Thursday, January 4

Frankenstein in Vietnam: China's factory owners find less picky pastures

"According to entrepreneurs in China who spoke on condition of anonymity for fear of angering government officials, leaders in coastal areas have been encouraging pollution-intensive industries such as plastics, steel and electronics to consider relocating to Southeast Asia."(1)

"Pundita! I asked for a summary of where US foreign policy stands now and I get a series of posts on China. Is all this leading somewhere?
Caesar in San Francisco"

Dear Caesar:
It's all about pattern recognition. Until we recognize the patterns, we don't know where we stand. If we don't know where we stand, how can we formulate rational foreign policy?

Now we turn to Vietnam because the country is a great case study for our purpose. I'm starting with a blurb on Vietnam's security issues with China because they illustrate one pattern. No matter how much trade China does with another country, if the country is anywhere near China they are vulnerable to China's territorial claims.
Although it doesn't publicly proclaim it, China -- as in the case of Taiwan -- historically has considered Vietnam a renegade southern province. They named it An Nam, or "the Pacified South."

China's killing of Vietnamese fishermen in the Vinh Bac Bo (Gulf of Tonkin) in January 2005, in fact, has added to a consistent pattern of Chinese southern expansionism: conquest of the Paracel Islands in 1974; invasion of the northern provinces of Vietnam in 1979 and subsequent annexation of 8,000 square kilometers of borderland; occupation of the Spratley archipelagoes the same year and acquisition of 12,000 square kilometers of territorial waters in the Vinh Bac Bo conceded by Hanoi under the 2000 Vinh Bac Bo Pact.

Not content with forcing territorial concessions from Hanoi, China is also building up its naval force and setting up a string of naval bases along the sea lanes in the Eastern Sea to protect oil shipments from the Middle East. The Washington Times recently revealed that a previously undisclosed internal report prepared for Defense Secretary Donald H. Rumsfeld noted that "many Pentagon analysts believe China's military buildup is taking place faster than earlier estimates, and that China will use its power to project force and undermine U.S. and regional security."(2)
Now we turn to China's business relations with Vietnam, which point to other patterns. Vietnam has one of the most corrupt governments in modern times; this is just the type of government that China prefers dealing with. Note also the conditions in China that drive factory owners to offshore in Vietnam. I am publishing the entire article because it's worth ten policy papers on China:
China Ventures Southward
In Search of Cheaper Labor, Firms Invest in Vietnam
by Peter S. Goodman
Washington Post Foreign Service
December 6, 2005
HANOI -- Before he left his native China two years ago, Li Shaoxing was losing money at his plastic-bag factory in the center of the country. Though his homeland had become synonymous with plentiful cheap labor and limitless manufacturing spoils, he was grappling with rising wages, energy shortages and flat prices for his goods.

So, much as capitalists have always done, Li went looking for an easier place to profit. He ventured south of the border, putting up a factory here in a new industrial park in northern Vietnam, where wages are roughly one-third cheaper than at home and where workplace safety and environmental standards are in scant evidence.

"The competition in China is intense, and the investment in Vietnam made sense," Li said, sitting in his air-conditioned, glass-fronted office, as 500 workers toiled in an adjacent factory bay amid the clatter of machinery and the smell of melting plastic. "In this area, workers have a hard time finding jobs. They are happy for any work, and they are willing to eat a lot of bitterness.

"Much as manufacturers in the United States have transferred jobs to Latin America and just as Western European factories now look to Poland and Hungary, China's modern-day capitalists are increasingly focused on wringing profit from Southeast Asia. They are tapping new markets for sales and farming out work to people willing to labor for less than at home and in even tougher conditions. In a global economy driven by the pursuit of lower costs and fatter profit -- a drive that has led so many multinationals to low-wage China -- Southeast Asia is emerging as China's own version of China.

"It's a bit like the United States and Mexico," said Deng Weiwen, general manager of TCL (Vietnam) Corp., the local arm of the giant Chinese television maker, which established a factory outside Ho Chi Minh City in 1999. "China and Vietnam complement each other."

In Vietnam, Chinese entrepreneurs have found a country -- much like their own -- in the midst of a wrenching transition from communism toward an economy governed by market forces. Chinese investors are already accustomed to doing business in a place where personal relationships and access to power often trump the law.

"We have no problem understanding that bribes have to be paid to get things done," said Zou Qinghai, a textile entrepreneur who heads the chamber of commerce for the Chinese province of Zhejiang in Hanoi. "Vietnam's way of developing is simply a copy of China's.

