Who Won the US-China Trade War? Vietnam

Who Won the US-China Trade War? Vietnam
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What you need to know

Vietnam emerges as a winner as the United States and China are butting heads against each other.

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By Eamon Barrett

There’s a common saying within the C-suite that a trade war has no winners. But recent reports suggest maybe one victor is emerging from the U.S.-China trade spat: Vietnam.

According to data from Japanese investment bank Nomura, Vietnam is the largest recipient of product orders diverted from the feuding nations, as importers attempt to avoid trade war tariffs. The value of orders diverted to Vietnam in the first quarter of the year was equivalent to 7.9 percent of the Southeast Asian nation’s GDP.

Meanwhile the second largest recipient, Taiwan, only took on additional orders equal to 2.1 percent of GDP.

President Donald Trump sees that shift as evidence the trade war is working. On Monday morning after Beijing revealed China’s slowest quarterly economic growth in 27 years—rising just 6.2 percent over the second quarter last year, when the trade war began — Trump tweeted out, “The United States tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving.”

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Photo Credit: Shutterstock
Ho Chi Minh City, Vietnam

In fact, manufacturers have been emigrating from — or, more often, expanding beyond — China for years. The trade war has added some impetus to that movement, but not every industry can afford to be so flexible.

Stanley Chao, managing partner of All In Consulting, which advises small- and medium-sized enterprises on how to do business with China, says there are a lot of smaller, specialized manufacturers that are stuck in China because nowhere else has an adequate supplier ecosystem.

“They’re waiting for bigger players to make a move so that they can piggyback off of the larger companies into new markets,” Chao says. “That’s exactly what they did in the past. They piggybacked into China.” Despite media reports, Chao adds, bigger companies aren’t rushing to leave China. It can take years to develop new supply chains and, ultimately, China will continue to be a valuable market.

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An employee shows a Nike's jacket for USA Olympic 2012 team which was produced by Maxport garment company at its headquarters in Hanoi, Vietnam.
Why Vietnam?

For those that can expand, however, Vietnam is an attractive destination. Wages are low, education is relatively high, and Hanoi has struck Free Trade Agreements with most major economies, as both a sovereign state and as a member of ASEAN. The EU ratified a free trade agreement with the Southeast Asian nation just last month, which will see duties removed on 99 percent of Vietnamese imports over the next seven years.

At home, the government has invested heavily in promoting high tech manufacturing, opening three multi-billion-dollar science parks across Vietnam’s major cities — Danang, Hanoi and Ho Chi Minh — and is opening three new Special Economic Zones (SEZ) at port towns, to add to the 18 SEZs it already has. It should be noted, however, that the new trio of SEZs have seen stiff opposition from protesters who worry about Chinese industries snapping up land on Vietnamese soil.

“The pace of Chinese investment has definitely accelerated in recent months, to the point where there are buses of Chinese investors literally running around industrial parks and pointing at plots of land saying, ‘I want this, I want that,’” says Alberto Vettoretti, managing partner of Asia-focused consultancy Dezan Shire & Associates.

詹賀博:光隆營收來自成衣占比將愈來愈重
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A Taiwanese clothing manufacturer with factories based in Vietnam has benefited from the U.S.-China trade war's diverted orders.

According to the consultancy, China rose from seventh to fifth place among Vietnam’s leading foreign direct investment contributors in 2018, pumping US$2.4 billion into the economy. In the five months through May, China's rank increased to fourth place; it would be a clear winner if its ranking incorporated investment from Hong Kong, which has injected over US$5 billion of capital into Vietnam so far this year.

Entering the Sinosphere

The surge in Chinese investment has pros and cons for Hanoi. Some investors are bringing legitimate business, hiring opportunities and advanced tech. Others, however, are simply speculating on the real estate market as Vietnamese factory space reaches a premium. Worse yet, a number of buyers are opening tariff-dodging assembly plants where Chinese components are repackaged and exported to the U.S. in an illegal practice known as "transhipping."

Vietnam’s customs agency vowed to crackdown on transhipment after finding scores of such cases in June, but the violation had already caught the attention of the "Tariff Man” himself.

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Photo Credit: AP / TPG Images
U.S. President Donald Trump (Right) and China's President Xi Jinping (Left) at the 2018 G20 summit in Buenos Aires, Argentina.

"A lot of companies are moving to Vietnam, but Vietnam takes advantage of us even worse than China. So there's a very interesting situation going on there," Trump said in an interview with Fox Business on June 26. Trump went on to declare that Vietnam was the “single worst abuser of everybody.”

The U.S. commerce department slapped a 400-percent levy on Vietnamese steel imports at the beginning of this month, since it suspects the material has origins in other countries. Whether the U.S. will ratchet up more pressure on Vietnam is unclear. “No one has a crystal ball,” Vettoretti says.

For now, the best thing or Vietnam to do is take advantage of its moment in the spotlight and put some of that increased investment to good use.

© 2019 Time Inc. All rights reserved. Republished from fortune.com and published with permission of Time Inc. Reproduction in any manner in any language in whole or in part without prior written permission is prohibited.

TNL Editor: Daphne K. Lee (@thenewslensintl)

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