Trade

Before making the final assessment of economic pragmatism as one of the important components running Vietnam’s hedging strategy, it is essential to know why it is logical with the purpose of the country’s choice. As an inevitable rule, in order to overcome backwardness and gain the wealth and prosperity, the sustainable economic development is the goal of many countries, including Vietnam. Therefore, since the normalisation of relations in 1991, Vietnamese central task is the development of economy (Vu Dang, 2016, October 10). Regarding the maintenance of peaceful relations with China, Vietnamese leaders increasingly promoted economic relations.

In fact, after the two countries signed an agreement of “comprehensive strategic partnership” in 2008, Vietnam - China economic relations developed rapidly (Phuong Hoa, 2010). Being aware of its own interests and gaining from opportunities offered by China's rise, Vietnam continuously enhance its economic relations with China, especially in trade and investment fields.

It could be said that although Vietnam’s growing economic interdependence with China is inevitable, Beijing cannot freely use economic measures to force Vietnam to give in over the South China Sea disputes. Le (2013b) explained that the basic reason is the potential costs that may incur followed the rising volume of bilateral trade and investment. To be more precise, he explained that despite Vietnamese minor fraction of China’s total foreign trade and investment, “the disruption and/or suspension of bilateral economic ties would certainly have a negative impact to the economies of China’s southern provinces as well as those industries that have a large stake in

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maintaining their exports to Vietnam” (Le, 2013b). He also added that those provinces and industries are helpful agents that boost favourable relations between authorities in this area and Vietnam. Thence, “economic pragmatism” is apparently still a key component of Vietnam’s hedging strategy against China.

According to UN’s statistics, Vietnam and China bilateral trade increased rapidly since the normalization, especially since 2006. For example, it rose from $10.6 billion in 2006 to $71.9 billion in 2016, accounting for 20.5 % of Vietnamese total trade turnover. Remarkably, Vietnam’s import from China continuously increased in dramatic numbers. In 2009 and 2010, Vietnamese deficit of trade with China constitutes almost Vietnam’s entire trade deficit. This number is also higher than in 2011, and it even still happens when Vietnamese trade balance is zero or in surplus in 2012, 2013 and 2014. It could be said that, China is Vietnam's largest trading partner (Phuong Linh, 2015, November 4) (See Table 4-1).

Table 4-1: Vietnamese trading turnover from 2006 to 2016

Source: UN Comtrade database and Vietnam Customs

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Even though Vietnam’s efforts in promoting economic ties with China may be apparently motivated, such a strong and deep economic tie with China also brings about potential implications for the country’s security and domestic economy.

Vietnam always wants to narrow trade deficit with China. However, after many years of intensifying their economic ties, the proportion of trade deficit from neighboring country is not only still very high but also tends to increase. For instance, in 2016, the total trade turnover of Vietnam - China reached $71.9 billion, up 8.9%

over 2015. In details, Vietnam's exports to China reached $22 billion, up 28.4%;

Imports from China reached $49.9 billion, up 0.9%; Trade deficit was $28 billion, down 13.67% over the previous year. (See figure 4-1 and table 4-2).

Table 4-2: Vietnam’s trade deficit from 2006 to 2016

Source: Author’s own collection based on OEC at http://atlas.media.mit.edu/en/profile/country/vnm/#Imports and

Vietnam Customs at

htpps://www.customs.gov.vn/Lists/ThongKeHaiQuan/ViewDetails.aspx?ID=1038&Category=Phantichdinhky&Gr oup=Phantich

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Figure 4-1: Vietnam – China bilateral turnover from 2006 to 2016

Source: Author’s own collection based on UN Comtrade Database

It is true to say that China-Vietnam trade relations are strong with various large-scale fields. This may be because according to Li Yuan, Director of the ASEAN-China Center, Vietnam has a special geographic position, a gateway for ASEAN-China to enter the ASEAN market, and Vietnam has a large labor force and the cost of labor is relatively cheaper while China has a lot of experience and high potential of investment (Minh Huu, 2017), thus, the two countries have the ability to support each other and development will be very high.

In the bilateral trade relations between Vietnam and China, the positional correlation is very different. While the influence level of China's imports and exports on Vietnam's total of import-export turnover is very high, the impact of Vietnam's import-export on China’s total of import-export turnover is very small. Besides, the proportional share of Vietnam and China is 11 times higher than the percentage share of China and Vietnam compared with each’s total turnover, respectively. As a matter of fact that Vietnamese economy still depends on China because the trade balance is

7.4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

USD billion

Import from China Export to China

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increasingly favoring China (See table 4-3). This may also affect the investment motivation in supporting industries, clean and new technology of domestic and foreign enterprises in Vietnam.

