Vietnam’s leaders look to consolidate gains in 2015

Author: Thomas Jandl, MRTJ Asia Consulting

For Vietnam’s leadership, 2014 was another year of growing into a role as an increasingly active international player, both diplomatically and economically. Two events — the Haiyang 981 oilrig incident and TPP accession negotiations — gave Vietnam a place in the spotlight and shed light on a continued path for 2015.

Vietnamese diplomacy hit some high notes during the Chinese oilrig incident. Hanoi earned plaudits for its handling of the crisis. It attempted to de-escalate through multilateral negotiations, while standing firm on the principle that China’s claims over virtually all the waters of the South China Sea (or East Sea) are unfounded in international law. Prime Minister Nguyen Tan Dung found the right words in international fora, with the result that China became increasingly isolated. For the first time, ASEAN took a position on the dispute, while the United States made strongly-worded critical statements about China’s actions. And while officially nobody wants to be alarmist, Indonesia is rethinking its maritime defence strategy over China’s aggressive posture.

All the while, Vietnam is actively — and visibly — trying to keep channels of communication with Beijing open, proclaiming not only a willingness to discuss and follow established codes of conduct but also to bring the case before international tribunals — anathema for Beijing.

The impact of the tensions on Vietnam’s domestic politics is less clear. Observers debate whether pro-China or pro-Western forces are emerging on top — if such a dichotomy is not oversimplified in the first place. But the Communist Party of Vietnam will continue to grapple with managing both its relations with its powerful neighbour to the north and with the West in 2015 and beyond.

Vietnam’s other key policy event was the accession negotiations to the Trans-Pacific Partnership (TPP). For the government, membership is a high priority. As the least developed of all candidates, it would show yet again that Vietnam is being taken seriously internationally. But more importantly, the TPP would represent the external push force required to bring Vietnam’s slowing economy back into high gear.

TPP membership will have three main effects on the economy. First, it promises to provide Vietnam’s crucial garment sector with tariff-free access to the North American and Japanese markets. Second, it will require reform of state-owned enterprises (SOEs). Consuming the better part of new capital, Vietnam’s SOEs deprive the more efficient private sector of credit and of the ability to invest and grow. There is broad agreement on this, but without strong external pressure, the politically well-connected SOEs are hard to reform.

And third, under strict TPP rules of origin, only products made entirely (or largely) within the TPP zone enjoy tariff-free market access. So investors gain an incentive to build more textile mills in Vietnam, to supply the massive domestic garment and apparel industry, rather than importing cloth from China. Investment in these upstream industries would have a significant impact on Vietnam’s biggest economic problem: the low levels of productivity in what is essentially a final-assembly economy based on imports of the higher-end inputs.

Joining the TPP would cause a shift in economic power away from the state-owned industries and their cronies and toward smaller, private businesses. In addition, it could be a major factor in bringing foreign investment into Vietnam’s intermediary materials industries. Since these are often higher on the value chain than the assembly process, the TPP would be crucial in adjusting productivity upwards. And rules aimed at levelling the playing field between state and non-state businesses are likely to be a shot in the arm for the innovative but cash- and credit-starved SMEs. These changes are needed to break the dependence on an assembly economy that imports the lion’s share of its parts and inputs from abroad, leaving most of the value-added offshore.

Of course, there are domestic considerations here as well. If the SOEs are reformed too suddenly, much of their outstanding loans — generally to state-owned banks — will become non-performing and turn into a liability for the state. But inaction will only push the problem further into the future.

Overall, 2015 will be a continuation of 2014. Managing its relationship with China will remain a challenge for the government, which will continue attempts to join the TPP. None of this will be easy. The problem with China is that Beijing can manipulate public discontent in Vietnam simply by invading Vietnamese waters, and Hanoi can do little to counter it beyond diplomacy. Similarly, the TPP is largely beyond Vietnam’s control. The main question is not whether Vietnam can join but whether the Obama Administration and the now-Republican Congress can agree on an agreement at all.

Yet in spite of all the questions and caveats, 2014 has shown a path on which Vietnam’s leaders are likely to continue in the next year.

Thomas Jandl is a founding partner of MRTJ Asia Consulting, a firm advising on economic policy and investment issues in Vietnam. He was a Professorial Lecturer and Scholar in Residence at the School of International Service at American University, Washington. His research focus is on Southeast Asian political economy, decentralisation, trade and investment.

This article is part of an EAF special feature series on 2014 in review and the year ahead.

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