Several major ASEAN economies including Vietnam could benefit from the ongoing trade war between the world’s two largest economies in the longer run if foreign direct investment shifts away from China, Financial Times (FT) Confidential Research and VinaCapital have said.In addition, tariffs on goods produced within China will encourage companies in that country to accelerate offshoring to less expensive ASEAN economies, FT said.
Workers walk in front of a Samsung plant in northern Vietnam. Photo: Samsung
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Sharing the same view, Michael Kokalari, chief economist at Vietnam-focused asset management firm VinaCapital, opined that the trade war between the US and China will speed up the on-going efforts of companies to relocate manufacturing facilities from China to Vietnam.
Multinational firms such as Foxconn, Samsung, and Daikin are already opening new factories in Vietnam, rather than in China because Chinese factory wages doubled over the last seven years.
Furthermore, wages in Vietnam are two-thirds lower than Chinese wages, but the quality of Vietnamese workers is comparable to that of Chinese workers, according to a survey by the Japanese government.
For those reasons, Chinese manufacturing companies already prefer to relocate their factories to Vietnam more than to any other country, and with the US-China trade war brewing, companies now have another reason to relocate production to Vietnam, in order to avoid new US tariffs.
The US is unlikely to target Vietnam in the trade war because it has exerted considerable effort in recent years to build a special relationship with Vietnam, motivated by concerns about declining US influence in Asia as China rises, Kokalari wrote in a report.
Further boost to Vietnam’s high-tech exports
Most of the additional foreign direct investment (FDI) that will flow to Vietnam as a result of the US-China trade war will probably be focused on the production of cell phones, electronics and other high-tech products because of Vietnam’s close geographic proximity to the supply chains that support the manufacture of those products.
China exported about US$250 billion of high-tech products to the US last year, compared to Vietnam’s circa US$8 billion (about half of Vietnam’s exports to the US are still garments and footwear).
“This enormous gap gives us confidence that Vietnam’s high-tech exports will continue surging for years to come, as does the fact that less than 10% of the country’s workforce is employed by FDI firms, so the country has ample workers to support the ongoing relocation of production from China to Vietnam,” said the economist.
Also, about two-thirds of the high-tech products the US imports are made in China, so it needs to reduce its dependence on China by diversifying to other suppliers, making Vietnam and Malaysia the biggest winners from the US-China trade war, according to Standard Chartered.
According to the University of Groningen’s sophisticated “World Input-Output Database” Leontief matrix analysis, Vietnam’s economy will get a circa 2% boost from the trade war, but “we believe the ultimate lift to Vietnam’s economy could be even larger.”
Vietnam is most susceptible in Southeast Asia to trade war
Vietnam may become the economy among the big five in Southeast Asia with the highest risk of incurring serious damage from the escalating trade spat between the United States and China due to its high level of exports to GDP, Nikkei Asian Review reported, citing an analysis by Financial Times (FT) Confidential Research.
Vietnam's export-driven economy is by far the most export-dependent among the ASEAN big five that also include Indonesia, the Philippines, and Thailand, Malaysia. For the 12 months ending March 2018, the country shipped goods equivalent to 99.2% of gross domestic product, FT Confidential Research said.
Vietnam’s exports nearly quadrupled between 2008 and 2017, reaching $226 billion in 2017, up 21.20% year-on-year, according to the country’s customs data.
The US was Vietnam’s largest export market when buying US$41.61 billion worth of goods from the Southeast Asian country last year. The figure also put the U.S. at the top among the ASEAN five, making the country sensitive to softening U.S. consumer demand.
It is sales to the U.S., EU and other developed markets, and not to China, that have propelled Vietnam's growth over the past decade, according to FT.
Another factor that could further weight on emerging markets is the strengthening of the US dollar. Vietnam is the only stock market that has been able to save many of last year's gains while equities in the other four ASEAN countries have plunged.
The dong is down 1.5% so far this year, and the government could take more aggressive action if exports slow significantly, according to FT Research.
