The Doi Moi reforms were officially initiated in Vietnam in 1986 following many years of struggles resulting from the reunification of North Vietnam and South Vietnam in 1975 and had adopted the Soviet Union's economic style of central planning and self-isolation. Goods and services were highly regulated under the traditional centrally planned economy, and all means of production were owned by the state. After the mid-1980s, Vietnam realized that the country was on the brink of economic collapse and the development model the country had borrowed from the Soviet Union and the Eastern European bloc had proven to be outmoded with flaws that hindered the country's economic growth. This realization became a turning point and galvanized Vietnam's leaders to act and adopt economic and political reform, the Doi Moi, to modernize and liberate economic policies at the time. Vietnam was an underdeveloped country before the new reform policies of Doi Moi with strict sanctions imposed on it by the United States and was subsequently blocked from cultivating relations with other countries. In order for developing countries, like Vietnam, to experience growth and reduce poverty, they need to look at things on a microeconomics and macroeconomics scale, but more importantly, on a microeconomics level that focuses on supply and demand promoting international integration and conducting vigorous trade with other countries. The Communist Party of Vietnam understood that the key to economic progress in alleviating Vietnam's poverty at the time was by attracting foreign investment, as well as turning the country into an export-oriented producer.
With the new reform policies of Doi Moi, Vietnam prioritized the removal of self-imposed barriers it once had as an autarchy state by opening itself up to the outside world and into the international trade arena, as well as rectifying its unproductive centralized economy transitioning it to a market-oriented economy, and in the interim, retaining and maintaining the Communist Party's monopoly on political power of its socialist system identity. Under the new Doi Moi reform policies, the state implemented an export-orientation strategy and proceeded with its removal of restrictions on foreign trade, which consequently allowed foreign direct investment with the invasion of foreign multinational corporations in the country and encouraged private sector activity, especially in trade. This shifted the once underdeveloped country to a more industrialized country with millions of Vietnamese households and small businesses, and foreign investment enterprises mobilizing underutilized land, as well as capitalizing on cheap but skilled labor in the production of goods for export, which was the catalyst of Vietnam's ever-growing manufacturing sector.
The Formation and Infrastructure of Vietnam's Manufacturing Sector
During the Doi Moi reform policies, the state implemented development zones within the country to promote economic growth by attracting foreign direct investment that was designed to provide preferential governmental policies and incentives to foreign investors setting up shop in certain geographical regions in Vietnam. During the initial stages in the formation of the development zones, some considered it a social experiment to desperately alleviate Vietnam's economic crisis at the time. In 1991, the first economic zone was built in Ho Chi Minh City, and by 2019, there were 343 industrial zones and economic zones established in the country. In 2020, Vietnam received $28.53 billion (USD) of inbound foreign direct investment, which was a significant drop of 25 percent from the previous year due to COVID-19. In 2021, the country received $19.74 billion (USD) in foreign direct investment due to the major lockdowns in Vietnam surrounding the pandemic. Three decades later, after the implementation of the Doi Moi reform policies in 1986, and attracting foreign direct investment, the Vietnamese government decided to take a step further to propose and hopefully legitimize their special economic zones (SEZs) plan.
On May 23, 2018, the majority of parliament members agreed upon this draft SEZ law that would allow the establishment of three strategic areas of special administrative and economic units with their own special incentives and fewer restrictions to entice more foreign capital, as well as foster more rapid growth in the economy. Furthermore, there were no significant differences from the already established rules and regulations on the existing development zones, however, there was one important catch on the proposed draft law, and that was allowing foreign investors a 99-year land lease. On June 9, 2018, the National Assembly decided to postpone passing the bill to the National Assembly for a final decision in October 2018, as it needed more time to ensure that this SEZ route would be in the best interest of both legislators and the public. As the meetings were taking place at the National Assembly from June 9 to June 11, 2018, this controversial legal draft caused a stir among the Vietnamese people who adamantly protested claiming that this new plan to establish special economic zones would be dominated by Chinese interest. Perhaps the SEZ would never come to fruition as this was not the first time Vietnam had tried to establish these special economic enclaves. Vietnam had implemented the first SEZ law in 1979 but it was later terminated in 1991 due to its economic ineffectiveness. Furthermore, it had been proposed again in 1994 but it never panned out due to lack of budget and political constraints at the time. In hopes of the third time being a charm, the approval and ratification of the SEZ law had been delayed and was supposed to be implemented in May 2019, but unfortunately, due to its controversial nature, it has been put on the backburner, and as of today, it still has not been passed by the National Assembly.
