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Why Washington Shouldn’t see Vietnam as the Next China

Vietnam

Why Washington Shouldn’t see Vietnam as the Next China

In a recent Senate Finance Committee report, U.S. Trade Czar Robert Lighthizer opined that Vietnam must take action to curb its growing trade surplus with the U.S., including removing barriers to market access for U.S. companies.

While it is true that Vietnam’s trade surplus has grown significantly in 2019, much of it is the result of the trade war between the U.S. and China that has prompted importers to source from Vietnam as an alternative to China.

Rather than attempt to stunt Vietnam’s trade surplus through tariffs or other trade actions, Washington should be establishing alliances with countries in Southeast Asia as part of its quest to ensure balanced trade and market stability.

Lighthizer’scomments were in response to queries from the Committee and echoed previous statements made by White House administration officials who have identified Vietnam as one of several countries to watch with respect to trade activity. And while there hasn’t been a direct threat of imposing tariffs on Vietnamese imports, the recent implementation of a 400% duty on Vietnamese steel imports and the recent rhetoric in Washington regarding transshipment has many businesses nervous that their new safe haven may be the President’s next target for trade action.

Troublesome to United State Trade Representative (USTR) is that the surplus thus far in 2019 is already more than 30% higher than it was at this time last year, making Vietnam the leading nation in terms of percentage increase of import value in 2019.

Hastening trade imbalance

Washington has been at least somewhat complicit in hastening Vietnam’s growing trade surplus. Since the U.S. began imposing tariffs on China-origin goods, many U.S. companies (and some Chinese companies) have been looking to shift production to neighboring markets in Asia. A recent poll of U.S. companies by the U.S. Chamber of Commerce in China showed that more than 40% of American companies with production in China were looking to move to a neighboring country if they hadn’t already done so. These include the likes of Dell, HP, Steve Madden, Brooks and others. Even non-U.S. companies, like Japan’s Nintendo and China’s own electronics giant TCL are looking to shift production out of China and into Vietnam.

Vietnam was an obvious choice for many of these manufacturers looking to circumvent Washington’s onerous tariffs. For years, Vietnam has been investing heavily in improving its roadway and port infrastructure, as well as augmenting its pool of high-skilled laborers so that it can attract large hi-tech giants. The advancements were well-timed to coincide with increasing wages and regulatory restrictions in China that were driving up costs and forcing foreign producers to look elsewhere for low-cost manufacturing alternatives. This was taking place well before the current administration in Washington began cracking down on China’s questionable trade practices.

To be fair, Washington does have some cause for complaint. It’s one of Asia’s worst kept secrets that Vietnam, Malaysia and Thailand have become convenient transshipment hubs for Chinese companies looking to circumvent quotas and, more recently, tariffs by making minor tweaks in neighboring countries to products almost wholly manufactured in China and sending them along to the U.S. as “Vietnamese” or “Malaysian” exports. In the end, there is little monetary gain for Vietnam and much opportunity for reputational damage. Hanoi’s incentive for playing along is purely political; it wants to placate China, its much larger neighbor and regional hegemon.

Hanoi has already said it will crackdown on Chinese transshipments labeled as being of Vietnamese origin. Nikkei Asian Review is reporting the Vietnamese government is considering new rules that would require 30% of a good’s price to be comprised of Vietnamese manufacturing for it to be considered as being of Vietnamese origin. Whether or not this will pacify the USTR remains to be seen.

Yet while Chinese transshipments may have been a catalyst to Vietnam’s soaring trade surplus, the ongoing U.S-China trade war has unquestionably accelerated the development of a trend that was only in its infancy a few short years ago.

If Washington is looking to penalize Vietnam for a trade surplus born out of Washington’s trade war with Beijing, where will the cycle of tariffs end?

Options for low-cost sourcing plentiful

Let’s assume Washington succeeds in quelling the growth of Vietnam’s trade surplus by imposing tariffs in the same manner it has with China, the EU and other entities. The likely outcome will be that U.S. companies then look to Thailand, Myanmar, Bangladesh or Cambodia (as many have already) to replace or supplement their production in China.

