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How will the change of leadership in Vietnam affect foreign policy?

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Observers say that despite the uncertainty in Hanoi following the death of long-serving leader Nguyen Phu Trong, China’s relations with Vietnam will remain largely stable.

Mr Trong, 80, who died last week after a long illness, was a prominent figure in Vietnam’s rapid economic growth and fight against corruption. He also spearheaded Vietnam’s ‘bamboo diplomacy’, which struck a delicate balance in the US-China rivalry.

In a rare visit to the Vietnamese embassy in Beijing last Saturday, Chinese President Xi Jinping spoke of their ‘deep friendship’ and praised Trong’s ‘outstanding contribution’ to relations between the two countries and their ruling parties.

The Chinese Communist Party also issued a condolence message hours after Trong’s death was announced, describing him as ‘a good comrade, a good brother and a good friend’. China’s No 4 official, Wang Huning, is leading a delegation to Vietnam to attend Nguyen’s state funeral on Friday (today).

Hanoi stressed the importance of its relations with Beijing, pledging to Chinese Ambassador Pham Sao Mai to ‘stick to the strategic choice and priority of developing friendly cooperation with China’, according to the official Xinhua news agency.

Zhang Mingliang, an expert on Southeast Asian affairs at Jinan University in Guangzhou, said Xi’s embassy visit showed that Beijing was relatively satisfied with the development of bilateral relations during the Trong era.

“Compared to relations during the oil rig crisis in 2014 and [former US President Donald] Trump’s state visit to Vietnam in 2017, Sino-Vietnamese relations have improved significantly since Hanoi adopted the concept of ‘community of shared destiny’ at Beijing’s request last year,” Zhang told the South China Morning Post.

“Compared to the high tensions with the Philippines in the South China Sea, Vietnam and China have managed to get along well without exaggerating their deep differences on regional issues,” he added.

Relations between the communist neighbours have been turbulent in recent decades, with clashes over the disputed Paracel Islands in the 1970s and a brief but bloody border war in 1979.

Zhang noted that relations also hit a low point during the 2014 diplomatic row over China’s placement of a deepwater oil rig near the Paracels, which was seen as a turning point in Hanoi’s relations with Washington.

“Under Trong’s rule, Vietnam has managed to establish at least a superficially friendly relationship with China. But at the same time, Vietnam’s relations with the US and Russia have reached unprecedented levels,” Zhang said.

“The purpose of all this is to keep China in check and ensure that Vietnam enjoys a favourable international environment and relatively stable relations with China, which are largely under Hanoi’s control. This may seem like an impossible task, but Trong’s Vietnam has managed to hedge its bets with the big powers,” he added.

Relations with China

Vietnam’s most influential leader since founding revolutionary leader Ho Chi Minh, Trong became general secretary of the ruling party in 2011 and secured a precedent-setting third five-year term in 2021. Trong also served as Vietnam’s president from 2018 to 2020.

Amid speculation that his health was deteriorating, Trong visited Beijing in October 2022, his first overseas trip since suffering a stroke in 2019, and the first foreign leader to meet Xi after securing a third term.

In the past 10 months, despite his illness, Trong has hosted both Xi and US President Joe Biden in Hanoi, and met with Russian President Vladimir Putin in June. Hanoi has also elevated Japan, India, South Korea and Australia to its highest level of comprehensive strategic partners.

Carl Thayer, professor emeritus at the University of New South Wales in Australia, told the South China Morning Post that Trong will be remembered for his 2015 trips to the US and Japan, which laid the groundwork for closer ties with the West.

“Hanoi’s relations with Beijing will remain ‘stable and friendly’ because Vietnam will not abandon its foreign policy of ‘peace, cooperation and development’,” Thayer said.

“China plays a special role in Vietnam’s foreign relations. It is Vietnam’s first comprehensive strategic partner and the only major power to be called a comprehensive strategic cooperation partner,” he said.

Analysts also pointed to Trong’s personal bond with Xi and the ties between the two communist parties, which over the years have acted as a counterweight in the turbulent relationship between Hanoi and Beijing.

As Vietnam has expanded its diplomacy and improved its relations with the United States, I think Trong has been able to convince Beijing that Vietnam is truly neutral and independent and that improving relations with Washington would not be to Beijing’s detriment,” said Southeast Asia expert Zachary Abuza, a professor at the National War College in Washington.

“This was possible because of Trong’s resolute communist ideology. He saw the world the way Xi Jinping does,” he added.

