Vietnam: Playing with fire

Follow America and save the country; follow China and save the party. This saying, heard everywhere in Vietnam, distills the geopolitical dilemma facing its ruling Communist Party.

Forty years after the last American troops left Vietnam, the party that won independence and unified the nation has lost much of its legitimacy. No amount of harking back to the virtues of Ho Chi Minh and his comrades can restore its élan nor, it seems, root out systemic corruption. The regime's biggest liability is its failure to right a faltering economy. But public opinion is also scornful of its inability to defend Vietnam's interests against China.

From the perspective of the man in the street in Hanoi or Ho Chi Minh City, Beijing has thrown off the cloak of "peaceful rise" and reverted to its historic role of regional bully. Its farcical claim to the marine and mineral resources of the entire South China Sea is only the most prominent example. China's construction of a cascade of dams on the upper Mekong in Yunnan province and support for a plan to build a further 11 dams downstream in Laos threaten to wipe out the annual flood surge that sustains the fertility of Vietnam's Mekong Delta region.

Chinese enterprises are also pursuing Laos' mineral and lumber resources, challenging Vietnamese hegemony in its backyard. In Vietnam itself, growing investment by Chinese engineering, construction and mining firms—notably Chinalco's multi-billion dollar bauxite project in the central highlands—has drawn heavy criticism. Cheap and often shoddy Chinese goods have flooded Vietnam's markets, crushing local manufacturers.

The man in the street wants to hit back. It doesn't occur to him that Vietnam's armed forces are no match for China's or that Vietnam is highly vulnerable to economic retaliation. Western analysts typically attribute Chinese "assertiveness" to surging popular nationalism and to over-zealous security agencies, but to ordinary Vietnamese it is obvious that Chinese aggression is coordinated in Beijing.

That is nothing new: the grand theme of the nation's history, everyone learns in school, is dogged and ultimately successful resistance against invaders. And most of the armies sweeping across Vietnam's borders for the past 2000 years have been Chinese. There is no reason why it should be different this time.

Prickly partnership

Vietnam and China share a 1,350-km border and much more. Both countries are Leninist states with a political culture shaped by neo-Confucian ideas of merit-based hierarchy and well-tended relationships. Their ruling Communist Parties have survived by shedding Marxist economics while nurturing a pervasive state-security apparatus. Their "socialist market economies" allow vibrant free markets to exist alongside thousands of state-owned enterprises, which dominate heavy industry.

Both Beijing and Hanoi are tormented by the lively criticism of internet-enabled dissidents. These shared cultural and political factors underpin a web of party-to-party and state-to-state consultations aimed at sustaining cooperation between the regimes.

Nonetheless, bilateral relations have normally been prickly. China's far greater geopolitical and economic weight means its relationship with Vietnam is fundamentally unequal. When Chinese people pay attention to Vietnam at all, they often regard it as a willful province that somehow slipped loose from its moorings.

Conversely, Vietnam's 90 million residents are always uncomfortably aware of their northern neighbors, who are 15 times more numerous and whose economy is 50 times larger. Yet the Vietnamese will not kowtow to Beijing when territorial integrity is at stake. Ho Chi Minh excepted, their greatest heroes are generals who forced dynasty after dynasty of Chinese invaders to withdraw. As recently as 1979, some 20,000 Chinese soldiers died when Deng Xiaoping sought to "teach Vietnam a lesson" for toppling Beijing's Maoist protégés in Cambodia and forging an alliance with the Soviet Union.

By the mid-1990s, China and Vietnam had slipped back into a relatively comfortable relationship. Both nations were preoccupied by internal economic reform, the Soviet Union had disintegrated, and China was advertising its "peaceful rise" to the Association of Southeast Asian Nations (Asean), which now included Vietnam.

Bilateral trade was expanding, there was discussion of upgrading "trade corridors" from landlocked southwest China to Vietnamese ports, and negotiations to demarcate the land border were progressing well. Even the rival claims to ownership of the reefs, rocks and shoals of the South China Sea seemed under good management, if no closer to solution.

All that changed, however, in 2009. Whether by design or diplomatic mishap, China was no longer content to leave the overlapping claims on the shelf. In May that year, China presented a crude map at the United Nations claiming "indisputable sovereignty" over 80 percent of the South China Sea.

Tensions escalated sharply thereafter, drawing in non-regional nations—including the United States—and challenging Asean cohesion. Vietnam and the Philippines have borne the brunt of the Chinese drive to create "facts" that, although incompatible with international law, are difficult to rebut. Nationalist passions are boiling in all three nations, threatening armed skirmishes at sea. Hanoi's policy of deferring to China is in tatters.

Many of Vietnam's non-party elite, as well as some within the party itself, believe the solution is to seek a de facto economic and military alliance with the US. Yet senior members of the party remain highly skeptical of US intentions, viewing themselves as locked in an existential conflict with Western liberalism, capitalism and imperialism. They have yielded only grudgingly to reforms aimed at establishing the nation's global economic competitiveness and engaging the US as a counterbalance to China.

Party stalwarts gag on American demands that Vietnam allow greater democratic freedoms, fearing that Washington's true objective is to bring down the Communist regime. For all the recent frictions, they do not believe China's leaders will betray a ruling Communist Party so like their own.

Still waiting for a free lunch

In truth, China these days cares a lot less about helping its fellow Communists cling to power than it does about exploiting regional resources and extending its economic tentacles. With a sackful of export credits and eligibility for concessional loans from state-owned banks, Chinese firms have become major players in infrastructure development in Vietnam, particularly construction of thermal power plants.

