Stronger US-Vietnam economic ties could also trigger China

In a historic development, Vietnam and the US upgraded their ties to the comprehensive strategic partnership (CSP) level in mid-September. This is the highest in Vietnam's hierarchy of relationships, putting Washington on par with China, India, Russia and more recently, South Korea. While observers have been quick to note that the CSP is targeted at China, the upgrade - to Vietnam at least - is more about economics than defence and security.

To presume that the CSP has nothing to do with China would be naive. It is an open secret that the US and its allies in the Indo-Pacific are seeking to counter China's power and influence in the region. The upgrade, however, does not mean that Vietnam will soon abandon its independent foreign policy to align with the US against China. Hanoi remains averse to any position that might put it on a collision course with Beijing - the very scenario it aims to evade by embracing the US as its newest comprehensive strategic partner. The US, for its part, emphasised the outreach to Vietnam is about "global stability, not containing China".

To borrow an oft-used turn of phrase used by former US President Bill Clinton, Vietnam-US relations are all about the economy. Prior to President Biden's trip, a series of Vietnam visits by senior US officials, including Trade Representative Katherine Tai in February, State Secretary Antony Blinken in March, and Secretary of the Treasury Janet Yellen in July, all focused on deepening economic cooperation.

On those occasions, the emphasis was on Vietnam's allure for America's "friend-shoring" policy - relocating strategic businesses such as semiconductors to "friendly" nations. With the upgrade, Washington apparently believes Vietnam will become a critical partner in its "de-risking" strategy which aims to insulate the high-tech supply chain from China's influence. In short, Washington sees the CSP as a double-edged sword: it boosts relations and deepens the economic relationship with Vietnam as part of a wider effort to counter China; to Vietnam, it is more about the former than the latter.

Vietnam can play a significant role in these strategies and fill the void left by China. Vietnam boasts potential at every phase of the high-tech supply chain, thanks to its rich mineral reserves, prime logistic hub locations, burgeoning tech industries, and a renowned science, technology, engineering, and mathematics (STEM) educational system.

Vietnam's rapidly growing semiconductor industry has garnered significant interest in recent years; therefore, it is understandable why this is the focus of Biden's visit. Given Vietnam's relative proximity to the centre of the global semiconductor supply chain, it is a favourable location for the US effort to build "a more resilient semiconductor supply chain".

When Biden was in Hanoi, both sides signed a Memorandum of Cooperation on Semiconductor Supply Chains, Workforce and Ecosystem Development. American firms Synopsys and Marvell announced the development of semiconductor design centres in Ho Chi Minh City, while a US$1.6 billion factory established by Arizona-based Amkor is due to go online near Hanoi this October.

But Vietnam's contribution to the semiconductor industry goes beyond new factories and projects. Vietnam can provide critical minerals used for high-tech industries which are currently under stress due to China's dominance. Vietnam's rare earth reserves are estimated at 22 million tonnes, second in the world only to China (44 million tonnes).

During Biden's visit, both sides signed a Memorandum of Understanding (MoU) which allows the US to invest in the industry. In addition, Vietnam also has the third largest reserves for tungsten (also known as wolfram), a crucial mineral for high-tech and military applications, only behind the US's global competitors (Russia and China). Those critical minerals have not been widely exploited due to Vietnam's lack of capacity. This offers a huge opportunity for US businesses to exploit.

Second, thanks to its position as a transit hub, Vietnam can play a crucial role in the next phase of an American infrastructure initiative which was launched recently at the G20 meetings in New Delhi. Vietnam, as the gateway to Northeast Asia through the South China Sea, offers an ideal point to connect the region to the planned India-West Asia-Europe corridor, which is aimed at challenging China's Belt and Road Initiative.

For Vietnam, US support will help it avoid the "infrastructure leverage trap" - Vietnam's concern for being excluded from Chinese-backed connectivity frameworks in Asia. A notable joint venture on the horizon is the proposed US$6.7 billion Cai Mep Ha Logistics Centre in southern Vietnam, which will be jointly developed by Seattle-based port operator SSA Marine and Vietnamese private company Gemadept.

Vietnam also has the potential to cover the labour shortage in the high-tech industries. Despite being a developing country, Vietnamese education - particularly in STEM subjects - is exceptionally good. In the Programme for International Student Assessment (PISA), an OECD worldwide study of educational systems, Vietnam's science score ranked 4th in the world, outshining the US at 19th. Although Vietnam is struggling to meet the skilled labour demand of high-tech investors, the reason is due to its lack of training capacity instead of the labour itself. As a result, various initiatives signed during Biden's trip which focus on "upskilling" the Vietnamese labour force should be welcomed. They will bring benefits to both sides in the medium and long term.

The recent announcement of the Vietnam-US CSP might not signify a major shift in Vietnam's foreign policy. However, in terms of the long-term trajectory of economic development, it signifies Vietnam's attempt to seek deeper integration into the US-led economic ecosystem. The US envisions its new "friend and reliable partner" to fill some of the vast vacuum in a world striving to "de-risk" from China. Vietnam has much potential to fulfil such a high expectation, but it needs to both attract more investments, particularly in infrastructure, and continue much-needed structural reforms in its post-Covid economy.

Simultaneously, Vietnam must guard against potential economic coercion from China as it draws closer to the US, even only in the economic domain. The blocking of hundreds of Vietnamese fruit trucks at the Chinese border as Vietnam announced the CSP with the US serves as the first warning shot.

This article was first published in Fulcrum, ISEAS - Yusof Ishak Institute's blogsite.

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