The pandemic is expanding strategic competition between China and Vietnam from the South China Sea into the economy. Vietnam could see a boost to its economy as the COVID-19 crisis wears off and companies look to shift their operations out of China.
By Niranjan Marjani
COVID-19 will likely alter relations between Vietnam and China, from conflicts in the South China Sea to economic competition. COVID-19 has caused disruptions to supply chains in China, pushing companies to look for an alternative location, and Vietnam is emerging as one of the preferred alternatives.
Relations between Vietnam and China are currently dominated by competition for strategic space in the South China Sea. Over the past few years, the region has seen disputes between Vietnam and China over territorial boundaries and economic privileges. In the past two months, both sides have increased activity: China’s maritime militia moved towards the Spratly Islands, the Vietnamese received the USS Theodore Roosevelt at Da Nang and a Chinese ship reportedly sank a Vietnamese fishing boat.
These incidents will likely continue and relations between Vietnam and China will remain strained on account of strategic competition—now the defining factor in Vietnam-China bilateral relations.
China’s economic loss could be Vietnam’s gain
As COVID-19 has disrupted supply chains in China, impacted companies will soon be looking to diversify their supply chains and governments across the world are looking to reduce their dependency on China for imports and trade, from raw materials to manufactured goods and food. Many US companies have already left China due to the impacts of the trade war between the two countries and that trend is likely to continue as a result of the COVID-19 crisis.
At the same time, China is increasing its economic influence abroad, in the form of economic aid packages, infrastructure projects and investments. Countries like India, Italy, Spain and Germany have changed their foreign investment policies because of concerns about hostile takeovers by Chinese enterprises. Though Beijing continues to expand its partnerships and investments, it may now struggle to do so as host countries are wary of reliance on China.
Amid these possible economic setbacks for China, Vietnam has emerged as an alternative and a preferred destination for investment, building on existing momentum of companies relocating operations from China to Vietnam amid the US-China trade war.
Before COVID-19, British investment bank HSBC predicted that Vietnam would be the fastest growing economy in Southeast Asia, seeing 7% growth in 2020. The Vietnamese government expected that the trade war would continue boost Vietnam’s economy.
But Vietnam was unable to take full advantage of the trade war, in part because many exports to the US from Vietnam were actually Chinese exports that had been re-routed through Vietnam to avoid tariffs. As a result, the US imposed a 400% duty last July on steel imports from Vietnam. Hanoi worked to address this situation, suspending some exports to the US and identifying goods that were likely candidates for tariff-dodging.
But the COVID-19 crisis has given Vietnam another opportunity. Companies like Samsung, Google and Microsoft are looking to shift their operations out of China and into Vietnam. While many manufacturers were considering this move before the COVID-19 crisis, they are now likely to speed up the process.
Economics, the South China Sea and public relations will lead to increased strategic competition between Vietnam and China
The COVID-19 crisis will increase strategic competition between Vietnam and China in three ways: first, strategic maneuvering in the South China Sea will continue to dominate bilateral relations. Second, Vietnam has a positive image compared to China in terms of its handling of the pandemic. Vietnam has been able to control COVID-19 infections and has supplied medical equipment to other countries.
China’s image has suffered on account of its handling of the crisis and incidents of supplying faulty medical equipment to a number of countries like Italy, Spain, the Netherlands and Turkey. Third, with businesses moving their operations from China to Vietnam, economic competition between the two countries will become a major factor in their bilateral engagements.
After the COVID-19 crisis, increasing economic engagement with other countries will provide a boost to Vietnam’s manufacturing sector. Vietnam’s positive image from its handling of the pandemic could prove to be an important factor for attracting investment. At the same time, however, China will pose a challenge since China’s investments in Vietnam have also increased in the past few years. Vietnam will have to balance the influx of Chinese money with investments from other countries—Hanoi will not benefit if China and other investors see themselves as in competition.
Bilateral relations between Vietnam and China are dominated by the competition for strategic space in the South China Sea. However, as a result of the COVID-19 crisis, businesses are looking for options outside China to set up operations and Vietnam has presented itself as a preferred investment destination. The crisis will increase competition between Vietnam and China as the two expand their strategic maneuvering from the South China Sea into the economy.