Vietnam's Communist Free Traders See Positives in Trump Tariffs

(Bloomberg) -- Sitting down for an interview at Vietnam’s Government Office in Hanoi, Prime Minister Nguyen Xuan Phuc is a man in a hurry.

As an aide wipes away sweat from his forehead, Phuc explains that he’s running late and needs to soon rush off to a meeting with investors in town for a World Economic Forum event. His message, he says, is simple: Vietnam is doing everything it can to emerge from the U.S.-China trade war unscathed -- and potentially even better off than before.

Vietnam's Communist Free Traders See Positives in Trump Tariffs

“It is bringing both opportunities and challenges to us,” Phuc said, waving off staff members who try to end the interview after only a handful of questions. “But more opportunities than challenges.”

Vietnam’s leaders have reason to hustle: The country’s economy is more dependent on trade than any nation in Asia apart from Singapore, relying on sales of smartphones, shoes and shrimp to stoke one of the fastest growth rates in the world. More trade barriers, and higher prices from suppliers, put that expansion at risk.

Yet the long-term opportunity is also impossible to ignore. As U.S. President Donald Trump threatens tariffs on all goods from China, companies already burdened by higher wage costs are accelerating plans to shift production to other countries -- and neighboring Vietnam is well placed to benefit.

The nation of 96 million people has embraced free-market reforms over the past few decades, leading to surging growth under an authoritarian one-party Communist government that offers the same political stability as China. What’s more, workers in Vietnam are two-thirds cheaper than in China and nearly just as productive, according to a July report by VinaCapital, an investment company with $1.8 billion in assets.

Several large manufacturers have already made significant bets on Vietnam. The biggest is Samsung Electronics Co., which accounted for about a quarter of the country’s exports last year. Other companies such as LG Electronics, Intel Corp. and Nestle SA also have a sizable presence.

To make Vietnam an attractive manufacturing destination, Phuc’s government has signed as many free-trade agreements as possible. It just reached a deal with the European Union, soon after inking the revamped Trans-Pacific Partnership, which Trump withdrew from when he took office last year.

“Vietnam has the busiest trade negotiation team in the Asean,’’ said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore.

Rare Feat

That hard work has paid off in recent years as Vietnam has moved up the value chain. Electronics now account for a third of the country’s overseas sales, up from 5 percent a decade ago, while exports of garments and agricultural goods remain strong.

Vietnam has also managed to pull off a rare feat: Expanding sales to the U.S. while largely avoiding the wrath of Trump over a growing trade imbalance. It recorded the sixth-highest trade surplus with the U.S. in 2017, after China, Mexico, Germany, Canada and Japan -- all of which have been targets of Trump’s attacks.

While Trump could start piling on Vietnam anytime, he’s got reason to hold fire. Most of Vietnam’s exports to America consisted of low-end garments and footwear. High-tech sales to the U.S. amounted to about $8 billion last year, compared with $250 billion for China, according to VinaCapital.

Popular Americans

The other incentive is strategic. Despite fighting a war that killed upwards of several million people, the U.S. and Vietnam are now moving closer together militarily to counter China’s growing power -- particularly in the disputed South China Sea.

Americans may be more popular in Vietnam than anywhere on the planet. A Pew Research Center survey last year found that 84 percent of the country viewed Americans favorably, the most among the 36 countries surveyed. That compares with 10 percent for China, the lowest of any nation.

For Vietnamese authorities, the widespread antipathy toward China is a tricky issue. In June, thousands of Vietnamese in Ho Chi Minh City protested special economic zones with 99-year land leases over fears they would lead to Chinese encroachment, as well as cybersecurity legislation that could curb online freedoms.

Denied Entry

The government ended up delaying the land bill and moving forward with tougher restrictions on the Internet, showing that it has little tolerance for dissent. Activists and bloggers who challenge the legitimacy of the party and government are frequently jailed. Just this week, Vietnam denied entry to two human rights officials invited to speak at the World Economic Forum event.

At the same time, Vietnam has pushed ahead with reforms that could boost growth, such as fighting corruption, strengthening the banking system and privatizing state enterprises. The country also needs to create a stronger private sector to help local businesses tap its growing middle class, said Indranil Roy, executive director of Deloitte Southeast Asia.

“In the short term, some companies that are exporting to the U.S. market or to the global supply chain will be affected,” Roy said. “But it’s going to force them to focus on local partnerships.”

Although the pace of change has been slow, the government realizes that economic performance underpins the party’s stability.

“If people are better off, they will prefer the status quo,” said Le Hong Hiep, a fellow at the Institute of Southeast Asian Studies in Singapore. “The party cannot tolerate political risk but it can to a certain extent adopt economic liberalization as long as such measures do not undermine the party’s rule.”

In the interview, Phuc said the government is looking for “new ways” to boost growth and “will not let our people’s lives be affected” by trade tensions. He made sure to tread carefully on foreign affairs, saying Vietnam wants friendly ties with both the U.S. and China.

Asked about territorial disputes with China, Phuc said Vietnam wants international law to be respected in the South China Sea, an indirect swipe at Beijing. Still, it’s hardly enough to create any waves -- a strategy that Phuc hopes will make Vietnam even stronger in the years ahead.

“We are not fighting against anyone,” he said. “We need each others to grow, so we will be partners with everyone.”

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