For the past two decades, Vietnam has leveraged its strategic location as the gateway to Indochina to become one of the biggest success stories in the Asia-Pacific. This position has allowed it to largely remain neutral among great power competitions over the years, which continues to serve to its benefit today as now the top export “safe haven” from the U.S.-China trade war.

This, however, has come at the cost of ramping up its trade deficit with the United States, which has threatened to retaliate should Hanoi not increase its purchases of American goods and services — a warning the U.S. trade representative reiterated on July 29, noting the “host of unfair trade barriers” that U.S. businesses face upon entering the Vietnamese market.

Desperate to avoid coming under the siege of a trade salvo, Vietnam has used every opportunity to remind Washington of its value as a foil to China. Such words, however, hold only so much weight when Hanoi’s actions are constantly stiffened by its desire to also keep on good terms with Beijing. But with its own maritime relations with China now on the rocks, there’s a chance Hanoi could finally start inching toward the United States’ side.

Vietnam’s Coming of Age

Vietnam’s economic surge has been a long time coming. Home to a large and low-cost labor pool, stable political environment and pro-investment policies, Hanoi has established itself as a low-end manufacturing powerhouse in sectors such as garments and textiles. This has, in turn, made it an alluring alternative to China’s rising manufacturing costs. And as a result, Vietnam’s economy has kept an average growth rate of 6.17 percent for the past 19 years — putting it well ahead of some of the region’s other middle-powers such as Thailand and Malaysia.

To integrate closer with the global supply chain, Vietnam has also embarked on one of the most ambitious free trade quests in the Pacific Rim. Hanoi has recently signed 11 trade agreements, including a bilateral deal with the Russia-led Eurasian Economic Union. Last year, the country also joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP), and most recently signed on to another separate trade agreement with the European Union on June 30.

The high standards set forth by both CPTTP and the European Union will require Hanoi to undertake extensive regulatory overhauls and politically sensitive labour union reform. Doing so could threaten the operations of its bloated state-owned enterprises and political authority, which is a large reason why Hanoi is the only developing country to have signed deals with both trade blocs and serves as a testament to Vietnam’s desire to break out of its low-end manufacturing status.

Gaming the Trade War

But Vietnam’s deepening integration with the rest of the world has also made it more vulnerable to volatility in global markets, given Hanoi’s still-evolving economic foundation. Like its Southeast Asian neighbours, Vietnam has not been immune to the ripple effects of the global and Chinese economic slowdown. Indeed, its domestic economy de-escalated to 6.8 percent in the first half of 2019, slowing from a robust 7.5 percent during the same period in 2018. And foreign investment has also declined year-on-year by 9.2 percent.

Despite these dips, however, Vietnam’s economic ascendance has remained relatively intact in recent years, thanks in large part to the U.S.-China trade war. The country’s close proximity to Beijing — combined with years of carefully integrating with its neighbour’s supply chain — has paid off amid global supply chain revamps prompted by the uptick in Beijing and Washington’s trade tensions, as companies increasingly seek refuge in Hanoi to escape U.S. tariffs.

Vietnam is now actively being courted by multinational companies and East Asian manufacturers seeking to diversify their electronic and tech production lines away from China. As a result, Vietnam has been able to more deeply integrate itself into the supply chains of Asian giants, as companies like Japan’s Nintendo and China’s TCL seek to move part of their production to the country.

This has not only strengthened Vietnam’s overall trade and financial position, but it has also granted Vietnam once largely denied access to the know-how of these regional heavyweights to then pass down to its still lagging domestic tech companies.

Balancing Between Great Powers

The gains that Vietnam has been able to garner from the trade war is largely the product of the balancing act Hanoi has maintained between great powers over the past 20 years. Hanoi’s transition toward value-added industries requires a strong investment in infrastructure, technological capacity and greater development of domestic industrial capabilities. Within this context, Vietnam’s close proximity to China and longtime maritime disputes with its powerful northern neighbour has placed it in a uniquely delicate position compared with the rest of its Southeast Asian peers.

And as a result, Hanoi has focused on diversifying its economic and strategic partnerships with major powers such as the United States, Japan, South Korea and Russia, while avoiding any disruption to its relations with Beijing and the trade and economic benefits that relationship yields.

