How Vietnam Went from American Foe to American Friend

Nguyễn Phú Trọng Joe Biden
American vice president Joe Biden listens to a speech by Nguyễn Phú Trọng, the general secretary of the Communist Party of Vietnam, 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 “How Vietnam Went from American Foe to American Friend”

China, Vietnam Trade Blows Over South China Sea Oil

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. Read more “China, Vietnam Trade Blows Over South China Sea Oil”

Vietnam Expected to Loosen State Controls, If Carefully

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? Read more “Vietnam Expected to Loosen State Controls, If Carefully”

Vietnam Addresses Trade Deficit with China

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. Read more “Vietnam Addresses Trade Deficit with China”

America, Vietnam Deepening Cooperation to Balance China

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. Read more “America, Vietnam Deepening Cooperation to Balance China”

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

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. Read more “Laos’ Hydropower Boom Attracts Regional Attention”

Banking Scandal Exposes Split in Vietnam Leadership

Vietnam has been rightly recognized as one of the hottest markets by global investors since its đổi mới policy of market reforms was instituted in the late 1980s. It has taken great strides in transforming itself from a wartorn country thirty years ago to one of the Asian Tigers. Lately however, Vietnam has hit a speed bump from bad economic policies seemingly resulting in a split within the Communist Party. These differences, culminated last week in the arrest of a prominent businessman, have sent shock waves through the country with rumors rife of additional arrests.

The 2000s were heady times for Vietnam as its gross domestic product averaged 7 percent annual growth, foreign direct investment flowed into the country and it joined the World Trade Organization. The euphoria began to wilt after the government, in a bid to stimulate greater growth in the economy, clung to expansionary monetary policies too long which caused inflation to spiral out of control. Inflation peaked at 23 percent in August 2011 before falling to 8.3 percent in May of this year.

Since then, GDP growth has slowed from 6.8 percent in 2010 to 5.9 percent in 2011 to 4 percent in the first quarter of 2012. The World Bank warned in June that “inefficiencies in state-owned enterprises, banks and public investments [will] be a drag on long-term growth.”

The government’s economic policy, modeled on the growth of South Korea’s chaebol style conglomerates, called for assisting its domestic companies to expand in order to become more competitive globally.  But after years of cheap credit, state-owned companies have turned into inefficient behemoths saddled with ballooning debt levels.  They are so big that they currently produce 40 percent of Vietnam’s GDP.

The collapse of the state shipping companies Vinashin and Vinalines could be indicative of the trouble many public enterprises are in. In fact, the ruling party was so concerned about the state-owned enterprises that it convened in early 2011 to review the country’s economic growth model and its failure in building chaebol style companies.

Against the backdrop of a slowing economy and troubled state-owned enterprises, officials are increasingly concerned about the stability of the country. The arrest of business tycoon Nguyễn Đức Kiên two weeks ago, the cofounder of Asia Commercial Bank and owner of the Hanoi Football Club, for unspecified economic crimes is being interpreted as a way to deflect blame from the government.

A few days later, Asia Commercial Bank’s chief executive officer Lý Xuân Hả was also picked up for “violating state regulations on economic management,” according to the state run Vietnam News Service.

Since the arrests, the Ho Chi Minh Stock Index has sold off by 12 percent and ACB’s stock is down 22 percent. Moody’s Investors Service cut the bank’s credit rating with a warning that it was placing its credit on review for a possible future downgrade. Fitch Ratings wrote, the “arrest could trigger renewed investor concerns about corporate governance, transparency and liquidity issues in Vietnam’s banking sector.”

According to some press reports, the arrests at ACB, one of Vietnam’s biggest priate banks, are the result of a power struggle within the Communist Party. Specifically, between Prime Minister Nguyễn Tấn Dũng and President Trương Tấn Sang.

Dũng, viewed by many as Vietnam’s most powerful prime minister after being reelected to a five year term in 2011, was the force behind Vietnam’s drive to develop dominant state-owned enterprises.

Sang, on the other hand, is believed to be part of the old guard, worried about the increasing divide between rich and poor in the country. As such, cracking down on state-owned enterprises because of corruption is a way of discrediting the chaebol policy.

In a pointed opinion article last week, President Sang said that “Vietnam was now under pressure from broken state-owned enterprises.” He lamented the “degradation of political ideology and the morals and lifestyle” of public officials. A not so subtle shot at Dũng.

The prime minister, for his part, has come out supportive of the punishment of illegal activities in the banking sector “no matter who they are.”

The crackdown by the government is sparking rumors of other arrests. Yesterday, Nguyễn Đăng Quang, the chairman of the food conglomerate Masan Group, came forward to dispel rumors that he had been detained.

If the Communist Party seeks to insulate itself from the public’s ire over the struggling economy with a campaign targeting the wealthy, it risks starting another economic crisis by scaring away the foreign investment that drove much of the country’s growth in recent years. If that happens, its entire economic reform program could be threatened.

“Russia Seeks Naval Presence in Cuba, Vietnam”

Russia hopes to establish another naval base abroad and is eying Cuba, the Seychelles and Vietnam as possible locations, the country’s naval chief was quoted as saying on Friday.

Vice Admiral Viktor Chirkov, the commander-in-chief of the Russian navy, told the RIA Novosti news agency, “It’s true that we are continuing work on providing the navy with basing outside the Russian Federation.”

Russia’s only foreign maritime base at present is situated in Tartus, Syria in the Eastern Mediterranean. Although the facility is limited in scope, preserving it is seen as a reason for Russia to support the regime of President Bashar al-Assad despite international condemnation of the brutal crackdown of dissent that he has orchestrated in Syria for the last seventeen months.

Russia vacated the Cam Ranh naval base in Vietnam in 2002 during Vladimir Putin’s first term as president because the country could no longer afford to pay the rent. Reoccupying it may spark some undue concern — in Beijing. Read more ““Russia Seeks Naval Presence in Cuba, Vietnam””

United States Expanding Naval Presence Across Asia

Secretary of Defense Leon Panetta announced this weekend that up to 60 percent of American warships will soon be deployed in East Asia. To underscore the United States’ commitment to the region, he visited the deepwater port of Cam Ranh Bay in Vietnam on Sunday.

Panetta was the most senior American official to visit Cam Ranh Bay since the end of the Vietnam War when it served as a key logistic hub for South Vietnamese and United States forces.

As the United States are “rebalancing” their military to the Pacific, “it will be particularly important to be able to work with partners like Vietnam to be able to use harbors like this as we move our ships from our ports on the West Coast toward our stations here in the Pacific,” said Panetta.

Relations between Vietnam and the United States have markedly improved in recent years despite the troubled history. In large part, that’s because Vietnam worries about the rise of neighboring China. Read more “United States Expanding Naval Presence Across Asia”