In the second part of a three-article series on Vietnam’s emergence as a hot topic for global media outlets amid rising tension between the U.S. and China, Tuoi Tre News’ Du Nhat Dang explores how the friction might affect Vietnam and how the Southeast Asian is preparing to respond.

>> Part 1 - Vietnam captures global media attention amid US-China friction

>> Part 3 - Vietnam and FTA diplomacy

The trade war between the United States and China is about more than just trade. 

The true nature of the dispute is the result of categorical difference between the two world powers across a range of issues. 

As an end to the tension hasn’t yet appeared on the horizon, history is a strong indicator that Vietnam should be ready to step up and take advantage of emerging opportunities created by the friction.

Soybean can’t save the world

“If we treated China as an enemy, we were guaranteeing an enemy in the future. If we treated China as a friend, we could not guarantee friendship, but we kept open the possibility of more benign futures,” American political scientist Joseph Nye was quoted in Dr. Stewart Paterson’s book “China, trade and power: Why the West's economic engagement has failed.”

Paterson’s book was presented to reporters at a trade training program in Hong Kong in June sponsored by the Hinrich Foundation.

At the program, trade and geopolitical experts, former ambassadors, and political scientists offered their analyses on the current U.S. – China trade war.

Julien Chaisse, a professor at the City University of Hong Kong’s School of Law presented an interesting counterargument to the U.S. government’s trade war with China, citing the iPhone as relatable example.

According to the government agencies that control U.S. imports, iPhone is not entirely made in China, though the reality is much more complicated.

For an iPhone that costs approximately $180 and is exported to the U.S., the value that Chinese companies add during the manufacturing process is just $8. The remaining $172 is split between entities in Europe, Japan, South Korea and other countries.

In this particular example, the majority of burden of the tariffs that affect the iPhone are born by non-Chinese companies such as Foxconn, Intel, Sony, and Samsung who Apple depends upon for the components and creative value they contribute to the iPhone.

This argument is one of many reasons experts are skeptical of U.S. President Donald Trump's decision to use tariffs as a tool to resolve disputes with China.

From a historical perspective, however, the Trump administration’s strategy seems to be a bit clearer.

In 2001, China’s economy was booming and the country decided to join the World Trade Organization (WTO). At the time, experts who supported China’s WTO membership likely held a view similar to Prof. Nye: let’s be friends with China.

Dr. Paterson's book summarizes the West’s strategy for China at the time as focused on two parallel goals: access to the billion-people market and the use of WTO rules to regulate China’s behavior.

According to Patterson, optimists bet on the scenario that China would become prosperous while simultaneously becoming exposed to Western economics and values, thus changing the Asian country’s values. However, just like title of Dr. Paterson’s book suggests, those optimists were never able to cash in on that bet.

China entered WTO as a ‘developing country,’ so Beijing could still enjoy some special and differential treatments in the intergovernmental organization, including a longer transition period to fully reform and implement the organization’s requirements.

In the eyes of Americans like President Trump, such a privilege should be abolished. That is why, besides highlighting a trade deficit with China, the Trump administration has frequently asked that China implement the WTO-required reforms.

Unfortunately, headlines about implementing reform don’t seem to draw in as many readers as buzzwords like “trade war.”

From the geopolitical and historical approach, it can be seen that in essence, what President Trump wants for now doesn’t stop at the issue of trade deficit. There must be investment protection, copyright issues and even human rights reforms.

For all those reasons, it’s important to remember that China simply buying more U.S. soybeans to make up the trade deficit is a solution to the problem.

Soybean cannot save the world, even though many economists seem to think so.

Reform message to Vietnam

Since the U.S.-China ‘trade war’ broke out, Vietnam has been widely considered a case study of changes in the entire global supply chain.

Many think Vietnam will continue to benefit when companies are forced to leave China and choose Vietnam as an attractive choice for foreign direct investment (FDI).

Others, however, point out signs that Vietnam may be the next target of the Trump administration.

The US Census Bureau’s latest data shows U.S. imports from Vietnam jumped 40 percent in April 2019 on an annual basis. This is the largest increase among the 40 largest supplier countries to the States, according to Prof. Chaisse.

This is one of the statistics supporting the argument of many economists who believe that Vietnam is the biggest winner in the trade war.

But the figures may not completely describe the situation. Export shipments from Vietnam to the U.S. are not like buying food in a grocery store and relocating a company is not a decision made overnight.

In fact, while headlines like “Chinese companies moving to Vietnam” are rife these days, not many articles provide authentic interviews of newly registered companies in Vietnam or those that really relocated from China to Vietnam.

Talking about that point, Prof. Chaisse said that company relocation reflects a phenomenon that is both cyclical and structural.

“Since the manufacturing sector is highly developed in Vietnam, it has been easy for Chinese to cross the border to relocate their production capacities. But this phenomenon of relocation began before the trade war because Chinese companies were seduced by the competitive advantages. In this sense, the US-China trade war has only precipitated and accelerated an existing phenomenon,” he said.

Alicia García-Herrero, chief economist for the Asia-Pacific region at French investment bank Natixis, said that Vietnam needs to pay attention to optimize its benefits.

“In principle, Vietnam can indeed be a winner of trade war. However, it is too small to capture all production capacity re-shoring out of China without creating significant bubbles in domestic asset prices. This stems from Vietnam’s relatively small endowment of labor and capital,” she said.

Herrero's suggestion of capital and labor is exactly the same to what pointed out by experts at the Vietnam Reform and Development Forum (ARDF) 2019 last week.

In a presentation presented on September 19 in Hanoi, Dr. Nguyen Si Dung, former deputy head of the National Assembly's Office, questioned the effectiveness of superstructure operations and confirmed the needs to separate politics from expertise.

Meanwhile, Dr. David Dollar, a senior researcher at the Brookings Institution (U.S.), also affirmed that Vietnam cannot rely entirely on FDI enterprises but neglect domestic enterprises.

To solve the problem, Dollar said that Vietnam needs to reform access to credit, land, labor, and implementation of the provisions of Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is also a useful solution in itself.

Institutional reform, developing the private economic sector and transparency of the banking system are all familiar terms and are mentioned in Dr. Peterson's book.

That is exactly what the West had expected from China.

Considering Vietnam's position in the trade war, which is actually a move of U.S. President Trump as he wants to ‘correct’ the China approach’s failure, conducting reforms and finding sustainable development is the best way for Vietnam to respond to all risks.