Relations between China and Vietnam have remained troubled and uneasy for many years. Although China supported North Vietnam during the Vietnam War, ties between the two nations deteriorated after the reunification of the country in 1975.

The Sino-Vietnamese War started in 1979, when China invaded Vietnam following a spurt of cross-border raids and skirmishes along its shared 1,281 kilometre (796 miles) southern international boundary. The two neighbouring countries ended up engaging in a border conflict for eleven years. Despite this, China and Vietnam have since adopted a policy of moderation, and political parties of both the countries continued to retain their socialist links for over three decades.

Trade war

During the Indochina Wars, North Vietnam found crucial allies in the Soviet Union and Communist China. Between 1949 and 1975, the Chinese Communist Party helped the Communist North beat back the French colonial empire, South Vietnam, and their ally, the United States, by providing weapons, military training and crucial supplies. The aid from China was, however, viewed with suspicion by Vietnam as a ploy to wrest control and influence.

Relations between China and Vietnam worsened in recent times due to several reasons. With trade competition intensifying between the two, Vietnam has emerged as the favoured low-cost manufacturing base, which threatens to usurp Chinese position of dominance. Vietnam also belongs to the alliance camp that opposes China’s supremacy in the South China Sea and seeks greater freedom in the strategic shipping lanes. In addition to that, Vietnam’s close ties with US, Japan, EU and India has long been a source of discomfort for the PLA.

It is yet to be seen whether Chinese leader Xi Jing Ping’s third term as General Secretary of the Communist Party is going to improve bilateral relations. In a show of goodwill, Xi Jinping had met his Vietnamese counterpart, Nguyễn Phú Trọng, in 2020, on the occasion of Vietnam’s 75th National Day. Both leaders showed solidarity and issued a statement: “In the past 70 years, although there have been some ups and downs in bilateral relations, friendship and cooperation had always been the main flow,” it read.

State-run media on both sides reiterated that the meeting was a historic turning point for diplomacy and normalisation of the two countries’ age-old ideological and national ties.

But despite these overtures, relations between Hanoi and Beijing remained tense throughout 2020, fuelled by heightened rivalry and escalating maritime tensions. Both China and Vietnam have strong strategic interests in South China Sea, and Vietnam’s geographical proximity to these waters is being seen as thwarting China’s ambition.

Competition- Is Vietnam Giving China a hard time?

Ever since China emerged as a major power, it set off anticipation of similar rise of other Asian countries. Vietnam was among those that closely followed China’s path of development, and the reason behind its success in the past two decades. The growth in Vietnam is led by exports, but critics say that the country needs to diversify and participate in the regional production network.

While Vietnam diversified its export with agility, its structure is closely aligned with that of China’s.

Both the nations compete for exports to the US, particularly in textile and clothing. Being a WTO member since 2001, China had benefited from exemptions of trade quotas. As a result, its exports to the US market doubled in three years between 2004 and 2007. Today, Vietnam ranks fourth among US exporters. And after the 2008 recession, Vietnam was the only country whose exports to the US kept growing while China’s exports stagnated for a while.

In 2015, China’s free trade agreement with ASEAN came into force. This gave further boost to the Vietnamese economy.

Advantage Vietnam

According to a Business Standard article, cheaper labour, land acquisition and operational costs gives Vietnam an edge to set up factories and warehouses. While the Covid-19-led economic slowdown disrupted the global supply chain in Guangdong province and Shanghai, Vietnam’s economy grew by 5.03%, according to the 2022 first quarter results. China recorded 4.8% growth during the same period. Beside, more foreign investors are looking at opportunities to invest in the Vietnamese markets.

Another China worry is that increasing number of factory orders are flowing out of China and shifting to Vietnam. Danish Toy Company Lego announced investment to the tune of $1 billion for setting up a manufacturing unit in Vietnam. This is the biggest investments by a European country in the southeast region, and largely prompted by deteriorating China-EU relations since last year.

The US, on the other hand, plans to further divert its investment towards countries like India and Vietnam, which are competitors of China. Major companies like GoPro, Apple, and Microsoft etc. have also shifted its manufacturing from China to countries like Mexico and Vietnam. Japan, too, introduced ‘China Exit’ subsidies, which motivated some 87 companies to move out of China and set up manufacturing base in Japan and other Southeast Asian region.

Countries like Vietnam and Mexico benefited from the 2018 US-China trade faceoff, with the former’s export trade surplus sharply rising within a year, from $63 billion in 2020 to $81 billion in 2021.

