THE IMPACTS OF THE US CHINA TRADE WAR ON VIETNAM

The trade conflict between the US and China has the potential to affect Vietnam’s trade with both countries as both are important trading partners. The imposition of safeguard tariffs by the US will affect Vietnam’s exports to the US. The tariffs imposed on China raises the possibility of trade and investment diversion to Vietnam. Reexports play an important role in Vietnam’s export adjustments to the US and China. The possibility of investment diversion from China is high given the growing presence of China’s investment in Vietnam, which leads to both positive and negative impacts on Vietnam. This paper shows the positive and negative effects of the USChina trade war. It also provides some solutions to take advantage of the positive effects as well as limit the unexpected effects of the trade war.

FOREIGN TRADE UNIVERSITY

FACULTY OF ENGLISH FOR SPECIFIC PURPOSES

THE IMPACTS OF THE US-CHINA TRADE

WAR ON VIETNAM

Authored by: Group 1 – TAN432(1-1920).2_LT Submitted to: M.S Phan Kim Thoa

Ha Noi, November 2019

TABLES AND FIGURES 3

ABSTRACT 4

INTRODUCTION 5

1 TERM AND DEFINITIONS 7

2 BACKGROUND INFORMATION ON THE US-CHINA TRADE WAR 8

2.1 Causes of U.S Trade War with China 8

2.2 The US – China Trade War Major Events Timeline 8

3 THE IMPACTS OF THE US-CHINA TRADE WAR ON VIETNAM 11

3.1 Positive impacts 11

3.1.1 Encourage export from Vietnam 11

3.1.2 Encourage FDI into Vietnam 13

3.2 Negative impacts 14

3.2.1 Trade diversion 14

3.2.2 The risk of commercial fraud due to investment diversion 16

3.2.3 Negative impacts on the environment and social security 17

4 SOLUTIONS 19

4.1 For government 19

4.2 For companies 20

CONCLUSION 21

REFERENCES 22

TABLES AND FIGURES

Figure 1 Item structure Import from China in the US tax package US $50 billion worth

of goods since 2018 12Figure 2 Item structure Import from China in the US tax package US $200 billionworth of goods in September 2018 12Figure 3 Top 5 countries having the largest trade surplus with America in 2017 17

The trade conflict between the US and China has the potential to affectVietnam’s trade with both countries as both are important trading partners Theimposition of safeguard tariffs by the US will affect Vietnam’s exports to the US Thetariffs imposed on China raises the possibility of trade and investment diversion toVietnam Re-exports play an important role in Vietnam’s export adjustments to the USand China The possibility of investment diversion from China is high given thegrowing presence of China’s investment in Vietnam, which leads to both positive andnegative impacts on Vietnam This paper shows the positive and negative effects of theUS-China trade war It also provides some solutions to take advantage of the positiveeffects as well as limit the unexpected effects of the trade war

The American - China trade war is an ongoing economic conflict between theworld’s two largest national economies, China and the United States The US has alarger nominal GDP, whereas China has a larger GDP when measured in terms of PPP.China as the world's largest exporter and the United States as the world's largestimporter They have so far been important pillars for the global economy

In 2018, President Donald Trump began the trade war by setting tariffs andother trade barriers on China to force it to make changes to what the U.S says are

"unfair trade practices" The trade war has caused a significant deterioration in China–United States relations as the countries exchanged tit-for-tat tariffs for over a year, withTrump threatening more to come and no resolution in sight

In the United States, the trade war has brought struggles for farmers andmanufacturers and higher prices for consumers In other countries, it has also causedeconomic damage, though some countries have benefited from increasedmanufacturing to fill the gaps It has also led to stock market instability Thegovernments of several countries, including China and the United States, have takensteps to address some of the damage The trade war has been criticized internationally.Many economists argue that escalating tariffs conflicts result in no winners

External trade plays an important role in Vietnam’s economy, providing anopportunity for exporters to gain economies of scale by venturing outwards beyond theconfines of the small domestic market Vietnam has actively participated in globalvalue chains, through the inflows of foreign direct investments (FDIs) in the country.However, this openness to international trade also implies that Vietnam is susceptible

to external shocks such as fluctuations in commodity prices and the ongoing trade warbetween the US and China as both are important trading partners for Vietnam

The current trade tensions can affect Vietnam’s direct exports with the US due

Vietnam’s major exports to the US It may also affect Vietnam’s trade with China sincesome of Vietnam’s exports to China contribute towards its exports of final products tothe US as well as other third country export markets At the same time, any slow-down

in China’s economy due to the negative impact of the trade war can also affectVietnam There is also the possibility that the US may substitute some of its importsfrom China with imports from Southeast Asia, including Vietnam Investmentdiversion is another potential impact as investments shift away from China to avoid thetariffs Hence, the tariffs imposed on China has the potential to generate trade andinvestment spill-overs in Vietnam's trade with the US as well as China

