Mizuho Chart Speak - US-Vietnam: Uneasy Relief

Mizuho daily insights by Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

In a Nutshell: Our view that the Biden Administration is far more favourable for Vietnam, for the obvious reason that Vietnam is spared the vagaries of Trump-style zero-sum game tirade on bi-lateral trade imbalance, is unchanged. But it would be complacent not to recognise this as an uneasy relief rather than an unconditional resolution from latent trade risks. To be sure, Vietnam’s attraction as an investment destination (which predated the US-China “trade war”), while potentially interrupted by uncertainties dialled up US-China conflict and the pandemic, is undiminished, if not accentuated. Especially as supply-chain reconfiguration gets underway.

But equally, the elephant in the room is Vietnam’s sharply wider and growing trade surplus with the US, which led to a worrying parting shot of the “Currency Manipulator” label by Trump’s Treasury team in the (bi-annual) US Treasury Report released in December 2020. Admittedly, the Biden Treasury may take a less abrasive and mercurial approach; partly necessitated by the need to forge alliances to counter China. But that’s not to be mistaken for an unambiguous acceptance of US-Vietnam trade imbalances. Point being, diplomatic tensions on trade are not rigid, fixed rivalries between countries, but fluid, ever-changing function of constant clamouring for competitive advantages. In which case, Vietnam remains vulnerable to perceptions of proxy trade mercantilism as well as its own rapid ascendancy. Meanwhile, VND could be where potential threats are projected.

Immediate Relief …

First things first. The Biden Administration is justifiable cause for relief as far as Vietnam diplomats and trade officials are concerned; having had to walk on eggshells with a predictably unpredictable Trump Administration that could with little warning escalate trade antagonism. The case in point being the December 2020 US Treasury Report that labelled Vietnam as “Currency Manipulator”, which, while does not necessarily need to descend into, opens the doors to, punitive tariffs. The zero-sum bottom-line approach to bi-lateral trade by the Trump Administration’s iteration of “America First”, regardless of strategic considerations, meant that Vietnam’s potential to gains from supply-chain reconfiguration as a result of US-China conflict was exposed to not only risks of collateral damage to global demand, but a cascading clamp down on supply-chain migration.

And so, the Biden Administration brings with it immediate relief from the vagaries (at times tyranny) of a reckless, shoot from the hip “America First” policy under Trump and his trade hawks. Not only because Biden’s approach will be one of multilateralism rooted in trade accords and rules. But crucially because Biden is better placed to understand the trade-off and allowances required to gain the strategic advantage (against China) of allies in Asia. At least until manufacturing capacity in the US is broadened and deepened.

… But Lingering “Risks

But this relief must be appreciated in the context that US’ large and widening trade deficit with Vietnam is necessary compromise tolerated by the US, not an equilibrium trade position cherished. Point being, the increasing focus on the perils of growing twin deficits in the US taken alongside the rapid ascend of Vietnam up the value chain means that at the margin, Vietnam will be seen an emerging direct competitor to US manufacturing (which has a fairly wide spectrum of value-add).

In turn, the US Treasury will be less inclined to give Vietnam a free pass unequivocally and indefinitely. Especially given that Vietnam’s combination of its absolute trade gap with the US and explosive pace at which the imbalance has widened render it a major risk to US trade position. In fact, there is no guarantee that the Biden Administration will promptly relieve Vietnam of its “Currency Manipulator” label given bona fide need to assess the merits of the case as well as the political calculus involved in undoing Trump-era “tough” policies on trade.

And even if more serious rivalries based on technological dominance is quite a few years away, the issue of major competitors such as China, Japan, Korea and even Taiwan setting up manufacturing base in Vietnam to circumvent US Treasury scrutiny on bi-lateral trade imbalances means that the US could perceive these to be backdoor mercantilism. Consequently, the US could start paying closer attention to Vietnam, applying pressures accordingly if it deems fit.

In other words, proxy competitive trade policies channelled via Vietnam as well as Vietnam’s ascendancy as a manufacturing hub in Asia are developments that may not be able to deflect geo-political ramifications that exist in a climate of prolonged US-China tensions; as the two super powers battle it out for domination on many dimensions.

Near-term Benefits from US-China Conflict Overwhelm

The good news though is that in the near-term Vietnam continues to be the beneficiary of supply-chain reconfiguration driven by two overarching trends that result in massive investments into its manufacturing sector.

First is the relocation of supply-chains out of China, which had started with lower value-add manufacturing (e.g. apparel, footwear) even before the US-China “trade war” emerged; but has since intensified to include more upstream and higher-value manufacturing.

Second is the increasing demand to invest in deliberate (over-)capacity/redundancy given the need to mitigate higher risk of supply-chain disruptions.

On both accounts Vietnam is well-placed as a destination for manufacturing firms given its low cost of labour and a relatively well-placed labour force alongside China-type policies to enhance connectivity that is critical to replicate a desirable manufacturing eco-system not unlike China (although on a very different scale and expertise). Put differently, the road to divesting away from China features Vietnam prominently as a tried and tested solution.

And so as the world gets past pandemic uncertainties and readies for a more coordinated approach to China by Biden’s Administration, which involves deepening alliances elsewhere in Asia, Vietnam appears well placed for ascendancy led by manufacturing investments in the near-term; so long as it remains vigilant to the precarious geo-political environment that could persist.

VND is the Canary & Bugbear

For now, the VND remains in equal parts the canary in the coal mine and the bugbear with regards to vulnerabilities to trade antagonism. Point being, lack of VND appreciation in 2020 and sustained under-performance over a 5-year period against all other Asian currencies, with the exception of INR, is at odds with its stellar trade gains and growth out-performance.