Let’s assume that Washington then imposes similar tariffs on imports from those countries. The likely outcome will be that U.S. companies then shift their attention to India, Mexico or any other country that offer lower cost labor and limited regulatory burden. And on and on it goes.

Washington wants to see production repatriated back to the United States, but only six percent of American companies moving production out of China are looking at reshoring their manufacturing facilities. One of the key reasons is that the facilities currently in China are intended to support regional exports and reshoring production to the U.S. would result in unnecessary transport costs and time in transit. In other cases, the cost of moving production to the U.S. could be too onerous to allow companies to compete globally.

A battle worth waging – along with friends and allies

This is not to suggest Washington’s war on China’s unsavory trade practices is unjust or futile. On the contrary, China’s history of misappropriating intellectual property through technology transfer, cybersecurity incidents and other trade violations requires America to act. But tariffs only punish American companies that will continue to shift their production as necessary to reduce their landed costs.

Instead of reprimanding and punishing countries like Vietnam with tariffs in response to growing trade surpluses, Washington should be working with them to forge alliances that will ensure China is forced to play by the rules.

If the U.S. truly wants to stave off bad actors such as China from continuing to abuse the global trade’s rule-based system, it will need the support of friends and allies in the eastern and western hemispheres. Acting alone and imposing unilateral restrictions only throws Washington into a battle of wills for which collateral damage is certain, but the outcome remains unknown.

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Cora Di Pietro is vice president of Global Trade Consulting at trade-services firm Livingston International. She is a frequent speaker and lecturer at industry and academic events and is an active member of numerous industry groups and associations. She can be reached at cdipietro@livingstonintl.com.

Asia’s Fish Fillet Market – China’s Export Share Exceeded 50%

IndexBox has just published a new report: ‘Asia – Frozen Fish Fillet – Market Analysis, Forecast, Size, Trends and Insights.’ Here is a summary of the report’s key findings.

The revenue of the frozen fish fillet market in Asia amounted to $3.9B in 2017, growing by 4.9% against the previous year. This figure reflects the total revenues of producers and importers (excluding logistics costs, retail marketing costs, and retailers’ margins, which will be included in the final consumer price). The market value increased at an average annual rate of +1.9% over the period from 2007 to 2017; the trend pattern indicated some noticeable fluctuations being recorded in certain years.

The growth pace was the most rapid in 2009, when the market value increased by 35% against the previous year. Over the period under review, the frozen fish fillet market attained its peak figure level at $4.6B in 2011; however, from 2012 to 2017, consumption remained at a lower figure.

Production in Asia

In 2017, production of frozen fish fillet in Asia amounted to 1.9M tonnes, remaining relatively unchanged against the previous year. The total output volume increased at an average annual rate of +1.6% from 2007 to 2017; the trend pattern remained relatively stable, with only minor fluctuations being recorded throughout the analyzed period.

Exports in Asia

The exports totaled 1.7M tonnes in 2017, flattening at the previous year. The total export volume increased at an average annual rate of +3.5% over the period from 2007 to 2017; however, the trend pattern indicated some noticeable fluctuations being recorded in certain years.

In value terms, frozen fish fillet exports amounted to $7B (IndexBox estimates) in 2017.

Exports by Country

China was the main exporting country with an export of around 901K tonnes, which accounted for 53% of total exports. It was distantly followed by Vietnam (597K tonnes), constituting 35% share of total exports. The following exporters – Indonesia (43K tonnes) and Thailand (27K tonnes) – together made up 4.2% of total exports.

From 2007 to 2017, the most notable rate of growth in terms of exports, amongst the main exporting countries, was attained by Vietnam, while the other leaders experienced more modest paces of growth.

In value terms, China ($4B) remains the largest frozen fish fillet supplier in Asia, comprising 57% of total frozen fish fillet exports. The second position in the ranking was occupied by Vietnam ($1.6B), with a 23% share of total exports. It was followed by Indonesia, with a 3.8% share.

Export Prices by Country

In 2017, the frozen fish fillet export price in Asia amounted to $4,130 per tonne, therefore, remained relatively stable against the previous year. Over the last decade, it increased at an average annual rate of +2.0%. The growth pace was the most rapid in 2008, an increase of 14% against the previous year. Over the period under review, the export prices for frozen fish fillet attained their maximum at $4,486 per tonne in 2011; however, from 2012 to 2017, export prices failed to regain their momentum.

