Vietnam has golden opportunity in US-China trade war

The United States and China are two vitally important trade partners for Vietnam and the current on-going US-China trade war is creating various diverse situations in the global market.

In this file photo taken on June 29, 2019 Chinese President Xi Jinping (R) and US President Donald Trump attend their bilateral meeting on the sidelines of the G20 Summit in Osaka. (AFP Photo)

In this file photo taken on June 29, 2019 Chinese President Xi Jinping (R) and US President Donald Trump attend their bilateral meeting on the sidelines of the G20 Summit in Osaka. (AFP Photo)

However, for Vietnamese enterprises, this is a ‘golden opportunity’ to change and evolve its present production and business structure to become a significant part of the global supply chain.

Increasing pressure from both partners

In the last few years, the US has been Vietnam's leading partner in most exports, showing a trade surplus of USD 39.5 billion in 2018. Therefore, when the US economy encounters difficulties or American consumer confidence decreases, Vietnam's exports face unexpected setbacks.

While on the other hand, China is a huge market and it imports vast quantities of raw materials and other goods from Vietnamese enterprises, accounting to as much as 70-80%. So when China faces trade difficulties, it could leave a serious negative impact on Vietnamese enterprises.

Although Vietnam is capable of adjusting its targets, markets, and import-export activities, the effects of the on-going US-China trade war are difficult to predict. As the US-China trade war continues, it will certainly impact production growth as well as Vietnam's import and export activities, which currently account for over 200% of GDP.

For example, when import of manufactured goods face difficulties or exports to the US and other countries suffer setbacks, China finds ways to push them onto neighboring countries at a lower price, including to Vietnam. Vietnam has a very long open land and sea border for trade, so Chinese goods have many ways to flood the domestic market illegally, and cause difficulties for businesses involved in domestic production by creating unequal competition due to cheap prices.

Particularly those goods that are imported through non-quota are not fully inspected and supervised in terms of quality, quantity and material types, creating a risk of trade fraud, origin, endangering locally produced goods, reducing reputation of Vietnamese enterprises, and leading to many difficulties in the consumption and distribution of goods.

Currently, many Chinese enterprises are stepping up direct investment in Vietnam to avoid tariff barriers from the trade war inflicted by the US, so the potential for importing components and semi-finished products from China to produce, assemble and export to the US and other countries is very large, which is detrimental to the domestic business production and the economy.

As for exports, from the beginning of 2019, after statements made by President Donald Trump on importing goods from Vietnam and other countries to replace Chinese goods, Vietnamese goods exported to the US have rapidly increased. Some items have even shown a growth rate of 30-40%, and some upto 70-80%.

But this changing scenario needs to be dealt with extreme caution. Because one of the three criteria of the US is that if a country has a large trade surplus of more than USD 40 billion, that country may be termed a currency manipulator. So when Vietnam showed a trade surplus with the US of USD 39.5 billion in 2018, the situation could have been reconsidered and this is what Vietnam needs to think about.

It is also noteworthy to know that as exports to the US in some commodities increased, imports from China also increased. Some domestic enterprises as well as FDI enterprises still mainly import materials and appurtenances from China to assemble in Vietnam, and to use Vietnam as base of origin to export to other countries.

This really can decrease Vietnam's added value, which means benefits for the economy won’t show much gain. In addition, a serious issue is that if the US checks and discovers the goods have been dubiously labeled and misrepresented by their origin, they will strictly monitor exports, as they recently did with the steel issue. This is a valuable lesson that Vietnam must be careful of and take appropriate action, or else the situation could   become complicated, with the possibility that the US could declare a trade war with Vietnam as well.

Strategic and cognitive transformation

Although the US-China trade war has had many negative effects on the Vietnamese economy, it still provides ‘golden opportunities’ for the country to revamp and totally change its production and business structure, a fact that is becoming quite apparent. When the trade war begins to reach climax point, most US businesses will leave the Chinese market, and then the production chain and value chain of American companies as well as multinational companies will be broken. This will be the best time for multinational corporations to restructure their production line and supply chain. They really need new factors to replace Chinese enterprises to meet the needs of commodities in the supply chain of manufacturing goods and value chain.

Therefore, this will be a good opportunity for Vietnamese enterprises to become a part of the supply chain of several multinational companies in general and US companies in particular. If Vietnam quickly takes advantage of transferring US investments from China to Vietnam, Vietnamese enterprises can make use of capital resources from US banks, high-end technology and good technical skills that US enterprises can provide.

When American multinational corporations expect other enterprises to replace Chinese enterprises in the supply of commodities and semi-finished products for supply chains, they will give Vietnamese enterprises good chance to have access to capital resources, technology and willingly train high-tech workers for the purpose of helping Vietnamese businesses form new links in their supply chains.

Simultaneously, this is also an opportunity for Vietnamese enterprises to increase import machinery, equipment, materials, accessories and semi-finished products from the US to meet the manufacturing requirements of high-class products according to international standards. At that time, Vietnamese goods will easily join the global supply chain, and also receive preferential treatment from the countries that have signed bilateral and multilateral free trade agreements (FTAs).

In order to take advantage of the current opportunity and transform the economy, a new transformation strategy, awareness and determination by state agencies and enterprises must be implemented. If Vietnam misses this opportunity and ignores its present chances, the country will completely miss out on these ‘golden opportunities’.
This chance is also aimed for a bigger goal. When the production and business structure is changed, the businesses applying modern technology will focus more on investment in manufacturing high-quality goods and reduce the production of low grade and substandard products. This will really contribute to improving labor productivity, create good conditions for restructuring the economy and most importantly help Vietnam overcome and emerge from the ‘middle-income trap’.

Besides, changing the production and business structure will also increase the possibility of importing equipment, technology, machinery, materials, and accessories from the US. It will help Vietnam avoid an extremely large surplus of goods and also avoid risk of currency control. This will help to reduce the import of goods from China and make trade balance between Vietnam and China less stressful.

Especially, when Vietnam signed the FTAs (Free Trade Agreements) like EVFTA (EU-Vietnam Free Trade Agreement), CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) in order to receive preferential treatment from these countries, its goods were required to meet international standards.

Changing the direction to manufacturing of high-class products in accordance with international standards requires national resources to meet this goal, which will gradually reduce or eliminate demand for machinery, equipment, accessories to be imported from China. This will also simultaneously reduce high tension on excessive imports as opposed to exports to China, as has happened in the past.

Translated by Thúy Hằng

Assoc. Prof. Dr. Dinh Trong Thinh, Senior Lecturer at Finance Institute

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