GIS Dossiers aim to give our subscribers a quick overview of key topics, regions or conflicts based on a selection of our experts’ reports since 2011. This survey reviews our experts’ analysis and predictions for Vietnam, a burgeoning regional leader that must carefully balance its relationships with regional partners and global powers to maintain its autonomy.
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Perched on the eastern edge of the Indochinese Peninsula, Vietnam has a coastline that stretches for more than 3,400 kilometers along the South China Sea. Long and thin, like Norway or Chile, the country’s geography makes it an attractive investment destination, trading partner and military ally. Its population of more than 97 million is powering a dynamic economy that grew by 6.8 percent last year, and not slower than 5 percent over the past five years.
The country has bolstered its regional leadership role, especially within the Association of Southeast Asian Nations (ASEAN), most recently by hosting the February 27, 2019 meeting between United States President Donald Trump and North Korean leader Kim Jong-un. Yet the challenges it faces are growing with China’s rise. As it becomes stronger militarily and economically, Beijing is impinging on Vietnam’s dearly held independence. Relations with the U.S. have become more complicated, too, as Washington disengages from the region economically while taking a tougher stance on trade and freedom of navigation in the South China Sea.
Vietnam is unique among Southeast Asian nations for being at the intersection of not only U.S. and Chinese interests, but also those of Russia, GIS expert Walter Lohman pointed out in a September 2016 report on Vietnam’s balancing act. “Vietnam is a medium-sized country seeking a maximum degree of autonomy,” he wrote, adding that the country will “calibrate its relationships to balance these powers against each other.”
Hanoi’s relationship with Beijing is not as bad as some assume in the West
In general, he said, Hanoi’s relationship with Beijing is not as bad as some assume in the West, considering the difficult history Vietnam and China share. And while there is tension between the two countries over the South China Sea, it is only part of a broader relationship in which similarities in their style of government make cooperation easier.
The reverse is true of Vietnam’s relationship with the U.S. A memorandum of understanding on defense cooperation has brought the countries closer, but Hanoi is still keen to keep Washington at arm’s length.
Vietnam’s close ties with Russia are determined by the countries’ defense relationship. Russia has provided Vietnam with weapons and military equipment for decades. Vietnam buys more than 80 percent of its arms from Russia. Nevertheless, the demise of the Soviet Union has loosened ties. Moscow can no longer afford the huge financial assistance it offered in the 1980s.
Mr. Lohman imagined three scenarios. In the most likely one, U.S. influence declines due to a failure to keep pace with Chinese military modernization and a retreat from promoting free trade. If that were to happen, Vietnam would try to bolster its relationships with countries like Japan, India and South Korea, but none of this would suffice to resist Chinese pressure. “A regional order determined by the Chinese would form, and Vietnam would take its subordinate place in that order.”
Careful economic strategy
GIS founder Prince Michael of Liechtenstein discussed how Vietnam’s search for balance also applies to its economy in a March 2018 comment on the country’s careful strategy. Just as Hanoi is keen to diversify its diplomatic and military partnerships, it wants a wide array of trade ties and foreign investments. In recent years, it has become a hub for South Korean and Japanese manufacturers. Despite the strong position of state-owned companies (due to Vietnam’s communist legacy), the private sector is gradually becoming more important.
The GIS founder offered a glimpse into how Vietnam is setting out its stall for business in a comment from May 2015, describing a recent visit he had taken there. “I talked with a number of people who had started their own business and wanted ideas for branding to succeed and build exports. The entrepreneurial spirit is alive and kicking,” he wrote. Though the government is autocratic, “it leaves its people a high degree of personal development potential and business opportunities, as opposed to the Soviet system.” It also wants to privatize more state-owned companies, he added.
Prince Michael rightly predicted that Vietnam would remain one of the world’s fastest-growing economies and that Vietnamese companies would also become increasingly active globally.
South China Sea dispute
Vietnam’s more than 3,400 kilometers of coastline lie entirely along the South China Sea, a crucial venue for trade, fishing and mineral extraction. Any adversary that gains a foothold off Vietnam’s coast could pose a huge threat to its security. China’s claim to nearly all of the South China Sea (through its famous “nine-dash line” policy) therefore presents an existential risk to Vietnam.
China is reclaiming islands and building military outposts on features throughout the sea, especially in the Spratly Islands and Paracel Islands, both claimed by Vietnam. Moreover, in 2014, the Chinese deployed an oil rig inside Vietnam’s exclusive economic zone.
