Any search for sunshine in this gloomy moment for the global economy should turn to Vietnam.
The Southeast Asian nation boasts one of the fastest economic growth rates anywhere, a swelling and optimistic population and political stability. Big investments by multinationals from Samsung Electronics to Nestle are morphing Vietnam into a manufacturing powerhouse and raising living standards. In May, a sovereign upgrade from Fitch Ratings put the nation just two notches short of investment grade.
Yet all the forward momentum in the world is no match for Donald Trump's debilitating trade war.
Can a small, open and export-led Asian economy survive the U.S. president's assault on global commerce and the retaliatory hits from China? Add in the U.S. Federal Reserve's monetary tightening cycle and investors have every reason to suspect Hanoi's 6.8% gross domestic product growth in the second quarter may prove fleeting.
Prime Minister Nguyen Xuan Phuc recently ordered his ministries to redouble market surveillance and craft plans to minimize any fallout. Yet Trump's tariffs are only the most obvious of threats to social and economic stability in Southeast Asia's sixth-biggest economy. Two others: anger over Chinese encroachment and a harsh crackdown on cyberspace.
Trump's levies are terribly timed for Phuc's export-reliant economy. While enviable by global standards, Vietnam's second-quarter pace marked a notable downshift from 7.5% in the previous three months. Behind the slowdown are reduced state investments and a slide in mining output. The trajectory of the all-important export sector is now very much in doubt.
Overseas shipments rose 16% from a year earlier between January and June. Big declines could be forthcoming as Trump's levies on steel and aluminum -- 25% and 10%, respectively -- boost materials costs and slam trading partners. Like most Asian peers, Vietnam counts on China, Trump's main target, as its No. 1 export destination.
South Korea, Vietnam's second most important export market, also is in harm's way. In the October-December quarter, growth there contracted for the first time in nine years. More recently, export growth came to a halt in June, dropping 0.1% following a 13.2% gain in May. The headwinds bearing down on Korea are a problem for another reason: it is Vietnam's biggest long-term investor.
Samsung, LG Electronics and other Korea Inc. giants are pouring tens of billions of dollars into Vietnam to diversify away from China's rising labor costs. Samsung alone has invested more than $17 billion there in eight factories that churn out the bulk of its smartphones. In 2017, Samsung shipped some $54 billion of goods from Vietnam, a figure equivalent to 28% of gross domestic product. As Washington's trade war hits Korea Inc. and Seoul's top-line growth, investment flows on which Hanoi relies could grow scarce.
An argument can be made that Trump's tariffs could end up advantaging Vietnam in counterintuitive ways. Even before Washington announced tariffs, European, Japanese and Korean executives sought a Plan B as Chinese costs rise. The uncertainty and volatility plaguing China's outlook could accelerate a shift of production bases out of China into Southeast Asia's more stable and, in many cases, more competitive cost environment.
That makes it more vital than ever for Phuc's team to accelerate structural reforms: strengthening financial institutions; replacing jaundiced state-owned enterprises with a vibrant private sector; curbing shadow banks; liberalizing the capital account; increasing transparency; and reducing graft. It also means investing more in human capital to build on Vietnam's nascent startup boom.
Roughly 25% of Vietnam's 92 million people are under 15. The trick is cultivating the entrepreneurial spirit coursing through the nation. Doing so is vital to accelerating gains in living standards. Average GDP growth of 6.3% over the last 12 years raised annual per capita income to $2,385 -- a more than six-fold gain from 2000.
That leaves Vietnam a long way off from China's $9,000 level. We also are some ways from knowing whether Vietnam can beat the middle-income trap that often ensnares nations around the $10,000 mark. To preserve those gains and reduce inequality, Phuc's government must alter the basic dynamics of growth. One obvious target: reducing the reliance on monetary easing. Today's 4.7% inflation rate, relative to the 4% level preferred by Hanoi policymakers, limits easing options. Any move to cut the 6.25% refinancing rate would add to overheating risks.
Upgrading the economy, and relying more on fiscal tweaks, would generate more organic and balanced growth. Vietnam too often veers from extreme optimism to extreme pessimism, and back. Today's story, of course, is the latter as Vietnam rivals China's growth rate. The risk, though, is that Trump's trade war suddenly sends the pendulum in the other direction.
China is a growing concern on another front: proposed special economic zones offering 99-year leases. Fears Chinese investors will win most of the leases are provoking sizable demonstrations, some numbering in the thousands. The government, says Melinda Hoe of Eurasia Group, must "carefully manage dissent to avoid a repeat of the May 2014 anti-China protests that marred Vietnam's image as a safe investment destination."
The same goes for public anger over a social-media inquisition. In recent weeks, Hanoi began forcing Google, Facebook and other digital companies to choose between privacy or growth. A reasonable balance, perhaps. Yet a cybersecurity law approved last month compels Silicon Valley to store local data in the country. Activists worry that will compromise communications.
The law also goes much further to limit internet speech. Its vague language concerning dissent has Amnesty International decrying a "devastating blow" to freedom of expression. The state also can compel tech companies to turn over vast reams of personal data on users.
Industry group Asia Internet Coalition warns the legislation will impede Hanoi's ambitions for GDP and regional competitiveness. That runs counter to Hanoi's stated desire to foster greater innovation. Reduced transparency, meantime, will protect provincial governments and misbehaving companies from the public scrutiny needed to boost national competitiveness.
The good news is that Vietnam is enjoying a level of momentum few economies can match. The bad news: in the Trump era, Hanoi has its work cut out to keep the economy on the road toward greater riches.
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.