Vietnam, explained.
Electric cars from the Vietnamese electric vehicle maker Vinfast navigate evening traffic in Hanoi (Nhac Nguyen/AFP via Getty Images)
The international economic environment could hardly be less propitious.
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National champions – Vietnam’s solution to the middle-income trapNational champions – Vietnam’s solution to the middle-income trap
Vietnam has transformed itself at a rapid clip from one of the poorest countries in the world in the late 1980s to a lower middle-income country. More recently, it has been the most obvious beneficiaries of supply chain diversification out of China, attracting investment from the likes of Samsung, Intel and Apple suppliers.
These eminently marketable investments can give a illusory picture of the actual strength of local industry. Vietnam largely remains a site for final assembly, with limited local linkages into the operations of major manufacturers.
Tô Lâm, who took over Vietnam’s top job of General Secretary in August 2024, has been unusually candid on the depths of the country’s challenges. Speaking earlier this year, he warned that Vietnam was “stuck at the lowest end of the value chain” and risked failure without major structural reforms.
The gloomy appraisal is corroborated by granular and more macro level data. None of the more than 30 Apple suppliers in Vietnam are local companies. Samsung has given the appearance of obliging persistent requests to source more from local companies, but has no major Vietnamese-owned suppliers.
Foreign-invested enterprises dominate Vietnam’s trade, accounting for more than 70% of exports by value. Rather than manufacturing or sourcing domestically, these companies continue to import most components.
Vietnam can still realistically aspire to capture more value from its existing exports and mirror aspects of the development paths of Thailand and Malaysia.
This growth model is fast approaching the boundaries of Vietnam’s natural capacity and facing growing exogenous pressures. There is a dwindling pool of rural migrants who can take factory jobs in the city. Wages and industrial land costs have risen steadily and infrastructure is beginning to strain. With up to 90% of Vietnam’s manufacturing jobs being low skilled, the risk is that manufacturers will move operations to places such as Cambodia.
This is to say nothing of tariffs. Vietnam’s assembly-based manufacturing, with its heavy reliance on Chinese inputs and investment, is particularly vulnerable to US allegations of transshipment.
Allegations that Vietnam ships huge quantities of Chinese goods with almost no local value-add are belied by the data. But in the current White House, perception matters much more than the wonkish minutiae of global trade.
The United States has still provided little detail on how its 40% tariff on transshipment will apply. Tariffs of this rate on any significant portion of Vietnam’s US-bound exports – worth more than US$136 billion in 2024 – would be a nightmare scenario for Vietnam’s competitiveness.
Tô Lâm, Vietnam’s Communist Party general secretary, attends an event at Yonsei University in Seoul, South Korea last month (SeongJoon Cho/Bloomberg via Getty Images)
Tô Lâm’s prescription for Vietnam to cultivate chaebol-like national champions, would if realised, address many of these challenges.
As part of his overarching campaign to make Vietnam’s private sector the “most importance force” in Vietnam’s economy, Tô Lâm wants Vietnam to have 20 globally competitive national champions by 2030. He envisages that these companies will participate in global value chains and actively cultivate more mature domestic supply chains within Vietnam.
Hanoi will help catalyse the emergence of these companies by reconfiguring public procurement (which currently favours state owned enterprises, especially for infrastructure), offering preferential credit and supporting international expansion.
Vietnam is not trying to reinvent the wheel. Tô Lâm’s vision has much commonality with the development trajectories of Singapore, Taiwan, South Korea and China. All started off with mostly assembly-based manufacturing before moving up the value chain.
Vietnam undoubtedly faces a much more parlous international trading regime than decades past.
Vietnam is trying to offset US tariffs by striking free trade deals with Mercosur and the Gulf Cooperation Council. Whilst trade diversification will help around the margins, there is no readily available substitute for unfettered access to the world’s largest consumer market.
Still, subject to the major caveat of how US tariffs on transhipment are applied, Vietnam faces similar tariff rates to its neighbours and is still in a far better position than China.
Leaving aside the vicissitudes of US domestic politics, the biggest longer-term challenge to Vietnam’s national champion agenda is probably China.
China’s aggressively mercantilist trade tactics means that it wins market share from other exporters without a commensurate increase in its own domestic demand. The net effect is a smaller global export pie than would otherwise be the case. China, and the Asian Tigers which preceded it, all benefited from the absence of a low-cost, China-sized competitor.
Nor has China shown any voluntary inclination to offshore or cede market share in traditional-labour intensive industries, as industrial powerhouses have historically done.
Even if there is now a lower ceiling on the efficacy of export-led growth, Vietnam can still realistically aspire to capture more value from its existing exports. This would mirror aspects of the development paths of Thailand and Malaysia, which, while generally failing to cultivate globally competitive manufactures, have fostered sophisticated local supply chains.
Vietnam has developed a near complete supply chain for furniture and has made progress in electronics. Modest subsidies have recently been offered for companies building local supply chains for textiles, electronics and the automotive sector.
There is even a conceivable world in which there could be synergies between US tariffs on transshipment and Tô Lâm’s agenda. That would require a much more pragmatic approach than Washington has evinced to date, and deft management of Chinese sensitivities.
About the author
Henry Storey
Henry Storey is Manager - Projects, Research and Analysis at Dragoman with a focus primarily on Asia and the South Pacific.
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