By LIU Zixiang

Followers of international trade have for years been prophesying that Vietnam will one day replace China as the world’s factory. Never have they been closer to being proved right than now. In Q1, Vietnam’s total foreign trade increased 14.3 percent year on year, reaching US$177 billion (1,190 billion yuan). Growth was especially strong in March, which saw total trade up 38.1 percent from the previous month. Exports account for slightly more than half of the total trade in both Q1 and March, indicating trade surpluses of US$1.5 billion and US$2.1 billion respectively.

Notably, manufactured goods, mainly electronics and textiles, have supplanted bulk agricultural products as the biggest component of Vietnam’s exports. Samsung, for example, now produces 60 percent of its smartphones in Vietnam. In Q1, the country sold about a third more textiles and apparel in the US and Europe than in the same period last year.

BAI Ming of the Chinese Academy of International Trade and Economic Cooperation chatted with Jiemian News recently on the rise of Vietnam and the implications for China.

Jiemian: Could you bring us up to speed on Vietnam’s foreign trade in the past few decades?

Bai: Vietnam now is like China right after it joined the WTO, although the growth is not as fast as China’s back then. Foreign trade in Vietnam started rather late. The country emerged relatively unscathed from the 2008 financial crisis because volumes were so small back then. Since 2018, when the US-China trade war started, the US has been importing more textiles from Vietnam and less from China. When you buy clothes in America today, you’ll probably see more “Made in Vietnam” than “Made in China.”

Now Vietnam’s total foreign trade is about a ninth of China’s. (US$66 billion vs US$676 billion - Editor) But numbers are only part of the whole story. A country can either engage in low-end manufacturing, with fairly small value added, or take on heavy technology tasks with the efficiency that no one else can achieve. China has enough high-end manufacturing that in many industries, it dominates the conversation, while Vietnam, in many cases, is just joining the chat group.

Jiemian: Are Vietnam and China direct competitors?

Bai: We are both competitors and partners. Collaboration can span processes and industries. A lot of apparel manufacturers have moved to Vietnam, but they buy fabric from China. Same for electronics. A phone might be designed in China, assembled in Vietnam with Chinese-made parts, and sold back to China. And of course, different countries specialize in different things. China sells cars and motorbikes to Vietnam and buys tropical fruit from it. That’s simply how international trade works.

Jiemian: As China moves low-end manufacturing from coastal cities to inland provinces, central and western cities need jobs now. How will the rise of Vietnam affect them?

Bai: In this case, they are competitors. China wants western cities like Chengdu, Chongqing and Xi’an to become manufacturing hubs for consumer electronics like laptops and phones. But some orders have gone to Vietnam and India instead.

Jiemian: So, what should we do?

Bai: Take advantage of our infrastructure. Internationally, there is the China Railway Express (a freight train network that connects China’s east coast to Western Europe through Central Asia - Editor). There is New International Land-Sea Trade Corridor (a trade and logistics network with Chongqing as a hub that when completed, will connect 190 ports in 90 countries - Editor). Within the country, a uniform domestic market will make the economy less fragmented and more efficient. China should make the most of all these initiatives.

Different cities and regions should divide and conquer. Central and western China has been trying to either build entire clusters from scratch or expand existing ones. And they have made good progress. Anhui has a fairly large photovoltaic sector. Chengdu, Chongqing and Xi’an are strong in electronics. Hunan has heavy machinery. Wuhan has steel making. Businesses on the east coast, on the other hand, should strive to be more tech-heavy and less labor-intensive.

Jiemian: Which industries have moved to Vietnam, and to what extent?

Bai: The pandemic has slowed things down but a lot has changed even before the pandemic. Many jobs had moved, mainly in labor-intensive industries that don’t have very complicated upstream or downstream processes, such as textiles.

The jobs have moved from China to Vietnam because labor is cheaper there, but the industries have not. Decisions are still made in China. Most of the supply chains are through China.

It is the decision makers – companies like Apple and Samsung – that make the most money, because they spread resources around. In more high-tech, high-value-added manufacturing, it’s hard to move entire industries around.

Clothes are made in Vietnam, but brands buy fabric from China. Samsung makes phones in Vietnam, but it couldn’t make parts there even if it wanted to, because Vietnam simply doesn’t have the capacity to mass produce them. So for now, the industry remains in China, although assembly is in Vietnam.

But won’t Vietnam one day make fabrics and phone parts? Possibly, but it is a rather small economy without the capacity for as many industries as China.

China may not be able to outcompete Vietnam in every industry and it doesn’t have to, especially in labor-intensive ones such as textiles and apparel. But for tech-heavy, more profitable industries, such as phone making, cities like Chongqing and Zhengzhou could and should try to win more contracts and forge stronger relationships with outsourcing companies.

Jiemian: So exactly why have many jobs moved to Vietnam?

Bai: The main reason is cheap labor. (Average hourly wage in Vietnam is about 50 percent of that of China - Editor) And the population is younger and not so highly educated but it doesn't matter, because the jobs do not require sophisticated training. Also, Vietnam is in many more trade agreements with the US and EU than China.

The pandemic and general disruption have us keenly aware of the perceived risks of making and buying everything in China, raising the notion of “China + 1”: a backup supplier outside China. Some countries are moving factories out of China for political reasons.

Jiemian: What do you make of the trend to be less reliant on China?

Bai: It’s an inevitable outcome of globalization and economic development. When a country becomes economically and technologically sophisticated, it becomes less competitive at the low end as labor becomes more expensive. Japan and Korea have gone through this stage. Their unskilled jobs went to China. Now China is passing the torch. The rise of Vietnamese manufacturing only affects China to a limited extent.

Jiemian: If Vietnam is to become the world’s factory, where does it go from here?

Bai: Vietnam has factories but hardly any supply chain. If Vietnam doesn’t import, its factories grind to a halt. It is a crucial vulnerability. Vietnam’s manufacturing capacity is still tiny. It will take a long time to build supply chains if it ever does.

The cost of labor is already rising fast in Vietnam, although remains low for the region. There are political and geopolitical risks too. US policy, for example, might have an impact.