The Saigon River bustles with cargo ships, delivering materials to factory hubs in and around Ho Chi Minh City, Vietnam’s main financial center. Overhead, a steady stream of planes lands at the crowded airport, mirroring the frenetic activity in the city’s industrial zones. Much of this vibrancy is driven by Chinese manufacturers, who have increasingly shifted their production to Vietnam since Donald Trump’s trade policies first disrupted Sino-American trade in 2018.

The trend appears poised to accelerate as Trump prepares to re-enter the White House in January 2025, vowing to impose additional tariffs on Chinese imports. Trump has proposed a 10% hike on existing tariffs, promising to bring manufacturing jobs back to America. However, for Chinese manufacturers, Vietnam remains a strategic alternative, offering tariff-free access to key global markets for now.

Vietnam: The New Manufacturing Powerhouse

Chinese manufacturers relocating to Vietnam are motivated by a mix of geopolitical and economic factors. Trump’s trade war, which began during his first term, imposed tariffs on $360 billion worth of Chinese goods. These measures catalyzed the migration of industries seeking to mitigate risk while maintaining competitive production costs.

Vietnam, with its proximity to China, abundant labor supply, and competitive wages, has emerged as a preferred destination. The country’s political stability and investor-friendly policies have made it an attractive hub for industries ranging from electronics and textiles to renewable energy components.

Rising Foreign Direct Investment

Vietnam has seen a substantial influx of foreign direct investment (FDI) from China in recent years. Chinese investors accounted for nearly 30% of Vietnam’s FDI in new projects during the first seven months of 2024, totaling $1.97 billion, according to data from the Chinese Ministry of Commerce. Vietnam’s share of US imports has also nearly doubled since 2018, reflecting the shifting production landscape.

Manufacturing giants like TCL Technology Group have set up production facilities in Vietnam, with TCL’s factory in Binh Duong province producing over 6 million television sets annually. The factory highlights a broader trend where Chinese firms are diversifying production to higher-value goods such as consumer electronics and renewable energy equipment.

Geopolitical and Economic Challenges

While Vietnam benefits from Chinese investments, it also faces potential trade risks. US policymakers have raised concerns about Vietnam being used as a transshipment hub for Chinese goods to bypass tariffs. The US-Vietnam trade surplus, which exceeded $100 billion in 2023, has drawn scrutiny, with American officials considering whether Vietnam could face targeted tariffs.

Frederick Burke, senior adviser at law firm Baker McKenzie, noted that Vietnam’s localization requirements—currently set at 30% for goods exported under “made-in-Vietnam” labels—may rise to meet US compliance standards. Some experts also caution that increased US attention could slow Vietnam’s economic momentum if new trade restrictions are imposed.

Vietnam’s Competitive Edge

Despite potential risks, Vietnam’s free trade agreements (FTAs) provide a significant competitive advantage. With 17 FTAs encompassing 50 countries, including the US-Vietnam Bilateral Trade Agreement, Vietnamese exports enjoy reduced tariffs, enhancing their global competitiveness. These trade pacts allow Vietnam to attract non-Chinese firms as well, including investors from Canada, Japan, and South Korea.

The country’s strategic location on China’s southern border offers logistical benefits, enabling seamless supply chain integration. Modern infrastructure, including deep-water ports and highways, further supports industrial growth. Moreover, Vietnam’s relatively lower labor costs—estimated at one-third of China’s—continue to attract labor-intensive manufacturing operations.

Trump’s Return and Future Trade Policies

Donald Trump’s return to office raises questions about the trajectory of global trade. While his administration may push for stricter trade rules, analysts believe his policies could inadvertently accelerate Vietnam’s growth as a manufacturing hub. Trump’s focus on reshoring jobs to the US is likely to face significant cost and feasibility challenges, as highlighted by business leaders like Winnie Lam of the Hong Kong Business Association Vietnam.

Lam noted that while US factories operate at much higher labor costs—up to $32 per hour—Vietnam remains an affordable and scalable option for global manufacturers. “Any Vietnam-specific tariffs would hurt US businesses dependent on cost-efficient imports,” Lam added.

Conclusion: A Delicate Balance

Vietnam stands at the crossroads of global trade and geopolitics, balancing the influx of Chinese investment against potential US trade pressures. The country’s robust economic policies, strategic location, and growing global partnerships position it well to capitalize on shifting supply chains. However, the road ahead is fraught with uncertainty as global powers reassess their trade and economic strategies.

For now, as planes land and cargo ships dock along the Saigon River, Vietnam continues to thrive as a vibrant manufacturing and trade hub, solidifying its role in the global economy.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

29th November, 2024