Right place, right time in the trade war

The trade war hasn’t stopped trade flows – it’s simply redirected them. For some countries, their next wave of growth is about putting themselves in the right place at the right time.

Many south east Asian countries are reaping benefits from the redirected flows on the back of rising trade tensions between the United States and China. Of the individual sectors affected, machinery related industries have seen the most impact from the China side.

Several companies based in and outside of China either plan to or have already shifted production to countries like Thailand and Vietnam. These countries will benefit from the increased foreign direct investment and resultant trade flows.

This is clearly illustrated by growth in Vietnam, which is expected to leapfrog other countries up the list of exporters to the US.

However, Vietnam’s burgeoning trade surplus with the US has now drawn attention, as seen from the US slapping tariffs on Vietnam’s steel exports. This could open up opportunities for other countries, including India, to step in to capture investments and trade flows from affected groups.

Vietnam’s experience can provide useful insights for these countries to effectively manage this phenomenon of changing trade flows and investment, and maximise the potential benefits.

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“In the first five months of 2019, FDI in Vietnam reached a four-year high of $US16.74 billion, which is greater than the full-year result in 2018.

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Winners

The countries which will benefit most from US-China tensions are those which are more competitive and have the economic capacity to replace incumbent US and Chinese firms.

Among major south east Asian countries, Vietnam has been the biggest beneficiary of the redistribution, with inward foreign direct investment increasing significantly in the last two years. In the first five months of 2019, FDI in Vietnam reached a four-year high of $US16.74 billion, which is greater than the full-year result in 2018.

Indonesia has also seen significant FDI increases as a result of redirected flow, especially from China.

Source: ASEANStats

Various machinery sectors will see strong trade diversion due to US tariffs. In the US, the effects of Chinese tariffs will be felt largely in the chemical, agricultural and auto sectors.

The table below outlines the plans of various companies looking to expand or relocate their manufacturing operations offshore. As these companies targeting countries like Vietnam and Thailand as their planned destinations, the redistribution of trade appears to indicate China could be an increasingly major investor in south east Asia.

Companies from China

Companies outside of China

Source: Nikkei

Imports into the US are also changing. The below table highlights the speed at which Vietnam is growing in this market. Vietnam is expected to leapfrog several countries to become the seventh-largest exporter to the US in 2019.

US import projections

Next target?

It’s not all good news for Vietnam. The US is starting to target other countries with which it has a trade deficit.

Vietnam’s annual trade surplus with the US has exceeded $US20 billion since 2014 and reached $US40 billion last year, the highest in records going back to 1990.

The US is now pressuring the Vietnam to slash its trade surplus, threatening one of the world’s fastest-growing economies.

In May, the US Treasury added Vietnam to a watch list of countries being monitored for possible currency manipulation.

Vietnam has already announced a crackdown on Chinese exporters rerouting products through the nation with fake ‘Made-in-Vietnam’ labels to bypass US tariffs.

More tariffs from the US are a possibility. The US has already slapped duties of more than 400 per cent on steel imports from Vietnam which originated in South Korea and Taiwan.

What about India?

India may also be starting to benefit from the redirection of trade. According to India’s Department of Industrial Policy and Promotion, US FDI into India has increased noticeably over 2019, and the fastest growing source of FDI is now China.

Invest India estimates around $US12 billion has been invested from China in the past five years, led by tech and manufacturing.

FDI Equity Inflows to India

Lynette Chow is an AD and Jack Tan is a Director at Client Insights & Solutions at ANZ