AS the US-China trade war hots up, and economists warn of shrinking GDP growth and disrupted supply chains, there are some markets that are reaping the benefits of the face-off.
Vietnam, in particular, is expecting a major wave of industrial relocations from an increasingly expensive China.
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. Although the role the tariffs played in this move cannot be certain.
This has been almost universally seen as a positive due to Vietnam being one of the region’s most trade-reliant countries.
Economists, investors and commentators have been predicting a Southeast Asia boom with Cambodia and Vietnam predominantly picking up the slack as companies get jittery in China.
But there could be a flip side to mopping up some of China’s trade as, you’ve got to remember, it was that trade that got China in trouble in the first place.
“The tariffs on China are there because of the trade deficit,” said Economist Intelligence Unit (EIU) economist Yue Su said on Tuesday.
“These other countries that pick up the supply chain, their deficits will also go up and then they will face a trade war with the US.”
Vietnam already operates on a US$32 billion trade deficit – America’s sixth largest.
Granted, this is nowhere near the behemoth US$350 billion that China has racked up, but it’s still significant.
It has so far flown under the radar. With bigger fish to fry, the US’s attention has been elsewhere, namely China, Mexico, and Canada. But as business mounts up, and the deficit widens, the country risks drawing ire from a heavily trade-focused President Trump.
While this is bad news for Vietnam, it’s good news for China as other markets suffer the same fate and start to lose their shine with investors. This, Yue says will stem the flow of factories moving out of China.
This levelling of the playing field will be especially welcome given the movement of manufacturing away from China is not a new phenomenon. The new tariffs and threats of trade war can only take part of the blame. In fact, even less than that as, according to EIU principal economist, Tom Rafferty, the effects of which are yet to be felt in China’s economy.
Even before Trump, rising labour costs, the need for diversification, and the government’s focus shifting from labour-intensive sectors to high-tech industries, was driving business out.
Vietnam has long been an attractive prospect for business for a number of reasons. Its convenient geographic proximity to major markets, lower wages, and yet highly skilled labour, and regional connectivity with Asean. Not to mention beneficial trade agreements that look set to get even better when the upcoming Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) kicks in in the coming weeks. It’s no surprise that Vietnam has emerged as one of the most preferred alternatives for manufacturers.
But its appeal has already garnered the country unwanted attention, both from sly manufacturers and the US.
Back in May, the US slapped steep import duties on steel products from Vietnam after discovering manufacturers were diverting Chinese products through the country to circumvent imposed tariffs.
If Chinese-based manufacturers use Vietnam as a shipment base to reroute goods and elude US tariffs, this unwanted attention from the US will only increase, potentially fraying what has so far been a fairly cordial trade relationship.
It will also add to the trade deficit with the US and place Vietnam firmly in the eye-line of the White House. With Trump’s preference for individual bilateral deals, the small, trade-reliant country could find itself in a trade war of its own, only compared to China, it will be a much smaller David to fight the US’s Goliath.