The relocation of manufacturing firms from China amid the trade tensions has also fuelled growth in Vietnam’s economy – though some of the firms have moved only in name, using the Southeast Asian nation as a pit stop so they can claim their products were made there.
Some experts warn that such penalties could dampen growth for markets with already undervalued currencies, and leave them susceptible to a flood of imports from China. But if handled right, others say working to eliminate tariff-dodging practices could help Southeast Asian economies turn the rapid gains they are seeing from the trade war into long-term growth.
But these changes can make it hard to distinguish whether products have actually been made in Vietnam, or were simply imported there from China first before being sent on. This practice, in which goods are shipped through an intermediary country to obscure their origins, is known as transshipment.
It is one of the ways firms get around tariffs, along with falsified certificates of origin – issues that have long been problems in Southeast Asia. Nations in the region have also landed in hot water over dumping, or pricing exports below market rates.
“This [problem] not only affects enterprises, but the whole industry,” said Khanh in Ho Chi Minh City, describing how Vietnamese firms with low production capacity “cheat” by engaging in transshipment. “If output increases suddenly, the US could become suspicious and [impose] sanctions, as they did with steel.”
To Adams Lee, international trade lawyer at Harris Bricken, there will only be more movement of companies out of China, “whether it is legitimately or illegitimately”. “A lot of companies are legitimately trying to move their production operations so they can say ‘We’re not producing a Made-in-China product’,” he said. “But others are definitely taking short cuts.”
Experts say countries with which the US has large or growing trade deficits – such as Japan, Vietnam, South Korea and Malaysia – could be at risk for scrutiny over tariff-dodging activities like dumping.
On top of this, manufacturing growth in these markets could be further destabilised by an influx of imports from China – especially in hi-tech industries, where locally made products would not be able to be produced cheaply enough to compete.
Lee said that due to the number of firms looking to relocate their production operations outside China – and a possibly even greater number of firms looking to do so nominally – it might be difficult for any country in Asia to distinguish itself as a safe haven.
THE TALLEST NAIL
Speaking to the South China Morning Post, economists in Southeast Asia as well as the US warned that the combination of gains resulting from the trade war and the widening deficit the US has with Vietnam could be the perfect storm to make the Southeast Asian nation the next target of the Trump administration’s wrath.
Oh at Bryn Mawr University said the US was making an example of Vietnam – and could do so with other Asean nations – in order to influence their trading relationships with China, and prevent them from serving as places through which Chinese goods pass.
To Khanh from the Ho Chi Minh City shoes and leather association, it will not be difficult for the US to uncover false-origin labelling should Washington consider the manufacturing capacity of companies operating in Vietnam, lumping legitimate businesses in with those who are dodging tariffs.
His concerns are shared by manufacturers across Southeast Asia, as customs officials from Cambodia to Malaysia have been talking about cracking down on these practices to head off the Trump administration’s trade crusade.
Even Japan, a long-time ally and economic partner of the US, has faced repercussions, with Trump threatening to raise tariffs on auto imports from Japan to 25 per cent, 10 times the current rate.
At US$20 billion, Vietnam currently maintains the US’ fifth-largest trade deficit, according to Pictet Asset Management – and this has not escaped Washington’s notice. Trump last month railed against the Southeast Asian nation, telling Fox Business that while it has a smaller deficit with the US than China, Vietnam was “almost the single worst abuser of everybody”.
Vietnamese foreign minister Pham Binh Minh had earlier told state-run media dozens of products had been identified as being subject to tariff-dodging practices, and vowed to “increase the punishment to deter cases of goods claiming to be Vietnamese goods entering other markets”.
DOWN WITH DUMPING
Signalling how serious it is about enforcing anti-dumping measures, the US Court of International Trade in April hit an American company, Univar, with a US$62.5 million penalty after it was found to have shipped Chinese-made saccharin through Taiwan to evade anti-dumping duties. It is the largest anti-dumping recovery payment the court has ordered.
Afraid of facing similar scrutiny, customs officials in Cambodia last month pledged to strengthen the management and operation of the Sihanoukville Special Economic Zone after US officials announced that “a number of companies” in the zone had been fined for transhipping goods made in China.
Officials in Malaysia have also raised concerns the nation could be used as a transshipment point – and pay the price. The US blocked imports of Malaysian firm Pantech’s carbon steel fittings for nearly a year beginning last July, though it later lifted the suspension.
Though Malaysia’s deputy international trade and industry minister Ong Kian Ming previously warned that the possibility of foreign goods being dumped in Malaysia was “very high”, he told the South China Morning Post there had not been any new cases of fake certificates of origin this year.
But data from research firm Global Financial Integrity (GFI) ranked the nation within the top 30 worldwide for illicit outflows of goods, which includes false-origin labelling – more than US$35 billion in 2016, the latest year for which data was available, and more than US$33 billion the year before.
GFI senior economist Rick Rowden said while data about how the trade war might have impacted illicit outflows from Malaysia was not yet available, an increase in false-origin labelling was likely as importers and exporters alike took steps to avoid US tariffs.
While there is much work to be done, experts say cracking down on tariff-dodging practices could help countries in Southeast Asian cement some of the short-term gains from the trade war, turning them into sustainable growth.
”The added value for these firms in Vietnam from transshipment is close to zero,” said Le Hong Hiep, a fellow at Singapore’s ISEAS – Yusof Ishak Institute. “Vietnam can only benefit from this.”
A crackdown could encourage more firms to relocate their manufacturing activities to Southeast Asia, boost customs regulations, and help Asean nations grow their reputation for transparency and rule of law at a time when there are international calls for the bloc to step into a leadership role in the global economy.
“In the medium term, Southeast Asian nations will find more permanent, and legally compliant, arrangements in response to the new trade environment,” said Jikon Lai, assistant professor at the S. Rajaratnam School of International Studies’ Centre for Multilateralism Studies in Singapore.
Some analysts suggest the realignment could also see Asean nations shifting their economic reliance away from the US, towards China and other countries that have signed on to large regional trade agreements such as the Regional Comprehensive Economic Partnership.
But, ultimately, most feel Southeast Asia is caught between two feuding economic giants.
“These measures may be aimed at punishing Chinese firms. If other countries comply, the damage is done to Chinese exporters,” Le said. “Other countries know they aren’t benefiting from this, and it will blow back to the competition between the US and China.”