China Invests Billions To Help Laos and Cambodia Bypass Vietnam

Although China and Vietnam are neighbours with significant trade ties, the communist states are not exactly friends. China's growing assertiveness, driven by competition for resources and influence, has seen Vietnam draw closer to the United States, to Beijing’s alarm. In response, China has sought to circumvent trade with Vietnam through strategic infrastructure projects in Laos and Cambodia.   

The complex dynamic between China and Vietnam has deep historical roots, with Vietnamese nationalism strongly informed by a legacy of resistance against ancient Chinese dynasties who ruled over their southern neighbours throughout the first millennium. China’s resurgence over the past forty years consequently represents both an economic boon and geopolitical concern for Hanoi, particularly in the aftermath of the Sino-Vietnamese war of 1979 and the overlapping territorial disputes in the South China Sea, or East Sea, as it is known in Vietnam.

These territorial disputes prompted Vietnam to reach a maritime security agreement with the Philippines in January of this year. However, Vietnam was notably absent from a subsequent pact reached by the Philippines, the US, and Japan. This illustrates Hanoi’s strategic flexibility with respect to its relations with Beijing, with Vietnam seeking security alliances as a counter to Chinese dominance in Southeast Asia, while working to maintain profitable economic ties with its northern neighbours at the same time.

Conversely, Beijing harbours apprehensions about Vietnam aligning with foreign powers in a containment strategy against China, fearing that emboldened by alliances, these countries could instigate a conflict in an attempt to contain China’s rise. For Beijing, there are parallels with the Ukraine conflict, with China warning that actions taken by the US to strengthen its military presence near China’s borders risk stoking rather than preventing armed conflict.

This is why just as Vietnam has diversified its diplomatic strategies, so has Beijing, with China actively courting other countries in the region such as Laos and Cambodia, both of whom have traditionally been within Vietnam's sphere of influence.

With Vietnam enveloping the majority of Southeast Asia's eastern coastline, natural geography has historically provided Hanoi with leverage over Laos and Cambodia's access to the sea. As China has re-emerged as the dominant power in Asia, this has produced a protracted struggle for influence between Beijing and Hanoi, with Laos and Cambodia now looking to China to help alleviate this reliance on Vietnam.

Recent developments suggest that China's the Belt and Road Initiative (BRI), funded by China’s large trade surplus, has tipped the balance in Beijing’s favour. Completed in 2021, the China-Laos Railway marked a pivotal moment in this on-going competition for influence. Providing a high-speed commercial freight route linking the Laotian capital, Vientiane, with China, means Laos no longer depends on Vietnam’s ports and has positioned the country as an intermediary between China and Thailand. Additional rail projects are set to further increase trade between Beijing and Bangkok, solidifying Laos' growth prospects, and independence from Vietnam.

Just as the China-Laos Railway allows Laos to bypass Vietnam’s ports in trade with China, the Funan Techo Canal in Cambodia offers similar benefits to Phnom Penh. The 180km canal is a monumental project, enabling two way traffic along a route which is home to 1.6 million people. The 100 metre wide canal is estimated to reduce freight costs from Cambodia by over 15% with an internal rate of return of as much 30%, or approximately $500m of the estimated $1.6 billion build cost. While Cambodia has enjoyed strong economic growth in recent years, this is still a substantial figure for Cambodia’s $30 billion economy, representing nearly 2% of nominal GDP.

The Chinese funded canal will turn Cambodia's capital into a port city, bypassing the Mekong Delta, which lies within the borders of Vietnam. As such, this infrastructure project enhances Cambodia's economic prospects while undermining Hanoi's control over its neighbour, taking Cambodia from a historical subordinate to a commercial competitor of Vietnam.

In a broader context, China's support for Laos and Cambodia at Vietnam's expense aligns with Beijing's strategy under the BRI to integrate the continent's interior and establish trade routes bypassing the contested waters of the South China Sea. As the US and its allies increase their military co-operation, these new trade routes take on additional significance, a strategic move further solidifying China's influence at a time during which that influence is being contested.

Vietnam, faced with these developments, has adopted a seemingly paradoxical approach by further integrating with China to maintain its position in regional trade. High-speed railway links connecting Vietnam’s northern cities with Yunnan and Guanxi provinces in China are set to be built as Vietnam looks to secure its position as the primary intermediary between China and the West in an era of increased global trade diversification.

Remaining central to China’s regional supply chains is especially important to Vietnam in light of the recent drive by the United States to import less goods directly from China. While direct trade between China and the US has declined, these declines have been offset by increased exports from China to Vietnam, India and Mexico, who in turn have increased their exports to the United States by a similar volume. 

This indicates that instead of truly de-coupling from China, trade is simply being rerouted via third countries and Vietnam is a major beneficiary of this trend. Over time, supply chains might mature, and Vietnam could capture more market share for its own firms, but in the meantime, acting as a conduit for what in effect remains trade between the US and China is currently an important driver of economic growth in Vietnam.

While China and Vietnam remain competitors, they also share many complementary interests, which incentivises them to maintain a cordial status quo. Apprehension about China's growing power has led Hanoi to seek other alliances. However, considering China’s efforts to integrate Laos and Cambodia, Vietnam still benefits from working with Beijing and will look to protect its profitable trade relationship with China into the future.