"For now, China's investment in Vietnam remains in infancy. Since 1988, Vietnam has attracted more than $50 billion, with roughly half coming from Taiwan, Singapore, Japan and South Korea, according to state figures. Mainland China has injected only $734 million while competing for foreign investment.

But much mainland money is filtered through partners in Hong Kong, which has sunk $3.7 billion in Vietnam since 1988, according to state figures. Chinese investment has surged in recent years. China has become Vietnam's largest trading partner, with two-way commerce expected to reach $7.5 billion this year, according to government figures.

"We figure that China will develop faster in the future, and Chinese businesses will have more interest in investing outside of the country," said Nguyen Anh Tuan, vice director for Vietnam's Foreign Investment Agency in Hanoi. "The potential for Chinese investment in Vietnam is very great."

Foreign multinationals with factories in the Pearl and Yangtze river deltas -- China's principal manufacturing zones -- are increasingly exploring Vietnam and other areas of Southeast Asia as alternatives to expanding in the Middle Kingdom. This is particularly so for Japanese firms, which fear the consequences of diplomatic sparring and street protests over Japan's perceived unwillingness to take responsibility for wartime atrocities.

Among Chinese companies in Vietnam, many have focused on locking up natural resources and energy. In October, as Chinese President Hu Jintao visited Hanoi, China National Offshore Oil Corp. signed a deal with a local energy firm to jointly explore for oil and gas in Vietnam's Beibu Bay.

Chinese manufacturers are now expanding into Vietnam, in part to lock up shares of the Southeast Asian market ahead of the creation of a planned free-trade agreement with China. Textile and garment-makers are shifting to Vietnam to sidestep quotas on their shipments into Europe and the United States.

Some investment is propelled by stricter enforcement of environmental standards in some areas of China. According to entrepreneurs in China who spoke on condition of anonymity for fear of angering government officials, leaders in coastal areas have been encouraging pollution-intensive industries such as plastics, steel and electronics to consider relocating to Southeast Asia.

A strong push is coming from Wenzhou, a city in Zhejiang province south of Shanghai that has long served as a locomotive for growth in China's private sector.In recent months, officials in Wenzhou have convened roundtables with local entrepreneurs to encourage major polluters to move. At one meeting, a vice mayor of Wenzhou specifically declared that high-polluting industries would be deprived of access to land, water and electricity, according to two participants.This year, the Wenzhou city government and the Zhejiang provincial government have jointly organized roughly 50 all-expenses-paid trips for local businesses to survey prospective industrial sites in Vietnam and elsewhere in Southeast Asia, the entrepreneurs said.

While few would describe China as a beacon of labor safety or high wages, Chinese investors acknowledged in interviews that Vietnam beckons as an even cheaper, less regulated place to run a factory.

"Here, the workers can really accept hardship," said Qing Song, deputy general manager at Lifan Vietnam, a motorcycle factory opened outside Hanoi by a Chinese company. "Whatever requirements you set out for them in a day, they meet."

At the factory on a recent afternoon, men uncoiled sheaths of aluminum without protective gloves, while others operated heavy machinery without goggles or earplugs. The work went on beneath corrugated aluminum ceilings in poorly ventilated structures. Men in flip-flops used a donkey cart to move bricks to a construction site.

For Li, Vietnam has offered refuge from the brutal competition of Chinese business. Born and raised in Wenzhou, he launched his plastic-bag factory in Henan province in 1992 as a joint venture with a local cement maker. They supplied animal feed and fertilizer companies with plastic sacks.

In the first years, wages in impoverished Henan ran as little as $12 per month. But as China has boomed and factories proliferated, wages climbed, reaching about $72 at the Henan factory. At the same time, China's appetite for energy has exceeded its generation capacity, forcing factories such as Li's to shut down during key hours.

A flood of cheap bank credit has nurtured many competing factories, keeping prices down and eroding profits. Today, Li's Henan factory sells bags for roughly the same price as five years ago even while the costs of plastic and energy have increased by nearly one-fifth."Now," said Li, "we can't make any money."

In November 2002, Li took a vacation to Hanoi. As he walked tree-lined streets navigated by bicycle rickshaws, past fading French colonial villas and peddlers selling bowls of noodles, he might have been in his own country a decade earlier. At home, there was too much competition. Here was a frontier of opportunity."

I just had this feeling that I had to go out of the country and invest," he said. "It just seemed interesting and exciting."

The following month, he returned to Hanoi -- this time to look for a new factory site. Over the next several weeks, he and a translator rode all over northern Vietnam, meeting with the local governments that controlled land.He examined local market conditions, determining that -- unlike at home -- he could compete."

I used a means of deception," Li said, smiling. "I would visit other bag factories and pretend to be a customer and then ask for their prices," he said.

