Vietnam-India trade relations must develop in the shadow of the US-China trade war

Narendra Modi With Prime Minister Nguyen Xuan Phuc of VietnamPhoto: Narendra Modi

Vietnam and India were expected to benefit from the US-China trade war but could not. They should turn to each other to increase exports.

By Niranjan Marjani

The trade war between the US and China wreaked havoc on global supply chains. The tit-for-tat imposition of tariff duties prompted many international manufacturers in China to move operations to other regional markets.

A manufacturing exodus from China was initially seen as a potential opportunity for both India and Vietnam. The expectation was that the abundance of cheap labour in both economies would make them a viable alternative to China and bring manufacturing jobs to their shores, boosting exports, GDP growth and generating jobs.

Despite being in an advantageous position, India and Vietnam have been unable to take advantage of the trade war. Policy barriers like strict rules regarding large scale production and land acquisition put manufacturers off relocating to India. In Vietnam, the lack of essential manufacturing skills in the workforce was a perceived challenge.

India and Vietnam did not benefit from the trade war as expected but deeper economic ties to each other could bring some of the benefits they missed out on and increase bilateral trade.

What is the status of India-Vietnam economic engagement at present?

Economic relations between India and Vietnam have experienced a steady rise over the past two decades. Bilateral trade between India and Vietnam stood at US$200 million in the year 2000. In the 2018-2019 financial year, it had reached $13.69 billion. The agreed target for 2020 is $15 billion.

Indian-Vietnamese bilateral trade

Meat and fish are India’s principal exports to Vietnam. Meat accounts for 27% of total Indian exports to Vietnam while fish exports stand at 17%. India’s principal import from Vietnam is electrical equipment, which forms 49% of Vietnam’s total exports to India.

Indian investors are also heavily involved in Vietnam’s energy, mineral exploration and agro-processing sectors. India is also involved in 255 projects with investments in the country totalling some $922 million. Vietnam’s investments in India are around $29 million, with pharmaceuticals and information technology (IT) taking the lion’s share. There is scope for Vietnam to increase its investments in India when compared to India’s investments in Vietnam.

Tourism, e-commerce and food manufacturing are the sectors with the highest potential to boost economic cooperation between India and Vietnam. Both offer visitors from the other nation tourist visas on arrival, however the lack of direct flights connecting the two nations has limited tourist opportunities. The launch of direct flights between India and Vietnam in 2019 is expected to help the development of a thriving cross-border tourism sector.

E-commerce and food manufacturing also hold opportunities for development. India now allows 100% foreign direct investment its food and beverage sector and its e-commerce industry. This should act as an incentive for Vietnamese companies to invest more in India.

The coronavirus could act as a catalyst for the development of Indian-Vietnamese economic ties

The scope for increasing economic engagement with Vietnam also offers India an opportunity to increase its engagement with ASEAN since Vietnam is the current ASEAN chair for 2020.

Also with India refusing to join the Regional Comprehensive Economic Agreement (RCEP), it is expected that India and ASEAN will review its existing free trade agreement. India’s revised engagements with ASEAN could result in a doubling of bilateral trade to $300 billion by 2025.

At present, there are two specific sectors—farm products and pharmaceuticals—that could benefit from reduced trade barriers. Vietnam has requested India ease its trade barriers on agricultural products since the coronavirus outbreak. Vietnamese agricultural exports are reliant on Chinese demand. Reduced orders from China caused by the coronavirus has left the Vietnamese government looking for alternative regional buyers. There are currently restrictions on imports of key items like black pepper and cashew nuts in India. If they are lifted, Vietnamese agricultural exporters could unlock a new regional market.

At the same time, India is asking Vietnam to open up its pharmaceutical market to generic version of drugs. The pharmaceutical sector is one of India’s fastest-growing sectors. Pharmaceutical exports account for almost 6% of India’s total merchandise exports. Vietnam’s domestic pharmaceutical industry is also growing, but at present, it meets only 53% of domestic demand. Vietnam is trying to get Indian pharmaceutical companies to manufacture in Vietnam rather than increase purchasing from India.

The full economic potential of India’s relations with ASEAN nations awaits to be explored. Concerted efforts towards strengthening Indian-Vietnamese economic relations offer benefits to both countries and could provide India with a platform to deepen economic engagement with ASEAN as a whole.