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Why Vietnam Has Become A Battleground For Corporate Governance Standards

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By most accounts, the U.S.-China trade war has been good for Vietnam. As Washington and Beijing’s trade dispute festers, a growing number of multinational companies have moved portions of their operations out of China and into Vietnam or are developing plans to do so.

This is not just about the avoidance of U.S. tariffs on Chinese-origin goods. The real catalysts are the U.S.-China geopolitical rivalry and, more specifically, the intensifying technology race.  International businesses are scrambling to avoid becoming victims of the next round of politically “weaponized” supply chains.

Google, for example, will shift production of its Pixel smartphones from China to a rebuilt, state-of-the art factory, once owned by Nokia, in the northern Vietnamese province of Bac Ninh. Apple has tasked its key contract manufacturers, including Foxconn, Pegatron and Quanta Computer, to provide scenario mapping around new production operations in Vietnam. Intel, the U.S. chipmaker, has moved some key production from China to Vietnam.

 Japanese companies have also been on the move. Sharp has moved Chinese production of PCs to Vietnam, while Kyocera has relocated assembly of high-end printers.  

Meanwhile, according to the U.S. Chamber of Commerce, Chinese FDI accounted for the largest portion of foreign investment in the first four months of 2019—which increased more than 50% over the same period in 2018—and Chinese interests have been quietly acquiring or setting up manufacturing operations in Vietnam. This has been the trend for years, as rising costs in China have forced  factory owners to seek cheaper wages abroad, but recent trade tensions have accelerated the movement of Chinese money into Vietnam.

This influx of foreign companies into Vietnam, however, with vastly different approaches to corporate governance, has set the stage for a clash of standards and business practices. Vietnam has become a microcosm of conflicting corporate governance models, especially between China and the West.

Going forward, who will be the rule-makers and rule-takers in Vietnam?

Hanoi has been struggling to keep up with infrastructure needs and capacity-building efforts, but enforcing a progressive framework of rules worthy of Vietnam’s latest rounds of free-trade agreements will pose an even more difficult task.

As a signatory to the EU-Vietnam Free Trade Agreement, and the Comprehensive and Progressive Trans-pacific Partnership (CPTPP), Hanoi has committed to abiding by and enforcing a host of “next generation” FTA rules which include, among other things, labor rights, environmental standards and intellectual property protection.

Vietnam’s current business landscape, however, will struggle to achieve the capacity-building and standards required for the EU-Vietnam FTA or CPTPP rules frameworks.

TIEN TUAN/AFP/Getty Images

The World Economic Forum ranks Vietnam number 77 out 140 countries in its 2018 Global Competitive Index, where corruption in institutions was identified as a significant issue. On another critical metric, Transparency International ranked Vietnam 176 out of 180 countries in the World Press Freedom Index.

These are important benchmarks. Under the new generation of FTAs, preferential treatment would be deniedand punitive measures sought—for exports of illegally logged lumber, for example, or in other instances where a supply chain was linked to deforestation and other forms of environmental degradation.

But for these rules to work, key stakeholders must be able to call out offending parties without fear of censorship or reprisal.

 As recently as 2017 a 22 year-old Vietnamese blogger was sentenced to seven years in jail for criticizing government authorities for the alleged cover up and mismanagement of a toxic chemical spill which contaminated miles of Vietnam’s coastline. The entity responsible for the spill was a steel plant owned by the Taiwanese Formosa Plastics Group.

The Formosa Plastics incident has brought to light a growing consensus in Vietnam’s business community about opaque deals done between big foreign companies and political elites:  they lead to bad governance and even worse outcomes.

Which begs the question whether non-state actors, alone, can set the rules for corporate good governance in Vietnam, or whether it is necessary to have a strong state actor function as the anchor of an FTA. Assuming the later, when the United States withdrew from the Trans-pacific Partnership, it very well may have doomed the possibility of enforcing next-generation-trade standards in Vietnam, under the CPTPP.

On the other hand, multinational companies like Unilever, Dow Chemical and Microsoft, for example, have invested millions of dollars into corporate social responsibility programs which include fair access to entrepreneurship opportunities, education and up-skilling as well as sustainable business practices. This is having a positive impact on local communities, supply chains and general business practices.

But can a group of Western companies operating under a multi-lateral trade framework collectively exert enough influence on the general trade governance environment in Vietnam?

A growing number of skeptics say no. Thus, a growing number of multinationals favor a newly negotiated bi-lateral U.S.-Vietnam FTA, which could effectively spill over into the governance landscape and elevate standards for all of Hanoi’s next-generation FTAs.  For now, however, the trade governance landscape in Vietnam will remain conflicted and fragmented.