Opportunities and threats arising from “Trump-ian” trade protectionism; Vietnam wins again?

Authors:Shauryaa Ladha, Bhavya Verma, Shawn Tenh

Research Head: Shawn Tenh

Editor: Praharsh Mehrotra

Illustration by Jasmine

Abstract

As global trade relations shift from mutually beneficial cooperation to the protection of narrow-minded national interest, we see the application of tariffs and the restriction of technology transfer as a tool of negotiation to rebalance trade volume. Other than the immediate reduction in bilateral trade between the US and China, a secondary effect has been a diversion of trade to other exporting nations as the relative cost of imports decreased in the absence of new tariffs. However, the benefits from the increase in exports are far from certain. 19 months after the first tranche of tariffs was applied on the $34 billion worth of Chinese goods and as the 2 largest economy enter into a phase 1 deal, a closer investigation is necessary to analyse the full effects on the Vietnam economy.

1. A new beginning

Economic reforms and “renovations”:At the end of the 6thNational Congress of the Communist Party of Vietnam in 1986, Vietnam adopted the policy of Doi Moi (“Renovation”) (Sakata, 2013). This was a series of economic policies and legislation that aimed at transitioning the centrally planned economy to a “socialist-oriented market economy”. The adoption of the market economy increased efficiency of production while the price mechanism distributed goods efficiently. The reforms also created a “level playing field” by removing discriminatory charges and pricing which forced domestic corporations to compete fairly. Western corporate governance was adapted, especially by corporations with foreign ownership, to decentralize business decisions to business managers. The reforms were well received by the regional and international community and Vietnam successively earned membership to ASEAN, APEC and WTO.

2. Enter the age of Exports

At the end of the Vietnam War in the late 1970s, Vietnam was one of the poorest countries in the world and was reliant on foreign aid (upto $5.6 billion from COMECON) for post war reconstruction and development (CIA, 1978). While the shift to a market economy was a big leapt forward in terms of economic organization, the economy suffered from weak domestic demand and struggled to reinvigorate itself. Export presented Vietnam an opportunity to leverage on external demand to drive economic growth (Nguyen, 2016). By exporting its services and production capabilities, Vietnam could earn foreign currencies. This was a critical resource that allowed Vietnam to import modern machinery that greatly improved the productive capabilities of the local workforce within a short period -as opposed to a longer-term strategy like education.

3. Vietnam’s Strengths and Weaknesses

According to Ho et al. (2018), Vietnam’s economic rise comes down to three main factors: Firstly, it has embraced trade liberalisation, shown by joining ASEAN trade agreements and, more recently, the Trans-Pacific Partnership, even without the US. Secondly, deregulation and lowering the cost of doing business have positively impacted investment. Thirdly, Vietnam has invested heavily in its human capital and infrastructure. Its market-friendly environment has made it a hub for foreign investment and manufacturing. However, itsmajor downside lies in its huge dependence on the same foreign investment and trade. In addition, a fragile banking system, weak business climate (lack of transparency and corruption) and incomplete public sector reforms are other flaws that hinder the economy.

4. Vietnam and the US-China Trade war

The protectionist tit-for-tat between the US and China has far-reaching consequences, not just for their own economies but also for third-parties that are economically linked to them.This is mainly due to two reasons: the potential diversion of US imports to non-Chinese firms, particularly in East Asia, and a diversion in investments towards other countries, mostly concerning Chinese investment attempting to maneuver US import tariff hikes(Yap, 2019).Global economic activity is poised to slow down as a result of rising trade tensions. While trade has helped to drive economic activity in Vietnam in the past, it now threatens local economic stability. The question arises: is Vietnam a winner in this trade war, or a vulnerable loser? Initially, Vietnam seemed to have much to gain. This is evident in Vietnam’s GDP from July to September 2019, which grew 7.31 percent from the last year due to a surge in exports as more and more Chinese firms shifted their production bases to Vietnam (Michishita, 2019). However, this has attracted the attention of US regulators. President Trump even went on to threaten the imposition of tariffs on Vietnam (Bermingham and Zhou, 2019). The practice of rerouting Chinese products through Vietnam to the US as ‘made-in-Vietnam’ is especially harmful and concerning, with some US companies holding off on purchase of Vietnamese products as well. Another downside is the risk of Vietnam becoming a pollution haven, with many Chinese companies bringing in outdated and small-scale industrial technology that is severely deteriorating the environment. Vietnam is already environmentally weak, and is vulnerable to climate change.

5. Effects of the phase 1 deal

The US and China signed a preliminary trade agreement on January 15, with its centrepiece being a commitment by Beijing to purchase USD 200 billion worth American goods and services. On the other hand, the US will halve its 15 percent tariff on about USD 120 billion worth Chinese goods. This is a smart political move by Trump to appease the average American citizen affected by the trade war.Many experts are sceptical about how realistic this deal is. China would have to divert its imports from other nations to the US to meet the target of USD 200 billion. As China is the second largest destination for Vietnamese goods with an export value of $39.9 billion(Fernandez, n.d.),Vietnam is placed in a vulnerable position. For example, increased US exports of cereals, such as sorghum, wheat and corn, might come at the expense of Vietnam’s export.

6. Vietnam’s strategy

The path forward for Vietnam is unclear as it is dependent on the outcome of phase1 and the upcoming Phase 2 agreements between China and the US. There are both opportunities and risks involved in the US-China trade war, and the government must anticipate scenarios and plan solutions for each of them. In the short-term, Vietnam should navigate its trade and investment policies without severely compromising on bilateral ties with US and China respectively. Vietnam needs to clamp down onChinese transhipment to avoid retaliatory tariffs from Washington. Secondly, strict environmental regulations should be implemented to curb pollution levels. The careful screening of new FDI, particularly with Chinese origin, will help Vietnam to kill two birds with one stone. Vietnam’s long-term goal should be to strengthen its domestic economy. This is a serious endeavour, and can only be achieved by implementingfiscal policiestoincrease productivity within the economy. While the Ministry of Finance sits on a pool ofexcess public monies,many infrastructure projects lack funding(Yap, 2019). The selection and executionof projects with net positive benefitswill not only increasethe productivity but also give confidence to investors to set up operation within the country.Lastly, Vietnam, without necessarily giving up on its socialist beliefs,should complete its transition into a true market economy. While the nation might disagree on the distribution of its economic gains and the organisation of its political structure, the arguments of the market economy is grounded in economic theory and empirical reality. Being a true market economywill also further the economic integration with the wider global economy and reducepunitivetariffs from the US. Becoming a true market economy will have massive long-term benefits for Vietnam.

7. Conclusion

Vietnam has done well in its initial market reforms but more work lies ahead. At best, one can only consider the current trade arrangementbetween US and Chinaas an unstable equilibrium.Where major policy direction has diverged from conventional consideration and subject to wimps of the US’s president, the Vietnam government needs to remain vigilant and adaptable.Attracting high qualit