The US-China trade war and the COVID-19 pandemic have disrupted the traditional global supply chain that originated in China. The disruption of international trade has necessitated supply chain adjustments.
Before that, supply chains were set up to aim for low costs. Following the impacts of the COVID-19 pandemic, supply chains are being readjusted to reduce the risk of future disruptions. Thus, many companies are moving away from China.
The shift of supply chains away from China is presenting opportunities for low and middle-income countries. The international community is looking to shift supply chains out of China to India and other countries.
The pandemic is a wake-up call for companies that rely entirely on Chinese suppliers. Diversifying suppliers is one way to increase resilience, which means that at least some production lines may have to move permanently elsewhere.
According to the second quarter report of quality control and supply chain services company QIMA, Vietnam and India emerged as some of the most appealing and preferable alternative sources of supply.
In early 2021, according to the EIU report, Vietnam became a new low-cost manufacturing center in the supply chain in Asia. Factors that helped Vietnam stand out from other countries in the region include incentives for international businesses to open high-tech factories, abundant cheap labor, and benefits from free trade agreements.
"Vietnam scores higher than India and China on FDI policy and controls on international trade and foreign exchange," the EIU report stated. "Vietnam's labor market score is also higher than that of India. With a population of 1.38 billion, India is still behind Vietnam - a country with a population of 97.34 million."
India scored surprisingly low on FDI policy among the 14 countries surveyed by the EIU. Except for Indonesia and Bangladesh, India ranked behind all other countries in terms of FDI and labor market.
EIU's report predicted a bright prospect for Vietnam. "Becoming a member of free trade agreements proves that Vietnam has a strong position in trade relations, thereby reducing export costs," the report commented.
Free trade agreements have been assisting Vietnam in developing the economy of the country. Joining FTAs helped Vietnam attract more FDI and boost the economy’s recovery. CPTPP and EVFTA have officially taken effect in Vietnam from January 2019 and August 2020, respectively. These trade agreements have broader and deeper commitments in both trade-related aspects than the multilateral commitments of the World Trade Organization.
These new-generation FTAs bring Vietnam and the business community the expectation of rapid development in the context of the COVID-19 pandemic. Specifically, with the CPTPP, export turnover to member markets that have not had a previous FTA with Vietnam has grown rapidly. For example, exports to Canada in 2020 are estimated at 4.4 billion USD, up nearly 12% compared to the previous year. In 2019, exports to Mexico were estimated at 3.2 billion USD, up 12%.
Meanwhile, according to a report by Deloitte in 2017, less than 3% of companies in India were making use of trade agreements. A major country of the world, India is also absent from the two big trade deals: the Western-led Comprehensive and Progressive Trans-Pacific Partnership and the China-led Regional Comprehensive Economic Partnership. That absence may make it hard for India to make their way into the global value chains that may shift away from China.
Social distancing and lockdown applied in different provinces in Vietnam recently raised concerns that business activities of enterprises, including foreign direct invested ones, will be affected. There were worries that Vietnam’s investment environment will become less appealing, and foreign investors will shift their interest elsewhere.
However, according to the Foreign Investment Department (under the Ministry of Planning and Investment), as of August 20, 2021, the total newly registered capital, adjusted and contributed capital to purchase shares, purchase capital contribution of foreign investors reached 19.12 billion USD, equaling 97.9% over the same period in 2020. While FDI slightly stumbled, the authorities believe that it is natural as the country is suffering from the heavy impact of the pandemic. On a long-term outlook, Vietnam can still be an attractive destination for foreign investment.
Dorsati Madani - Senior Economist of the World Bank - assessed that, although at the moment, Vietnam is having to focus on fighting the COVID-19, the Government prioritizes policies on epidemic prevention and control, affecting production and business of enterprises. However, foreign investors’ confidence in the Vietnamese economy remains. A short-term decrease in FDI inflows is still normal. When the pandemic is under control and the economy is restored, FDI into Vietnam will increase again.
References: The Ministry of Planning and Investment, vneconomy, Nikkei Asia
Compiled by VietnamCredit