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The US-China trade war's gift to Vietnam

Image credit: calflier001 (Flickr user: Creative Commons)

When the Korean War broke out in 1950, Japanese Prime Minister Shigeru Yoshida declared that it was "a gift of the gods," as Japan benefited greatly from the wartime boom to the economy. Today, a similar gift has been bestowed on Vietnam, which is currently experiencing an economic upturn thanks to the ongoing trade war between the United States and China. This gift has turned the trickle of companies moving production across the border to Vietnam into a flood as companies relocate to avoid increased US tariffs on Chinese goods.

Vietnam’s exports to America have increased dramatically, rising by 26 per cent over the first quarter of 2019. The rapid increase in exports is the result of multinational companies placing a large number of new orders with Vietnamese factories to bypass US tariffs and a large number of textile factories relocating their operating sites to Vietnam from China. Resulting in the second strongest first-quarter growth Vietnam has experienced in the past decade with real gross domestic product growing by 6.79 per cent.

This remarkable growth is occurring despite exports to China dropping as its economy slows and Samsung’s financial difficulties, which has caused a drop in Vietnam’s exports of electronics. However, this initial boost in exports is only the beginning. Initially, many firms are unable to divert their business to Vietnam due to logistical constraints of relocating and building new factories. After overcoming these logistical challenges, Vietnam's manufacturing sector is expected to expand rapidly as factories move from China.

The movement of factories from China to ASEAN countries predates the trade war. Wages in China have skyrocketed over the past decades, and companies have to contend with increased regulations. This trend is particularly prominent among companies that manufacture labour-intensive goods like footwear and apparel. American tariffs on China are only accelerating this trend, like adding fuel to the fire.

The decision to relocate factories to Vietnam is primarily due to pro-business policies, low labour costs, and growing skilled workforce. The export-led growth strategy practiced implemented by the Vietnamese government has resulted in strong economic growth and the country’s political stability which acts as a beacon for investors. Furthermore, Vietnam has the largest workforce in Southeast Asia as well as the lowest manufacturing wages in the region and has recently completed a free trade deal with the EU makes it the only country in the region that has unfettered access to the European market. While the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will allow it to integrate with the new supply chains that are currently being built across Southeast Asia.

Additionally, Vietnam’s proximity to China enables companies to incorporate new factories into existing supply chains more efficiently. Manufacturers will be able to evade US tariffs by assembling Chinese products on the Vietnamese side of the border and then shipping them out of Vietnam. Allowing firms to capitalise on existing capacity in China and take advantage of Vietnam’s political position to get around the trade war and other geopolitical issues. Vietnam could become the lynchpin between the new supply chains in ASEAN and the old ones in China, which would make the “Made in Vietnam” label worth its weight in gold.

For these reasons, companies will continue to shift production to Vietnam even if the US and China sign a trade deal in the near-future. Global companies have become increasingly aware of the dangers of relying solely on China to produce their products. Such awareness makes it imperative that they diversify their supply chains to avoid future disturbances.

The idea that a third party benefits from a battle between two great powers is not a new concept and like Shigeru Yoshida, before them, the Vietnamese leaders must be thinking that the trade war is "a gift of the gods."

Andrew Thomson is the International Trade and Economy Fellow for Young Australians in International Affairs.

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