Investment shift

Major countries are shifting location from China to other South Asian countries due to several reasons:

• COVID-19 pandemic: Covid-19 has adversely impacted China with its lockdowns continuing even as the rest of the world opened up. This has hurt manufacturing and their economy.
• Vietnam’s GDP Growth: During the peak of the pandemic, many countries saw a fall in their GDP, including China. But Vietnam’s GDP grew at 5.5% in 2020-21, according to World Bank figures. This positive trend attracted overseas manufactures to set up plants in Vietnam.
• Low Cost of Labour: A wage hike is observed in the Chinese labour market. The average annual wages were about $5,500 in 2010. Within a decade, this rose to $13,670 in 2020. This was another reason why Vietnam became a favoured investment destination. In Vietnam, average monthly wage is about $150, or $1800 a years.
• The planned US and EU strategies to shift their reliance away from China to other pro-US developing nation saw a host of companies shift their bases from China to Vietnam.
• The Russia -Ukraine war has exuberated the situation with the EU and US planning to shift reliance from Sino -Russia other countries. Vietnam, India top the list in attracting the fleeing companies due to the economies of scale/ market size/ excellent business ecosystem.

The Future of Vietnam

About half of  Nike’s shoe products are made in Vietnam, beating China which now produces about 20% of its total production. Trade between the US and Vietnam are expanding, whereas, China’s overall imports to the US is seeing a steady decline.

In Vietnam, the GDP per capita is about $2,700, whereas, in China, it is about $10,000, or nearly four times higher. Due to its trade with the US, China’s economy grew to become the second largest in the world. However, things are evolving. At $67 billion, US imports from Vietnam were worth 36% more in 2019 than the previous year. By 2020, it touched $80 billion. It is true that this represents a small portion of China’s total imports, which are expected to touch $435 billion in 2020. However, that same year, trade actually decreased by almost 4%. It grew rapidly in the same year as Vietnam. The Trade War was the driving force behind this change.

Due to its ability to capture some of the manufacturing business that was previously going to China, Vietnam benefited from the tariff war, which was welcomed by businesses.

During the pandemic, most economies faced severe challenges, but in Vietnam, the economy expanded significantly. As a result, Vietnam actually experienced a trade surplus with the US in 2020, a time when things were extremely tense for many nations and businesses.

Some economists caution that Vietnam cannot replace China. Here are two justifications.

About 1.4 billion people live in China compared to 95 million in Vietnam. Thus, Vietnam will never be able to fully fulfil global demand in the same way that China does. Secondly, China has been developing its infrastructure for many years. Less so in Vietnam. Highways and factories are receiving significant investments at present, but China has significant advantages in these areas. As businesses expand their presence in Vietnam, people’s standard of living is rising and adding to the growing number of middle class. Vietnam’s economy has experienced rapid growth to attain middle-income status in a short span of a few decades.

What is in it for India?

As global businesses pull out of China, India should leverage this opportunity and open up partnerships with Vietnam.

India has risen as a viable alternative to China. Apart from its huge consumer market, operation costs in India is lower than both China and Vietnam. For example, several multinational companies and financial institutions have set up their bases in Chennai, the country’s third most populous city, including Nokia, BMW, Dell, Motorola, Foxconn, etc. It is also the headquarters of several global financial institutions.

Moreover, India’s middle class is seemingly rising as an export base for manufacturing domestic sales.  India is among countries that has both cheap labour and wide consumer base. Investors are now looking at India as a potential country that can add value to their global operations.

Vietnam is now the new ‘Asian Wave’ for export manufacturing-based investment. However, the ecosystem for Vietnam is considered more conducive by foreign investors. As several global manufacturing companies relocate from China post COVID, a majority chose Vietnam over India.

India and Vietnam are portrayed as rivals in matters of global investments. But this label overshadows the two nations’ trade and investment relations. Both the nations have their own unique strengths. India is one of the fastest growing economies with a young demography and a vibrant democracy that is reassuring for potential investors. While Vietnam, with its prime geographical location, has a robust economy with a GDP growth rate of 6.3%, between 2000 and 2018.

India’s operation costs is lower than both China and Vietnam

India is one of the major developing economies in the world. As it is a developing nation it has some perks which are the reason for major players shifting their manufacturing to India to get the benefit of cost advantage. Whereas Vietnam has the labour which is young and skilled; Indian labour is much cheaper than the Vietnam’s labour. The minimum wage rate in India for a standard 8-hour shift is around 70 USD where as in Vietnam it is around 148 USD. Given India’s population size, it can serve greater number of people and different varieties of products as compared to the Vietnam’s market. Both the countries are trying to attract as many as foreign investors as they can and both have provided different subsidies and tax benefits to the players. But the services in India are more superior in IT related fields; software development will be available at much lower rates and will benefit the operation cost. This is because bulk production needs good software and technical support which is faster and cheaper in India, compared to the Vietnam and China’s market.

Moreover, India has an increasing number of skilled labours and a good growth rate which will automatically solve the problem of unavailability of skilled labour in Indian Market. India’s leapfrog in attracting Foxconn to invest in $ 20 Billion in semiconductor fab will help India become a much better competitive destination. In a report (Sood, D. 2022, August 22) it was quoted that India has added 4.5 times more skilled workers in the tech field which was around 45 lakhs in 2022 but will need to go to 52 lakhs to full-fill its demand- the growing education in the country will full-fill the gap in near future. Besides, time is treated as money in India; the principle followed by its manufacturers, the time of completing production is much lower without compromising on the production quality. There are plenty of players currently in the Indian market which are giving competition to each other; which gives benefit of cost to the foreign players. With this there are different types of manufactures which give option to choose. English is the most common language which removes the communication gap between the foreign players and the Indian manufactures and its different departments. The production quantity can also be easily scaled in India due to less documentation required and availability of resources of production.  These factors give not only benefit in the operation cost in Indian Market but also provides ease in doing business in India.

