Vietnam’s pivot to the West?

Author: Peter Drysdale, East Asia Forum

Signing onto the Trans-Pacific Partnership (TPP) agreement in Atlanta last October and the high-level state visits of half the politburo to the United States put Vietnam in the international spotlight and, when the dust had settled, left the Southeast Asian diplomatic status quo profoundly shaken. Did this represent a decisive pivot by Vietnam to the West that would overturn the established, less-aligned, order in Southeast Asia? Was it the harbinger of political reform at home — reform that might lead to a political system congenial to even deeper political relationships with the United States?

Certainly all eyes in Jakarta, at the heart of ASEAN, have been watching Vietnam’s perorations closely on the international stage.

Vietnam’s embrace of the TPP threatened to corrode ASEAN centrality and East Asian economic coherence. The main economic benefit for Vietnam from the TPP derives from more, and preferred, access to the US clothing and textiles market — an important export market for Vietnam and one where the benefits appear so large as to swamp any costs associated with signing up to new rules that seem more suited to advanced economies than developing countries like Vietnam. But that market access will require materials and inputs into products sold into the US to be sourced from within TPP countries. They cannot be sourced in China, Indonesia, India or any other, likely lower cost non-TPP country.

This problem affects not just textiles but all trade that discriminates between trading partners. Diverting trade away from non-members towards members of the TPP means that trade is simply being shifted around to preferred (higher cost) suppliers instead of new trading opportunities created. That might be good for Vietnam’s textile exporters (in the case of this so-called ‘yarn forward’ arrangement), but it does nothing for US consumers except shift imports away from China, Bangladesh and other suppliers towards Vietnamese imports. That’s a cost increasing redistribution of trade to a favoured partner, not a welfare-enhancing creation of cost-lowering trade for American consumers or Vietnamese producers: in short, a slice of the economic pie in return for political favours.

This is what happens when trade policy becomes politically feral. No wonder President Joko Widodo of Indonesia expressed a polite interest to signing up to the TPP at some point. Vietnam’s, more than Malaysia’s, participation in the TPP has set the cat among the Southeast Asian pigeons, strategically as well as economically!

The coming decade offers a crucial window for Vietnam to succeed in the global economy. Like Indonesia it has the present advantage of a large, hard-working, young and relatively low cost labour force. It hopes to benefit from being the least developed TPP member and its monopoly in TPP markets, more specifically in the United States. While growth is stuck or trending down in other Southeast Asian economies, Vietnam’s GDP is expected to grow at 6 per cent and trade by nearly 10 per cent this year. Foreign investment — including from China — is surging in from firms that seek a slice of the new American pie.

In our lead essay this week, Thomas Jandl points out that more important to domestic reform in Vietnam are the state-owned enterprise (SOE) provisions in the TPP, which require heavily protected SOEs to live — or die — under the same rules and regulations as the private sector. The Party in Vietnam ‘used SOEs as an employer of convenience, a career option for elite families and friends, and a way to legitimise communist government in a country that is now clearly capitalist. All this has held the economy back’. Productivity and the efficiency of capital use in SOEs have been abysmal compared to the private sector, and especially compared to small and medium businesses. Still SOEs have received the lion’s share of credit and government contracts. ‘This will have to end. As a result, the ways in which elites exercise economic control and obtain rents will change’.

‘Reformers have embraced the TPP because necessary reforms would be impossible to push through the Party’s power structures without a bigger prize that could be offered in exchange’, says Jandl. Yet, he cautions, nothing is guaranteed to change quickly.

David Brown makes the point that it is not the party’s dwindling band of ideologues but rather the preference of the opportunists for the status quo that has blocked political and structural reform in the past and will do so in the future. ‘The state’s continued direct control of many large enterprises is a lucrative source of illicit income for the enterprise managers and for central and local officials. Similar opportunities abound in the conversion of agricultural land to other uses or the preferential provision of services. Such leverage will not be lightly surrendered’.

Even reformists, Jandl says, will not rapidly open the doors to wider democratic reforms. They will need to change the ways in which Party supporters are rewarded. Vietnam is not a totalitarian state that is unresponsive to public protest, he says, and the opportunities for expressing dissent are widening. Whatever the final character of the new leadership after the 12th Party Congress early next year, Jandl concludes, it will try to find an agreeable arrangement with Beijing. Hanoi’s bargaining power will have increased. ‘The period after the 12th Party Congress should allow Hanoi to speak with one voice when negotiating with Beijing, further adding to Vietnam’s leverage’.

But don’t bet, Brown warns, that these developments — perhaps more a shuffle towards the centre than a decisive pivot towards the West — will empower current prime minister and putatively new Party General Secretary in the making, Nguyen Tan Dung, to press the political reform agenda, connected tightly though it is to economic reform.

See other pieces in EAF’s 2015–16 year in review series which will be running through January.

Peter Drysdale is the editor of the East Asia Forum.

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