“Made in Vietnam” for the wrong reasons

Vietnam may be tapped as clear beneficiary of the ongoing trade war, but it also faces significant headwinds to its export sector.

This Southeast Asian nation has taken four companies to task for fraudulent labelling of goods manufactured in China but labelled to be ‘Made in Vietnam’ to bypass US import duties.

These companies – assemblers of bicycles and furniture – have so far admitted to the violations.

Local customs authorities are also expanding their probe into nine other provinces to investigate possible violations by 24 other companies exporting products from LED lights to solar energy batteries to the US and European Union.

The US became the largest importer of goods from Vietnam after exports surged 28.8% y-o-y in Q1 this year thanks to US-China trade tensions.

In fact, Vietnam’s trade surplus of US$46.3 billion with the US for the first 10 months of 2019 is a hefty 39% hike compared to the same period last year.

The electronic components and furniture sector, which saw their annual export volume surge by more than 15%, are particularly suspect.

Dubbed by President Donald Trump as “almost the single worst abuser of everybody” in June this year, Vietnam is also under the spotlight for possible currency manipulation.

In response, it has promised expensive purchases from the US including aircraft and liquefied natural gas to help offset the surplus.

The Ministry of Industry and Trade (MoIT) is also suspending all import of plywood products to Vietnam for re-export to the US. This ruling is effective December 27, 2019 and will last until December 31, 2024.

Capital Economics Ltd. estimates that the Southeast Asian nation could see at least one percentage-point of its growth rate shaved off if Trump imposes a 25% tariff on its imports.

Unfortunately, Vietnam’s exceptional 7.31% growth in 3Q2019 – far outpacing that of its ASEAN peers – may well be short-lived.

To date, the US has slapped tariff duties of more than 400% on Vietnamese steel imports.

Last month, authorities seized US$4.3 billion worth of Chinese aluminium bound for shipping overseas.

To ensure it does not become collateral damage of the trade war, Vietnam needs to step up its game to crack down harder on fraudulent origin labelling.

Doing so will probably prompt manufacturers of US-bound goods to shift their fraudulent practices elsewhere. Malaysia, Cambodia, and Laos have been identified as possible conduit countries for trade fraud.

At the very least though, Vietnam gets to capitalise on genuine capital flowing into the country as compliant companies realign their supply chains to manufacture in the country.

Far from being an Asian backwater, Vietnam is Southeast Asia’s fastest growing economy. Photo by Thijs Degenkamp on Unsplash