Vietnam and External Powers: Reconfiguring Power Equations

Dr.Pankaj Jha Associate Fellow Institute for Defence Studies and Analyses(IDSA) Email:pankajidsa@gmail.com

Abstract

Vietnam was the country which led to the tug of war for balance of power in the region of Southeast Asia. Also in due course of time it was involved in the Cambodian crisis which led to differences between the erstwhile allies namely Soviet Union and China. In 1979 when the Cambodian crisis happed due to opposite stance taken by USSR and China, US tried to make better relations with Chain and so there was a complete turnaround in relations with China. This also promoted the fizzling of the anti china stance by few of the countries of Southeast Asia namely Thailand and Singapore. Vietnam, in the post resolution of Cambodian crisis phase, involved itself in the multilateral organisations like APEC, ASEAN and ARF. The dividends of such an engagement and the enhanced ties with China subsequently led to the rise of Vietnam. Prior to that the Doi Moi(economic liberlisation) initiative has put Vietnam into the path of economic growth. The robust economic growth of Vietnam in the post 2000 phase has made it a lucrative investment destination for major powers and also got the investment form the regional ASEAN countries. How far Vietnam is going to sustain the arte of growth and whether with the induction in WTO, Vietnam can forebear the economic guidelines of opening up is a matter of concern. Also the major powers have started seeing Vietnam as the next Dragon and a competitor to China. This might create problems between the two neighbours but it is to be seen whether Vietnam maintains its neutrality or looks for external support for its national security. The paper discusses the nitty gritty of such an involvement and the future perspectives of Vietnam economic and defence growth.

Vietnam was the country of contention between the two superpowers from 1905s to late 1970s and with the defeat of US in the second Vietnam War and the Vietnamese assertion during the Cambodian crisis which saw embarrassing skirmishes for China, one thing got very clear that a new regional power had arrived in the Southeast Asian scenario. Vietnam thereafter has connived with the major powers for peaceful resolution of the Cambodian crisis. The role of Vietnam with regard to induction into the ASEAN, APEC and ARF showed the constructivist part of Vietnam which wanted to secure its economic and national security. The results of such an engagement were the induction of the rest of the Southeast Asian countries into ASEAN. Also due to the growing strategic importance of Vietnam it got a seat in APEC and also ARF. This was at that time when China was slowly growing in importance and US started getting apprehensive about the growth of China.

In the last decade almost all the countries in the region and also extra regional powers have stared taking the stature of Vietnam as not only a communist country but as a country with a huge potential for economic growth and also as a country which can be counter balance to China’s military growth. Though it would be not justified that Vietnam had acquired that Stature but the increased investments and growing trade with almost all the international powers, Vietnam is sure to emerge as the next economic giant. China also has stared giving due weight age to Vietnam and the results have been the resolution of the boundary dispute and the demarcation of the maritime boundary. The issue of Spratlys islands still looms large in the strategic thinking of the southeast Asian nations but the role and the involvement of Vietnam in case of crisis is still not been decrypted. Vietnam on the other hand is making itself lucrative and the recent spate of the investment promotion initiatives and the foreign direct investment regulations has clearly demarcated the areas of interest for Vietnam. Vietnam with a steady economic growth of 7/8 per cent in the last five years has arrived in the economic scene and the role of the external powers is what the paper would decipher. Vietnam though ahs not emerged as a very formidable regional power but has the remnants of benign the middle power.

Role of Vietnam as the Middle power

The term middle power itself raises few questions but if we go by the terminology used then Middle power are those which are located in the middle. The middle of what is not important beyond the requirement that it provides power. Power theoretically, could come from an infinite number of sources. Practically, however, strategic territory, military or economic resources, ideology and/or level of relative economic development are commonly believed to provide power in the contemporary world. Holbraad demonstrated, in his benchmark text Middle powers in International politics, the problem of defining middle power. Holbraad research is based on the work of Martin Wight¹. Small states were not able to maintain themselves without external support whilst large states had a notable advantage over their neighbours. By qualifying the security of states in relation to their need of the help of another, Giovanni Botero in his published work in 1589 found a link between the relative size determined by security and behaviour of medium states. Botero’s concept of security included the idea of longevity. The medium state, he found, had the greatest potential longevity owing to its mediocrity. The longevity of the medium state, as theorised by Botero, results from its position within the hierarchy of states and is endangered predominantly by the failure of its leader to recognise the limits of mediocrity. So a middle power is defined through the examination of the security of that state. A state which is large enough to maintain itself without assistance form another, whilst not having notable advantage over its neighbours, allows for its inclusion within the classification of middle power². Vietnam because of its economic development, role and stature in international politics in general and region in particular as well as other factors like population and military strength qualifies as the middle power. Vietnam has with greater economic growth and peace and stability has cultivated a better say in the southeast Asian region and also contribute to the extension of its strategic interests because of the fact that economic statecraft have become an important component of strategic statecraft in the international politics especially in the aftermath of cold war and the ensuing phase of globalisation.

