I recently had a conversation with a high
ranking officer in Vietnam’s Ministry of Industry and Trade whose work
responsibilities include promoting and facilitating border trade and investment
between Vietnam and China.
We have
been meeting for years and despite past flareups in the South China Seas and
the occasional anti-China rally in Hanoi, he has always expressed optimism
toward the future of the China-Vietnam relationship.
He has
believed that cooler heads will always prevail at the upper levels of
government and that the increasing flows in border trade and investment
overland between China and Vietnam do much to alleviate the tensions brewing on
the seas. But in my recent meeting, the officer expressed a 180 degree
interpretation of the future of trade relations between China and
Vietnam.
He
fears that as a result of China’s aggressive movements in the South China Sea,
the two countries will soon adopt isolationist and protective trade policies
toward each other, and the goodwill provided by decades of border trade and
shared investment projects will soon become undone.
Background
on China-Vietnam bilateral trade
China’s
1300km border with Vietnam is shared between two provinces on China side
(Yunnan and Guangxi) and eight provinces on Vietnamese side. Since
border trade officially reopened in the 1990s between China and Vietnam, 20%
annual trade increases have become a common occurrence.
In 2013
trade between China and Vietnam totaled USD 50.21 billion with 30% of trade
going through Guangxi province and 5 billion through border trade with Yunnan
province. More than 90% of border trade with Yunnan is in border trade
flows through the Hekou/Lao Cai port of entry and both China and Vietnam have
invested billions in highway and railway infrastructure to facilitate trade
between Hanoi and Kunming.
On the
other hand, traders from Vietnam have more
choices for ports of entry in Guangxi which has a few deep water ports
that link to Vietnam’s ports at Haiphong, Hue, Ho Chi Minh City, and Can Tho on
the Mekong Delta along with major overland ports at Pingxiang and Dongxing
Vietnam
exports iron, copper, agricultural products like dragon fruit, watermelon,
limes, and most importantly rice to China. Vietnam is one of the world’s
top exporter of rice and sends China much of it. Across the border, China
exports minerals, energy from hydropower, and various temperate zone
agricultural products such as apples, pears, peaches, and garlic.
China
also exports electronics, daily use items like cooking utensils and cosmetics.
Importantly, a large portion of China’s exports to Vietnam is partially
processed products like factory machines, electronics, and clothing.
The
manufacturing process which begins in China is completed in Vietnam and then
shipped to the rest of the world. Although hydro-power exports from China
to Vietnam are on the decline due to recent increases in Vietnam’s abilities to
tap its own hydro-power, China’s advantage is clear: a greater variety in
products plus a more robust export processing industry that allows for the
shipping of unfinished products to Vietnam for finishing instead of vice-versa.
Guangxi
serves as a critical trade conduit between China and Vietnam given its
neighboring proximity to Guangdong, the powerhouse of consumption and production
in southern China. The portion of goods which remain in Guangxi for consumption
is unknown, but one can assume a majority of goods simply pass through and then
are distributed to China’s densely populated coastal provinces.
Goods
are unloaded from Vietnamese trucks, inspected and then repackaged for sale in
China. As a result of this process, a service sector that facilitates
distribution of Vietnamese goods into China has developed at Guangxi’s two
overland entry ports.
Guangxi
is favored as the land transit point for trade into China because it has more
border points than Yunnan province, and its border has been open longer than
Yunnan’s port at Hekou. Compared to Yunnan, Guangxi’s ports of entry are
located in less remote and less mountainous areas where the speed of entry is
faster, thus dropping cost of trade. Goods entering into China through
Guangxi only need to travel for two to three more hours before reaching a major
urban area like Nanning which hosts major wholesale distribution centers.
It is
widely known between traders in the region that between China and its Southeast
Asian neighbors, some entry points into China are better than others in terms
of ease of flow, inspection procedures, and transaction costs.
