Despite Trump's Tariffs, Vietnam's FDI Will Grow - Emerging Market Views

Despite Trump’s Tariffs, Vietnam’s FDI Will Grow

With no clear sign that the Sino-US trade dispute will be over anytime soon, multinational firms have increasingly shifted their manufacturing from China to Vietnam to avoid US tariffs and to find new low-cost suppliers in Asia. As a result, Vietnam’s realized foreign direct investment (FDI) capital has risen by 7.8 percent in the first five months of 2019, totaling about $7.3 billion.

Vietnam has also continued to liberate its economy and gain access to new markets, signing several significant Free Trade Agreements (FTAs) such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP) and the European Union Viet Nam Free Trade Agreement (EVFTA). These moves are expected to increase the country’s FDI about 8 to 10 percent, in excess of $20 billion disbursed for 2019, according to Kevin Snowball Founder, CEO, and CIO of PXP Vietnam Asset Management.

The Southeast Asian nation has become one of the fastest-growing sources of American imports, moving from the 12th place to 8th place this year.

Thieu Thi Nhat Le, CEO of VAM Vietnam Fund Management JSC, agrees and believes that major FTAs will give the country’s growth a major boost as FDI contributes around 70 percent of the country’s export revenue. She adds that from January to May of this year, Vietnam’s FDI value increases to 38.7 percent, mostly driven by Chinese firms as well as the manufacturing and processing sectors.

“Given favorable conditions for investment in Vietnam including political stability, the skilled workforce at competitive labor cost, young population, strong domestic demand, several FTAs with large trade partners, I believe the FDI flow into the country will continue to be resilient in coming years,” said VAM Vietnam Fund Management CEO. “We have also seen foreign/multinational companies shifting their manufacturing from China to Vietnam amidst escalating trade war between the US and China.”

Vietnam Manufacturing PMI

A PMI above 50 indicates expansion, while a PMI below 50 indicates a contraction.

Vietnam’s manufacturing PMI increased to 52.5 in June, according to Nikkei Purchasing Managers’ Index. The growth is supported by new product launches and increased customer orders. PXP Vietnam Asset Management’s Snowball explains that Vietnam recorded a higher PMI number than some of its neighbors because “Vietnam is coming from a much lower base than, for example, Singapore, Thailand, or Malaysia and is following the Chinese model of attracting foreign investment in order to modernize and industrialize its economy.”

Relationship With The US

Vietnam runs about $600 million in trade surplus with the US, according to Bank of America Merrill Lynch. The Southeast Asian nation has become one of the fastest-growing sources of American imports, moving from the 12th place to 8th place this year.

Hai Phong seaport has the largest flow of goods in northern Vietnam with modern facilities and synchronized infrastructure according to international trade.

The surplus attracted US President Donald Trump’s attention when a Fox Business host asked the president whether he would impose tariffs on Vietnam. Trump immediately expressed frustration with Vietnam and described it as ‘the single worst abuser of everybody’.

“A lot of companies are moving to Vietnam, but Vietnam takes advantage of us even worse than China,” said Trump. The following week his administration slapped duties on more than 400 percent on steel imports from Vietnam.

The clock is ticking for Trump as the 2020 presidential re-election campaign moves into high gear. With no trade deal yet reached between the US and China, PXP Vietnam Asset Management’s Snowball warns that “It is entirely possible that Trump sets his sights on Vietnam as a supposed ‘easy’ target, particularly given his ability to isolate particular issues from the bigger picture of geostrategic relationships.”

James Lan, portfolio manager at Thailand’s local wealth management Six Sigma Capital and explains Trump’s steel duties have mainly trivial economic effects, he says, because “Vietnam’s steel export revenue to US accounts to only 0.3 percent of its GDP – a small percentage when compared to the total revenue from steel export of Vietnam which stands at 2 percent of the GDP.”

As of now, there are no signs that the Trump administration will be targeting other major export products from Vietnam.

Photo Credit: Vietnamnet