Vietnam's economy benefits from China's pandemic policy

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Unlike China, Vietnam has largely recovered from the pandemic. Now it wants to build on the successes of recent years. The short-term prospects are good. But how well is the country doing in the medium term?

Vietnam's manufacturing and trade boom

Vietnam was one of the few countries in the world whose economy grew in the 2020 pandemic year. Early and rigorous action by the government and a zero-COVID strategy that has been successful for a long time was decisive for this. In the summer of 2021 – before the Omicron variant changed the rules of the pandemic – the situation got noticeably out of control. The number of infections rose, factories of electronics companies such as Samsung and Apple or textile factories of Nike and Zara had to close for weeks. Workers returned to their native villages in chaotic conditions. According to the World Bank, economic growth fell to 2.58 percent.

Vietnam eventually changed its strategy and pushed ahead with the vaccination campaign that had previously been neglected. Hanoi took a pragmatic approach and, unlike China, also used Western vaccines. Daniel Müller from the East Asian Association (OAV) in Hamburg, the network of the German Asian economy, says in an interview with DW: “Vietnam got the curve relatively quickly, and that shows the adaptability of the Vietnamese system.” 

In October 2021, tens of thousands of workers from Ho Chi Mih City returned to their home villages and towns

Almost all corona measures have now been lifted. The risk of further lockdowns is low, according to Dang Duc Anh, director of the National Institute of Hygiene and Epidemiology in Vietnam, as he told Reuters. The Asian Development Bank forecasts growth of 6.5 percent for 2022 and 6.7 percent for 2023. 

More investments from China too

There are clear signs that Vietnam is benefiting from the course correction in pandemic policy. Many companies, especially in the electronics industry, spend a lot of money. The South Korean company Samsung announced in February this year that it would invest a further 920 million US dollars in its Vietnam location.

The week-long hard lockdown with low incidences brought not only economic life, but also everyday life in Shanghai to a standstill

The trend of relocating production from China to Vietnam is also continuing. Chinese electronics companies such as Luxshare Precision Industry, Goertek and Pegatron are going to Vietnam, as reported by the specialist magazine “Elektronik Praxis”. Raphael Mok of management consultancy Fitch Solutions told Reuters: “Vietnam will be one of the main beneficiaries of shifting supply chains.” Müller from the OAV adds with a view to Germany: “Vietnam has always been in the focus of German companies. The real run has not yet started, but that could change now because the dissatisfaction of companies in China has now reached a level that it had previously didn't exist.” With its zero-COVID policy and week-long lockdowns with low incidences, China is increasingly attracting criticism, especially in the economic metropolis of Shanghai.

Challenge: resilient supply chains

Despite the good prospects, there are also challenges for Vietnam's economy. First, there is Vietnam's deep integration into global supply chains, which is both a blessing and a curse. Blessing, since Vietnam's open economic policy in recent years has made growth possible in the first place. Curse, since Vietnam is dependent on the supply of raw materials and basic products that are missing or delayed due to the pandemic. Vietnam is also vulnerable to rising geopolitical tensions between the US and China.

The keyword for the solution is: resilient supply chains. According to Müller, Vietnam is not yet well positioned here. For example, the topic of digital supply chains is not yet sufficiently in focus in Vietnam. Digital supply chains mean the digital networking of all processes and steps in a supply chain in order to monitor them in real time and make them even more efficient. 

Robust economy

But not only the supply chains, but also Vietnam's economy as a whole must become more resilient. The resilience can only be increased if the productive value added is increased and placed on a broader basis. “This requires further professionalization at all levels,” says Müller. Vietnam's education and training system, for example, needs to improve. At the moment it can hardly keep up with the growing demand.

Vietnam is seeing strong growth, especially in the electronics industry< /p>

Resilience also means strengthening domestic demand. When COVID-19 broke through in late summer 2021, it hit the economy, which is dependent on foreign trade, very badly. According to the World Bank, Vietnam's foreign trade ratio was 209 percent in 2020. A high value indicates a high economic dependency. Of course, Vietnam, with its almost 100 million inhabitants, cannot strive for domestic development like China. “Initially, it can only be a matter of balancing that out a bit,” says Müller.

Although Vietnam has recognized the problem, it is struggling to take the necessary steps towards balance. Larger parts of the population would have to benefit from economic growth for increased domestic demand, but inequality is growing, as is the urban-rural divide, as a study from March 2021 in the trade journal “Economies” shows. 

Challenge: human and labor rights

Another challenge, especially with regard to investments from Germany and the EU, is the country's authoritarian politics. The current federal government declared in the coalition agreement that it would pursue a “value-based foreign policy” in which the human rights situation should be given greater consideration. The Due Diligence Act (also known as the Supply Chain Act), which has been in force since 2021 but only has to be implemented gradually after 2023 and depending on the size of the company, places higher demands on companies with regard to environmental protection and human rights. 

Vietnam is not a first-choice partner here, which is also evident in the EU-Vietnam Free Trade Agreement (EVFTA). The latter has been in force since August 2020, but there are still crunches when it comes to implementation. According to the agreement, Vietnam has committed itself to allowing independent trade unions. But the process is progressing slowly. To this day, no law regulates how and under what circumstances independent trade unions can be registered. 

Open economy

For Müller from the OAV it is clear that Vietnam cannot be counted among the narrowest circle of like-minded partners in the context of value-based foreign and trade policy. But for the extended circle of trading partners who – unlike the People's Republic of China or the USA under Trump – are sticking to an open economy, “Vietnam is actually indispensable from a German and also from a European point of view.” Namely as a location for labour-intensive production.

In this regard, Müller believes that Vietnam has a special position in Southeast Asia. Vietnam's possible competitors Thailand and Indonesia will not quickly become a threat to Vietnam for various reasons. Thailand's economy is already a step further in terms of development and producing higher value goods. Indonesia, on the other hand, is only now beginning to gradually break away from its traditional domestic orientation and integrate itself more closely into the global economy.