Vietnam goes on defence as China and US clash on trade

With China and the US as its largest export destinations, Vietnam is seeking ways to insulate itself from an escalating trade war between the world’s two biggest economies.

Analysts are calling for measures from devaluing the dong to increasing scrutiny of products to counter an anticipated flood of Chinese goods.

The National Center for Socio-Economic Information and Forecast – under the Ministry of Planning and Investment – has submitted a report to the ministry on the potential impact of the trade war and how authorities should prepare to defend the economy.

“If the US and China escalate the tension with tit-for-tat moves, it could reduce our exports and foreign investment inflow and hurt domestic production,” Luong Van Khoi deputy director general at the centre in Hanoi, said in an interview.

He declined to give details of the report. Vietnam’s reliance on exports and foreign direct investment to power growth makes it vulnerable to the showdown between the US and its trading partners like China and the European Union.

The economy, much like other developing nations, is also under threat from financial volatility with the currency and stocks weakening while inflation is surging.

“It would be naive to think that Vietnam will remain unscathed from the global trade war,” said Eugenia Victorino, an economist at Australia & New Zealand Banking Group in Singapore. “Vietnam is well integrated into global supply chains. The government needs to carefully calibrate its external and domestic policy settings to offset these risks.”

The central bank should consider devaluing the dong against the US dollar to boost the competitiveness of Vietnamese products, the Vietnam Institute for Economic and Policy Research said this month.

The dong, which has lost more than 1% this year and is trading at a record low, is still performing better than most Asian currencies.

“Devaluing the dong can help exports, but it will also fuel inflation and increase costs in importing materials for domestic productions, therefore we must be very cautious,” said Can Van Luc a senior economist at Hanoi-based Bank for Investment and Development of Vietnam. “A drop of about 2% for the dong for the entire 2018 will be suitable.”

The dong is little changed at 23,045 per dollar as of 9:30am in Hanoi, according to data compiled by Bloomberg.

With the US threatening more tariffs on Chinese goods,Vietnam is worried that Chinese products such as garments, leather and furniture will flood the local market.