Vietnam is angling to strike a delicate trade balance between the US and China. Photo: Reuters
A clothing boutique in downtown Hanoi. Photo: AFP/Hoang Dinh Nam

As Asian nations brace for US-China trade war impacts on their economies, Vietnam is positioning itself as a possible two-way winner of the conflict.

Vietnamese Prime Minister Nguyen Xuan Phuc made clear last month that his country will not take sides in the tiff and intends to maintain good trade relations with both partners – a balancing act many in Southeast Asia are now aiming to strike.

That balance is especially crucial for Vietnam, one of the region’s most trade-reliant countries. According to World Bank data, trade amounts to twice Vietnam’s gross domestic product (GDP) – more than any other country in Asia apart from Singapore – while overseas sales as a percentage of GDP is slightly over 100%.

With China facing a potential permanent loss of .2% to .4% of GDP over the long term due to higher US tariffs on its goods and services, China-based exporters are believed to be looking for possible workarounds, including in logistically conducive neighboring Southeast Asia, to mitigate the trade war’s impact.

China-based manufacturers, including foreign multinational producers, have already begun to move certain high margin industrial operations to Vietnam. That’s been seen in the electronics sector, with big name producers like Intel, Foxconn, LG, and Samsung recently relocating to Vietnam. It’s not clear yet how many, if any, of the relocations have been made to elude US tariffs.

Vietnam-Trade Balance-2011-2018-Vietnam Customs
Vietnam’s trade volumes rise and rise. Source: Vietnam Customs

Indeed, the China-to-Vietnam relocation trend was well in train for low value-added manufacturing well before the onset of the trade war, as many Chinese producers have recently moved their factories across the border to tap Vietnam’s lower wages.

But Vietnam is expected to boost leather, footwear and handbag exports as a result of the trade war, with some analysts predicting shipments could grow by as much as 10% from 2017. Finished Vietnamese products such as toys are also set to see short term trade war gains, the analysts say.

Advantageous trade deals, regional connectivity with Association of Southeast Asian Nations (ASEAN) economies, and a strategic position on China’s southern border with existing transportation links will all add to Vietnam’s appeal as companies adapt their supply chains to new economic realities.

A trade war-driven influx of new manufacturing from China is expected to create jobs, increase exports and further fuel export-oriented economic growth. However, some already fear that too much relocation from China could quickly lead to skilled labor shortages.

Vietnam also enjoys competitive trade advantages as a party to 12 free trade agreements (FTAs) and 17 total trade deals, among the highest total for any nation worldwide. Several other trade-promoting deals are in the negotiation pipeline.

Once the European Union-Vietnam FTA and Comprehensive Agreement for Trans-Pacific Partnership (CPTPP) go into effect, Vietnam will arguably become an even more attractive manufacturing destination due to its increased global connectivity.

Vietnam – Exports – Sectors – 2017-2018-Vietnam Customs Department
Source: Vietnam Customs

At the same time, China’s status as the world’s factory floor was already eroding before US President Donald Trump launched his trade war. While supply is strong, demand for Chinese manufacturers is dropping, exemplified by a decline in new export orders from 51.2% in May to 48% in September, according to the Chinese National Bureau of Statistics.

Wracked by anxieties of escalating US tariffs and with fast rising manufacturing costs (wages have risen by nearly 50% over the last five years), China-based manufacturers are opting to reduce their domestic payrolls and could soon move even more of their production operations to Vietnam, analysts say.

Chinese-owned factories in Vietnam could try to mask their Chinese-made content to elude US tariffs, tactics that may or may not work as US trade regulators will be on rising guard against such country-of-origin accounting tricks. Moreover, Vietnam already has a US$40 billion trade surplus with the US.

To be sure, trade war-disrupted global supply chains will hit Vietnam in certain sectors, including its electronic component and auto part industries, both of which ship large amounts to China for assembly into products that are then exported to the US.

Some China-based auto part manufacturers are reportedly looking to move to Vietnam as quickly as possible.

While the US and Vietnam have maintained cordial trade relations under the Trump administration despite Vietnam’s hefty surplus, that could change if the imbalance rises substantially due to China using Vietnam as a manufacturing and shipment base to elude US tariffs.

Vietnam-China trade balances over time. Source: Vietnam Customs

China has already invested heavily in Vietnamese infrastructure, creating a tight transport network between the manufacturing centers of southern China and northern Vietnam. Last year, Vietnam imported US$57 billion in goods from China, and Chinese investment in Vietnam continues to grow rapidly.

The two countries had long-discussed establishing looser trade terms in their shared border region, which came to fruition in part in August when the State Bank of Vietnam (SBV) issued Circular 18 to formally allow payment in Chinese yuan for certain entities and individuals in the Chinese border region.

The Vietnamese government also issued two laws which may encourage rerouting Chinese-made products through Vietnam. These laws and formalization of yuan-based trade will facilitate already booming Vietnamese border trade, notably at a time avenues for Chinese exports to the US tighten.

This arrangement may lead to the assembly of more Chinese exports on the Vietnamese side of the border, potentially allowing for Chinese products to be labeled as “made in Vietnam” to elude US tariffs.

This approach is not without risk, however, as the US slapped heavy duties on steel products from Vietnam that were originally imported from China in a 2016 trade dispute. Some experts believe country-of-origin standards will be enforced even more rigorously by the US as the trade war intensifies.

Vietnamese protesters shout slogans against a proposal to grant companies lengthy land leases during a demonstration in Ho Chi Minh City on June 10, 2018. Photo: AFP/Kao Nguyen
Vietnamese protesters shout slogans against a proposal to grant companies lengthy land leases during a demonstration in Ho Chi Minh City on June 10, 2018. Photo: AFP/Kao Nguyen

China and Vietnam are also expected to cooperate in new Vietnamese special economic zones (SEZ), though likewise with attendant risks. A draft SEZ law was set for adoption on June 15 but was delayed due to massive nationwide public protests earlier that month.

While no specific country is mentioned in the law’s text, the draft was controversial because it allows foreign investors to lease land for up to 99 years in designated zones, an arrangement nationalistic protestors saw as selling national sovereignty to Chinese investors in particular.

While the anti-China protests temporarily delayed the law’s passage, incentives for its eventual enactment are growing on both sides of the border as the US-China trade war opens substantial new trade and investment opportunities for Vietnam as a middleman between the two, at least in the short term.

Other players are taking a wait-and-see approach as the recalibration of supply chains is expected to take time and no one is sure how long the trade war will persist, making any immediate gains potentially temporary and easily reversed.