Currently, the industrial zones and economic zones are regions within the country where the government has designated land for the specific purpose of the production of industrial goods and services. Vietnam's industrial zones and economic zones established throughout the country are categorized by three administrative regions that include: the Northern (North Key Economic Zone [NKEZ]), Central (Central Key Economic Zone [CKEZ]), and Southern (Southern Key Economic Zone [SKEZ]). Each region has its own characteristics, as well as offering incentives and a barrier-free environment to promote economic growth by attracting foreign investment for export-oriented production. The NKEZ is within close geographic proximity to China and appeals to companies looking to transplant their manufacturing operations from China to Vietnam, especially with the convenience of importing goods when it is known to cost significantly less when shipping by sea routes. The CKEZ includes economic activities relating to light industry projects and food processing, and it is also known for its marine economy. The SKEZ has the most robust economic activities and is home to the first economic zone that was built in the bustling city of Ho Chi Minh. It makes sense that it is considered the leading hub in the industrial development which includes commerce, exports, technology, services, telecommunications, and traditional sectors such as rubber, plastics, textiles, and apparel. It also attracts the highest foreign direct investment compared to its Northern and Central counterparts. Vietnam's development zones are divided into two categories, industrial zones (IZs) and economic zones (EZs). The IZs are further classified into different types of zones, which are export processing zones, supporting industrial zones, and ecological industrial zones. The EZs are further classified into coastal EZs and border-gate EZs.
These industrial zones and economic zones are specifically reserved to encourage domestic and foreign investment and each zone serves its own agenda with its own special incentives. With all of the new developments in manufacturing in Vietnam in recent years, one key component to the success of an industrial zone or economic zone is having a good infrastructure that makes the moving and trading of goods efficient, as the proximity to key destinations such as airports, borders, major cities, main highways, and seaports are things to consider. In the SKEZ, the government is currently building three more highways, which are scheduled to be completed by 2025, that will make the transporting of goods more efficient between the key industrial areas in the region. Samsung for instance, opened an assembly plant which is the company's biggest production base in the world located in the Yen Phong Industrial Zone in Bac Ninh Province and Thai Nguyen Province in the Northern region, and helped finance the highway to help workers migrate. Due to the trade war, in 2017, Vietnam invested approximately $11 billion dollars in construction projects towards the development of infrastructure, especially the Hai Phong Port, which happens to be the leading seaport in Northern Vietnam and was initially built in 1874 by the French during the period of French Indochina. Due to its geographical proximity to China, the Hai Phong Port is ideal for importing goods to manufacturers in Vietnam that are dependent on Chinese suppliers. According to the Vietnam Maritime Administration, the country currently has 44 seaports in total with an annual capacity to hold 470-500 million tons. Let us do the math. If a standard 40-foot container can accommodate around 25 to 30 tons; an average cargo ship around 700 feet long can carry approximately 1,000 of these 40-foot containers; that would be a total carrying capacity of about 25,000 tons; therefore, these seaports can accommodate an annual total of 18,800 – 20,000 700 feet long cargo ships. Additionally, that total number of cargo ships does not include the smaller ports that are dispersed throughout the 3,260 km coastline of Vietnam bringing the number of ports in the country to 320 total. In short, the goal of these zones is to provide foreign capitalists a range of special economic and administrative privileges to attract foreign investment, however, these industrial zone and economic zone developments have ultimately fostered the "factory-driven" economic growth indeed, but not necessarily economic development to benefit the country holistically.
