Can Vietnam Avoid Getting Hurt in the Crossfire When the Tariffs Are Flying?

When elephants fight, the ants perish: The Khmer proverb captures the sense of peril in the escalating trade war between the United States and China. 

The world’s two superpowers have locked tusks over tariffs, and the rest of the world — especially Asia — seems in danger of being trampled. As the trade war heads into its third month, with the United States set to impose a new tranche of $200 billion in tariffs this fall, expanding the conflict fourfold, one truth is clearer than ever: In a globalized economy, nothing exists in isolation. There is no such thing as a trade war of surgical strikes, in which tariffs hit their targets and leave everything around them unscathed. In its attempt to punish China for unfair trade practices and to reduce a $375 billion trade deficit, the Trump administration is also inflicting harm on some of America’s allies in Asia — forcing them, like ants under the elephants’ feet, to scramble in search of escape.

Consider the predicament of Vietnam. China and the United States, which each have their own violent histories in Vietnam, are now that country’s most important trading partners. Together, the giants gobbled up roughly 35 percent of Vietnam’s exports last year, furthering its transformation from sleepy purveyor of rice and coffee to manufacturing hub. When the trade war broke out, so did the ominous headlines in Hanoi. A rapid devaluation of the Chinese yuan sparked a brief run on Vietnam’s currency and a drop in its stock market. Rumors spread about an influx of cheap Chinese consumer goods and the threat of American protectionism spreading in ways that would affect Vietnam’s vital exports. And there was a tangible concern: Nearly $5 billion of Vietnamese exports are part of China’s value-added supply chain, meaning they may feel the impact of being exposed to punitive American tariffs.

Soon another sort of reaction began taking place. Driven by the dangers of the trade war, many foreign companies with stakes in China — those ants underfoot — have started shifting production away from China to Southeast Asia. One sign of this development was on display in mid-July, when a group of visitors showed up on Vietnam’s northern coast near Ha Long Bay. The men in white shirts and dark ties were not tourists. They represented 72 Japanese businesses, in industries ranging from textiles to electronics, and they were looking for economic refuge. “Many of these Japanese firms have been operating in China,” Nguyen Duc Tiep, an official from the local-investment promotion center, told a Vietnamese magazine. “They want to expand their investment markets out of China to shun risks caused by the nation’s rising production costs and by the U.S.-China trade war, which is making it hard for Japanese firms to export their products to the U.S. from China.”

The Japanese businessmen may be among the trade war’s first economic victims. But the shift of manufacturing away from China is not a new phenomenon. Over the past few years, as wages in Chinese factories have risen sharply, many companies, foreign and Chinese alike, have begun moving at least some of their operations to Southeast Asia to take advantage of lower production costs. In Vietnam, where wages are barely a third of those in China, Adidas now makes twice as many shoes as it does in China, and Intel and Samsung Electronics have made billion-dollar investments there. The country’s export-led growth depends on attracting foreign investment, and now American and Chinese policies may be hastening its arrival. “For many companies, the trade conflict is a catalyst to explore changes they hadn’t contemplated before,” says Jon Cowley, a tax-and-trade partner at the law firm Baker McKenzie in Hong Kong. “For others, it’s an accelerant to a process they’d already started. The trade conflict is just pushing them over the finish line.”

It is still early in the trade war, only two months in, so many of these corporate moves are just taking shape. Still, the race is on to secure excess manufacturing capacity all around the region — in Thailand, Indonesia and elsewhere. In late July, Delta Electronics, a Taiwanese producer of Apple power components, approved a $2.14 billion buyout of its Thai affiliate to cope with the growing trade risks. Also this summer, Hong Kong’s Techtronic Industries (T.T.I.), the maker of Hoover vacuum cleaners and Milwaukee power tools, opened a new plant in Vietnam and another, its sixth, in the United States. Some 76 percent of T.T.I.’s revenue comes from North America. “We have always said we won’t want all our eggs in one basket,” the company’s chief executive, Joseph Galli, said in August, stressing the importance of “a flexible supply chain.”

Supply chains, innocuous as they sound, are a locus of collateral pain in this trade war. The American exports that China is hitting with retaliatory tariffs are mostly simple goods sourced close to home: pork, soybeans, whiskey. But China’s exports to the United States, especially in high-tech, are complex products assembled in China from a staggering array of foreign components and raw materials. A “Made in China” laptop shipped to America, for example, may have a South Korean screen, a Japanese hard drive and a memory chip from Taiwan. A tariff hurts every part of this international supply chain. Asia’s most advanced economies, including Japan, South Korea and Taiwan, are so globalized that they can easily get caught in this protectionist crossfire.

Taiwan may stand to lose the most. It supplies 18 percent of China’s total imports of intermediate goods, or nearly 14 percent of Taiwan’s gross domestic product, according to the Stimson Center in Washington. As Tsai Ming-fang, an economist at Taipei’s Tamkang University, told Bloomberg: “Trump’s tariffs are giving Taiwanese companies further incentives to move to Southeast Asia.”

The dust kicked up by the trade war obscures the fact that Asia is the world’s most dynamic trading region. According to the World Trade Organization, Asia in 2017 had the world’s fastest growth in trade volume for both imports and exports, 9.6 percent and 6.7 percent, respectively. Eighteen months ago, the leaders of Vietnam and 10 other Pacific Rim nations believed the economic outlook would be enhanced even further by the creation of the Trans-Pacific Partnership. The agreement, which included the United States and Japan but not China, also offered the chance to push back, as a group, against Beijing’s unfair trade practices like intellectual-property theft and forcing companies that do business in China to share their technology.