Export prices varied noticeably by the country of origin; the country with the highest export price was Thailand ($7,128 per tonne), while Vietnam ($2,629 per tonne) was amongst the lowest.

From 2007 to 2017, the most notable rate of growth in terms of export prices was attained by Thailand, while the other leaders experienced more modest paces of growth.

Imports in Asia

In 2017, imports of frozen fish fillet in Asia totaled 864K tonnes, picking up by 4.2% against the previous year. The total imports indicated a strong growth from 2007 to 2017: its volume increased at an average annual rate of +6.8% over the last decade. The trend pattern, however, indicated some noticeable fluctuations being recorded throughout the analyzed period. Based on 2017 figures, the frozen fish fillet imports increased by +93.6% against 2007 indices.

In value terms, frozen fish fillet imports amounted to $3.5B (IndexBox estimates) in 2017.

Imports by Country

Japan dominates frozen fish fillet imports structure, amounting to 524K tonnes, which was approx. 61% of total imports in 2017. It was distantly followed by China (56K tonnes), comprising 6.4% share of total imports. Israel (39K tonnes), South Korea (38K tonnes), the Philippines (26K tonnes), China, Hong Kong SAR (25K tonnes), Singapore (21K tonnes), Malaysia (19K tonnes), Iran (14K tonnes), Taiwan, Chinese (14K tonnes), Saudi Arabia (14K tonnes) and Vietnam (14K tonnes) followed a long way behind the leaders.

From 2007 to 2017, average annual rates of growth with regard to frozen fish fillet imports into Japan stood at +5.8%. At the same time, the Philippines (+60.0%), Taiwan, Chinese (+24.6%), Vietnam (+21.3%), China (+20.3%), Singapore (+18.5%), Iran (+18.0%), Malaysia (+15.3%), Saudi Arabia (+10.8%), China, Hong Kong SAR (+1.4%), Israel (+1.2%) and South Korea (+1.2%) displayed positive paces of growth. Moreover, the Philippines emerged as the fastest growing importer in Asia, with a CAGR of +60.0% from 2007-2017. Malaysia (-1.6%), Singapore (-2%), the Philippines (-3%), China (-5.4%) and Japan (-26.2%) significantly weakened its position in terms of the global imports, while the shares of the other countries remained relatively stable throughout the analyzed period.

In value terms, Japan ($2.1B) constitutes the largest market for imported frozen fish fillet in Asia, comprising 61% of total frozen fish fillet imports. The second position in the ranking was occupied by South Korea ($233M), with a 6.7% share of total imports. It was followed by Israel, with a 6.1% share.

Import Prices by Country

In 2017, the frozen fish fillet import price in Asia amounted to $3,996 per tonne, surging by 8.9% against the previous year. Overall, the frozen fish fillet import price, however, continues to indicate a relatively flat trend pattern.

There were significant differences in the average import prices amongst the major importing countries. In 2017, the country with the highest import price was Taiwan, Chinese ($6,346 per tonne), while the Philippines ($1,515 per tonne) was amongst the lowest.

From 2007 to 2017, the most notable rate of growth in terms of import prices was attained by Saudi Arabia, while the other leaders experienced more modest paces of growth.

Source: IndexBox AI Platform

Amid the US-China Trade War, Vietnam Emerging as a Rising Star

As the US-China trade war continues to escalate with no relief in sight, American businesses are scrambling to find solutions to avoid the hard swallowing 25% tariffs on imported Chinese goods. One silver lining from the protracted conflict is China’s neighbor to the south and, at one time, one of America’s staunchest enemies, Vietnam. War-torn and poverty stricken merely 4 decades ago, this Southeast Asian star is rising quickly and experiencing record performing 7% GDP growth. However, despite its potential can Vietnam live up to the hype as China’s best alternative?

It is without a doubt that Vietnam has been rising eyebrows the last decade as a low-cost manufacturing destination. Since early 2000s, supply chains have been shifting quickly to this small, Southeast nation. In recent years, foreign direct investment (FDI) from China, Taiwan, Japan, and South Korea have been pouring in, boosting its manufacturing base. For the last several decades Vietnam has been an export leader in textiles, electronics parts, machinery, and cell phones, with no signs of slowing down.

