DONALD TRUMP’S ‘REAL THREAT’ OF VIETNAM TARIFFS SENDS RIPPLES OF ANXIETY THROUGH SOUTHEAST ASIAN NATION

Date: Sunday, August 25th, 2019
Source: South China Morning Post

Steven Yang had been considering moving his mattress factory from China’s manufacturing heartland of Guangdong to Vietnam for some years, because despite increasing the salary of his 50 workers every year, his staff kept leaving.

Yang’s company, Foshan Jietai Furniture, exports to the United States, European Union, Canada, Hong Kong, Australia and other parts of Asia. He had been focused on increasing his exports to America, but these plans were devastated when US President Donald Trump imposed anti-dumping duties of up to 1,731 per cent on Chinese-made mattresses.

Yang quickly took to WeChat and shared an expletive-laden post attacking Trump, then contacted an agency in Vietnam to start the relocation process. He finished the paperwork in July and is set to start production in Vietnam at the end of August.

Now, however, he is cursing Trump again – with the US President turning his ire on the Southeast Asian country, which has been the destination of choice for many manufacturers leaving China, driving up its trade surplus with the US.

US customs authorities are also wary of transshipment, where Chinese manufacturers export to Vietnamese ports, only to then ship them on to America claiming they are made in Vietnam despite little or in some cases no change taking place to the products.

This has led to mounting speculation that Vietnam could be the next battleground in Trump’s trade war after he last month described the country as “almost the single worst abuser of everybody”.

Indeed, in July, Washington imposed duties of more than 400 per cent on steel imports from Vietnam, saying that some metal was being shipped from South Korea and Taiwan to the US via Vietnam to avoid the respective steel tariffs.

There is a fear that other products will be next, and those who have invested heavily in Vietnamese factories are growing more worried by the day. “If Trump imposes tariffs on all Vietnamese goods, I can only say I am completely out of luck,” said, Yang, who will still need to import up to 70 per cent of his raw materials from China. “I know the percentage is not low, but I don’t think there will be a problem for me to get the made in Vietnam label.”

Trump’s volatility, combined with Vietnam’s soaring surplus, has made further tariffs a very real prospect, according to those familiar with the matter. The US deficit with the Southeast Asian nation is almost US$40 billion, and has been steadily rising as it becomes a more attractive destination for production.

“I do hear from the back rooms that tariffs are not off the table completely. If something does not really change with this US$40 billion trade surplus, I would not rule it out. It's a real possibility,” said Frederick Burke, managing partner at Baker & McKenzie’s Vietnam office.

At the turn of the millennium, the fledgling manufacturing hub had a surplus of just US$453.8 million with the US. That rose by 2,359 per cent to US$11.2 billion in 2010. It was US$31.99 billion in 2016, another jump of 187 per cent, and has risen by a further 25 per cent in the three years since.

“I think it would be very unwise to ignore the threat of tariffs,” said John Goyer, executive director for Southeast Asia at the US Chamber of Commerce. “I believe it is a real threat – there is a real possibility that this administration could slap tariffs on Vietnam.”

Those companies who are legitimately manufacturing in Vietnam are concerned that their exports to the US could be killed by companies engaging in transshipment. As with Yang, many have fled China due to rising costs and tariffs, and have established full production facilities in Vietnam, to the extent that its trade infrastructure – ports, roads and airports – are groaning under the weight of the jump in exports.

Ernie Koh closed his Chinese factories five years ago, moving his high-end furniture production facilities to Vietnam and Malaysia. Now, most of his company Koda’s US exports come out of his Vietnam factories, and if tariffs were to come in, he would have to shift to Malaysia.

“I have read a lot about the tariffs and I am very concerned about it,” Koh said. “There’s a lot of talk about it now because of the tariffs on steel. There’s been a huge influx of Chinese investment into Vietnam, but there are also a lot of opportunists. These are the people we are worried about, it just takes a small batch to ruin it for everyone.”

Mindful of killing its golden goose, the Vietnamese authorities are working to crackdown on transshipment. The country’s customs authorities have upped their inspections at ports and also within the factories, to ensure that the goods being finished are not simply assembled there, from Chinese parts that would face tariffs if sold directly to the US.

One Hong Kong-owned exporter, whose Vietnamese factory was recently visited by customs inspectors, reported that the officials asked to see components and records of where the raw materials came from, as well as where the finished products were being shipped. This allowed inspectors to see that “they're not exporting a bunch of finished products that they did not have the components for”.

Another manufacturer said that at a closed-door meeting in July, Vietnamese Prime Minister Nguyen Xuan Phuc said he had raised the issue of transshipment with Trump at June’s G20 summit in Osaka.

“He assured me there will be no issues,” said the factory owner, who did not wish to be named. “He met and Trump assured him it was all taken care of. I do not know whether that is a political answer or a fact.”

However, as long as Vietnam’s yawning trade surplus with the US remains, most think that it is unlikely Trump will be satisfied. The US president is known to hold a zero-sum view on trade, with a surplus considered to be “good” for the country who holds it and a deficit “bad”. This school of thought is disputed by many economists, who point out that many wealthy nations hold trade deficits, because they buy more consumer goods from the developing nations that host low-cost manufacturing facilities.

The threat of tariffs will therefore remain in place, unless the government in Hanoi can think of a way of narrowing the gap. But even a large-scale purchase of US goods – a fleet of Boeing aircraft for example – is not a sustainable way to correct this as, in the long-term, there is simply more demand for Vietnamese made goods in America than vice versa.

“If Trump imposes tariffs on all products made in Vietnam, we will all get into trouble,” said Li Weihua, a Chinese businessman whose company, Gaocheng Furniture, makes products in Vietnam to export to the US. “But I don’t think he will slap the tariffs on in the near future.”

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