Vietnam Buckles Under Chinese Pressure

Since China's July 16 withdrawal of its HYSY-981 oil exploration rig from waters claimed by Vietnam, tensions in the South China Sea have momentarily defused. But Beijing's months-long placement of the rig roughly 130 nautical miles from Vietnam's coast presented the most divisive threat in years to Hanoi's Communist Party leadership

Hanoi showed itself to be all but powerless to counter Beijing's maritime provocation. Diplomatically, China's actions fell just short enough to avoid any potential Association of Southeast Asian Nation unified front against the rig's placement. The United States, likewise, did not get involved in a meaningful way. Indeed, China may have succeeded in convincing other South China Sea claimants that the US would be an unreliable ally in future disputes in the area.

But the greatest damage to Hanoi was that China's actions exposed a large rift among the senior echelons of the party over how to respond to Beijing's aggression. Vietnamese leaders were hoping for a diplomatic concession from China when Chinese State Councilor Yang Jiechi visited Vietnam on June 18-19.

The visit, however, was anything but conciliatory when he berated his hosts for "hyping up" the situation and said bluntly that China would "take all necessary measures" to protect the rig. During the visit, China deployed a second exploration rig into the contested waters.

At the time, Hanoi seemed ready for a fight. Prime Minister Nguyen Tan Dung made very clear that Vietnamese sovereignty was not for sale. "Vietnam has always wanted peace and friendship with China. However, we cannot trade our sacred independence and sovereignty for some elusive peace or any type of dependence."

Advocates of a more assertive foreign policy seemed to be carrying the day. A June 2014 meeting of the Vietnam Communist Party's Central Committee unanimously resolved to condemn Chinese aggression and encroachment.

Yang held meetings with Deputy Prime Minister and Foreign Minister Pham Binh Minh and Dung, as well as with Communist Party chief Nguyen Phu Trong. Minh and Dung reportedly maintained a less compromising approach. Not surprisingly, Trong was more conciliatory and focused on party-party ties and long-term relations.

Immediately following Yang's departure, the Politburo met to formulate a response. One group led by Dung and Nguyen Sinh Hung, the Chairman of the National Assembly who has been vociferous in his public calls for Vietnam to stand up to China, advocated a more hardline and confrontational approach. They argued that any concession to China would only encourage future aggression and advocated a multi-faceted strategy entailing:

·  The filing of a brief with the International Arbitration Commission, paralleling the submission by the Philippines in March 2014 that infuriated Beijing;

·  Proactive leadership within ASEAN to push for a binding Code of Conduct in the South China Sea;

·  Forging closer ties and coordination with the Philippines and Indonesia.

·  Engaging in more multilateral military exercises, including with the US, India, Indonesia and Japan;

·  Developing closer ties with the US and negotiating a more defined "comprehensive partnership";

·  Joining the US-led Trans Pacific Partnership (TPP) trade deal, necessitating major economic reforms and opening of closed or heavily regulated sectors of the Vietnamese economy, including state-owned enterprises;

·  Developing closer ties with Japan. Perhaps not publicly endorsing Prime Minister Shinzo Abe's reinterpretation of Article IX, but quietly encouraging a more proactive diplomatic and security posture in the region;

·  Acceptance of an economic slowdown due to less Chinese trade and investment, with a belief that it would force Vietnam to diversify their economic relationships and end their dangerously high levels of economic dependence on China.

Other members of this group included the pro-reformist Le Thanh Hai (Ho Chi Minh City's Party Chief), Deputy Prime Minister Nguyen Xuan Phuc, the deputy chairmen of the National Assembly, Nguyen Thi Kim Ngan and Thong Thi Phong.

In China we trust

The other group led by Communist Party General Secretary Nguyen Phu Trong was much less willing to provoke Beijing or do anything that would further escalate tensions. They offered no real strategy, but argued that defusing tensions with Beijing would serve the country's interests in the long term.

