Vietnam's accession to the WTO has induced a flurry of speculation about the impact on China's status as the world's go-to manufacturing base.
Both countries share relatively stable Communist governments and both have successfully managed high growth rates and attracted much foreign investment. But whereas China has recently seen labor shortages and an increasing average wage rate, Vietnam still remains in the initial states of economic development.
Just as the media was abuzz after China joined the WTO in 2001, many now wonder if Vietnam, which became a member of the world trade body on January 11, will be the next big thing.
"Vietnam is seen by investors as an opportunity to diversify away from China, but that doesn't mean that they are leaving China to set up shop in Vietnam," said Tamara Trinh, senior economist for Asia at Deutsche Bank Research.
Trinh believes that China as a whole is not likely to be threatened by Vietnam any time soon, but some of China's inland areas might see investment shifting to Vietnam as companies migrate towards its lower labor costs.
Vietnam is primarily an exporter of textiles, shrimp, rice, rubber, and tea, but its young, relatively well-educated population has started to attract high-tech companies. Early last year, the computer chip maker Intel agreed to set up a US$1 billion dollar testing and assembly plant.
Other high tech companies such as Microsoft are beginning to eye the country as an alternative location.
Riding the wave
China is among those attempting to profit from the country's rise. In January, several hundred Chinese businesses and associations met in Guangzhou to discuss increasing investment ties with Vietnam. Currently, China has US$795 million in registered capital in the country. Two-way trade hit US$10 billion in 2006, making China Vietnam's largest trading partner.
Yet for all the exuberance, Vietnam still has a long way to go.
Two-way trade between Vietnam and the US has jumped from US$1 billion in 2001 to US$8 billion in 2005, but is still a tiny fraction of the US$285 billion in US-China trade. China's total labor force stands at over 791 million compared to Vietnam's 44 million.
Vietnam's government is also notoriously corrupt. Transparency International's 2006 Corruption Perception Index has Vietnam tied at 111th, along with Laos and Timor-Leste. China is 70th.
Then there are Vietnam's infrastructure problems.
As Walter Blocker, chairman of the American Chamber of Commerce in Ho Chi Minh City, said recently: "Physical infrastructure constraints continue to threaten foreign direct investment (FDI) for manufacturing and export. The adequacy, or lack, of infrastructure, is a key factor for firms that are considering an investment in Vietnam and the southern focal economic zone."
The country still lacks a port big enough to handle super cargo containers, and much of outgoing cargo must be routed through Singapore.
Nevertheless, Vietnam has made considerable progress on the back of a decade of spectacular growth. FDI reached US$10 billion in 2006, up more than 50% from 2005. The poverty rate has been slashed dramatically from 58% in 1993 to 26.2% in 2004 as per capita GDP grew from US$180 in 1993 to US$640 in 2005.
And, although China's population is certainly larger, Vietnam's is much younger. While Beijing frets about demographics and welfare, its southern neighbor has more room for maneuver with 60% of its citizens still under 30.