Vietnam and China bound together as trade war climax nears

AS THE US and China are trading blows and are slapping new tariffs on each other’s goods, one
country’s economic well-being is particularly threatened: Vietnam.

Often overlooked in the context of the US-China dispute, the country has thus far seen
economic gains from Chinese firms relocating inside its borders to avoid US tariff requirements.
However, with the tone from both Washington and Beijing now changing markedly compared
to the more conciliatory approach a few weeks ago, Vietnam is now stuck in a dangerous rut.

At the of April, in a meeting with Vietnamese Prime Minister Nguyen Xuan Phuc on the sidelines
of the Belt and Road Forum in April – where China still hinted at making concessions in the
trade negations – Xi emphasized the common interests of the two countries and said they must
behave like “good neighbours, good friends, good comrades and good partners”.

But it’s clear that China has upped its aggression since Beijing sent a cable on May 3
backtracking on many of its concessions, now demanding Washington needs to meet Beijing
halfway.

Vietnam in the Middle

Hanoi will be praying Xi remembers those words as trade talks begin from anew: If China
doesn’t move on the demands of the US, the current trade dispute will escalate further and
Vietnam will be caught in the crossfire.

This might seem slightly counter-intuitive, given that many commentators believe Vietnam has
“won” the trade war. The country has emerged as an attractive destination for multinational
companies, with a young workforce and less red tape than China. The dispute between Beijing
and Washington has brought a new spike in foreign investment, as companies with operations
in China seek a way round the U.S. tariff walls.

Scores of companies have relocated their operations from China to Vietnam, pushing economic
growth to multi-year highs. FDI in Vietnam’s manufacturing sector has soared to 11 percent a
year, while exports to the U.S. rose 26 percent in the first quarter of 2019. For the Vietnamese
government, which has pitched its country as ‘China Plus One’, a low-maintenance alternative
to its giant neighbour, the trade war has provided the perfect marketing tool.

However, Vietnam’s victory could soon turn to defeat if the U.S. negotiators don’t get what
they want from the current round of talks with China.

Considering the tumultuous events of these last few days, a resolution indeed seems unlikely,
and Washington will likely ramp up its scrutiny on Vietnam too, searching for goods that have
originated in China.
“Laundering the label”

Analysts have warned that any company found to be using Vietnam to store their products,
rather than manufacture them, will be suspected of “laundering the label”.

But China’s proxies aren’t the only ones to lose out. Vietnam currently enjoys a trade surplus of
$38.5 billion with the U.S., which will make the country particularly vulnerable should Trump
decide to further sharpen his protectionist agenda.

Washington already imposed tariffs on Vietnamese aluminium and steel on suspicion that the
metal originated in China and was allowing Beijing to obviate anti-dumping and anti-subsidy
rules. Amid growing Chinese aluminium exports, especially of semi-finished aluminium, Hanoi
has come under special scrutiny since at least 2016 when it became clear that it stored
hundreds of thousands of tonnes of “fake semis” – Chinese-produced aluminium modified just
enough to avoid Beijing’s export tax on unwrought metal, instead qualifying for a VAT tax
rebate.

Most of these metal products were then exported, disguised as Vietnamese products. This
practice first made global headlines in a spectacular manner when a large fake semis aluminium
stockpile was found in Mexico, waiting to be shipped north across the border.

Washington’s tariffs move against Vietnam cuts to the very core of the current trade dispute:
it’s been known for years that China has been flooding the metals market with cheap
aluminium, subsidized by the state.

Steel and aluminium exports were the original targets of Trump’s tariff offensive, and he has
referred to Chinese subsidies regularly throughout his presidency. A rare issue on which
Washington and Brussels agree, the EU has also pressured China to cease its subsidy program.

Shaky commitment

Xi has previously made some notable commitments on the issue of subsidies, pledging to end
“unreasonable” state support and bring China’s economic practices into line with WTO rules.

But he never defined what “unreasonable” meant, or gave a timeline for the transition.
International observers can be forgiven for being cynical, considering that Beijing has been
promising for the last 10 years to seize subsidized aluminium production, and has done little to
actually do so.

As long as this concern isn’t addressed, the topic is sure to come up again during bi-and
multilateral talks. U.S. negotiator Robert Lighthizer has identified these subsidies as a key area
of concern. Just three months ago, the OECD expressed concern about China’s
“unprecedented” increase in aluminium output, with exports currently at record levels.

If Xi’s delegation can’t give firm, specific guarantees that they will end the subsidies program,
there’s an obvious risk that the talks will collapse.

Mutual interest

Which is why Beijing’s sudden change of tack is so unsettling, for it’s hardly something China
can afford if it doesn’t want to lose face and belie its claims of being a responsible international
actor.

Vietnam needs China to co-operate with U.S. demands, but the relationship works both ways.
Hanoi has been rather lukewarm on Belt and Road, because it feels that Chinese money comes
with too many strings attached, and the ongoing South China Sea dispute makes it wary of
Beijing’s influence. Having negotiated free trade deals with the EU and a group of Pacific
countries, it has plenty of other options.

Hanoi has at least provided diplomatic support to Belt and Road, but if it becomes a casualty of
Beijing’s conflict with Washington, it may feel inclined to withdraw that backing.

Such an outcome would be seriously damaging for China as it bids to sell its geopolitical project
to the world at a time when enthusiasm for it is generally waning. Xi has launched a global
roadshow in the West to add new countries to his pet project, though if China’s own neighbour
rejects the idea, scepticism will only rise.

China has seemingly overplayed its hand in the trade talks, for which Vietnam could pay dearly.
As Xi said, their countries have plenty of common interests.

But if he and his emissaries don’t behave responsibly and negotiate a favourable end to the
trade war, their partnership could become a mutually destructive one.