Lam, Xi meeting suggests Vietnam's supply chain is tilting in China's favour

Vietnamese President To Lam's first state visit to China since taking office underscores the strategic importance Hanoi attaches to Beijing as it balances a supply chain shakeup by the United States and China, analysts said.

The Chinese president and President Xi Jinping agreed to “promote an equal and orderly multipolar world and a universally beneficial and inclusive economic globalization” during their meeting, Chinese Foreign Ministry spokesperson Mao Ning said at a press briefing in Beijing on Wednesday.

Lam's three-day visit to China ended Tuesday after she met with X and issued a joint statement pledging to expand bilateral ties, including trade. On Monday, they signed 14 documents, including agreements on industrial and financial cooperation.

Mark Kenney, director of the Wahba Institute for Strategic Competition at the Wilson Center in Washington, said Lams' choice to visit China first after taking office earlier this month is significant because both the United States and China are at the highest level of Vietnam's diplomatic relations.

The United States and Vietnam upgraded their relations to a comprehensive strategic partnership last September. China and Vietnam upgraded their relations to that level in 2009.

China is Vietnam's largest trading partner, with trade totaling $172 billion last year, while trade between the United States and Vietnam was worth about $125 billion.

In 2023, China and Hong Kong's investment in Vietnam exceeded $8.2 billion for more than 6,600 projects. In contrast, the US investment accounted for $500 million in the same year.

That figure could change as Vietnam has become a prime location in recent years for U.S. companies looking to expand operations or relocate manufacturing supply chains from China.

Last March, Hanoi welcomed several American companies, including Boeing, SpaceX, Pfizer and Amazon. Retail giants Zara and H&M, as well as Nike and Adidas, have relocated their production plants from China to Vietnam.

U.S. companies have taken steps to guard against supply chain disruptions, particularly since the COVID-19 pandemic, and to protect against Beijing's coercive economic practices that the G7 countries have pledged to counter over the past two years.

But the shift in the US and Western supply chain has prompted China to reorganize its manufacturing supply chain networks to Vietnam as well.

The PRC circumvents U.S. tariffs by shipping intermediate goods from the PRC to Southeast Asian countries, including Vietnam, to be repackaged and exported to the United States after varying degrees of processing in the country, the Wilson Centers Kennedy said.

In May, the United States raised tariffs on $18 billion worth of goods imported from China to protect American industry.

Hanoi's strategy aims to secure its position as a key player in the global supply chain while maximizing its economic and security advantages, said Shay Wester, director of Asian economic affairs at the Asia Society Policy Institute.

As China seeks to strengthen its relationships with the developing world, Vietnam is becoming increasingly strategic in the broader U.S.-China economic rivalry and essential to ensuring that Vietnam remains a critical partner amid the ongoing reconfiguration of global supply chains.

However, products made in Vietnam that contain parts imported from China are facing increasing scrutiny from the United States.

In August last year, the United States determined that solar panel manufacturers in Southeast Asian countries, including Vietnam, hadUS trade rules circumvented by exporting products containing materials of Chinese origin subject to US customs tariffs.

This example shows how deepening economic ties between Vietnam and China can bring additional risk to economic ties with the United States, said Robert Walker, a research associate at the Lowy Institutes' Center for Indo-Pacific Development.

It is plausible in the future [that] Economic ties could become more strained due to the growing presence of Chinese companies in Vietnam, but that is not a major concern at present, Walker said.

Vietnam's heavy reliance on Chinese imports, such as steel, plastics and electronic parts essential for manufacturing finished goods, could pose risks to its economy, analysts said.

This trade dynamic has widened Vietnam’s trade deficit with China to $50 billion by 2023, an increase of nearly 50 percent over the past five years, Wester said. This highlights the complexity of Vietnam’s rapid industrialization, whose integration into global supply chains has been fueled by and remains closely tied to Chinese imports.

Kennedy said: “A more sensible path for Vietnam would be to develop its own manufacturing capabilities that draw on supply chains from a diverse group of nations other than China.”

Vietnam may have doubts about U.S. economic commitments, said Alice Ba, interim chair of the University of Delaware's Department of Political Science and International Relations.

There are questions about how future domestic politics and U.S. human rights concerns could affect U.S. economic engagement with Vietnam, Ba said. Human rights concerns, for example, may have influenced the U.S. decision to reject Vietnam's application for U.S. market economy designation.

The United States rejected that request earlier this month, saying the Vietnamese government's involvement in its economy distorts prices and costs in a way that is unfavorable to the United States.