As the United States considers imposing further tariffs on China amid ongoing trade tensions, foreign companies operating in China are shifting production to its southern neighbor, Vietnam. The disputes between the world’s two largest economies could prove a significant boon for the Vietnamese economy, which this year reached its highest rate of growth in the eight years.
Official data published by the Vietnamese authorities shows that the country’s GDP has grown by 7.1 percent in the first half of 2018, and its export average surged from 17 percent in 2017 to 20 percent through this June.
Foreign direct investment (FDI) into Vietnam increased by 9.2 percent from January to August in 2017 to $11.25 billion in the same period this year, Vietnam’s investment ministry said last month.
Because of geostrategic and commercial factors, Vietnam is unlikely to be a target of Trump’s trade war, despite its having a $40 billion trade surplus with the United States, said Bill Stoops, chief investment officer of Dragon Capital.
The pressure of rising costs associated with Washington’s tariffs on China is likely to draw foreign companies to Vietnam. “Even China might start to shift a lot more of its production to Vietnam,” Stoops told CNBC on Sep. 12. “This is the sort of trend we could see.”
Given the rate of Vietnam’s economic growth, it is also unlikely to suffer much from a U.S. Federal Reserve plan to increase interest rates over the next 12 months.
“If the U.S. is unable to offset lower Chinese imports by reshoring manufacturing, then continued strong demand conditions in the U.S. will have to be met from alternative sources,” Dwyfor Evans, the head of Asia Pacific macro strategy at State Street Global Markets, told CNBC on Sep. 10. “I will not import toys from China. Instead, I will import from Vietnam, so trade wars and protectionism actually end up as a positive for Vietnam.”
Compal Electronics, a Taiwanese original design manufacturer, is increasing production capacity in Vietnam. Techtronic Industries Company Ltd., a Taiwanese power equipment manufacturer, is increasing its production in low-cost countries and the United States. Its Vietnamese production line will not be impacted by U.S. tariffs.
Production costs in Vietnam are currently lower than those in China, which has made it an increasingly popular host of foreign investment over the last decade. The U.S. tariffs on China will only intensify this trend by further increasing the cost of goods produced in China.
“A lot of companies are relocating,” Robert Subbaraman, head of emerging markets economics at Nomura, told CNBC. “FDI inflows, in particular, have been very strong and have been providing good balance of payment support for Vietnam.”