Sometimes economic trends take years to emerge and evolve only very slowly. Others develop more rapidly and cause us to reassess our view of the world at short notice. The potential decoupling (or de-risking) of US-China supply chains might fall into the latter camp. Given that the US economy is already operating at close to full employment, it does not seem feasible to suggest that it will onshore the production of all strategically important goods that are currently made in China. Rather, we are likely to see the onshoring of some manufacturing, coupled with the ‘friendshoring’ of the production of key technologies. Vietnam is often cited as one potential beneficiary if Western companies seek to spread their risk by adopting ‘China plus one’ strategies.
Vietnam’s economy has been expanding at a healthy clip in recent years — it has averaged a year-on-year GDP growth of 6.7% between1991 and 2023. As a result, the share of the country’s population employed in the agricultural sector fell from 75% in the early 1990s to just 33% in 2022, while real per-capita incomes have risen by a cumulative 450%. Moreover, unlike most advanced economies (and indeed neighbouring China), its rate of growth did not materially slow after the Global Financial Crisis, in part due to its admission to the World Trade Organisation (WTO) in 2007.
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Vietnam’s importance as a source of exports has been steadily growing since the US lifted a trade embargo 30 years ago, with its WTO accession providing a further leg up. Looking forward, US-led attempts to diversify supply chains away from China could provide extra impetus for Vietnam’s trade position. As things stand, the country’s exports now represent around 1.5% of global merchandise trade, and it is plausible to expect this to rise over the remainder of the 2020s.
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It is not just the value of its exports that is changing, the composition of Vietnam’s exports is changing too, with a growing reliance on IT-related goods. Electronics and computers now represent 16.5% of the country’s total exports of goods — this sector overtook exports of textiles, shoes and sandals late last year, a sign that Vietnam is ‘moving up the value chain’.
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A large part of Vietnam’s increasing trade prowess can be attributed to its ability to attract FDI from overseas. According to World Bank data, it typically receives inflows equivalent to around 4–5% of GDP per year — well above the global average and also well in excess of the relative statistic for China. This FDI can be directly linked to Vietnam’s success in breaking into high-tech export markets — Samsung’s investments into the country have totalled in excess of US$20 billion since 2003 and as a result Vietnam’s exports of mobile phones are now second only to China’s.
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There are other positive factors that make Vietnam an appealing place for high-tech manufacturing. These include its well-educated and growing workforce, high levels of fixed capital investment and proximity to existing supply chains (although the latter could also be considered a negative for those seeking geographical diversification).
However, set against this is Vietnam’s system of governance — it typically ranks poorly on international measures of political freedoms. Several metrics provided by the World Bank and related to this theme are shown in the chart below. As can be seen, Vietnam compares unfavourably to the US (although its rankings are noticeably similar to China) along these indicators. For Western corporates, weaker standards of governance may act as a deterrent to overseas investment, or at least make them more reluctant.
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That said, there are many reasons to be optimistic that Vietnam’s role in global trade will continue to grow, and past Fathom work has generally chimed with this conclusion — see for example Geoeconomic implications of a fractured global economy or Global Outlook, Autumn 2023: fortunes diverging[1]. Ultimately, the country’s size will limit its ability to act as a replacement for China’s role in global supply chains. More likely than not, the US (and its like-minded peers) will find that ‘China plus one’ strategies will require the cooperation of many partnering countries. Vietnam is likely to be on that list, but so too will others such as Mexico and India.
- 1. These articles are available to read upon request.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
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