Vietnam’s manufacturing potential has been creating a buzz—and for good reason. One of the most dynamic countries in Southeast Asia, Vietnam’s population is just under 100 million to which a 70% of the population is under the age of 35. A young, vibrant, hungry and able population make for an attractively strong workforce. As labour prices and raw materials continue to climb in China, manufacturers are enticed by Vietnam’s low-cost labor often at one-third less to that of China.

Government stability, fostered by Vietnam’s communist government, is also an attractive condition many businesses require before investing whole-heartedly. Finally, geographically, Vietnam is blessed as sits strategically to the south of China and is at the cross-roads of some of the busiest maritime trading routes in the world and within easy access to its economically growing ASEAN neighbors. For these reasons, Vietnam is a standout among its peers.

Despite the country’s potential, however, when it comes to manufacturing investors are quickly discovering that Vietnam is no China. For one, the overall country’s infrastructure is underdeveloped and in bad need of repairs and upgrades: roads, bridges, ports and railways all lag many of its neighbors. To the government’s credit, there are major infrastructure and developmental projects in the works, such as commuter metro trains in both Hanoi and Ho Chi Minh City and updated shipping ports, however, Vietnam needs to press on in major ways if it wishes to compete in the 21 century global economy.

Though Vietnam boasts a young and energetic workforce, the reality is that the majority of its workers are low-skilled, lacking any modern manufacturing training and skill sets essential to meeting the current manufacturing surge. This phenomenon dates back to the historically poorly plagued educational system, including its outdated vocational training, facilities, and know-how. Third, production infrastructure, proper facilities, and quality raw materials are in short supply, compounding this problem. For these very reasons, Vietnam may not be the silver bullet many are hoping for.

Vietnam’s stunning export growth is backed by impressive numbers. In 2019, exports to the USA increased 28.8% compared to last year. The investment bank Nomura in one estimate credits the US-China trade war to boosting Vietnam’s economy 8%. Everything from telephone electronics parts, furniture, and automatic data processing machines have all seen an uptick. Light industry manufacturers such as textiles and electronic components have all benefited in recent months.

Though the lack of modern infrastructure has plagued Vietnam’s growth, in recent years the government has been investing heavily in industrial parks, answering the calls by large corporation demands and their needs for up-to-date facilities.

While Vietnam is rising as a quick alternative to China, obstacles could quickly derail this apparent boon. For one, in late June of this year American President Donald Trump, in a news briefing with reporters who asked what his thoughts are about the quick shift in manufacturing from China to Vietnam, remarked, “Vietnam is one of the worst offenders. Sometimes even worse than China.” He followed up by threatening that as president he would consider tariffs against Vietnam. If President Trump were, indeed, to follow through on his threat doing so would quickly sap Vietnam’s headlining potential. Moreover, as Vietnam nudges forward as an export leader, its neighboring countries are also quickly upping their manufacturing, technology and export industries in earnest, adding to the competition in the process.

Thailand, Cambodia, the Philippines, Malaysia, and Indonesia—all members of ASEAN— are ramping up their industrial competitive advantage. Finally, rampant corruption at both the provincial and national level as well as the increasing environmental destruction and pollution are cause for concern. The result is the lack in the ease of doing business; foreign direct investment and attracting skilled foreign expats to work in Vietnam are increasingly being jeopardized. Vietnam’s recent gains, though substantial, are fragile are at risk of unraveling at a moment’s notice.

Vietnam finds itself at an opportune crossroads at a time to reap the benefits made by the US-China trade war. This emerging market holds great potential which has already proven itself as an industry leading manufacturer in electronics, small parts, and textiles. However, despite Vietnam’s enormous strides in recent years, the country falls short in several key areas, mainly, skilled workers with modern training and know-how, outdated facilities, lack of quality raw material, and overall poor infrastructure.

Despite these deficiencies, with government leadership, input from business leaders, continued foreign investment, and the implementation of the rule of law and decreased corruption, Vietnam may not only be a convenient alternative to China but emerge as an economic Asian tiger in its own right.

Vinh Ho is a Manager at APAC Consulting