Vietnam, widely regarded as one of the US-China trade war’s biggest winners, is stepping up efforts to prevent US-bound China-made goods from being transported through its territory to dodge US tariffs.

Whether US trade officials are convinced that effort is genuine and effective will likely determine if Vietnam’s trade war win becomes a loss in the months ahead.

Hanoi recently drew up a list of 25 products that are reputedly most at risk of such Chinese re-routing in a bid to avoid retaliatory US measures, a rising concern after the US imposed in July a 400% duty on certain Vietnamese-made steel imports.

In another bid to assuage US concerns of Chinese trans-routing, Vietnam’s Ministry of Industry and Trade announced it will suspend exports of some plywood goods to the US from late December.

Investigators have found previously that products made in South Korea and Taiwan have been shipped to Vietnam for minor processing before being re-packaged and transshipped as “Made in Vietnam.”

With US tariffs of 25% on some Chinese products, and more duties tentatively set to take effect on December 15, shipping goods through Vietnam – which has zero tariffs on most goods exported to the US – is worth the risk for many Chinese producers.

To be sure, Hanoi is keen not to irk the Donald Trump administration, which already has Vietnam in its sights due to its high and rising trade surplus with the US. Vietnam’s surplus rose to US$41 billion in the first nine months of this year, up 29% over the same period last year.

US President Donald Trump next to a bust of late Vietnamese president Ho Chi Minh at the Presidential Palace, Hanoi, February 27, 2019. Photo: Saul Loeb / AFP

With that imbalance, the US Treasury Department added Vietnam to a watchlist of possible currency manipulators in May. The following month, Trump lashed out at Vietnam in a media interview, referring to it as “almost the single worst abuser of everybody”, without elaborating.

Vietnam is one of the few Asian nations to have clearly benefited from the US-China trade war, as Chinese and other manufacturers have shifted their supply chains south across the border, where wages are lower and trade infrastructure suitable for large-scale international shipments.

But Vietnam’s gain could turn to loss as greater exports to the US, a byproduct of production shifting from China to Vietnam, have increased its trade surplus and raised suspicions in Washington that Hanoi is secretly allowing Chinese-made goods to be re-routed through its territory.

The two issues are closely connected. Despite Hanoi’s apparent efforts to reduce its trade surplus with the US, it nonetheless continues to grow. And there is a distinct possibility that the surplus is now being artificially raised by Chinese-made goods.

Although officials in Hanoi began drawing up ways to tackle improper trans-shipment and relabelling of Chinese goods in June, it now seems that officials stepped up their efforts after a visit by US Secretary of Commerce Wilbur Ross in early November.

According to observers, American and Vietnamese investigators are now on the lookout for US-bound products which have recently seen a drop in imports from China and a coincident rise from Vietnam.

Vietnam’s decision to suspend exports of some plywood goods to the US is apparently an upshot of those investigations.

The move came after imports of plywood goods to Vietnam from China rose 37% in the first quarter of this year, while Vietnamese exports of the same products to the US rose by 95% compared to the same period in 2018, according to Vietnamese media.

The US has slapped a 25% tariff on Chinese-made plywood, so there is a strong incentive to trans-ship the product through Vietnam to reach US markets. A similar US tariff on Vietnamese plywood products would likely be disastrous for the sector, as exports to the US were worth some $190 million in 2018.

Also in November, Vietnamese customs officials said they had confiscated around $4.3 billion worth of Chinese-made aluminum products that had been shipped to Vietnam and falsely labelled “Made In Vietnam.”

By one estimate, if Washington imposed a 25% tariff on Vietnamese imports, as it has done with many Chinese goods, the punitive measure would trim 1% off of Vietnam’s gross domestic product (GDP) growth.

Still, Vietnamese officials who are genuinely trying to stem transshipped Chinese goods face certain institutional problems.

Channel News Asia reported last month that customs officials say they can only verify 5% of all import-export declaration forms, meaning that Chinese goods can easily be repacked with “Made in Vietnam” labels to evade US tariffs.

Vietnam is angling to strike a delicate trade balance between the US and China. Photo: Reuters
A clothing boutique in downtown Hanoi. Photo: AFP/Hoang Dinh Nam

American officials most likely understand the problems Hanoi faces, but at the same time are keen to press for change, not least because it could be used to pressure Vietnam to reduce its trade surplus with the US.

This was apparently one of the main talking points when US commerce chief Ross led a delegation to Hanoi in early November, where a number of new deals were signed that may slightly reduce Vietnam’s trade imbalance with the US.

Virginia-based AES, an energy giant, signed an MOU with the Vietnamese Ministry of Industry and Trade to help build the $3.1 billion Son My 2 Combined Cycle Gas Turbine Power Plant, while Vietnam Airlines signed a $1 billion engine repair deal with another American firm.

“Over the course of the last 25 years, trade between our nations has grown exponentially…and the United States is the largest export market for Vietnamese goods,” Ross said at a Vietnam CEO luncheon held in Hanoi.

“However, we are concerned about the goods trade deficit of $40 billion. We want to work with the Vietnamese government on reducing this trade deficit,” he added.

In early December, the Vietnamese Ministry of Finance announced that it was also considering cutting tariffs on US agricultural imports, a key issue for the Trump administration, particularly as the president bids to win over farm states at the 2020 elections.

At the same time, there is reportedly concern in Washington that pushing Vietnam too hard on trade issues could jeopardize budding strategic relations.

Vietnamese military officials watch as the US Navy’s Guided Missile Destroyer USS Curtis Wilbur moors at the Vietnamese port of Da Nang. Photo: Facebook

While Trump is keen to trim the surplus, the State Department and Pentagon are apparently more focused on security matters, particularly vis-à-vis China.

In recent years, Vietnam has grown into one of America’s closest allies in Southeast Asia, with both sides sharing a common interest in checking China’s expansionism in the South China Sea.

US Secretary of Defense Mark Esper made his first visit to Vietnam in mid-November, just after Ross left the country, to reaffirm America’s security ties with Hanoi.

Esper announced that the US will transfer next year to Vietnam’s navy a second Hamilton-class High Endurance Cutter, one of the largest in the US Coast Guard’s fleet, a vessel that will bolster Hanoi’s ability to patrol the South China Sea.

But the wider relationship, it seems, will turn more on Vietnam’s ability to show the US that it is effectively stamping out Chinese transshipment and willing to buy significantly more US good and services.