By Bridget Websdane
At the start of this month, the World Trade Organisation disclosed alarming information concerning the ramifications of the ongoing global trade wars. Notably, the organization cut its forecasted global trade growth for 2019 from 2.6% to 1.2%, due in large part to the continued slowdown of world GDP growth, the threats to job creation in export production, and the potential damages to living standards as a result of falling investment triggered by business uncertainty.
Ultimately the most topical and sensational of trade wars is the one between the United States and China. Both economic giants are stumbling, with Chinese industrial growth at its lowest since 2002, and American manufacturing at its lowest in a decade.
Manufacturing companies based in China – Chinese, American and others – wanting to avoid the hike in costs incurred by the tariffs have been seeking to relocate production. Perhaps the mass corporate migration, at least in the case of US firms, is also partially the result of President Trump’s forceful August tweet, ordering “great American companies … to immediately start looking for an alternative to China.”
Due to it being both the world’s largest manufacturing economy and one of the largest consumer markets, China has long been a goldmine for multinational corporations. The prospect of an alternative is not easily fathomable – such a location would need to meet several prerequisites.
One criterion is geographical proximity. For the sake of practicality and profit-maximisation, firms are less inclined to venture beyond Asia. However, many South Asian countries are not making the cut for manufacturing companies, likely a result of the heavy dependence on textile production among countries in the region. Bangladesh’s top five exports, amounting to nearly $16 billion USD, are all garments. Similarly, Indonesia’s top five exports are all primary commodities, severely limiting the potential of its manufacturing sector due to its current lack of FDI-attracting infrastructure and industrial development. Ultimately, the ideal recipient for foreign direct investment will have a capital-intensive and modernised industrial sector. Cheap labour, poor working conditions, and technology, while cost-minimising, are looking less appealing each day – especially in comparison to China’s technological innovation.
There is one country that appears to meet these criteria. Amidst all the chaos, Vietnam has come through as the diamond in the rough.
Vietnam’s prosperity is not a new phenomenon. World Bank economists Sebastian Eckardt, Deepak Mishra, and Viet Tuan Dinh attribute a long period of post-war and twenty-first century growth to “global integration, domestic liberalization, and investing in people and infrastructure.” However, more recently, its economy is further flourishing thanks to the trade war. Economic growth in the third quarter of this year has increased by 7.31% compared to that of last year. 52.6% of this growth is due to the expansion of the industrial sector, which has been driven primarily by rising manufacturing – 11.37% since last year. This rapid industrialisation, combined with Vietnam’s pre-existing low corporate income tax rate (currently at 20%), has enticed FDI, with a 26.4% increase in FDI projects (General Statistics Office of Vietnam). Among these foreign investors is Google, which decided in August to shift production of its Pixel smartphone from China to Vietnam, joining Samsung – which has been manufacturing its smartphones in the country since 2009 (Song).
The Vietnamese economy is currently in large-part reliant on exports: in 2018, exports accounted for 95.4% of its GDP. Such dependence is generally accepted to be extremely risky, yet in this climate it has enabled Vietnam to significantly benefit from the trade diversion of US imports. As of August, Vietnam is the eighth largest trading partner of the US – a significant step up from number fifteen the same time last year. Yet this statistic glosses over some crucial information, that could well jeopardise these trade ties in the future. Vietnam is the sixth largest exporter of goods to the US, yet does not even fall in the top fifteen importers of American goods, making it the country with which the US has its fifth largest trade deficit. Vietnam has put itself in a dangerous position – its trade surplus, yet another component of its economic growth, dramatically contrasts the 54.9 billion dollar trade deficit faced by the US. Such a disparity prompted President Trump to label Vietnam as the “single worst abuser” regarding international trade at the G20 summit in June, which, in turn, has led the country to pledge to import more US goods.
Historical and ideological tensions between the US and Vietnam, alongside the frequent labelling of the latter as a ‘mini-China’, exacerbates Vietnam’s economic vulnerability. This may be a case of ‘the enemy of my enemy is my friend’. In other words, for Vietnam to safeguard its current economic triumphs, it needs the US on its side, which might be accomplished only by openly opposing China. Efforts are already being made on this front, with Vietnam maintaining a firm stance by denouncing China’s activities in the disputed areas of the South China Sea, as was seen in July with its deployment of vessels to confront Chinese ships in the waters.
But standing up to China also presents a risk, considering many Chinese companies are among those seeking to relocate to, and invest in, Vietnam. The country needs Chinese firms like it needs to export to the US. It’s a tricky situation.
All parties will cross paths at the upcoming Asia-Pacific Economic Cooperation (APEC) Economic Leaders’ Meeting, taking place from November 16-17. Hopefully, the summit will serve as a medium through which other middle-income countries will take a leaf out of Vietnam’s book. It seems this is already in motion for certain other South Asian countries. In late September, India reduced its corporate tax rate from 30% to 22%, hoping to entice foreign investors. Indonesia is committed to spending $412 billion over the next five years, 60% of which is to go towards improving transportation. As a nation comprised of thousands of islands, this will facilitate industrial expansion with greater ease, ideally increasing FDI.
The dispute between the world’s two largest economies, while detrimental to themselves, has laid the foundations for middle-income economies to prosper, especially those in Asia. Vietnam appears to be the role model, with its reliance on exports and strong, diverse, and highly industrialised manufacturing sector. However, continued threats and assertions of dominance from the US and China reinforce the vulnerability of Vietnam and middle-income economies like it, and one wonders whether their rise is sustainable, or strictly a momentary phenomenon. Regardless, it will be interesting to observe the individual attitudes and the overall dynamic when these players come together next month at the APEC leaders summit.
The opinions expressed in this article are the author’s own, and may not represent the views of The St Andrews Economist.