Economic Sector

Last updated: Thursday, February 21, 2019


US-China Trade War: Challenges and Opportunities for Vietnam

Posted: Friday, September 28, 2018

The trade war between the US and China has kept on escalating with many complicated developments, and is difficult to predict. The war between the two world powers has a great impact on the world economy, including Vietnam.

China's trade surplus with US in 2017 increased 13 per cent from the previous year to US$288 billion. Such rapid growth has led to an investigation and the results show that China has engaged in a series of unfair policies and practices related to US intellectual property and technology.

Thus, with the expectation of reducing the trade deficit and creating more jobs, as well as strengthening national security, on September 17, US President Donald Trump intensified his trade war with China by imposing a tariff of 10 per cent on US$200 billion worth of Chinese goods and those duties will increase to 25 per cent at the beginning of 2019. In response to the US moves, on August 3, China announced new plans to put tariffs from five per cent to 25 per cent on US products worth US$60 billion if President Trump would not intend to stop trade protectionism.

Impact on the Vietnam’s economy
According to economists, the US-China trade war not only affects their economies significantly, but also disrupts the world economy and has a great impact on the Vietnamese economy.

With open economic policy, Vietnam has to face many risks when the world economy is affected by the US-China trade war. Furthermore, because these are also the two largest trading partners, this will impact the Vietnam’s economy directly and much faster.

According to Dr Pham Tat Thang from Institute for Industry Policy and Strategy, Ministry of Industry and Trade, Vietnam is adjacent to China, so when the domestic goods are restricted to enter US, they will have to find ways to reach other markets, in which, the easiest ones are the countries which share the border line through both official and unofficial cross-border trade. This will cause a great competition pressure on domestic goods.

On the other hand, the stagnant Chinese production also affects the demand for imported raw materials from Vietnam. That is not to mention that some products of China are disguised as Vietnamese goods to export to the US to influence the prestige of Vietnamese goods.

Dr Tran Toan Thang, Director of the World Economic Affairs Department of the National Centre for Socio-Economic Information and Forecasting (NCIF), said that the US-China trade war had hit Vietnam in early 2018 and will peak in the period 2020-2021. In particular, in 2018, the trade war of the two powers reduced Vietnam's GDP by 0.03 per cent. This amount will increase to 0.09 per cent in 2019, to 0.12 per cent and 0.15 per cent in 2020-2021 and 2022, respectively.

It is estimated that the size of Vietnam's economy in 2017 is VND5,000 trillion (US$210 billion) . If average growth is 6.5 per cent in five years from 2018, the size of the economy will reach about VND6,850 trillion (US$290 billion) by 2022.

According to NCIF’s calculations, the US-China trade war will reduce Vietnam's GDP in 2018 by about VND1,600 billion (US$70 million), by VND5,105 billion (SU$220 million) in 2019 and peak in 2021 by VND7,720 billion (US$330 million) and VND7,740 billion by 2022. Thus, in the period 2018-2022, this war will reduce the GDP of Vietnam about VND29,200 billion (US$1,250 million), an average of VND6,000 billion (US$260 million) per year.

Overseas, Vietnam continues to be pressured by the appreciation of the USD. In addition, there are US protectionist trade policies with other countries, especially the goods imported from China.

Domestically, Vietnam has increasingly to face the pressure of keeping macroeconomic stabilisation policy from the exchange rate and control of inflation. NCIF said that the momentum from the foreign investment sector was losing, with no new driving force for economic growth.

Turning risks into opportunities
On the positive side, the assessment by the World Trade Organisation (WTO) indicated that some of Vietnam's commodities could take advantage of the market opportunities left open by the tariff impositions to boost exports to the two countries.

According to Mr Huynh Quang Thanh, Chairman of Binh Duong Wood Processing Association, "US tariff on China's wood products is an opportunity for Vietnam's wood industry to thrive. The fact that China’s wooden furniture has restricted entry to the US market will be an opportunity for Vietnamese furniture to occupy the market share that the Chinese has left. Vietnamese companies can take advantage of this opportunity to increase capacity by 30 per cent, improve the quality of products to occupy the position in the international market”.

On the other hand, the devaluation of the yuan will cause the price of raw materials that Vietnam imports from China to reduce, facilitate cost reduction for Vietnamese enterprises.

In addition, the war also accelerates the shift of direct capital flows from both China and US to other countries in the region. In particular, Vietnam is an ideal destination in the eyes of foreign investors.

In the long run, if this war is widespread, it is difficult for anyone to know anything in advance. It is possible that this will result in vacant markets and create new competitive opportunities for Vietnamese goods.

However, trade flows can also shift to alternative markets, and the shift of investment flows may have negative and positive effects on small economies like Vietnam. Hence, economists and policymakers need to keep a close watch on the "trade war" between the US and China in order to come up with a backup plan, as well as correct, reasonable, quick and accurate policies to turn the risks into opportunities, continuing to develop the country's economy and contributing to the social security.

Giang Tu

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