Vietnam’s Economic Resurgence

The economic development of Vietnam can be put in two phases which was before Doi Moi and after Doi Moi to date. Prior to the Doi Moi phase, the period from 1976 to 1985 was that of slow rise in national income in the range of 3.7 per cent with a slow increase in agricultural; production and even Industrial production increase not reaching the two digit mark. Even there was greater reliance on the imported goods like rice and cloth. The debt was growing in both non convertible and convertible currencies. By the year 1986 Inflation ahs reached up to 700 per cent³. In the spot Doi Moi Phase, during the 1986-90, five year plan government implemented three large programmes for production of food, consumer goods and exports. The main motivation for these policies was the renovation of the economic mechanism. In 1987, the government issued the law of foreign investment in order to attract foreign capital to the country. The banking system was also restructured as well as reorganised to cope with the new situation. Exports were encouraged by a reduced reliance on quotas and the issue of licences for export activity passed to the local government rather than being controlled by central authorities. The results of these changes were as follows:

• GDP increased 48.2 per cent(an annual average increase of 3.9 per cent)
• Agriculture: Paddy cultivation expanded from 18 million tonnes per year to 25 million tonnes (1991-95), shifting from importing rice to exporting rice.
• Industry: Average growth of 13.5 per cent per year. This industrial development partially came form the results of large investments in the past in heavy industries such as petroleum, electricity such as petroleum, electricity, cement, paper, steel. The increase in crude oil exploitation and capacity by large factories have contributed significantly to the growth of industrial production.
• Structural transformation: The share of sector I (Agriculture) has decreased while that of industry and services had increased while inflation also came down to 5 per cent mark by 1997.
• US normalised diplomatic relations with Vietnam and Vietnam also signed a cooperation agreement on economic relations, commerce and technology with European Union and also joined ASEAN.

Vietnam has slowly emerged from the war phase and has slowly evolved itself into a more market oriented economy since the launch of Doi Moi in 1986.The scenario has changed in the last two decades since then and as per the 2006 statistics Vietnam has a GDP of US$ 60 billion which has been propelled by a growth arte of over 8 per cent in the last five years. The export and Import have surged to $39.6 billion and 44.1 billion in 2006 .China has been promoting trade with Vietnam but still US, EU and ASEAN countries emerge as the largest markets for Vietnamese goods. In political terms Vietnam has been rather stable and strong commitment has been shown by the ruling elite to bring reforms with regard to economy, governance and better investment climate. Also there has been greater urgency for wiping out corruption at all levels and generating better internal party democracy as well as increasing transparency. Vietnam has been keen in enhancing bilateral trade relations with its neighbours and with the developed economies of the region namely Singapore and Japan. Even in terms of break up of the ownership of the companies the major chunk of per cent which used to be in state owned domain has slowly been under the non state sector. While State sector ownership has been 39.23 per cent, Non state sector has been 45.61 while Foreign invested sector has been 15.17 per cent. Even in terms of market capitalisations in 2006 it has improved form 5 per cent to 23 per cent of GDP.But the growth of Vietnam has been posing problems also and opportunities as well. While Demand has outdone supply and so Vietnam has been clamouring for investment in strategic sectors. Also Vietnam though has been stated to have one of the high growth economies of Asia but most of its economic growth is underreported because about 30 per cent of Vietnam’s economy is informal economy and so even employment figures and add on GDP would be more than what has been reported by various international agencies. These developments have spurred the interest of the developed countries in the world to invest in Vietnam as well as look for strategic sectors. Vietnam has been looking for greater engagement with the international economy and the membership of WTO has opened areas of greater engagement with the international economy.