The objective of this study is to examine the potential impact of the ongoingtrade war between the US and China on Vietnam’s trade and investment, environment,and social security Specifically, it suggests some solutions to take advantage of thepositive effects as well as limit the unexpected effects of the trade war

The paper consists of four (04) main parts:

1 Terms and definitions

2 Background information of the US-China trade war

3 The impacts of the US-China trade war on Vietnam

4 The solutions to deal with the US-China trade war

1 TERM AND DEFINITIONS

A trade war is when a nation imposes tariffs or quotas on imports and foreign

countries retaliate with similar forms of trade protectionism As it escalates, a trade warreduces international trade

A tariff is a tax that is paid on goods coming into or going out of a country

(Oxford Dictionary) Tariffs are generally introduced as a means of restricting tradefrom particular countries or reducing the importation of specific types of goods andservices

For example, to discourage the purchase of Chinese leather handbags, the U.S.government could introduce a tariff of 50% that drives the purchase price of those bags

so high that domestic alternatives are much more affordable The government hopesthat the added cost will make imported goods much less desirable

A quota is the limited number or amount of people or things that are officially

allowed (Oxford Dictionary) A quota is a government-imposed trade restriction thatlimits the number or monetary value of goods that a country can import or exportduring a particular period

A foreign direct investment (FDI) is an investment made by a firm or

individual in one country into business interests located in another country

Commercial fraud is a badge applied to a number of wide ranging different

actions against or involving a company or business usually involving criminal activity

or dishonesty

I

2 BACKGROUND INFORMATION ON THE US-CHINA TRADE WAR 1.1 Causes of U.S Trade War with China

U.S politicians have long threatened a trade war with America's largest tradingpartner in goods A trade deficit occurs when exports are less than imports In 2017, theUnited States exported $130 billion to China The three largest export categories areaircraft at $16 billion; soybeans, $12 billion; and automobiles, $11 billion.U.S imports from China were $506 billion Most of it is electronics, clothing, andmachinery (According to the Guardian Newspaper)

Half of all Chinese imports are goods used by U.S manufacturers to make other products They send raw materials to China for low-cost assembly Once shipped back

to the United States, they are considered imports The tariffs raise their costs, forcing them to either raise prices or lay off workers.

An example is a salmon caught in Alaska and sent to China for processing, thensent back to U.S grocery shelves If Trump imposes tariffs on seafood imports, it willraise prices by 25 cents to 50 cents a pound (Source: USITC Data)

China is the world's No.1 exporter Its comparative advantage is that it canproduce consumer goods for lower costs than other countries can China has alower standard of living, which allows its companies to pay lower wages Americancompanies can't compete with China's low costs, so it loses U.S manufacturing jobs.Americans, of course, want these goods for the lowest prices Most are not willing topay more for "Made in America."

2.1 The US – China Trade War Major Events Timeline

According to China Brief

Total US tariffs applied exclusively to China: US$550 billion

Total Chinese tariffs applied exclusively to the US: US$185 billion

May 2, 2016: While campaigning for the Republican Party’s presidential

nomination, Trump says “We can’t continue to allow China to rape our country andthat’s what they’re doing It’s the greatest theft in the history of the world.” Thestatement is one of many that Trump makes on the campaign trail about China’s tradepractices

March 22, 2018: Trump signs a memorandum directing the following acts:

 To file a WTO case against China for their discriminatory licensing practices;

 To restrict investment in key technology sectors; and

 To impose tariffs on Chinese products (such as aerospace, informationcommunication technology, and machinery)

March 23, 2018: the US imposes a 25 percent tariff on all steel imports (except

Argentina, Australia, Brazil, and South Korea) and a 10 percent tariff on all aluminumimports (except Argentina and Australia)

April 2, 2018: China imposes tariffs (ranging 15-25 percent) on 128 products

(worth US$3 billion) including fruit, wine, seamless steel pipes, pork and recycledaluminum in retaliation to the US’ steel and aluminum tariffs

April 3, 2018: The USTR releases an initial list of 1,334 proposed products

(worth US$50 billion) subject to a potential 25 percent tariff (list revised June 15)

April 4, 2018: China reacts to USTR’s initial list, and proposes 25 percent

tariffs to be applied on 106 products (worth US$50 billion) on goods such as soybeans,automobile, chemicals (list revised on June 16)

May 3-7, 2018: the US and China engage in trade talks in Beijing, where the US

demands that China reduce the trade gap by US$200 billion within two years Talksend with no resolution

June 4-5, 2018: Two days of trade talks between the US and China held in

Beijing

June 15, 2018: Initial list of products reduced and finalized List 1 now

implements a 25 percent tariff on a reduced 818 products (from 1,334) and is set totake effect on July 6, 2018 List 2 of 284 new products is also announced and underconsideration

June 16, 2018: China revises its initial tariff list (25 percent on 106 products) to

now includes a 25 percent tariff on 545 products (valued at US$34 billion) This tariffwill take effect on July 6, 2018 China also proposes a second round of 25 percenttariffs on a further 114 products (valued at US$16 billion)

July 10, 2018: the US releases second tariff list.

