On Wednesday last week, as it became evermore clear that Donald Trump would most probably assume the presidency of the United States, shares of Vietnam’s Kinh Bac City Development began to climb. This was quickly pegged to an agreement the Vietnamese real estate developer had signed with the Trump Organisation just a month or two ago to build a Trump branded resort and golf course south-east of Hanoi. To be clear, Kinh Bac now had an agreement with the next president of the United States and investors seemed to like with shares in the firm trading at a 6.85 percent premium to their open at the close of trade.
But whereas Trump’s return was good news for Kinh Bac, for Vietnam’s economy more broadly the prospect of greater protectionism coming out of the United States has been a cause for concern. Indeed, pundits and Vietnam watchers have speculated at length on what impact this might have, some suggesting a lot, although others not much at all.
Most analysis, however, has centred around two key recurring themes: an increase in import tariffs in the United States as a direct impact on Vietnam’s economy; and, the indirect impact of a stronger US dollar as a result of said tariffs and subsequently increased pressure on the dong.
Specifically, Trump has called for a blanket tariff on all imports from everywhere of 10 to 20 percent with goods from China attracting rates of between 60 and 100 percent. This seems excessive and problematic, and will likely be watered down over the coming months, that said, change to the global trading regime is still most definitely afoot under Trump and economies around the world will need to respond.
So in the Vietnam context what might that look like?
Firstly, retaliatory tariffs are not really an option. In the first ten months of this year, Vietnam imported just US$11 billion worth of goods from the USA. The USA, however, imported US$88 billion worth of goods for Vietnam or about a third of the country’s US$290 billion worth of exports. Ergo, counter-tariffs would be piecemeal at best. They could also antagonise the Trump administration and a tit-for-tat, based on these trade numbers, would be unwinnable for Vietnam.
That said, wages in Vietnam are significantly lower than in the US and even a 20 percent tariff would likely not be enough to make it more economical to produce most goods made in Vietnam now, back in the United States.
To be clear, Vietnam’s economy is heavily dependent on manufacturing and processing, but more specifically on low-skilled, end-of-the-line assembly and packaging roles. These are not the kind of jobs Americans are generally keen to perform. They can also be very labour-intensive–garment manufacturing in particular–whereby wages are a major contributor to costs.
What might be a bigger concern with respect to tariffs, however, is the knock-on effects from the much-higher China tariffs.
On the one hand, this could mean a resurgence in the China-plus-one paradigm and see huge inflows of foreign direct investment into alternative manufacturing bases in Southeast Asia. This was the case last time around although it was also helped along by China’s COVID prevention measures, which saw manufacturing in China seize up, and firms subsequently diversifying their supply chains as a de-risking strategy.
Also, a lot of that foreign direct investment looks to have come from Chinese exporters that took to using third countries as intermediaries to circumvent trade remedies applied in the US. This emerging paradigm, however, has got a lot of attention of late with trade remedies on China in a number of sectors expanded to include Vietnam as well.
On the other hand, like Vietnam, China is heavily dependent on the US market to buy its manufactured goods. Higher tariffs could lead to fewer purchases and a broader downturn in China’s economy which is Vietnam’s second biggest export market after the US. Ergo Vietnam could be hit with a much-dreaded double-whammy.
Furthermore, in the past, huge trade surpluses have been a point of contention for the incoming US president and Vietnam’s trade surplus with the US is among the biggest. There could be purely aesthetic motives here for Trump to try and change that.
Vietnam does, however, have plenty of space to negotiate. Last time around, the Trump administration came to settle its trade conflict with China by negotiating with the country to buy more US goods. This could be one option for Vietnam.
Another, however, might be to utilise deregulation. Save for the archaic Bilateral Trade Agreement from the 90s, Vietnam and the US do not have a free trade agreement to speak of. This is particularly problematic for US agricultural producers who compete with countries like Australia, Canada, Germany, France, and the Netherlands, all of which have free trade agreements with Vietnam.
In this context, lowering non-tariff barriers, of which there are many, for US firms could help mitigate any trade tariffs headed Vietnam’s way.
On that note, the myriad of free trade agreements Vietnam has signed would also give the country plenty of room to pivot should it need new markets. The challenge here, however, would be pivoting in a timely fashion with the pace of change in Vietnam often glacial (it would not be surprising if Trump’s presidency finished well before the construction of Kinh Bac’s Trump-branded golf course).
All of that said, what will arguably be the bigger challenge for Vietnam will be an impending stronger US dollar. This could be considerably more problematic than any tariffs.
The COVID-19 pandemic and the wars in Eastern Europe and the Middle East, have wrought havoc on the global economy in recent years, inflation and currency markets in particular.
Vietnam’s policy, however, has been to fight against the tide. Rather than let the local currency devalue it has dipped into its US dollar reserves, accepted power and fuel shortages rather than raise retail energy prices, and paid millions of dollars in interest on treasury bills. However, these tools have their limits and it’s not clear how much more global economic turbulence it can withstand sans reform.
That said, Vietnam has plenty of reform options available to it. Opening up its market, reducing tariffs on US goods, removing restrictions on foreign ownership, widening the trading band on the dong or doing away with it altogether and moving to a free-floating currency–all of these things can help to stabilise the local economy and may also be solid bargaining chips should Vietnam need them in trade discussions with the US.
What’s more, this new US trade environment could provide cover to make some unpopular decisions. Weakening the dong, for example, allowing energy prices to appreciate, or relaxing foreign ownership limits in key economic sectors (READ: Where vested interests persist).
But this is all very speculative a week after the US election. There is still two months before Trump moves into the White House and following through on policy to the letter in the past has not so often been the case. That said, should Vietnam find itself in the eye of a Trump trade storm it does have plenty of options and the economy could even come out all the better for it.