They apparently argued that Vietnam could not afford a conflict with China and emphasized historical and ideological affinities with Beijing. They quashed the filing of an arbitration submission and questioned US intentions and resolve. The crux of their argument was a naive belief that China will accommodate and make concessions in the future.

The de-escalation camp was joined by To Huy Ru'a, a member of the Party's Secretariat, Le Hong Anh (VCP Secretariat), Ngo Van Du (Chair Central Committee for Inspection), Dinh The Huyen (Propaganda and Education Commission), Pham Quang Nghi (Hanoi Party Chief), Nguyen Thien Nhan (Chairman of Vietnam Fatherland Front). The Minister for Public Security, Tran Dai Quang was probably fearful of mass discontent and continued protests should the conflict escalate.

There are two heavyweights whose input could have made a difference. President Truong Tan Sang most likely sided with the majority. He is one of the most pro-economic reformers but wary of conflict. The Minister of National Defense Phung Quang Thanh, the senior most uniformed officer who had been vocal in terms of the need to pursue an arbitration case, is cautious about reliance on the West. Cognizant of Vietnam's limited options, Thanh joined the majority and supported accommodation.

Regardless of the actual vote, the result seems evident: the Politburo approved a policy to de-escalate tensions. In early June, the decision to file an arbitration case seemed to have been made with the Prime Minister, the Minister of National Defense, and the Chairman of the National Assembly all speaking in favor of the move. Today, it seems to be shelved, spoken of only as a hypothetical by mid-level foreign ministry personnel. Senior leaders seem to be extremely wary of antagonizing Beijing by filing a suit similar to that of the Philippines. Hanoi did file a complaint with the United Nations but an arbitration filing is unlikely to happen any time soon.

Second, Foreign Minister Minh canceled a well publicized scheduled trip to Washington at the invitation of US Secretary of State John Kerry at the height of the oil rig tensions. A US presidential envoy did travel to Hanoi to meet with Minh, a much lower profile exchange than an official visit to Washington. Educated in the West, Minh is perceived warily by Beijing as pro-Western. He is also known to have a long rapport with Kerry. He is also the son of Nguyen Co Thach, the architect of Vietnam's opening to the West who was sidelined by pro-Chinese leaders following the collapse of communism in Eastern Europe.

Hanoi quietly announced that Pham Quang Nghi would pay a visit to the US in Minh's place. Although he is a Politburo member, Nghi's official position is simply the party chief of Hanoi, so in terms of protocol his visit is much lower profile. Nghi has an important job to do in ascertaining Washington's level of commitment to playing a role in a potential conflict with China in the South China Sea.

Vietnam's activist foreign policy within the 10-member ASEAN seems to have been tempered with the de-escalation. Earlier calls from Hanoi for a binding Code of Conduct have more recently drifted to the background. In short, Vietnam appears to have retreated from its previous tougher policy line towards China. Indeed, the rig crisis showed that a majority of the Politburo is unwilling to stand up to China, even though the country's historical narrative is built on fighting back against and repelling Chinese aggression.

There are arguably four main reasons: 1. The economic costs of continued confrontation are too great. Though Vietnam is working to diversify its exports, China remains the most important foreign player in its economy and serves as its largest trading partner, accounting for nearly $50 billion in bilateral trade in 2013. That amount is climbing each year as Vietnam becomes more integrated into China's supply chain. Some 10% of Vietnam's exports go to China, mainly food and natural resources. China is simply too vital for the Vietnamese economy at a time the World Bank says the country is under-performing its potential.

2. Vietnam knows that China is not going to back down on the South China Sea disputes and the costs of further escalation and armed conflict are simply too high. Vietnam would lose any military conflict at sea, no matter how limited. That would be both costly and a humiliation for the country's Communist Party leadership.

3. There is a hope in some quarters that by making concessions on the Paracel Islands, the Chinese will reciprocate in the Spratly Islands. But this is folly. For one, the Vietnamese made significant concessions on their land border demarcation, in the expectation that China would be conciliatory with the Gulf of Tonkin negotiations, which of course never happened. China is instead increasing its presence in the Spratlys, currently dredging at five separate atolls to create artificial islands.

