Vietnam Goes on the Defense as China and U.S. Clash on Trade

(Bloomberg) -- With China and the U.S. as its largest export destinations, Vietnam is seeking ways to insulate itself from an escalating trade war between the world’s two biggest economies.

Analysts are calling for measures from devaluing the dong to increasing scrutiny of products to counter an anticipated flood of Chinese goods. The National Center for Socio-Economic Information and Forecast - under the Ministry of Planning and Investment - has submitted a report to the ministry on the potential impact of the trade war and how authorities should prepare to defend the economy.

“If the U.S. and China escalate the tension with tit-for-tat moves, it could reduce our exports and foreign investment inflow and hurt domestic production,” Luong Van Khoi deputy director general at the center in Hanoi, said in an interview. He declined to give details of the report.

Vietnam Goes on the Defense as China and U.S. Clash on Trade

Vietnam’s reliance on exports and foreign direct investment to power growth makes it vulnerable to the showdown between the U.S. and its trading partners like China and the European Union. The economy, much like other developing nations, is also under threat from financial volatility with the currency and stocks weakening while inflation is surging.

“It would be naive to think that Vietnam will remain unscathed from the global trade war,” said Eugenia Victorino, an economist at Australia & New Zealand Banking Group in Singapore. “Vietnam is well integrated into global supply chains. The government needs to carefully calibrate its external and domestic policy settings to offset these risks.”

The central bank should consider devaluing the dong against the U.S. dollar to boost the competitiveness of Vietnamese products, the Vietnam Institute for Economic and Policy Research said this month. The dong, which has lost more than 1 percent this year and is trading at a record low, is still performing better than most Asian currencies.

“Devaluing the dong can help exports, but it will also fuel inflation and increase costs in importing materials for domestic productions, therefore we must be very cautious,” said Can Van Luc a senior economist at Hanoi-based Bank for Investment and Development of Vietnam. “A drop of about 2 percent for the dong for the entire 2018 will be suitable.”

The dong is little changed at 23,045 per dollar as of 9:30 a.m. in Hanoi, according to data compiled by Bloomberg.

China Threat

With the U.S. threatening more tariffs on Chinese goods, Vietnam is worried that Chinese products such as garments, leather and furniture will flood the local market. The trade ministry is working to prevent such an eventuality, Minister Tran Tuan Anh said this month.

The nation imported $57 billion of goods from China last year.

Ministries should work together to come up with non-tariff measures to limit large inflows of Chinese products, both Luc and Khoi suggested. Authorities need to intensify quality check at border checkpoints and increase quality requirements, they said.

Reducing costs for exporters and producers by cutting the number of licenses and permits, as well as helping them find new markets would also help, said Nguyen Anh Duong, head of the macroeconomic policies department in the Central Institute for Economic Management, a government think-tank in Hanoi.

Exports, which accounted for 102 percent of gross domestic product in 2017, are holding up. They gained 16 percent in January to June from a year ago, outperforming those in Singapore and the Philippines.

Manufacturing Giant

Vietnam has transformed itself into a manufacturing giant and shipments of Samsung Electronics Co. alone accounted for about a fourth of its $227 billion exports last year.

It would need exports to remain strong to support economic growth, which eased to 6.8 percent in the second quarter. The government has already forecast a further slowing in the second half of the year.

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