Vietnam in WTO

Vietnam was inducted into the World Trade Organization (WTO) on November 8, 2006 and became a full-fledged member on January 11, 2007⁴. One hindrance in the realisation of Vietnam's WTO membership plans had been the passing of the "Permanent Normal Trade Relation" (PNTR) bill in the US Congress. In fact, the US was planning to grant PNTR status to Vietnam prior to the APEC summit on November 18-19 in Hanoi, but this did not happen due to legislative wrangles. Granting PNTR status to Vietnam has safeguarded US interests in the region by engaging an erstwhile adversary, which is also one of the most populous nations in Southeast Asia. Though there are contentious issues between the US and Vietnam, the former has endorsed Hanoi's full membership of the WTO because of several reasons. Firstly, Vietnam's economic growth is quite robust at about 8.4 per cent in 2005. Secondly, its relatively young population (about 80 per cent of its population is below the age of 30 and 90 per cent of population is literate) means that it could be a very good manufacturing centre for US business entrepreneurs who are at a disadvantage because of low labour costs in China and India. Thirdly, from the strategic point of view, it would hurt China in a way because as of now Vietnam acts as a raw material provider to China and if industrial structures are established then Vietnam would do more second stage manufacturing thus eating into China's share of the market. Finally, in order to curb Chinese economic hegemony in the East Asian region, Vietnam is likely to attract financial support and investments from Japan and Taiwan. But there is also an apprehension that Vietnam might go the Mexico way. Mexico has a big trading partner in the form of the US in its neighbourhood because of which it has been unable to add value to products made domestically. This has meant that it has remained an assembly zone and supplier of raw materials, thus missing out on a huge growth potential. However, such a scenario is not inevitable with respect to Vietnam given the interest of regional economic powers and the strategy of the EU and the US to checkmate China in the world market. In fact, one of the strategic purposes of the US is to streamline its Foreign Direct Investment (FDI), which is now principally directed towards China, and divert it to Vietnam so that its short-term economic interests are not hampered. One major example is the setting up of new manufacturing units of branded sports wear in Vietnam. This logic is augmented by the fact that the US is willing to help Vietnam financially in setting up basic economic infrastructure to enable compliance with WTO regulations. Even the Trade and Investment Framework Agreement (TIFA) between US and Vietnam have strategic connotations as it is a move of US to engage strategically important nations in Southeast Asia⁵. In this milieu, it has been seen that owing to the sanctions on Chinese textiles India's textiles export to the European market had increased in early 2006. But with the induction of Vietnam, there would be another viable competitor for the same range of products. Vietnam might also emerge as a shadow-manufacturing base for Chinese products and so the rules of origin have to be imposed meticulously. While on the one hand India has to face major competition from China, on the other hand Vietnam's emergence in the coming years would make it imperative that India invests in that country so as to reap the benefits of economies of scale as well as low labour costs, thus emerging as a trusted economic partner of Vietnam in the process. It would be unjust to say that everything would be just fine with Vietnam's economic development and accession to WTO, though India can act as a human resource developer given its expertise and skilled workforce in English, which Vietnam lacks. India would face stiff competition with the emergence of Vietnam especially given that the US would be willing to locate its manufacturing facilities as well as invest in that country. In order to reap the benefits of trade liberalisation, Vietnam has to transform its centrally planned economy into a market oriented economy as well as its economic superstructure from an agriculture based economy to a more industrialised one. It has to have more effective fiscal expenditure, an upgraded banking system, real estate market reforms and a more robust capital market along with labour reforms to meet WTO requirements. In case Vietnam obtains huge foreign investments and industrial know-how, it might even surpass Chinese productivity on a smaller scale and cater to the long-term strategic calculations of the western world. Such expectations could well become a reality in the future. Vietnam's accession to WTO would not only create more competition in the world markets but also define new economic calculations in Asia. In order to counter any such scenario China has started taking active interest in the developments in the Vietnamese economy. Also other wary external powers have begun looking Vietnam in the new light.

External Powers and Vietnam

Vietnam had been the playground for the external powers during the cold war and even after the demise of cold war, there has been greater engagement but in terms of economic engagement. Almost all the major powers in the region and beyond have been trying to cultivate the market and potential of Vietnam. Though it is a different matter that Vietnam can take decisions with regard to its economic imperatives but with the increased investments and trade it might become a unique case of economic miracle which has suffered the globalisation paradox in the starting years. The engagement of the external powers has been discusses subsequently in this subsection.

