Profound nature of US-China trade war and impacts on Vietnamese businesses

By Kim Yen - Sep 22, 2018 | 08:54 AM GMT+7

TheLEADEREven China awaits after the US elections to devise appropriate strategy so Vietnam must wait for response accordingly.

Although the Office of the United States Trade Representative (USTR) said that dozens of US companies and technology groups protested Trump's new tariff, Trump's government decided to finalize tariffs on $200 billion of Chinese imports.

To make the problem more clearly, Ph.D Tran Toan Thang, a head of world economic board (National Centre for Socio-Economic Information and Forecast (NCIF), Ministry of Planning and Investment) shared some useful information.

The profound nature of the US-China trade war and its impact on Vietnamese businesses
Ph.D Tran Toan Thang

What are the root causes of the US - China trade war?

Ph.D Tran Toan Thang: Trade war once was predicted not to happen because a lot of other sides' interests were involved but now it has been really happened.

I would like to mention a photo taken at the G8 conference five months ago showing Trump, arms folded and eyes glaring, sitting while around him stand a group of world leaders. The whole world seemed to stand while Trump was sitting, which maybe means that until now, every disturbance of the world is focused on Trump.

What Trump is like now is still in argument but it is clear that Trump is associated with recent uncertainty of world economy. If we make in-depth analysis, we can see that there is a unity between what he said and what he has done.

To understand why trade war happened, it is necessary to go back to the context before it which is the rise of China.

How did China rise?

Ph.D Tran Toan Thang: China is a huge economy. Ensuring high growth over the long term is very difficult but the country achieved it. Its growth was sometimes up to 12,5 per cent in 2010 and then always about 6.8 per cent to 2015, which leads to the reaction of other countries including the United States. Trump started trade war and one of his purposes is to control China's rise.

The rise of China created the surplus of Chinese products, but the country has maintained a high level of investment while other countries have revised their investment strategy. However, the high rate of investment in GDP made China's profit margins fall.

Besides, China has to face risks from its own policies. Its argument in reform and increasing importance of the Communist Party since Xi Jinping became President of China that make centrally-planned economy dominate maybe create higher and higher government debt.

In term of free trade agreement (FTA), it signed 16 out 23 ones but they focus most on cutting tariffs rather than achieving deep integration with big markets such as the US, the EU, Japan or South Korea.

Secondly, the Belt and Road Initiative (BRI) which aims to create a favorable trade corridor for China to export its excess products through infrastructure to other countries now is at risk when Malaysia and other countries delayed projects in their countries.

Since Xi Jinping took power, China's position has changed. It wants to define itself as a powerful country and shows its rise through outward investment in order to get technology back in the country.

Thirdly, there are over 50 countries signed the internationalization of the China's renminbi (RMB), making the RMB transaction rate rocket. The RMB now is in currency basket of the Asian Infrastructure Investment Bank (AIIB).

If we read carefully "Made in China 2025", we can see that it is an ambitious strategy in a long term rather than short term which helps China dominate global growth based on technology. China aims to build 15 technology innovation centers with a specific level of technology application such as 50 per cent in 2015, 70 per cent in 2017 and then 82 per cent in 2020.

Was the U.S. aware of China's rise and now firmly strengthened their position?

Ph.D Tran Toan Thang: Increasing trade tensions, controlling China's rise to give the Republican Party seats in the midterm elections next November and the story of allies or antagonist in trade war now is not clear.

In term of the US's huge trade deficit with South Korea, Trump's first goal is to renegotiate FTA with Korea, which towards fairness instead of using "stick and carrot" strategy.

The US does not work much towards multilateral agreements because it is clearly that in position of big countries, smaller deals such as bilateral agreements is much more beneficial.

On the first day of his inauguration, Trump broadened the scope of his predecessor Obama's "The Pivot to Asia" strategy to the India - Pacific, making the US come into bigger conflict with China and widening the gap between an expansionist and a pragmatist.

When we take a look at trade balance between two countries, the US always had a deficit with China for a long time, but the question is why the US decided to start trade war at that time. Actually, the US needs China more than China need it so trade is just a story rather than a reason for a war and Trump knows this.

I think that there are four main reasons, including achieving trade balance, controlling the China's rise as well as its pace of science and technology development that is the most important factor in permitting China's long-term development. 

The last one is in term of Trump's personality, the US has lost patience with China because the country is considered not to really free and open for foreign businesses, showing a rise that overwhelms US's influence in the region and the world. However, no one knows the exact reasons.

In your opinion, what is the impact of the US-China trade war on the global economy in general and on Vietnam in particularly?

Ph.D Tran Toan Thang: I think the impact is not only in the field of trade but also finance, technology with the level of damage cannot be measured.

Vietnam is a wide-open economy so the decline of growth from other countries greatly affects Vietnam.

When the US products cannot be exported to China, Beijing may find other markets and Vietnam can take advantage of its strengths like pork. However, with the tariff on up to $500 billion worth of Chinese imports, Vietnam is not likely to get much benefits.

People will go to other investment channels if they are cheaper than trade. The US income tax fell sharply when Trump government attracts FDI and Chinese businesses could invest again in this country.

What is the disadvantage for Vietnamese enterprises in terms of consumer goods?

Ph.D Tran Toan Thang: In fact, there are positive and negative effects. There are three scenarios with different levels of impact.

The impact on the world economy will be different on each scenario, increasing gradually from trade to production and then, the market will gradually adjust. The tension between two largest economies will make the whole world suffer.

Vietnam has a wide-open economy so the impact from trade war will be higher and it is the same situation in Singapore, Japan or South Korea.

The US and China are expected to lose $40-50 billion a year only in term of tariff and it does not count the impact on the financial markets. If China devaluate its currency to tackle trade, Vietnam will feel much greater impact.

Based on Vietnam's current economic structure, although the trade war has benefited third countries, Vietnam is difficult to get much opportunities.

What are your recommendations for macroeconomic management?

Ph.D Tran Toan Thang: China will push forward RCEP negotiations, so Vietnam needs to study carefully and have a strategy as China's dependence on RCEP countries grows. Vietnam businesses must prepare carefully once RCEP takes effect because Chinese enterprises will come.

Vietnam also continue to consider scenarios to cope with world economic turmoil, including the trade policy as well as the US and China exchange rate. The Ministry of Industry and Trade, the State Bank of Vietnam and other ministries still gives a macro level overview so each company have to find out their own direction.

What are the options for Vietnam in trade war?

Ph.D Tran Toan Thang: The Vietnamese government should be always in balance to make the most benefit to Vietnam. 

It is a great opportunity for FDI enterprises to come to Vietnam, so Vietnam should not continue to attract investment at all costs in order to prevent foreign enterprises from taking advantage of cheap labor, buying strategic assets or dominating the market. Vietnam must make a careful selection, not accept low-cost labor projects and must focus on enterprises with high technologies.

In fact, Chinese good has been flooding the Vietnamese market for many years, which is still not solved. However, Vietnam only uses simple non-tariff barriers while other countries use much more sophisticated ones.

Moreover, even China waits after the US elections to have appropriate strategy, so Vietnam must wait to response.