Vietnam's Major Trade Partners
Vietnam has experienced a high rate of economic growth over the last two decades and that trade has been a major contributing factor in the structural transformation and development of the country's economy. Without the country's trading partners and foreign direct investment that saw its economic potential, Vietnam would still very much be an underdeveloped agrarian society. During these last two decades, Vietnam has earned its status as a country that has become an important exporter in electronics, with electrical and electronic products being the top exporting goods surpassing coffee, textiles, footwear, and rice. It is a no-brainer that the United States is the leading country of export. Following the United States, the main exporters come from China, Japan, South Korea, Hong Kong, Germany, and the Netherlands. Although the United States may be the top country of export, the United States falls behind other Asian countries such as China, South Korea, Japan, Taiwan, and Thailand as the main country of import, but is still the leading as a Western trading partner beating any other countries in the European Union. In terms of foreign direct investment, several U.S. businesses have invested into Vietnam, showing their commitment, and realizing the country's potential. Some of the major and noteworthy U.S. companies with manufacturers currently in Vietnam are Williams-Sonoma, Restoration Hardware, West Elm, Nike, Adidas, Puma, Lululemon, Gap, Apple, Intel, and Microsoft. In addition to that list, we will include a few more U.S. companies that have facilitated the United States and Vietnam to become major trading partners and crowning the United States as Vietnam's top exporter.
Qualcomm is an American multinational corporation that engages in the development, design, and provision of digital telecommunications products such as semiconductors, software, and services related to wireless technology. In 2020, Qualcomm set up a facility in the Northern region in the city of Hanoi due to the trade war with China. This facility is an R&D lab consisting of three different sub-facilities that are used to develop new cellular technologies and provide testing services to domestic manufacturing partners. In 2019, U.S.-based Universal Alloy Corporation (UAC), a manufacturer of aircraft components for aerospace companies such as Boeing and Airbus, as well as supplying components to Embraer, Bombardier, and their associated supply chains, made an investment of $170 million (USD) and established its new facility at the Da Nang Hi-Tech Park. The factory officially opened in 2020 and produces 4,000 of the five million parts used in today's commercial aircraft with exports mostly to North America and Europe. Additionally, UAC Vietnam also supplies fuselage components for Boeing 787, 777, and 737 aircraft and engine parts to Rolls Royce with an ambitious goal to target exports of $85 million this year and $180 million from 2026 onwards. Hasbro, Inc. is an American multinational toy and board game company, and is one of the largest toy makers in the world and the maker of popular board games such as Monopoly and Scrabble. The majority of its products are manufactured in East Asia, and as of 2020, this includes Vietnam.
Rubber is one of the greatest natural commodities in the world and Vietnam is the third-largest rubber producer in the world and in 2020, the United States was the largest country of export followed by Japan, China, South Korea, and Germany. Historically, Vietnam has always been known for producing rubber especially under the French Indochina period where large rubber plantations existed. It is no surprise that Vietnam is one of the leading countries producing rubber and manufacturing sports shoes since the soles are made from rubber. Vietnam currently manufactures famous American brands such as Nike, Adidas, and Puma. Aleron Vietnam Footwear Co., Ltd. is a footwear manufacturing and processing company based in Thanh Hoa Province located in the Northern region and is among the fastest growing with over 9,000 employees. The company manufactures millions of shoes every year, sports shoes specifically, and their largest customers are Puma, Clarks, and other U.K. and U.S.-based companies. VinFast, a Vietnamese manufacturer producing electric SUVs, has recently announced that it will build a factory in North Carolina this year. Vietnam's ambition in the automotive sector looks promising and will put the country on the map in the future as a leader in automaking and further strengthening the United States and Vietnam as trade partners.