For the United States and its regional allies, Vietnam has become key to the maritime security and freedom of navigation to fend off China’s expansion in the South China Sea, distinguishing Hanoi from the other more muted Southeast Asian claimants. Vietnam, for example, quietly excluded China’s Huawei from its domestic 5G rollout, while its neighbours (including even staunch U.S. allies such as South Korea and Thailand) kept their cooperation.

At the same time, Vietnam carefully treads the evolving strategic balance against China — its longtime rival and formidable northern neighbour. Thus, despite being singled out by the White House as a potential security partner, Hanoi has still kept itself at an arms-length distance from Washington’s regional initiatives for fear of complicating its relations with China. Even though Hanoi has its own reservations about Beijing’s Belt and Road Initiative (BRI), it has yet to outwardly align itself with U.S. efforts to check against China’s maritime expansionism.

Instead, Vietnam has opted to embrace its place in Beijing’s BRI and the subsequent influx of Chinese investments. And relatedly, while Hanoi generally supports Washington’s infrastructural initiatives in the region, it has also shied away from talk of including a potential security bloc.

From Beneficiary to Potential Victim

But as the great power competition between the United States and China continues to escalate, Hanoi’s tried-and-true method of remaining “neutral” has become an increasingly precarious act. Vietnam’s emerging role as a place to dodge tariffs has exacerbated U.S. concerns over Hanoi’s growing trade deficit, which is currently the sixth-largest the United States has with any country.

In early July, Washington threatened to impose duties of up to 456 percent on Vietnamese steel imports that originated in either Taiwan or South Korea, shortly after Trump referred to Hanoi as “almost the single worst [trade] abuser of everybody.”

“The latest flare-up in the South China Sea could prompt Vietnam to adopt a more confrontational stance against Beijing elsewhere.”

The timing of the threats could not be worse for Hanoi, which is pushing for the United States to change its current nonmarket economy designation (which has made Hanoi more susceptible to Washington’s anti-dumping tariffs over the years) before it expires in 2019. Should Vietnam’s trade surplus continue to widen, there’s also a chance that the White House could reach for the same legal weapon it’s used to impose greater tariffs on China by claiming a Section 301 case.

Should the White House impose a 25 percent tariff on Vietnamese shipments as it’s done on Chinese exports, Hanoi’s export revenue would be immediately cut by 25 percent and its gross domestic product cut by 1 percent. Such a tariff hike risks stalling or significantly slowing Vietnam’s economic trajectory, due to the country’s heavy reliance on exports and export-related foreign investments to source its economy and value-added industries.

As a result, Hanoi has sought to dodge this threat by increasing its purchases of U.S. energy products and agricultural products in recent months. Washington has also long pushed Hanoi to reduce its purchases of Russian weapons and, in turn, increase its purchases U.S. arms.

Doing so is currently the safest bet to reduce — or at least, delay — the prospect of becoming the victim of Washington’s next trade salvo by helping reduce its trade surplus. But progress has been slow on this front.

In October, Vietnam abruptly cancelled a dozen defence activities with the United States, including military exchanges, likely in an effort to show Beijing (and Moscow) that it was holding strong against U.S. pressure to buy American military equipment.

Inching Away From China?

However, renewed tensions with Beijing over energy exploration in the South China Sea may reduce Hanoi’s previous reservations about fostering closer security relations with the United States. Since May, Chinese and Vietnamese vessels have been engaged in a confrontation in the disputed waters of the oil-rich Vanguard Bank.

After the two countries’ last maritime flare-up in 2014, Hanoi had trodden lightly in the region, careful to keep its oil and gas activities discreet from Beijing. However, China’s continued harassment of Vietnam’s energy operations could prompt Hanoi to take a more confrontational stance in the South China Sea — an approach that may very well bleed into its position against Beijing elsewhere.

This development — combined with the threat of being the next target of the United States’ trade salvo, and the subsequent toll it would take on Vietnam’s economic progress — could make Hanoi more willing than ever to step up its resistance against China and more directly side with the United States. Such a move would free Vietnam to commit more fully to U.S. demands to reduce its trade deficit, such as buying more U.S. arms purchases. But as tensions between Washington and Beijing continue to rise, doing so carries the risk of warranting Chinese retaliation — whether it be in the form of reduced BRI investments, or more violent clashes in the South China Sea.

Editor’s note: The article reflects the author’s opinion only, and not necessarily the views of editorial opinion of Belt & Road News.