Vietnam thrives in US-China trade war

Workers sort fish in Vietnam
China Dialogue
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Vietnam

Vietnam thrives in US-China trade war

China’s neighbour is growing at its fastest rate in 11 years, but as firms look to avoid trade-war tariffs, there are social and environmental risks

Sleepy Song Khoai commune in Quang Ninh province along the Chinese border has become a testing ground for Vietnam’s economic growth strategy and a focal point in a swirling debate about how this Southeast Asia nation responds to the US-China trade dispute.

Not long ago Song Khoai’s only distinction was its location on the road to the tourist magnet of Ha Long Bay, famous for its nearly 2,000 islands. However, in late 2018, work began on the US$156 million Song Khoai Industrial Park, which its Thai developer, the Amata Group, says will bring in foreign investment and eventually create up to 300,000 jobs.

Amata is betting on US-China trade frictions helping fill Song Khoai’s factory units when the first phase opens in 2020 as manufacturers, including Chinese ones, seek to avoid punitive tariffs imposed by Washington.

“One of our targets is Chinese and foreign investors who can’t [be based] in China as a result of higher manufacturing costs and the trade war,” said Somhatai Panichewa, CEO of Amata VN Public Company Limited, a subsidiary. 

Economic Winner

Economic data show that Vietnam has reaped the rewards of a tit-for-tat trade battle sparked in mid-2018 when US President Donald Trump slapped additional tariffs of up to 25% on China-made goods and Beijing reciprocated.

In a June report from Japanese investment bank Nomura, economists compared monthly trade data with official tariff lists and found that both US- and China-based firms have cut back imports of certain goods from each one another to avoid higher tariffs and are sourcing those goods elsewhere – especially from Vietnam.

Those trade diversions accounted for an estimated 7.9% of Vietnam’s gross domestic product in the year to March 2019, according to Nomura.

Vietnamese prime minister, Nguyen Xuan Phuc, told Bloomberg early this year that his country is “ready to grab the opportunity” from the trade war in an attempt to meet the goals of the government’s economic liberalisation policy, which envisages rapid growth from export-oriented and foreign-led investment.

Chinese investment is a major contributor, providing 6.8% of all foreign direct investment (FDI) in 2018, according to Vietnamese government data. That investment is concentrated in the construction, manufacturing and energy sectors and has grown from US$700 million in 2011 to over US$2.4 billion in 2018. China is now Vietnam’s fifth-largest investor after Japan, South Korea and Singapore.

The trade war is expected to accelerate the growth in FDI from Chinese companies. But experts warn that there will be longer-term challenges to Vietnam’s sustainable growth if the current “trade war boom” produces over-reliance on the export sector and foreign investment.

study from the Singapore-based ISEAS Yusof Ishak Institute points to the more immediate risk that all Vietnam’s goods could suffer higher US tariffs if Chinese goods are seen to be rerouted through the country, labelled as “made in Vietnam,” and exported to the US.

Importing Dirty Industries 

There is also the risk that Chinese firms will relocate outdated and polluting technologies to Vietnam, causing environmental stress and damage.

Public fears were first raised – and played out at the time in racist sentiments against ethnic Chinese – when mass fish die-offs took places in central Vietnam’s coastal provinces in 2016. The disaster was caused by Taiwan-owned Formosa Ha Tinh Steel, which discharged toxic industrial waste into the ocean.

Now, with the US-China tariffs, the Association of Seafood Exporters and Producers expects that demand will rise for Vietnam’s seafood, putting pressure on one of its major export industries.

In Bac Lieu province in the Mekong Delta region, growing international demand for Vietnamese shrimp has resulted in the expansion of intensive shrimp farming and the loss of mangrove forests.

Shrimp farm owner Tran Thanh Phong says Vietnam's main markets for shrimp exports are the US, China and Europe. He described Chinese dealers he has met as “easy buyers” who do not pay strict attention to quality and standards.

Some experts believe Vietnam will need more regulatory reforms to limit the environmental impact of low-cost business and manufacturing.

They include Le Anh Tuan, deputy director at the Research Institute for Climate Change, Can Tho University, who monitors the environmental impacts of development and thinks Vietnam has to think of different, more beneficial approaches to growth, partly “to reduce the risks of this trade war.”

Green and Skilled 

For now, Vietnam is following the export-led economic growth model adopted by several successful New Industry Countries (NICs), such as Thailand and South Korea. That means relying on strong inflows of foreign investment coupled with productivity growth, largely in heavy industry, chemicals and other sectors with intensive use of natural resources.

Some economists say this model causes environmental and social strains and promotes labour-intensive industries that can skew or suppress the development of skilled labour, creating eventual barriers to long-term growth. 

In a recent article in the Hong Kong-based South China Morning Post, Lam Thanh Ha, a senior lecturer at the Diplomatic Academy of Vietnam’s Ministry of Foreign Affairs, wrote: “Vietnam will need to move up the value chain. It must find ways of attracting hi-tech industries, environmentally friendly firms, clean energy, as well as advanced medical equipment and health care services.”

Critics to Vietnam’s current approach worry that the country risks missing out by focusing too much on short-term benefits and easy wins.

Amata Group’s Somhatai is more upbeat, promising that the 714-hectare Song Khoai industrial park will be a green development. She believes building more infrastructure has a role to play in redistributing development benefits across the country, as railways and deep-sea ports will increase investment opportunities. 

“There’s plenty of scope for growth within a sustainable framework,” she said.

This story was produced in collaboration with The Mekong Eye, a media resource for sustainable development and a project of Internews’ Earth Journalism Network. It originally appeared on China Dialogue on 16 July 2019.

Banner photo: Workers processing fish in Vietnam / Photo courtesy of the World Bank via Flickr

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