By January 2003, Li had settled on a new industrial park an hour's drive north of Hanoi. It was an undeveloped area of rice paddies, but it sat on the Friendship Highway connecting Vietnam to southern China, making it easy for Li to bring in Chinese technicians to construct and operate the factory.

He settled on a 50-year lease with the local government, which seemed pleased when he told them he would have jobs for 500 workers. The local minimum wage was $30 a month.

Still, Li needed approval from the Chinese government, which regulates capital leaving the country. By March 2003, less than six months after his first visit, he had the formal blessing to transfer $1.5 million to Vietnam to launch the factory. By May, construction had begun."

I knew if I was going to act, I had to act fast," Li said. "I couldn't be considering the pros and cons."These days, Li dons a blue suit as he crisscrosses Vietnam in search of customers, mostly state-owned animal feed factories. It is a new country, but so much is familiar -- the contractor who used shoddy materials in building the factory, the "special fees" and "expediting charges" that he hands customs agents at the port."

We Wenzhou people are used to that," he said. "In fact, it works for us. It's really convenient. A lot of things work quicker."

Li brings in materials from China to keep costs low. He lives in a factory dormitory room shared with another Chinese manager. He speaks no Vietnamese. He plays poker with the other Chinese managers and sometimes watches Chinese television via satellite. Mostly, he works.

"I'm not here to feel comfortable," he said. "I'm here to make money."

Special correspondent Eva Woo contributed to this report.
Now we turn to an utterly correct, impassioned and doomed plea from an American who protested extending PNTR to Vietnam:
Forum: Vietnam lures United States into trade deal
by Scott Johnson, an advisor to the Montagnard Foundation.
03/09/2006, The Washington Times
[...] a lure has been cast out to the United States [by Vietnam], just prior to Congress' scheduled vote on Permanent Normal Trade Relations (PNTR) with Vietnam this month, a lure to catch the U.S. Congress.

PNTR, you see, is a stepping stone for entry into the WTO and the proponents of PNTR will argue economic engagement is the key to Vietnam's development. They will say 'we must engage economically with Vietnam and this will assist Vietnam in changing its repressive ways."

This is what the U.S. trade lobby argues, and to be fair they have a point. However, Vietnam's northern neighbor (and communist brother) China, has spoiled the "miraculous cure all" remedy of economic engagement. The United States indeed granted PNTR to China some years ago and it didn't result in any great reforms.

Judging from a comment by Iowa Sen. Charles Grassley, Republican chairman of the Senate Finance Committee, one can see that China has actually ruined the image of economic engagement. Mr. Grassley stated in a Senate hearing on PNTR negotiations for Vietnam that, "We need to make sure that we aren't played for a sucker in the case of Vietnam, as we have been with China."

The question should really be, how does the United States do things differently to ensure Vietnam does indeed bring about the promised human rights reforms? Admittingly this is a dilemma as Vietnam has a history of diplomatic trickery and is one of the most corrupt nations in the world. But we can safely say that outright appeasement will not work.

Once Vietnam gains PNTR and accedes to the WTO, there are few if any sticks left to wield against Hanoi. [...]

[T]he United States needs to engage Vietnam, but not with a weak position on human rights. Now is the time to stand strong with the dissidents, time to show courage and state loud and clear that the United States will not tolerate repressive governments in the pursuit of trade deals.[...]
Now we turn to the bottom line:
A Trip-Up Before Key Trip,
Oxford Analytica November 2006, republished in Forbes
[...] President George W. Bush on Nov. 15 traveled to Singapore, on the way to the Asia Pacific Economic Cooperation (APEC) summit in Hanoi, Vietnam, on Nov. 17. The day before Bush's trip, Congress failed to pass a bill granting Permanent Normal Trade Relations (PNTR) status to Vietnam. For Asian leaders, the PNTR debacle may suggest that the U.S. administration is weak and unable to deliver on its trade agenda.

On his first trip to Vietnam, Bush had planned the delivery of PNTR status to Hanoi as a key goodwill gesture. Vietnam officially joined the World Trade Organization last week, and the United States will be out of compliance with WTO rules until it passes PNTR for Vietnam. In Hanoi, Bush had hoped to demonstrate U.S. resolve to close trade deals by presenting PNTR to Vietnam and signing the U.S.-Russia WTO Agreement with Russian President Vladimir Putin.

However, the administration's PNTR plans went awry yesterday when the House of Representatives refused to put the legislation to a simple majority vote, after the defeat of a vote on Nov. 13 under "suspension" rules, which would have required a two-thirds majority to pass.

