How does the US-China trade war affect the exchange rate and trade of Vietnam?

If the goods in transit are not controlled and prevented, it may be a reason for the US to sanction Vietnam. Photo: N.H

Pressure on the exchange rate

Mr. Nguyen Xuan Thanh, Director of Fullbright University in Vietnam said that in the first two rounds of imposing taxes by the US on Chinese goods, the direct impact on trade was insignificant. Because the products that are taxed are intermediate goods including machinery, mechanical equipment, means of transport and are not consumer goods. Therefore, if Chinese goods cannot be exported to the US, it is difficult to export to Asia, including Vietnam.

However, the currency market was affected by the first round of imposing taxes. The Yuan has fallen sharply since the US-China Trade war took place, from 6.9 Yuan/USD at the end of March to 6.39 Yuan/USD in the beginning of October, devaluing by 9.5%.

In that context, the State Bank of Vietnam has been determined to stabilize the exchange rate. But the devaluation of the Yuan against the US dollar means that the Vietnam Dong appreciates against the Yuan. This has created exchange rate pressures between VND and USD.

Accordingly, the USD/VND exchange rate of commercial banks inched up in recent years. The difference between the official exchange rate and the free market exchange rate has also appeared. With the reserves of over US $ 63 billion, the State Bank of Vietnam can completely intervene to stabilize the exchange rate. However, Mr. Thanh said that if it was too rigid and the trade war still escalated, the exchange rate must be adjusted and the adjusted rate would be high and disturb the market. It is possible to understand that the SBV's adjustment of the USD/VND exchange rate is based on market signals and based on external influences.

Accordingly, the exchange rate policy should be in the direction of not letting the VND appreciate or depreciate so much against the average rate of eight currencies being Vietnam's important economic partners ( including USD, EUR, CNY, JPY, KRW, TWD, SGD and THB). By the end of August, 2018, against the basket of 8 currencies, the VND has only appreciated 0.76% since the beginning of the year.

Many risks for businesses and the economy

Compared with US$ 200 billion of taxes that was imposed on Chinese goods by the US in the third round, the similar products that Vietnam also exported to the US was valued at US$ 13 billion, of which, taxes imposed on furniture accounted for 36.7%, suitcases and handbags accounted for 8.8% and agricultural products accounted for 22.1%. According to experts, Vietnamese enterprises that export these commodities to the US will enjoy the benefits. Meanwhile, manufacturers for the domestic market will be subject to stronger competition from Chinese goods.

Dr. Tran Du Lich, VIAC's Vice President recommended that in order to capture opportunities in the US market while maintaining the domestic market, businesses should promote investment to improve product quality and reduce costs to have competitive price.

In particular, a major risk is the transit of Chinese goods via Vietnam to export to the United States to avoid punitive tariffs. This can be simple import and export activities but can be a complicated activity by counterfeiting processing through domestic or FDI companies in Vietnam. If the transited goods are not controlled and prevented, they may also be a pretext for the US to punish Vietnam.

Accordingly, Mr. Lich noted that the the business community should not for their benefits affect the country. In addition, in the FTAs that have already been signed, the preferential policies also stipulated conditions on the origin of goods and localization rate… Thereby, the State needs to issue criteria to check and self check to avoid new risks.

Recently, Vietnam’s steel but originating from China is an example when the US imposed taxes up to 45% (including 199.76% anti-dumping tax and 256.44% countervailing duty). When the US Trade Agency detects, the enterprises that will be sanctioned are Vietnamese enterprises and product group. Not only being imposed high taxes, but also Vietnam’s prestige will be affected and the US can sanction Vietnam because the trade surplus of Vietnam with the US is also great.

Currently, Vietnam ranks the fifth among the economies with the largest trade surplus with the United States (US $ 32 billion estimated by Customs of Vietnam, US $ 38 billion estimated by the US in 2017), followed by China (US$ 376 billion), EU (US$ 151 billion), Mexico (US$ 71 billion) and Japan (US$ 69 billion). Currently, China, the EU and Mexico have been applied the policy on imposing import duty by the US. Also, Japan is under pressure to negotiate trade with the US, otherwise the US will impose taxes on cars.

Vietnam’s economy has the seventh largest open rate in the world with a total import-export turnover of 200% of GDP. If being imposed taxes by the US, Vietnam’s economy will be affected much more than that of the EU, Mexico, Japan or China.

"The preparation of a solid basis to prove that Vietnam does not interfere with the exchange rate to enhance the competitiveness of exports, the adjustment efforts to make import-export relations more balanced and maintain the diplomatic relations well, will help Vietnam avoid being attacked by the US protectionism, " Mr. Thanh noted.

In addition, the negative impact on the global production and supply chain and the region will certainly incur. The largest proportion of goods subject to punitive tax is machinery, mechanical and electronic equipment, which are commercial activities, value chains, production networks, and large proportion of multinational corporations. With the policy on diversification of production, they all have assembly plants in many countries not only in China.

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The impact will not be too negative when these corporations adjust their manufacturing among their factories in the world in the short term.

In the medium term, they will also adjust FDI of new plants. This may become a positive factor for Vietnam as FDI capital into China is shifted to Vietnam.