The Middle Kingdom and its neighbours (part II): two case studies

The destination and composition of trade flows from Vietnam and Malaysia have been transformed since the beginning of the century. Vietnam previously exported mostly mining products, refined products and textiles to Asia (over 50% of its exports went to Asian countries, particularly Japan, which accounted for almost 20%). In contrast, in 2021 30% of Vietnamese exports went to the US and more than half are electronics and machinery products.1 On the other hand, 60% of Malaysia’s exports at the turn of the century were electronics and machinery products, especially to the US (21%), and half also went to Asia (especially Singapore and Japan). In 2021, less than half of exports were electronics and machinery products, and they were mainly concentrated in Asia (accounting for two-thirds of Malaysia’s exports, with Singapore and China as the top destinations).2

The value chains of these two countries have also diverged over time. In the second chart, we can see how Vietnam has become increasingly open to the outside, accompanied by greater integration into the entire Asian value chain, in particular with China and South Korea, while the weight of other advanced economies (such as Japan, the US and the EU) has remained relatively stable. On the other hand, in Malaysia there has been a gradual decrease in the foreign value added in its exports, with the likes of Japan, the US and the EU losing a notable share (see third chart).3 One notable exception to this trend is the growing integration of Malaysian manufacturing with China, particularly in sectors such as electronics or machinery, which accounts for 10% of the GVA of exports (in Vietnam, this figure stands at 16% in electronics and 21% in machinery).

The evolution of trade with China (the second biggest trading partner for both countries) is particularly interesting. Exports of goods from Vietnam to China have gone from around 7 billion dollars in 2010 (30% mining and refined oil products) to 58 billion in 2021 (60% electronics and machinery). On the other hand, Malaysia exported 27 billion dollars to China in 2010 (over 50% of which was machinery and electronics), while in 2021 it exported around 48 billion, with a lower proportion of advanced manufacturing (less than 40% corresponds to machinery and electronics) and a greater proportion of mining and refined products (mainly oil and gas) and metals, which went from less than 3% to 15%. The data for China’s imports of electronics (one-sixth of the total, on par with mining and refined products) confirm the structural transformation of Vietnam’s trade pattern: today, 10% of these imports come from Vietnam (a figure similar to that of Japan or the EU, and only surpassed by South Korea and Taiwan), compared to 5% in the case of Malaysia. A decade earlier, 7% came from Malaysia and less than 1%
from Vietnam.4

Behind these differences in the recent patterns of international trade, it is important to underscore the differing economic, geographical and political conditions among ASEAN countries.5 In the case of Vietnam, we see a period of economic boom and increasing specialisation, accompanied by a diversification of trade flows. Malaysia, which at the outset was already one of the most developed economies in the region, saw a concentration of its value chain in Asia, particularly in China, whose strong demand for commodities and metals has gained prominence in the country’s trade flows. On the other hand, although China’s rise in the global market has served to hoist up the export sectors of some of these countries (such as Vietnam or Thailand), which has generated benefits throughout the value chain, it has also resulted in greater competition in the more cutting-edge sectors, and this has a greater impact on the more advanced economies of the region (such as Malaysia, Singapore and Japan).

But the case of Vietnam is not just one of economic convergence and positive side effects from the economic development of China. Vietnam is often cited for the quality of its education system, which has generated a supply of labour that is able to meet the country’s growing demand for more specialised skills and has contributed to the rapid expansion of sectors such as electronics. Added to this is the demographic factor, with a growing and young labour force, at a time when other Asian neighbours are facing a population decline. Investment in infrastructure has also helped, as has geography: its capital, Hanoi, is now less than 17 hours’ drive from China’s leading technology cluster, Shenzhen, and the country’s 3,000 kilometres of coastline facilitate global maritime connections.6 The ingredients behind Vietnam’s success, which replicate the experience of the «Asian tigers», thus offer several lessons in development for other countries in the region. Finally, Vietnam may already have been one of the first winners of the US-China trade tensions. Between 2018 and 2021, its exports of electronics to the US have tripled, while China’s have practically stagnated.

Vietnam is now among the most open economies in the world and is a member of more than a dozen trade agreements, including the RCEP, considered to be the largest regional trade agreement in the world,7 and, since 1995, the ASEAN group. Despite their dissimilarities, perhaps the greatest achievement of the ASEAN countries has been to bring peace and dialogue to a region devastated by conflicts just a few decades ago. But the bloc could still be more ambitious. Intra-regional trade still accounts for only 20% of total trade in the region (compared to more than 60% in the case of the EU, or 40% for the USMCA, the successor to NAFTA), a rather modest figure considering the high level of tariff-free trade barriers in the region. On the other hand, in a context of growing geopolitical tensions, the virtual non-existence of common institutions makes it difficult to take advantage of the favourable geo-economic environment and threatens the defence of regional priorities, such as the stability of the South China Sea. Like Vietnam in the 1980s, in order for the ASEAN bloc to continue to drive development in the region, it needs a doi moi reform plan.