The earliest that Vietnam's PNTR status can come before Congress again will be in December, but with the Democratic agenda gathering steam, there is no guarantee that the measure will pass quickly. The administration's best opportunity for passage will come before the end of the year, since Democrat support for PNTR is dissipating.

Despite the embarrassing PNTR defeat, Bush's trip to Vietnam should produce some significant gains:

-- Intel deal. Last week, Hanoi increased Intel's (nasdaq: INTC - news - people ) license to operate in Vietnam four-fold.

-- Boeing purchases. The Export-Import Bank made loans to Vietnam that will enable it to purchase four Boeing (nyse: BA - news - people ) 787s for its national airlines. [...]

As he is only the second sitting U.S. president to visit Vietnam since the end of the war, Bush's trip to Hanoi (and Ho Chi Minh City) is his most important stop in his tour of Southeast Asia, which will also include visits to Singapore and Indonesia. Political instability in Washington's two bilateral security treaty allies in Southeast Asia--questions about President Gloria Arroyo's political legitimacy in the Philippines and the military coup in Thailand--have kept them off Bush's agenda.

Washington had hoped to use Bush's visit to Vietnam as a vehicle for strengthening relations with the Association of Southeast Asian Nations (ASEAN). Earlier in the year, the United States proposed a formal U.S.-ASEAN summit on the margins of the APEC meeting.

APEC presently excludes Burma, Laos and Cambodia as members. This automatic exclusion was convenient for the United States, which refuses to conduct high-level meetings with Burma. As the APEC host, Hanoi was eventually persuaded to accede to a smaller "ASEAN-7" meeting.

Last week, Washington threatened to back out of the U.S.-ASEAN summit if Thai Interim Prime Minister Surayud Chulanont attended while Thailand was still under martial law. However, the White House later agreed to accept a promise from Bangkok to lift martial law in the near future. This confusing climb-down may make Southeast Asian leaders wonder if the United States is sincere about its desire for a closer relationship with the region as a whole.

PNTR still has a chance of passing in Congress before the end of the year, but its temporary defeat has hurt U.S. credibility, both in Vietnam and in Asia as a whole. With his party's midterm election defeat and the defeat of the PNTR legislation, Bush may have difficulty at APEC overcoming the impression of an administration in disarray.
The above says nothing about offending US dairy farmers who export to Vietnam but God forbid the perception at APEC that US foreign policy is in disarray, so the first thing overboard is the democracy doctrine:

Congress Approves PNTR for Vietnam, Extends Trade Preference Programs
(December 18, 2006) As one of its final acts, the Republican-led 109th Congress earlier this month sent to President Bush a package of trade legislation that included permanent normal trade relations (PNTR) with Vietnam and renewed expiring trade preference programs, including the Generalized System of Preferences (GSP).

The legislation passed the U.S. House of Representatives by a vote of 212 to184 and the U.S. Senate by a vote of 79 to 9. "We are extremely pleased that Congress was able to pass this important trade package before it adjourned," said Clay Hough, IDFA senior vice president.

"Both PNTR for Vietnam and the extension of the Generalized System of Preferences are important to IDFA members, because they will allow U.S. companies to compete more effectively in domestic and global markets."

Last year, U.S. dairy exports to Vietnam were valued at $50 million. Once Vietnam is admitted to the World Trade Organization, which is expected to happen January 11, the country has agreed to cut its tariff rates on finished dairy products by 5% over the next five years. PNTR will give U.S. companies increased market access.

"IDFA supported the GSP extension because it allows products important to the dairy industry to enter the United States at a preferable duty rate," Hough said. "We expect U.S. dairy companies will benefit from this trade preference program." Although GSP was extended for two years, the administration can choose to revoke trade preferences after six months on certain products that are deemed able to compete effectively in the U.S. market without tariff relief.

Other trade legislation in the package included the Miscellaneous Trade and Technical Corrections Act (MTB) and the Andean Trade Preferences Extension Act (ATPEA). The MTB amends the U.S. Harmonized Tariff Schedule (HTS), modifying duty rates for certain products. IDFA had strongly opposed including language in the MTB that would increase tariffs on milk protein imports, and was pleased that the final legislation did not contain any regulations that would adversely affect U.S. dairy companies.

Regarding ATPEA, IDFA supports the bilateral free trade agreements that United States signed this year with Peru and Colombia, and believes that extending trade preferences for these countries is an appropriate measure. "IDFA looks forward to working with the new Congress next year to move the free-trade agenda forward to the benefit of the U.S. dairy industry," Hough said.
1) From The Washington Post article shown above.
2)30 years after the Vietnam War: China remains a threat by Thi Q. Lam, Pacific News Service, April 14, 2005

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