Is Vietnam next on Tariffs and a Trade War?

Vietnam has been one of the world’s biggest US-China trade war winners, as global supply chains shift production away from tariff-hit China and towards the low-cost Southeast Asian nation.  But it may be discovering that with fast growth comes risks.  

Is Vietnam next for tariffs?   In an interview with Fox Business Network in Late June, Trump labeled Vietnam as “almost the single worst abuser of everybody” in a response to a question about imposing tariffs on Vietnam.   Trump continued “a lot of companies are moving to Vietnam, but Vietnam takes advantage of us even worse than China.”

It is unclear whether the Trump administration is genuine about its threat of possible future sanctions on Vietnamese imports, or whether it is a dramatic negotiating tactic to extract more concessions.

Many companies are trying to diversify their supply chains to other countries in order to allay a potential tariff burden, this can be a costly and time-consuming undertaking.

Economic Growth

In 2018, according to American customs data, the U.S. imported $49.2 billion of Vietnamese goods and services while exporting to Vietnam a mere $9.7 billion-worth. Data from the first months of 2019 show Vietnam’s exports surging further in all the categories covered by the U.S. tariffs. That’s a big bump in bilateral trade, but not a really huge distortion in a multilateral trading world. The U.S. typically sells a lot less stuff to developing countries than it imports from them.

Data released Friday by Vietnam’s Customs Department shows a growing trade surplus with the U.S., with exports between January and June surging 27.4% compared with the same period last year. In the first five months of 2019, the U.S. trade deficit with the Southeast Asian nation was $17.1 billion, compared with $12.94 billion last year.

Overall, Vietnam is the second-largest exporter of shoes to the U.S. after China, accounting for 18.7% of all footwear imports in 2018, according to the Commerce Department. (China, by comparison, accounted for 69.2%, a 21-year low.) Footwear was also Vietnam’s third-largest category of exports to the U.S., reaching $6.2 billion in 2018, according to the U.S. Trade Representative.

USA Footwear imports from Vietnam

Many companies started shifting their supply chains to Vietnam many years ago in response to rising labor costs in China.

Last May, Adidas said that Vietnam had overtaken China as its top supplier for footwear, with Vietnamese factories producing 44 percent of its shoes by volume in 2017, up from 31 percent in 2012, and Chinese manufacturers supplying 19 percent, down from more than 30 percent in 2012.

Transshipments

Vietnam is well aware that there is a chronic transshipment problem.

Transshipment is the sort of shady practice that needs to stop in order to gain a secure place in the world-trading club. Vietnam earns a lot of ill will and almost no profit when Chinese or other foreign goods pass through its factories and ports just to get a new label.

China is on the border of Vietnam

Over the years, Chinese firms sought out or set up, Vietnamese companies to put the finishing touches on garments and footwear imported from China that is sent to international buyers around the world.

The US could next slap punitive tariffs on certain Vietnamese imports based on allegations Hanoi is allowing Chinese-made products to be rebranded as Vietnamese goods before export to the US to circumvent tariffs on China, process officials refer to as “transshipment.”

Foreign Direct Investments (FDI)

The National Assembly delegates of Vietnam recently called on Communist Party functionaries to curb Chinese investments, with lawmakers arguing that Hanoi should be more particular about which foreign-invested projects it accepts.

Conclusion

The president’s surprise comments have proven yet again that the footwear and apparel industry needs to stay on its toes when it comes to trade.

“If companies are not thinking critically about their current sourcing profile, where they’re sourcing, and their agility and ability to move to other countries, they’re doing themselves a disservice,” said Matt Priest, President and CEO, Footwear Distributors and Retailers of America.

Constantly switching suppliers is not good for any business, as you need to qualify, validate, vet, and onboard new vendors with policies, procedures, systems, and training.

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