Exaggerated Fears About Tariffs
One of the key points of concern centers around the potential imposition of heavy tariffs on imports to the United States. In the recent U.S. Presidential campaign, both candidates pledged to bring manufacturing jobs back to America if they won. Donald Trump, in particular, made headlines with a promise to levy a 60% tariff on Chinese goods and to impose a 10-20% tariff on imports from other countries. The idea was to pressure Chinese manufacturers to set up factories in the U.S. and employ American workers, echoing what Japanese companies did in the 1980s and 1990s.
However, Trump's bold tariff proposals likely served a dual purpose. First, the threat of steep tariffs, especially targeting China and Mexico, acted as a potent campaign slogan aimed at rallying support from his key voter base—working-class Americans. Second, the 60% figure may have been a negotiating tactic, giving Trump leverage in potential discussions with China. As a seasoned real estate developer, Trump is known for employing extreme opening negotiation strategies. His team of skilled economic advisors, who have a better grasp of the broader consequences of high tariffs compared to his first administration, are likely to temper any drastic measures.
Imposing excessively high tariffs on imported goods would have significant downsides. For one, such tariffs could obstruct the process of bringing manufacturing jobs back to the U.S., as they would drive up the value of the U.S. dollar, making American exports more expensive. Additionally, J.D. Vance, the Vice President-elect, has pointed out that the U.S. dollar’s role as a global reserve currency has resulted in an overvalued dollar, complicating efforts to bring manufacturing jobs home. Implementing heavy tariffs would only exacerbate this issue.
Another pressing concern is that the U.S. economy appears to be heading toward a phase of "stagflation"—a combination of high inflation and low economic growth—which could be the worst since the 1970s. With U.S. national debt also rising rapidly, aggressive tariffs on China could worsen inflation, an issue likely to hit the American economy hard next year.
Trump's New Approach: Focusing on China, Not Vietnam
It is clear that Trump's primary target is China, not Vietnam. The U.S.-China trade war, initiated by Trump and continued under Biden, underscores that both major U.S. political parties view China as a strategic competitor. As a populist, Trump is unlikely to single out Vietnam, a country that enjoys favorable perceptions among American voters. In fact, Vietnam could be seen as a valuable partner in reducing U.S. dependence on cheap Chinese goods.
The reality is that high wages and a shortage of skilled factory workers in the U.S. would limit any effort to bring manufacturing back, especially for lower-value goods. Therefore, Vietnam is well-positioned to produce items that are too costly to manufacture in the U.S. but are still in high demand by American consumers. Trump would likely prefer these goods to come from Vietnam rather than China, which aligns with his focus on counterbalancing China's economic influence.
What Vietnam Stands to Gain and Lose
Vietnam's large trade surplus with the U.S. could become a sticking point in the future. In 2023, Vietnam’s trade surplus with the U.S. was approximately $100 billion, making it the third-largest trade surplus with the U.S. after China and Mexico. This imbalance might eventually catch the attention of the Trump administration. Fortunately, this issue could be mitigated by increasing purchases of high-value American products, such as liquefied natural gas (LNG) and aircraft engines, which would help balance trade relations.
Despite potential challenges, Vietnam is likely to continue its steady economic growth under Trump’s administration. Vietnam’s deft diplomatic strategy of maintaining good relations with all major global powers has paid off, and there is no reason to believe this will change. Even if the U.S. introduces new tariffs on imports, a severe tariff hike (20-30%) on Vietnamese goods seems unlikely. Additionally, if the U.S. imposes a broad, low-level tariff (e.g., 5-10%) on imports from all countries except China, Vietnam would still maintain an edge over other competitors for Foreign Direct Investment (FDI) inflows.
One of Vietnam’s key advantages in this evolving economic environment is its position as a trusted manufacturing hub outside of China. As American companies increasingly look to diversify their supply chains, Vietnam is poised to benefit from this shift. It offers a relatively stable political environment, competitive labor costs, and an expanding network of trade agreements with major economies, including the U.S. These factors make Vietnam an attractive destination for investment, particularly for firms looking to avoid risks associated with heavy reliance on Chinese production.
Vietnam's favorable position is further solidified by its ability to produce mid-range manufactured goods efficiently, bridging the gap between low-cost Chinese products and high-quality Western alternatives. This versatility makes Vietnam an ideal partner for companies navigating the complexities of global trade, especially those wary of potential U.S. tariffs on Chinese imports.
While Vietnam might gain from an increase in American demand for non-Chinese products, it will need to navigate the delicate balance of keeping its exports competitive in a potentially protectionist U.S. market. Key Vietnamese export sectors like electronics, textiles, and footwear could face scrutiny if the U.S. adopts stricter trade measures aimed at reducing its trade deficit.
However, Vietnam's ability to adjust to shifting market demands has been one of its strengths. The country has shown a consistent capacity to diversify its exports, moving beyond traditional goods like textiles to higher-value products, such as electronics and machinery. This adaptability could prove crucial if the U.S. economy moves towards more protectionist policies under Trump.
In summary, Vietnam's economic outlook under the new U.S. administration is a mix of opportunity and caution. On one hand, the country's role as a reliable manufacturing partner for American companies seeking to lessen their dependence on China presents a significant opportunity. On the other hand, Vietnam’s substantial trade surplus with the U.S. could invite closer scrutiny, potentially leading to trade adjustments that may require careful negotiation.
(*) Michael Kokalari is the Director of Macroeconomic Analysis and Market Research at VinaCapital.
