Vietnam's economic record in last two decades has been extraordinary given its infrastructural bottlenecks and unskilled labour. With increasing global integration, Vietnam has emerged as one of the most potent alternatives to China as a sourcing location. Its future course will now depend on how rapidly it can implement labour and infrastructural reforms.

Global economy has seen the rise of Vietnam since early 2000s. A country with per-capita GDP of less than USD 400 at the beginning of this century is now five times richer with per-capita income of USD 2,715. Having a largely unskilled population, infrastructure that still lags global standards, Vietnam's economic performance has been nothing short of extraordinary during this period. One of the key features of this economic performance has been increased global integration of this small South East Asian nation.

Vietnam's increasing trade integration throughout the last two decades has placed it in an interesting position today. Global export share increasing from 0.2 per cent in 2000 to 1.4 per cent in 2019 has been key to its economic gains. In the textile and apparel sector, it has taken an even greater space. Textile and apparel exports are just about 5 per cent of global exports but its use in several other industries as intermediates, makes its supply chain quite crucial. Vietnam has managed to raise its share in global textile and apparel exports by 9x, from 0.5 per cent to 4.5 per cent in the last two decades. In many categories, it has an even larger share today. For instance, Vietnam exported 7.4 per cent of textile yarn and 6.2 per cent of apparel products in 2019, and the share is likely to grow even further.

Due to the geo-political conditions prevailing in the last few years and in the wake of the COVID-19 pandemic, Vietnam has increasingly emerged as a favorable trade and investment destination. FDI flows to Vietnam have almost doubled during this decade to now USD 16 billion in 2019 from USD 8 billion in 2010. Vietnam currently has free trade agreements with several of its large export partners -- US, South Korea, and Japan more prominently, providing its products a favourable footing in these economies. Global value chains thrive on convenience, lower costs, technological skills and lower political risks. Vietnam has largely proven its economic worth with stable (less volatile) and relatively higher economic growth in the past, very reasonable labour costs for manufacturing, and strategic location for trade. The nation also has a largely stable political environment with a single-minded focus on growth.

Vietnam has made a particularly remarkable presence for itself in the textile and apparel industry and will likely stride further. QIMA's barometer report for Q2 2021 reflects that even though China remains the preferred sourcing location currently, Vietnam is increasingly being preferred over its neighbour by buyers in the western countries. Inspection and audit demand for Vietnam went up 16 per cent yoy in Q1 2021, third consecutive quarter of growth since the lockdown restrictions were relaxed. Having a 4.5 per cent share in global textile and apparel exports, it has recently begun to compete heavily with Bangladesh for apparel exports, particularly woven as well as knitted or crocheted apparel. In woven apparel, Vietnam raised its share from 3.5 per cent in 2010 to 6.2 per cent in 2019, competing well with Bangladesh, its closest competitor. For knitted or crocheted apparel, Vietnam has even overtaken Bangladesh, jumping from 3.1 per cent share in global exports in 2010 to 7.4 per cent in 2019, vis-a-vis Bangladesh's 5.2 per cent. Some estimates suggest that Vietnam surpassed Bangladesh's garments exports in first half of 2021, but would Vietnam sustainably do so can only be a matter of anticipation right now. However, Vietnam's factories are largely still known for their cut-make-trim models but with investments flowing in and technological support, much higher value-added business models such as original design manufacture (ODM) or original brand manufacture (OBM) are expected to emerge in large proportions. More investments will also render vertical integration across the textile supply chain more efficient and feasible.

Global manufacturers have increasingly started to prefer Vietnam as an alternative location to China, more so post the US-China trade tensions and the COVID-19 pandemic came about. China's exports to the US, specially in the textile and apparel sector started recovering well post the restrictions were lifted but have tapered down early this year. Meanwhile, Vietnam has gained tremendous share as EU and the US embrace a shift from China. Vietnam's share in US imports rose above that of China in March-21 for the first time ever except in March-20 when China had a complete shutdown. Vietnam's economic and export performance during the pandemic has also been extremely resilient. IMF World Economic Outlook shows that Vietnam had a 2.9 per cent in 2020 and will recover to 6.5 per cent, slightly more than its pre-pandemic 10-year average. The likelihood of rising geo-political tensions between the western countries and China is only going to help Vietnam further.

US-China trade conflict may bring some strategic challenges for Vietnam as well, if only gradually. If conditions worsen, Vietnam may have to tilt its position towards either sides. This will be valid for all ASEAN nations as much as for Vietnam. However, it is very pertinent for Vietnam as both countries remain important trade partners for Vietnam, China more so. For now, Vietnam has ramped up its manufacturing to gain from the conflict and choose to remain neutral in this battle. That appears the best choice as Vietnam is also a member to the largest economic bloc in the world, the Regional Comprehensive Economic Partnership (RCEP). Not engaging with RCEP and therefore China could only hurt its economy. The free trade agreement signed by RCEP countries late last year is expected to bring significant trade and efficiency gains to the members and in the US-China conflict, these countries will likely gain further as trade flows shift from China. Maintaining trade and strategic ties with US and EU is a prudent option to have a check on its economic security when dealing with China.

The other challenge that could face Vietnam sooner is massive upskilling of manpower and infrastructure boost that will be required to attract investors further down the line.  World Bank data shows Vietnam's overall quality of infrastructure to be significantly lower than the global median. With just 11.6 per cent (Source: Manpower Group) of the total workforce as highly skilled, Vietnam will soon have to invest in skilling its workforce to make them employable in high-tech sectors that are investing in Vietnam right now. These two factors significantly impact a country's cost competitiveness and with global demand recovering faster, countries with better logistics, infrastructure and technological know-how are likely to be preferred by global manufacturers.

Vietnam faces stiff competition from its own neighbours such as Bangladesh and India, and from Turkey, which are now investing heavily in the textile and apparel sector with global demand shifting from China. However, early trade data and trends suggest that it is clearly making a much larger impact on the global scene. Will it continue to do so largely depends on the scale and timeliness of reforms that are undertaken by Vietnam as well as its competitors.