Vietnam's economy comes of age

Vietnam's economy comes of age

Vietnam in Southeast Asia is one of the best growing economies in the region. The country has become an attractive destination for investment from all over the globe. The trade wars between the US and China have certainly contributed to this outcome. Since the US has stopped cooperating with China in a number of industries, the profitability of manufacturing in China has fallen. As the general living standard has also increased, labour is cheaply available elsewhere. This has motivated manufacturers to find cheaper destinations, such as Vietnam.

The government of Vietnam has put in a lot of effort into making the country a good host for incoming investment and companies. Several companies have moved their units across the border to Vietnam from China. They include tech companies like Nokia, Samsung and Olympus, as well as shoe manufacturers such as Nike and Adidas. Vietnam has attracted particular interest from Australia in recent times. They were on the opposite sides of battlefield a few decades back, but now business has brought the governments together.

The visit of Australian Prime Minister Scott Morrison to Vietnam in August was reflective of the increasing bilateral ties. Mr Morrison's visit to Hanoi was the first for an Australian prime minister since 1994, and it was characterised by cooperation in sectors of business and defence.

Business relations

The bilateral business between the two countries stands at US$14.5 billion a year, increasing by the day. Australia exported US$5 billion worth of goods to Vietnam in 2018, while the imports stood at US$6.1 billion. Australian investment abroad contributes to only 0.1 percent in Vietnam but it is set to change as more companies are interested in opening their units in Vietnam. Several companies such as ANZ in banking, Austal in shipbuilding, Linfox in logistics, and RMIT International have also entered the Vietnamese business landscape.

Australia is also looking to build infrastructure and supply liquefied natural gas (LNG) to Vietnam. Former Australian rugby player, Wes Maas, has invested in Vietnam and set up a construction unit in the country in July 2019. The outskirts of Ho Chi Minh City are lined up with warehouses of Japanese and Korean companies. Average wages in Vietnam are as low as one-tenth of Australia.

Comparison

The ease of doing business index for Vietnam is at 69 in 2019. This is against India's rank of 77. India has lagged behind due to heavy paperwork and land issues. Vietnam has maintained a GDP growth rate of more than 6% since 2000, whereas other neighbouring Southeast Asian countries have faltered badly due to the trade wars. Electronic items exports of South Korea have gone down by 22%.

Guy Debelle, the deputy governor of the Reserve Bank of Australia, has said Vietnam is nearing its full capacity. Many businesses are shifting production to Vietnam to avoid the effects of tariffs. Vietnam has granted investment licenses to about 1,720 projects in the first six months of 2019. The economy has grown at the rate of more than seven percent in 2018, which was a 10-year high.

The exports of Australia to China included heavy elements, such as iron and steel, but to Vietnam it includes Australian services, logistics and other products. An Australian group, SunRice, has set up its unit in Vietnam and is exporting rice to neighbouring countries. This is because Australia does not have free trade agreements for rice with these countries. This is how Vietnam's free trade policies have helped attract industrialists from Australia.

India in the matrix

Amitabh Kant, CEO of NITI Aayog, the Indian government's policy think tank, has pointed out the factors that act against India in matters of foreign investment. He has said production costs in India are higher than both China and Vietnam. He is heading a committee expected to make recommendations to improve Indian electronic exports. India produced over 140 million handsets in 2010 while Vietnam produced only 38 million.

Even though the quality differed, India had a numerical advantage. This has been overturned though, as India's mobile phone production has gone down to a value of US$2.5 billion in 2019, whereas Vietnam's production of phones has gone up to a staggering $49 billion in 2018. The improved performance of Vietnam has not been limited to mobile phones; it has generally excelled in production of all electronic items.

A key factor in Vietnam that attracts industries is the lucrative corporate tax rate for large firms that are looking to relocate. A few large firms in Vietnam have managed to get tax rates as low as zero for the first five years, 5% for the next decade and 10% for the subsequent next two. In comparison, India's tax rates for a foreign firm could be as high as 43%.

Strategic objectives

The Australian prime minister's interest in Vietnam is not entirely limited to business; Vietnam is strategically located in the South China Sea. The defence and military cooperation between the countries was also another check box on Mr Morrison's list of objectives in his Vietnam visit.

Vietnam is going to take a non-permanent seat in the UN Security Council for the 2020-2021 term, and she will also serve as the chair for Asean in 2020. She will be the first chair after the adoption of Asean's outlook paper on the Indo-Pacific. It is noteworthy that Australia stands to gain immensely both in terms of security and business as countries of the Indo-Pacific come closer under one umbrella and are able to develop better ties among each other. A good chunk of Australian business is dependent on the well-being of Southeast Asian economies.

In March 2018, Vietnam and Australia upgraded their relationship to a strategic partnership. There are possibilities of Australian companies collaborating with Vietnam to explore energy in Vietnamese waters. A point to note is India was also a part of this arrangement with Vietnam; however, it withdrew as Chinese objections became prominent.

Australian forces have helped airlift Vietnamese forces in South Sudan, indicating a cooperative defence relationship between the two countries. In October, Chinese vessels in Vietnamese waters sparked fresh tensions between the two countries embroiled in a large multilateral dispute in the South China Sea over who shall control the strategic waters.

For India, both Australia and Vietnam are important countries. India has fast-growing business and trade with both countries; and it strives to create a strategic balance as they share the same apprehensions about the dominance of China in the Asia-Pacific and beyond. By virtue of geography, relations between Australia and Vietnam will continue to grow. It will be important for India to keep up the bonhomie.

Track 2 dialogue and cooperation would allow for greater opportunities of dialogue and identification of areas of cooperation. India has ample defence expertise as well as hardware. Defence cooperation among the three countries would be a necessity given the volatility of security on India's northern front. She must be able to secure the southern front through a system of reliable alliances and stakeholders.

Given the prime position of India in the Indo-Pacific region, its security and stability would be important for all countries in the region, including Vietnam and Australia. Therefore, trilateral cooperation among the three on business and security can only go in positive direction.

Nehginpao Kipgen is associate professor, assistant dean and executive director at the Centre for Southeast Asian Studies, Jindal School of International Affairs, and OP Jindal Global University. Akash Sahu is a master's student in the department and currently interns at the Institute for Defence Studies and Analyses, New Delhi.


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