Nobody expects Vietnam to replace China as the world’s major exporter, but the Southeast Asian country certainly appears to be taking some of China’s business with the US, CNBC reported.

Illustrative photo.

In the first nine months of this year, US imports from Vietnam jumped 34.8% year-on-year, accelerating from a 5.8% gain in all of 2018, according to a Thursday note by consultancy IHS Markit. In comparison, US imports from mainland China shrank 13.4% year-on-year in the January-September period, the note said.

Tariffs were a major reason behind the decline in US imports from China, said Michael Ryan, IHS Markit’s associate director of comparative industry service, who wrote the note.

He added that Vietnam’s fastest growing export categories to the US are computers, telephone equipment and other machinery.

Those products were among the US’s top imports from mainland China, Mongolia and Taiwan in 2018, according to the US Trade Representative. That suggests that Vietnamese exports of those goods to the US may have replaced the reduction in flows between China and the US.

The US remained Vietnam's biggest export market in the January - October period, spending US$50.30 billion on Vietnamese goods, up 27.6% year-on-year and accounting for 23% of Vietnam's total exports, followed by the European Union with US$34.55 billion, down 0.7%, and China with US$33 billion, down 1.4%. 

Meanwhile, China remained Vietnam's largest import market with turnover of US$62.3 billion, a 16.1% climb year-on-year and making up 29.6% of total imports

South Korea claimed the second place by exporting US$39.43 billion worth of goods to Vietnam, up 0.5% year-on-year, followed by ASEAN with US$26.67 billion, up 2.1%.  

Challenges for Vietnam

Vietnam is often named as one of the largest beneficiaries of the trade war because of an increase in its exports to the US. In addition, Vietnam has seen a jump in foreign direct investments from manufacturers looking to circumvent elevated tariffs between the US and China.

But the US has not invested in Vietnam in a big way, noted Ryan. He pointed out that US investments into Vietnam only accounts for 2.7% of total FDI the country received.

One reason is that the US does not have a free trade agreement with Vietnam and the broader Association of Southeast Asian Nations, according to the IHS Markit report. But that is just “one of many factors tempering the pace and magnitude of supply-chain diversification” into Vietnam, Ryan was quoted by CNBC as saying.

Vietnam is also faced with a shortage in skilled labor, he said. The country’s talent pool has not been able to support the influx of inquiries, as many multinational companies are looking to relocate parts of their manufacturing supply chain outside of China, he explained.

“Simply, demand is outpacing the current ability to supply,” he said, adding that infrastructure in Vietnam is not yet up to standards for many international firms to establish shops.

Specifically, that means finding local business partners and fulfilling government requirements to obtain permits could be major obstacles for foreign companies, according to Ryan. In addition, there has been deficiencies in Vietnam’s transport infrastructure development, which add to the time needed to travel and move goods around, he said.

“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,” said Ryan.