US economy

Vietnamese exports surpass economic output


The knock-on effect of the US-China trade war has helped propel Vietnam into a select band of countries where exports are greater than national output.

The south-east Asian country’s exports of goods and services are likely to reach 101 per cent of gross domestic product this year, assuming that the 8.4 per cent growth in the dollar value of exports witnessed in the first nine months of 2019 is maintained and the IMF’s estimate of GDP growth of 6.5 per cent proves accurate.

This would make the nation of 96m by far the largest country in the handful of “super-exporters” where outbound goods and services exceed GDP.

This elite group currently consists of Luxembourg, Singapore, Hong Kong, Malta and Ireland, according to World Bank data, all small countries or trade entrepôts with populations below 7.5m with limited domestic markets for their goods and services. (While the World Bank data cover about 140 countries, they do not include some large oil and gas exporters such as Qatar and Kuwait). 

Vietnam appears to have been the biggest beneficiary of the superpower trade spat, with signs that multinationals are increasingly shifting production there to evade US tariffs. This has accelerated a process that has seen manufacturers pushed out of China by rising wages increasingly alight on Vietnam’s low-cost labour.

Samsung Electronics now produces about half of its phones in Vietnam, while Nike has moved around 6 per cent of its manufacturing to the country since the start of the trade war, according to Citi.

The US bank said that, of 109 companies that had made announcements about supply chain shifts in south-east Asia in the first nine months of the year, 61 referred to shifting production to, sourcing from, or increasing capacity in Vietnam or to buying Vietnamese companies.

This is well ahead of the second-most popular country, Malaysia, with 19 such mentions, followed by Thailand with 16. 

Other multinationals favouring Vietnam include GoerTek, which is planning to move wireless earphone production to the country; Li & Fung, which is sourcing suppliers for clothing and footwear; and Cooper Tire & Rubber, building a tyre plant in Vietnam with joint-venture partner Sailun. Foxconn is another considering increasing its capacity.

“Vietnam continues to dominate supply chain shifts to [the] Asean [region], aided by its proximity to China and market access through free trade agreements,” said Wei Zheng Kit, an economics and markets analyst at Citi.

“Clearly, Vietnam is punching above its weight,” said Thomas Costerg, senior economist at Pictet Wealth Management. “They are surfing on the wave of the export-led model and have taken advantage of the situation in China in terms of the tariffs.”

Mr Costerg believed it was very unusual for a good-size country to have gross exports larger than its national output, with the only previous examples possibly being the Asian tigers of Taiwan and South Korea during their rapid growth phases between the mid-1960s and the mid-1990s. 

“It’s very old school, but [Vietnam] are doing it well,” Mr Costerg said. “They can attract investment, build infrastructure and improve the business climate. They are well placed geographically speaking. They seem to be gaining market share in electronics.” 

Some doubt whether Vietnam can really leverage the US-China trade conflict to push its export-led growth model much further, though.

“This [US-China] dispute has highlighted the process of foreign companies rethinking their supply chains and how exposed they are to China. What [Donald] Trump has done has led to a lot of conversations,” said Andy Rothman, investment strategist at Matthews Asia. 

However, while there has been a steady drumbeat of low value-added industrial capacity shifting from China to the likes of Vietnam this decade, Mr Rothman doubted whether many companies were really stepping up the pace as a result of the Sino-American ructions, which he believed were likely to be resolved in the coming months anyway.

“Moving supply chains is really difficult and expensive,” Mr Rothman said. “Vietnam is a small place. It’s about the size of one Chinese province. Wages are going up a lot, it’s hard to find skilled workers. Do they have the customs clearance, the shipping ability, the supplies of all the inputs that go into the intermediate stages?

A second fear is that Vietnam itself may, at some point, be hit with US tariffs. The country’s exports to the US jumped 33 per cent year on year in the first half of 2019, even as exports from China to the US fell 12 per cent.

Hanoi now has the fifth-largest bilateral trade surplus with the US, behind only China, Mexico, Japan and Germany.

This has not escaped the attention of Mr Trump, who tweeted in June that Vietnam was “almost the single worst abuser of everyone” in global trade, “[taking] advantage of us even worse than China”.

Growth in exports from Vietnam into the US “does not seem to have abated and it’s difficult to see why it should abate as capacity is being added on the ground,” Mr Costerg said.

“It should start to worry them as they can move into the US crosshairs. I think there is a realisation [in the Trump administration] that China’s loss is Vietnam’s gain and basically you have just substituted one country for another,” he added.

“We are seeing a massive increase in exports from Vietnam to the US and at heart I don’t think [Mr Trump] is very happy about that.”

Given the greater scrutiny on Hanoi, Mr Kit thought that Vietnamese policymakers would increasingly focus on the quality, rather than quantity, of foreign direct investment, potentially slowing the rate of capacity growth.

Mr Costerg was optimistic that Vietnam could “slip under the radar for the moment,” with Mr Trump now starting to enter election mode and potentially favouring a steadier economic ship.

However, he feared that under a “Trump mandate number two, then it becomes more complicated”, for Vietnam, while even a presidential victory for senator Elizabeth Warren, a leading contender for the Democratic nomination, could spell trouble.

“The risk is that with a Warren presidency [Washington] can look at this because she seems to have the same instinct [as Mr Trump] when it comes to trade,” he added.

 



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