Vietnam uses US-China trade war to rebalance its economic and security relationships

  • Hanoi is taking advantage of heightened rivalry between the two greater powers to make new friends in the region
PUBLISHED : Wednesday, 12 December, 2018, 6:01am
UPDATED : Thursday, 03 January, 2019, 10:35am

As the rivalry between China and the US intensifies and uncertainty hangs on whether they can resolve their trade war beyond the current 90-day truce, it’s an uneasy time for Asian nations caught between the two powers. In this special investigative series the South China Morning Post explores how the China-US rivalry is affecting four countries in Asia. In part one, Keegan Elmer looks at Vietnam.

Heightened US-China rivalry is transforming Vietnam’s relationship with its big neighbour to the north, and allowing the Southeast Asian nation to diversify its economic and security relationships.

Vietnam relies on China for the steadfast support of a fellow communist government and, as its biggest trading partner, to propel its rapidly growing economy but there are signs it is rebalancing the relationship.

Public reaction to a plan to create three special economic zones in Vietnam brought tens of thousands on to the streets in June to protest what was widely seen as a direct Chinese presence on Vietnamese soil.

Anti-China protests in Vietnam set to aggravate tensions with Beijing

The Vietnamese authorities stressed that the zones – on a total of 1.3 million hectares, including one site just 100km from the northern border with China – would be open to all foreign investors.

But elements of the draft law, combined with years of disputes with China over investment projects and territorial claims, made some citizens feel the plan was just another way for China to strong-arm its neighbour.

Legislators responded by voting to postpone the decision until October, only to quietly delay it once again until May next year.

The decision is seen as a sign that Vietnam is more alert to Chinese influence and is taking advantage of the heightened US-China rivalry to rebalance the relationship.

Here’s who wins and also loses in US-China trade war: Vietnam

“In terms of great power politics, [the] balancing is very good for Vietnam,” said former Vietnamese ambassador Nguyen Ngoc Truong, president of the Centre for Strategic Studies and International Development (CSSD) in Hanoi.

“The good relationship [between China and US] is not necessarily so good for Vietnam, and a worsening relationship [between China and the US] is not that bad for Vietnam.

“When the two major powers have a good relationship, it’s more dangerous for small nations like Vietnam,” he said.

“During very good times between the United States and China, under Obama, China tried to do very harmful things regarding artificial islands in the sea,” Truong added, referring to what Beijing calls the South China Sea and which Hanoi refers to as the East Sea.

There is a view that Hanoi’s conflicting claims with Beijing in the disputed waters have a louder voice when joined with a more assertive Washington.

In trade, Vietnam has capitalised on the fallout of the US-China trade war to become a top destination for manufacturers looking to avoid tariffs.

Destination Vietnam for companies

“People are on the move,” said John Rockhold, executive director of the American Chamber of Commerce in Vietnam’s Ho Chi Minh City chapter.

Rockhold has seen a major increase in the number of firms interested in moving from China. Since September, he said, four companies a week have approached the chapter for advice on relocating to Vietnam – four times the rate of previous months.

China firms reconsider moving to Vietnam after trade truce

Others are noting the increased interest in Vietnam. One company, Hang Sinh Business Service Centre in Ho Chi Minh City, has been busy helping manufacturers in auto parts, apparel and consumer electronics to relocate from China to Vietnam.

“It started at the end of August. [The increase was] extremely clear,” Zhang Diansheng, general manager of Hang Sinh Business Service Centre, said.

Zhang received inquiries from more than 100 companies over three months, two to three times the number of cases compared to the same time last year.

“We believe this is only the beginning,” he said.

The truce reached between China and the US following the meeting between their two presidents on December 1 may curb the surge but, Zhang said, “the ceasefire is only a temporary phenomenon, because the China-US trade conflict cannot stop”.

The trade war has also highlighted Vietnam’s historic economic dependence on China, and increased the risks for Vietnam.

From Vietnam to Brexit: what happens when leaders need to look tough

“I’m afraid that Chinese goods will come here, be stamped [as made in Vietnam], and shipped on to the United States – this is not good for Vietnam,” said Bien Bang Bui, chief executive officer of CSSD.

Bui explained that the more trade war-related relocation there was to Vietnam from China, the more likely it would be that Washington may come down on Vietnamese products.

In May the US slapped tariffs on Vietnamese steel, saying China was using Vietnam to avoid US-imposed anti-dumping measures on Chinese steel.

The trade war has increased Vietnam’s resolve to diversify its risks, and pushes to build on its already highly active efforts to pursue trade agreements with a wide variety of partners.

Vietnam reduces reliance on China, ratifies new Trans-Pacific Partnership trade deal

“It’s not a coincidence that Vietnam has tried to develop relationships with other major investment partners, like Korea, Japan or Taiwan,” Maxfield Brown, head of Dezan Shira’s business intelligence unit for Asean, said.

“They provide a counterbalance, from an investment perspective, to China. It allows them to counterbalance Chinese influence without having to restrict Chinese investment in the country.”

