Vietnam and the New Pacific Trade Triangle

Author: Tran Van Tho, Waseda University

Vietnam is highly integrated into the global economy and since 2017, trade has consistently exceeded 200% of GDP. Vietnam has trade relations with more than 150 countries, but the majority of its trade is concentrated between China, South Korea and the United States, forming a new Pacific trade triangle.

In 2020, the United States and China accounted for 45% of Vietnam’s exports. The share of Chinese and South Korean imports has increased to 50%, with one-third of total imports coming from China. The type of products exchanged and the commercial imbalance between the partners are remarkable. Reliance on the United States as an export destination, accounting for around 40% of Vietnamese exports in 2020, has seen Vietnam’s trade surplus with Washington grow rapidly in recent years.

Vietnam is heavily dependent on imports of intermediate goods such as semi-finished goods and capital goods from China and South Korea, resulting in large trade deficits with these countries – with a high propensity to China. In 2020, China accounted for 32% of industrial semi-finished products, 27% of parts and 38% of capital goods imported into Vietnam. South Korea’s shares were 16%, 36% and 21% respectively.

This trade model resembles a new Pacific trade triangle made up of China, South Korea and the United States, with Vietnam as the focal point. The Triangle of the 1980s included industrializing Asian economies such as South Korea and Taiwan, which imported intermediate and capital goods from Japan and exported final consumer goods to the United States.

This led to large trade deficits with the former and surpluses with the latter, resulting in a trade conflict with the United States. Newly industrializing economies in Asia have solved this problem by replacing imports from Japan with upgrades to their own industrial structures.

The current Pacific Trade Triangle in which Vietnam is entangled is more risky. On the one hand, the United States can impose protectionist measures on trading partners with which it has large deficits. On the other hand, an overreliance on imports from China can lead to instability when changes in Chinese domestic politics affect trade with neighboring countries.

China’s strict border controls under its zero COVID-19 policy have seriously restricted Vietnam’s agricultural exports, and a sudden reduction in the supply of inputs from China will negatively affect Vietnamese industrial production. There is also the risk that China will exploit the weaknesses of its trading partners to obtain concessions in diplomatic or territorial disputes.

The current trade structure also reflects Vietnam’s low level of industrialization, characterized by its production of labor-intensive goods and its participation in the early stages of global supply chains. Vietnam can modernize its industrial structure by replacing imports from China and South Korea. In addition to gradually diversifying its exports away from the United States, this industrialization strategy would dismantle the new Pacific trade triangle and stabilize Vietnam’s trade structure.

A new industrialization policy should focus on two aspects. First, a new foreign direct investment (FDI) strategy. The government should introduce new FDI projects on a case-by-case basis, improve infrastructure, and provide incentives to encourage import substitution of high-tech components and other intermediate industrial products.

In August 2019, the Political Bureau of the Communist Party of Vietnam issued a resolution calling for a new FDI policy. The resolution emphasized the introduction of high-quality projects (which produce highly skilled, technology-intensive products), although a broader FDI policy has yet to be put in place. Although Vietnam’s lack of a new FDI framework is partly due to the pandemic, more proactive policy and concrete initiatives are needed to achieve Vietnam’s trade and economic goals.

Second, the supply of skilled labor should be expanded to improve Vietnam’s industrial structure. The improvement of specialized technical colleges and the expansion of science and technology faculties in major universities should be the focal points of this upgrading.

A more immediate response would be to connect Vietnamese technical trainees in advanced countries, namely Japan, with foreign and local companies investing in higher quality industrial products in Vietnam. The number of Vietnamese skilled workers doing internships in Japan stood at 220,000 at the end of 2019. In addition, in Japan, there was an increased number of specified Vietnamese skilled workers who passed examinations in fields of specific engineering and an intermediate level of Japanese language. At the end of 2020, these specified skilled workers numbered 15,663.

Investing in a young generation of highly skilled workers will ultimately help Vietnam raise its industrial capacity. Yet this is one of many updates to Vietnam’s industrial and trade policies that are needed to help Hanoi navigate the instability of the new Pacific Trade Triangle.

Tran Van Tho is Emeritus Professor of Economics in the School of Social Sciences at Waseda University.