Issue: 2011: Vol. 10, No. 2, Articles

Vietnam’s Relations with China: A Delicate Balancing Act

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Dennis C. McCormac

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Dennis McCornac is a professor in the Sellinger School of Business, Loyola University Maryland, Baltimore, Maryland. He can be reached at [email protected].. 
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Vietnam’s Relations with China: A Delicate Balancing ActThe agreement between China and Vietnam on the process to guide the settlement of maritime issues signed in October 2011 may be a first step in easing tensions over the contentious issue of who controls the islands in potentially oil-rich waters which China calls the South China Sea and Vietnam calls the East Sea. The establishment of a hotline between the two countries’ capitals to resolve crises and the creation of semiannual talks are aimed at finding “mutually acceptable basic principles” and a long-term approach to solving maritime disputes. The two countries are now committed to friendly consultations to properly handle maritime issues and make this area a sea of peace, friendship and cooperation. 1

China and Vietnam share a long history marked by collaboration and cordiality, but also tumult and hostility at times, as far back as the first century B.C., and as recently as during the last half -century. Nevertheless, following modern economic reform in China and Doi Moi in Vietnam, both countries have continued on their transition path to a market-oriented economy putting industrialization and trade issues at the forefront, with territorial disputes generally left on the back burner. The year 2010 marked the 60th anniversary of the establishment of China-Vietnam diplomatic ties with official normalization of relations being in place since 1990. There is no doubt that China and Vietnam will forever be intertwined because of geographic, economic and political realities.

Swinging on a Tightrope

A Vietnamese government official once described Vietnam as swinging on a tightrope in which China held one end and the United States held another. Not willing to place all its eggs in either basket given its past history with both nations, and in an effort integrate into the global economy, Vietnam is pursuing a foreign policy of what some analysts label “more friends, fewer enemies.” Stable, normalized economic and military relations with both China and the United States are the current state of affairs. Vietnam has also placed an emphasis on global integration which has resulted in political and economic engagement with a wider range of countries, the purpose which is presumed to counter the influence of Beijing in the region.

Strains in Sino-Vietnamese relations emerged in 2009 when China presented a claim to 80 percent of the South China Sea (East Sea) to the United Nations Convention on the Law of the Sea. This put Vietnam in the awkward position of either accepting Chinese dominance of this areas or risking an engagement. 2

The issue is particularly important to both sides since it involves the claim on possession of two island groups: the Paracels and Spratlys. The most important matter at stake is who has the right to explore and exploit the natural resources in and below the waters surrounding the islands. Although proven reserves have not yet been forthcoming, the most optimistic estimates from China suggest potential oil resources of the Spratly and Paracel Islands could be as high as 213 billion barrels of oil and the area is also rich in natural gas. 3

The disputes will ultimately focus on who has the rights to these natural resources, and is being structured as a legal dispute on the interpretation and application of Article 121 of the 1982 United Nations Convention on the Law of the Sea (UNCLOS). Article 121 provides that an island – defined as “a naturally formed area of land above water at high tide” – can, in principle, generate the same maritime zones as land territory. These include a 12 nautical mile (nm) territorial sea; a 200 nm exclusive economic zone (EEZ) and a continental shelf.4

Some of the Spratly Islands’ features claimed and occupied by China and Vietnam, and other countries as well, do not meet the definition of an island. In addition, a majority of the declared EEZs overlap, and historical claims to ownership are difficult to prove. As Jörn Dosch notes, “Outcomes are unpredictable given that all claimants have at least some convincing arguments on their side . . . yet Beijing holds the key to a resolution of the dispute which will either be decided through Chinese power projection or a negotiated settlement on the Chinese terms. The latter seems more likely than the former.5

It is not, however, in the best interest of Vietnam to antagonize China unnecessarily. Ideologically, Vietnam is more comfortable with China than with the United States. Economically, China is a large market, a source of financial assistance and a model of development.6 Nevertheless, in Vietnam as well as China, nationalist sentiments have put pressure on their governments to remain firm on issues of sovereignty. For Hanoi, the matter has become especially sensitive as an array of dissidents has taken up the cause of the archipelagoes, accusing the ruling Communist Party of selling out to China with every act of acquiescence.7

A controversial mining venture involving China in 2009, for example, although supported by the Vietnamese Communist Party, raised the ire of notable figures in Vietnam, including military icon General Vo Nguyen Giap. “I would like to propose to the prime minister to stop the implementation of bauxite exploitation until its ecological impact is seriously studied by international experts,” wrote the 97-year-old retired general, criticizing the agreement allowing China to mine and process bauxite in the central highlands region.