In 2016, the Permanent Court of Arbitration in The Hague (PCA) invalidated the most ambitious interpretation of China’s claims in the South China Sea. Mr. Lohman wrote that the outcome clearly benefits Vietnam. Nevertheless, he predicted that Vietnam would take a conciliatory approach.
Indeed, GIS guest expert Joseph Dobbs pointed out that Hanoi’s initial reaction to the ruling was muted. “Vietnam’s response demonstrates how China’s neighbors see the ruling as both potentially aiding them in their own maritime disputes, but also possibly encouraging China to be more aggressive in future,” he posited. Hanoi called for disputes to be resolved using “peaceful measures, including diplomatic and legal procedures, without using or threatening to use violence.”
That approach is benefiting Vietnam, since, as GIS expert Dr. Junhua Zhang wrote in January 2019, China has recently adopted a carrot-and-stick approach toward its neighbors. “Beijing has sought more diverse, bilateral solutions to disputes,” as part of its tactical shift to “soft diplomacy.” It is currently working on a “code of conduct” for the South China Sea with other countries in the region, an initiative that pointedly excludes the U.S.
And despite the widespread belief that China’s military buildup and economic strong-arming have gained it the upper hand, Mr. Lohman wrote in June 2017 that Beijing has not won yet in the South China Sea. The other parties to the dispute over the sea (Brunei, Malaysia, the Philippines, Taiwan and Vietnam) have not given up their own claims on sovereignty. In the Spratly Islands, for example, Vietnam still controls most of the occupied features.
China’s activity in the South China Sea is not the only way it uses water as a political weapon. It also exploits its control over major rivers in the region. This makes the Mekong River, which stretches from the Tibetan Plateau to southern Vietnam, a big point of contention between the two countries. The river is a crucial lifeline for Vietnam, which depends on it for fish and crop irrigation. Fifteen percent of the world’s rice, a major Vietnamese export, is grown in the Mekong Delta.
China is building dams on its half of the river at a fast pace. Chinese firms are also building dams in Laos, upriver from Vietnam.
Control over the upper half of the Mekong gives Beijing tremendous leverage over Hanoi
All this gives Beijing tremendous leverage over Hanoi, which must tread carefully. “It is possible that by pushing too hard on Mekong issues, for instance, [Vietnam] could provoke a Chinese reaction in the South China Sea or somehow inhibit economic activity,” Mr. Lohman wrote in 2016.
Thailand and Cambodia are also vulnerable to China’s whims when it comes to the Mekong River. Yet, as Mr. Lohman pointed out, “The interests of the Mekong countries converge in a way that prevents them from effectively cooperating to address this problem, leaving them open to Beijing’s influence.” He concluded: “In the absence of greater coordination among these countries, the most likely scenario is for Beijing’s sway over each of them to grow.”
As part of its strategy to limit global powers’ influence in its affairs, Vietnam joined ASEAN in 1995. The association has become a regional powerhouse in its own right. It comprises 10 countries, which together have a population of 651 million and a gross domestic product of $3 trillion, according to a 2018 International Monetary Fund estimate.
However, the group is being split by the specter of Chinese guns and money, GIS guest expert Cameron Frecklington wrote in October 2015. As with most other countries in ASEAN, China is a crucial trade and investment partner for Vietnam. However, any escalation of tensions in the South China Sea could undermine economic cooperation.
At the same time, the growing web of economic ties in Southeast Asia is limiting China’s sway in the region. Trade and investment have increased especially between Vietnam and Thailand, wrote GIS expert Dr. Thitinan Pongsudhirak in May 2018. Over the past decade, bilateral trade has doubled to more than $15 billion, vaulting Vietnam to Thailand’s second largest trade partner in the region, behind Malaysia. Thai foreign investment in Vietnam has also increased rapidly.
Yet just as the group is becoming more integrated, it has also been marginalized by global events, including rising U.S.-China tensions and Washington’s decision to negotiate directly with the North Koreans on denuclearization. As such, Vietnam will only have limited success in trying to amplify its own influence through the group.
