Vietnam and Cambodia revamp economic partnership
As US tariffs bite and Chinese capital beckons, Vietnam and Cambodia discover renewed potential in their economic relationship. Neither can afford to alienate powerful partners, yet the risk of becoming pawns in a geopolitical tug-of-war grows ever clearer. Their evolving partnership shows how countries with complicated pasts can pursue practical cooperation on specific economic fronts while managing unresolved political frictions.
The threat of steep US ‘reciprocal’ tariffs — 46 and 49 per cent on Vietnamese and Cambodian exports, respectively — has prompted economic planners in both Hanoi and Phnom Penh to reconsider their trade dependencies. This economic pressure coincides with Chinese President Xi Jinping’s April 2025 charm offensive across Southeast Asia. Xi showered both countries with investment pledges aimed at pulling them more firmly into Beijing’s orbit against what China terms US ‘unilateral bullying’.
For two countries with historically complex relations, this moment presents both a challenge and an opportunity to recalibrate their economic partnership. Cambodia and Vietnam have maintained close ties, but tensions — notably Cambodia’s 2024 withdrawal from the Cambodia–Laos–Vietnam Development Triangle Area and controversies surrounding Chinese-backed projects like the Funan Techo Canal and Ream Naval Base — have tested their relationship.
A landmark summit in Ho Chi Minh City in February 2025 highlighted a pragmatic, though subtle, shift. Vietnam’s Communist Party General Secretary To Lam, joined by nearly the entire Politburo, met with Cambodian Prime Minister Hun Manet and his influential father, Hun Sen. Unlike previous high-level encounters often dominated by ideological rhetoric, this meeting — held in Vietnam’s commercial hub rather than its political capital Hanoi — emphasised practical economic collaboration. The unprecedented presence of prime ministers alongside party chiefs at an Indochinese meeting underscored this reorientation toward economics over ideology.
The summit produced tangible outcomes, including commitments on infrastructure, cross-border trade and investment, and a unified tourism initiative aptly named ‘One Journey, Three Destinations’, also encompassing Laos. Three months later, another meeting between Hun Sen and To Lam — again in Ho Chi Minh City — reaffirmed mutual pledges to ‘strengthen the connection between the two economies’. A bilateral trade agreement for the 2025–26 period was signed, establishing preferential tariffs on exports from both sides.
The economic logic for both countries is compelling. Hun Manet’s government has practical reasons to diversify economic partnerships without fundamentally altering political alignments. Closer ties with Vietnam allow Cambodia to counterbalance its growing reliance on Chinese capital, which has drawn criticism for opaque financing, inflated costs and limited local benefits. Rising labour costs in Vietnam have also created opportunities for Cambodia to integrate into Vietnamese-led manufacturing networks.
Vietnam’s investments in Cambodia — reaching over US$550 million in 2024 alone, second only to China — demonstrate the substantial economic integration already underway. Cumulatively, Vietnam’s investments in Cambodia total approximately US$3.5 billion, making it the country’s largest ASEAN investor. Major Vietnamese firms, including Viettel, BIDV, Hoang Anh Gia Lai and Vietnam Rubber Group, have established significant operations in Cambodia. These investments connect Cambodian firms to broader regional supply chains while providing markets for Cambodian agricultural products within Vietnam’s food processing sector.
Bilateral trade has rebounded, reaching US$10 billion in 2024 — representing nearly 20 per cent of Cambodia’s total trade — and reversing the declining trend observed in 2023. Though ambitious, the goal to double this figure reflects both governments’ belief that deeper regional integration offers a partial hedge against global trade turbulence.
Cambodia’s trade deficit with Vietnam, while still substantial, narrowed from US$753 million in 2023 to around US$480 million in 2024 — a modest improvement when compared to its yawning US$8 billion deficit with China. This shift helps Hun Manet balance deeper economic ties with a show of autonomy crucial to his domestic legitimacy. Infrastructure upgrades like the Ho Chi Minh City–Moc Bai expressway, due for completion by 2027, serve this dual purpose perfectly. Connecting to Cambodia’s Bavet–Phnom Penh highway, it will halve travel time between Ho Chi Minh City and Phnom Penh while being framed as a Cambodian-led initiative that boosts regional trade without compromising sovereignty.
For Vietnam, whose manufacturing sector faces rising domestic labour costs and intensifying competition from other emerging economies, Cambodia represents a logical extension of its industrial base rather than merely a market for Vietnamese goods. While Vietnam cannot realistically replace the United States as Cambodia’s primary market amid looming tariffs, its firms can help both countries pivot towards alternative markets through cross-border production networks. Cambodia gains from knowledge transfer, job creation and greater participation in global value chains, while Vietnam preserves competitiveness by shifting labour-intensive processes abroad while maintaining higher-value operations at home.
Challenges to deeper integration persist. Historical grievances, particularly anti-Vietnamese sentiment among segments of the Cambodian public, remain politically sensitive. Unresolved border demarcation issues and the status of ethnic Vietnamese communities continue to complicate ties. The imbalance in economic size also carries risks — Phnom Penh must carefully manage integration to avoid over-dependence on any single partner, be it China, Vietnam or the United States. For Hanoi, concerns over Beijing’s expansive footprint in Cambodia are unlikely to dissipate.
Despite these lingering anxieties, economic pragmatism may ultimately triumph — particularly with a new generation of pragmatic leaders, Hun Manet in Phnom Penh and To Lam in Hanoi, now steering the relationship.
As globalisation fractures into competing economic blocs, middle and small-sized states like Vietnam and Cambodia have strong incentives to build regional resilience. In an era of sharpening great-power rivalry, an old Vietnamese saying rings ever truer — a close neighbour may well prove more dependable than a distant friend.
By Nguyen Khac Giang – ISEAS–Yusof Ishak Institute / Eastasiaforum.org – July 9, 2025