Saigon's Chinese--going, going, gone
When the Vietnam War finally ended in 1975, roughly 4 percent of Vietnam's population was of Chinese extraction. Perhaps 1.5 million were citizens of the defeated southern regime, of whom more than half lived in Cholon, Saigon's Chinese quarter. Only around 300,000 lived in the victorious northern half of the country.
Vietnam's Chinese community had prospered over the years. Merchants of Chinese origin monopolized wholesale trade in the south and dominated manufacturing and retail trade. The descendants of refugees from the collapsing Ming dynasty, who settled in Vietnam in the mid-17th century, were substantially assimilated. Yet the majority, offspring of much more recent migrants, maintained their regional Chinese cultures. As in many other parts of Southeast Asia, their outsider status and economic success created resentment among locals.

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By and large the Chinese firms are not squeezing out Vietnamese contractors, instead grabbing business from Japanese, South Korean, US or European competitors by entering bottom-dollar bids. But critics accuse Chinese enterprises of employing their own countrymen and producing work of low quality, with frequent missed deadlines and cost overruns. Vietnamese security hawks further assert that dependence on Chinese contractors in strategic sectors like energy undermines national security.

Another bone of contention is Vietnam's mounting trade deficit with China, its largest trading partner, which economist Tran Van Tho calls an "industrial tsunami." Vietnam's trade with the other nine Asean countries and with Japan is roughly balanced, and it has a huge surplus with the European Union and the US. But with China it ran a US$16.4 billion deficit in 2012, giving China a bilateral trade surplus of 40 percent.

The bulk of Chinese exports are intermediate goods for assembly in Vietnam's export processing plants: fabric, zippers, buttons, wires, circuit boards, and assorted widgets. But China also provides more expensive capital goods—machinery to equip Vietnam's factories and build infrastructure.

A third and very visible component is consumer goods, priced to undercut domestic competitors. Vietnamese newspapers regularly feature stories alleging that China dumps dangerous or shoddy goods, and provocative moves by Beijing in the South China Sea reflexively result in calls to boycott Chinese wares.

It wasn't meant to be this way. According to economists' predictions, Vietnam should be eating Guangdong's lunch by now. With its much lower labor costs, Vietnam was the logical destination for factories from China's export-processing center migrating to cheaper climes. The labor-intensive garment and footwear industries have long accounted for about 20 percent of Vietnam's exports; they got their start in the 1990s when China's garment and footwear exports were capped under EU and US quota schemes.

Yet labor productivity remains low, real wages rose at 10 percent a year in 2006-11, and Vietnam has largely failed to lure manufacturers from their bases in China. As labor costs continue to rise in both China and Vietnam, factories are migrating instead to Cambodia, Bangladesh and even Myanmar.

It is not all bad news. As the global economy slowly recovers, Vietnam's foreign-invested sector is growing once again. Rather than shifting factories from China, some multinationals and their contractors have diversified their manufacturing bases by opening additional plants in Vietnam. Anecdotal evidence suggests a pronounced trend toward higher quality investments, which can benefit from substantial tax breaks.

Firms establishing or expanding assembly plants include household names like Canon, Samsung, Intel and IBM, Hitachi, Panasonic and Nokia. Yet nearly all the inputs to Vietnam's manufactured exports are imported, some from China. All that is added in Vietnam, typically, is labor—something China can do more efficiently and on a much larger scale.

Comprehensive strategic blunder

In 2008, capping a warmer phase in relations, Chinese party chief Hu Jintao and his Vietnamese counterpart, Nong Duc Manh, declared a bilateral "comprehensive strategic cooperative relationship." And if China is truly interested in nurturing a special relationship with Vietnam - and thereby strengthening its diplomatic muscle in Southeast Asia - Beijing is in a position to help.

Although Vietnam's rulers admit to no anxiety over the bilateral trade imbalance, it is nevertheless a chronic political liability. China imports plenty of rubber, coal, oil, lumber and agricultural products, but is uninterested in Vietnam's industrial goods. Friendly moves to pump up industrial imports would cost China little and be very good news for Hanoi.

Above all, a sincere proposal for joint development of mineral resources and co-management of fish stocks in the disputed area of the South China Sea could be a game-changer—both for relations with Vietnam and with Asean.

Yet the reality is that the relationship between Beijing and Hanoi has become dangerously unstable since the agreement in 2008. Chinese pressure on political and strategic issues has boxed in Vietnam's leaders, arguably threatening their survival. Beijing has bolstered its standing among Chinese nationalists by flexing its muscle in the South China Sea, while Hanoi's ineffectual attempts to fend off Chinese provocations have steadily eroded its position among nationalists at home.

Short of armed conflict, it is hard to imagine what more China could do to hasten the downfall of its would-be friends and ideological allies in the world's only other "market socialist" regime. In all probability, this would bring in new leaders looking to cozy up to the US - an entirely self-defeating result.

More worrying, an armed conflict between is not out of the question. China has vastly more firepower than Vietnam, but Hanoi is ramping up its air and sea deterrent capabilities. If pressed against a wall, history suggests that the Vietnamese will hit back. A miscalculation by either side could result in a clash. This would be sharp and bloody, with unpredictable consequences. China can continue playing the bully - but it is playing with fire.

(David Brown is a retired diplomat and regular contributor to Asia Sentinel. He wrote this for the Hong Kong-based Gavekal Dragonomics' China Economic Quarterly.)