Factories have fled to Vietnam, but may not escape tariffs

When Donald Trump urged US manufacturers to move their supply chains out of China, many hustled to set up shop in Vietnam. Now the administration has labeled Vietnam a currency manipulator, and products made there could face tariffs all the same. It's a rude reminder to companies that the effects of policy inconsistency could bleed into President-elect Joe Biden's early months in office. US allies, meanwhile, should learn that friendship will only go so far.

Consider Tapestry Inc., whose brands include Kate Spade New York and Coach. The company started moving some of its production out of China years ago, worried about being over-exposed to a single country. That put it ahead of the game when the trade war escalated.

Tapestry has gone from having 98% of its production in China to having a "significant majority" outside of it, according to testimony by Peter Charles, the global head of supply chain, to a committee convened by the US Trade Representative. "Vietnam has been a core sourcing country for my company over the last 10 years."

Once praised by Trump as a model economic student, Vietnam is drawing fire from powerful voices in industry and government, worried that American producers are being undercut. Last month, the Treasury Department called Vietnam a currency manipulator, while USTR heard testimony on whether Hanoi's foreign-exchange policies warrant remedy, possibly including wide-ranging tariffs. 1 For its part, the Communist government, which fostered good ties with Washington in recent decades, denies manipulating its currency or that the dong is much undervalued.

Companies and investors in Vietnam fret that broad tariffs might be applied, perhaps before Trump leaves office. It's a frustrating prospect for manufacturers that have endeavored to wean themselves from China in recent years. "Over the past decade, we have worked hard to substantially reduce our reliance on China for the manufacturing of our goods," said Charles.

Tapestry isn't alone. Many companies responded to Trump's public calls to shift sourcing out of China to Vietnam, according to the testimony of David French, senior vice president at Washington-based National Retail Federation, the world's largest retail trade association. The sentiment might be summed up along these lines: What do you want from us? Are we supposed to uproot again, and, if so, where?

That question will fall to Biden, who will need to send the right message to American companies while appeasing a strategic ally. This will involve weighing the advantage of cordial ties with Vietnam versus assuaging free trade skeptics, especially within his own party. 

For Vietnam, the changing tide could spell economic danger. The possibility of expansive tariffs is the main risk to forecasts for a robust comeback from the pandemic-induced slowdown. The value of exports is roughly equivalent to the size of Vietnam's entire gross domestic product — a big reason the economy notched any expansion at all last year. Growth was 2.9%, down from 7% in 2019, but much stronger than neighbors, which likely logged sharp contractions.

One broad lesson from the contretemps is that it's easy to get caught between broad strokes of US policy and specific complaints by vocal constituencies to an array of agencies. Individual departments have their territories — often jealously guarded. This whole fracas could amount to little more than a turf battle between USTR and Treasury.

More than a few people told the USTR panel that Treasury's process is the best way of dealing with exchange-rate issues. The latter's oversight in this area tends to be less punitive. Getting on the manipulator list, in itself, doesn't do much other than embarrass the target country and compel a conversation about better behavior. A determination of currency foul play, though, can be used as a cudgel to ram home points in other parts of the political and administrative system. There is a degree of that happening now.

The arguments made to USTR are redolent of past tussles over commerce with China. Those seeking to sanction Vietnam say low cost goods, cheap in part because of suspected currency shenanigans, jeopardize jobs in industrial heartlands and pivotal electoral states like Ohio and Pennsylvania.

In the end, all this confusion could end up routing business back to China. One company that recently shifted production told French of the National Retail Federation that if products from Vietnam face tariffs, it would need to return to the mainland given "the complexity of [its] supply chain." 

For others, snarled distribution in Vietnam meant China was never truly out of the picture. Mark Bradley, president of Magnum Magnetics Corp. — which says it is one of the few remaining magnet makers in the US — said in his testimony that Vietnam lacks the necessary raw materials and equipment for production. "It is widely believed throughout the industry that the bulk of the work on these magnets is done in China [and] a bare minimum process, such as cutting into various shapes and sizes, is conducted in Vietnam to allow them to falsely claim a country of origin as Vietnam."

USTR entertained testimony and submissions until last week. Even if Vietnam dodges a bullet this time, it's clear that the country is now in the cross hairs. Its sin may have been to spot an advantage in US policy and turn that into rapid development. Who can blame them? America all but invited it. But if there's any lesson for other would-be trade-war winners, it's watch your back.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement.