $40 billion by 2012, expanding over 1,200 percent.

While both countries have benefited from this meteoric rise in bilateral trade, in recent months Vietnamese leaders have sought to address the trade deficit that exists with China.

During the first two quarters of 2013, Vietnam’s trade deficit with China reached $11.4 billion dollars, with exports worth $6 billion and imports totaling $17.4 billion.

In order to increase Vietnam’s exporting power to China, the government has ratified new addendums to liberalize the country’s Law on Investment aimed at boosting foreign direct investment into several sectors, including oil refining, iron and steel, cement and construction materials. It is hoped that the increased flow of foreign capital will allow Vietnam to boost the value of its exported goods by climbing the value added chain.

“These moves aimed to make Vietnam less dependent on the import market and more active in reshaping its export pattern,” said Dao Viet Hoa, vice consul general to Vietnam’s consulate in Nanning, China.

FDI into Vietnam has already seen favorable growth this year, with inflows growing 20 percent year on year. Manufacturing and processing operations remain the most active sector for FDI, accounting for over 85 percent of committed capital.

Capitalizing on Vietnam’s strong industrial capabilities and potential, the Vietnamese government has also welcomed Chinese companies to participate in the growth of these sectors through direct involvement.

“Vietnam will create favorable conditions for China to build industrial parks and export processing zones with a focus on providing input materials for industrial production and export outsourcing,” Dao Viet Hoa further commented.

As Vietnam’s largest trade partner, bilateral economic relations with China are a key component of Vietnam’s continued growth. According to Dao Viet Hoa, government officials expect to see continued growth in trade between the two countries of up to 20 percent per year in spite of the global economic slowdown.

This story first appeared at Asia Briefing, August 6, 2013.

America, Vietnam Deepening Cooperation to Balance China

Sailors aboard the USS Blue Ridge man the rails while the USS Lassen follows behind approaching Da Nang, Vietnam, November 7, 2009
Sailors aboard the USS Blue Ridge man the rails while the USS Lassen follows behind approaching Da Nang, Vietnam, November 7, 2009 (USN/Cynthia Griggs)

In an historic meeting at the White House in Washington DC on Thursday, President Barak Obama announced with Vietnam’s president Trương Tấn Sang by his side that bilateral relations between the former rivals will be upgraded to a comprehensive partnership.

In his remarks, President Obama called it “the steady progression in US-Vietnam relations.” Indeed, the progress since 2005, when a slew of business contracts was signed, has been profound with the United States now Vietnam’s largest export market. With unprecedented cooperation, in a wide array of sectors, it appears that a new era in American-Vietnamese relations has begun.

The agreement stops short of a mutual defense treaty, similar to the one America has in place with Japan and the Philippines, but the breadth of sectors now open for cooperation will touch about every area of society. They include political and diplomatic relations, defense, trade, science and technology, education, the environment, health, tourism and war legacy issues.

This development comes against the backdrop of the “pivot” to Asia, the Obama Administration’s policy of reorienting American diplomatic attention toward Asia, a region that is considered central to economic growth in the twenty-first century.

Given Vietnam’s dismal human rights record, there has been inevitable criticism about engagement with the communist country. The government reportedly escalated attacks on civil rights and free speech advocates recently, including jailing prominent religious leaders, lawyers and bloggers. Obama said that he had a “frank” discussion with Sang about human rights and reiterated American support for the freedom of expression, religion and assembly.

Sang’s visit came eighteen years after relations were normalized in 1995. Economic concerns are as much behind Vietnam’s engagement with the United States as are political reasons. The population has begun to grow agitated with the country’s economy slowing to around 5 percent growth after experiencing years of rising prosperity. Protests have also mounted against China over its revisionist maritime border claims in the South China Sea which clash with Vietnam’s own claims there. Deepening relations with the United States could address both concerns.

Vietnam is taking part in negotiations to join the Trans Pacific Partnership, recognizing that the proposed free-trade area would be a boon to its economy. If it includes Japan opening its agriculture and other sectors, the partnership could boost Vietnamese gross domestic product 10 percent per year by 2025.

China’s policy in the South China Sea is delineated in its nine dash line map which covers virtually the entire sea. After his meeting with Obama, President Sang spoke at a Washington think tank where he called the nine dash line “groundless both legally and practically” and said that Vietnam supports the Philippines’ recent decision to bring China in front of a United Nations arbitration tribunal to have the map declared illegal.

As a result of this tension, the United States are welcomed in the region with open arms. Sang showed Obama a letter written by Hồ Chí Minh in 1946 to President Harry Truman. In it, the Vietnamese leader sought the establishment of “full cooperation” between his country and the United States and, ironically, said he was inspired by the writings of Thomas Jefferson about equality and liberty.

American-Vietnamese relations have come a long way over the last forty years when the last American troops were pulled out of the country. Trade and economics have heretofore been the focus of the relationship. The United States account for $10.5 billion of foreign investment in Vietnam, placing it seventh globally. With bilateral relations seemingly on an upward trajectory, it is remarkable that in such a short period of time the United States and Vietnam will see extensive cooperation in areas once deemed unthinkable like defense and politics.

India, Vietnam Emerging as China Alternatives

At the turn of the twenty-first century, there were two main schools of commercial thought with regards to China. The most popular was that China represented a massive market to sell to with roughly 1.3 billion potential consumers. The second was that China had a young, available and inexpensive workforce that was relatively skilled and disciplined. While the latter has proven the dominant economic driver for the past two decades, China’s one-child policy (implemented nationwide in 1982) has meant that the nation’s supply of cheap labor has been drying up — and is now doing so at an increasingly rapid rate.

China today is one of the fastest aging populations in the world — a fact that has not gone unnoticed by the central government. Wary of inheriting a huge population of aged but poor citizens, it has been state policy over the past few years to get more money into the pockets of Chinese nationals and to implement what by global standards is a relatively expensive, contribution based state insurance scheme.

These policies have had the effect of increasing minimum wages across the country by an average of 12.6 percent each year from 2008-2012, with this impacting vertically upon more senior level employees. It is hard to justify to senior staff that lower level employees have increases of 12.6 percent when senior employees cannot. The effect, therefore, of raising the minimum wage has been a massive wholesale increase in salaries across businesses based in China at all levels.

When you combine these base salary increases with every employer’s mandatory social insurance and housing fund contributions at roughly 35-45 percent on top of salaries for each employee, these costs begin to add up fast.

Even relocating a factory into the relatively inexpensive inland regions of China is proving a false economy — firstly because increased infrastructure and transportation costs eat into most of the savings and secondly because these areas too are experiencing large increases in wage overheads.

While all of this is good news for businesses wishing to sell to China, it is becoming increasingly difficult for export driven businesses to justify a China presence — unless at least part of that production is destined for the domestic market.

Yet even here, competition is just around the corner.

Competition for this type of export manufacturing business model is appearing right around the corner as China’s free-trade agreement with ASEAN kicks in come 2015. This means that factories based in Southeast Asian countries, such as Vietnam, can soon sell products duty free to the Chinese consumer market. When one then factors in Vietnam’s lower wages and land use costs, the implications are clear.

Vietnam has even gone to the extent of directly targeting China as a key competitor for manufacturing based, export driven foreign direct investment. It has recently passed legislation dropping its corporate income tax level to two points below that of China beginning January 1, 2014 and, like China did twenty years ago, has introduced sweeping investment reforms and numerous new export processing and manufacturing free-trade zones along its eastern coast.

Consultants still selling the China story will suggest Vietnam’s infrastructure is not up to par but that too is rapidly changing with the Vietnamese government introducing massive construction projects and road, rail and port development schemes. A drive from the airports in Hanoi and Ho Chi Minh City into their respective downtown areas will provide a visual snapshot of the large-scale infrastructure development now taking place in the country. It is prudent to recall that not so long ago, China used to look like one big construction site as well.

There are also other drivers at work here. An increasingly wary United States is becoming concerned with placing all of its purchasing needs into a single China basket; a feeling shared by many of China’s neighbors. Alarm bells went off globally when China suddenly cut supplies of rare earth minerals to Japan after a political spat and concerns over China’s tendency to use trade ties to strong arm other countries into bending to its wishes is also having an effect. Hedging the China risk is now influencing the spread of global manufacturing across Asia.

India, meanwhile, also represents an attractive alternative to today’s China as it actually bears a strong resemblance to China twenty years ago — with its massive consumer market and an abundant, young and inexpensive workforce.

Overall, operational costs in India remain far lower than China and like Vietnam, any executive arriving at the new international airports in Delhi or Mumbai, or taking a trip along the highway into either city center, cannot fail to be impressed by the scale of development — construction sites and cranes are everywhere as the country rapidly upgrades its infrastructure.

The east Indian port city of Chennai is a classic example. While the media focuses on Delhi and Mumbai, Chennai is home to the third largest expatriate population in India. It is also a manufacturing home for multinational corporations, including Nokia, BMW, Siemens, Dell, Motorola and Foxconn among many others, while it hosts the Asian headquarters and back office operations for many global financial institutions.

There’s also the matter of India’s own middle class which is currently about the same size as China’s at 250 million — making it a rising star as a combined base for export manufacturing and domestic sales. India is now one of the few countries where both cheap labor and a large, wealthy consumer class go hand in hand.

In short, investors that are able to look beyond India’s perennial issues — such as its inadequate (but rapidly improving) infrastructure and a large, loud democratic government that at times is slow to put forward necessary reforms — should be able to add value to their global operations by investing in India.

The reasons for these developments are clear. As China’s working population ages and becomes more expensive, alternative Asia beckons. Vietnam in particular is leading the new Asian wave of investment for export driven manufacturing while India now offers not just export manufacturing opportunities, but also, like China, the ability to sell to an increasingly wealthy middle-class population.

China’s continuing evolution can perhaps best be explained in a recalibration of the popular opinion at the turn of the century that the 2000s will belong to China, much like the 1800s were dominated by the British Empire and the 1900s saw America’s rise to prominence.

