US and Vietnam: from “Best Friends” to Trade Rivals?

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Next possible leg of the trade war may affect countries that have emerged victorious at the expense of first victims. This assumption is explained by the fact that losing the accumulated trade and economic advantage is more expensive for any economy than simply missing it out – and Trump understands this perfectly well. Already very attractive for the US president is the ability to knock out concessions from China’s small neighbour, Vietnam, which is seen as one of the main beneficiaries of the transformation of the supply chains in the trade between the US and China:

Trump just needs to make a threat, but can Vietnam avoid this or a new trade front with an East Asian country is only a matter of time?

First, it is worth remembering that in May, the US Treasury Department included Vietnam in the list of potential currency manipulators, which gives Trump a formal pretext for imposing tariffs on Vietnamese goods if the fact of deliberate devaluation is proved. This threat has already led to the introduction of 400% of the tariffs on steel imports from Vietnam, which was produced in South Korea or Taiwan. Thus, the role of the country as an “unwitting accomplice” is being blocked, also serving as a warning that the connivance of the authorities will be punished specifically with tariffs on Vietnamese goods.

And there is a reason for this. For example, there are allegations that Chinese goods are “rebranding” in Vietnam and exported to the United States under the guise of Vietnamese goods. The rise of exports from China to Vietnam and from Vietnam to the United States indicates that there may be a phenomenon that US officials call “transshipment”:

As can be seen, China’s exports of key goods to the United States have shrunk along the “short route” and have grown along the “long route” through Vietnam.

If the United States introduces 25% tariffs on imports from Vietnam, considering that the severity of misconduct is commensurate with Chinese, then according to some estimates, this could lead to a reduction in export volumes by 25% and a loss of 1% of GDP. The United States continues to be Vietnam’s main trading partner, and vice versa, the share of US exports to Vietnam, especially in terms of agricultural products, has risen sharply:

Last month, Trump stunned the Vietnamese authorities with statements that Vietnam was “the worst abuser in the trade of everybody” and “fairness in trade with Vietnam may even be less than with China.” Back in 2016, after entering the presidency, Trump made similar complaints, but the contract for Boeing purchases of several billion dollars and the trend to strengthen alliances with China’s neighbours, in the opinion of the Vietnamese authorities, have become a reliable dam protecting the country from criticism of the POTUS. But it was not there. Trump expressed discontent with the explosive growth of Vietnam’s trade surplus with the United States, which in the first five months of this year reached $21.6 billion, almost doubling compared to the same period last year.

Several sources claim that Vietnam made several promises to Washington related to trade, and Trump’s recent criticism can only accelerate their implementation. For example, the development of a law on the creation of three free economic zones, which, according to fears of local firms, could go under the control of China, was suspended indefinitely, demonstrating to Washington that the trend of rapprochement with a neighbour was interrupted. Nevertheless, Vietnam is also working on a “spare airfield”, having entered into the Trans-Pacific Agreement (from which the United States left) and signed a free trade agreement with the European Union. Together they can mitigate damage from possible US sanctions.

Thus, the chances of introducing trade tariffs against Vietnam will directly depend on:

  1. Dynamics of transshipment operations, where Vietnam serves as a gasket between China’s exporters and US importers. The lack of repression and conniving routes – loopholes is likely to provoke a new wave of criticism from Trump.
  2. Vietnam surplus with the United States. The main item of US exports to Vietnam is agricultural products (4 billion dollars in 2018). If purchases will grow at a faster pace, it can be assumed that countries have agreed on something.
  3. Cooperation in the military sphere. In terms of concrete numbers, this should be increased purchases of American weapons and equipment. This should be a more reliable signal of preference for cooperation with the United States to balancing between the interests of superpowers (i.e. US and China and probably Russia).