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Why Vietnam Isn’t The New China

USAID Mission Director visiting Danang University of Technology in Vietnam.
Danang University of Technology. Photo by Richard Nyberg, courtesy USAID Vietnam.

Economists often claim that nobody wins a trade war. Yet when it comes to the dispute between the U.S. and China, Vietnam certainly isn’t losing.

Goods that have been made in China are increasingly being made partially or totally in Vietnam, including Hoover vacuum cleaners, Google’s Pixel smartphones and Nintendo’s Switch gaming system. There have even been rumors that Foxconn could begin producing some iPhones in the country. Vietnam’s Ministry of Planning and Investment announced in June that foreign direct investment had increased by nearly 70% in the first five months of 2019 compared to the year before. According to data from Japanese investment bank Nomura, the value of orders diverted from China to Vietnam in the first quarter was equivalent to 7.9% of Vietnam’s overall gross domestic product. And Vietnam’s exports to the U.S. have increased by more than $1 billion since the U.S. implemented tariffs on Chinese goods.

The Chinese-American trade war accelerated this trend, but it did not start it. Production of shoes, toys and certain types of clothing moved from China to Vietnam years ago in response to rising Chinese wages and increasing environmental regulations. About half of Nike and Adidas’ shoes are already made in Vietnam, for instance. Hanoi has expressed enthusiasm about taking on higher-value items such as consumer electronics as the country’s manufacturing sector expands, so international companies have increasingly turned to Vietnam as trade tensions escalate. Vietnam’s economy grew by 7.1% last year, according to the South China Morning Post. This has led some observers to speculate about Vietnam’s prospects. In May, Quartz called Vietnam “a kind of China in waiting.”

Yet predictions that Vietnam will be the “next China” ignore a set of very real constraints facing China’s smaller neighbor. No matter how long the trade war lasts, Vietnam is not likely to be the next China, at least not at anything like China’s scale.

The first problem of scale is a human one. Vietnam’s population, at around 96 million, is less than one-tenth of China’s. As of 2017, Vietnam’s manufacturing sector included about 9.3 million workers. China’s Guangdong province, its major manufacturing center, offers 12.71 million local workers, but these represent only 58% of the province’s total workforce. Guangdong draws in 42% of its manufacturing workers from elsewhere in China. Many of China’s workers are also already well-trained in relevant skills. This is seldom true in Vietnam, where workers are generally well-educated but lacking specialized experience. While Vietnam’s labor pool is cheap, especially by Western standards, it is limited in both skill and size. Training can rectify the first, but not the second; Vietnam is already running into labor shortages as more international companies set up shop there.

In addition to a population larger than Vietnam’s by an order of magnitude, China boasts a system of infrastructure and supply lines that will be hard for any country to replicate quickly, if at all. Many existing Chinese manufacturing plants have already acquired the capital-intensive machinery necessary for complex orders. Similarly, China boasts factories that have obtained safety certifications in line with U.S. norms. Vietnam – like other countries hoping to step into the manufacturing vacuum created by the U.S.-China trade war – faces the potential of major upfront expenses before it can meet global manufacturers’ demands. As demand for manufacturing space in Vietnam grows, prices for land and facilities are also rising.

Vietnam’s roads and ports are already overburdened, suggesting the need for transportation spending to avoid delays and bottlenecks. Compared to China, Vietnam’s railways are sparse and its highways are narrow. Vietnam is building a new deep-water port, but it will not be operational for another three years. As manufacturing demand increases, the cost of expanding and modernizing infrastructure will increase too.

This is not to say all these problems are insurmountable. Vietnam could improve its infrastructure, and workers could gain the skills manufacturers want. The Vietnamese government has said it plans to train 2 million of its citizens in vocational schools. But beyond these particular constraints, it is worth asking: Does Vietnam even want to be the world’s next factory floor?

Vietnam’s leaders are aware that there is no guarantee their exports won’t face harsher U.S. tariffs in the future. President Donald Trump has suggested the country may become a target, calling Vietnam “almost the single worst abuser of everybody.” The U.S. has already imposed duties of more than 400% on Vietnamese steel, largely on suspicions that the material actually comes from elsewhere. Investing heavily in manufacturing could also backfire spectacularly if China and the U.S. reach a deal and the trade war ends.

Further, Vietnam understands the benefit of a diversified workforce. Agriculture has long been central to the country’s self-sufficiency, and that is unlikely to change. Increased global manufacturing is not the only way, or even the best, for a small country to build its wealth.

There is also the question of whether any one country needs to fully take China’s place. So far, relatively few international companies are leaving China entirely. The Wall Street Journal reported that many are pursuing a “China + 1” strategy, where they relocate only part of their production lines and continue to manufacture goods that aren’t U.S.-bound in China. Vietnam is likely to continue to benefit from this sort of supply chain diversification, but doing so does not mean it will eventually step into China’s massive shoes.

Vietnam has benefited from China’s trade loss and is likely to continue to do so. But it is also likely that Vietnam will become one of several countries to fill the gap, rather than stepping into the breach alone. Indonesia, Malaysia, the Philippines and India may all take pieces of the former monolith that was Chinese manufacturing. At least for now, no one is the “new China,” even if some countries can honestly say they are “winning” the trade war in a smaller sense.

Vice President and Chief Investment Officer Paul Jacobs, of our Atlanta office, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 12, “Retirement Plans;” Chapter 15, “Investment Approaches and Philosophy;” and Chapter 19, “A Second Act: Starting a New Venture.”

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