Geostrategic Media Political Commentary, Analysis, Security, Defense
Minh Do and Dieu Linh Nguyen
Chinese Foreign Minister Wang Yi’s visit to New Delhi, followed by handshakes between Chinese President Xi Jinping and Indian Prime Minister Narendra Modi on the sidelines of the SCO Summit in Beijing, has sent shockwaves throughout the region. Both parties, facing a deadlock in tariff negotiations with the U.S., have seemingly agreed to set aside their geopolitical rivalry and territorial disputes for mutual strategic gains. This development further tips the scales against Vietnam in its effort to strike a strategic balance among major powers, core to its “bamboo diplomacy”.
Two months prior, U.S. President Trump had announced the conclusion to bilateral trade negotiations with Vietnam. According to the deal, the U.S. would impose a general 20% tariff rate and a 40% rate on “transshipments” through Vietnam – a move directly targeted at Chinese goods using Vietnam as a vessel for export into American havens. From Beijing’s perspective, the deal is at best concerning and at worst actively damaging to its trade interests. Many suggested that Vietnam then needed to appease China, either through strengthening economic ties or leveraging party-to-party relations, in order to restore balance.
Under the first Trump administration, this balancing act relied on China remaining dependent on its U.S. exports, thereby selecting Vietnam as an alternative manufacturing hub and dodging the exorbitant tariffs levied on Chinese goods. Souring relations between India and China helped to consolidate Vietnam as the best option for Chinese firms in their diversification. The considerable concessions which Hanoi made in its deal with the second Trump administration were to preserve this dynamic to the best of its ability, by satisfying Washington while still allowing Chinese manufacturers some breathing room. It might not have accounted for China losing interest in the American market.
Earlier this year, amidst the tariff back and forth, while analysts recognised that China had become much more resilient since 2018, avoiding a trade war in the context of internal instability would still be to Beijing’s benefit. However, success in holding ground and forcing a compromise also reassured China of the merit of diversification. Improving economic relations with India can thus be viewed as a massive boon for China in its effort to reduce dependence and increase leverage in competition with the U.S..
The economic effect of China-India rapprochement can be clearly seen in two areas: trade and manufacturing. In Chinese Foreign Minister Wang Yi’s visit in August, the two countries agreed to “facilitate trade and investment flows”; with rare earth and fertilizer exports from China – critical to India’s automotive and agricultural industry – given the green light. Chinese battery and electronic manufacturers have also grown their presence in India, largely down to New Delhi’s increasing openness to FDI.
Compared to Vietnam, India’s appeal to China lies much more in its domestic market capacity than its access to America. That the 50% tariff rate imposed by the U.S. on India became a solicitor for, rather than a deterrent to cooperation, exemplifies this fact. The Indian market represents 1.45 billion people’s worth of as yet largely untapped potential for Chinese exporters, with uncompetitive local producers further guaranteeing successful entry. China can also take advantage of the growing Indian industry to expand its trade surplus, which consists mostly of intermediate, manufactured goods. In a situation where the trade war intensifies, therefore, India has a competitive advantage over Vietnam for Chinese investment.
China, in finding a different avenue for economic output, has taken some weight off its end of the scale. Having committed itself to its trade relationship with the U.S., Vietnam now has few options to strengthen its own ties with China. Vietnam may have been able to retain some ambiguity in the definition of transshipments and continue to pursue strong economic integration with China; however, it cannot be sure of China’s incentives. Furthermore, in the balance of power in the Indo-Pacific, rapprochement with India only serves to improve China’s stature, and therefore demand more effort from Vietnam should it wish to maintain equilibrium. In essence, simultaneous strong interdependence on both major powers can no longer be equally sustained.
Vietnam then has two ways to proceed. Having not officially acknowledged the tariff agreement with Washington, Hanoi can continue to negotiate for a much better deal, and preserve its competitive advantage as a more attractive destination for Chinese FDI seeking American market access. This would involve securing a better rate than its neighbours and strictly limiting the definition of transshipments. Vietnam can use a potentially lower trade surplus thanks to Chinese exports rerouting as a bargaining chip, but most of the progress can only happen through more favourable concessions for U.S. businesses and exports.
Alternatively, Vietnam can seek to wean itself off dependency on both the U.S. and China. Any movement towards either side threatens to upset the balance; and as both show signs of withdrawal through protectionism or diversification, Vietnam should do likewise. Options for market expansion include regional middle powers such as Japan, South Korea and Australia, external powers such as the EU, the UK and Canada, as well as developing economies in ASEAN and beyond. Additionally, Vietnam should seek to complement Chinese imports by strengthening its domestic industrial base.
Ultimately, Vietnam is still restricted by the urgency and resource intensiveness of carrying out its “era of national rise” – involving mass infrastructure development, and bureaucratic and economic reforms – as well as the continued outsized influence of U.S. exports on the economy. Therefore, the most Vietnam can afford to do is adopt both approaches in tandem and move gradually towards a more manageable interdependence. With India giving China options, persisting with the present level of reliance on the U.S., without substantial adjustment, risks spoiling the hard-earned fruits of Vietnam’s bamboo diplomacy.
Authors’ Bio:
Minh Do: International Relations Graduate from the Diplomatic Academy of Vietnam
Dieu Linh Nguyen – International Relations Graduate from the Diplomatic Academy of Vietnam
