Taiwan-Vietnam Economic Relations in the Age of Disruption

Taiwan-Vietnam Economic Relations in the Age of Disruption

Taiwan-Vietnam Economic Relations in the Age of Disruption

In December 2019, Taiwan’s economic relations with Vietnam reached a key milestone when the two sides signed an updated bilateral investment agreement (BIA), which later came into force on May 24, 2020. Taiwan’s Ministry of Economic Affairs (MOEA) viewed the BIA as a major achievement of the New Southbound Policy (NSP, 新南向政策), which aims to diversify Taiwan’s investments and strengthen relations with neighboring countries in the Indo-Pacific. Since President Tsai Ing-wen (蔡英文) initiated her signature NSP in 2016, Vietnam has come into the limelight as one of the next global manufacturing hubs. The disruptions in international supply chains caused by the US-China trade war has further facilitated the relocation of a swarm of overseas Taiwanese businesses to northern Vietnam. The rapid growth of foreign investment inflows into Vietnam, however, has raised concerns about overheating Vietnam’s markets, while the threat of US punitive tariffs on Vietnam’s exports may also diminish the prospects of greater Taiwanese investment in Vietnam.

Government Efforts to Promote Bilateral Economic Relations

To deepen and broaden bilateral economic ties, Taiwan’s government has focused on people-to-people and business-to-business exchanges. A series of higher education and vocational training projects have been launched under the New Southbound Talent Development Program (新南向人才培育計畫) to cultivate talent among Taiwanese and Vietnamese youth, who play critical roles in bridging the two countries and enhancing mutual understanding. Additionally, Taipei has organized various showcase events and networking platforms, such as the New Southbound Market Networking (新南向國家企業聯誼會), to help Taiwanese businesses navigate Vietnam’s market. These efforts are largely devoted to Ho Chi Minh City, Vietnam’s most populous metropolitan area, where MOEA has set up a dedicated investment help desk—”Taiwan Desk” (台灣投資窗口)—to offer advisory services. In the hope of complementing these services, Taiwan External Trade Development Council (TAITRA, 中華民國對外發展貿易協會) further launched an online “Southern Star Club” (指南星俱樂部) in January 2019. This interactive website has provided instant information and support to more than 1,400 Taiwanese businesses that can directly interact with TAITRA overseas offices.

Vietnam, as the host country, is committed to creating an attractive business environment to attract foreign investment. According to the Five-Year Socio-Economic Development Plan for 2016-2020, Vietnam’s focus has continued to center on three strategic goals: putting a socialist-oriented economy in place, improving the quality of its workforce, and constructing infrastructure systems in synchronization with urban modernization. Vietnam also has 18 coastal economic zones with up to 325 state-supported industrial parks, which are designed to offer an array of incentives to foreign investors. These incentive schemes include tax breaks, elimination of tariffs on selected items, lower rates for corporate income taxes and value-added taxes, and reduced land rents and land fees. Lu Chih-sheng (盧智生), chairperson of the Hanoi branch of the Council of Taiwanese Chambers of Commerce in Vietnam (越南台灣商會聯合總會河內分會), pointed out that a two-year tax exemption and 50-percent reduction in payable taxes for four subsequent years is currently applied to most Taiwanese businesses based in Vietnam’s industrial parks.

Updated Taiwan-Vietnam Bilateral Investment Agreement

As a result of these mutually beneficial policies, Taiwan has emerged as the fifth-largest foreign investor in Vietnam in 2019, while Vietnam has become the seventh-largest importer of Taiwanese goods. Clearly, the Vietnamese government has gradually realized that better legal protections for Taiwanese investors could boost investor confidence and bring in more businesses. This growth in economic cooperation strengthened the two sides’ determination to update the existing bilateral investment agreement (BIA), which was first signed in 1993. At that time, President Lee Teng-hui’s (李登輝) Southbound Policy (南向政策) used Taiwan’s investment in Southeast Asian countries to gain political advantages for Taiwan, including the resumption of substantive semi-official interactions by establishing de facto embassies and consulates. However, the original BIA’s policy objectives were outdated and incompatible with the current need for diversified investments. The agreement fell behind with international standards in many ways; for instance, the BIA’s exclusion of Taiwanese investment in Vietnam via a third country was an arguable defect. Taiwan and Vietnam did not seriously acknowledge the defects until Vietnam’s nationwide anti-China protests in 2014, which marked a turning point and brought the two sides to the negotiation table.

