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Vietnam’s Diversification of Trade and the China Plus One Strategy
Vietnam Briefing examines Vietnam’s position in the China plus one strategy appearing as a favorable investment destination due to its proximity to China, its coastline, and lower export tariffs implemented by free trade agreements.
We also look at the complementary relationship between Vietnam and China due to close trade ties.
Recent media reports have underlined Vietnam as an export destination with exports surpassing those of Shenzhen in March. Several analysts have said that this is a result of Vietnam benefitting from a shift in global supply chains. While this is true, we need to examine which products are being exported at what cost and which industries have shifted their supply chain ecosystem to the country.
China plus one strategy
We have discussed the China plus one strategy in several articles on Vietnam Briefing, but we will look more in-depth given the current scenario in the aftermath of the pandemic.
Vietnam’s exports rose to 48.2 percent in March from the month earlier and 14.8 percent for a year earlier to US$34.7 billion while Shenzhen’s exports contracted 14 percent year on year to US$18.3 billion due to pandemic related lockdowns as per customs data.
Since the US-China trade war, and even before that, businesses have been looking at Vietnam as a China plus one destination due to cheaper labor costs, particularly in electronics and supply chain industries.
But rather than competing, the two countries are complementing each other. Vietnam still imports a significant amount of raw materials from China, South Korea, Japan, and others and has a less developed supply chain network.
Products are then processed and completed before being shipped to the US, the EU, and so on. It is important to note that Vietnam’s current trajectory is what China’s coastal areas were at several years ago.
Vietnam and China’s bilateral trade jumped to US$230.2 billion and China is Vietnam’s largest trade partner and the second-largest export destination.
It is also important to note that Shenzhen is just one city in China compared to Vietnam as a whole country. And while Vietnam’s success should be applauded Shenzhen has moved away from lower-quality manufacturing to high-end manufacturing something that even Vietnam wants to mature into. Several large tech companies such as Huawei and ZTE have headquartered in Shenzhen.
Vietnam, in contrast, has benefitted from lower costs in land and labor and with a younger population. This is especially seen in labor-intensive industries such as textiles and garments, footwear, and electronics. Vietnam will hope that it can emulate a similar path to Shenzhen in attracting hi-tech industries.
While Vietnam is not yet at the level of China in terms of developed supply chains, infrastructure, and business environment, there are signs of a shift.
This article was first published by VietnamBriefing which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in in China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to [email protected].
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