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CNN
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President Joe Biden is in Vietnam on a visit aimed at deepening economic ties between Washington and Hanoi, thereby reducing America’s dependence on China.
The former foes have officially upgraded their diplomatic ties to a “comprehensive strategic partnership,” a symbolic but critically important step that experts say will cement trust between the nations as America looks for an ally in Asia to manage political tensions To counter China and advance its ambitions for key technologies such as chip manufacturing.
Companies from Apple (A`L) to Intel (INTC) have already moved deeper into the country to diversify their supply chains, keeping many Vietnamese factories busy and contributing to an economic expansion that continues to defy a global slowdown.
Biden’s visit following the G20 summit in India is the first visit by a US president to Vietnam since Donald Trump’s trip in 2019. According to the White House, he met with Vietnamese Secretary General Nguyen Phu Trong and other leaders to to “promote the growth of a technology-driven” Vietnamese economy and discuss ways to improve stability in the region.
Evan Vucci/`
President Biden (right) and US Secretary of State Antony Blinken (left) meet with Vietnam’s General Secretary Nguyen Phu Trong at the headquarters of the Communist Party of Vietnam in Hanoi on Sunday
Their trade has already increased significantly in recent years under an existing partnership agreed in 2013, so the expansion of the relationship “just keeps pace with the reality that already exists,” said Ted Osius, president of the US-ASEAN Business Council and former U.S. ambassador to Vietnam, CNN said.
According to US government data, the United States imported nearly $127.5 billion worth of goods from Vietnam in 2022, compared to $101.9 billion in 2021 and $79.6 billion in 2021 2020.
Last year, Vietnam became the United States’ eighth-largest trading partner, rising from 10th place two years earlier.
The two sides are moving closer together as U.S. officials, particularly Treasury Secretary Janet Yellen, have repeatedly highlighted the importance of “friendshoring.”
The practice involves shifting supply chains toward allies, in part to protect companies from political tensions.
“Instead of being highly dependent on countries where we have geopolitical tensions and cannot count on continuous, reliable supplies, we need to really diversify our supplier group,” she said in a speech at the Atlantic Council think tank last year.
These tensions are increasing facing a variety of pressures, including rising labor costs and an uncertain operating environment, that have already caused companies to think twice about how much business they do in China, still considered the factory of the world.
But there is increasing competition. During the US-China trade war that began in 2018, companies of all sizes began moving production to emerging markets such as Vietnam and India due to tariffs.
After the pandemic hit, companies were increasingly forced to consider strategies called “China plus one,” which meant spreading out production centers to reduce reliance on a single production base.
The latest exodus could cost China dearly: In a 2022 report, Rabobank estimated that up to 28 million Chinese jobs depend directly on exports to the West and could leave the country due to “friendshoring.”
About 300,000 of those jobs, focused on low-tech manufacturing, are expected to move from China to Vietnam, analysts wrote.
From an industrial perspective, the country has been booming for years, said Michael Every, a global strategist at Rabobank who wrote the report. Relatively lower wages and a young population have given Vietnam a solid labor and consumer base, strengthening the case for investment in the country of 97 million people.
Nguyen Huy Kham/Reuters/File
A fruit seller walks past an Apple Store in Hanoi
But companies hoping to make the switch may already be too late, with some factories so overwhelmed that customers are left waiting, he said.
Alicia García-Herrero, chief economist at Natixis, referred to what she called “overheating,” saying demand in Vietnam’s manufacturing sector had in some cases exceeded supply.
“Too many companies [are] I’m going to Vietnam,” she told CNN.
Vietnam enjoys an advantage because it was the first country in the region to build supply chain capacity “for many, many sectors” years ago, she said.
Shortly after Biden landed in Vietnam on Sunday, the White House announced a new semiconductor partnership.
“The United States recognizes Vietnam’s potential to play a critical role in building resilient semiconductor supply chains, particularly in expanding capacity with reliable partners where it cannot be relocated back to the United States,” it said in a statement.
The semiconductor industry has become a key source of tension in US-China relations. Both Beijing and Washington are seeking to increase their capabilities in the sector, and both sides have recently introduced export controls aimed at limiting each other’s capabilities.
The United States needs a trusted partner for its chip supply, and Vietnam can do just that, Osius said.
Intel sees it that way. The California-based chipmaker has committed $1.5 billion to a sprawling campus just outside Ho Chi Minh City that it says will be the largest single assembly and testing facility in the world.
Osius expects further investment in this area to follow as Washington strengthens its ties with Hanoi.
“Vietnam’s importance in this supply chain will increase,” he predicted. “We will see an acceleration when it comes to collaboration in technology.”
The International Monetary Fund forecasts Vietnam’s growth will slow to 5.8% from 8% last year as the country copes with lower demand for its exports from abroad.
But that’s a good result compared to a global growth forecast of 3%, and is significantly faster in many of the world’s major economies such as the United States, China and the Eurozone.
“While the rest of Asia is underperforming, Vietnam will still be one of the fastest-growing economies,” Natixis said in a recent research note.
That’s tempting for companies looking for bright spots in an otherwise bleak environment.
This interest was noted in March when the US-ASEAN Business Council led its largest-ever business mission to Vietnam. The delegation consisted of 52 American companies, including corporate heavyweights such as Netflix (NFLX) and Boeing (BA).
Of course, companies still have reservations about factors like Vietnam’s technology regulations, which they fear could include restrictions on “cross-border data transfer or too many rules requiring data localization,” Osius said.
In some cases, companies are also concerned that the country’s infrastructure still pales in comparison to a long-time trading power like China.
For example, “there is not enough port capacity to export some of the goods as quickly as companies would like,” Osius said.
Politically, Vietnam shares many similarities with China, as it is an authoritarian one-party state that tolerates little dissent.
But overall, companies simply want an easy way to hedge their risks.
Vietnam was an obvious choice because it was a cheap alternative to manufacturing in China, García-Herrero said.
The transition is not difficult for various industries as many Chinese suppliers have also moved there due to US tariffs, she explained. “It’s the most similar because you have the same providers as in China.”
The Biden administration will also likely be interested in securing this alternative.
“It’s pretty clear that they are trying to engineer a series of foreign policy victories by 2024 [by] “Signing a strategic comprehensive partnership with Vietnam,” said Every, the Rabobank analyst.
— CNN’s Kyle Feldscher, Jeremy Diamond and Kevin Liptak contributed to this report.
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