No, the twenty-first century will more aptly be headlined as “Asia’s century,” and although China will very much be a part of that, other countries in the region will be too.

For those businesses that are involved in export driven manufacturing, it is the Asian connection that now counts. This is the chief reason why China’s role within global trade and the development of emerging Asia should now be reassessed in order to better absorb the ongoing financial battle between production costs and the demands of the global end user.

This article by Chris Devonshire-Ellis originally appeared at Asia Briefing, March 26, 2013.

Laos’ Hydropower Boom Attracts Regional Attention

Construction site for the Xayaburi Dam in northwestern Laos, July 22, 2011
Construction site for the Xayaburi Dam in northwestern Laos, July 22, 2011 (International Rivers)

The recent decision by the government of Laos to green light the long delayed construction of the massive Xayaburi Dam made headlines across the world. Most analysts and commentators agree the move is controversial, as the dam will likely have significant negative environmental effects within Laos as well as in Cambodia and Vietnam, which lie further down the Mekong.

It is believed that the small Southeast Asian country is planning to build up to seventy hydroelectric dams along the Mekong River and its tributaries, an increase from the previous but already significant estimate of 55. This construction boom will have wider repercussions than extensive environmental damage. It has the potential to alter the geopolitical balance in Southeast Asia.

Even though the Laotian economy has been growing steadily over recent years, the country remains one of the most underdeveloped in Asia. Its gross domestic product per capita (at purchasing power parity) in 2011 was $2,700 and according to World Bank data only 71 percent of the country’s population had access to electricity in 2010.

In many ways this small, landlocked country of 6.5 million has long resided in the shadow of its larger and more powerful neighbors, such as China, Thailand and Vietnam. If the country achieves its ambitious goal of becoming “the battery of Southeast Asia,” however, all that may change.

The government in Vientiane intends to generate substantial revenue from electricity exports once the dams are operational. Apart from aiding the Laotian economy these exports will greatly increase the country’s regional importance, as well as establish it as one of the largest energy hubs in the region and perhaps in Asia as a whole.

The significant hydroelectric potential of Laos — around 26,000 megawatts, the majority of which will be available for export rather than domestic consumption — has already attracted considerable attention from countries both in Asia and further afield. Companies from China, France, Japan, Norway, Russia, South Korea, Thailand, the United States and Vietnam are involved in the planning or construction of several hydroelectric dams. The construction projects are given ample funding from sources such as China’s policy banks, the World Bank and the Asian Development Bank. Although it may be premature to speak of “a scramble for Laos,” the surge in international interest in the country is undeniable.

Although profit is likely the main motivator of private companies hoping to join in the construction boom, some of the states in the region have more long-term objectives in mind.

China in particular has been cultivating close ties with Laos in recent years and Chinese companies, many of which are state owned, have invested close to $2.8 billion in the country over the last decade. Significantly, around 32 percent of this amount was invested in hydropower. This sizable percentage may be an indication of Beijing’s priorities in Laos. Although revised downward, China’s economic growth forecast for the next several years hovers around a still impressive 7 percent and the emerging superpower’s appetite for energy will continue to be voracious.

With the fate of its continued hydropower investment in rapidly reforming Burma uncertain, China appears ready to position itself as a major player in the Laotian hydropower sector, a position which could directly contribute to its energy security in the coming years and decades. Supported by China’s policy banks, its state-owned enterprises (such as the world’s biggest dam builder, Sinohydro) are currently involved in at least thirteen hydropower projects in Laos in various stages of planning or construction.

Of the other international actors in Laos mentioned earlier, two are specially eager to get a piece of the country’s hydroelectric pie.

Thailand has already established a firm foothold in the hydropower sector of Laos and much of the future Laotian hydroelectric exports are slated for its western neighbor. The fact that the largest currently envisioned dam in the country, the $3.5 billion Xayaburi, is being entirely financed by Thai banks testifies to the significance that Laos holds for Thailand and its energy security.

Vietnam, the third major player in Laotian hydropower, has invested about $3.45 billion in the economy of its western neighbor, with much of that sum going into hydropower projects. Vietnamese companies are involved in the planning and construction of several hydroelectric dams in Laos, with most of the electricity that will be generated by these projects already earmarked for export to Vietnam.

Laos is certainly strengthening its position within Southeast Asia with each passing year and is well on its way to becoming an important regional actor. Although Vientiane’s plan for transformation into an energy hub is ambitious, much can still go wrong. Few of the proposed hydroelectric dams will be without an accompanying negative environmental impact and they have already come under fierce criticism from nongovernmental organizations as well as other Southeast Asian states that would need to deal with some of the consequences. The decision to green light Xayaburi Dam also drew criticism from the United States and there is no definitive consensus on the vision of Laos as the “battery of Southeast Asia” even within the country itself.

Even so, if these issues are eventually overcome — and given the tremendous geopolitical interests the dam construction boom has attracted, this is a distinct possibility — Laos is set to emerge out of the shadow of its neighbors and finally establish itself as an important regional actor in its own right.

This article was published as the winning entry in an internship competition at Wikistrat, the world’s first massively multiplayer online consultancy.