Table 4-3: Vietnam – China trading turnover in comparison from 2006 to 2016

Source: Author’s own collection based on UN Comtrade Database

Between 2006 and 2016, the share of exports to China was about 12.5% of Vietnam's total export turnover, but the share of imports increased from 16.5% to over 28.7%. In fact, Vietnam's exports to China are just 1.38% of China's imports, compared with over 28% of China's export value of the total of Vietnam's imports value (the difference was 21 times). In 2016 Vietnam exported to China around $22 billion and imported $49.9 billion, increasing by over 2 times. This discrepancy is expected to be greater in the future. By 2016, the share of imports from and exports of Vietnam to China were 28.68% and 12.44%, respectively. Although Vietnam gained trade surplus between 2012 and 2014, trade deficit from China was not decreased but continued to increase strongly (See figure 4-2 and table 4-2).

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Figure 4-2: The dependence ratio of Vietnam - China export-import value

Source: Author’s own collection based on Vietnam Customs and UN Comtrade Database.

8.14 7.51 7.74

9.46 10.72 11.98 11.21

9.98 9.94 10.23

12.44 16.46

20.25 19.79

23.84 23.81 23.29

25.52

27.94

29.52 29.82

28.68

0.76 1.04 1.12 1.39 1.28 1.31 1.42 1.67 1.86 2.17 2.36

0.41 0.38 0.43 0.54 0.56 0.67 0.71 0.68 0.76 0.99 1.38

0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00

2004 2006 2008 2010 2012 2014 2016 2018

%Vietnam’s exports to China/Vietnam export turnover total %Vietnam’s imports from China/Vietnam import turnover total

%China’s exports to Vietnam/China export turnover total %China’s imports from Vietnam/China import turnover total

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In 2016, Vietnam import turnover of 10 main commodities reached $110.78 billion, accounting for 63.6% of the total import turnover. Among them, the largest group was machinery, equipment, tools and spare parts (over $28.37 billion) followed by computers, electronic products and components (over $27.87 billion); phones and components (over

$10.56 billion); fabrics (over $10.48 billion) (Vietnam Customs, 2017). In particular for importing goods from China, the imports of machinery, equipment, tools, and spare-parts from China had turnover of nearly $9.28 billion, up 2.8% over the same period last year (Vietnam Customs, 2017). Imports of computers, electronic products & components were

$5.92 billion, up 13.7% (Vietnam Customs, 2017). Phone parts and components in 2016 were mainly imported from China with more than $6.14 billion, down 11% over the same period last year (Vietnam Customs, 2017). Raw materials were also imported from China with a turnover of more than $8.02 billion, up 5.3% over the same period last year (Vietnam Customs, 2017). Many of Vietnam's manufacturing industries were heavily dependent on China for inputs (materials, inputs) and outputs (consumer markets). It is worth mentioning that many products which are Vietnam’s strength, such as agricultural and aquatic products, are still massively imported from China to Vietnam (Bao Viet Security, 2016). According to Vietnamese General Statistics Office (GSO), there nearly half of the fruits and vegetables imported from abroad into Vietnam are from China. Not only importing fruits, vegetables, but also raw materials and production materials such as reapers, rice seeds ... also depend on China. According to Ministry of Agriculture and Rural Development (MARD), Vietnam has about 700,000ha of hybrid rice (mainly in the North and North Central) but the source of hybrid rice is mainly imported from China (accounting for 60-70% of the area) (Bao Viet Security, 2016). Each year, Vietnam spends about $40 million to import 13,000-15,000 tons of rice seed from China, equivalent to the export of 100,000 tons of rice in premium quality (Bao Viet Security, 2016). Clearly, the import commodities and Vietnam's dependence on

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China's market, especially materials and inputs for production, may cause serious impacts on the domestic economy, especially in the context of Vietnam's economy is going to establish the stability of macroeconomic factors (See figure 4-3).

Figure 4-3: Top 10 of Vietnam imported goods in 2016 Source: (Vietnam Customs, 2017)

In terms of export, according to General Department of Vietnam Customs, China is the biggest importer of computers, electronic products & components from Vietnam with $4.1 billion, up 47.2%. Vietnam's footwear exports to China totaled $905 million, up 20% from 2015. Export of aquatic products to China reached $685 million, up 53%. Exports of wood and wood-based products to China reached more than $1.02 billion, increasing by 4.7%.

Group of agricultural products exported to China was nearly $3.13 billion, up 50.4% over the previous year (Vietnam Customs, 2017) (See figure 4-4):

Import

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Figure 4-4: Top 10 of exported goods in 2016 Source: (Vietnam Customs, 2017)

There are five reasons on why Vietnam import too much from China. Firstly, most of Chinese goods (from machinery to raw materials and consumer product) are very cheap because the cost of Chinese labour is the lowest in the world (Minh Huu, 2017). In addition, China maintains export support policies in various forms. With low prices, productive models and diverse types, Chinese consumer goods are widely accepted by Vietnamese, especially for low income earners. Raw materials from China are also imported because of cheap prices, especially when Vietnam does not have enough supporting industries to supply raw materials for the export processing industry. China's cheap machinery and equipment are chosen by many Vietnamese enterprises, especially small and medium enterprises, due to their limited financial capacity. Secondly, the weak competitiveness of Vietnamese goods, in terms of price and quality, many of Vietnamese products are difficult to penetrate into the Chinese market (Trung tâm Thông tin - tư liệu, 2014). In addition, the fact that most of Vietnam's goods haven’t created their brand names in the international market is a minus in competitiveness. Thirdly, in the structure of products in the Vietnam-China trade, Vietnam

