Biggest winner

Titikorn Lertsirirungsun & Tanitta Tumrasvin, Analysts, Asia Pacific

20 June 2019

Vietnam winners of the trade war

Vietnam’s emergence as the biggest benefactor of the US-China trade war

An agreement was struck in 1985 between the G5 nations – France, Germany, Japan, the UK and US – with the aim of managing the US trade deficit with Japan and Germany by depreciating the US dollar against the yen and Deutsche mark. Why Plaza? Quite simply, because the accord was signed at the famous Plaza Hotel in New York City.

Ultimately, the agreement strengthened the Japanese yen against the US dollar, which meant that Japanese products were more expensive and less competitive in the global market. Japanese companies therefore began relocating their production facilities elsewhere, with a particular focus on the ASEAN region. A notable example was the shift of production activity by several Japanese OEMs to Thailand. In other words, one of the effects of the Plaza Accord was to catalyse growth in the Thai automotive industry.

If President Trump’s international policy of targeting China by increasing import duties on all Chinese products entering the US is anything to go by, one might argue that the current global economic situation is in repeat mode.

The prolonged and escalating US-China trade war has not only affected domestic businesses, but also foreign companies in China, many of which have relocated their production activities elsewhere, or invested in other countries as a means of circumventing the import tariff hikes.

Japanese investment bank Nomura has named Vietnam as the biggest winner of the trade war, with Taiwan, Chile, Malaysia and Argentina hot on its heels. In the ASEAN region, Singapore, Thailand and the Philippines have also profited from the US-China trade spat.

Turning our attention to Vietnam, media reports point to a six-fold increase in new Chinese FDI inflows into the country between January and May 2019, when compared to the same period in 2018. Not only that, but the level of investment in the five-month period this year was higher than in the whole of last year.

Vietnamese exports to the US are currently soaring as global companies are now shifting the source of their imports from China to Vietnam to avoid high US tariffs on Chinese goods. In fact, Vietnam’s export volumes to the US surged by 40% year-on-year in the first quarter of 2019.

So, why exactly has Vietnam emerged as the winner of the US-China trade conflict to become the destination of choice for relocation beyond China’s frontiers? The answer lies in the following factors:

  1. The country’s cheap labour costs.
  2. A growing middle class, which is boosting local demand.
  3. Vietnam’s membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CTPP, or TPP without the US), which grants access to North America (Canada and Mexico) and Oceania (Australia and New Zealand).
  4. The imminent approval of the EU-Vietnam FTA (EVFTA) – if final approval is granted by the EU parliament, Vietnamese exports to the EU will benefit from a substantial boost.

 

We do not expect Chinese OEMs to relocate production to Vietnam or, indeed, other countries/regions, given that China has limited auto exports and these are not the main target of the US-China trade war.

Nevertheless, the Vietnamese auto industry should still benefit indirectly from the trade dispute as strong FDI inflows and relocation of companies from other nations will support economic growth and job creation. The knock-on effect will be to boost incomes and, in turn, Light Vehicle demand.

We now project full-year sales of 365,000 units this year in Vietnam, marking growth of 14.4% from 2018. We see ongoing growth in the years ahead, with sales set to hit 536,000 units in 2026, equivalent to a compound annual growth rate (CAGR) of 6.7% between 2018 and 2026.