The trade war rages on

The Sino-American trade war is escalating in unpredictable ways. Contrary to some analyses, its impacts on Vietnam are arguably beneficial. A vulnerable economy such as Vietnam’s is unlikely to benefit from this global war.

The trade war rages on
More batches of Vietnamese bananas have recently been exported to China. However, the rise remains unstable

Many analysts believe that when Chinese goods cannot enter the U.S. market due to soaring tariffs, other countries, including Vietnam, will benefit.

This is unlikely because entering the U.S. market is a challenge and entails immense capabilities on the part of Vietnamese enterprises, which cannot be changed in the short term.

Firms also need to consider the feasibility of investing with the U.S. market in mind, as well as when and how the trade war will end.

It is possible that Chinese goods will immediately flow into alternative markets, including Vietnam, and become available at lower prices due to a cheaper yuan. This will spell trouble for Vietnamese companies.

China supplies materials for many sectors in Vietnam.

The trade war may cause Chinese suppliers to focus on their domestic market, triggering input shortages and higher material prices in Vietnam.

The lower prices of imported materials that may arise from a cheaper yuan will not bring sustainable benefits.

Some say that foreign direct investment (FDI) will flow into Vietnam so that the products generated by foreign-invested firms can be exported to the U.S.

However, this will have socio-economic and environmental impacts.

Product origin and manufacturing will be more complex.

If this issue spirals out of control, Vietnamese firms may be penalized.

The U.S. did issue a warning against Vietnam’s steel producers when it was alleged that some of their exports were Chinese steel hoping to enjoy a more favorable tariff in 2018.

More FDI will fuel demand for labor, causing local firms to face more constraints in human resources and land in the short term.

Prices may shoot up, too. Consequently, the positive impacts of greater FDI must be assessed carefully and weighed against risks and trade-offs before it is considered a bonus for Vietnam.

Pressure from a weaker yuan

China’s devaluation of her yuan will considerably crank up pressure on Vietnam’s importers and exporters. Firms with exports to China will be confronted with shrinking revenue.

The lower purchasing power of the yuan will hamper demand in China, causing the export share of Vietnamese firms to drop.

If China continues this tactic, the yuan will be cheaper compared with other main currencies, making Chinese goods cheaper.

 

Vietnamese enterprises with exports to the European Union (EU), Japan and East Asia countries will face stiff competition from their Chinese counterparts and suffer in terms of competitiveness and market share, which is already limited. 

Money and forex policies

As the yuan becomes cheaper, the dollar has risen in value.

This has piled up pressure on the State Bank of Vietnam (SBV), which must review its monetary and forex policies in the face of an escalating trade war.

In 2018, the SBV was both bold and prompt in devaluing the dong by 1% before the U.S. and China started the trade conflict.

This created a buffer zone for forex fluctuations, eased speculative pressure on the official rates and reduced the detrimental impacts of the trade war on Vietnam.

Subsequently, the SBV adhered to monetary tightening, price stabilization and flexible forex rates (down by another 1.5%) to help Vietnam’s economy navigate the rough waves of yuan and dollar fluctuations.

Will this strategy continue to work wonders this year? Things are more complicated now, partly because the trade war has escalated and become more unpredictable and partly because inflationary and speculative pressure have been stoked by rising power, fuel and realty prices.

Many may rush to buy gold and dollars as a buffer against trade war risks.

The question is how the SBV should respond if the dollar continues rising and the yuan keeps falling. Should the dong fall in value?

The answer is “no.” Repeating the move last year will trigger deleterious effects because market sentiments are different now.

Devaluing the dong will dent confidence in the local currency and fuel inflationary expectation. Moreover, the SBV stands a better change of maintaining exchange rates this year since its foreign reserves have expanded since the start of 2019.

The central bank should promptly reaffirm its monetary stance, so that the public and market will have faith in Vietnam’s commitment to upholding monetary discipline, combating inflation and protecting the dong.

This will help enterprises, investors and the public strengthen their confidence in the efficacy of monetary policy and resist buying gold, dollars or land.

If Vietnam fails to do so, the situation may spiral out of control and impede economic growth in 2019, a year of political significance. SGT

Nguyen Khac Quoc Bao
Associate Professor, Dean of Finance Faculty, HCMC University of Economics

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