The Strategist

Here's how Vietnam is making profit out of US-China trade war

07/02/2019 - 12:10

Vietnam's economy is growing rapidly this year. The country benefits from the trade war between the United States and China, as some companies are moving their production in there. However, Vietnam’s exports are also increasing due to scammers trying to circumvent American sanctions on the import of Chinese goods, and Washington doesn’t like it.

Vietnam's GDP in the II quarter grew by 6.71% in annual terms. Growth, though slowed slightly compared with 6.82% in the first quarter, was better than analysts' forecasts. Experts polled by Bloomberg expected it to decline to 6.61%. This result was provided primarily by the manufacturing sector, which showed an increase of 9.14%.

Vietnam more than other Asian countries won from the trade conflict between Washington and Beijing, writes Financial Times. According to the newspaper’s estimates, US imports from Vietnam rose by almost 40% in the first four months of 2019 compared with January-April 2018. During the same period, US imports from China decreased by 13%.

At the moment, Washington has imposed a 25% duty on imports of Chinese goods for $ 250 billion. US President Donald Trump also threatens to impose 25% duties on Chinese goods worth another $ 300 billion due to dissatisfaction with the course of trade talks. According to the Asian Development Bank (ADB), in the event of a trade conflict escalating, Vietnam’s GDP will increase by an additional 2% over three years. The country benefits from the fact that it "sells many of the same goods on which the tariff were imposed," says ADB Chief Economist Yasuyuki Sawada.

However, some companies moved production to Vietnam before that. The country attracted them with lower labor costs and less stringent environmental regulations, writes FT. Last year, foreign direct investment in Vietnam reached a record $ 18 billion.

The US deficit in trade with Vietnam in the first quarter grew by 45.5% in annual terms to $ 13.5 billion. The country has a larger deficit only in trade with China, Mexico, Japan and Germany. Therefore, some are wondering if this will make Washington angry if the deficit continues to grow. Much will depend on Trump’s goal in the trade war: to return production to the United States and reduce the trade deficit with other countries or simply force China to abandon methods that it considers dishonest, writes FT. “Many companies faced with duties are moving from China to Vietnam and other Asian countries. That is why China is so eager to conclude a trade agreement,” Trump tweeted in May.

“Trump's tweet shows that the situation with Vietnam quite suits him. But the problem with his trading strategy is that it will not work in the long term,” said an economist at Pictet Wealth Management. “Fees should be levied on everyone or anyone, otherwise someone will just cut in line.”

Some exporters do use this, writes The Wall Street Journal. They ship goods from China to Vietnam, where they undergo only a little processing, and then re-export them as Vietnamese to the USA.

Vietnamese authorities promise to fight this practice. But customs data shows that such fraud is very common. For example, in the first five months of 2019, shipments of computers and other electronics from China to Vietnam increased by 80.8% in annual terms to $ 5.1 billion. Over the same period, the export of such goods from Vietnam to the USA grew by 71.6% to $ 1.8 billion. A similar trend is observed with the supply of machinery. According to experts, it is beneficial to port owners. "Many so-called factories in Vietnam are actually warehouses for the temporary storage of goods from China," says Jeffrey Newman, founder of the law firm Jeffrey Newman Law (quoted in WSJ).

In an interview with Fox Business Network at the end of June, Trump had already spoken much harsher about Vietnam. According to him, the country is abusing the situation and behaving "even worse than China," so the US is already having a discussion with it.

Vietnam has previously played the role of such a mediator. For many years, the country re-exported Chinese steel to the United States in the same way, helping its manufacturers bypass duties. As a result, Washington came to the conclusion that the value added of some types of steel created in Vietnam is insignificant, and in May 2018 this steel was levied 250% duties.