Closer trade ties with friendly nations adds to Vietnam’s investment allure: expert

Closer trade ties with friendly countries in the region will add to Vietnam’s attractiveness as an FDI destination, writes Dr. Daniel Borer, business school lecturer in management, RMIT University Vietnam.

The immediate historical context to this is the abrupt halt caused by the 2008 global financial crisis to the impressive expansion of globalisation the world experienced in the second half of the 20th century. As the world recovered from this shock, the U.S.-China trade war ignited, which again produced cracks in global trade.

Gradually, countries were able to arrange their trade around the U.S.-China trade war, benefitting third-party countries like Vietnam – to which much of Chinese manufacturing went. As trade was picking up, the Covid-19 pandemic hit, causing supply chains to break down.

The world gradually recovered from the pandemic but in February 2022, Russia marched its troops into Ukraine and again, global trade suffered major disruptions. The current geopolitical conflict in the Middle East, with the Hamas-Israel war at its epicentre, has aggravated the situation further.

Before the global financial crisis, the world had hit an all-time high of trade as a percentage of global GDP in 2007, when 61% of the global production was traded internationally. Despite some people solemnly burying globalization as a phenomenon of the past, the unthinkable happened - international trade resurrected. The latest available data from 2022 shows an impressive recovery of trade as a percentage of world GDP in the previous two years from 52% to 63%, a record high.

A rethinking

True, a rethinking took place, where trade became less global and more regional, but countries quickly adapted to this new development. In Asia, the Regional Comprehensive Economic Partnership (RCEP), signed in 2020, gave birth to the largest trading block ever created with ASEAN, China, South Korea, Japan, Australia and New Zealand. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), where Asia-Pacific countries including Vietnam and, interestingly, the UK are part of, is boosting trade in the region.

Besides this, multinational corporations are relocating production nearer to their customers in a move towards domestic manufacturing and what is now called “near-shoring.” Also, as the Western and Eastern blocks start to re-emerge, trade has become more directed towards political partners, leading to the “friend-shoring” concept.

Given these geopolitical scenarios, it would be beneficial for Vietnam to strengthen trade relations with friendly, nearer partners like Australia and New Zealand, countries with large untapped potential for Vietnamese trade.

Rare earth benefits

Another beneficial development for Vietnam is trade in raw materials, especially in Rare Earth Elements (REEs). REEs are required to build wind turbines, electric vehicles, any types of screens, and medical devices, among others. According to the United States Geological Survey (USGS), Vietnam has the second largest reserves of REEs globally with 22 million metric tons, after China, which has 44 million metric tons and before Russia and Brazil, both with 21 million metric tons.

The REEs is a strategic key future resource needed for the green revolution, making Vietnam a key global player in this industry. South Korea, eager to acquire a part of Vietnam’s resources, is planning to mine REEs in Vietnam. While this initiative should be welcomed, how this strategic resource can benefit Vietnam’s global position and economic strength needs to be looked at.

Key global player

While closer trade ties with countries in the region are making Vietnam an attractive FDI destination, it is necessary to create an economic environment wherein cheap labor is no longer the main selling point for Vietnam. Key infrastructure projects that the government has already initiated will help improve Vietnam’s position as a key global player.

Besides this, the ongoing fight against corruption is a necessary battle that will help the country gain credibility.

Foreign investors often cite the lack of skilled labor as one deterrent to investment in Vietnam. Alongside university graduates, it is necessary to build up vocational training, so that formally trained electricians, plumbers and mechanics are available for investment projects.

The Vietnamese government has put in place several measures and implemented key projects that are conducive to sustained growth and economic stability. Coupling these measures with redirecting closer trade ties with more friendly countries as well as solidifying Vietnam’s position as an FDI manufacturing hub in the region will equip the country to withstand storms bound to happen in the future.