Tech, Talent And Trump Pose Risks To Vietnam’s Economic Strategy – Analysis

By David Dapice

Vietnam, one of Southeast Asia’s star performers, finds itself facing an all-too-common problem. Having rapidly grown its economy by bringing its workforce into low value-added manufacturing jobs, Vietnam’s model is now threatened by technology and labour constraints, as well as the spectre of Western protectionism against its exports. In 2024, Vietnam’s economy will likely experience a solid 6–6.5 per cent growth rate, but investment into critical AI infrastructure and technological development is essential to ensure future economic growth.

The World Bank and International Monetary Fund forecast continued growth of around 6 per cent in 2025, as many US-bound exports have shifted from China to Southeast Asia where Vietnam remains a major beneficiary. The country has a 4 per cent inflation rate and low debt, a trade surplus and continuing inflows of foreign direct investment (FDI). But newly registered FDI grew only 1–2 per cent in 2024, falling in real terms.

Vietnam’s ability to move more than a million workers a year from farms to factories and other urban jobs — and in doing so, boost worker productivity and GDP growth — is diminishing. With fewer young workers to do assembly jobs, the low value-added model of Vietnam’s exports is approaching its limits. From 2018 to 2019, manufacturing jobs grew by 1.3 million but from 2022 to 2023, they grew by only 0.2 million. The result was that GDP growth fell from 7.4 per cent in 2019 to 5 per cent in 2023.

A further complication facing Vietnam’s economy comes from US President-elect Donald Trump. He is a fan of tariffs and dislikes getting ‘ripped off’ when US imports exceed exports to a particular country. The US Census reports that the trade deficit with Vietnam amounts to US$10 billion a month in 2024. Even worse, a lot of those exports include imported inputs from China which were lightly processed to avoid tariffs on direct Chinese exports to the United States.

While Vietnam does not subsidise these exports, China may subsidise its exports through Vietnam. Vietnam benefits from this middleman status and curbing it would slow growth. With Trump’s appointees targeting Mexican and Canadian exports involving Chinese inputs, Vietnam is likely to face similar treatment.

It would help tariff negotiations if Vietnam added more value itself, especially from domestic companies. But this is not happening enough. For example, from 2019 to 2023, Vietnam reported that exports to the United States rose by US$34 billion, while imports into Vietnam from China grew by US$30 billion. In September 2024, a Chinese economist wrote about the low level of domestic firms’ value added in Vietnam’s exports, especially for the fast-growing electronics sector. In 2019, Vietnam’s Politburo Resolution No. 52-NQ/TW also identified the weakness of Vietnam’s domestic industrial sector in its ‘Industry 4.0’ analysis and recommendations.

But there has been limited progress in the last five years. Some argue this is because officials only understand top-down directives, while others point to private firms being underutilised as a source of revenue for potential development opportunities. In any case, adding export restrictions to a still-lagging real estate sector would depress retail consumer spending growth of about 4 per cent a year in real terms, capping sales of domestic firms.

A more forward-looking example of Vietnam lagging behind is evident in its hyperscale data centre infrastructure. Hyperscale data centres process inquiries for — and teach — large language models for artificial intelligence. Vietnam has so far tried to ‘go it alone’ but its data centres are only 5–10 per cent the size of its competitors, much less secure and lack value-added services for local companies. The rules on data localisation are cumbersome and uncompetitive with Malaysia or Singapore. For example, as of mid-2024, Vietnam’s existing, under-construction, committed and early-stage data centre investments stand at 143 megawatts compared to 3,221 megawatts in Malaysia.

Vietnam has also had trouble supplying adequate electricity for existing factories in the north — there is not enough transmission capacity when hydroelectricity is limited due to drought. While transmission to the north — but not the south — is being remedied, green energy contracts are frozen due to a reluctance to sign agreements similar to those given to coal plants. This poses an issue give many FDI data centre companies want green energy.

Vietnamese Communist Party Secretary General To Lam has spoken about a new era of technology. If Lam realises just how threatened existing exports may be due to tariffs and how far behind Vietnam is in critical AI infrastructure, he may be able to reorient growth away from low value-added exports, which face demographic headwinds, and rapidly strengthen the private sector. This is the only way that Vietnam can reduce the income-per-capita and technology gap with China and maintain its functional independence and ‘bamboo diplomacy’.

So long as Trump’s tariffs do not impede growth, Vietnam’s outlook for 2025 can remain positive. But this will only be a short-term respite — like in other middle-income economies, the gains from moving low-productivity workers to more productive jobs are slowly fading.

• About the author: David Dapice is a Senior Economist in the Ash Center for Democratic Governance and Innovation at the John F. Kennedy School of Government, Harvard University.
• Source: This article is published by East Asia Forum and is part of an EAF special feature series on 2024 in review and the year ahead.