Vietnam introduced the Doi Moi economic reforms in 1986. This is nearly a decade and a half later than China’s market-oriented reforms, launched in 1970. India, on the other hand, initiated its economic liberalisation in 1991. The fact that Vietnam has been able to achieve higher growth than India gives the nation positive confidence. Today, the US imports more garments from Vietnam, China and Bangladesh than it does from India.

Between 2010 and 2019, Vietnam’s total exports in merchandise grew at an annual growth rate of 18%. During this same period, India’s export of merchandise only saw 5% growth. Vietnam registered a trade surplus of $47 billion, an improvement over its trade deficit of $13 billion in 2010. Trade deficit for India, on the other hand, increased from $130 billion to $156 billion during the same period.

Despite stiff competition from Vietnam, the good news is that India has been able to attract massive investments in semiconductor manufacturing. Top Taiwanese player Foxconn has announced plans to invest $20 billion in India.

What India can do

Since liberalisation, India has drafted major national manufacturing policies from the National Manufacturing Policy to the Make in India initiative. Yet, there has not been any significant changes in the exports manufacturing sector. Vietnam, on the other hand, has made its cheap labour, low taxes and a friendly work environment attractive for foreign investment. Operating under trade war shadows, Vietnam offers lower corporate taxes to investors seeking to relocate their businesses as well. In order to keep up with its Asian neighbours and restore competitiveness, India needs to promote free trade, quality labour and an amicable business environment.

With the status of India rising as a dominant Asian power capable of countering Chinese challenge, Vietnam and other East Asian nations are keen to explore strategic partnerships. India should leverage this opportunity to expand its defence exports while securing partner nations. Recently, India’s defence minister handed over 12 high-speed guard boats to Vietnam. Five of these boats were built in India, while the rest were made at a Vietnamese shipyard under India’s $100 million Defence Line of Credit. In addition, India has activated a satellite imaging and tracking station in Hanoi to track Chinese naval activities in the region. India is also looking at selling Brahmos supersonic cruise missiles to Vietnam and with a ready credit line to facilitate this deal.

India should expand its defence exports while securing partner nations

The Indian defence ecosystem is spreading its arms overseas as military exports have increased by 334% over the most recent five years, which includes supplies of arsenals supplies in excess of 75 nations all over the world.

Prominently, India exported around Rs 1,387 crore worth of defence related exports during the first quarter of the financial year 2022-23 (April-June), according to the official data released.

Further, the nation’s defence and innovation related exports touched the most noteworthy at any point figure of Rs 12,815 crore in the year 2021-22, a 54.1 percent ascend over the previous year.

It is relevant to take note of that the exports in the year 2022 were almost eight times, of what they were around five years back.

As per the reports, India’s defence exports were worth Rs 8,434 crore in 2020-21, Rs 9,115 crore in 2019-20 and Rs 2,059 crore in 2015-16. India’s export trades are mostly to nations like the US, the Philippines and different nations in South-East Asia, the Centre East and Africa.

Indian Defence Minister Rajnath Singh as of late paid a three-day visit (8-10 June 2022) to Hanoi to reinforce defence and security ties with Vietnam. The two sides discussed regional security issues and consented to agreements to expand their defence engagement.

During Minister Singh’s recent visit, India and Vietnam signed two key agreements:

• The first agreement, ‘Joint Vision Statement on India-Vietnam Defence Partnership towards 2030’, casts a long-term perspective on the mutual ties. While contents of the agreement are not available in the public domain, according to officials, it aims to “enhance the scope and scale of existing defence cooperation.”
• The second agreement, an MoU, focused on mutual logistics support to enable the two countries to use each other’s military bases to repair and replenish supplies. According to the official statement, this agreement is “the first such major agreement which Vietnam has signed with any country.” This arrangement will mainly benefit the Indian Navy as it ramps up its profile in the Indo-Pacific.

Since the South China Sea clashes, Vietnam has boosted its defence spending, averaging US $4.8 billion between 2014 and 2018. However, with the danger presented by China and its military requirements, this spending is insufficient. Therefore, Hanoi is looking for more affordable defence suppliers with this moderate defence spending.

India can potentially be one such source. The Indian military enjoys the benefit of operating similar platforms to Vietnam’s. It has leveraged this by assisting Hanoi in training and capacity building in Kilo-class submarine operations and Sukhoi-30 fighter jet training.

-The writers are student of Term-I Integrated BBA-MBA programme at Institute of Management, Nirma University. The article was written as part of the course – International Organisations, Regional Blocks and WTO, administered by Prof Punit Saurabh

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