Abuza also noted that China has inter-party channels with Vietnam to ensure a constant flow of communication between senior officials, something the United States does not have.

Nguyen Khac Giang, an analyst at the ISEAS-Yusof Ishak Institute in Singapore, said Trong and Xi had a close relationship because of their shared commitment to Marxism-Leninism.

“This helped stabilise bilateral relations, especially during periods of tension over maritime disputes in the South China Sea, Trong also had a very positive view of China and admired the Chinese Communist Party, but took a pragmatic approach with them on many sensitive issues,” the analyst told the South China Morning Post.

Although Trong’s potential successors, such as President To Lam, may not have the same bond with Xi, “I don’t think this will greatly affect Hanoi’s ability to maintain good relations with China because the inter-party bond remains strong,” Giang said.

He said the bamboo diplomacy approach ‘is working well’ and Trong’s successor is unlikely to change it or its core policies ‘to prove his legitimacy as the rightful heir’, at least in the medium term.

‘No drastic changes in foreign policy’

A day before his death, Trong’s duties were temporarily transferred to Lam. Lam, 66, who became head of state in May, was previously Vietnam’s minister of public security and oversaw the anti-corruption campaign. The so-called ‘furnace of fire’ campaign has led to the dismissal of 40 members of the party’s central committee and dozens of army and police generals since 2016.

The removal of six of the 18 members of the Politburo since December 2022, including three of Vietnam’s top five leaders since March, has raised concerns about uncertainty.

Despite the political turmoil, Abuza said he expects ‘absolutely no change’ in Vietnam’s foreign policy, saying Hanoi will remain ‘scrupulously neutral’ and has deep economic ties with both China and the US and its allies.

ASIA

How will Trump’s potential tariffs affect Southeast Asia?

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Southeast Asia is worried about Donald Trump’s threat of universal tariffs and a new trade war with China. Five of the region’s six largest economies run a trade surplus with the United States.

But experts say the situation may not be so bad. The region, which tries to remain geopolitically neutral, saw an increase in gross trade with both China and the U.S. between 2017 and 2020 during Trump’s first presidency. Vietnam, Indonesia, Malaysia, and Thailand have benefited as companies from China, Japan, South Korea, Taiwan, and the U.S. have expanded their production bases in Southeast Asia to avoid U.S. tariffs.

Experts say exports and economic growth will take a hit in the short term, but the region could benefit from trade diversion and substitution.

What is Trump’s tariff threat?

The goal of Trump’s trade policy is to bring manufacturing jobs back to the U.S. and decouple supply chains from China. Trump and his advisers claim that China’s trade advantage is due to “currency manipulation, intellectual property theft and forced technology transfer”.

During his first term, Trump used executive powers to impose tariffs of up to 25% on $250bn of electronics, machinery and consumer goods imported from China. Beijing retaliated with similar measures on U.S. agricultural, automotive and technology exports.

Now Trump has proposed a 60 per cent tariff on all Chinese goods entering the U.S. and tariffs of up to 20 per cent on imports from everywhere else.

How bad could it be for Southeast Asia?

According to Oxford Economics, about 40 per cent of Cambodia’s exports go to the U.S., making it the largest exporter in Asean as a percentage of total exports, followed by Vietnam with 27.4 per cent and Thailand with 17 per cent. Thanavath Phonvichai, president of the University of the Thai Chamber of Commerce, said the Thai economy could take a 160.5 billion baht ($4.6 billion) hit if Trump fulfils his promises.

Vietnam has the world’s fourth-largest trade surplus with the United States. This imbalance has been growing rapidly as Chinese, Taiwanese and South Korean companies have used Vietnam to avoid Trump-era tariffs. Vietnam’s fortunes could change just as quickly, especially if the U.S. continues to classify Vietnam as a ‘non-market economy’, which requires higher tariffs.

Uncertainty over Trump’s tariffs could cause companies to pause or halt investment plans in Southeast Asia. U.S. companies accounted for about half of Singapore’s $9.5 billion in fixed-asset investment last year, according to the city-state’s Economic Development Board. In his congratulatory letter to Trump, Prime Minister Lawrence Wong was quick to remind him that the United States enjoys a “consistent trade surplus” with Singapore.

Any blow to the Chinese economy will have repercussions for Asean countries that depend on Chinese consumption, export demand and tourism. A reduced appetite for Chinese goods will also affect Southeast Asian suppliers of inputs to Chinese producers. Indonesia, Southeast Asia’s largest economy, will suffer the most because it exports 24.2 per cent of its goods to China, mainly commodities.

