MARKET ECONOMY

Vietnam’s Journey to Industrialization: The US Connection

AMID RISING TENSIONS in a multipolar world, Vietnam plays an important role in the geostrategic considerations of the United States. In this context, it is understandable why Washington is currently considering whether to recognize Vietnam as a “market economy,” with several positive implications for relations with Hanoi. But how is Vietnam doing economically today? Is it correct to say that the market economy has prevailed in this one-party communist nation? 

The results of Vietnam’s economy in the first four months of 2024 show that its position is more positive than previous predictions: gross domestic product (GDP) increased by 5.66 percent in the first quarter. Expectations for 2024 onward are 6-6.5 percent per year. All three pillars of the Vietnamese economy — investment, trade and consumption — have shown a strong upward trend. 

Foreign direct investment (FDI) totaled US$6.28 billion, an increase of 7.4 percent. It is particularly noteworthy that 80 percent of registered FDI is concentrated in localities with excellent infrastructure, qualified human resources and local administrations dedicated to streamlined investment promotion. Improvements are also evident in the quality of FDI, which includes high-tech products and environmental protection, especially in the industrial and manufacturing sectors, which account for 78.5 percent of FDI utilization.

Vietnam also had a positive trade balance of US$8.4 billion in the first four months of 2024, which can be broken down into exports of US$123.64 billion, up 15 percent year-on-year; and imports of US$115.24 billion, up 15.4 percent. 

Economic Transformation 

In 1993, 80 percent of Vietnamese people were still living in poverty; in 2020, the figure was just 5 percent. What are the reasons for this spectacular transformation and the country’s continued economic development, even during the Covid-19 crisis? The World Heritage Foundation’s recent Economic Freedom Report 2024 ranked Vietnam as a “moderately free country,” 59th out of 179 countries. At first glance, this ranking seems to be nothing noteworthy, especially when compared to economically prosperous countries such as the US, which is ranked 25th, albeit with a downward trend compared to previous years. It is worth noting that since the report was launched 30 years ago, no other country of comparable size (except Poland) has shown higher growth than Vietnam, which has moved up 12 places in the last year alone. 

In 2024, then, Vietnam’s economic policy is characterized by: 

• A clear commitment to free trade; 

• A balanced, manageable state budget-debt ratio of around 34 percent; 

• A public spending ratio to GDP of approximately 21 percent; 

• An investor-friendly economic climate; 

• Policies aimed at achieving a balance between various political and economic partners, which is particularly important in times of newly emerging geopolitical conflicts.  

Today, the country is one of the most dynamic economies in the world, offering investors from around the globe attractive conditions. That is one reason why the economic climate in Vietnam is marked by great optimism. In addition, the Vietnamese people — according to a recent study by the Foreign Trade University Hanoi and the Friedrich Naumann Foundation — have a very positive attitude toward prosperity and the rich.  

The First Game Changer: the 1986 Doi Moi Reforms  

The country’s rise was triggered by the abandonment of a planned economy through the Doi Moi — literally “new change” — reforms of 1986 and the new economic policy that followed. It basically meant leaving behind socialist planned economy principles step by step. However, it was to take years before the reforms became visible. Initially, annual inflation rates shot up to as high as 100 percent. The Vietnamese government deserves a lot of credit for pushing through these massive changes against all odds and, above all, for having the patience to see them through. It takes time to introduce market economy reforms, as Argentinian President Javier Milei is currently learning. 

To be fair, even before Doi Moi, markets and business activities had emerged unofficially at the grassroots level and out of sheer necessity, as the German researcher Rainer Zitelmann described so vividly in his 2024 book How Nations Escape Poverty: Vietnam, Poland, and the Origins of Prosperity.  

The Second Game Changer: US Policy in the 1990s 

It was not only Doi Moi that gradually transformed Vietnam. One of the most decisive factors was the lifting of the trade embargo by US President Bill Clinton in 1994. Just as the previous reforms prepared the ground, the new US policy toward Vietnam meant sowing seeds. 

