The U.S. and China are currently embroiled in a trade dispute, with both countries slapping additional duties on each other in the past few months. The U.S. has imposed extra tariffs on $250 billion worth of Chinese imports — with U.S. President Donald Trump threatening to impose levies on all $500 billion worth of goods from the Asian giant. Beijing has retaliated with additional tariffs on $110 billion worth of U.S. imports, and is threatening qualitative measures that would affect US businesses operating in China.
The US decision to impose tariffs on Chinese imports marked a serious escalation in its hostilities with Beijing over trade. Yet economists believe protectionist measures will have only a modest impact on global growth — provided the bilateral conflict does not turn into an all-out multilateral war.
International trade in goods has already fallen as a proportion of global output in recent years, despite the upswing in the world economy. This is partly because of currency effects and changes in commodity prices, but manufacturers are also becoming less reliant on imported inputs and popular hostility to globalisation may also be playing a part, with trade disputes and the use of anti-dumping measures on the rise even before the latest rounds of tariffs.
Although the US-China conflict now looks likely to affect the vast majority of the goods traded between the two countries, it makes up a modest proportion of global trade. Even if the US acts on all the threats it has made so far, only around 5 per cent of global imports would be affected.
World trade is largely concentrated in 3 regions: North America, Europe and East Asia, with a large share of trade being intra-regional.
International trade is largely composed of trade flows between rich countries and the East Asian region but developing countries’ trade with China is increasingly important. A big question now is whether other countries in south-east Asia are able to benefit from greater integration with China as existing trade flows are diverted to new markets, and if Chinese manufacturers seek to shift production to countries not affected by tariffs.
TRADE WAR MAKES VIETNAM A HAVEN
In addition to these factors, the escalating trade war between the US and China that has already seen additional duties being imposed on US$500 billion worth of goods, accelerated the trend of foreign investors realigning their supply chains.
Due to its geographic proximity, lower wages, skilled labor, trade agreements, and regional connectivity, Vietnam has emerged as one of the most preferred alternatives for manufacturers. The Vietnamese government had anticipated that due to higher tariffs on Chinese products, the manufacturers may try to reroute goods through Vietnam in the short term to maintain exports.
Hence, the government has taken several steps to ensure the origin of imported and exported products. For example, Decree No. 31/2018/ND-CP which is in effect since March 2018, supplements new regulations related to the origin of exported goods and imported goods. Due to product origin issues, the US government in March 2018 hiked tariffs on steel products from Vietnam that originated from China.
This proves that Chinese exporters may use Vietnam to reroute goods in the short term, but it is not recommended. Rather than doing so, they should focus on other long-term risk mitigating strategies to minimize their exposure to the ongoing trade disputes.
Manufacturers based in China can minimize risk by moving to other cost-effective locations in Southeast Asia, including Vietnam. This would require finding new suppliers, renegotiating contracts, and moving assets which will be time-consuming and costly. In the short term, companies can add new suppliers and apply tariff engineering strategies if possible to mitigate trade risks.
Before considering moving out of China, firms need to closely review the tariffs and ensure correct HS code classification for their products. In addition, they also need to focus on customs valuation to determine the value of imported goods.
Moving to a new location
Eventually, they need to focus on completely relocating their production lines to a third country, such as Vietnam. Already in the last few years, major electronics firms such as Intel, Foxconn, LG, and Samsung have moved to Vietnam due to higher wages in China. In addition, several retail brands such as Nike, Adidas, and Puma have also shifted to Vietnam and Cambodia to reduce costs. The ongoing trade war will continue to accelerate this trend.
In addition to its geographic proximity, Vietnam offers several advantages for manufacturers planning to move outside China.
Vietnam’s average wages are much lower than that of China, which has grown steadily in the last few years. Wages are slightly more than half of those in southeast China.
Labor quality along with young demographics offers manufacturers a stable workforce.
Vietnam is part of several Free Trade Agreements (FTA), which gives it a competitive advantage compared to other countries in the region. It is not only part of the FTAs as a member of ASEAN but is also party to major bilateral agreements.
Border economic zones
Further trade zones are planned near the border as they are close to Chinese manufacturing hubs in Guangdong province and the Yangtze River Delta.
Vietnam, located along major global shipping routes, has 44 seaports as of 2017 with a total capacity of 470-500 million tons per year. Although the Chinese port capacities are much higher, the Vietnamese government has started to invest billions in new ports and increasing the capacity of existing ones.
Rail/road connectivity with China