◎ Manufacturers may eventually shift out of China to Vietnam and an economically liberalized North Korea.
During his State of the Union address on Feb. 5, United States President Donald Trump announced that he would be meeting North Korean leader Kim Jong Un in Vietnam from Feb. 27 to Feb. 28.
Three days later, Trump tweeted that the second summit between him and Kim would be held in Hanoi. He also tweeted that North Korea will become a “great Economic Powerhouse” under Kim’s leadership.
The big picture:
The second Trump-Kim summit comes just before the March 1 deadline for China and the U.S. to reach a trade agreement. Trump has promised to increase tariff rates if a “complete deal” is not reached.
Our take:
1. There are some obvious reasons why Vietnam might seem like a good choice for President Trump and Kim Jong Un to hold their second summit.
- Vietnam has good relations with both the U.S. and North Korea, and is a relatively “neutral” location.
- Kim might feel more comfortable holding potentially momentous discussions in a fellow communist country that is closer geographically to North Korea.
- The U.S. might wish to uphold the Vietnam model of economic and political reform as an example for the DPRK to emulate. Also, while Vietnam is still controlled by a communist party, the country traditionally has bad relations with China and the Chinese Communist Party. The CPV and CCP armies clashed in the Sino-Vietnamese War in 1979, and today, both countries are economic competitors. Vietnam even tried to join the Trans-Pacific Partnership during the Obama administration.
- According to a Financial Times report on Feb. 7, after Trump proposed to meet Xi Jinping in Vietnam for trade talks, the Chinese regime balked at the idea because it does not “want to be seen doing a deal with the U.S. in Vietnam, for political and historical reasons.”
2. We wrote last year that the U.S. and the DPRK could issue a joint declaration to end the Korean War as a prelude to signing a formal peace treaty during the second Trump-Kim summit. If both parties have such an intention, then the selection of Vietnam as the second summit site has likely significant longer-term strategic implications aimed at countering the CCP regime.
The holding of the second Trump-Kim summit in Vietnam allows the U.S. to simultaneously establish closer ties with both North Korea and Vietnam while pushing them out of Beijing’s orbit. We explained the historical bad blood between the CPV and the CCP above, and the “hot-and-cold” DPRK-PRC relationship in earlier articles (see here and here).
By building closer ties with Vietnam and North Korea, the U.S. could seek to nudge both countries to open up their economies and move away from communism and towards democracy. Upon greater economic and political liberalization, both countries could end up working together with America on its Free and Open Indo-Pacific Strategy. A U.S.-friendly Vietnam and North Korea will greatly increase geopolitical pressures on the PRC because both countries are right on China’s doorstep.
The PRC faces an existential crisis if Vietnam and North Korea move into Washington’s orbit and if America is able to get its infrastructure building plan up and running in the Indo-Pacific region:
- China’s explosive economic development was built on its ability to carry out low to middle-end manufacturing at a much lower cost. The CCP achieved this through the benefits of demographic dividends, sacrificing the environment and human rights (ignoring workers’ rights and interests, suppressed wages, “stability maintenance” work, etc.), and cheap land rental costs. With these advantages, the CCP was able to attract substantial foreign investment for many years.
- In recent years, however, China’s advantages are vanishing. The country is seeing very low fertility rates, an aging population, soaring land prices, rising wages, environmental degradation, and rising production costs. The Sino-U.S. trade war has accelerated China’s economic woes, resulting in many enterprises failing, production moving overseas, and weakening upstream and downstream supply chain advantage on the mainland. Much of the outgoing production has moved to the Southeast Asian region.
- Vietnam is a major beneficiary of foreign and Chinese manufacturing moving out of mainland China. The country could eventually catch up with China economically if U.S. tariffs on Chinese goods remain in place and U.S.-Vietnam ties grow stronger.
- If North Korea moves decisively towards peace, full denuclearization, and economic liberalization, it is not inconceivable that companies moving production out of mainland China (such as Samsung, LG, etc.) could set up shop in North Korea. In fact, President Trump could be anticipating this scenario when he tweeted that “North Korea will become a different kind of Rocket – an Economic one!”
- Presuming that production flows out of China and to Vietnam, North Korea, and the Southeast Asian region, then China would lose its status as the “world’s sweatshop” and its primary economic advantage. Without a booming economy, the CCP’s political legitimacy, which has been founded on delivering economic performance since Deng Xiaoping, becomes endangered.
