By Pritesh Samuel Many foreign investors diversifying their supply […]MORE
US Duties on Vietnam Steel: Investors Bullish Despite Trump’s Trade Threat
By Pritesh Samuel
The US Department of Commerce (USDOC) announced duties of more than 400 percent on steel imports from Vietnam, surprising many observers, and prompting concerns among foreign investors about the potential for more tariffs in the future.
Vietnam, thought to be the main beneficiary of the US – China trade war, has recently attracted increased scrutiny from the US. In the most recent ruling, the USDOC stated that certain products produced in South Korea and Taiwan were being sent to Vietnam for minor processing, before being shipped to the US as corrosion-resistant steel products and cold-rolled steel.
Tariffs are now set to as high as 456 percent on Vietnam steel imports using material from South Korea and Taiwan.
How the US and Vietnam got here
Vietnam’s trade surplus with the US has grown to US$600 million, according to a Bank of America Merrill Lynch study. In the first five months of the year, the surplus was already 43 percent higher than the previous year. It is this surplus that the US seems to be targeting.
The US in May 2018 imposed duties on Vietnamese steel products that originated in China. Earlier in December 2017, the US imposed duties on steel products specifically on Vietnam that originated from China as they evaded anti-dumping rules.
Authorities in Vietnam have stated that the country is working to reduce the trade surplus by buying Boeing jets and energy products as well as cracking down on Chinese manufacturers who reroute goods to bypass tariffs.
However, US President Donald Trump said in a recent interview that Vietnam was “almost the single worst abuser of everybody,” prompting further concerns from investors if more tariffs were in order.
But what do the tariffs really mean, and does it really threaten Vietnam as an investment destination?
While the US accounted for 15 percent of Vietnam’s steel exports, with steady increases recently, steel accounts for less than two percent of Vietnam’s total exports.
It is also important to note that steel produced from materials locally or any other country is exempt from duties. Representatives of the domestic steel industry said that while the imposition of tariffs is not good news, it will have minimal impact on the industry.
In response, Vietnam’s Ministry of Industry and Trade has urged local companies to refrain from buying steel products from Taiwan or South Korea to avoid duties.
Cambodia accounts for the highest portion of Vietnam’s steel exports, while Indonesia and Malaysia also receive a significant amount. Vietnam could look to ramp up exports to these countries to offset the US imposed duties as an alternative.
What further tariffs would mean
The research consultancy Capital Economics reports that if the US imposes a 25 percent tariff on imports on Vietnam as it did with China, the tariffs would result in a 25 percent drop in export revenue, translating to one percent of the nation’s gross domestic product (GDP).
While this would affect the country’s economy, Vietnam has made efforts to insulate itself from trade shocks, such as by not being too dependent on a single market like the US.
The country has pursued several trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the recently signed European-Vietnam Free Trade Agreement(EVFTA) to complement FTAs already in effect, such as the ASEAN FTA. These agreements waive or reduce custom duties on imports and exports between Vietnam and member states.
Further tariffs could, however, see suppliers diversify their supply chains. Apple has already asked suppliers in China to diversify sourcing materials in Southeast Asia. Solar manufacturer Irex is also considering new markets to manufacture its solar panels to insulate it from any abrupt shocks.
Vietnam wants to alleviate US concerns
Earlier in June, Vietnam imposed anti-dumping duties on Chinese steel. To appease the US, it also ordered customs officers to pay closer attention to goods with certificates of origin from Vietnam, according to Maxfield Brown, Business Intelligence Manager at Dezan Shira and Associates.
Vietnam could take this a step further by banning the export of goods that flout rules of origin norms or impose a tax to further gain US favor.
The stakes could not be higher for Vietnam. The situation will remain fluid as long as the US – China trade war continues. While an uneasy truce prevails since the G20 summit, further escalations cannot be ruled out.
Even if the US and China come to an agreement and remove all tariffs, some risk remains. The manufacturing shift to Vietnam associated with the trade war has been in the making for a number of years; the US-China trade war has only accelerated the process.
Nevertheless, the US remains an important market for Vietnam and further tariffs will impact its economy. Hanoi will attempt to do everything it can to ensure that further tariffs are not imposed and the trade deficit is bridged.
Investor sentiment in Vietnam remains strong
The impact of US steel tariffs will have an effect on firms in Vietnam, but it will be limited. Affected firms will have to diversify their supply chain and export markets to minimize losses.
However, as mentioned earlier, steel exports account for less than two percent of Vietnam’s total exports. There are no indications at present that the US is interested in targeting Vietnam’s main export industries such as footwear, textiles, and seafood.
Vietnam is still in a probation period as it develops its economy and in its relations with the US as compared to other fast industrialized nations such as Japan, Taiwan, South Korea and Taiwan, but investors remain bullish. While Trump’s threats have caused some investors to raise eyebrows, FDI continues to pour into the country despite external factors.
The Vietnamese government will continue to implement pro-business reforms in an attempt to manage its growth sustainably.
Source: Dezan Shira & Associates