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China is already pre-empting this by turning Hainan Island into a Free Trade Port since mid-December, which by the way, is officially fully open to the world (you can access Youtube and the entire Western internet from Hainan Island without restriction now).

If China plays the card right, then Vietnam will be locked into low end manufacturing while China kills any chance of Vietnam transitioning into high end manufacturing sector.

Under the tariffs and the ongoing US-China dispute has positioned Southeast Asian exporter countries such as Vietnam to benefit from the current development, as foreign companies attempt to relocate their production sites from China to Vietnam.

And what is Vietnam’s advantage here? The world-class entrepot of Singapore that is conveniently situated in the East-West sea-based trade route. Vessels have to pass through the Malacca Straits to load and unload their cargoes in Singapore, and Vietnam being part of the ASEAN community takes advantage of Singapore as part of their supply chain network to integrate into the global market.

Now, the Hainan Island being converted into a Free Trade Port is about to upset this balance completely, if China’s strategy succeeds.

Read the link of China’s readout of the link above - the key clause is that goods entering Hainan and achieving 30% added value will be able to enter Mainland China duty-free. In other words, Hainan Island will simultaneously function as a key logistics hub that threatens to replace the role of Singapore, and more importantly, foreign companies that add 30% value to their products within Hainan Island will now enjoy tariff-free entry into China.

Look at Hainan Island’s geographical location in relation to Southeast Asia (Vietnam and Singapore) - pay attention to its proximity to Vietnam:

If Hainan Island can be developed into an industrialized region, do you think foreign investments, especially high tech sector, will still find Vietnam attractive?

First of all, Singapore has 17% corporate income tax. Hainan Island’s going to be 15%. So Singapore is going to lose its comparative advantage there.

Second, Hainan Island will effectively function as a portal for foreign corporations into China that will enjoy virtually very low tariff and tax for their goods (complementing Hong Kong’s role as China’s offshore financial powerhouse).

Third, just behind Hainan is the backing of the world’s most powerful industrial economy complete with world-class logistics and supply chain.

If China’s Hainan strategy succeeds, Vietnam will be locked into low end manufacturing for it cannot offer cost advantage for the high tech sectors with Hainan just next to them.

Now, there’s a caveat: which is that Hainan is still comparatively underdeveloped compared to Vietnam and other Southeast Asian countries, but the potential for growth is strong if China invests heavily into the region.

And most importantly, by supplanting Singapore and Southeast Asia as a chokehold against itself, China gains geostrategic advantage against the US blockade strategy and ensures its dominance in global trade on the supply side of the equation (i.e. Chinese export industries get to remain competitive).

Finally, just to reiterate: there is no contradiction at all with what I’ve been saying. China’s problem is internal and ideological - that its neoliberal policy cannot sustain a healthy growth of domestic consumption due to growing wealth inequality, hence its prioritization on global trade-based strategy, which in turn, serves as a positive feedback loop that makes China become even more reliant on global trade than ever. And when you have over-capacity, you have no choice but to kill your competitors’ trade through mercantilism because there isn’t enough demand in the world to keep all of the workers employed.

The opposite strategy, which is what I propose, will take advantage of China’s huge consumer market to absorb the global export surplus goods (including those from Vietnam) and alleviate much of the regional tension, allowing those countries to successfully transition into higher end manufacturing eventually. This will require wealth redistribution and abandoning of neoliberal policies to raise the income of the Chinese working class. Otherwise, China will have to choose protecting its own export industries and destroy that of its neighbors.