The United States has launched two Section 301 investigations targeting forced labour enforcement and excess capacity. This places Vietnam at risk of new tariffs on key exports.
Earlier this year, the US Supreme Court made the decision to void tariffs introduced by the Trump administration last year, under the International Emergency Economic Powers Act (IEEPA).
Not to be deterred, with tariffs a cornerstone of the administration’s trade policy, the president vowed to find “other ways” to implement his trade agenda.
This manifested earlier this month, in the United States Trade Representative (USTR), Jamieson Greer, announcing two 301 investigations.
The first is into whether or not a list of 60 economies have failed “…to impose and effectively enforce a prohibition on the importation of goods produced with forced labour.”
The second is into whether another list of 16 economies have a production capacity “…untethered from the incentives of domestic and global demand.”
Vietnam is on both of these lists and is likely to face a tough challenge arguing its case against both.
Forced labour
Firstly, Vietnam’s Labour Code and Penal Code both prohibit the use of forced labour. However, as far as preventing the import of goods produced with forced labour, there is no legislation to speak of.
Moreover, since June 2022, of 6,777 shipments from Vietnam stopped by US Customs and Border Protection under the US Uyghur Forced Labour Prevention Act (UFLPA), 4,192 shipments have been denied entry, worth about US$260 million. This is more than a quarter of a total of US$950 million worth of imports denied entry in total.
This would suggest systemic exposure within Vietnam-linked supply chains, and therefore, even if legislation can be introduced, enforcement will likely be a much bigger challenge.
Excess capacity
As for the second investigation, the USTR says Vietnam’s repeated and significant trade surpluses support the argument that it has an overcapacity problem, sustained through government policies and incentives.
Using trade surpluses, however, as a means to determine whether a country is playing fairly or not has been widely criticised by economists — Vietnam has run some very big trade surpluses for a range of reasons, singling out overproduction oversimplifying the situation.
That aside, it also says overproduction is evident in Vietnam’s cement industry, pointing out its output is almost double Vietnam’s domestic demand.
This is true. Estimates for last year put Vietnam’s cement production at just under 125 million tonnes, but domestic demand at around 63 million tonnes.
This is not, however, necessarily because of government incentives, but rather the result of poor planning and bad timing.
Specifically, in 2017, centralised cement sector planning was dismantled, allowing provincial authorities to approve cement manufacturing projects themselves. A lack of central coordination, however, led to extra capacity being added well beyond what was needed at a national level.
This was then compounded in 2022 by a slowdown in Vietnam’s property market, which reduced domestic construction demand, and weakness in China’s housing sector, which reduced export demand.
That said, the fact cement firms are still producing far more cement than they can utilise is difficult to explain using free market logic.
Finally, the USTR also cites a 2017 301 investigation, which found that “Vietnam’s intervention in foreign exchange markets and undervaluation of its currency were… unreasonable.”
Notably, this is a nine-year-old report, and a lot has changed since then. In particular, the State Bank of Vietnam, in recent years, has intervened in currency markets to keep the dong stronger than it might otherwise be.
The government response
Last Thursday, the Ministry of Foreign Affairs issued a short statement responding to these two investigations.
It was very general, reiterating that it believes Vietnam’s economy operates “…according to the laws of a market economy”, and that “business activities in Vietnam always aim for sustainable development” and “strictly comply” with its international obligations.
It did not, however, address the specific claims made by the USTR, leaving uncertainty over how it intends to defend its position as the process advances.
Moving forward
Notably, these investigations are required to follow a very different process from the now void IEEPA tariffs from last year.
In the first instance, they are open to public comment for about a month, followed by public hearings and then a seven-day window for stakeholders to make rebuttal submissions.
It’s only then that the USTR can complete its investigation and make a determination, including whether to take any remedial action and, if so, what that might be.