Vietnam has been enjoying a manufacturing-sector surge thanks to President Donald Trump’s ongoing trade war with China, but it may now be discovering that this newfound position of power comes with some risks.
In an interview with Fox Business Network in late June, Trump called Vietnam “almost the single worst abuser of everybody” in terms of international trade. “A lot of companies are moving to Vietnam, but Vietnam takes advantage of us even worse than China,” he said.
Data released Friday by Vietnam’s Customs Department shows a growing trade surplus with the U.S., with exports between January and June surging 27.4% compared with the same period last year. In the first five months of 2019, the U.S. trade deficit with the Southeast Asian nation was $17.1 billion, compared with $12.94 billion last year.
While most economists argue that trade deficits shouldn’t be a cause for concern — and in fact can ultimately benefit the U.S. in the form of foreign investment — Trump has repeatedly zeroed in on the indicator as a sign that other countries are exploiting the American economy. He hasn’t shied away from acting on this grievance: His administration has so far imposed 25% tariffs on $200 billion of Chinese goods and warned that additional duties may soon be applied to another $300 billion, including consumer products like footwear.
But while China has also come under international fire for purported unfair trade practices like currency manipulation and intellectual property theft, Vietnam has seemed eager to follow the rules laid out by the U.S. government, said Matt Priest, president and CEO of the Footwear Distributors and Retailers of America.
“They’re really willing to ensure that their relationship with the U.S. is on good footing because they would rather align themselves with the United States than with China,” he told FN. “They want the economic and geopolitical alignment and relationship with the U.S., and so the notion that they aren’t doing certain things correctly surprised a lot of us.”
In response to reports of illegal transshipping — in which importers dodge tariffs by routing goods through a third country — the Vietnamese government has promised to crack down on the practice by ramping up factory inspections, increasing penalties and being more cautious about its supply of certificates of origin.
Most of the companies that are shifting some of their supply chains to Vietnam aren’t bad actors, of course, and often they began setting up infrastructure in the country years ago in response to rising labor costs in China. Last May, Adidas said that Vietnam had overtaken China as its top supplier for footwear, with Vietnamese factories producing 44 percent of its shoes by volume in 2017, up from 31 percent in 2012, and Chinese manufacturers supplying 19 percent, down from more than 30 percent in 2012. It’s also perfectly legal for companies to import shoes as a product of Vietnam (or any other country) even if they use Chinese component parts, so long as there has been substantial transformation, explains Priest.
Overall, Vietnam is the second largest exporter of shoes to the U.S. after China, accounting for 18.7% of all footwear imports in 2018, according to the Commerce Department. (China, by comparison, accounted for 69.2%, a 21-year low.) Footwear was also Vietnam’s third largest category of exports to the U.S., reaching $6.2 billion in 2018, according to the U.S. Trade Representative.
While some companies will try to diversify to other countries in order to allay a potential tariff burden, this can be a costly and time-consuming undertaking. Even Cambodia, which has grown its footwear shipments to the U.S. by 456% over the past five years, still only accounts for 1.3% of America’s shoe imports and doesn’t have the kind of infrastructure that Vietnam is developing.
“If you do source from Cambodia or Indonesia, for example, you’re importing a lot of the inputs that go into the shoes,” said Nate Herman, SVP of supply chain at the American Apparel & Footwear Association, “So your supply chain now has more potential risk, because if a shipment of a certain material doesn’t show up on time, that means there could be more delays in the factory.” Cambodia also doesn’t have a deep water port, so shipments may have to be routed through Shanghai or Singapore, adding even more time to the supply chain.
Herman said the main concern he’s encountered has to do with electronics manufacturers and whether they might eventually swoop in and push out footwear suppliers as they flee Chinese tariffs. These worries aren’t unfounded: In June, the Nikkei Asian Review reported that Apple is considering moving 15% to 30% of its production away from China to Southeast Asia or Mexico.
In any case, the president’s surprise comments have proven yet again that the footwear industry needs to stay on its toes when it comes to trade.
“If companies are not thinking critically about their current sourcing profile, where they’re sourcing, and their agility and ability to move to other countries, they’re doing themselves a disservice,” said Priest.
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