Trade and tribulation
As China has grown stronger and more assertive, Vietnam has discreetly but consistently moved closer to the U.S. The partnership was mutually beneficial, since the Americans had set out a strategy of containing Beijing through a series of alliances along the western edge of the Pacific Ocean. After a warming of diplomatic relations and some initiatives for military cooperation, the next logical step was a strengthening of economic ties. Hence Vietnam’s decision to enter the U.S.-led Trans-Pacific Partnership (TPP) – a huge free trade group that excluded China.
President Donald Trump’s decision to pull out of the agreement dealt a big blow to that strategy, making Vietnam “perhaps the biggest loser in the TPP’s demise,” in the words of Mr. Lohman. In a January 2017 report he added, “Vietnam stood to gain the most economically and was prepared to make major changes in governance to implement” the agreement. “Faced now with uncertainty about American commitment to the region, Vietnam will have to expand relationships with other partners.”
Hanoi therefore took an active part in the creation of the TPP’s successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes Japan, Australia, Canada, Mexico and Singapore, among others. Vietnam also has a free trade agreement pending with the EU.
President Trump’s decision to pull out of the TPP dealt a big blow to Vietnam’s strategy
This is not to say that a potential economic partnership with the U.S. is out of the question. The Trump administration prefers bilateral trade deals to multilateral ones, and the Vietnamese appear open to cutting a bilateral deal. However, the Trump team is also fond of slapping sanctions on trading partners, something Mr. Lohman warned against in the case of Vietnam, which could be alienated by such measures: “Over time, the result [would] be to shape supply chains and foster new economic relationships that marginalize the U.S.”
Benefiting from U.S.-China tensions
As China reels from the economic impacts of U.S. sanctions, it has become more conciliatory with countries in the region and gone on a charm offensive. In Vietnam, Beijing has encouraged a revival of the countries’ “communist brotherhood,” wrote Dr. Zhang, a move that helped reduce tensions.
The U.S.-China trade tussle also benefits Vietnam economically, as investors look for new low-cost manufacturing locations. The fact that Chinese labor costs are now close to those of some EU countries and well above many investment destinations in Asia has exacerbated this phenomenon, according to GIS economic expert Professor Enrico Colombatto in February 2019.
Dr. Zhang agreed, adding that Vietnam will greatly profit as a member of the CPTPP. Countries like Vietnam “will be a natural magnet for companies looking to diversify away from China this year.”
Vietnam requires more than a diverse network of alliances to protect its prized independence. It also needs a strong military. In a May 2017 report on China as the emerging hegemon in Southeast Asia, GIS expert Urs Schoettli pointed out that Vietnam has an army second only to China’s in the region. “The war-hardened nation has a long experience of friction with its larger neighbor, and ... repeatedly has been able to hold its own,” he wrote. “However, given the massive modernization of the Chinese armed forces, it is doubtful that Vietnam would be able to sustain an extended conflict.”
The Vietnamese intend to defend their maritime rights, but especially their independence
In March of the same year, Prince Michael emphasized that “the Vietnamese intend to defend their maritime rights, but especially their independence.” Vietnam has a long military tradition and effective armed forces, which have started cooperating with India and Japan, he wrote.
The Japan factor
With the Chinese becoming increasingly assertive and the Americans less reliable, Vietnam could gain from enhancing its relationship with Japan. Tokyo, as Mr. Schoettli wrote in January 2019, has begun a new policy of outreach in Asia. “Much closer cooperation can be expected with those ASEAN nations – notably Indonesia, Malaysia and Vietnam – that are most worried by Chinese expansion.”
GIS has seen this coming for a long time. In 2014, GIS expert Bernard Siman examined the consequences of Prime Minister Shinzo Abe’s government “reinterpreting” Japan’s constitution to allow its military to defend allies abroad. The move would shift Japanese foreign policy toward making alliances with Southeast Asian countries like Vietnam, he predicted. The two countries had already signed a memorandum of understanding on bilateral defense cooperation in 2011 – a first building block toward a closer relationship.
“The strength of the Japan-Vietnam relationship is demonstrated by Japan’s overseas development assistance (ODA) to Vietnam, totaling some $12 billion between 2008 and 2012,” he wrote. In October 2014, Japan sold coastguard vessels to Vietnam, a deal funded through Japanese ODA.
Mr. Siman emphasized that both Vietnam and Japan have territorial disputes with China, and that Tokyo has supported Hanoi’s position on the South China Sea. Vietnam “thanked Japan for publicly supporting its position and has stated officially that it is asking for Japan’s support against China. This specific request is a critical development toward an alliance.”