Vietnam and Indonesia last week elevated their bilateral relationship to a so-called comprehensive strategic partnership, committing to deeper economic cooperation, the removal of barriers to trade and investment, and expanded defense and intelligence collaboration. The move was unexpected: The two nations were not overtly striving for closer ties, especially given their long-standing maritime boundary and fishing rights conflicts in the South China Sea. But Vietnam, typically assertive in such matters, has suddenly taken a different approach. Alongside this upgraded partnership, both countries announced that in April they will ratify an agreement demarcating their exclusive economic zones after 12 years of negotiations.

Historically, Vietnam has prioritized balancing between the United States and China. But a new Vietnamese foreign policy is taking shape, one in which Hanoi seeks closer cooperation with its Southeast Asian neighbors, especially in sectors critical to its modernization such as technology, manufacturing and energy. Besides Indonesia, Vietnam in recent months has signed similar agreements upgrading bilateral ties with Singapore and Malaysia, indicating a broader pivot toward regional integration.

Vietnam’s long-term ambition is clear: It aims to become a middle power by 2045. Middle powers wield significant regional influence through diplomacy, economic strength and soft power. At a time of rising great-power competition, middle powers play a crucial role by promoting stability in their regions, maintaining balance and fostering cooperation. Vietnam’s strategic location makes it a good candidate for achieving middle power status, but to fulfill its potential it must navigate superpower rivalries, enhance its regional diplomatic influence and tackle domestic political and economic issues to shore up support at home. This goal also drives its slow and carefully planned efforts to distance itself from both China and the United States, and to strengthen bilateral ties with its regional peers.

Since joining the Association of Southeast Asian Nations in 1995, Vietnam has played a key role in the bloc’s economic and political integration. Its strategy – for itself and for ASEAN – has prioritized regional stability and hedging between the U.S. and China. The U.S. is now one of Vietnam’s largest trading partners, with bilateral trade exceeding $100 billion. Hanoi has also deepened security cooperation with Washington, particularly in maritime security and freedom of navigation. Meanwhile, China remains Vietnam’s top trade partner, supplying essential goods (e.g., machinery, electronics and raw materials) and investing in Vietnam’s infrastructure and manufacturing. Despite their territorial disputes in the South China Sea, Vietnam has been careful to protest diplomatically while avoiding escalation.

Vietnam’s modernization trajectory differs from its ASEAN peers. Though its economy has surged since the “Doi Moi” reforms of the late 1980s, its per capita gross domestic product, at around $4,600 in 2023, still lags Malaysia (roughly $11,000) and Singapore (more than $70,000). It has established itself as a manufacturing hub for global trade, but it specializes in electronics, textiles and agriculture and has struggled to climb the value chain. Its tech and digital economy sectors have been slow to develop, and technology adoption and innovation are poor. Severe income inequality, environmental concerns and restricted civil liberties further complicate its progress. Unlike its more democratic ASEAN neighbors, Vietnam’s one-party authoritarian system hinders the sort of innovation and debate that typically drives modernization.

But something has changed. The lagging modernization process and the risk of entanglement in a U.S.-China trade war likely prompted Communist Party leader To Lam to act. In December, he proposed sweeping government reforms intended to fundamentally restructure Vietnamese governance. Approved in February, the overhaul eliminated five ministries (some were merged with others), three state-level commissions and more than 100,000 public sector jobs. It also included plans to consolidate smaller provinces and eliminate district-level offices. In addition, Lam’s new Cabinet is younger and includes more women and technocrats (12 new ministers hold doctorates), a stark contrast to the previous government, which was mostly men over the age of 65.

Lam’s unprecedented reforms aim to streamline governance, boost economic efficiency and accelerate technological advancement. Unlike his predecessor, Nguyen Phu Trong, who emphasized state centralization and anti-corruption crackdowns, Lam seeks to base his and the Communist Party’s legitimacy on rapid economic growth. He is dismantling outdated party practices to attract investment and align with global economic trends. At the same time, he is expanding the Politburo and placing loyalists in key positions – a classic move in communist power consolidation.

His foreign policy reflects this pragmatic turn. Unlike previous leaders who kept democratic ASEAN neighbors at arm’s length, Lam is actively strengthening regional ties. With the help of the freshly upgraded partnerships with Indonesia, Malaysia and Singapore, he hopes to kick-start Vietnam’s green energy, digital transformation and semiconductor technology. To reduce reliance on great power allies, Hanoi is also enhancing maritime security cooperation within ASEAN. In an effort to facilitate this shift, Lam even compromised on a long-standing territorial dispute with Indonesia over the Natuna Islands – reversing a position Hanoi had staunchly defended.

Lam’s leadership marks a break from Vietnam’s ideological past. He is putting pragmatism over doctrine, believing that Vietnam must adapt and assume leadership of ASEAN to remain competitive. Yet, his consolidation of power mirrors Chinese President Xi Jinping’s approach, demonstrating that while he is reforming governance, he remains firmly in control. If he can sustain this balance – modernizing the country while maintaining political stability – then Vietnam’s transformation could serve as a model for other countries navigating similar constraints.