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Escalating tariff war brings opportunities, challenges for Vietnam’s export sector
The Saigon Times Daily
Thursday,  Sep 20, 2018,17:05 (GMT+7)

Escalating tariff war brings opportunities, challenges for Vietnam’s export sector

The Saigon Times Daily

Workers put the finishing touches on their wooden furniture. U.S. tariffs on wooden furniture from China present an opportunity for the Vietnamese wood industry to thrive – PHOTO: DAO LOAN

HCMC – Vietnam’s export sector is facing both opportunities and challenges in the ongoing trade war between China and the United States, experts were quoted by Nguoi Lao Dong newspaper as saying.

Fierce competition

Some local sectors dealing with textiles and garments, mechanical engineering, steel and building materials might witness a heavy influx of Chinese goods, said Tran Toan Thang, director of the Department of World Economic Issues at the National Center for Socio-economic Information and Forecasts (NCIF) under the Ministry of Planning and Investment.

He added that the prices of input materials would be low due to market pressure and the devaluation of the Chinese yuan. However, Chinese consumer products would flood Vietnam's market, thus threatening local producers' survival.

Viet Capital Securities Company (VCSC) said in a report that in terms of trade, though the U.S. tariffs on China would not have a direct impact on Vietnam, the Southeast Asian nation’s exports would likely be affected as some of its exports to the northern neighbor are raw materials and parts.

According to the report, Vietnamese businesses could face increased competition if Chinese goods are dumped on the Vietnamese market. However, Vietnam could benefit if U.S. businesses look for alternative supply chains, and U.S. consumers choose substitute goods from Vietnam, with foreign investment in China shifting to Vietnam to avoid tariffs.

The report noted that goods under the coming U.S. tariffs on China could account for some 29% of Vietnam’s exports to the United States and 7.6% of total Vietnamese exports.

U.S. tariffs on wooden furniture from China present an opportunity for the Vietnamese wood industry to thrive, said Huynh Quang Thanh, chairman of the Binh Duong Furniture Association.

Thanh noted that Chinese wood furniture would find it difficult to enter the U.S. market, giving wood furniture exporters in Vietnam a chance to push up shipments stateside. Vietnamese companies could grab this opportunity to increase their capacity by some 30% and may even expand their production scale.

He said Vietnamese wood products, which are internationally known for their high quality, have already fulfilled the strict requirements of the U.S. market.

Le Quang Hung, chairman of Saigon Garment JSC (Garmex Saigon), remarked that even though textile and garment products are not yet on the list of goods subject to the tariffs, many major U.S. importers have gradually transferred their import orders from China to Vietnam.

As a result, some local textile and garment producers may get more orders until the end of this year. Garmex Saigon has secured orders for next year.

There is some concern that Chinese textiles and garments will flow into the markets of neighboring countries, including Vietnam, when they fail to reach the U.S. market, fuelling domestic competition, said Hung.

Exchange rate pressure

According to the VCSC report, the new round of U.S. tariffs is fueling a fierce conflict between the world’s two largest economies and will likely shake the global economy. This could rattle the foreign exchange market and put further pressure on the Vietnamese dong.

However, the VCSC expected solid growth in exports, and disbursed foreign direct investment (FDI) will help support the dong to some extent.

The firm also suggested that the State Bank of Vietnam could reduce its foreign exchange reserves by a further US$6 billion if necessary to maintain its central exchange rate below VND22,874, which is equivalent to a maximum depreciation of 3.8% of the interbank exchange rate.

This will cause foreign reserves to fall to US$54.5 billion, which is equal to 2.5 months of imports, from the current level of some US$60.5 billion.

Nguyen Khac Quoc Bao, dean of the School of Finance from the University of Economics HCMC, pointed out that the exchange rate would feel the first impact of the escalating tariff tension. In fact, China has continuously devalued its own currency in an attempt to create advantages for its exports, which has influenced other neighboring countries.

As Chinese goods are cheaper, local producers tend to select more raw materials from this country, he noted, adding that this raises the risk of increasing the trade deficit between Vietnam and its northeastern neighbor.

Meanwhile, the devaluation of the yuan also makes the greenback more expensive, thus exerting pressure on the U.S.-Vietnamese dong exchange rate. As the exchange rate has increased significantly recently, the dong interest rates have followed suit.

Raising interest rates in dong have made local residents hesitant to keep U.S. dollars. However, the situation could affect interest rates on bank loans, thereby increasing capital costs among businesses and raising the selling prices of domestically made products.

Thang of NCIF suggested the authority should, in the short term, make every effort to create an exchange rate response aligned with the new trade conflict development, with special attention given to foreign exchange reserves and FDI attraction to improve the foreign exchange balance.

On Monday, the United States announced an additional 10% tariff on US$200 billion worth of Chinese imports – some 40% of total U.S. imports from China, effective from September 24, in a significant escalation of their ongoing trade dispute. The tariffs will potentially rise to 25% in early January next year.

The new measures will apply to a broad spectrum of Chinese products, with the scope of consumer goods significantly expanding from the previous rounds of tariff increases. Consumer goods make up roughly a quarter of the newly targeted Chinese products, while intermediate goods account for about half of the total, and capital goods make up the rest.

In response, China on Tuesday added US$60 billion of U.S. products to its import tariff list in retaliation against the United States’ planned levies.

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