Limited by its infrastructure and talent shortage, Vietnam is unable to fully cash in on the benefits offered by the Sino-US trade war.
By Joelyn Chan
Since US President Donald Trump took office in 2017, US trade relations with China has been a rollercoaster ride. Hopes of a trade deal wax and wane, exhausting investors and sending manufacturers scrambling to find ways around costly tariffs.
To bypass tariffs, Chinese firms supply components to Southeast Asia nations, who export to the US. Out of the ten ASEAN member states, Vietnam is expected to be the largest beneficiary of this trade diversion from Mainland China.
According to IHS Markit, a consultancy firm, in the period from January to September 2019, US imports from Vietnam rose by 34.8% year on year, rapidly accelerating from a modest 5.8% gain in all of 2018. During the same period, US imports from China contracted 13.4% year on year.
It is impossible to fill the shoes of the Chinese global manufacturing hub. Vietnam’s population is just 7% of China’s 1.4 billion, and it does not have the same access to skilled labour. There are, however, ample opportunities for growth.
For now, Vietnam is reaping rewards
In October 2019, Vietnam’s Prime Minister Nguyen Xuan Phuc said Vietnam’s gross domestic product (GDP) growth is expected to exceed 6.8% this year, propped up by a robust export market and access to a steady stream of foreign investment. The nation’s fastest-growing export groups to the US are computers, telephone equipment and other machinery.
Vietnam is also capitalising on company plans to relocate low value-added manufacturing activities from China to the ASEAN region. Companies are happy to pay a hefty sum to relocate, offering a windfall to Vietnam’s industrial real estate market and driving further development. For example, Chinese acoustic components company GoerTek has ploughed US$260 million into operations to shift the production of Apple AirPods to Vietnam.
But without local talent, there will be a limit to Vietnam’s economic gains
According to recruitment firm ManpowerGroup, only 12% of Vietnam’s 57.5 million-strong workforce is highly skilled. The majority of the Vietnamese workforce still resides in rural areas and works in the agricultural sector.
Even before the trade war unfolded, Vietnam needed a larger supply of IT workers, engineers and managers. The country responded to the labour crunch by enhancing the scale and quality of its vocational education and training (VET) programs.
However, low participation from the private sector limited the effectiveness of the improved training offerings. Without insights and input from the corporate sector, the VET system has struggled to provide courses that effectively prepare workers for the workforce and equip students with the skillsets in shortest supply.
The legislative arm has also been painfully slow to adapt. It took around three years to amend the nation’s labour code to bring Vietnamese labour laws in line with international standards. With stronger labour protections and improved clarity on the responsibilities of companies, more Vietnamese may be willing to leave the agricultural sector.
Inadequate infrastructure has also dampened Vietnam’s aspirations
The export-focus of China’s foreign direct investment (FDI) into Vietnam meant greater freight volumes coming through the nation’s roads, sea and airports. According to the Vietnam Maritime Administration, more than 530 million tons of cargo was shipped through Vietnamese ports in 2018, up 20% from 2017. This amount exceeded the maximum capacity of Vietnam’s 44 seaports, which sits at 470-500 million tons per annum.
Cost aside, poorly built roads and congested ports increase transportation time and reduce efficiency.
Without severe limitations on Vietnamese infrastructure and talent, the golden opportunity afforded by the US-China trade war could have fulfilled Vietnam’s ambition of being a modern industrialised country. While the economic fruits of the trade war have been sweet; the aftertaste of missed opportunity will leave a bitter taste on the Vietnamese palate.