Unable to send their goods to the U.S., Chinese exporters may turn to Southeast Asia, where governments have faced complaints from local producers hurt by dumping in metals, textiles, and consumer goods.

What is Southeast Asia’s advantage?

Southeast Asia’s current manufacturing boom started because of the trade war. Over time, analysts expect trade substitution and diversion to outweigh the hit to growth.

“We think a stronger crackdown on China could lead to more supply chain diversion as Chinese companies trade and invest more in Asia,” said Jayden Vantarakis, head of ASEAN research at Macquarie Capital.

“Electric vehicle factories, which some Southeast Asian governments are aggressively pursuing, could provide an economic buffer. Demand for EVs is also growing outside the U.S., so I think there could be a net benefit for Indonesia. Smaller countries that are trying to be carbon neutral, especially as petrol prices get more expensive, will try to take over the supply and buy more electric cars,” said Sumit Agarwal, a professor at the National University of Singapore’s School of Business.

Trump’s promised tariffs could embolden Asean governments to impose anti-dumping duties on Chinese goods, as Thailand did on rolled steel this year. Stricter U.S. rules of origin could also give governments an opportunity to ensure that more high-value parts are produced and assembled locally.

How will Southeast Asian currencies and markets be affected?

Trump’s tariffs could reduce pressure on Southeast Asian central banks to ease monetary policy further.

“Essentially, Trump’s victory is inflationary for the world because of his planned tariffs, so the global monetary normalization or easing cycle will probably not be as sharp as previously thought, including in the Philippines,” said Miguel Chanco, chief emerging Asia economist at UK-based Pantheon Macroeconomics.

Speaking to Nikkei Asia, Chanco said Southeast Asian currencies will not strengthen as much as previously expected, partly because markets are re-pricing the pace of easing by the U.S. Federal Reserve and thus the dollar will continue to strengthen.

Among Southeast Asia’s six major economies, the Thai baht and Malaysian ringgit have been the worst-performing currencies since Trump’s victory, losing 3.2 per cent and 2.9 per cent respectively against the U.S. dollar through Wednesday.

Thai brokerage InnovestX recommended stocks that would benefit from a strong dollar and weak baht. These include companies with significant export earnings, such as CP Foods and Delta Electronics, or tourism-related companies such as Airports of Thailand, property developers and hoteliers.

Governments are already taking steps to reduce their over-dependence on the U.S. or China by deepening ties with other countries and regions and emphasizing their neutrality.

Southeast Asian economies in particular are also expected to focus on building resilience by strengthening intra-ASEAN trade.

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Japan’s exports rise despite global risks, boosted by China

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Japan’s exports rose more than expected in October, driven by strong demand from China and other parts of Asia, despite growing uncertainties in global markets.

Exports increased by 3.1% year-on-year, led by significant growth in shipments of chip-making equipment, particularly to China, according to the Finance Ministry’s report on Wednesday. This marked a rebound following the first drop in 10 months in September. October’s figures exceeded economists’ forecasts of a 1% rise and were also bolstered by increased shipments of medical products to the United States.

Meanwhile, imports edged up by 0.4%, defying expectations of a 1.9% decline. As a result, the trade deficit widened to 461.2 billion yen ($2.98 billion), compared to 294.1 billion yen in the previous month.

This stronger-than-expected export performance has raised optimism about Japan’s economic recovery. Although the country’s gross domestic product (GDP) expanded for the second consecutive quarter through September, the pace of growth has been tempered by the drag from net exports.

“Today’s data raises hopes that external demand will revive in the October-December quarter,” said Hiroshi Miyazaki, Senior Research Fellow at the Itochu Research Institute. “The Chinese government’s stimulus measures have stabilized its economy and reversed the prior decline.”

Exports to China rose by 1.5% last month, rebounding from a 7.3% drop in September, with semiconductor manufacturing equipment exports surging by nearly a third. These gains align with signs that China’s stimulus policies are beginning to yield results, driving growth in certain sectors and boosting consumer spending.

Notably, Japanese exports grew despite the yen’s strengthening against the dollar, averaging 145.87 yen per dollar in October—2% stronger than the previous year, according to ministry data.

The export rebound occurs against a backdrop of heightened concerns about global trade policies. Business leaders are bracing for the potential return of Donald Trump to the White House, with fears that his proposed tariffs—60% on imports from China and 20% on other nations—could disrupt international commerce.

Some regions are already experiencing a slowdown. Shipments to the United States and Europe declined by 6.2% and 11.3%, respectively, in October.