Vietnam has also aggressively pursued major trade agreements in recent years, increasing its number of partners. This month Vietnam ratified the CP-TPP, a trade agreement of 11 Pacific Rim countries, excluding China, and the US, and negotiations for the EU-Vietnam Free Trade Agreement were concluded this year.

“It doesn’t have the opportunity to become a dominant power in this region because China is right there, but it can play its cards right to become a really developed and successful economy by playing the field,” Brown said.

Foreign relations

Vietnam has tried to apply the principle of diversity to its foreign relations as well, which has also helped it to hedge against China.

“Lack of political trust and insufficient real security has caused Vietnam to attempt to increase its relationship with the US and others to counter China,” said Zhang Jie, researcher on Southeast Asia at the Chinese Academy of Social Sciences.

In the South China Sea, Vietnam has pushed hard for a multilateral solution through Asean’s code of conduct, and has found support from a more assertive Trump administration.

South China Sea: Asean, Beijing continue to work towards code of conduct

Chinese President Xi Jinping and Vietnam’s Prime Minister Nguyen Xuan Phuc met in Shanghai in November, pledging to deepen cooperative bilateral ties, but that did not stop Phuc from bringing up touchy subjects like “sea-related issues”.

Just days later, Beijing took a tongue-lashing from both Washington and Hanoi over the Spratly Islands, subject of an ongoing territorial dispute in the South China Sea.

Vietnam demanded China stop operating its new weather stations on the artificially constructed islands, saying the installations – which Beijing considers to be public utilities – “seriously violated Vietnam’s sovereignty over the archipelago.”

Washington echoed Vietnam’s criticism of Beijing’s claims and made an unprecedented call for China to remove its missile installations from the Spratlys, immediately after its own high-level meetings in Washington on security issues with a Chinese delegation.

Vietnam and an increasingly assertive Washington are finding more synergies in the area of security.

At the Asean summit in Singapore in mid-November, Phuc met with US Vice-President Mike Pence and thanked the US for its support of Asean’s position on the South China Sea. Pence, in turn, pledged to uphold freedom of navigation throughout the Indo-Pacific region.

“Hanoi has been strengthening defence relations with multiple powers, including and most significantly with the US, to complicate any Chinese attempts to further change the status quo in the South China Sea in the future,” said Derek Grossman, senior defence analyst at Rand Corporation.

Vietnam is one of the loudest voices in Asia in countering Beijing at sea, according to Collin Koh, research fellow at the Maritime Security Programme, part of the S. Rajaratnam School of International Studies.

“The Vietnamese have been consistently protesting as and when there are issues that take place in the South China Sea,” Koh said.

“Vietnam will respond while the rest keep quiet, and China will not want to make any further outburst.”

Still, Vietnam adheres to its core foreign policy principles like the “three no’s”: no participation in military alliances, no foreign military bases on Vietnamese territory, and no reliance on one country to fight against another.

Even without the US, Vietnam continues to diversify its security partners, which help it to confront its differences with China.

Indian President Ram Nath Kovind made a three-day trip to Vietnam last month, where he addressed the National Assembly and met with the country’s new President Nguyen Phu Trong for closed door talks.

The two leaders agreed to boost bilateral trade and expand cooperation in oil, gas and defence during the visit.

In his address to the National Assembly, Kovind said the two countries had a “shared vision for the Indo-Pacific region” – a pet term of the US – with a commitment to freedom of navigation and unimpeded commerce at sea.

Kovind’s visit to Vietnam was followed by a high-ranking delegation to India from the Vietnam People’s Navy in the first week of December.

The cost for Vietnam

Last year US President Donald Trump suggested Vietnam increase its arms purchases to draw down its large trade surplus with the United States, but no deal has yet been announced.

“The Vietnamese government should not be seen as getting too close for comfort with the Americans,” Koh said.

“Trump wants to sell arms, yes, but the issue is Vietnam cannot afford them.”

Instead, Koh believes, Vietnam will likely focus on “low level” purchases, like electronic devices, rather than “big ticket” items.

“Vietnam does not want to be too beholden to the US,” Koh said, instead aiming to maintain a broad, diversified base of arms partners, from South Korea to India, but primarily from its traditional source of arms, Russia.

Vietnam purchased more than US$1 billion in Russian arms in September according to Reuters, and has also bought attack submarines, warships and jet fighters from Russia.

Vietnam looks to Russia as it strikes US$1 billion weapons deal

Rebalancing away from China will occur under US-China competition, but smaller countries like Vietnam fear things getting out of control, Zhang Jie, from the Chinese Academy of Social Sciences, said.

“For Vietnam, competition between China and the United States is indeed beneficial to an extent, and it can use this to counter China,” Zhang said.

However, she added, China would not bend so easily to changes in the relationship.

“China will not make concessions to Vietnam on the South China Sea issue because of US-China competition.”

Regardless of tensions, Vietnam and China still rely on exchanges between their respective communist parties, as well as other forms of limited cooperation.

“Both sides have chosen to paper over their differences in the South China Sea not only with rhetoric, but by conducting confidence-building activities, such as joint coastguard patrols in the Gulf of Tonkin,” said Rand’s Grossman.