U.S., Vietnam: With a Small Salvo, the U.S. Brings the Trade War to Vietnam

4 MINS READJul 3, 2019 | 20:13 GMT
The Big Picture

Over the past decade, Vietnam has become one of Southeast Asia's most vibrant emerging economies. The country's large and inexpensive labor pool, stable political environment, favorable investment policy and strong foreign relations has helped escalate Hanoi's move up the industrial value chain. The trade war between the United States and China has also so far served to Vietnam's benefit, with many companies moving to the country to escape its fallout. U.S. unhappiness with Vietnam, however, has grown due to Washington's ongoing trade frictions with Hanoi.

What Happened

Despite their greatly improved relations seen in recent years, the United States now has Vietnam in the crosshairs of its global trade war. On July 2, the U.S. Commerce Department announced it would impose duties of up to 456 percent on steel from Vietnam that originated in either South Korea or Taiwan. The department has found that corrosion-resistant steel and cold-rolled steel produced in South Korea and Taiwan have been shipped to Vietnam for minor processing before being re-exported to the United States in a bid to circumvent U.S. anti-dumping duties imposed on South Korea in 2015, and later Taiwan in 2016. The new anti-dumping tariffs — which were triggered by pressure from the U.S. steel producers — will impact only a small amount of trade. The United States imposed similar restrictions in May 2018 on Chinese steel shipped to Vietnam. 

The new duties come after separate warnings from the White House about Vietnam's increasing trade surplus, with U.S. President Donald Trump referring to the country in a recent interview as "almost the single-worst abuser of everybody." In May, the U.S. Treasury Department also threatened to label Vietnam a currency manipulator.

Why It Matters

Vietnam's emerging role as a place to dodge tariffs has exacerbated U.S. concerns over the Hanoi's growing trade surplus, which existed long before the Trump administration took office. Over the past two decades, the U.S. trade balance with Vietnam has gone from a surplus of $110 million in 1997 to a deficit of around $38 billion in 2017, the fifth-largest trade deficit the United States has with any country. In response, the United States has initiated anti-dumping measures on certain Vietnamese exports, including clothing and catfish.

U.S. displeasure with Vietnam has grown in recent years due to Trump administration's focus on reducing trade deficits.

U.S. displeasure with Vietnam has grown in recent years, given the Trump administration's focus on reducing trade deficits. Hanoi has since strived to reduce Washington's anger by highlighting its willingness to purchase U.S. goods, as evidenced by Vietnam ordering $20 billion worth of Boeing planes and other equipment in February. Hanoi has also worked to deflect U.S. pressure by imposing its own tariffs on Chinese steel, and cracking down on the deceptive labeling of Chinese products for re-export.

But despite these efforts, Vietnam's trade deficit with the United States has continued to widen. As a manufacturing hub for low-end goods and a rising player in the regional tech supply chain, the country has become an ideal location for avoiding the U.S.-China trade war, as manufacturers look to relocate their factories outside China and re-export their goods to circumvent U.S. tariffs. As a result, Vietnam's exports of computers and electronics to the United States, for example,  increased by 71.6 percent in the first five months of 2019 at the same time its Chinese imports for the same products rose 80.8 percent.

Looking Forward

The widening trade surplus makes it very possible that the White House will go beyond anti-dumping tariffs and raise a Section 301 case against Vietnam to justify imposing tariffs on a wider range of Vietnamese products. Already, the United States has included Vietnam on its "watch list" in the Office of the U.S. Trade Representative's 2017 Special 301 Report on Intellectual Property Protection. Hanoi could seek to dodge this threat by increasing its purchases of U.S. energy products and, even more helpful, weapons — something Washington has already pressed it to do to reduce its longtime reliance on Russia. However, bureaucratic issues and fears of complicating relations with China have so far kept Vietnam from upping its purchases of U.S. arms. 

Hanoi may be banking that Trump will hold back from additional trade salvos, given that he already has his hands full with China. Either way, lingering U.S. criticism over Vietnam's currency manipulation, nontrade barriers and need for labor reform — on top of Washington's concerns over its trade deficit — could continue to complicate a bilateral relationship that had been recently been improving amid the two countries' shared fear of China.

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