Although the United States (US) and China have reached a 90 day truce in their year-long trade war during the G-20 Summit, there are still several obstacles that could deter the attainment of a long-term deal. Despite putting the trade war on pause, the tariffs imposed by both countries are still welded in place, with Trump and Xi adamant in securing a deal that is in their favour. Apart from the 2 superpowers, a country has risen to be a force to be reckoned with, and that country is Vietnam.

Contagious tariffs

Apart from Vietnam’s sizeable labour force, its minimum wages constitute an attractive factor for foreign investments from Chinese firms. Minimum wages in Vietnam are far below that in China, with the former ranging from US$120 to US$170 and the latter from US$315 to US$350 per month respectively. Chinese companies relocating to Vietnam are thus inclined to propose higher wages for the workforce in a bid to compete for labour with the local Vietnamese companies.

The influx of Chinese companies to Vietnam serves as an impetus for the US to impose tariffs on Vietnamese exports. The backdrop for the event to occur has already been set. Back in May, Washington has imposed tariffs on Vietnamese aluminium and steel on the basis that Chinese companies were using the Southeast Asian Nation to avoid anti-dumping duties in the US.

The heightened propensity for additional tariffs to be imposed could ultimately displace the lower operational costs of production of consumer products in Vietnam.

Protectionism on the rise

Apart from China’s potential influence over Vietnam, Vietnam’s trade history with the US sheds light on the likelihood for tariffs to be imposed on the country. For one, Vietnam is the 6th largest country that enjoys a trade surplus with the US at US$38.5 billion in 2018 and this number is expected to climb in 2019. Given Trump’s aggressive stance towards countries accumulating a trade surplus with the US, Vietnam is in a perilous position and could be at the receiving end of US’ tariffs.

Moreover, Trump’s predecessor, the former President of the United States, Barack Obama, had imposed punitive tire tariffs on China during his term in 2009 due to speculations of China’s dumping activities in the US. This demonstrates that the sentiments of protectionism has always been lurking within the US’ administration even before Trump’s term, making it inevitable for Vietnam to fall prey to US’ tariffs.

A silver lining

Despite the aforementioned circumstances, all is not lost.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a trade agreement amongst 12 signatories, including Vietnam and Singapore. The CPTPP reduces, and even eliminates tariffs across the signatories and liberalizes trade and foreign investments amongst the members. Vietnam could evolve into the hub for processing and manufacturing industries in the Asia-Pacific region. More importantly, Singapore stands to benefit from Vietnam’s should Vietnam thrive as a hub through the reduction in the prices for their exports.

Additionally, the US might be more lenient towards Vietnam as opposed to their stance against China. Vietnam’s political ties with the US – especially with regards to their overlapping interest in countering China’s claims in the South China Sea – created other priorities for the Trump Administration in its bilateral relationship with Vietnam. The main priority being a free and open Indo-pacific region suitable for trade.

Vietnam also indicated willingness to negotiate a bilateral trade agreement with the US, paving the way for the country to emerge as the next centre for manufacturing and bolster the logistics industry in the Asia-Pacific.

What Now

Vietnam is no longer a by-stander in the scene of the US -China trade war but an important player in the field. Given the country’s close proximity to Singapore, it is imperative for local logistics firms to not merely react to the changing winds caused by the trade war but be proactive in fine tuning their capacity. It is also critical for businesses venturing into trade and e-commerce to partner with a reliable logistics company to ride out the brewing storm.