Vietnam’s exports face risk of US punitive tariffs: research entity

Illustrative photo (Source: VOV)

The macro research - focused Fitch Solutions are mulling over conflicting factors with regard to the prospect of the US levying punitive tariffs on Vietnamese exports, similar to that on Chinese exports.

Fitch Solutions analysts believe that the US is likely to want to avoid fighting its trade war simultaneously on too many fronts. This implies that until some resolution on the US-China trade war looks set to be reached, other countries such as Vietnam and India are unlikely to receive too much focus from the Trump administration.

Since the US-China trade war began in mid-2018, Vietnam has been frequently touted as a ‘winner’ amid elevated trade tensions.

Indeed, the ongoing US-China trade war has likely served to accelerate the structural shift in manufacturing operations to Vietnam from China, particularly in the lower value added manufacturing segment of electronics and textiles.

Fundamentally, Vietnam’s edge over China in this segment stems from a large labour force and low cost of labour, combined with an environment friendly to foreign direct investment and the country’s open door trade policy, having signed numerous free trade agreements with various countries and trading blocs.

The pick-up in Vietnam’s total exports growth from March 2019, and perhaps more importantly, strong growth in exports to the US from August 2018, likely reflects this shift as companies previously manufacturing in China sought to avoid paying tariffs on exports to the US.

However, the rise in Vietnam’s exports to the US could possibly involve some degree of transhipment fraud from China, the Republic of Korea (RoK), and Taiwan (China), as companies in these economies seek to circumvent the host of US tariffs levied across of wide range of Chinese exports, and on RoK and Taiwanese steel, warned Fitch Solutions experts.

In response to allegations of transhipment fraud, the US in July implemented tariffs as high as 400 per cent on steel exports of Vietnam with RoK and Taiwanese origin.

Regardless of the reason for the increase in Vietnamese exports, given that the Trump administration appears to be targeting the top economies the US has a trade deficit with, Vietnam, at sixth position in 2018, looks likely to provoke tariff action from the US.

The US’ trade deficit with Vietnam has soared from US$14.8 billion in 2012 to US$34.8 billion in 2018, with the 2019 figure looking set to surpass that of 2018, with the deficit in the first half of 2019 registering US$20.5 billion.

The large and growing trade deficit has not gone unnoticed by the Trump administration as US President Donald Trump said that ‘Vietnam takes advantage (of the US) even worse than China’, Vietnam is the ‘single worst abuser of everybody’, and that US has to work to reduce the ‘unsustainable trade deficit’.

There are two reasons that Vietnam is unlikely to see major tariff action from the US, at least over the near term. First, the trade tensions between the US and China remain elevated, and until some sort of resolution comes within reach, while that the US will likely keep its focus on China especially as Trump gears up for re-election in November 2020.

Vietnam is likely off the hook for major US tariffs in the meantime. Furthermore on August 13, President Trump delayed the imposition of import tariffs on certain categories of Chinese goods until December 15 ‘for the Christmas season’, with the aim of avoiding tariffs causing an adverse impact on American consumers over the festive season. These products span mobile phones, laptops, video game consoles, toys, computer monitors, and footwear and clothing.

 This suggests that President Trump is now aware of the adverse upside impact on prices his administration’s tariffs would have on consumer goods in the country.

Given that the US’s imports from Vietnam are mainly in consumer electronics, textiles, and clothing, the US will similarly avoid levying tariffs on Vietnamese goods over the near term. This is to avoid a surge in clothing prices from tariffs being levied on both its two largest sources of clothing imports, China and Vietnam, which together account for almost 55 per cent of the US’s total apparel and footwear imports in 2018.