The significance of this agreement was immense. On the one hand, it was an acknowledgment by the US of Vietnam’s willingness to open up; on the other, it was a visible sign of the normalization of bilateral relations between Washington and its former wartime enemy. The unique role that was played by the US in this post-Cold War window of opportunity was also a sign for other countries to intensify their contacts with Vietnam. 

After the US lifted the trade embargo, Vietnam’s exports to the US increased steadily. The bilateral trade agreement between the two countries then provided a real boost after it came into force in December 2001, with the US expanding its normal trade relations and granting Vietnam the most-favored-nation status. It is fair to say that the trade agreement contributed immensely to Vietnam’s economic growth. Thirty years into the normalization of relations and 23 years after the trade agreement, the US is now Vietnam’s largest export market and a major source of foreign direct investment.  

The Vietnamese call their economic model a “socialist-oriented market economy.” However, this is misleading. In fact, its economic system can rightly be seen as a broadly capitalist-oriented model with a remarkably low public spending ratio to GDP. In the meantime, Vietnam has risen to become one of the 20 largest economies in the world in terms of trade volume, with US$730 billion in 2022 and US$681 billion in 2023, and is ranking 26th with regard to GDP (based on purchasing power parity). Since the 1986 reforms, gross national product has increased 50-fold. By 2045, Vietnam wants to achieve the status of an industrialized country — a goal that no longer looks unrealistic. 

The US as an Important Business Partner  

After the signing and entry into force of the US-Vietnam Bilateral Trade Agreement, floodgates opened. Just six years later, in January 2007, Vietnam joined the World Trade Organization (WTO). A large number of free-trade agreements (FTAs) followed, including the EVFTA with the European Union, which is seen as a “new-generation FTA” due to its in-depth provisions. It is a groundbreaking agreement that is normally only concluded between industrialized countries. 

The US has also benefited from these stronger trade relations. Alone in the last five years, Vietnam’s export earnings to the US grew by 230 percent while imports increased by more than 175 percent. Along with increased trade co-operation, the two countries have also joined hands in investment, research, high-tech development, transportation, education, telecommunications and energy. For example, in 2022, US-based General Electric won a power plant deal to supply power generation equipment packages for Petro Vietnam’s gas-powered plants in Dong Nai Province, 70 kilometers from Ho Chi Minh City. 

Industries such as textiles, footwear, aquatic products, electronic components, and furniture are expected to boost exports to the US even further in the coming years, according to the Vietnamese Ministry of Industry and Trade. 

Due to its favorable geographic location, lower wages, skilled labor, trade agreements and regional connectivity, Vietnam has emerged as one of the most preferred alternatives for manufacturers. Major US firms such as Apple, Intel, Qualcomm, Universal Alloy Corporation (UAC), Nike and Key Tronic EMS have already moved production lines to Vietnam due to costs associated with the US-China trade war, creating thousands of jobs for Vietnamese. 

AmCham Vietnam, meanwhile, has played an important role in forging economic relations between the two countries. Founded in 1994, the year of the lifting of the trade embargo, the chamber plays a very active role supporting US-Vietnam relations. In the US, the Vietnamese diaspora, which numbers more than 2.4 million people, also plays a crucial role as a link between Vietnam and the US in various areas, including investment, trade, tourism and remittances, according to economic experts. 

As far as FDI is concerned, over the past five years, the US has consistently ranked among the top 12 foreign investors and was in the top eight in both 2021 and 2022 with more than US$700 million in registered FDI per year, despite the negative impact of the Covid crisis.  

According to the Vietnamese Ministry of Planning and Investment (MPI), US companies initiated 124 new projects in Vietnam in 2023 and invested an additional US$626.3 million in registered capital in these new companies and in several existing companies. This made the US one of the top 10 foreign investors in Vietnam in 2023. Other main beneficiaries of FDI were wholesale and retail trade as well as scientific and technological activitiesThe total cumulative US investment in Vietnam amounts to around US$12 billion, spread over 1,374 projects. In short, it has taken just under 30 years to accumulate such substantial investments.

