Trump’s election unlikely to derail Vietnam’s healthy economic trajectory: VinaCapial

The much-discussed impact of Trump’s election to economies around the world is overestimated and there is no risk that Trump’s election will derail Vietnam’s healthy economic trajectory, according to fund manager VinaCapital.

The U.S. campaign was rife with outlandish statements and hyperbolic media reporting, leading to overly pessimistic perceptions of a second Trump administration, particularly the economic consequences, wrote Michael Kokalari, Vietnam-focused VinaCapital’s chief economist, in a note.

‘Overblown’ tariff threat

Both presidential candidates vowed to “re-shore” manufacturing jobs back to the U.S. if elected. Trump said he would impose 60% tariffs on imports from China and impose 20-30% tariffs on other countries to achieve that objective.

According to Kokalari, Trump promised high tariffs on the campaign trail because the threat of imposing tariffs (especially on China and Mexico) is powerful campaign rhetoric that appeals to one of Trump’s key constituencies, disaffected blue collar workers; and the 60% figure is probably a bargaining chip for future negotiations with China.

In reality, Trump has a number of accomplished individuals who are advising him on economic issues and are likely to have more influence over him than those he had during his first administration and who fully understand the negative consequences of imposing overly draconian tariffs on imports to the U.S. Those negative consequences include preventing re-shoring manufacturing jobs to the U.S. because draconian tariffs would push up the value of the U.S. dollar.

A more immediate concern is the fact that the U.S. economy is clearly headed for the worse “stagflationary” economic conditions since the 1970s for a variety of reasons, including soaring U.S. government debt.

Inflation was low when Trump imposed tariffs on China, but this time draconian tariffs would exacerbate the major rebound in inflation. “Trump has demonstrated that he will not put ideology ahead of economics, making it unlikely that he would actually take actions that would exacerbate inflation, especially given that the main reason he won re-election was voter dissatisfaction with the economy,” said Koralari.

Vietnam not a focus of trade tension, but massive trade surplus may be troublesome

The VinaCapital economist reckoned that China is the focus, not Vietnam in case of any trade confrontation. Trump initiated the U.S.-China trade war and Biden essentially continued it, making it clear that both U.S. political parties view China as a strategic competitor to the U.S.

In contrast, VinaCapital has repeatedly proven there is an enthusiastic economic embrace of Vietnam at the highest levels of the U.S. government. “Furthermore, Trump is a populist, and we are not aware of any significant reservations from American consumers to purchase “made in Vietnam” products.”

In fact, Vietnam may be viewed as helpful in weening the U.S. off of low-end China-made goods because high wages and low availability of qualified factory workers will likely limit U.S. efforts to re-shore manufacturing jobs to only high value-added products.

“In short, Vietnam can make things that U.S. consumers want to buy but are too expensive to be made in the U.S. and which Trump would prefer they don’t buy from China.”

In addition, VinaCapital expects less chaos than last time. After winning the 2016 presidential election, Trump entered office unprepared for the challenges laid before him. This time, Trump has a better understanding of how things work as well as some notable business leaders advising him, making it more likely that he will have a more focused approach to trade-related issues.

However, Kokalari warned that Vietnam’s massive trade surplus with the U.S. could become an issue.

Vietnam had a circa $100 billion trade surplus with the U.S. last year, making it the country with the third-largest trade imbalance with the U.S. after China and Mexico. “At some point, this numerical imbalance will become an issue for the Trump administration.”

He pointed out that the issue can be readily addressed by purchasing large-ticket products such as LNG and aircraft engines from the U.S.

“While some new U.S. tariffs on imports are possible, we believe it’s very unlikely that the U.S. will impose draconian tariffs (20-30%) on imports from Vietnam.”

Furthermore, if the U.S. were to impose blanket tariffs of, for example, 5-10% on imports from all countries besides China, Vietnam would retain its comparative advantages against other potential competitors for FDI inflows.

Consequently, the qualities that make Vietnam appealing for manufacturers now and that resulted in billions of dollars of FDI flowing into the country should continue.

“That said, Vietnam would be well-served to start looking at how it can reduce its trade surplus with the U.S. before it becomes an issue with the new administration,” Kokalari suggested.