Key Takeaways:
The 13 October agreements between Vietnam and China are expected to deepen political and economic ties between the nations, particularly in trade, infrastructure, and defence cooperation. Despite ongoing disputes in the South China Sea, both countries are moving toward greater collaboration through diplomatic compartmentalisation.
KSG assesses that the U.S. is likely to intensify efforts to counter China's influence in Vietnam, especially in securing semiconductor supply chains, where Chinese investments are currently far ahead of U.S. efforts.
Vietnam's strategy of balancing relations with both the U.S. and China ensures it attracts significant foreign investment, making it a key player in global supply chains, especially in technology manufacturing.
KSG assesses that Vietnam’s agricultural sector is poised to grow as China opens its markets to Vietnamese goods, with agreements on cross-border trade facilitation likely to accelerate this process.
Overview:
During Chinese Premier Li Qiang's visit to Hanoi, Vietnam and China signed a series of agreements on October 13, 2024, to enhance economic and security cooperation. This marked the first visit by a Chinese Premier to Vietnam in 11 years.
Two-way trade between the countries surged by 21.9 percent in the first nine months of this year. In keeping with this trend, the 10 agreements focused primarily on economic integration and improving the ease of doing business across the border. Both governments agreed to strengthen human resource development cooperation and the establishment of a working group to study a model for the development of cross-border economic cooperation zones between Vietnam and China. The two governments also agreed to improve customs clearance at borders, and Vietnam’s National Payment Corp signed an agreement with China’s Union Pay to implement cross-border QR code payments.
Furthermore, the Chinese government agreed to open the Chinese market further to Vietnamese agricultural goods, and the Vietnamese government committed to facilitating greater Chinese investment in Vietnam.
Among the key agreements was a document outlining progress on cross-border railway links, with Vietnam requesting China's support through preferential loans, technology transfers, and workforce training for three standard gauge rail lines connecting the two countries.
Additionally, Prime Minister Pham urged collaboration on large-scale, high-tech projects in areas like renewable energy, electric vehicles, and smart city development, while advocating for greater cooperation in finance, education, tourism, and environmental protection. KSG assess that this collaboration is likely to hasten in the next 2 years.
Notably, the visit also produced a bilateral commitment to foster greater defence and security cooperation despite ongoing disagreements regarding sovereign rights in the South China Sea.
Forward Look:
Vietnam-China Relationship
KSG assesses that the recent agreements between the two nations are highly likely to accelerate political and economic integration. China is Vietnam's largest trading partner and a key supplier for its manufacturing sector. Chinese efforts to court the region’s powers through developmental support, economic cooperation, and investment are likely to grow moving forward. Furthermore, these agreements to increase defence and security cooperation demonstrate that South China Sea disputes do not pose an insurmountable obstacle to Chinese diplomatic advances in the region. However, China is not the only major power seeking to strengthen ties with Vietnam.
US Position
KSG assesses that the U.S. will continue to up its efforts to compete with China for influence in Vietnam. As one of Southeast Asia's most dynamic economies, Vietnam is a crucial partner for the U.S., particularly in its strategy to contain China. China’s growing diplomatic outreach in Southeast Asia, particularly through President Xi Jinping’s recent visits, has bolstered its regional influence. While both China and the U.S. aim to leverage Vietnam for semiconductor supply chains, U.S. investments still lag behind China's. In 2023, investments from China and Hong Kong exceeded $8.2 billion, compared to U.S. investment of roughly $500 million. The U.S. will need to ramp up efforts to compete with China for influence in Vietnam, particularly in securing its cooperation for control of the semiconductor supply chain. Vietnam’s stance could play a critical role in the success of the U.S. "small yard, high fence" strategy.
KSG assesses that this kind of supply chain integration is likely to intensify if Donald Trump returns to the U.S. presidency, given his proposal for a 60% tariff on Chinese goods. In such a scenario, Vietnam could become a key hub for companies seeking to avoid the effects of these tariffs. Even if direct U.S. government foreign investment slows under a second Trump administration, American firms are likely to expand their ‘friendshoring' efforts to mitigate the impact of an escalating trade war.
KSG assesses that it is likely that under a Kamala Harris presidency, tariffs on Chinese goods are also likely to persist or even increase. Harris has so far strongly aligned herself with Biden’s policy agenda, which has maintained and raised many of the Trump-era tariffs. Furthermore, Harris is more likely to persist in the overarching strategy of Chinese containment by way of targeted sanctions.
KSG assesses that the Vietnamese technology manufacturing industry is highly likely to grow as a result of Chinese and American investment. The Biden administration's CHIPS Act has incentivised both U.S. and Chinese companies to employ a ‘China Plus One’ strategy by expanding operations into Vietnam. Vietnam’s rules of origin only require that 30% of content be locally value-added for products to qualify as ‘Made in Vietnam’. Consequently, several American semiconductor companies, including Amkor Technology, Synopsys, and Marvell, have announced plans to open factories and design centres in Vietnam. This move aligns with the U.S. strategy of ‘friendshoring’—relocating supply chain links to friendly nations like Vietnam to reduce dependence on China. Conversely, Chinese suppliers such as Goertek, which supplies Apple, are also increasing their investments in the country.
KSG assesses that Vietnam is likely to continue to balance its relationships with both powers, ensuring that its ties with China do not deter U.S. interest, while enjoying maximum economic benefits.
Agriculture
KSG assesses that Vietnam’s agricultural sector is highly likely to grow significantly as a result of Chinese market concessions, in combination with other measures to facilitate cross-national trade described above. It is likely that these agreements mark an early step toward deeper integration of Vietnamese agricultural producers into the Chinese market for food stuffs as the Chinese population’s nutritional demand becomes increasingly import driven going forward.
This also has the potential to increase Beijing's leverage over Vietnam, as economic prosperity becomes further dependent on the Chinese market. This strategy has been utilised by China across the region regularly. This leverage threatens the U.S. position in Vietnam, as well as Western companies operating in the country, as Beijing can push Hanoi to harm Western interest.