In 2020, the worst year of the epidemic, Vietnam was once known as an “outstanding student” for epidemic prevention. It recorded an economic growth rate of 2.91%, surpassing China (2.3%) and ranking second in the world, ranking first in Asia and all developing economies. In 2022, when Chinese factories were temporarily shut down in response to Omicron, and foreign trade manufacturers were anxious because of port blocking, a set of statistics from Vietnam once again disturbed the nerves of the market, and many people could not help but ask—
After catching up for decades, Vietnam finally ran ahead of China?
Will Vietnam replace China as the next factory of the world?
Vietnam’s export substitution to China
In the past few years, Vietnam, with a population of 97 million, has been regarded as one of the most important destinations for Chinese industrial transfer. As early as 2000, many world-class brands such as Nike, Adidas, Apple, and Samsung have established foundries in Vietnam, and Vietnam’s manufacturing industry has become a potential competitor to China.
Data in recent years seem to bear this out. Since September 2021, the share of US imports from ASEAN has reached 10 percent. According to the latest data released in March, US imports from ASEAN rose 1.2 percentage points from February, while the share of imports from China fell to 16 percent from 19.7 percent in September last year, a rapid decline of 2 percentage points from February.
One rise and one fall, showing signs of ASEAN’s import substitution trend towards China.
One liter and one drop, the contribution of the liter, Vietnam accounted for the bulk. According to the latest data released recently by the General Administration of Statistics of Vietnam, the Ministry of Planning and Investment, and the Ministry of Industry and Trade, Vietnam’s total exports in the first quarter of 2022 will be US$88.58 billion, a year-on-year increase of 12.9%. In addition to clothing and other industries, the export value and quantity of mobile phones and parts, electronic products, computers and parts have also expanded, with the export value exceeding 27.3 billion US dollars, equivalent to its sales in the first half of 2021. After September 2021, Vietnam’s exports to the United States will increase by more than 20%.
Specifically, in the field of clothing products, which Vietnam is traditionally good at, 1/3 of footwear products and 1/5 of clothing in the US market are printed with the “Made in Vietnam” logo; in the electronics industry, Samsung has over 50 % of mobile phone exports and 1/3 of electronic product shipments are produced in Vietnam.
In addition to Samsung, Intel, LG and other international brands that have already established a presence in Vietnam, more and more electronic product manufacturers such as Luxshare Precision, Winston, Pegatron, Goertek and others have arrived in Vietnam after the epidemic to prepare for Make Vietnam an important production base.
Looking at a longer period, from US$36.45 billion in 2002 to a record high of US$668.54 billion in 2021, Vietnam’s import and export volume has increased by 17 times in the past 20 years, and its trade scale has jumped to the 20th place in the world. Most of the top 19 countries in Vietnam are energy or mineral exporters, only China and India are known for their manufacturing industries.
In the blink of an eye, our humble southern neighbor, Vietnam, following China and India, seems to have, to some extent, taken on the shape of the world’s factory. Superimposed on the domestic anxiety about the relocation of the industrial chain after the Sino-US trade conflict, many people can’t help worrying that Vietnam will replace China and become the next world factory.
The substitution effect of Vietnam’s exports to China is unclear
Comparing the U.S. import data from ASEAN and China during the same period, it can be found that ASEAN and China’s exports to the U.S. are not a relationship of trade-offs. For example, in 2021, the average monthly proportion of US imports from ASEAN will be 10%, which is indeed an increase of 1.8 percentage points from the monthly average of 8.2% in 2019 before the epidemic. However, during the same period, the share of US imports from China, the monthly average share was 17.7% and 17.9% respectively, only a slight decrease of 0.2 percentage points. Therefore, it cannot be inferred that ASEAN (including Vietnam) has formed a substitute relationship with China’s exports based solely on the fluctuation of the data share. The increase of ASEAN’s export share is not contradictory to the high prosperity of China’s exports.
Secondly, in the sub-sectors, the substitution effect of Vietnam’s exports to China has begun to show.
In labor-intensive industries, especially the clothing, shoes and hats, and toy industries where Vietnam has traditional advantages, Vietnam may have a partial substitution effect on China’s exports. For example, among the major U.S. imports from Vietnam, the share of apparel rose from 14.3% in September 2021 to 18.9% in February 2022; the share of footwear and hats rose from 20.4% and 8.4%, respectively 25.5% and 14.3%. During the same period, the share of China’s exports of related commodities to the United States fell slightly or fluctuated.
However, the decline in China’s export share of light industrial products, including clothing, shoes and hats, may be mainly due to the disturbance of epidemic prevention and the situation in Russia and Ukraine. It is difficult to judge whether Vietnam’s “replacement” is temporary or permanent. For example, China’s light textile industry mainly consists of four provinces: Fujian, Guangdong, Zhejiang and Jiangsu. Shaoxing Textile City in Keqiao District, Shaoxing, Zhejiang is the largest chemical fiber fabric base in the world. There are more than 10,000 enterprises engaged in production and domestic and foreign trade, which are exported to 135 countries and regions. Before the epidemic, Keqiao District mainly relied on participating in international exhibitions to obtain new orders, and collected samples through international express delivery to contact customers. However, the prevention and control of the epidemic has significantly reduced the capacity and speed of international flights and international express delivery, resulting in the delay of old orders and difficulty in acquiring new customers.
In addition to the decrease in exports to the United States, China’s exports to Europe also decreased year-on-year, while Vietnam’s exports of light industrial products such as clothing, shoes and hats to Europe increased year-on-year. The reason is that Fujian, Guangdong, Zhejiang and Jiangsu’s exports to Europe are mainly by sea, while the Odessa port in Ukraine is an important transit point for Sino-European trade. Affected by the war, the goods that originally passed through Odessa could only be transferred to the Central European Express or Istanbul, Turkey, and the freight and time have increased. Considering that the disruption of the domestic supply chain caused by the current local epidemic still needs some time to repair, and the resumption of work and production in Southeast Asia is further progressing, it is expected that the export substitution effect from ASEAN including Vietnam may increase in stages. But whether it can permanently replace China’s market share is still unknown.
Vietnam has undertaken a lot of direct investment and active industrial transfer from China
ASEAN is China’s largest trading partner. In 2020, Vietnam surpassed South Korea to become China’s third largest export destination country. China’s exports to Vietnam have two characteristics: First, most of China’s exports to Vietnam are intermediate products. Second, the direct investment and industrial transfer of Chinese enterprises in Vietnam are important reasons for the increase in the export of intermediate goods to Vietnam.
In fact, under the framework of the Regional Comprehensive Economic Partnership (RCEP), the principles of tariff reduction and exemption and accumulation of origin have promoted China’s direct investment and industrial transfer to Vietnam, making the relationship between China and Vietnam closer in the international division of labor, and some China’s surplus with Europe and the United States has turned into China’s surplus with Vietnam, and Vietnam’s surplus with Europe and the United States, which has reduced the pressure on China’s balance of payments imbalance.
According to the statistics of China Customs, the bilateral trade volume between China and Vietnam will exceed 200 billion US dollars for the first time in 2021, reaching 230.2 billion US dollars, a year-on-year increase of 19.7% in US dollars, and China’s surplus with Vietnam will be around 45 billion US dollars.
It can be seen that the current Sino-Vietnamese economic and trade relationship is more similar to the previous Japan-China economic and trade relationship: China has become an important node in the global value chain, and Vietnam has the potential to become a secondary node. Some supply chain links spill over to Southeast Asia, which in a sense means that the scale of the China-centric supply chain network has become larger.
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