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After China – Who is next?

Photo by DAVID ILIFF. License: CC-BY-SA 3.0

Photo by DAVID ILIFF. License: CC-BY-SA 3.0

It’s no secret a great deal of the economic growth that’s occurred in the United States (and really all of the West – Canada included) over the last 25 years has happened because of investment in China. Made in China: for as long as I can remember China was where everything was manufactured, but changes are around the corner.

I was honestly surprised at the number of attack ads during last year’s U.S. presidential election. Both Obama and Romney hammered each other on the issue of China, cheap Chinese manufacturing stealing American jobs, stealing American ideas, unfair business practices, etc. Personally, I don’t have a huge problem with this rhetoric. I think it’s about time the U.S. stepped up its criticism of Chinese labour practices and it should’ve been debated much more prior to this. But of course, that’s the heart of the issue, isn’t it?

The reason China has become a domestic political issue in the U.S. now, and only now, is that American businesses aren’t making as much money on China as they used to.

Labour costs in several key Chinese industries, and most significantly, manufacturing, are increasing. And so, as the rules of business dictate, U.S. and other western businesses have begun looking for new markets.

But what will this look like? It seems scary, almost – the world after China. I don’t know the future, but I have a few ideas. And even though this is an editorial, I think they’re good ones. So bear with me for a minute.

Vietnam.

I know, it sounds strange even saying or thinking it. Didn’t they have that massive war with the United States, yesterday? That’s true, but if there’s anything more unappealing to Vietnam at this point other than the United States, it’s China.

Historically, you can go back literally thousands of years and see China and Vietnam have a troubled past, and have never gotten along well. This trend in animosity has resurfaced in China’s recent flexing of its new naval muscle in the South China Sea, and has put the Vietnamese and Chinese governments at odds yet again.

So being faced with two evils, it’s likely the Vietnamese government would choose the lesser at this point: the Americans. Still, you might say it’s an impossible pairing: the U.S. and Vietnam.

The thing is it’s already happening. In recent years and more recent months, the Vietnamese government has loosened restrictions to allow for more western, and specifically American, investment in infrastructure and more importantly, business investment.

Increased trade and investment with western banks is a signal to the international community that Vietnam is serious about standing up to China.

But Vietnam makes sense from an American investment standpoint as well, for several key reasons.

Vietnam is a formally communist state: what the Americans found in East Europe and China in the post-Cold War era was that former communist countries made for great new markets. For one thing, former communist countries generally have somewhat stable governments, as well as a standard of infrastructure, which, as long as the governments were open, made them reasonably stable countries for investment. But more importantly, however, because all businesses and markets were government run, they were easily outmatched by competitive western businesses.

Vietnam has a long coastline. Most of the western investment that went into China over the past 25 years occurred along its southern, but mostly eastern coastline. The reason why these long coastlines made China a useful base for manufacturing was that it offered many different ports for trade ships to dock at, increasing its ability to export quickly. Vietnam’s coast is attractive for the same reason, even though Vietnam does not have as many large cities as China. Although China has many supercities now, the fact is that many of the manufacturing cities along the coast, such as Guangzhou, grew almost overnight in the last three or four decades, primarily because of western investment. Vietnam also has a large and growing population, which would support labour demands as the economy expands.

Vietnam’s government has also committed to more joint military exercises with the United States and other nations in the region, as well as to increase political ties with those same countries.

Will the U.S.-Vietnam partnership come to pass? Maybe. Maybe not. But if not Vietnam, where will the next manufacturing hub of the world be?

Who can say? What is certain, however, is that we are in a time of flux.

China doesn’t intend to be so easily replaced. The Chinese government has its own military hardware now, and its navy isn’t just picking on smaller players like Vietnam and the Philippines anymore. On several recorded occasions, Chinese navy ships have attempted to intimidate U.S. navy ships, as well.

What’s also clear, however, as the rhetoric from the last presidential election suggests, is that the United States is serious about moving its manufacturing interests out of China.

During the course of his first term, President Obama has been steadily transferring U.S. military hardware away from the Mideast and into East Asia. High-ranking officials in the U.S. military have denied that this move to East Asia is to do with China, however years of inaction on other security issues in the region, such as North Korea and Taiwan, seem to dictate otherwise. Increased labour and manufacturing costs in China are pretty much the only key elements related to U.S. interests that have changed in the last three decades in the region.

Whether Vietnam becomes a major trade and manufacturing partner to the U.S. is essentially beside the point. Ostensibly, the U.S. is moving its military hardware to East Asia to protect its new trade/manufacturing partner from China, whichever partner that turns out to be.

I want to make clear that I don’t really take sides. And I don’t think the Americans are going into this looking for a war. They’re in it for trade interests. But either way, a trade war of some sorts looks to be around the corner.

Whatever else happens, it’s certainly safe to say we’re entering the after China era.