Chinese inroads in Vietnam

Vietnam and China resumed their official economic and trade relations in 1991, ending a cold war stand-off between the two nations .In the post 1991 phase the bilateral Chinese –Vietnamese trade has grown from $32 million in 1991 to $ 8.8 billion in 2005. In terms of trade China is having a trade surplus of $1.7 billion in 2004 which increased to $2.8 billion in 2005 and was already $1.8 billion in first six months of 2006⁶.The skewed trade relations has been due to the low technology products that China imports from Vietnam while exporting high technology goods to Vietnam. After tumultuous years of apprehension and doubt China and Vietnam are finding favour in each others markets. Also China has somehow tried to put behind the history and has initiated a series of measures to involve Vietnam in a more constructive way. The year 2005 when Vietnam was celebrating the 20th year of Vietnam’s Doi-Moi programme⁷ and Chinese initiatives in the form of outward looking policies have put the foundation for further engagement between the two nations in economic front, though the friction on the issue of occupation of Mischief Reef did caused problems for the relationship to go ahead at a faster pace. The reasonable engagement saw the advent of economic investments in Vietnam from China and as of mid-2006; China had 377 directly invested projects in Vietnam, with a total registered capital of US$ 795.6 million ranking China 15^th among the 74 countries that have invested in Vietnam⁸. Chinese investments in Vietnam have focused on developing the energy and transport sectors, including the $710 million Cao Ngan thermal power project, the $340 million Hanoi-ha dong urban railway project, a $64 million project to upgrade the signal system for three northern railway lines, and a $2 million project to modernise the information and signal system on the Vinh-to-Ho Chi Minh City railway line. The Ha Bac Nitrogenous Fertiliser factory, which was gifted by China to Vietnam in the 1960s, prior to the differences between the two communist led governments in both countries, was given a $32 million Chinese assistance for up gradation⁹. The Chinese national offshore oil Corp signed an agreement in 2005 to explore jointly for oil and gas in Vietnam’s Beibu Bay. A new highway connecting Hanoi to the Chinese industrial city of Nanning has recently been cooperatively completed. China and Vietnam share a land border of 1,643 kilometres and China has been seeking ways to facilitate a new economic corridor linking four of their localities .In theory, the corridor would stretch from China’s south-western city of Kunming to Vietnams’ capital Hanoi, and encompass the Vietnamese industrial town of Hai Phong as well as tourist attractions in the northern province of Quang Ninh.

Vietnam has been perturbed by the increasing imbalances of trade to the tune of US$2 billion with China which is unacceptable for long term growth of Vietnam. Even strategically there are points of divergence between the two countries. The South China Sea is potentially contentious, because of the number of claimants to the bits and pieces of land that dot that body of water. Little chance of armed conflict presently exists, however, primarily because no significant energy reserves have been found in the disputed central areas of the Sea. In fact, China, the Philippines, and Vietnam have signed an agreement to jointly explore the area¹⁰ but it cannot be discounted as a dispute free area¹¹. In fact if one sees the history of the conflicts on the issue of the South China Sea Vietnam considers China its greatest strategic rival and so has gone ahead for mending ties with US. US, on the other hand, after the accession to WTO has announced economic grants so as to support Vietnam in infrastructure activities and also to help it in abiding to the WTO regulations. These measures and counter measures by US and China means that Vietnam is going to be a major fulcrum with regard to another balance of power scenario in Southeast Asia.

US overture towards Vietnam

US has been concerned about the Beijing’s designs on Vietnam and very forthcoming in engaging Vietnam¹². This includes business interests as well as strategic interests. Vietnam though an ideological ally of Beijing, fears an expanding Chinese sphere of influence and being reduced to an economic appendage by China¹³. In June 2006, Donald Rumsfeld announced small but significant steps to deepen the military cooperation between the United States and Vietnam, including the possibility that Vietnam would buy American military spare parts. One of the major events has been the enrolment of two Vietnamese officers at a military language school in San Antonio for English classes financed by Pentagon’s International Military Education and Training programme that is open to friendly countries. In one of the most significant new American investments, Intel chose Ho Chi Minh City as the site of a $1 billion microchip plant that will begin production in mid-2009¹⁴. Vietnam has also agreed to work with the United States to begin converting a nuclear research reactor to using low-enriched uranium fuel from highly-enriched uranium¹⁵. With Vietnam’s membership in the WTO quite a number of American banks, insurance and communications companies were looking for investment avenues in the country¹⁶. Vietnam is currently the United States’ 43rd largest goods trading partner with $9.7 billion in total goods trade during 2006. The United States exported $1.1 billion worth of goods to Vietnam in

2006. Two-way trade has grown 500 percent since 2001, when the United States and Vietnam signed a Bilateral Trade Agreement¹⁷. Relations between Vietnam and the United States have improved in the last several years but remain troubled by uneasiness in Washington over human rights and by the opposition of many Vietnamese Americans to the Hanoi Government. Even Vietnam wants to balance itself between the two major powers so as to have the best of both worlds. India would benefit if it sustains and enhances its relations with Vietnam in the economic domain also.