Currently, Germany is the largest E.U. trading partner with Vietnam and a German multinational automotive corporation, Daimler AG, is one of the world's leading car and truck manufacturers. Daimler AG currently has a factory in Ho Chi Minh City that assembles various Mercedes-Benz models from CKD kits, and in 1996, the first car assembled by Mercedes-Benz Vietnam was an E-Class. Peugeot is a French brand automotive company and opened a factory in 2019 in the central province of Quang Nam through joint venture with Truong Hai Auto Corporation (THACO). The powerhouse factory was designed with a total capacity to produce 20,000 Peugeot cars per year for domestic use as well as export, and in 2013, also began exporting locally manufactured Mazda cars, accessories and spare parts, semi-trailers and special purpose vehicles to Columbia, South Korea, Malaysia, Russia, Kazakhstan, Laos, Myanmar, and Cambodia. While Germany may be the largest E.U. trading partner, the Netherlands comes second as the largest E.U. trading partner of Vietnam with Dutch companies such as Heineken, Damen Shipyards, Philips, and Friesland Campina that have been investing and doing business in Vietnam for many years.
It is no surprise that China is the biggest trade partner of Vietnam in Asia considering the fact that the country does rely on China for sourcing materials for the manufacturing of garment, footwear, and smartphones. Aside from imports, Vietnam main exports to China include smartphones, computers, machinery, wood, and cotton yarn, as well as Vietnamese fresh fruits and fish as China is the biggest export market of Vietnamese agricultural and seafood products. Due to the Regional Comprehensive Economic Partnership (RCEP), the largest free trade agreement in history among the Asia-Pacific nations that officially took effect on January 1, 2022, eliminating 90% of the tariffs between the signatory countries, Southeast Asia is now one of Vietnam's largest export markets after the United States, the E.U., and China. The predominate Vietnamese exports to Southeast Asia include agricultural products, mobile phones, electronics, steel, machinery, vehicles, textiles and garments, and crude oil.
Russia and Southeast Asia Political and Trade Relations
In light of the recent Ukraine-Russia crisis, many Asian countries have mixed feelings toward Vladimir Putin's aggression and invasion on Ukraine with this unnecessary catastrophic war, instead of choosing a peaceful diplomacy approach. Shockingly, as many countries in the world have condemned Russia, some countries in the Far East such as Cambodia, India, Malaysia, the Philippines, Thailand, and Vietnam included, have simply expressed their concerns regarding Russia invading Ukraine, especially with the safety of the evacuees from these Asian countries who were in the Ukraine at the time when news on the invasion broke out. On the world stage, none of these countries have publicly expressed disapproval towards Russia's actions in destabilizing world order. It is interesting that these countries are not willing to jeopardize their trade relations with Russia considering the fact that most of these Asian countries have relatively small trade volumes with Russia, however, these countries are heavily dependent on Russia for arms exports. Russia has a grip on these countries. In South Asia, India relies on Russia for military hardware for its aircraft carriers, tanks, guns, fighter jets, and missiles. In Southeast Asia, Russia is the leading arms supplier for these countries, with over $10.7 billion (USD) in defense equipment sales to regional states from 2000 to 2019, more than the United States. Vietnam specifically, cannot break free from Soviet-era or Russia arm exports, such as Russia's military hardware, which the country is accustomed to. The investment Vietnam would need to become experienced in handling, and integrating U.S. military equipment, would pose a challenge and be costly. Even so, Vietnam has done extensive trading with the United States and has been looking to diversify its military equipment in recent years.
Myanmar on the other hand, formerly called Burma, specifically with its military junta, which was officially established since of last year in 2021 when junta leader Min Aung Hlaing who is considered in Asia as "Putin's puppet" seized power in a coup d'état overthrowing the democratically elected government of Nobel Peace Prize laureate Aung San Suu Kyi, blatantly expressed and justified Russia's invasion as "the right thing to do." Shortly after the European Union imposed its fourth round of sanctions on the military junta on February 21 of this year, Russia invaded the Ukraine, and the Myanmar military was one of the few that came to Russia's defense. Under Myanmar military dictatorship, the current situation in their country with the attacks on innocent Burmese civilians seems to be of a similar theme with Russia's attacks on innocent Ukrainian civilians. Perhaps it rings true as there is an English proverb that says, "Birds of a feather flock together," as both authoritarian governments seem to have very little concern for humanity and the violent destruction and pain that their regimes have caused by their brutal military assaults. Since last year's coup, Myanmar's junta was provided a military arsenal that included arms and equipment from countries including China and Serbia, but more specifically, Russia, which remains its top international defense partner and supplier, all knowingly that these military arsenals will be used to attack innocent Burmese civilians. With the ongoing armed conflict in Myanmar, it will limit any economic activities relating to the manufacturing and export sectors, especially with the extreme sanctions imposed on the government and factoring in the public health issue surrounding the pandemic, and a potential banking crisis diminishing the currency value of the Burmese kyat. With that said, given the current political, social, and economic climate in Myanmar, the junta cannot afford to buy all of its military equipment from Russia in dollars, however there is a high possibility its purchases are supported by the transfer of raw materials, including gemstones and timber.
