A détente may have been reached between the U.S. and China with the recent Phase 1 trade accord, although the structural fallout from the trade war will prompt a substantial rethink of commercial production and go-to-market strategies for years.
Simmering economic tensions and the rapid outbreak of the coronavirus have revealed the fragility of becoming too reliant on any single source, reinforcing the need to develop a diversified supply chain as a means of operational effectiveness and resiliency. Since Section 301 tariffs against China were imposed in July 2018, there has been a notable supply shift towards Southeast Asia, particularly Vietnam.
Newly released full-year trade data from the U.S. Census Bureau show a 35.6% surge in goods imports from Vietnam last year, weighed against a 16.2% contraction in goods from China. A corresponding perspective reveals Vietnam has become dramatically more reliant on the United States as its top export market, accounting for 23.2% of goods exports in 2019, from a 19.5% share the year prior.
America’s public policymakers should take a more active approach in shaping U.S.-Vietnamese relations that will spur supply chain diversification, open access to promising markets, and foster stability in a geo-strategically important region.
The general perception of Vietnam as a low-skill manufacturing hub disguises a leap up the value chain over the past decade: computers and telephone equipment now constitute a major portion of goods exports. This is due in large part to Samsung Electronics’ collective $17-billion-plus investment across eight factories and one R&D center since 2008, accounting for just under one-fourth of Vietnam’s total exports and about one-third of the company’s total global production.
Vietnam’s young and expanding population of approximately 100 million denotes sizable opportunities for consumer and service-oriented businesses. Nominal GDP per capita in purchasing-power parity terms stands at $7,720, about two and half times less than mainland China, and roughly on a par with China’s 2006 position when adjusted for inflation. While starting from a lower base, Vietnam’s absolute rate of income growth places it among the world’s leaders in this regard.
Deepening engagement with Vietnam would also serve as a valuable strategic plank in furthering America’s alliance structure with the Association of Southeast Asian Nations (ASEAN), a 10-country bloc representing 650 million people, seemingly destined to become one of the world’s preeminent commercial zones.
From a trade policy perspective, the United States should look to build on its 25 years of rapprochement with Vietnam as a valued strategic partner. The bilateral diplomatic and security relationship is arguably further developed than that in the commercial realm, with a record of shared concern and cooperation in protecting maritime rights in the South China Sea and fostering peace on the Korean peninsula.
While the Trump administration may wish for production to reshore to the United States or the broader United States-Mexico-Canada Agreement (USMCA) trade zone—and this does appear to be happening in certain regards—the reality is that many industries require access to large, cheap, and flexible labor forces to be internationally competitive and keep a lid on consumer inflation at home. In this context, Vietnam and other nations in Southeast Asia should be embraced as valued allies and a pragmatic strategic hedge.
The recent strength of U.S.-Vietnamese trade disguises outdated bi-lateral frameworks, namely the December 2001 Bilateral Trade Agreement (BTA) and June 2007 Trade and Investment Framework Agreement (TIFA), the update of which would serve to significantly benefit both parties.
While a free-trade agreement (FTA) may be out of the question with election-year politics swirling, there exists room for a revised commercial framework that would help resolve ongoing disputes while at the same time allowing American companies to close the widening bilateral trade deficit with expanded exports of agriculture, LNG, and a host of services ranging across hospitality, banking, logistics, education, and information technology.
The United States is just about the only large economy with whom Vietnam does not share a Free Trade Agreement. A formal agreement would represent a big feather in Vietnam’s cap. Despite the seeming convergence of forces to reach a deal, the two markets remain apart since U.S. participation in the Trans-Pacific Partnership (TPP) was terminated.
From a U.S. perspective, the major roadblocks on the path to consensus center around intellectual property and investor protections, data localization requirements, workers’ rights, health standards for food and agriculture, opening barriers to financial services, limiting use of regulatory non-tariff barriers, and enforcement mechanisms.
For Vietnam, having the U.S. recognize it as a market economy, as opposed to a non-market economy, would carry both economic and reputational benefits, providing some protection in cases related to antidumping and countervailing duties. Reduced barriers would make goods more competitive and improve job prospects for a burgeoning population.
These mutual opportunities won’t manifest themselves, though. The strategic rationale for American public policy makers to act with greater urgency will help ensure supply chain security, facilitate commercial openings, and advance national interests in Southeast Asia. A late start need not preclude a rich outcome.
Michael Ryan was 2018 President of the National Economists Club, Washington, D.C.
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