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  • Writer's pictureYizhi Xu

Asian miracle or investment minefield? The reality of Vietnam’s rapid economic development.

Updated: Dec 14, 2020

In recent years, the Vietnamese economy has maintained high growth. It is one of the world's fastest growing countries, and many media outlets have predicted that it will be the 'next Asian miracle'.

Even in 2020, a year with many 'black swan' events, Vietnam is still performing impressively. The country's GDP achieved an incredible positive growth of 2.12% in the first three quarters of 2020: 3.68% in the first quarter, 0.39% in the second quarter and 2.62% in the third quarter. In its Economic Outlook released in October, the International Monetary Fund forecasted that China and Vietnam would be the only Asian economies to achieve positive GDP growth in 2020, at 1.9 and 1.6%, respectively. Vietnam is a shining star among emerging economies.

It is no accident that the Vietnamese government remains flexible on the diplomatic front. Vietnam not only joined the comprehensive and progressive Trans-Pacific Partnership Agreement (CPTPP), Trans-Pacific Partnership (TPP) and Regional Comprehensive Economics Partnership (RCEP), but also signed a significant amount of bilateral agreements with China, Japan, EU, and other neighbouring countries. It is precisely because of this free trade facilitation arrangement that Vietnam has created a beneficial investment environment for itself and consequently attracted investors' attention from all over the world.

Several positive factors have contributed to Vietnam's rapid manufacturing growth over the past decade. From 2010 to 2019, foreign direct investment (FDI) funds in Vietnam grew at a compound annual rate of 7%, with manufacturing growing at a compound annual rate of 17%. The number of foreign companies establishing themselves in Vietnam's industrial parks has exploded in order to reap the rewards. By the end of June, new projects had generated $6 billion in capital and attracted 335 FDI projects, according to a report by Vietnam's Ministry of Planning and Investment. All this, however, is a sweet burden for Vietnam.

Infrastructure restrictions and low environmental standards are undermining Vietnam's ability to attract foreign investment. 'Poor infrastructure and inadequate storage capacity are plaguing Vietnam', reported the Vietnam Express in June. The website quoted Le Trong Hieu, director of industrial and logistics services in Vietnam for US real estate firm CBRE, as saying: 'It will take at least two years for developers to expand existing parks to serve more companies, and even longer for new parks'.

Moreover, Vietnam's major industrial clusters are still in the development stage, and the production of the required parts and components is highly dependent on China. According to Vietnamese officials, China accounted for 60% of Vietnam's fabric imports and 55% of its fibre market in 2019. The Vietnamese manufacturing industry's problem is that even if companies set up factories in Vietnam, they still need to 'match' the Chinese factories. For example, some enterprises need to ship semi-finished garments processed in Vietnam to Chinese factories for secondary deep processing and then ship them back to Vietnam to complete the final step before selling them overseas.

The second problem is that as labour-intensive industries have flooded into Vietnam, the vast trade surplus with some countries, like the United States, has led to tariff retaliation. Indeed, the United States has sought revenge against Vietnam more than once this year.

In an August report on an anti-dumping investigation of Vietnam's light tyres, the US Treasury and Commerce Departments concluded that a manipulation of the Vietnamese Dong had occurred and argued for the imposition of punitive tariffs. Subsequently, on 2 October, the US trade representative formally announced a section 301 investigation into Vietnam's timber and currency policies on the grounds of 'illegal logging or illegal trade'.

The last and most critical issue for Vietnam is its reliance on a single foreign investor: Samsung. In response to the substantial increase in Chinese wages in recent years, Samsung closed its last mobile phone factory in the country last September and has invested more than $170 billion in Vietnam in the previous decade. As the largest investor in Vietnam, Samsung accounts for more than 25% of Vietnam's total exports. Thus, the problem is, if Samsung's products suddenly lose their appeal to customers, what will this mean for Vietnam's exports?

A stable one-party political structure, a vibrant and young workforce and its strategic location in the Asia-Pacific region made Vietnam a shining star in uncertain times. Can it succeed and consolidate its position in the global value chain? It remains to be seen.



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