As the US-China trade war escalates, one of the biggest regional beneficiaries, Vietnam, risks suffering collateral damage, as Hanoi’s soaring trade surplus puts it in President Trump’s crosshairs. Washington has already imposed heavy tariffs on Vietnam and suspects it of currency manipulation. There are signs that further penalties may be imposed unless Hanoi reduces its surplus.

Yet the US would be ill-advised to pick a fight with Hanoi at a time when it needs regional allies in dealing with what it sees as Chinese bullying in the South China Sea, a major trade route that Beijing asserts is its private lake

With its relatively low labor costs, stability, investor-friendly policies and proximity to China, Vietnam has been regarded for some time as a good location for Chinese and China-based foreign companies facing rising costs, to relocate some of their production capacity. Firms elsewhere in Southeast Asia have also been attracted, turning the country into a regional manufacturing hub – producing anything from sportswear to computers – with one of the fastest-growing economies in the region.

In recent years, foreign direct investment has surged along with Vietnam’s trade surplus with the US, a record US$40 billion last year. In the first half of 2019, it was around 40 percent up over the corresponding period last year.

The US under Barack Obama courted Vietnam as part of a pivot towards Asia. He ended a longstanding arms embargo and included Hanoi in his big economic project for the region, the Trans-Pacific Partnership. In February Trump praised Hanoi’s achievements and efforts to reduce the countries’ trade imbalance, but his attitude subsequently changed, probably as evidence emerged that Vietnam is allegedly being used to dodge US tariffs. In May Trump in a domestic television interview derided Vietnam as “almost the single-worst abuser of everyone.”

For Trump, who has made it his mission to get the US better trading deals, the country’s deficit with Vietnam is unsustainable. It has been made more concerning by reports that some companies based in China, both local and foreign, are moving products through Vietnam to America to circumvent US tariffs. The extent of the so-called transshipment is unclear but this, together with US concerns over access to Vietnamese markets, has contributed to Washington’s view that Hanoi is not playing fair.

Vietnam has vowed to crack down on the trading violations and imposed anti-dumping tariffs on certain Chinese goods deemed to be getting around US duties. It has also signalled that it is prepared to step up imports from America to reduce its surplus, recently buying more energy and agricultural products. Yet Hanoi has been put on notice by Washington. It was recently placed on a currency manipulation watch-list and incurred up to 456 percent tariffs on steel that originates in South Korea or Taiwan. Consignments are said to be shipped to Vietnam for minor processing then re-exported to the US as means of dodging duties.

Nonetheless, there will be those in Washington counseling restraint, as Vietnam is helping to buttress another no less important US foreign policy strategy in the region: stemming Beijing’s increasing dominance of the South China Sea. A vital shipping lane, through which about US$3 trillion worth of trade passes annually, the sea is also rich in energy resources and fisheries. Beijing lays claim to most of the waterway, building artificial islands and militarising them. This has alarmed the US and the littoral states.

Of the latter, Hanoi has been arguably the most willing to challenge China’s territorial claims that, as with neighboring countries, encroach on its exclusive economic zone.

The Chinese authorities have for some time been accused of interfering in Vietnamese energy exploration and fishing activities. In 2014 a Chinese oil rig withdrew from waters claimed by Hanoi after nationwide anti-China protests in Vietnam. More recently, a dangerous game of cat and mouse has been played off Vietnam’s coast with a Chinese survey ship and Coast Guard escort vessels shadowed by Vietnamese naval vessels. China’s actions have been condemned by Hanoi and raised concern in the US.

But Vietnam’s willingness to confront China might be undercut should the US choose to punish it with further tariffs or other trade penalties. That might deny Washington an important ally in its bid to combat Chinese assertiveness in the South China Sea. Trump would not want to see Vietnam becoming more accommodating to Beijing, just as the Philippines’ own pivot to China exposes the risks of countries in the region making too many concessions.

Soon after coming to power in 2016, President Rodrigo Duterte sought to repair previously strained relations with Beijing to draw investment and trade. Duterte controversially played down his country’s objections to China’s claims on its coastal waters and agreed to joint energy exploitation. But this only appeared to embolden China, whose incursions reportedly continued, with matters coming to a head in June when a Chinese trawler rammed and sank a Filipino fishing vessel. The owners of the trawler have since apologized.

Vietnam would rather not have to decide between the US and China. It has attempted to steer an even course between the two, primarily because its economy is so heavily dependent on trade with both. In time, it will become less beholden to them as it diversifies its trading partners. It has been included in, and separately negotiated, several trade agreements in recent years. Notable among these are the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which succeeded the TPP after Trump withdrew the US, and more recently a deal with the European Union, regarded by the bloc as “the most ambitious free trade deal ever concluded with a developing country’”.

The fruits of these agreements may take some time to materialize. In the meantime, it is hard not to have some sympathy for a country that, without doing too much wrong, has found itself in the firing lines of the world’s biggest powers. It is unclear whether either will relent in their separate disputes with Vietnam. Given developments in the South China Sea, the US would probably be wise to do so.

Yigal Chazan is the head of content at Alaco, a London-based business intelligence consultancy

Asia Sentinel

US Should go Easy on Vietnam