Executive Summary
Vietnam has recently witnessed changes in political leadership at unprecedented speed. While the grip on power of the Communist Party of Vietnam (CPV) looks uncontested, fissures have become visible ahead of the 2026 party congress.
Vietnam continues to be one of the fastest growing economies with an annual growth rate of five percent in 2023. The country benefits from the intensifying Sino-American rivalry as companies diversify from China to Vietnam.
In quick succession, the leaders of the United States, China, and Russia visited Hanoi vying for closer ties due to the country’s strategic location in Southeast Asia.
Implications for International Business
Vietnam emerges as a manufacturing alternative to China in certain sectors such as garment/fashion or electronic devices. However, it still relies heavily on imports for high-tech components and its infrastructure compares poorly with China.
International businesses increasingly use Vietnam as a strategic hub for accessing ASEAN markets and the wider region – a role the Vietnamese leadership continues to embrace and plans to expand on further.
Vietnam faces geo-economic pressure from both Washington and Beijing as the two are locked in a contest for regional hegemony. International businesses must monitor closely how Hanoi responds to these pressures over time.
State of Play
Throughout the last 18 months, Vietnam has witnessed major political upheaval not seen for decades. An anti-corruption campaign led to the resignation of two presidents and high-ranking politicians, including Politburo members, as well as to hundreds of arrests and thousands of dismissals and reprimands. On 19 May, news broke that Nguyen Phu Trong, the General Secretary of the Communist Party of Vietnam (CPV) and driving force behind the anti-corruption campaign, passed away. The Politburo has appointed President To Lam, a former head of the country’s secret service, as interim party leader. He is also the likely successor to the party leadership after the next regular party congress in early 2026. While the power of the CPV remains uncontested and there are few signs of wider threats to domestic stability, considerably party frictions have emerged. Currently dominant in the power struggle is a faction of officials, led by Lam, with close ties to the country’s domestic security apparatus who seek to re-ideologize the CPV and strengthen the role of the party vis-à-vis state bureaucracy and society.
As one of the fastest growing economies focusing on export-driven growth, Vietnam is particularly vulnerable to geopolitical and geo-economic disruptions. It has thus put maintaining cordial relations with all major powers at the center of its so-called “bamboo diplomacy”. Specifically, it expanded bilateral relations with the United States and with U.S. allies such as Australia, Japan, and Korea as well as with Europe. At the same time, Hanoi maintained good relations with China despite maritime disputes in the South China Sea. It also reinforced its close relations with Russia, its largest arms vendor, not least by Russia’s President Vladimir Putin’s visit to Hanoi in June 2024. This includes its relations with the EU and its member states. The EU-Vietnam Free Trade Agreement has led to a huge expansion of economic ties, especially in exports by Vietnam to the EU in sectors such as textiles, footwear, electronics, and agricultural products (to a total of 47.6 bn Euro In 2023). Beyond economic ties and aid, however, EU-Vietnam relations have not progressed as quickly as imagined. Hanoi’s close ties with China and Russia have at times been at odds with the EU’s strategic interests. Moreover, concerns over the country’s abysmal human rights records, its violations of labour standards and intellectual property rights, endemic corruption, and slow progress in legal and administrative reforms have hampered closer cooperation.
Key Issues A more assertive regional and geopolitical player
Vietnam has profited substantially from current diversification trends, as even Chinese companies have diversified to Vietnam to circumvent export restrictions. So far, Hanoi has successfully maintained good bilateral relations with all major actors to sustain its high levels of economic growth. While increasing security and defense ties with America and its allies, Hanoi also strictly adheres to Beijing's "one China" principle, which claims Taiwan as an inalienable part of China. However, in the case of a Taiwan contingency its strong economic engagement with Taiwan plus the hundreds of thousands of Vietnamese citizens working on Taiwan would pose multiple simultaneous challenges for Vietnam. Hanoi has actively participated in ASEAN and associated multilateral forums, especially concerning issues revolving around the South China Sea. Its leadership also drives efforts toward an ASEAN Economic Community (AEC) as it seeks to profit from stronger trade and investment ties with other ASEAN states.
Vietnam’s security and defense policy has been chiefly focused on its immediate neighbourhood rather than the wider region. The key issue for Vietnam’s leadership has been the South China Sea conflict, which it seeks to navigate primarily via diplomatic engagement. The CPV attempts to use its close ties to China’s leadership based on ideological affinity while also asserting its claims internationally based on international law. Nonetheless, Hanoi has itself militarized a number of islands and reefs it controls in the South China Sea and has made attempts to upgrade its navy and coastguard. The primary aim, besides providing illegal revenues through mark-ups and kickbacks for high-ranking military personnel, is for Vietnam to be able to “quietly” contest Chinese maritime expansionism in the South China Sea, in contrast to the Philippines more open confrontation. Yet, the official goal of modernizing the armed forces by 2030 has been effectively curtailed by budgetary constraints, mismanagement, and endemic corruption, and an earlier over-dependence on Russian arms exports which slowed to a trickle since 2022.
Geoeconomics
Vietnam is one of Asia’s most export-oriented economies and therefore very dependent on continued access to global trade and supply chains, as its high trade to GDP ratio shows. It has created a favourable environment for international companies seeking to establish manufacturing and export bases offering various incentives to foreign investors, including tax breaks, reduced tariffs, and simplified administrative procedures. Vietnam holds membership in all multilateral trade agreements (AFTA, CPTPP and RCEP) to enhance market access across the region, support regional supply chains and reduce tariffs. Its labour costs are low, with an average hourly wage at US$2.99 (VND 68.000) compared to China’s US$6.50. It thus has increasingly emerged as a regional alternative manufacturing hub to China in several sectors, such as textiles (boasting a well-established manufacturing infrastructure), footwear, and furniture making (particularly to the U.S.). Vietnam is also a major exporter of agricultural products such as coffee, cashew nuts, or seafood, effectively competing with China. In consumer electronics, the country has a growing sector with significant investments from Samsung and LG. However, while the country can handle assembly and some component manufacturing, it still relies on imports for high-tech components.
Challenges persist also in other sectors: In advanced electronics, Vietnam lacks the advanced semiconductor fabrication and high-tech component manufacturing capacity that China possesses. Its automotive industry is still developing, with some local assembly and component manufacturing successfully established, but unable to replace China’s established automotive manufacturing base. The same goes for machinery and heavy equipment as well as pharmaceuticals and chemicals. Also, much of the capital and the supply chains, as well as some of the infrastructure investments, that foster Vietnam’s growing clout are China-centric, so diversification to Vietnam does not necessarily mean reduced economic dependence on China.
Vietnam’s embrace of the Belt and Road Initiative (BRI), however, has been lukewarm due to general mistrust in China as well as past controversies with Chinese-funded infrastructure projects. Conversely China has afforded Vietnam a low level of priority within the BRI. Vietnam has actively courted other partners to develop its ageing infrastructure, most notably Japan and South Korea as well as international development banks. As part of its Global Gateway initiative, the EU is funding three major projects in the area of just energy transition as well as the development of a new metro line in Hanoi. US sanctions against China can be potentially undercut by re-routing supply chains via Vietnam, with the significant challenges and limitations mentioned above. Also, Vietnam may face geopolitical pressure from both the US and China regarding its role in circumventing sanctions. How Hanoi will respond to such pressures remains unclear given the current change in leadership.
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