During the first quarter of 2019, China’s exports to the US has decreased 13.9%, whilst in the same period Vietnam’s exports to the US has increased 40.2% (Source: US Census Bureau). The second quarter showed similar trends, particularly after the US has significantly lifted tariffs in May. On the surface there is a potential risk that Vietnam might become another victim of the US trade war, but if we need look deeper, the current status quo offers opportunities (and of course challenges) for Vietnam.
Vietnam has been a foreign direct investment (FDI) dependent nation, and has built an impressive economic growth, averaging over 6% for the past 20 years (albeit from a very low base) on the back of FDI. With trade surpluses for the past 6 years, and over 70% of exports coming from the foreign invested sector, Vietnam is reaping the rewards from its trade and foreign investment focuses.
Vietnam has not sat on its laurels, after joining the World Trade Organisation in 2007, it has become a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018, and has signed a Free Trade Agreement with the EU (which awaits final ratification) earlier this year. The nation is also a member to numerous ASEAN Free Trade Agreements, including South Korea, Japan and Australia. To achieve these agreements, Vietnam has made tough concessions, including some that go against the nation’s socialist ideologies, however Vietnam’s leaders understand their nation needs a solid foundation built around foreign investment, integration and trade in order to improve their status.
For these reasons alone, it is less likely that US sanctions will also apply to Vietnam, at least not in the short term. Vietnam has shown willingness to negotiate and undertake 2-way dialogue to achieve balance.
Vietnam continues to be an economic outperformer in the region, one of the few jurisdictions which have so far been unaffected by the US-China trade war. Countless manufacturers have moved, or are in the process of moving their manufacturing operations from China to Vietnam, including the recent announcements from LG, Google, Apple and Sharp (just to name a few). Demand of industrial park in Southern Vietnam has skyrocketed, with occupancy rates in Binh Duong (an industrial province located adjacent to Ho Chi Minh City) reportedly at 97%.
Foreign firms that have manufacturing base in Vietnam are benefiting from this surge since it is the fastest path to market and facilitates international brands to shift production to Vietnam without much interruption. A full transition to a Vietnam supply chain and production process may take up to two years, which provides Vietnam with a further buffer to outpace any potential global economic downturn, relying on this two-year ramp up as insurance. Supply chain development is another area that will have a long-term impact, as local manufactured components and support services are sourced to replace those imported or sourced from the members of the Free Trade Agreement zones of which Vietnam is a member.
Acclime, and its partner firm in Vietnam, Domicile Corporate Services, offer a full range of market entry and advisory services for international investors seeking to enter Vietnam. Further information about our services is available here.
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