The project was divisive for a number of reasons with critics contending it would leave behind scarred landscape and produce effluents that pollute farmland and water sources. The central highlands are well known for production of coffee and other crops that are important sources of export earnings. Complicating the matter was the announcement that China would be bringing in its own workers to run the project, raising the specter of a permanent Chinese settlement in this strategically sensitive area. Originally thought to be an economic boom to the region, only a few jobs for Vietnamese workers were in the plans, causing outcries of Chinese economic imperialism and colonization.

Although the early phase of construction of the bauxite mine began in March of 2010, the issue may have more serious political implications for Vietnam in the long run. The unwavering support for the project by the majority of the most powerful members of the Vietnamese Communist Party has been attributed by some to payoffs to these officials by the Chinese. And the government of Prime Minister Nguyen Tan Dung was accused of kowtowing to China and selling out to Beijing and to capitalism.

A new concern in Vietnam, attributed to the “Chinese economic expansion,” is represented by the influx of illegal Chinese laborers, particularly involving joint Vietnam – China projects. Vietnamese press and labor leaders have warned of the irregular situation of Chinese workers in Vietnam. According to statistics from the Ministry of Labor, War Invalids and Social Security, in May 2011 there were 74-thousand foreign workers in Vietnam and among these employees, 90 percent are Chinese. Most Chinese employees, it is argued, do not have professional skills and the workers are causing instability in the economic, social, military, political spheres as well as everyday life of people. Newly elected President Truong Tan Sang has spoken out and told Vietnamese authorities and employers to better manage the country’s foreign workforce.8

The Dragon is Awake and Hungry

Despite the occasional hiccup, China and Vietnam bilateral relations are becoming more interdependent, particularly in the realm of economics. The year 2010 marked the 60th anniversary of the establishment of Sino-Vietnamese diplomatic ties, with official normalization of relations being in place since 1990. This has led to a rush of political goodwill and a boom in economic trade evidenced by growth in bilateral trade jumping from US$32 million in 1991 to just a shade below US$28 billion in 2010 and for the first nine months of 2011, it rose by 35 percent as compared with the same period of the previous year (See Figure 1).

China is Vietnam’s largest trade partner (See Figure 2), but because of China’s size and global trade integration, Vietnam counts for less than one percent of China’s total export trade.

Bilateral trade is increasing at a significant rate particularly, because China’s insatiable demand for goods and resources. Sustaining economic growth for a nation reaching almost 1.4 billion citizens requires a tremendous amount of natural resources, much of which needs to be imported. As China scours the globe building economic relationships with various nations and regions to ensure a continuous supply of commodities such as coal, crude oil and iron ore, it is only natural to look to a close neighbor for help.9 Further spurring trade, particularly along Vietnam’s northern border with China, has been the establishment of the Free Trade Area (FTA) between China and 10 member states of the Association of Southeast Asian Nations (ASEAN) that took effect January 1, 2010. 10

The size of bilateral trade notwithstanding, Vietnam’s trade deficit with China is continuously rising, with Vietnam selling unfinished commodities and running a trade deficit with China of more than US$12 billion in 2010. This figure is expected to rise substantially for the foreseeable future. The discrepancy in the trade balance can be attributed mainly to the types of products Vietnam exports to China: coal, crude oil, rubber, foodstuff, seafood and footwear, to name a few (See Figure 3a). The majority are either raw materials or low-value-added manufactured goods.

On the other end of the spectrum, China’s top exports to Vietnam include high-value-added manufactured goods such as cars, motorbike parts, machinery, package equipment, pharmaceuticals and petroleum (See Figure 3b). China, for example, accounts for almost 60 and 17 percent of Vietnam’s coal and oil export revenue respectively, and is also the major importer of natural rubber needed to fuel China’s industrial rubber products industry.