Japan and Vietnam: Economic Complementarities

Japan has initiated a series of measures to engage Vietnam economically and had emerged as the largest donor country. Japan has been insistent on the infrastructure development projects such as North-South high Speed railways and expressways and Hoa Lac High Tech Park. Japan has also been keen on development of Cambodia –Laos – Vietnam Development triangle. Japan has also been initiating dialogue with Vietnam on the proliferation of weapons of Mass Destruction (WMD), international terrorism and drug and human trafficking¹⁸. Apart from the macro initiatives Japan has been engaging Vietnam in micro ventures also. Japanese businesses had invested $ 400 million in 97 FDI projects in Vietnam in 2005 which accounted for one third of the total companies’ investment in Vietnam. In terms of the value of investments made that year, Japan was the third biggest foreign investor in Vietnam, after South Korea and Hongkong.Also Japan had made $ 6.2 billion worth of investments in Vietnam between 1988 and 2005 on an approval basis. Going by the realised investments amount only for the 1988-2005 period, Japan was the biggest foreign investor in Vietnam¹⁹. Among Japanese companies, three companies Honda, Nidec and Canon contributed half of the investment.Nidec has invested $100 million into its three factories in the last decade. The move pertaining to investment by Canon had prompted Canon satellite companies to investigate investment opportunities in Vietnam. Newly licensed projects mostly small and medium sized hi tech projects such as MCC Ltd Company’s project to design and produce software in Ho Chi Minh City with modest capital of $18,000, and a project of the global Labo Saigon Ltd Co. to produce software capitalised at $ 60,000.Vietnam ahs slowly evolved as the first choice of the Japanese small and medium businesses so as to reap the benefits of low labour costs in Vietnam. Few major Japanese projects which are in the pipeline include a $ 1 billion project to build the Dan Kia Suoi Vang resort, which is fully funded by Mitsui, Mitsubishi, Sumitomo and Limtec²⁰. Also recognising the enormous potential of the commercial exchanges between he two countries, the two sides have decided to facilitate favourable conditions for the business circles of the two countries, in the hope of expanding the two way trade volumes form $ 8.5 billion in 2005 to $15 billion by 2010²¹.

Russia: Reaching Out to Vietnam

Russia on the other hand has been active in Vietnam through the supply of military hardware. But in the recent past Russia has been showing interest in the fields of electric power, oil and natural gas, chemicals, mechanics, metallurgy and electronics²². With the closer cooperation between Russia and China, Vietnam does not figure much in the Russia strategy but US active engagement with Vietnam might change the scenario.

Even if one analyses the role of the external powers, one thing can be stated for sure is that ideological binding and the cold war baggage has dissolved in the milieu of Vietnamese growth and pragmatic approach to economic development. Though Vietnam ahs still to tread a long way but with the level of investments and trade as well as membership in the multilateral organisations it is for sure that Vietnam which was thought to be the nemesis of the Southeast Asian nations is slowly emerging as the incentive destination for many of its neighbours.

Conclusion

Though the question of Vietnam overtaking China with regard to growth would be a far fetched conclusion but with the rate of investment and trade it can very well give strong competition to the rising Asian economies like India and China. Vietnam has been lucrative to the external powers because of its immense potential with regard to cost advantages as in few areas the labour costs are much less than China. Also with Chain likely to reduce state subsidies for manufacturing sector in the near future would mean Vietnam eating Chinese share in the likely future. Vietnam also has an advantage with regard to decision making because of the core decision making authority. Secondly with the increasing US interest in Vietnam, Vietnam might soon emerge as the favourite destination of US entrepreneurs. The investment of Microsoft for setting up a chip plant is a testimony to that. With the pooling of investments from the not so friendly regions of China like Japan and Taiwan, the economic matrix might get complicated in future. Chain with the aging population and the lack of technical innovation might not pose a big option for companies in future. In case Vietnam develops its human infrastructure through adherence to the English as the business language in Vietnam then Chain which is also trying to catch up on English would find a tough competitor. India which ahs been at an advantage with regard to service industry might be able to maintain the lead in near future but with regard to manufacturing it has to factor in the rising costs and so might either look China or Vietnam for cost cutting exercises. So, the role of the external powers in Vietnam which was responsible for fomenting trouble in the country in the past might once again fight the economic battle to gain turf in Vietnam. Vietnam with its immense gas reserves is already becoming very lucrative for the gas and oil exploring countries of the wet as well as Asia but its would be seen whether the economic momentum is gained and can cerate a greater peace and security in the mainland Indochina or still issues like Spratlys’ might cerate a wedge between Chain and Vietnam and Create another battle of sovereignty in the southeast china sea. Though both China and Vietnam are apprehensive of any such situation arising in the near future but one thing is for sure that none of the countries would like to be the fodder for a new cold war. The transition from an agriculture economy to an industrialised one would be a long arduous process for Vietnam but with the kind of economic and financial support that it is gaining is sure to put Vietnam into the threshold developed economies stage in the near future.

End-Notes