Vietnam must maintain its foreign investment policies

So much progress has been evident over the recent decades as Vietnam entered the world stage as a formidable and reliable trading partner in the world. The economic growth in Vietnam has been consistently one of the highest in the world in recent years. Though challenges will always present themselves, Vietnam is in a position to continue strong economic growth.

As Donald Trump enters the Oval Office for the second time, the US president has indicated he will promote a protectionist agenda. On the surface, such policies usually negatively affect emerging economies most. Though many political analysts believe his policies may mirror his first administration, others believe that his policies may be more pronounced.

Many policy questions have emerged, such as will the administration impose a general or universal tariff on all goods imported to the United States? Clearly, the policy direction is unclear. This poses a challenge for Vietnam. Obviously, if China continues to be a significant target of tariffs, Vietnam will benefit in a likely fashion as during the first Trump administration. But, if Vietnam is included in the tariffs, it could have an adverse effect on Vietnamese exports and the economy.

In American politics, policy rhetoric is stronger than what eventually occurs. Also, such policy measures often take time to implement. Administration posturing is common in the political arena. Further, though the US president does not need congressional approval to wage tariffs, it is not likely that any administration would want to materially disrupt the economy in the US.

Tariffs imposed on goods entering the US could cause significant inflation and could derail economic growth and even cause a recession. As inflationary cost pressures have been evident in the US economy in recent years, additional inflation could cause significant economic disruption.

Additionally, the current focus of tariffs has primarily been on China, Mexico, and Canada. Certainly, the new US administration recognises the most current investment interest in Vietnam by Nvidia and other US groups. This would lead one to believe that Vietnam may, in fact, be a beneficiary of any new tariff policies as it may not be directly affected by them.

Facing up to increased costs

Regardless of the ultimate resolution of the issue, the effect on Vietnam may be muted. Since it is commonly known that less than 5 per cent of all exports from Vietnam are exported directly to the US, if exports are adversely affected through tariffs to the US, it is not likely that direct tariffs would significantly move the needle on economic activity in Vietnam.

Tariffs likely will not mean a shift away from production in Vietnam, as high value-added products such as electronics and electronic components represent a long-term commitment by technological groups such as Nvidia. Additionally, many products are vastly needed for worldwide supply chains which ultimately result in final sales of products in the US but are not directly exported to the US from Vietnam.

Although supply chain costs are critical to overall product cost structures in many industries, it is likely that costs associated with tariffs could be absorbed in the existing cost structures of many products with minimal affect.

On the other hand, Vietnam might experience higher input material costs as other countries experience a higher cost structure due to imposed tariffs. Vietnam could face increased input costs on many materials that are critical for production in Vietnam for domestic use as well as for export. Increased input costs could result in inflation which in turn results in lower GDP.

Whether any tariffs are directly imposed on Vietnam or not, there are inherent inflationary pressures that will result and that could ultimately cause a somewhat muted GDP for Vietnam. Still, in my opinion, this may be overstated.

As the world collectively grapples with the dawn of the US protectionist strategy, Vietnam would be affected in a minor economical way than many other countries. Of course, a question remains as to the ultimate effect of such US protectionist policies. It is possible that other countries will respond in kind and impose similar protectionist policies.

Such widespread policy implementation could cause inflationary pressures and cause recessionary pressures to emerge around the world. The likelihood of such effects is highly unlikely, though, due to the high economic correlation of most countries and their common reliance on each other for economic and monetary stability.

Robust investment

The state of the current economy is arguably more robust than in recent years. Foreign direct investment (FDI) has increased due to manufacturing migration from other more developed economies. Significant progress has been made to stabilise the real estate market. Commitment to improved infrastructure such as the commencements of the development of the high-speed rail system from Ho Chi Minh City to Hanoi, the Tam Sinh Nghia waste-to-energy plant, and the Sun Urban City are important contributions to the economic future of Vietnam.

The issues in the banking system continue to be addressed, and policy directives largely continue to be pro-business. The country has recognised that one of the most advantageous assets is an educated, highly productive workforce. It is this workforce, considered the backbone of the economy, that will continue to support high economy growth for the country for years to come.

As Vietnam enters the new year, two main challenges exist. Vietnam will need to maintain pro-foreign direct and indirect investment policies. Attracting significant foreign direct and indirect investment is a cornerstone of any country interested in high GDP growth. FDI in Vietnam has been robust, and current indications are that it will remain so in the Year of the Snake. Maintaining a political framework to encourage high FDI is one of the keys to maintaining sustainable GDP growth.

Furthermore, at this time, no one knows what will result from the development of AI, but it is readily assumed that it will have a profound effect on the world. AI has already presented multitudinous investment opportunities around the world which may or may not result in greater productivity and possibly lower costs of production, but what the ultimate result will be is anyone’s guess.

Vietnam will have to be fluid and open to policy changes to advantageously adapt to the changes that will occur from developing an AI-affected economy. Harnessing AI will be a key driver in the future economic progress of Vietnam.

Although progress is never certain, most roads point to progress in Vietnam.

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