The Vietnamese City in the Middle of the U.S.-China Trade War | WSJ Center Point

Key Concepts

• Manufacturing Hub Shift: Movement of manufacturing from China to Vietnam, specifically Haiphong, due to tariffs and trade tensions.
• Trade Surplus: Vietnam's increasing trade surplus with the U.S., raising concerns about Chinese goods being rerouted through Vietnam.
• Tariffs: Potential imposition of tariffs on Vietnamese goods by the U.S., impacting business planning and investment.
• Supply Chain Flexibility: The need for businesses to create flexible and agile supply chains to adapt to changing trade policies.
• Infrastructure Development: Expansion of ports, expressways, and railways in Haiphong to facilitate trade and economic growth.
• Foreign Investment: Influx of foreign investment into Haiphong, driving economic growth and infrastructure development.

Haiphong: An Emerging Manufacturing Powerhouse

Haiphong, a coastal city in northern Vietnam, has rapidly transformed into a major manufacturing and export hub in less than a decade. Thousands of acres of land were reclaimed to create a new economic zone and a deep-water port designed for direct exports to the U.S. The port is now one of the busiest in the world, exporting over $26 billion worth of products.

The Impact of Trump's Trade War

The U.S.-China trade war, initiated during Trump's first term, significantly contributed to Haiphong's growth. Companies like LG Electronics and Pegatron (an Apple supplier) shifted production from China to Haiphong around 2018 to avoid tariffs. Deep C, a company specializing in industrial zone development, invested billions to transform fishing areas into industrial parks, attracting over 170 clients, including Pegatron and Foxconn. According to a Deep C representative, Trump's tariffs acted as a catalyst, prompting foreign companies to consider Vietnam as a viable manufacturing alternative.

Infrastructure Boom and Economic Growth

The influx of foreign investment spurred a massive expansion of infrastructure in Haiphong. In 2018, a new deep-water port with direct access to the South China Sea (through which one-third of global trade passes) began operations. Also, an expressway connecting Haiphong to Shenzhen (China) was completed, reducing drive time to approximately 12 hours. This infrastructure development fueled rapid economic growth. In 2019, Haiphong's economy grew by over 17%, more than double the national growth rate. This growth continues to outpace Vietnam's overall economic expansion.

Rising Trade Surplus and Accusations of Circumvention

Haiphong's manufacturing boom led to a surge in trade, particularly with the U.S. Vietnam's trade surplus with the U.S. has risen significantly, becoming the third-largest, surpassing Germany. This has led to accusations that Chinese companies are using Vietnam as a backdoor to circumvent U.S. tariffs. The rise of Vietnam's exports to the U.S. mirrors the rise of Vietnam's imports from China in similar product categories.

Potential Tariffs and Business Uncertainty

Analysts predict that a second Trump administration would be more stringent in preventing Chinese imports from entering the U.S., potentially leading to tariffs on Vietnamese goods. The uncertainty surrounding the timing and scope of these potential tariffs is creating challenges for businesses. As one analyst stated, "It is really very difficult at this point of time to businesses to actually plan their expansions." This uncertainty can lead to businesses freezing investments and holding onto cash, hindering economic growth.

Long-Term Prospects and Supply Chain Flexibility

Despite the potential challenges, Vietnam is well-positioned for long-term growth. The country has free trade agreements with over 25 countries, allowing it to redirect exports to other markets if necessary. Haiphong continues to invest in infrastructure, with six more berths under construction at the Deep C port and an $8 billion railway project (partly funded by Beijing) planned to connect Haiphong to China by 2030.

The key to weathering potential trade storms lies in supply chain flexibility. Businesses need to create agile supply chains that can quickly adapt to changing trade policies. This may require increased investment in production apparatus, but it also provides the ability to mitigate risks by shifting production between countries like China, Mexico, and Vietnam as needed. As stated in the video, "The most optimal supply chain is not the cheapest, but it's the most flexible, the most agile."

Conclusion

Haiphong has emerged as a significant manufacturing hub, driven by foreign investment and infrastructure development, particularly in response to the U.S.-China trade war. While the potential for new tariffs poses a challenge, Vietnam's free trade agreements and ongoing infrastructure projects position it for continued economic growth. The key to success lies in building flexible and adaptable supply chains that can navigate the complexities of global trade.