Guangxi
has a one-up on ease of trade with Vietnam over Yunnan where customs officials
expect higher bribes for imports into China. Multiple entry ports into help
tamp down corrupt practices. We assume that all entry ports in Vietnam
and China require bribes, but with multiple choices to an exporter, if
officials at entry point A are charging a 5% bribe on top of the standard
tariff rate, then entry point B can compete for the business by charging a 4%
bribe and so on until costs are competitively lowered. Vietnamese border
traders cannot share the same advantage by trading through Yunnan where there
is only one major entry point at Hekou.
Confidence
in coping with change
My
colleague at the Ministry of Industry and Trade fears that bilateral trade
policy between China and Vietnam will soon change for the worse due to rising
tensions in the China-Vietnam relationship arising mostly from the South China
Sea conflict.
China
and Vietnam both lay claim to multiple overlapping portions of the South China
Sea and tensions have been playing out yearly since the 1980s. However,
this year relations are seemingly at their all-time worst. Recently, China’s
parked three billion-dollar oil rigs within Vietnam’s exclusive economic zone
200 nautical miles from shoreline.
These
rigs also lay within the “9 dash line” that China claims as sovereign territory
in the South China Sea. In May, China’s deployment of the first oil rig
sparked protests across
Vietnam and on the protests turned violent with the torching of foreign-owned
factories in industrial complexes in southern Vietnam.
In
mid-June Chinese and Vietnamese delegations held a
high-level dialogue to discuss the South China Sea conflict with zero
progress announced. To date the situation remains at a standoff and
will dictate much of this week’s strategic
dialogue between the US and China given the warming relationship
between Vietnam and the US.
The
effect of isolationist trade policy between China and Vietnam is
predictable.
China
is Vietnam’s top trade partner, but the Ministry of Industry and Trade seems to
be prepared to adjust and compensate for the loss in trade. The Ministry
of Trade and Industry views itself at an advantageous position where widening
channels of trade, particularly with the United States and Europe, give it
trading options that facilitate a shift away from trade with China.
The US
demands aquatic products such as shrimp, sea bass, and manufactured goods from
Vietnam and a portion of the agricultural products traded with China could
shift to being consumed in robust consumer markets in the US, Europe, and
Australia.
Rice
exports, importantly, can also find outlets for trade with the rest of the
world, but cannot be completely replaced by the total currently demanded from
China.
Yet
this predicament may also fit an emerging trend in Vietnam; due to
environmental degradation coupled with rural to urban migration in the Mekong
Delta, and the shifting of Delta farmers from rice production to higher value
agricultural products, rice yields in Vietnam are set to decrease in the near
future.
China
views itself in a similar advantageous position with the ability to substitute
the loss of imports from Vietnam with goods from the rest of the world,
particularly from its other neighbors.
The
loss in rice imports from Vietnam will likely be filled by rice imports from
Thailand which currently has a massive surplus in rice due to former Prime
Minister Yingluck Shinawatra’s rice
subsidy program. The program, which served as a contributing factor
to the May coup in Thailand, paid Thai rice producers up to 40% higher than the
world market price for rice, creating a massive excess in finished rice stocks.
Agricultural
export sectors in Thailand and northern Laos also produce or can potentially
grow the same agricultural cash crops as Vietnam. New highway systems in
Thailand and northern Laos leading into China will allow these replacement
exports to enter into Yunnan province for distribution throughout China.
As
Thailand’s export market is globally oriented and Laos’ agricultural export
market is inchoate at best, China’s loss of imports from Vietnam can only be
made up by a combination of trade with Thailand and Laos,
increasing
trade with either Thailand or Laos will not provide full compensation. It
is important to remember that Laos’ total GDP is USD 10 billion, just 10% of
the value of total trade between China and Vietnam.
It goes
without saying that the loosening of the China-Vietnam relationship brings a
strengthening of China’s relationship with Thailand and Laos, yet given China’s
aggressive actions in the South China Sea one cannot help but think that Thai
and Lao business interests will question the motivation and levels of trust established
between both their Chinese and Vietnamese counterparts.
From an
accounting perspective a reduction in imports from China will help Vietnam’s
balance of trade. Over the past ten years, Vietnam has posted a
persistent total trade deficit due to importing about twice as much as it
exports to China.