4. State Councilor Yang and General secretary Trong both spoke of the importance the two sides place on maintaining friendly party-party and state-state ties. For Trong, the long game of peaceful relations with its behemoth neighbor is greater than the potential hydrocarbon wealth supposedly in the South China Sea.

Appeasement risk

Hanoi's decision to back down has potential grave implications. Vietnam has effectively appeased China, which will most likely lead to more aggression. China will likely continue to explore and offer concessions up and down Vietnam's continental shelf, creating "facts on the ground" to reinforce their 9-dashed line map doctrine and complement their artificial island strategy on the eastern perimeter.

Pro-Chinese accommodationists can argue that their quiet back room diplomacy worked, i.e. that they convinced China to de-escalate tensions for the sake of regional stability. But China removed the rig when they did because it had already served their interests, namely:

·  They found some hydrocarbons, apparently enough to justify returning to the site at a later date;

·  They proved that they could act with impunity and that no one could stop them.

·  They were able to bully the Vietnamese into not joining the Philippine arbitration;

·  They sowed seeds of doubt in the region about America's reliability as an ally;

·  They could withdraw the rig in a face-saving way with the early arrival of major typhoons;

·  ASEAN remained divided and no closer to compelling Beijing to sign a binding Code of Conduct in the South China Sea.

With an early and active typhoon season and expected confrontations at the ASEAN Regional Forum scheduled for August, the timing was right for an early Chinese withdrawal.

Such faulty analysis will pose a danger to the regime itself. Most Vietnamese may not be aware of the leadership's decision to de-escalate. They can look to the near daily maritime encounters that often leave their small coastguard fleet battered as proof that the government continues to stand up to China. Yet the real threat in not standing up to China is the threat to the regime's legitimacy. Communist ideology is hollow and the government has to be responsive to the nationalist aspirations of its people.

If the public believes that their leadership capitulated, their legitimacy will be severely eroded, dangerously at a time of slowing economic growth. That's when the real street demonstrations, aimed both against China and the Vietnam's Communist Party-led government, could be sparked.

More importantly, the decision is likely to cause deeper rifts among the party leadership, which could have broad economic implications. The pro-Chinese camp will focus on the interdependence of the two economies, even though Hanoi runs more than a $20 billion trade deficit with China and primarily exports raw materials and rice rather than manufactured goods. Vietnam might becoming a more important spoke in the southern Chinese supply chain but the trade relationship is highly unequal.

The decision to accommodate rather than confront China is also a defeat for domestic economic reformers. Those who advocate accommodation with China still see a leading role for the state sector in the economy, despite its glaring inefficiencies. They believe that the reforms and concessions demanded by the US to gain entry into the TPP are too great and would threaten the regime's current iron-clad control of the economy.

Reformers see the TPP as key to economic diversification away from China and overhauling the state-owned sector. In March, Prime Minister Dung instructed ministries to speed up privatization of state enterprises. The government "equitized" 74 state enterprises in 2013, three times the number in 2011 and 2012. In early 2014, the government announced the sales of shares in key state enterprises, including VINASHIN, Vietnam Airlines, and several ports.

Making these firms economically viable is a top priority for the government as state enterprises use about 50% of public investment, tie up 60% of bank lending, and account for more than half the nation's bad debt.

The window of opportunity for Vietnam to gain entry into the TPP is closing quickly. There is also a concern is that there are really just one to two more Central Committee meetings where real reforms can take place before the remainder of the plenums are dominated by planning for the next party congress to be held in the first quarter of 2016. That change in focus will benefit China and undercut party reformers keen to respond to Beijing's challenge with a recalibration of the country's strategic and economic relationships.

Zachary Abuza, PhD, is principal at Southeast Asia Analytics specializing in regional politics and security issues.