- Jasrene Hor
Evaluating Vietnam's economic dependence on china & its ongoing trade diversification efforts
Despite the South China Sea tensions, Sino-Vietnamese economic relations have been on an upwards trajectory since the normalisation of bilateral ties in 1991. Vietnam’s trade dependence on China has increased significantly and has exceeded that of other ASEAN countries except Cambodia. China’s share of Vietnam’s total trade has grown steadily since 2009, from 16.7% in 2009 to 23.7% in 2020 (Figure 1). Two-way trade revenue between Vietnam and China reached USD$126.8 billion in 2020 (Figure 2), equivalent to 37.2% of Vietnam’s nominal GDP.
Figure 1: Vietnam’s Total Trade with Key Trading Partners (as a percentage of VN’s total trade)
Source: World Bank
Figure 2: Vietnam’s Total Trade with Trading Partners (in USD$ Million)
Source: World Bank
While Vietnam has reaped tremendous economic benefits from its bilateral trade with China, the Vietnamese government is aware that the nation has faced a chronic and unhealthy trade deficit with China since 2001, with its trade deficit with China continuously hovering around 10% of its nominal GDP (Figure 3).
Figure 3: Vietnam's Trade Flows with China (as % of VN's Nominal GDP)
Source: World Bank
The persistent trade deficit is mainly driven by Vietnam’s heavy dependence on Chinese intermediate and capital goods which create vulnerabilities in its entire production chain. The relatively low prices of Chinese inputs, made possible by China’s economies of scale and developed supply chains, has led to Vietnam’s continued reliance on China for imports of raw materials, machinery, and electrical components (Figure 4). In 2019, 52.3% of the components used to manufacture consumer electronics in Vietnam were obtained from China, compared to 28.5% produced domestically. Manufacturing companies operating in Vietnam have been unsuccessful in diversifying their electrical imports away from China. The high cost incurred and the difficulty in obtaining high-quality inputs from alternative sources have resulted in the continued reliance on China-centric production networks.
Figure 4: Breakdown of Vietnam’s Imports from China by Products (%)
Source: World Integrated Trade Solution (WITS)
The COVID-19 pandemic has exacerbated Vietnam’s trade deficit with China. Vietnam’s trade deficit with China surged by 82% year-on-year in the first four months of 2021 to USD$17.63 billion. During the four-month period, Vietnam imported goods worth USD$33.93 billion from China, an increase of 51.6% year-on-year from 2020. The disruptions in supply chains during the COVID-19 pandemic have impeded Vietnam’s trade flows with its other trading partners and increased the country’s reliance on China for its production inputs. For instance, intra-ASEAN trade fell following the implementation of border enforcement measures and factories shutdown by ASEAN countries to stem the spread of the coronavirus. As a result, Vietnamese manufacturers had difficulties obtaining production inputs from neighbouring ASEAN countries. In contrast, the early reopening of China’s economy in 2020 facilitated the resumption of cross-border trade between Vietnam and China. The greater ease in obtaining Chinese imports has contributed to Vietnam’s increasing reliance on its larger neighbour for production inputs.
In addition, Vietnam is also heavily reliant on China for export revenue, making it highly susceptible to the weaponization of trade by the economic superpower. China has a record of using its economic leverage to punish countries that undermine its territorial claims and foreign policy objectives by implementing measures such as freezing capital assets, restricting trade flows, encouraging popular boycotts, and cutting off tourism. In May 2014, amidst rising tensions in the South China Sea (SCS) after Beijing deployed a giant oil rig in Vietnam’s exclusive economic zone (EEZ), China suspended the imports of agricultural and seafood products from Vietnam under the pretext of tighter custom enforcements. With China being the largest importer of Vietnamese agricultural products from 2014 to 2020, China’s economic sanctions on Vietnam’s agricultural exports inflicted huge cost on Vietnamese traders. The incident ignited extensive public discourses on the extent and consequences of Vietnam’s economic vulnerabilities vis-à-vis China, serving as a wake-up call for Hanoi to reduce its trade dependence on Beijing.
To enhance its economic resilience, Vietnam has embarked on extensive trade diversification efforts. The country’s recently-signed Free Trade Agreements (FTAs) – such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the European Union-Vietnam Free Trade Agreement (EVFTA) – exemplify its efforts to seek new trade opportunities with other major economies. Implementing these two FTAs will accelerate Vietnam’s ongoing efforts to diversify its economic relations away from China. Under the CPTPP and EVFTA, Vietnam will be able to deepen its economic cooperation with key partners such as Japan, Singapore, Australia, and EU members, to reduce its trade dependence on China and to improve its strategic position vis-à-vis China, especially in the South China Sea dispute.
In addition, the recently-implemented FTAs will stimulate Vietnam’s economic growth. The nation’s exports to other CPTPP member countries are expected to grow by 4.04 percent and reach USD$80 billion by 2030, making up 25 percent of its total exports and raising the country’s gross domestic product (GDP) by 1.1 percent. Meanwhile, the EVFTA is expected to raise Vietnam’s export revenue to the EU by 42.7% by 2025 and 44.4% by 2030. Vietnam’s agricultural exports to the EU are set to increase by over USD$1 billion annually, increasing Vietnam’s agricultural GDP by 0.4-0.5% every year. The rise in Vietnam’s exports to the bloc will reduce the country’s dependence on the Chinese market for export revenue, such as in agricultural trade. The reduction of trade barriers under the EVFTA will boost Vietnam’s imports of high-tech machinery and electronic components from the EU, assisting Vietnamese manufacturers in reducing their reliance on Chinese inputs.
Participating in the CPTPP and EVFTA will also accelerate Vietnam’s institutional reforms and support its economic restructuring, allowing it to move up the global value chains. For instance, the ratification of EVFTA provisions that set high standards in areas of intellectual property, legal issues and rules of origin will incentivise Vietnamese manufacturers to use inputs from domestic sources, which in turn, stimulate the country’s supporting industries. According to forecasts made by the World Bank, should Vietnam adopt complementary domestic reforms to raise its productivity under the EVFTA, its GDP could increase further by 6.8 percent by 2030 — 4 percentage points more than the income gains from the EVFTA alone. Vietnam’s efforts to comply with international standards set in the newly-signed FTAs will, therefore, bolster the capabilities of its domestic supporting industries in supplying high-quality inputs for its electronic manufacturing industry. This will help to reduce the country’s reliance on cheap Chinese inputs in the medium-to-long term.
To conclude, Vietnam’s persistent trade deficit with China and its overdependence on Chinese intermediate and capital goods are economic vulnerabilities for the country. Since the 2014 HD-981 oil-rig incident that led to increased bilateral tensions over the South China Sea, Vietnam has become increasingly wary of China’s use of economic leverage to advance its geopolitical interests. Vietnam has made progress in reducing its trade dependence on China, by deepening its international economic integration and strengthening its relations with key partners such as Japan and the EU.The recently-signed CPTPP and EVFTA add yet another two strategic economic partnerships to the country’s extensive network of Free Trade Agreements (FTAs). While Vietnam remains heavily trade dependent on China, the ongoing diversification of its trade relations will reduce its vulnerability to Chinese economic influence in the long-term.