ASEAN poised to become more enticing FDI magnet

December 08, 2024 | 08:00

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The global demand shift to Asia, particularly China and ASEAN, is creating opportunities for Vietnam to diversify its export markets and woo more investment.

The World Bank in late November released a report titled “Vietnam 2045: Trading up in a changing world”, stating that with rising incomes and the emergence and rapid growth of the middle class, Asia is projected to become the largest source of final demand in the medium term.

ASEAN poised to become more enticing FDI magnet, Photo: freepik.com

It cited long-term growth projections by the Organisation for Economic Co-operation and Development as suggesting that by 2060, India and China alone will account for close to half the world economy - up from less than a third today.

ASEAN, which has a combined GDP of more than $2.7 trillion, will continue to grow, with GDP expected to more than double over the next two decades, despite slower medium-term growth prospects. In conjunction with convergence in GDP, the Asian middle-class consumer will become a major source of final demand. ASEAN and China together are projected to become the world’s largest consumer market within this decade.

“Demand shifts are already materialising in Vietnam’s trade flows,” the World Bank stated. “While traditional US and EU markets remain important, Vietnam’s export flows have shifted towards Asia.”

Under the bank’s study, China’s share in final demand for Vietnam’s exports increased from 2.4 per cent of Vietnam’s GDP in 2000 to more than 10 per cent of GDP in most recent years. China and ASEAN together have now become the primary source of final demand for Vietnam, together surpassing traditional markets like the US and the EU.

While only about 16 US cents of every $1 of added value in Vietnam’s export were generated to meet consumer or investment demand by emerging economies in Asia at the turn of the century, today nearly 30 US cents meet final demand originating within the region. “The shift of economic power to Asia will have profound effects on the direction and scope of future trade flows, creating significant opportunities for Vietnam to benefit from deeper regional integration,” the World Bank report said.

Over the past 20 years, foreign direct investment (FDI) inflows accounted for about 5 per cent of Vietnam’s GDP annually, contributing a higher share to overall investment than in almost any other country in the East Asia region. “Ensuring an attractive general investment climate and policy environment conducive to trade is key to attracting FDI and creating spillovers,” it added.

According to Vietnam’s General Statistics Office, ASEAN is also becoming a big magnet for FDI. Last week, it reported that in the first 11 months of this year, Vietnam’s export turnover from China and ASEAN hit $55.2 billion and $33.7 billion.

During his state visit to China in August, Vietnamese current Party General Secretary To Lam and China’s top leaders agreed that both nations share a flourishing relationship in trade and investment, which must be fuelled by expansion in cooperation in infrastructure development, with a focus laid on railway projects.

The Chinese side said it is ready to increase imports of Vietnamese agricultural products, expand Vietnamese trade promotion offices in China, and provide new advantages for high-quality farm produce to reach its market. Chinese Premier Li Qiang said both countries need to stay consistent with their cooperation structure and enhance bilateral relations by improving various rail connections and facilitating the entry of high-quality Vietnamese agricultural and fishery products into China, among other aspects.

At present, the countries are connected by two railways, but the Vietnamese infrastructure dates back many decades, and so passengers and goods are forced to swap trains at the border. Upgrading the Vietnamese side of the railways could boost trade and investment, as a growing number of Chinese manufacturers move some export-oriented operations to Vietnam.

Meanwhile, in October, the ASEAN Secretariat released an investment report for 2024, highlighting that among developing regions, ASEAN remained the largest recipient of FDI. The region attracted 17 per cent of global FDI inflows, up from 16.5 per cent in 2022.

The report’s calculations showed that FDI in the country rose to a record $18.5 billion in 2023, from $17.9 billion in 2022. “Manufacturing remained the largest recipient, followed by real estate and electricity generation,” read the report.

The World Bank also noted that regional trade agreements such as Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or partnerships between ASEAN economies are set to become instrumental for Vietnam to deepen its regional integration.

In late November, the CPTPP Commission organised its eighth meeting in Canada, which acts as CPTPP rotating chair in 2024. The meeting was focused on reviewing the implementation process of the deal and grasping emerging issues in global trade to help the CPTPP remain a high-standard agreement, bringing the best interests to all member states.

According to the General Department of Vietnam Customs, in the first nine months of 2024, trade turnover between Vietnam and CPTPP members reached $76.3 billion, up 9.6 per cent over the same period last year. Vietnam’s exports hit $41.4 billion, up 11.6 per cent and imports sat at $34.8 billion, up 7.5 per cent on-year.

While creating opportunities, Vietnam’s position at the heart of critical regional and global supply chains also makes the economy vulnerable. For trade-reliant economies like Vietnam, these developments are concerning. Vietnam’s exports to the US include a significant proportion of intermediate inputs from China, which are now at risk due to potential trade restrictions and a more constrained diffusion of technology across borders.

For instance, the US passed an Export Control Reform Act in 2018 imposing a licence for the export, re-export, or transfer of technologies to countries including China, covering technologies such as AI, robotics, nanotechnology, and semiconductors.

In addition, the US Entity List is increasing and would require specific licences for the export, re-export, or transfer with these companies, further complicating trade for countries whose exports to the US include significant input components from China, as is the case for many of Vietnam’s exports.

Recent measures by the US on the rules of origins of steel and aluminium products imported from Mexico, as well as anti-dumping investigations of solar panels imported from Vietnam, could signal more stringent policies against connector countries.

An assessment of export and import vulnerabilities which is based on concentration, potential for substitution, complexity of supply chain, and position of the product in the supply chain reveals that Vietnam’s risk of disruption within global value chains is concentrated in a select number of strategically important products.

The vulnerability is predominantly due to imports of machinery and electronic goods from China, which are integral to Vietnam’s export assembly processes. Although the number of vulnerable products is relatively small, their combined market value is substantial, amounting to $9.5 billion.

The range of vulnerable export products is similarly narrow, with textile goods destined for the US being the most affected. In terms of trade value, however, the potential risk is greater for imports than for exports. Source: World Bank

Vietnam sees increase in FDI in the first 11 months of 2024

Vietnam reported more than $31 billion in foreign direct investment (FDI) in the first 11 months of the year, an on-year increase of almost 1 per cent, according to data from the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment.