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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.

Ratifying USMCA the Only Responsible Option at this Point

The fate of free trade in North America is hanging in the balance.

That sentiment would have been true 18 months ago when negotiations of NAFTA began. It would have been true six months later when the parties failed to meet their self-imposed first deadline. It would have been true last October when it appeared the U.S. was prepared to sign a bilateral deal with Mexico and exclude Canada. And it’s still true today as the agreement gets lost in the fracas of politicking in Washington.

The impending release of the U.S. International Trade Commission (ITC) report, which provides members of Congress with in-depth analysis of the potential economic impact of the proposed United States-Canada-Mexico Agreement (USMCA), may very well have minimal impact in swaying Congressional opponents of the deal.

According to a recent report in Politico, the ITC’s analysis is likely to suggest the USMCA will have a negligible impact to U.S. GDP, which won’t serve as a bulwark against complaints by House Democrats that the agreement is short on enforcement mechanisms for its labor provisions. If that weren’t threatening enough, Ottawa has now suggested it may not ratify the USMCA unless Washington removes the Section 232 tariffs on aluminum and steel imports.

Yet, regardless of the ongoing warfare on Capitol Hill and the potentially uninspiring data in the ITC report, the reality is that at this point in time the ratification of the USMCA is the best possible option. The handful of alternatives available will only serve to further destabilize confidence in and certainty around the future of trade within North America.

Renegotiation

Democrats have been demanding stronger enforcement of the USMCA’s labor provisions. These demands are in keeping with the party’s longstanding complaint that NAFTA offered Mexico’s low-wage, low-regulation economy a leg up on attracting manufacturers. While the USMCA’s new labor provisions are intended to address this, Democrats argue the agreement lacks teeth in ensuring Mexico holds up to its end of the agreement.

However, creating an enforcement mechanism means going back to the negotiating table, something none of the parties are interested in doing, particularly since it took a great deal of intense negotiation over more than a year to come up with the agreement that’s currently on the table. It’s quite likely Canada and Mexico will demand significant concessions in exchange for a stronger enforcement mechanism, which may negate some of the agreement’s other benefits.

The Trump card

Whether or not the agreement is negotiated is, in some ways, irrelevant. U.S. President Donald Trump has already threatened that if Democrats attempt to quash the USMCA – either before or after a renegotiation of its enforcement provisions – Washington will simply pull the U.S. out of NAFTA, pitting the administration against Congress in a legal battle over trade-agreement decision making that is certain to become a wedge issue in the 2020 presidential campaign. The president recently reiterated his threat to withdraw from NAFTA during a recent interview on the Fox Business Network.

The result would be a return to a trade environment of uncertainty that would surely result in reduced cross-border investment that would adversely impact the economies of all three USMCA countries and potentially stymie Washington’s efforts to negotiate bilateral trade deals with Japan, the European Union and the United Kingdom – all important trade partners.

Forget the whole thing

If the threat to withdraw from NAFTA is simply bluster on the part of the President and ratification of the USMCA ends up locked in a Congressional stalemate, the other alternative is to simply do away with the renegotiated agreement and revert back to the original NAFTA deal. While that would certainly be a viable – and minimally disruptive alternative – the truth is that the USMCA made substantial gains in modernizing free trade in North America, addressing critical issues such as regulatory harmonization, the digital economy and intellectual property protection and host of other aspects that are not addressed in NAFTA. Whether these updates result in tangible gains to GDP and/or employment only time will tell. But at the very least they serve to incentivize those engaged in cross-border trade to continue doing so and perhaps even broaden the scope of their activity. Given that North American trade represents more than a trillion dollars annually, it’s critical to – at the very least – maintain the gains already made over the past 25 years. The USMCA does exactly that and more.

It took very seasoned negotiators and trade experts more than a year of intense talks to arrive at the agreement that’s currently on the table, including the chapters that serve to bring free trade into the 21st century in a fair and equitable manner. It would be irresponsible to do away with these gainful additions in the name of partisanship, and voters would presumably hold their elected representatives to account should they choose to do so.

The best course of action

The responsible and most advantageous thing for Congress to do at this point would be to ratify the USMCA. That’s the opinion of approximately 400 businesses and business associations that are now part of the USMCA Coalition, a collective of like-minded enterprises that believe in the importance of free trade to the U.S. economy and to U.S. jobs, and of which Livingston International is a member.

Given the impressive gains made by the USMCA in fostering an environment of fair and free trade across the continent, and the risks associated with returning to the negotiating table and/or drawing out the ratification of the agreement into the political fray of the 2020 election campaign, it is critical that lawmakers on Capitol Hill make ratification of the new deal a key priority in the coming months.

Failing to do so would put into peril the advantages of free trade on which so many jobs rely, and would serve to reinforce the perception that lawmakers are all too eager to put partisanship ahead of effective representation. 

Candace Sider is vice president of Government and Regulatory Affairs North America 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.

The Port of Seattle tackles Greenhouse Gas with RNG

In an effort to create the nation’s first airport heated entirely by renewable natural gas, the Port of Seattle announced last week’s Request for Proposals to support the boilers and bus fueling system of Seattle-Tacoma International Airport with renewable natural gas.

“The Port can play a major role in creating a renewable natural gas market because we offer a stable, long-term use of gas.” said Arlyn Purcell, Director of Aviation Environment and Sustainability, Port of Seattle.

The Port of Seattle’s Century Agenda is an initiative to meet the company’s vision of a 50 percent reduction in greenhouse gas emissions by 2030 within company operations. Currently, the company’s primary legislative focus is on the state level through advocating for a clean fuel standard in Washington and catching up to its competitors in California and Oregon that have ample support of state-level clean fuel standard policies.

Through the use of Renewable natural gas (RNG), the company hopes to replace fossil natural gas in its operations and create more opportunities that create a competitive advantage while supporting a gas emissions reduction total of 18,000 metric tons per year, depending on what proposals the company receives.

“If we can attract a project developer to supply the airport, this will spur more opportunities to feed the current gas pipeline with RNG rather than have landfills or digesters flare the gas on-site or allowing their methane emissions to escape into the air,” concluded Purcell.

Source: Port of Seattle

China Ends Ban on Pacific Northwest Shellfish

Seattle, WA – China has ended a seven month-long ban of live shellfish harvested from US West Coast waters.

The ban on the import of “double shell aquatic animals” – namely oysters, clams, mussels, and scallops –  harvested from Washington, Oregon, Alaska and Northern California was imposed after Chinese food inspectors reportedly detected high levels of inorganic arsenic in geoducks from Puget Sound.

China said it had also found paralytic shellfish poisoning (PSP), a biotoxin sometimes found in the algae consumed by shellfish, in geoduck clams harvested in Alaska.

High levels of inorganic arsenic and PSP were not found in the shellfish sourced in Washington, Oregon and California.

Geoducks – also known as ‘gooeyducks’ – are a species of large, burrowing, edible salt water clams that can fetch up to $50 per pound and are considered a delicacy in Asia.

China alone routinely imports about 90 percent of the 7 million pounds of geoduck harvested in Washington state annually.

The country “is a key export market for our region’s shellfish, and this news means greater economic stability for the workers and families in our region,” said Rep. Derek Kilmer (D-Washington) in a press statement.

“I look forward to working closely with federal, state, local and tribal stakeholders to ensure that the new testing and monitoring requirements can be swiftly implemented and we can get back to shipping world-famous Washington shellfish to a major market,” he said.

Following the ban, Kilmer served as a member of a bi-partisan Congressional delegation that urged the National Oceanic & Atmospheric Administration (NOAA) to develop new procedures to monitor shellfish inspection and certification.

At the same time the ban was lifted, Beijing said it would send a team of food-safety officials to the US to monitor the testing of shellfish slated for export to China.

06/12/2014