The Bank of Japan (BoJ) is closely monitoring these developments. BoJ Governor Kazuo Ueda noted on Monday that while the Federal Reserve’s prospects for a soft landing have improved, risks tied to the U.S. economy and their impact on global markets require careful consideration.

The most pressing concern for Japan’s trade outlook is the impact of potential U.S. tariffs. Historical data from the U.S.-China trade war (2018-2019) suggests that a 1% increase in export prices, including tariffs, led to a 0.35 percentage-point reduction in profit margins for Chinese exporters, according to research from Stanford University’s Centre for Chinese Economics and Institutions. A similar scenario could hurt Japanese firms’ profitability, counteracting gains from the yen’s depreciation.

“We are not yet at a stage where Trump’s tariff policy is clearly impacting export volumes or exporters’ behavior,” Miyazaki told The Japan Times. “However, there remains significant uncertainty, and we must continue to monitor the policy stance of the next Trump administration,” he added.

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IMF reviews Pakistan’s $7bn bailout

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An International Monetary Fund (IMF) team conducted an unscheduled visit to Pakistan last week to assess the country’s progress on the terms of its $7 billion bailout package. The surprise visit, coming less than two months after the loan’s approval, has raised questions about the future of the bailout program. IMF staff are expected to present their findings to the Washington-based executive board for review.

What prompted the IMF’s unexpected visit to Pakistan?

Several officials, speaking to Nikkei Asia on condition of anonymity, highlighted key factors prompting the visit. These included a $685 million shortfall in the government’s tax collection target for the first quarter of the current fiscal year and a $2.5 billion deficit in the external financing required under the bailout terms. Compounding these issues was the failed sale of Pakistan International Airlines (PIA), a key component of the IMF-recommended privatisation drive.

While routine IMF program review visits are standard, the timing of this visit—just seven weeks after board approval—has raised concerns. “This suggests significant difficulties in implementing the program,” said Naafey Sardar, an economics professor at St. Olaf College in the United States, speaking to Nikkei Asia.

Ikram ul Haq, a lawyer specializing in economic and tax policy, added, “The reality is that the government’s promises to the IMF have not been fulfilled.”

What were the key issues discussed?

The IMF raised the issue of the tax gap and urged action to ensure that Pakistan meets its annual tax collection target of $46 billion.

Islamabad was also asked to engage with Saudi Arabia and China, the largest investor, to bridge the external financing gap. Promised energy sector reforms and the repayment of billions of dollars of debt owed to mostly Chinese-backed power plants in Pakistan were also discussed.

Another issue was for the IMF to press provincial governments for more funds, such as the Benazir Income Support Programme, which provides a $2.1 billion annual cash transfer for poverty alleviation, currently paid for by the central government.

How does agricultural income tax fit into this picture?

As part of the loan agreement, Pakistan’s provinces missed an end-October deadline to harmonize their agricultural income tax laws with the federal income tax.

The IMF had previously said that Pakistan’s loan agreement would be in jeopardy if agricultural income remained largely untaxed. During the meetings, provincial government officials told the IMF that they would face significant difficulties in implementing a higher tax.

Economist Aqdas Afzal said such a move would face significant opposition from big landowners, who are disproportionately represented in the federal and provincial assemblies.

“Given the weak mandate of the current government, a higher agricultural income tax is unlikely as it could trigger major social and political unrest,” he added.

What assurances has the government given to the IMF?

Pakistan has assured the IMF that it will increase the provincial agricultural income tax rate by up to 45 percent. It has also pledged to meet annual tax collection targets and to continue reforms in the energy sector and state-owned enterprises.

“This is an ongoing dialogue process and there have been discussions [with the IMF] on energy and SOE reforms, the privatization agenda and public finance,” Pakistan’s Finance and Revenue Minister Muhammad Aurangzeb told local media.

Haq, a tax expert, said the government’s primary focus would be on meeting the six-month revenue collection target set by Pakistan’s Federal Board of Revenue, a government agency that regulates and collects taxes.

What are the challenges ahead for Pakistan’s loan agreement?

Meeting tough tax targets and implementing structural reforms are major hurdles for the government to overcome.

The IMF has previously cancelled other loan programmes when conditions were not met. Payments to Pakistan could be suspended or stopped altogether, which would be a serious blow to a country struggling with a sputtering economy.

The IMF is pressing for cuts in government spending.

“Structural reforms are being resisted by vested interests, making efforts to meet IMF conditions even more difficult,” Haq said.

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