Increases
in demand from the rest of the world for Vietnamese exports have helped bring
Vietnam’s trade balance closer to unity, but deficits continue to persist
sending Vietnam into dangerous inflationary cycles (up to 20% year on year) and
debt to pay off its trade imbalance.
While
undesirable for many industries in Vietnam, a downward adjustment in trade with
China could deliver a trade surplus to Vietnam providing it with excess income
to service existing debt and provide for critical government programs.
Increase
in demand from the US and joining the Trans-Pacific Partnership could further
improve Vietnam’s overall trade portfolio, but negotiations for Vietnam’s
admission to the TPP seem to be stuck in the mud.
If both
sides can compensate, then who hurts?
So if
overall, Vietnam and China can compensate for the loss of trade, who
hurts?
Opposed
to Guangxi where most trade goes through the province for distribution to
points throughout China, most goods imported from Vietnam into Yunnan stay in
Yunnan. Yunnan’s remote location prevents the flow of goods outward into
the rest of the country.
The
tropical fruits which abound in Yunnan’s markets will disappear or decrease
drastically unless quickly substituted by imports from Thailand and Laos, and
firms in Yunnan relying on iron or copper imports will feel the burn.
Locales
like Hekou which thrive on border trade and tourism could return to their
sleepy border post status of twenty years ago, and the future of a multi-billion
RMB cross-border industrial park located a few kilometers north of Hekou will
be unknown.
In
Guangxi, the loss in the once-robust services industry related to trade and
logistics that saw an ever-increasing boom in business over the past decade will
lead to unemployment in a sector that should be expanding instead of
contracting. These jobs are unlikely to be replaced and similar
employment impacts will be felt across the border in Vietnam.
In the
Mekong Delta, farmers are trying to diversify away from low-value rice planting
into more lucrative fruit production for cash crop export. This shift
requires investment new infrastructure, rerouting of the Delta’s irrigation
channels, and a quick study of new agricultural techniques.
As an
example, tens of thousands of farmers in the Delta have shifted to the planting
of watermelon for export to China, but if this
spring’s boycott of Vietnam’s watermelon exports to Guangxi that saw
the bottom fall out of the price of watermelon in Vietnam serves as a signal
for the future, then the message to watermelon planters is clear: get out of
the watermelon business and revert back to easy, low value rice production.
Even if
government policy does not shift to discourage trade between China and Vietnam,
firms and border traders on both sides are likely to be the first movers to
shift their exporting efforts to new ports.
Currently
package tours from China are banned from entering Vietnam through Yunnan and
Guangxi overland, and investment groups in Yunnan have silently agreed to shift
investment away from Vietnam and into Laos and Myanmar.
Since
so much of the trade is extractive, seasonal, or takes time to produce,
exporters planning for the future now are betting on a set of current
atmospherics that do not bode well for the future China-Vietnam trade.
For
example, a watermelon planter in Vietnam and former exporter to China now is
likely to be readying for the fall planting season with a cash crop aimed at
the US or another export market.
Quantitatively,
both sides may be able to compensate for losses in trade by shifting export
markets elsewhere, and the tangible benefits for China of controlling large
swaths of the South China Sea to reap the gains of energy resource exploitation
likely far outweigh the total loss of trade with Vietnam.
But the
distributions that result from the adjustment to a new status-quo in
China-Vietnam trade will be far from equal. Border trade is an industry that
affects many stakeholders at many sectors from the ground up and brings direct
benefits to consumers.
China’s
trade-off of border trade for energy resources from the South China Sea rewards
state-owned oil firms first and gas-guzzling industries second leaving the
consumer and small business at the bottom of the pecking order.
Further,
the implications that come with the uncoupling of trade relations and the
decrease in business-to-business ties only point to further destabilization and
the undoing of the neighborly relationships that both sides have invested in
building along its shared borders for the past 25 years.
It is a
shame to watch the hard work of those who have built the complex web of
connections between China and Vietnam go to waste, let alone consider the
ripple affects that the chill in China-Vietnam relations will bring to the
region.
BRIAN
EYLER
Business & Investment Opportunities
Saigon Business Corporation Pte Ltd (SBC) is incorporated
in Singapore since 1994.
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