Geopolitics and the Vietnam-US Relationship 

The US has repeatedly expressed concern about China’s growing influence in the Indo-Pacific region. This concern has been reflected in the Indo-Pacific Strategy (IPS), the US National Security Strategy and NATO’s Strategic Concept, as well as in various bilateral security agreements with Indo-Pacific countries. For the US, China’s assertiveness and posturing threaten both US partners in the Indo-Pacific and US global supremacy. Moreover, the US has spoken out strongly against China’s Belt and Road Initiative. As a result, the US has been relentlessly forging stronger ties in Southeast Asia and the Asia-Pacific region.  

Vietnam is expected to warmly welcome the Indo-Pacific Strategy led by Washington. It is genuinely interested in a regional rules-based order promoted by the strategy, but at the same time, it has proposed a hedging response through cautious statements and limited engagement. Still, 2023 represented another milestone in US-Vietnam relations, as the two countries upgraded their diplomatic relations to a “comprehensive strategic partnership,” the highest level in Vietnam’s diplomatic ranking.  

To put the current geopolitical situation into perspective in the more than 1,000 years of Vietnam’s history, it is useful to remember that the war between Vietnam and the US lasted roughly two decades, while the French colonial period in Vietnam lasted eight decades. But Vietnam was under China’s colonial thumb for a millennium, and the remaining years alternated between conflict and peaceful co-operation. The historical legacies of the relationship with China still characterize Vietnam’s sentiments today and should be kept in mind. 

Vietnam has definitely learned from the experience of the 20th century, when it became the battleground of different ideological blocs. Looking back in history, a similar pattern could be found in Thailand before the First World War when Vietnam’s neighbor (and traditional opponent) was able to maintain its independence through a mixture of reforms and clever maneuvering between the great powers of the time, France and Great Britain. 

In the current context of international integration, Vietnam’s “bamboo diplomacy,” with its solid roots, sturdy trunk and flexible branches represent the country’s soft, but determined appearance on the international stage. One indicator of this balancing policy is the diversity of the seven “comprehensive strategic partnerships” that Hanoi currently maintains with very different countries, including China (2008), Russia (2012), India (2016), South Korea (2022), the US (2023), Japan (2023) and Australia (2024). 

Challenges for Vietnam 

In this respect, the very positive developments in early 2024, reflected in encouraging economic figures, support the optimists. As an economist, former banker and interested observer of Vietnamese development in recent decades, I can only agree. Vietnam’s progress is particularly remarkable against the backdrop of current global economic difficulties, ranging from the continuing threat of inflation to the war in Ukraine. 

Recently, Vietnam has encountered several economic hurdles, primarily resulting from external factors. These external dynamics may be impacting Vietnam’s economy in general and the country’s export activities in 2024 significantly, especially due to Vietnam’s deep integration into international supply chains. 

Indeed, a flexible, multilateral foreign policy has brought Vietnam many successes. However, it could also lead to delays when Vietnam must take into account the national interests of its diverse and complex international partners.  

Outlook 

There is a good chance that the positive economic trend will continue in the near future. However, it is absolutely necessary that Vietnam continues on the reform path that started with Doi Moi, while at the same time maintaining good relations with the rest of the world, including China. 

Adherence to the policy of free trade and a market economy will also play a key role in making Vietnam attractive to foreign investors and trading partners.  

In view of the global tensions, it will be essential for Vietnam to continue to focus on diversifying its trade and investment partners in order to maintain its own economic resilience and thus assume the position of a neutral mediator. Good relations with China, but also with the US, are a matter of course. At the same time, Vietnam also needs to focus more on expanding relations with neutral partners. These include the European Union, the partner countries of the CPTPP, neighbors in ASEAN as well as Japan and South Korea. 

Vietnam is at the center of one of the most prosperous regions in the world. While the last century could be described as the “Atlantic century,” the 21st century could become the “Asia-Pacific century.” Vietnam and the US will play a key role here as Pacific Rim countries — and so will China.

The article was published in Global Asia in June 2024 (Vol.19, No.2)