September 7, 2018: Trump threatens new tariffs.

September 17, 2018: the US finalizes tariffs on US$200 billion of Chinese

goods

December 14, 2018: China levies temporarily lower tariffs on American autos;

resumes buying US soybean exports

January 7-9, 2019: the US and China engage in 3-day trade talks in Beijing January 22, 2019: the US cancels preparatory talks with China.

April 1, 2019: China bans all types of fentanyl.

April 3-5, 2019: the US and China hold trade talks in Washington.

April 30-May 1, 2019: the US and China hold trade talks in Beijing.

July 9, 2019: the US exempts 110 Chinese products from 25 percent tariffs,

issues licenses to American Huawei suppliers

September 5, 2019: China and the US agree to 13th round of trade talks.

3 THE IMPACTS OF THE US-CHINA TRADE WAR ON VIETNAM 3.1 Positive impacts

3.1.1 Encourage export from Vietnam

The US-China trade war will bring export opportunities to the US and Chinesemarkets for some Vietnamese products The imposition of tariffs on Chinese exportswill reduce the competitiveness of Chinese goods, which means reducing imports fromChina so they will be importing similar goods from other countries including Vietnam

According to calculations by the Peterson Institute for International EconomicResearch from USITC data, among China's exports subject to 25% taxation by theUnited States in the first and second batch (totaling 50 billion USD), intermediategoods, means of production, means of transport account for a high proportion, whileconsumer goods account for a very small proportion However, when the 10% tax(increased to 25% on January 1, 2019) to the US $ 200 billion of goods imported fromChina took effect on September 24, 2018, the list has expanded Many consumer goodsgroups, including wood and furniture, bags, agricultural and aquatic products, are quitesimilar to some of Vietnam's major consumer goods exported to the US Looking at theexport turnover of similar products from Vietnam to the US market in recent years, itcan be seen that Vietnam's export sectors that have benefited the most include woodenfurniture, agricultural and aquatic products, electronics, phones, computers, bags,suitcases

According to the Peterson Institute for International Economic Research, in bothtimes China levied a total retaliation of up to US $ 50 billion worth of imports from the

US and the most recent was up to the US $ 60 billion worth of goods Goods mostaffected are intermediate goods and means of production, while consumer goods onlyaccount for a small proportion of about 7% In particular, computers, electronicproducts and components (valued at 3.7 billion USD); phones of all kinds andcomponents (valued at 2.1 billion USD), fresh vegetables and fruits (worth 1.4 billion

USD) are the top export items of Vietnam to China in the first 6 months 2018,according to data from the General Department of Customs Especially now, thecountry is increasingly interested in Vietnam's agricultural and aquatic products, soVietnam has an opportunity to boost exports of this group to the Chinese market,according to the 2017 Export-Import Report of the Ministry of Industry and Trade.

Figure 1 Item structure Import from China in the US tax package US $50 billion

worth of goods since 2018

Source: Peterson Institute for International Economic Research

Figure 2 Item structure Import from China in the US tax package US $200 billion

worth of goods in September 2018

3.1.2 Encourage FDI into Vietnam

Besides increasing exports, attracting foreign direct investment (FDI) is also anopportunity and a trend to shift investment from China to Southeast Asian countries,including Vietnam, due to the increase in cost and risk when doing business in China.Currently, some US businesses investing in China also tend to shift production to othercountries and Vietnam, such as Procon Pacific, which previously manufactured allproducts in China, now produce 25% in India and 5-10% in Vietnam

The US-China trade tensions could also be an opportunity for Vietnam to attractmore investment from the US and be a push for this shift to happen faster Withgeographic location near China, cheap labor costs, stable political and economicsituation, besides the advantages of the US-Vietnam Bilateral Trade Agreement (BTA),

13 trade agreements Free trade agreements (FTAs) have been signed and generation free trade agreements are awaiting ratification such as Vietnam-EU TradeAgreement (EVFTA), Vietnam becomes an attractive destination for multinationalcompanies after trade tensions Major global manufacturers such as Intel, Foxconn,

new-LG, and Samsung have all moved their factories to Vietnam, according to an analysis

by The Economist Magazine (EIU)

At the same time, Chinese companies are also transferring orders to producegoods affected by the higher tax rates to partners in Vietnam Some Chinesemanufacturers may increase their investment in Vietnam or cooperate with companies

in Vietnam to fulfill orders for their partners in the US market According to a survey

of Chinese manufacturers conducted by Standard Chartered Bank in June 2018,Chinese manufacturing companies said they wanted to relocate their factories toVietnam more With the trade war between the US and China, companies have anotherreason to shift production to Vietnam, which is to avoid US punitive taxes