Vietnam has emerged as a low-cost manufacturing base in Asian supply chains, beating India and even China in indicators, including foreign direct investment (FDI) policy and foreign trade and exchange controls, according to the Economist Intelligence Unit (EIU).
In fact, Vietnam’s rise as an alternative manufacturing hub to China predates a trade war between Washington and Beijing in recent years, it says in a report. Vietnam’s incentives for international firms for setting up units to manufacture hi-tech products, pool of low-cost workers and proliferation of free trade agreements (the latest one is with the EU) place it at an enviable position among Asian peers, the report suggests.
According to the EIU, while Vietnam scored 6 on a scale of 10 in the FDI policy, both India and China have scored 5.5 each. Similarly, India scored just 5.5 in foreign trade and exchange controls, while Vietnam scored 7.3 and China 6.4. As for the labour market, Vietnam’s score was 5.6, against India’s 5.4. However, China here scores over both India and Vietnam with 5.7. While both Vietnam and India see a huge infrastructure deficit, New Delhi scored less than Hanoi (3 vs 3.5 out of 10).
Of the 14 countries in Asia that the EIU has focussed on, as many as 12 (except for Indonesia and Bangladesh) have outscored India in the FDI policy and labour. In foreign trade and exchange controls, only Pakistan performed worse than India, and in infrastructure, only Bangladesh scored less than it.
The EIU report highlights that Vietnam will continue to offer generous arrangements for international firms with incentives for investment, “with the downside that local supply linkages in more advanced manufacturing will remain limited for the next decade”.
The country’s low-skilled manufacturing wages will remain competitive for years to come, although scarcity of specialised labour will persist as a disadvantage of the business environment.
“Vietnam’s proliferating membership of free trade agreements represents a strong point of its trade relations, reducing export costs. There are only modest risks to this advantage, mainly in the form of trade tensions with the US,” the report said.
For instance, the EU-Vietnam FTA offers footwear manufacturers in Hanoi the biggest gain. Around 40% of exports to the EU in this category faced 30% tariffs, which were reduced to 0% from August 2020. The apparel sector of Vietnam, a competitor of India in this segment, will also get greater benefits. Vietnam is also a part of the China-dominated RCEP and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership involving 11 nations, including Japan.