In war, even the winners pay a price.
Vietnam's portrayal as a clear beneficiary of the US-China trade conflict was overdue for a reality check. President Donald Trump provided one, trash talking the country with the kind of language he once reserved for China and Mexico. Vietnam is “almost the single worst abuser of everybody,” he declared to Fox Business Network last week. That's a turnabout from earlier in the year when Trump praised Vietnam and said it was a model North Korea would be well advised to follow.
The Communist state has an industrial policy, cheap factory wages and a burgeoning trade surplus that resemble the China of years past, as I wrote here in May. In Vietnam's favor, it’s small relative to China and has had amicable relations with America in recent years. Still, playing the trade-conflict game has costs as well as benefits.
Positioning yourself as a key part of the export chain leaves you vulnerable when global demand weakens. A rush to expand manufacturing can create internal tensions, such as the clustering of factories in relatively small areas, large-scale domestic migration and strains on infrastructure. And pay doesn’t tend to stay low forever.
If Trump's disparaging remarks got lost amid the bonhomie between him and Chinese leader Xi Jinping, the Department of Commerce grabbed Vietnam's attention Tuesday. A preliminary ruling imposes an excise of more than 400% on steel imports from the country. The contention is that businesses in South Korea and Taiwan are avoiding higher duties by routing steel through Vietnam, where it undergoes some cosmetic nips and tucks before being shipped to the US.
Commerce has hit on Vietnam’s key vulnerability. A lot of stuff is flowing from China to Vietnam as firms increase purchases and ramp up production there to avoid tariffs. In part, Chinese-made goods arrive for final assembly before heading to ultimate destinations in America.
That's the supply chain world. Everything is linked. It's possible Trump's definition of “made in China” could evolve, and then Vietnam will really find itself under the spotlight.
Vietnam boosters should be careful what they wish for. Much of the increase in the country’s trade surplus with the US in the past year has been associated with goods subject to tariffs – if they come from China. Vietnam's share of US imports is up, relative to China, in many categories. The big ones are phones and parts, textile fibers, furniture, wood products and footwear.
Vietnam's turn in the sun has coincided with a slackening of global growth that's wounded manufacturing. The country's total exports probably grew around 6.5 percent in the first four months of 2019. That’s not bad, but is well down from the 13.2 percent clocked last year, according to a World Bank report released this week. Phones, the largest single export and about 20 percent of the total, declined. Footwear, garments and computers gained, but less rapidly as a result of waning global demand. The lesson is you can bulk up as an export powerhouse all you want, but the power has to be present for the idea to work.
Then there are the internal strains. As the World Bank notes, the export machine is concentrated in about 10 of Vietnam's 63 provinces, such as the economic centers around Hanoi and Ho Chi Minh City. The lopsided geography of development creates bottlenecks and other logistics challenges, not least the need to manage a surge in internal migration.
This all sounds like China, doesn't it? Malaysia certainly looks at Vietnam and sees something that looks like the rising manufacturing giant of the late 1980s and early 1990s. This came up, unprompted, in a couple of meetings with current and former officials in Kuala Lumpur and Penang last month.
On Penang Island just off the northwest coast of the Malaysian peninsula, the government set up an industrial zone in the early 1970s and attracted manufacturers such as Intel Corp. and Dell. They’re still there, along with a who’s who of electronics and technology including Agilent Technologies Inc.
Malaysia has been trumpeting its own prowess in attracting foreign direct investment this year, even going so far as to declare itself a winner. If anyone understands the threat from Vietnam, it’s Southeast Asian neighbors such as Malaysia .
In the arena of trade victors and vanquished, it’s a good idea to look over your shoulder.
Bloomberg View
