In the last few months, the US and China have been going back and forth over tariffs on numerous products, such as agricultural goods, automobile, chemicals, machinery, metals, and medical equipment. Further retaliatory tariffs are under consideration by both countries. This trade dispute between the two biggest economies in the world would have a cascading effect on other countries, including Vietnam, which already faces higher tariffs on steel from the US. The US and China are amongst the top trading partners for Vietnam, and the trade war could have a direct or an indirect impact, as Vietnam’s products are part of China’s value chain.
Impact of tariffs
If the tariffs are strictly restricted to China and do not affect the cross-border supply chain, Vietnamese exporters will be more competitive and will see an increase in demand for their products, especially textiles and garments.
Vietnam could also serve as an alternative to China for investors. Already, the country is benefitting from 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 labor-intensive consumer goods industry such as clothing, footwear, electronics, and electronics.
Vietnam, an export-oriented economy, with the FDI sector accounting for the majority of the exports will attract more investors as manufacturers continue to restructure their supply chains to reduce the impact from the US tariffs on China.
For most of the emerging economies, especially in Southeast Asia, the short-term effect may hurt some industries, but in the longer run, these economies will benefit.
Being an export-oriented economy has its advantages but also has its flaws, such as heavy reliance on foreign direct investment (FDI) and exposure to volatility in global markets. FDI firms in Vietnam dominate the exports, while domestic manufacturers continue to struggle.
In addition, if the US imposes broader tariffs on China, it will affect the cross-border supply chain, which will affect Vietnamese exports to China that act as inputs for Chinese exports. This will be true for every economy that is part of the US-China value chain.
China-based firms facing higher tariffs will redirect their raw materials exports towards Vietnam to maintain the balance, which will affect the local industries in Vietnam.
To minimize the risks arising from trade disputes, Vietnam has to focus on increasing their market access. The country is already part of numerous free trade agreements (FTA), with two more major FTAs coming in effect in the near future, Comprehensive Progressive Trans-Pacific Partnership (CPTPP) and EU-Vietnam free trade agreement (EVFTA). This will give Vietnam an opportunity to increase their exports to alternative markets.
However, Vietnam suffers from under-developed supply chains, heavy reliance on imports of raw materials, and lack of supporting industries and it has to focus on removing these obstacles to not only survive such trade wars but also fully realize the benefits of its upcoming FTAs.
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