US-China trade friction may help increase FDI in Vietnam

The ongoing US-China trade conflict is predicted to help Vietnam lure more foreign direct investment (FDI), amid an exodus of foreign businesses out of China where growing costs are vexing investors.

Vietnam is expected to attract more FDI from China following the tit-for-tat tariff plans
Vietnam is expected to attract more FDI from China following the tit-for-tat tariff plans

The US-China trade war has heated up recently, with the Trump administration imposing a wave of 25% tariffs on US$34 billion worth of Chinese products. The US also has plans to raise the tariff from 10% to 25% on another US$200 billion worth of Chinese products.

Trump has even threatened China with tariffs on over US$500 billion worth of Chinese goods. Last year, China’s total export turnover from the US totaled US$505 billion.

Meanwhile, China has responded by imposing the same import tariff rate of 25%, also worth US$34 billion on 545 US export items. Earlier, China announced that it will fight back with a plan for retaliatory tariffs on US$50 billion of 659 US products.

However, according to many experts, despite the potential risks, the retaliatory tariffs will help Vietnam attract more foreign direct investment from China, whose production and labour costs are increasing.

According to a survey of more than 434 US companies conducted in April and May 2018 by the American Chamber of Commerce in Shanghai, US firms in China are facing numerous challenges.

Specifically, for the second year, 60% of respondents found that China’s regulatory environment lacks transparency, which hampers good business practice. Lack of IPR protection (61.6%) and acquiring the required licenses (59.5%) were the top two regulatory challenges. Rising costs and domestic competition, at 95.6% and 85.7%, were viewed as the greatest operational challenges.

A representative from the American Chamber of Commerce in Hanoi (AmCham Hanoi) said that US companies, similar to companies from many other countries, are constantly adjusting their supply chains to keep up with competition, “It is possible that some companies will look at shifting production from China to Vietnam to avoid higher tariffs.”

According to a US-invested law firm specialised in providing consultancy for US investors in Vietnam, the US-China trade war will drive foreign businesses, including those from the US, in China into bigger woes at a time when they have been trying to stay competitive as China is inflicted with higher tariffs by the US.

“They will have to think about markets outside China. However, it is not easy for them to immediately shift their production out of China, because China is a global manufacturing hub and has joined the global value chains involving many global firms,” a firm consultant told Nhan dan Online.

“Instead of moving the entirety of their production chains out of China, they are likely to choose to supplement their China-based facilities with low-cost inputs sourced from other markets like Vietnam, which currently has a large network of free trade agreements (FTAs).”

At present, with 12 FTAs that have been inked (including 10 having taken effect), and four FTAs currently under negotiation, Vietnam will have FTA-based relations with nearly 100 partners in the world’s five largest market regions; Northeast Asia, Southeast Asia, Europe (both Eastern Europe and Western Europe), America (both Northern America and Southern America), and Asia-Pacific.

Therefore, FTAs which are based on strong tax cuts and open markets will allow Vietnam to attract more FDI, including FDI from China, even if the US-China war intensifies.

According to Pan-Asia, multi-disciplinary professional services firm Dezan Shira & Associates, under the US-China trade war’s impacts, Vietnam could also serve as an alternative to China for investors.

“Already, the country is benefitting from the China plus one strategy that involves investors in China shifting or expanding to other countries to increase market access, diversify risks, and reduce labor costs. The growing trade war will only hasten the shift, especially for the labor-intensive consumer goods industries of clothing, footwear, electronics, and electronics,” the firm said in a bulletin on the impact of the recently released US–China trade war on Vietnam.

“Vietnam, an export-oriented economy, with the FDI sector accounting for the majority of exports, will attract more investors as manufacturers continue to restructure their supply chains to reduce the impact from the US tariffs on China,” said the bulletin.

According to the Office of the US Trade Representative, the US’ goods and services trade with China totaled an estimated US$648.5 billion in 2016. Exports accounted for US$169.8 billion, while imports were US$478.8 billion. The US goods and services trade deficit with China was US$385 billion in 2016.

“China is currently our largest goods trading partner with $578.2 billion in total (two way) goods trade during 2016. Goods exports totaled US$115.6 billion and goods imports totaled US$462.6 billion. The US goods trade deficit with China was $347 billion in 2016,” the office stated on its website.

Trade in services with China (exports and imports) totaled an estimated US$70.3 billion in 2016. Services exports were US$54.2 billion, while services imports were US$16.1 billion. The US services trade surplus with China was US$38 billion in 2016.

According to the US Department of Commerce, US exports of goods and services to China supported an estimated 911,000 jobs in 2015 (latest data available), 601,000 being supported by goods exports and 309,000 supported by services exports.