The crucial role of multinational enterprises

Korean and Taiwanese investors in clothing and footwear who had settled in Indonesia in the early 1990s, severely affected by the Asian financial crisis of 1997-98, decided to relocate to Vietnam. In doing so, they radically transformed the specialization of this country, which initially focused on petroleum and food products, and switch back to the traditional manufactured products of textiles, clothing and wood, characteristic of early industrialization.

A second transition to electronics products began in 2006 with the entry of Intel, which preferred Vietnam to the Philippines, for assembling its electronic components. Intel has led the way for Japanese and Korean companies in the sector.

In the 2000s, growing tensions between Tokyo and Beijing led Japanese companies to adopt a strategy labeled by Nomura " China + one ", deciding that for every investment made in China there would be another in a different Asian country. Vietnam has quickly become the preferred target for Japanese companies, as the Japan Bank for International Cooperation (JBIC) surveys show[1]. They have often moved to the North to get closer to the Chinese market, while at the same time taking an interest in the domestic market.
 

Vietnam's accession to the WTO in 2007 has reassured Korea and the chaebols (large conglomerates) have become the first investors (in approved amount). They are found in the steel, shipbuilding and telecommunications equipment. Today, Samsung plants account for nearly a quarter of Vietnam's exports. These investments have also benefited from the financial support of Korea's development assistance programs, which has made Vietnam a priority. Political tensions between China and Korea, following the installation of the Terminal High Altitude Area Defense (THAAD) on Korean soil in 2017, have dealt a severe blow to the Korean economy due to China's informal boycott of imported Korean products and the strict limitation of the number of Chinese tourists visiting Korea. These tensions have only reinforced the desire of Korean manufacturers to reduce their exposure to the Chinese market. Moreover, their exports to the US from China are also under pressure. Finally, although the Sino-American trade dispute was late in affecting consumer goods[2], these increases were anticipated by the foreign subsidiaries present in China (Nike relocated 6% of its production from China to Vietnam[3]), but also by Chinese companies. In the first half of 2019, Chinese direct investment in Vietnam was larger than that of Korean investors – Korea remained by far the largest investor in stock.

Vietnam's resilience

Vietnam has become a springboard for Asian companies whose investments account for 81% of the stock of foreign direct investment in 2018. In the first ten months of 2019, multinational companies of all origins accounted for 69% of Vietnam's exports and 58% of its imports. They have a trade surplus of $ 28 billion, while domestic firms have a deficit of $ 21 billion. Concentrated in low-value-added industries, the Vietnamese government would like to move these investments towards more rewarding sectors, as it encourages local actors to do so[4]. There are, however, obstacles to this progress: the relative low level of qualification of the workforce and the underdevelopment of infrastructure.

The opening-up of its economy has allowed Vietnam to enjoy robust growth that, since 2001, has remained above 6% per year (and 5% in GDP per capita), including in 2018-2019, making it one of the most dynamic countries in the world. The trade surpluses it has achieved make it to some extent immune to external shocks. The rise in international trade tensions, particularly between the United States and China, does not seem to have much to do with it.

On the contrary, according to our rather rough estimate[5] for 2019 of the evolution of trade between China, Vietnam and the United States, we get the following pattern: compared to 2018, US exports to China fall by 32 billion while Chinese exports to the United States fall by 55 billion; meanwhile, Vietnamese exports to the United States increase by 12 billion and Chinese exports to Vietnam increase by the same amount (a coincidence). Thus, Vietnam appears to be benefiting from US-China trade tensions, although it alone cannot compensate for the decline in Chinese exports to the US.  Especially since Chinese investments in Vietnam, although growing very fast, especially in 2019 where they exceed Korean investments, are still limited in stocks[6].

There is, however, a risk to Vietnam. The US Treasury's latest report on trade partners with problem surpluses included in its list new Asian countries: Japan, Korea, Malaysia and Vietnam. Noting that Vietnam's current account surplus is 2.5% of GDP in 2017 and 2.0% expected in 2019, the report notes that despite the de jure adoption of a flexible exchange rate regime in 2016, the Dong's parity against the dollar has changed little, as, according to the report, the Bank of Vietnam is holding back on its appreciation. The risk of Vietnam in turn being hit by US tariffs is therefore not zero.