US-Vietnam Trade Accelerating But Direct Investment Lags Behind

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Michael Ryan, Associate Director at IHS Markit recently appeared as a guest on the Manufacturing Matters podcast to talk about the US manufacturing sector balance sheet. Below is an article just published by Mr. Ryan on US-Vietnam trade relations in the wake of the US-China trade war.

To listen to Mr. Ryan’s interview with Manufacturing Matters Host Cliff Waldman, Click Here

Summary: US imports from Vietnam are surging as an alternative to mainland China but challenges are impeding the creation of parallel supply chains, including the lack of a free-trade agreement and limited access to skilled labor.

US imports from Vietnam are up 34.8% year on year, year to date (y/y, YTD) through September, after a 5.8% gain in 2018. Comparatively, imports from mainland China to the United States shrank 13.4% y/y, YTD though the same period in 2019, with tariffs making a sizable dent since the trade war launched July 2018.

The US is Vietnam’s second-largest export market behind mainland China, accounting for 18.7% of total goods exports but only 2.7% of foreign direct investment. Despite forged interests amidst the backdrop of the trade war and Vietnam’s closer integration into the global trading system, neither the US and Vietnam nor the US and Association of Southeast Asian Nations (ASEAN) have secured a free-trade agreement. This is but one of many factors tempering the pace and magnitude of supply-chain diversification.

Another major issue is access to skilled labor, particularly at a time when so many companies are making simultaneous inquiries. This is compounded by difficulties in finding contractors who can design parts to desired specifications and quality standards. Simply, demand is outpacing the current ability to supply.

China trade alternatives

The splitting of production across countries with different regulatory, labor, tax, environmental, and safety standards has muddled streamlined and established processes. Businesses are faced with long lead times to search out the right facilities, find local business partners, and receive government permits.

New logistical routes must be mapped in a context of infrastructure bottlenecks, including poor roads and congested ports. US regulators need time to assess the safety of new production coming from new sources. Taken in combination, these factors are lengthening the delivery cycle to consumers and point to a drawn-out process of extricating operations from mainland China’s orbit.