Currently, there are almost 2,000 China-funded firms in Vietnam engaged in trade and investment, project contracting and other businesses. Vietnamese enterprises are paying more attention to the Chinese market and are looking to China for more business opportunities and markets for selling equipment and raw materials. China is also a main market for Vietnam tourism, accounting for one-fourth of the international tourists to Vietnam (almost 786,000 arrivals) in the first seven months of 2011. While the opening of markets and trading routes can be described as a win-win situation for China and Vietnam, it may be too simple a formula precisely because of the disparities between the two countries, particularly in terms of economic size and political power. 11

The influx of Chinese goods, both smuggled over the border and imported legally into the Vietnamese market, has negatively impacted the domestic production of a number of goods in Vietnam, particularly consumer goods. One special concern in Vietnam is that many of the goods are of low quality and dubious origin and may contain toxins and other substances harmful to people’s health. Some products can be made in Vietnam, but are still imported as the latter approach is more cost-effective. This, in turn, has choked a host of Vietnamese enterprises, including production of chopsticks and toothpicks. 12

Truong Thi Thuy Lien, director of the Lien Phat Ltd. Company, a shoe manufacturer in southern Vietnam, notes that since early 2011, prices of materials imported from China have increased by 40 percent against the end of 2010, exposing sudden price increases as the biggest risk factor in such imports. Economic expert Le Dang Doanh said local producers imported a large quantity of material from China because the country was nearby, so transport costs were low and added incentive for domestic exporters.13

Further adding to uncertainty regarding the pricing of Chinese imports is China’s overall trade surplus, which has escalated tensions with a number of its trading partners who are now arguing that the Chinese currency, the Yuan, is undervalued. Should China revalue its currency, Vietnam would see import prices rising even faster, putting more inflationary pressures on an economy with already escalating prices.

Even though this dependence on increasingly expensive Chinese imports has already pushed many Vietnamese firms into the red, Vietnam’s heavy dependence on trade with China is only expected to increase over time. Le Hong Hiep of the Vietnam National University fears that “should China decide to discontinue trade with Vietnam for some reason, the damage to Vietnam’s economy would be immense.14

Wither the Future

Relations between China and Vietnam have improved recently, and the conciliatory nature of the recent meeting between Beijing and Hanoi has ushered in a relative period of calm. Both countries appear keen to continue to foster better bilateral ties and improvements in Sino-Vietnamese relations are unlikely to damage Vietnam’s relations with the U.S.

However, anytime China swings the tightrope more aggressively, Vietnam finds itself in a more precarious position, not knowing which end of the rope is the safest point of refuge. If the Vietnamese government is to continue to be successful in maintaining a balance, it must avoid too close an alignment with one country at the expense of ties with the other.

Now is a relatively unique time in Vietnam’s history. It is unified, and it has the economic and political wherewithal to challenge China in the region – though whether it will be successful remains to be seen.15 The rise of national sentiments on either side may portend more troubling times ahead. And as a Vietnamese diplomat is quoted as saying, “No one will say it openly, but what drives every meeting in Southeast Asia now is fear of what the region will be like with China dominating.”16

References and Bibliography:
  1. Tuoi Tre News, “China sign agreement on basic sea principles,” 12 October 2011.
  2. Sophie Quinn-Judge, “Vietnam and China: Shoals ahead,” openDemocracy, 29 April 2010.
  3. U.S. Energy Information Administration, “South China Sea – Analysis brief,” 16 June 2011.
  4. Robert Beckman, Islands or rocks? Evolving dispute in South China Sea. RSIS Commentaries, 10 May 2011.
  5. Jörn Dosch, “The Spratly Islands dispute: Order-building on China’s terms?” Harvard International Review, 18 August 2011.,1.
  6. Hung Nguyen, “Vietnam,” The Diplomat. Accessed 30 September 2011.
  7. Ishaan Tharoor, “China and Vietnam: Clashing over an island archipelago, “TimeOnline, 14 January 2010.,8599,1953039,00.html.
  8. Thanh, Nien Weekly, “President encourages stricter management of foreign labor,” 12 August 2011.
  9. Joyce Roque, “Resources, relations and free trade: How China is opening up its borders to Vietnam, China Briefing, 10 December 2007.
  10. People’s Daily Online, “Effect of China-ASEAN Free Trade Area turning protruding, 30 March 2010.
  11. Brantly Womack, China-ASEAN pact offers more than win-win, AsiaTimes, 7 January 2010.
  12. VietnamNet, “Economists give alerts about increasing invasion of Chinese imports,” 21 May 2011.
  13. Vietnam News, “Reliance on imports poses risks, ” 22 August 2011,
  14. Le Hong Hiep, “Vietnam: Under the weight of China,” East Asia Forum, 27 August, 2011.
  15. Stratfor, Global intelligence, “Vietnam, China: Economic prosperity leads to heightened tensions,” October 5, 2011.
  16. Joshua Kurlantzick, “After Deng: On China’s transformation,” The Nation, 27 September 2011.