Export

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mainly exports to China minerals, agro-forestry-fishery products (accounting for over 70% of total exports to China). These are low added value products, suffering unstable price, tending to decrease, and comparatively low price in comparision to processed products. Meanwhile, products imported from China are mainly chemicals, basic products, machinery and equipment, accounting for over 80% of total imports from China. Fourthly, Vietnam has almost no technical barriers to Chinese imports, from food safety standards to technical standards and product safety for imported machinery, equipment and appliances (Hung Cuong, 2012). Therefore, China's goods, regardless of quality and standard, can still be easily imported into Vietnam. In reverse, beside technical barriers, China only allows Vietnamese export commodities going through designated ports for easy control (such as seafood only through Mong Cai; natural rubber only through Mong Cai and Luc Lam; fresh fruits only through Lao Cai and Lang Son). Fifthly, the domestic production capacity is not enough to meet demand, weak competitiveness, low investment efficiency and labor productivity (Bui, 2014; Trung tâm Thông tin - tư liệu, 2014). More importantly, enterprises have to import 80-90% of raw materials for production and China is a plentiful supply market. More importantly, due to the weak ancillary industries, Vietnamese enterprises have to import 80-90% of raw materials for production, and there is no better supply source than China.

Regarding the structure of imports, following Broad Economic Categories (BEC), it can be seen that the majority of Vietnamese goods importing from China are industrial auxiliary goods and intermediate goods for production, and imports of these two groups from China increased more than from other regions of the world. With a 20% share of consumer goods, 35% of manufactured goods, 35% of supporting industries and spare parts, there is about 70%

of Chinese goods imported into Vietnam to serve production activities of FDI enterprises and Vietnamese enterprises. It can be assumed that the import from China FDI enterprises has been used to produce exports and create a trade surplus for Vietnam.

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Actually, there is a worrying fact that not to mention consumption goods, a series of projects including important works and projects from thermal power plants to cement and machinery for agricultural production, Vietnam are using cheap "Made in China" products.

Many small and medium enterprises, even some large enterprises are using Chinese technologies in manufacturing. Although these technologies are available, easy to use and cheap, in the long run, this will not only put Vietnam at a lower level than China in terms of manufacturing technology but also testing the motivation of research and development from Vietnamese enterprises.

There is other fact that using Chinese technology will result in low labor productivity, high energy consumption, and low efficiency and especially there is a large number of equipment, machinery, works needed to be repaired or replaced when starting into production in a short time. This leaves long-term consequences for local producers in particular and undermines the competitiveness of the Vietnamese economy in general.

Vietnam is falling into the trap of trade liberalization in the Vietnam-China relationship.

It could be said that despite of richness in resources, Vietnam has a lower level of industrialization than China. The domestic economy is attracted by the export of raw materials, and preliminary processing. In the meantime, China exports finished products with high competitiveness to resources of exporting countries. As a consequence, Vietnam's industrial production has been shrunk or even undeveloped as it is tied to the export of resources and low-tech commodities. In the long run, the economy will lose its ability to improve productivity because the industrial production is lost and the innovation is low.

Because Vietnamese economy is still weak and developing, importing from other markets is easy to understand. Additionally, because China is the world's leading economy, it is normal to import too much from this market (Trần, Bui, & Le, 2016). If Vietnam does not import from China, Vietnam must also import from other markets because of its poor

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production capacity. Because there is no auxiliary industry, Vietnam has to import raw materials if it wants to export products. If the dependence on China’s economy is decreased, where Vietnam will import from and if it imports raw materials, machinery and equipment from other countries, will the goods of the Vietnamese enterprises be competitive or not?

What is more, due to security interest Vietnam attempts to promote bilateral economic ties, but Vietnam’s attainments from this might produce opposite effect. If its economic interdependence with China still rises, as a matter of fact, Vietnam’s enhanced national security and defense capabilities through its on-going military modernization would have been impossible. Indeed, if Vietnam cannot produce surplus from its bilateral trade with China, it might be difficult for the country to upgrade its military ability.

In summary, in terms of interests, the bilateral trade relations over the past ten years have been tilted towards China, as China mainly exports refined commodities and imports raw materials. As such, it can be said that Vietnam’s domestic production and business activities are heavily dependent on China. If Vietnam does not diversify both export and import markets, it will be increasingly reliant on China in the field of trade. As a consequence, if China adjusts its trade policy and applies protective measures for its domestic production, supporting its export, or forbidding or restricting certain imports and exports;

Vietnam’s economy will face many difficulties, even in the short term. Moreover, the country’s national security might be damaged significantly.