Even though 425 Taiwanese businesses were reportedly affected by the protests, causing direct losses of between USD $150 million to $500 million, only a limited number requested compensation from the Vietnamese government in accordance with the BIA. Roughly ten of the most severely damaged Taiwanese businesses finally declined to take legal action, which suggests that the old BIA was more symbolic than substantial. After more than four years of negotiation, Taiwan and Vietnam eventually signed an updated BIA in December 2019. In a bid to provide more comprehensive protection for Taiwanese businesses operating in Vietnam, both sides incorporated the lessons learned from the experience of dealing with compensation for Vietnam’s 2014 protests into the revised clauses. These are reflected in the updated BIA’s more comprehensive investor-to-state dispute settlement mechanism and the inclusion of the Taiwanese government as a mediator in investment issues on behalf of its nationals. Moreover, the Vietnamese government is expected to announce any amendments to its investment-related legal instruments in a timely manner so as to ensure regulatory transparency. A large majority of Taiwanese businesses in Vietnam recognized the governments’ joint efforts. Some highlighted that the new BIA would stimulate higher inputs from newcomer businesses and accordingly bring more benefits for them than for those who have already been running businesses in Vietnam for a long time.

Impact of US-China Trade War

This argument regarding increased benefits for newcomers into Vietnam’s market came against the backdrop of escalating trade tensions between the United States and China. US tariffs on Chinese goods have reportedly driven American importers to look for alternative supplier locations, particularly in terms of electronic products and electrical machinery. These current shifts in the global supply chain appear to come at an excellent time, allowing smaller Asian manufacturers of electronic components and accessories to fill in the vacuum left by the decline of the “red supply chain” of China. Vietnam is reportedly the biggest beneficiary of the relocation effect from the trade war, exporting more phone parts and automatic data process machines. This increase in exports contributed to 7.9 percent of Vietnam’s 2019 gross domestic product (GDP). Taiwan is reportedly the second-largest winner of the trade war after Vietnam, with an increase in exports of typewriter parts, office machines, and phone parts, which constituted 2.1 percent of Taiwan’s GDP in 2019. Accordingly, Taiwanese investors with manufacturing bases in China have begun to adjust their investments and overall strategy layouts.

Taiwanese Businesses Look towards Northern Vietnam

Even though Taiwan government has rolled out the red carpet for returnees from China, a large number of overseas Taiwanese businesses have decided to shift their focus to Southeast Asian countries instead, where they believe that the assembly and mass production of gadgets can be done in a more efficient and cost-effective manner. According to Kung Ming-hsin (龔明鑫), Taiwan’s Minister without Portfolio in charge of economic affairs, Vietnam is the most preferred destination for Taiwanese technology companies. Investors point to Vietnam’s stable political system and economic growth, improved business climate and infrastructure, skilled and trained workforce, and deeper integration into the global economy as signs of the country’s strong investment environment. Taiwan’s private sector is also ahead of the government in determining locations to set up production lines, a trend that can be seen in the increasingly frequent Taiwanese business field trips and surveys. Unlike the small and medium-sized Taiwanese enterprises in traditional industries that have taken root in southern Vietnam, these newly arriving Taiwanese electronics companies are increasingly looking towards the north.

Vietnam’s capital city Hanoi and the northern coastal city Hai Phong have emerged as Taiwanese investors’ top choices due to their strategic locations and relatively low land and labor costs. Electronic giants, including Foxconn (富士康), Compal (仁寶), Lite-On (光寶), Gemtek (正文), AmTRAN (瑞軒), Synnex (聯強), and Chilisin (奇力新) are increasing investments and constructing new plants to expand production capacity in those Vietnamese cities. As a result, Vietnam’s electronics components, computer, electronics, and optical product manufacturing industries made up 22.1 percent of the total Taiwanese investments in 2019, an 18.8 percent increase compared to 2018. This marks a shift in Taiwan’s investment in Vietnam away from the long-running focus on traditional textiles, base metals, and chemical industries. Riding on this trend, MOEA and TAITRA organized the third Taiwan Expo (台灣形象展) to promote Taiwanese brands and products in Hanoi, rather than Ho Chi Minh City, where the event was previously held for two consecutive years.

The continuous flow of investment from Taiwanese technology manufacturing industries is undoubtedly music to the ears of the Vietnamese government. Taiwanese investment is in line with Vietnam’s new foreign direct investment strategy aimed at attracting more high-quality investment from sectors where Taiwan has strong expertise, such as the mechanical and electronic sectors. The memorandum of understanding (MOU) signed by Vietnam’s first and largest high-tech park, Hoa Lac Hi-Tech Park, and Southern Taiwan Science Park (南部科學園區) could be regarded as a cornerstone for future bilateral cooperation. Nevertheless, some Taiwanese businesses are concerned about Vietnam’s overheating markets, which have raised land costs and wages. Vietnam’s lack of a holistic electronics manufacturing ecosystem also suggests that the country still has a long way to go before it can rival China. When reaping the benefits from strengthened Taiwan-Vietnam economic relations, Taiwan’s government and businesses should take these potential risks into considerations so as to map out countermeasures timely and appropriately.

The main point: Economic relations between Taiwan and Vietnam have strengthened under President Tsai Ing-wen’s New Southbound Policy, notably with an updated bilateral trade agreement as a key milestone.