The United States is not the only country embracing “friendshoring.” A similar dynamic is unfolding in China, and Vietnam has emerged as a crucial node in both countries’ strategies. As a “connector economy” bridging the supply chains between United States and China, Vietnam is being courted by both powers—and receiving substantial investment. The United States can leverage its strengths in technology investment and talent development to pull Vietnam closer to its side.

In December 2023, Chinese leader Xi Jinping visited Vietnam and agreed on building “shared future” between the two countries, three months after US President Joe Biden announced the US-Vietnam Comprehensive Strategic Partnership. In addition to private companies expanding their manufacturing bases to Vietnam as a de-risking strategy, the two major powers are also doubling down on courting Vietnam on an official level.

Registered investment from China and Hong Kong combined exceeded $8.2 billion in 2023, accounting for 6,688 projects, in contrast with $500 million from the United States. China’s integration in trade with Vietnam has steadily grown over the past decade—reaching $171 billion in 2023, bolstered by the free trade agreement between China and the Association of Southeast Asian Nations (ASEAN) and the Regional Comprehensive Economic Partnership (RCEP) that reduced tariffs and harmonized rules of origin and intellectual property protection. Meanwhile, Biden’s pledges of more investments and easier trade have significant ground to cover. In the first ten months of 2023, the United States invested just $500 million in foreign direct investment (FDI), while exports from the United States plunged by 15 percent to $79.25 billion.

China is positioning itself to prioritize innovation and research and development (R&D), aiming to ascend the value chain and achieve self-reliance in alignment with Xi’s strategy for “high-quality development.” Against the backdrop of the changing economic priorities, the State Council of China published a policy document in December 2023 that supported “core firms in the supply chains” to expand overseas production and leverage global resources. Responding to the “unreasonable trade restrictions” imposed by foreign governments, China is initiating a friendshoring strategy of its own.

The key is electronics. The persistent dominance of China in the critical supply chains of the United States is most evident in the Information and Communication Technology (ICT) sector, supplying 30 percent of US imports by April 2023. Thus, as global scrutiny over China’s manufacturing overcapacity intensifies, electronics companies are figuring out coping strategies. Vietnam’s rules of origin stipulate that if a product includes at least 30 percent of local value content or change to a different Harmonised System (HS) classification, it qualifies as “Made in Vietnam,” which provides a workaround for the trade barriers erected by the US government since the 2017 trade war. As multinational technology firms like Apple diversify their supply chains as part of their “China plus one” strategies, its Chinese suppliers are following this trend. For instance, Apple’s contractor, Luxshare Precision Industry Co., has announced plans to double its investment in Bac Giang, Vietnam to $504 million, responding to a trend of “internationalization of industrial chains.” Goertek, another Apple supplier, is also investing up to $280 million to establish a new subsidiary in Vietnam to serve Apple’s demands.

Since as early as 2013, nine out of the top ten Chinese electronic component and assembly companies have been making greenfield investments in Vietnam, with the capital influx accelerating since 2018. These expansions not only cater to Apple’s appetites, but also aim to broaden their market reach within ASEAN. For instance, BYD plans to open a plant in Vietnam to produce car parts, with the aim to export components to its factory in Thailand that serves mainly the expanding Southeast Asian electric vehicle market.

China accounted for 39 percent of Vietnam’s electronics imports in 2022, with a below-average annual growth rate of 1.3 percent among all sources. Considering that 33.21 percent of Vietnam’s total imports come from China, the electronics sector is not an outlier of particular concern. Vietnam’s electronics supply chain, intermediary and finished combined, remains diversified, with substantial contributions from South Korea (27 percent), Taiwan (9 percent), and Japan (7 percent). Despite recent increases in Chinese FDI, there has not been a corresponding surge in demand for Chinese intermediary goods, challenging the “re-routing” argument that these enterprises mislabel Chinese goods as Vietnam-made to evade tariffs.

Although Vietnam’s sourcing of electronic goods is not overly reliant on China, China can still influence on how Chinese-based companies operate there. When then US President Donald Trump placed an executive order to force TikTok to sell or close in 2020, the Chinese Ministry of Commerce expanded the “Catalogue for Prohibited and Restricted Export Technologies” and prohibited tech transfers relating to big data software. Currently, the ICT section of the catalogue only includes integrated circuits and robotics. Should China decide to include core electronics technologies in this catalogue, plants in Vietnam might face challenges in maintaining production.

As China’s intensifies its strategy of friendshoring in the electronics sector, Vietnam’s industries could be more entangled with China. In response, Washington should proactively bolster its anti-dumping and anti-subsidy enforcement. In a 2019 case, the United States imposed duties of 456.23 percent on steel imports from Vietnam, attributing the decision to the mislabeling of products from South Korea and Taiwan to evade the levies. The United States also has the option of lifting overall duties for products from key industries. Although the Biden administration waived trade duties on solar modules from Vietnam until June 2024, the exemption depends on renewals every two years and companies’ compliance of related trade rules.

The United States remains well-positioned to provide Vietnam with the right incentives to reduce its dependence on China and maintain it as a dependable supply chain partner. Under the CHIPS Act, the United States can allocate a portion of the $500 million of International Technology Security and Innovation Fund to enhance Vietnam’s semiconductor ecosystem. The United States has a strength in mobilizing private investments: it has initiated workforce development initiatives in Vietnam with two million dollars in “seed funding” to incentive the private sector to join. In contrast to Chinese firms, which primarily focus on manufacturing, US companies, including Qualcomm, NVIDIA, and fifteen other companies are planning to establish R&D centers and nurture local talent in technology, aligning with Vietnam’s goal to ascend the value chain and fostering a balanced approach amidst US-China tensions. By portraying itself as a good partner, the United States offers a prospect that Vietnam has every reason to embrace.

Stanley Zhengxi Wu is a former young global professional with the Atlantic Council GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Image: View of Bitexco Tower, Ho Chi Minh City Vietnam