As the rest of the world publicly ostracized and expressed condemnation against Putin, in Vietnam, he is being affectionately and undeservingly referred to as "Uncle Putin." The Communist Party of Vietnam and Russia have had a long alliance with one another dating back to the Soviet Union era. To reiterate, Vietnam after all, had once adopted the Soviet Union's economic style of central planning which was the culprit of the country's economic destruction. Before the Communist Party of Vietnam and reunification of the country, which is now considered the Socialist Republic of Vietnam, it was divided into North Vietnam and South Vietnam with its own political, social, and economic beliefs. South Vietnam believed in a free market economy, conducting extensive trade with other anti-communist or non-communist countries, whereas North Vietnam traded exclusively with the Soviet Union and China, both of whom supported their war effort. After the Fall of Saigon, when South Vietnam was seized and captured by the Northern Vietnamese troops enforcing their totalitarian-communist regime, the country was picking up the pieces after many decades of war and was very dependent on the Soviet Union for economic and military assistance due to the strict sanctions imposed on the country by the United States until it was lifted in 1994.
In reference to "Uncle Putin," it appears that the Communist Party of Vietnam does have a soft spot for its long-time ally, Russia. Officially on May 29, 2015, at the formal Free Trade Agreement (FTA) signing ceremony after many years of intense negotiations at Burabai Province, Republic of Kazakhstan, Prime Minister Nguyen Tan Dung and along with the Eurasian Economic Union (EEU) which includes Prime Ministers from Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan discussed the future of trade between Vietnam and the EEU nations. The FTA promised to reduce tariffs on 90% of all goods traded between Vietnam and the EEU nations, to boost trade between Vietnam and the EEU. Prime Minister Nguyen Tan Dung reminisced a turbulent Vietnamese past, a once war-torn country that transcended capitalism and socialism, colonization, and decolonization, emphasized that Vietnam and members of the Eurasian Economic Union (EEU) have a good and enduring traditional friendship. He further expressed that the country of Vietnam will always have a heartfelt gratitude for the aid provided by members of the union when the country struggled for independence from colonial rule and Western influence, and that it would not be the developing and thriving country it is today without its Eurasian allies. After the agreement came into effect on October 5, 2016, Vietnam since then has enjoyed many special terms for the import of necessary goods which includes raw materials, fertilizers, fuel, natural gas, and heavy industrial products.
Subsequently, the severe sanctions prohibiting trade with Russia surrounding the Russia-Ukraine conflict, have obstructed Vietnam exports to Russia including technological items and components, textiles, and coffee. Many shipping companies have refused to deliver goods from Vietnam to Russia, which is compounded by delays in transportation, including air transportation, and is forcing airlines to choose alternative routes. This has left many businesses to reconsider trade with Russia due to the complication of global logistics, an increase in costs to deliver goods, and of course sanctions to avoid. The sanctions on Russia have posed an economic impact to Vietnam but considering trade with Russia only accounts a small percentage of exports and approximately around $3.2 billion (USD) and imports at about $2.3 billion (USD) as of last year, it would be in Vietnam's best interest to diversify its trading partners and allocation of exports elsewhere aside from Russia and Belarus. Furthermore, Vietnam should pray for "Uncle Putin" and hope he finds redemption, as well as remain neutral during this time in order to continue a successful bilateral trade with its Western trading partners, including the United States, which accounted for an approximate export value of $77.07 billion in 2020.
Check out our new Digital Magazine Get the inside scoop on the Braumiller Law Group & Braumiller Consulting Group "peeps." Expertise in International Trade Compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.